Opinion of the European Central Bank of 26 April 2011 on recovery and resolution measures for credit institutions (CON/2011/39)
Date: 2011-04-26
Institutions: European Central Bank
Subjects: Ireland, central bank, company in difficulties, competence of the institution, credit institution, crisis management, financial stability, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 26 April 2011  

on recovery and resolution measures for credit institutions  

(CON/2011/39) 

Introduction and legal basis 

On 28 February 2011, the European Central Bank (ECB) received a request from the Irish Minister for 

Finance  (hereinafter  the  ‘Minister’)  for  an  opinion  on  the  Central  Bank  and  Credit  Institutions 

(Resolution) Bill 2011 (hereinafter the ‘draft law’).  

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 

Functioning of  the  European  Union  and  the  third  and  sixth  indents  of  Article  2(1)  of  Council  Decision 

98/415/EC  of  29  June  1998  on  the  consultation  of  the  European  Central  Bank  by  national  authorities 
regarding draft legislative provisions1, as the draft law relates to the Central Bank of Ireland (hereinafter 

the  ‘Central  Bank’)  and  contains  rules  applicable  to  financial  institutions  insofar  as  they  materially 

influence  the  stability  of  financial  institutions  and  markets.  In  accordance  with  the  first  sentence  of 

Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted 

this opinion.  

1. 

Purpose of the draft law  

1.1  The draft law was foreseen as one of the actions implementing the financial assistance programme 

agreed between the Minister, the European Commission, the ECB and the International Monetary 

Fund  to  restore  confidence  in  the  banking  sector  and  achieve  financial  stability  in  the  Irish 
economy2, alongside the Credit Institutions (Stabilisation) Act 2010 on which the ECB issued its 
opinion  on  17  December  20103  (the  ‘2010  Act’).  The  draft  law  will  apply  to  banks,  building 

societies  and  credit  unions  licensed  in  Ireland  (collectively  referred  to  as  ‘authorised  credit 
institutions’)4. However, the draft law will not apply to ‘relevant institutions’ to which the 2010 Act 

applies  (which  includes  Irish  licensed  banks  to  which  financial  support  has  been  given  by  the 

1  
2  

3   
4  

OJ L 189, 3.7.1998, p. 42. 
See  the  Memorandum  of  Understanding  on  specific  economic  policy  conditionality  of  3  December  2010,  page  4, 
available on the Commission’s website at www.ec.europa.eu. 
Opinion CON/2010/92. All ECB opinions are available on the ECB’s website at www.ecb.europa.eu.  
Section 2(1) of the draft law. 

 
 
 
 
                                                      
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Minister) until they cease  to be relevant institutions for the purposes of the 2010 Act5. The  ECB 

notes  that  the  draft  law  would,  therefore,  create  a  permanent  crisis  management  and  resolution 

regime for ‘authorised credit institutions’ only; the temporary regime created by the 2010 Act will 
expire on 31 December 2012, unless extended. Given the exclusion6 of ‘relevant institutions’ under 

the  2010  Act  from  being  ‘authorised  credit  institutions’  under  the  draft  law,  an  Irish  credit 

institution will be subject to one stabilisation and resolution regime only, at any given time. 

1.2  The  draft  law  grants  the  Central  Bank  a  set  of  resolution  powers  over  the  authorised  credit 

institutions.  It  provides  that,  amongst  other  things,  the  Central  Bank:  (i)  may,  if  specified 

‘intervention  conditions’  are  satisfied,  propose  special  management  orders  to  appoint  a  special 

manager to an authorised credit institution or propose transfer orders relating to all or any part of an 

authorised credit institution’s assets and/or liabilities; (ii) shall administer a fund to be applied to 

the resolution of financial instability in, or an imminent serious threat to the financial stability of, 

authorised credit institutions; (iii)  may establish a bridge bank which could on a temporary basis 

hold  the  assets  and  liabilities  of  an  authorised  credit  institution  and  carry  on  a  banking  business; 

(iv)  may  petition  for  the  winding  up  of  an  authorised  credit  institution  under  a  new  liquidation 

regime for such institutions, and may nominate two members to the liquidation committee; (v) may 

direct  an  authorised  credit  institution  to  prepare  and,  when  necessary  or  desirable,  implement,  a 

‘recovery plan’, and may itself prepare  a ‘resolution plan’ in respect of any such institution. The 

draft  law  also  foresees  that  the  Minister:  (i)  has  certain  regulatory  powers  in  relation  to  the 

abovementioned fund, bridge banks and the transfer of assets and liabilities; (ii) is to be consulted 

before  certain  decisions  in  relation  to  an  authorised  credit  institution  are  taken;  and  (iii) has  the 

right to nominate one member to the liquidation committee. 

2. 

