The Bank Guarantee
The financial crisis prompted a number of emergency pieces of legislation designed to prevent the collapse of financial institutions. The state’s guarantee of the liabilities of the Irish banks (later extended) was reflected in the Credit Institutions Financial Support Act 2008. This became law on the 2nd of October 2008, 48 hours after the announcement of the guarantee. It contemplated that financial support would be provided for a year. The period has been extended consecutively. On each occasion, the consent of the European Commission is required under the state aid competition rule.
The legislation permits the Minister for Finance to provide support except of the liabilities of a credit institution. This covers deposits owed to customers but also bank’s bonds, securities and interbank lending. The Minister for Finance is entitled to impose conditions on the support including particular conditions relating to the conduct of the institution’s business. The Minister may subscribe for shares in the financial institution and may create and issue new securities on such times as he sees fit.
Initially, the legislation specified the principal domestic banks and their subsidiaries. The scheme covered all deposits, senior, unsecured, debt, asset covered securities and dated subordinated debt excluding monies owing to the ECB arising from monetary operations.
Finance institutions joined the scheme by entering into a deal of acceptance. They were obliged to pay a charge and to indemnify the Ministers for Finance in respect of payments made under the scheme. Conditions were imposed on their conduct.
Institutions were required to submit enhanced reporting to the regulator. They were immediately obliged to subscribe to the Irish — the IBF code of conduct on mortgage arrears which was not then binding. The Minister for Finance was entitled to appoint a public interest director. Limits were placed on remuneration of senior executives.
The first scheme was effective for a two year period and covered a very wide range of liabilities saving excepting only subordinate bonds. A second scheme — the eligible liabilities guarantee scheme covered a narrower range of liabilities for a longer period.
The eligible liability scheme was introduced in December 2009. It covered new liabilities. It was administered by the NTMA. The eligible liability scheme covered a similar range of liabilities to the initial scheme but did not cover certain subordinated debt and new liabilities with a maturity date of more than five years. The scheme covered all deposits over €100,000.
Institutions participating in the scheme were subject to similar conditions as the previous scheme. A fee was payable in respect of the guarantee.
The Financial Services (Deposit Guarantee Scheme) terms allowed regulations to be made prescribing deposit coverage. Institutions must maintain sums in the deposit protection account. The eligible deposit scheme covers deposits up to €100,000. The eligible liability scheme may cover deposits in excess of that amount subject to its conditions