General observations  

2.1 

In line with its previous opinions, the ECB emphasises that, when adopting resolution measures for 

financial  institutions,  Member  States  should  act  in  a  coordinated  manner  in  order  to  avoid 

significant  differences  in  national  implementation  having  a  counterproductive  effect,  which  may 

involve  distortions  in  global  banking  markets.  Against  this  background,  any  national  measure 

should ensure a sufficiently level playing field within the euro area, which is of key importance to 

maintaining the integrity of the euro area banking system. 

5  

6 

Section 69(1) of the 2010 Act provides that it ceases to have effect on 31 December 2012 unless extended; Section 69(2) 
and (3) clarify, however, that any order or requirement made continues to have effect and that the provisions of the Act 
remain effective with respect to such orders and requirements. At the current time, ‘relevant institutions’ under the 2010 
Act comprise: (i) all of the main Irish credit institutions, namely: Allied Irish Banks, p.l.c., Anglo Irish Bank Corporation 
Limited, Bank of Ireland, , EBS Building Society, Irish Nationwide Building Society and Irish Life and Permanent plc; 
(ii) any subsidiaries/holding companies of those institutions; and (iii) all credit unions (of which there are more than 400). 
If the draft law is enacted as currently drafted, credit unions will no longer be ‘relevant institutions’ under the 2010 Act 
(as  Part  3  of  Schedule  1  of  the  draft  law  will  amend  the  definition  of  ‘relevant  institution’  by  deleting  the  reference 
therein to credit unions) and the 2010 Act will no longer apply to credit unions except to the extent that any orders or 
requirements have been made in regard to them under the 2010 Act. 
It would be helpful if it was made clear that this exclusion does not stop the relevant institution from being authorised to 
carry on banking business. 

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2.2  The ECB welcomes the wider powers under the draft law that will be available to the Central Bank, 

to  manage  and  resolve  financial  institutions  which  are  financially  distressed  and  whose  demise 

would  threaten  the  stability  of  the  financial  system.  They  will  include,  for  instance,  the 

appointment  of  special  managers  with  the  intent  of  preserving  or  restoring  a  credit  institution’s 

financial position. As in the case of the 2010 Act, the resolution powers foreseen under the draft 
law, which are exercised by ex parte application to a court without a full hearing on the merits7, 

have  the  potential  to  raise  legal  issues  with  respect  to  the  exercise  of  the  property  rights  of 

institutions’  shareholders  and  creditors.  Thus,  it  is  important  for  any  regime  to  properly  balance 

these fundamental rights with the general interest in the financial system’s stability. In this regard, 

the  ECB  would  welcome  if  the  draft  law  would  include  some  elaboration  of  the  rights  of 

transferors,  creditors  and  other  third  parties  as  regards  compensation  and  certain  other  rights  and 

remedies, if any, in respect of the resolution orders.  

2.3  Measures  that  are  intended  to  safeguard  financial  stability  should  involve  cooperation  with  the 

relevant  Member  State  authorities,  in  line  with  Union  legislation  and  the  arrangements  in  place, 

such  as  the  Memorandum  of  Understanding  on  cooperation  between  the  financial  supervisory 

authorities, central banks  and finance  ministries of  the European Union on cross-border financial 
stability8. 

3. 

Specific observations  

Central Bank independence 

3.1  The draft law specifies in Section 6 that nothing in its provisions prevents the performance by the 

Governor or the Central Bank of their functions in relation to any credit institution authorised or 

regulated in the State, or affects any obligation arising under the Treaties governing the European 

Union or the European Communities or the ESCB Statute. The ECB notes that Section 6 does not 

expressly refer to the Treaty principle of central bank independence nor state that it prevails over 

any  incompatible  draft  law  provision.  However,  the  ECB  understands  that  it  confirms  the 

obligations arising under the Treaties, including the protection of central bank independence. 

3.2 

In its opinion on the 2010 Act, the ECB recommended that any ‘relationship framework’ prepared 

under  that  measure  should  recognise  the  Central  Bank’s  institutional  and  financial  independence 
and  the  Governor’s  personal  independence9.  The  ECB  notes  that  Section  89  of  the  draft  law 

expressly  limits  the  extent  of  any  intervention  by  the  Minister  in  the  performance  of  the  Central 

Bank’s  functions  in  the  context  of  any relationship  framework  which  may  be prepared  under  the 

draft  law.  In  this  respect,  an  explicit  reference  should  be  made  to  the  principle  of  central  bank 

independence. 

7  
8  
9  

See, e.g., Section 23(1) concerning transfer orders and Section 41(1) concerning special management orders. 
Concluded on 1 June 2008. Available on the ECB’s website at www.ecb.europa.eu. 
Paragraph 3.3 of Opinion CON/2010/92; see also similar observations in paragraph 3.1.6 of Opinion CON/2009/93. 

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3.3  The  ECB  notes  that  Section  82(1)  of  the  draft  law  states  that  the  Minister  may  in  certain 

circumstances make orders mitigating any unfairness or undue hardship caused by the operation of 

Section 81 of the Act which impacts on the rights of counterparties dealing with authorised credit 

institutions  under  relevant  agreements.  The  ECB  recommends  that  Section  82  be  amended  to 

require the Minister to consult with the Central Bank prior to making any such order. 

Extra-territorial effect 

3.4  As set out above, the draft law will apply to banks, building societies and credit unions licensed in 

Ireland (‘authorised credit institutions’). However, the ECB notes that the draft law provides that a 

transfer order and a special management order may be made in relation to a ‘subsidiary’ or ‘holding 

company’  of  an  authorised  credit  institution,  as  well  as  in  relation  to  the  authorised  credit 

institution itself (Sections 20 and 38 of the draft law). The ECB understands that the definitions of 
‘subsidiary’  and  ‘holding  company’  under  the  draft  law  may  include  foreign  corporations10.  The 

ECB  assumes  therefore  that  the  Irish  legislator  intends  the  resolution  measures  contained  in  the 

draft  law  to  also  apply  to  foreign  incorporated  holding  companies  and  subsidiaries  of  authorised 

credit  institutions.  The  ECB  notes  that  these  measures  may  only  be  enforceable  against  such 

foreign legal entities to the extent permitted under the foreign law applicable to them.   

Bank levy 

3.5  Section 12 of the draft law provides that authorised credit institutions shall contribute to the Credit 

Institutions Resolution Fund (the 'Fund') in accordance with regulations. While the ECB notes that 

such regulations are to be made by the Minister and that these regulations are to provide for the rate 

of contribution, or method of calculation of such rate (Section 14(1) of the draft law), the method 

of calculation is not sufficiently clear from the draft law. In particular, it is not clear to what extent 

foreign assets and liabilities of authorised credit institutions, or indeed foreign assets and liabilities 

of foreign subsidiaries of authorised credit institutions, would be included in the calculation. The 

ECB would welcome more explicit clarification in the draft law as to which assets and liabilities of 

authorised credit institutions come within the scope of the Fund contribution calculations, and that 

assets and liabilities of foreign subsidiaries of such authorised credit institutions are excluded from 

the calculation of the contribution.  

Establishment of ‘bridge banks’ 

3.6  Under Section 16 of the draft law, the Central Bank may form private companies as bridge banks to 

which the assets and liabilities of an authorised credit institution may be transferred on a temporary 

basis pursuant to a transfer order. Sections 9(2) and 16(4) provide that any such bridge banks shall 

be capitalised from the fund with the consent of the Minister. The ECB welcomes the introduction 

in  the  draft  law  of  the  option  of  addressing  a  possible  crisis  situation  through  the  transfer  of  a 

distressed institution’s assets and liabilities to a bridge bank. The availability of a bridge bank is 

10  

The draft law defines ‘subsidiary’ and ‘holding company’ with reference to section 155 of the Irish Companies Act 1963 
and to the Irish European Communities (Companies: Group Accounts) Regulations 1992. 

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recognised  as  part  of  an  enhanced  convergence  of  national  legal  schemes  for  crisis  management 
and resolution which are developing at both international and European level11. The ECB welcomes 

in particular that Section 16(4) of the draft law prohibits the Central Bank from providing capital to 

any  bridge  bank  from  its  own  resources.  In  this  respect,  the  ECB  would  welcome  an  explicit 

mention in the draft law that the Central Bank as a shareholder in a bridge bank will in no event 

assume  or  finance  any  obligation  of  a  bridge  bank,  and  that  this  role  will  remain,  under  any 

circumstances,  consistent  with  the  prohibition  of  monetary  financing  under  Article  123  of  the 
Treaty, as supplemented by Council Regulation (EC) No 3603/9312, which prohibits, inter alia, any 

financing by a central bank of the obligations of the public sector vis-à-vis third parties, and further 

that Sections 9(2)(c), 16 and 18 shall be without prejudice to the independence of the Central Bank, 

in particular its financial and institutional independence.  

Recovery planning 

3.7  Section  73  of  the  draft  law  entitles  the  Central  Bank  to  direct  an  authorised  credit  institution  to 

prepare and submit to the Central Bank, for review, a recovery plan to facilitate, without recourse 

to  State  aid,  the  continuation  or  securing  of  the  business  of  such  an  authorised  credit  institution. 

The Central Bank may direct the relevant authorised credit institution to make such changes to its 

recovery  plan  as  the  Central  Bank  considers  appropriate.  The  ECB  notes  that  this  provision  is 

broadly in line with the recommendations of the Commission’s DG Internal Market and Services 
latest working document on a possible EU framework for bank recovery and resolution13. The ECB 

would welcome the incorporation of the detailed provisions of the working document into any code 

of practice issued pursuant to Section 73(3) of the draft law.    

Valuation mechanism 

3.8  The ECB notes that Sections 22(4) and 31 do not set out any specific approach to valuation of the 

assets transferred. The reliance on a competitive process (Section 22(4)), and the appointment of an 

independent valuer only if the valuation is disputed (Section 31(1)), do not seem sufficient to allow 

for  a  transparent  and  legally  certain  valuation.  Although  a  detailed  methodology  may  not  be 

necessary  at  the  level  of  the  law,  it  should  minimally  set  out  the  principles  that  will  be  used  to 

determine the value of the assets. This is a precondition for a fair treatment of creditors and other 

third parties, as their right of compensation may only be duly assessed against this information. It is 

important  that  market  participants  are  informed  in  advance  what  rights  they  will  have  to  claim 

compensation and on what valuation basis.  

11  

12   

13  

See  in  particular  the  DG  Internal  Market  and  Services  Working  Document,  Part  4  G3,  referred  to  in  footnote  8;  the 
‘Report  and  Recommendations  of  the  Cross-border  Bank  Resolution  Group’,  March  2010,  available  on  the  Bank  for 
International  Settlement’s  website  at  www.bis.org;  and  the  ‘Practice  Guide  on  Cross-Border  Insolvency  Cooperation’ 
adopted by UNCITRAL on 1 July 2009, available on UNCITRAL’s website at www.uncitral.org. 
Council Regulation (EC) No 3603/93 of 13 December 1993 specifying definitions for the application of the prohibitions 
in Article 104 and 104b(1) of the Treaty (OJ L 332, 31.12.1993, p. 1). 
See http://ec.europa.eu/internal_market/consultations/docs/2011/crisis_management/consultation_paper_en.pdf. 

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Collateral and netting  

3.9  The ECB notes that Section 81 of the draft law would have the effect of ‘switching off’ the rights 

of counterparties to the authorised credit institutions under ‘relevant agreements’ in certain events. 

Those events include the adoption of the draft law and any order made under powers thereunder. 

Section  81(4)  sets  out  a  list  of  consequences  that  are  to  be  ‘switched  off’.  Those  consequences 

include  ‘any  event  of  default  or  breach  of  any  right  arising’  under  a  relevant  agreement.  At  the 

same time Section 85 states that nothing in the draft law shall affect the operation of, inter alia, the 

Irish  regulations  implementing  the  Settlement  Finality  Directive  and  the  Financial  Collateral 
Arrangements  Directive14  (FCAD),  in  relation  to  any  agreement  to  which  the  authorised  credit 

institution or its subsidiary is a party. 

Moreover, the draft law also amends the 2004 and 2010 Regulations implementing the FCAD in 

Ireland. For instance, Schedule 2, Part 2 of the draft law provides for an amendment to the effect 

that  ‘for  the  avoidance  of  doubt,  nothing  in  Regulation  6,  7,  10  and  11  or  12  [of  the  2010 
Regulations] shall affect the operation … of Section 81 of the draft law.’15 

3.10  The  ECB  understands  that  the  intention  behind  Section  81  is  to  ensure  that  a  measure  adopted 
under the draft law is not deemed to be an ‘enforcement event’16 for the purposes of the FCAD as 

implemented in Ireland, but that it does not aim to interfere with the close-out netting rights per se 

of  the  counterparty  under  a  relevant  agreement.  Also,  Section  85  expressly  leaves  undisturbed 
Regulation 30 of the 2011 Regulations17, which states that the netting agreement is governed solely 

by the law of the contract that governs the agreement.  

Moreover, by denying to counterparties the consequences which normally would occur under their 

agreement  in  the  event  of  the  adoption  of  a  measure  under  the  draft  law,  it  could  be  argued  that 

these provisions prevent the close-out netting provisions from ‘[taking] effect in accordance with 

their  terms’  as  required  by  the  FCAD.  The  ECB  recommends  that  the  interaction  of  these 

provisions with the FCAD is clarified, if necessary in an explanatory note to the draft law. 

This opinion will be published on the ECB’s website.  

Done at Frankfurt am Main, 26 April 2011. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

14  

15  

Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and 
security settlement systems (OJ L 166, 11.6.1998, p. 45); and Directive 2002/47/EC of the European Parliament and the 
Council of 6 June 2002 on financial collateral arrangements (OJ L 168, 27.6.2002, p. 43). 
Schedule 2, Part 2 of the draft law amends the European Communities (Financial Collateral Arrangements) Regulations 
2010. 

16    As defined in Article 2(1)(l) of the FCAD. 
17  

European Communities (Reorganisation and Winding-Up of Credit Institutions) Regulations 2011. 

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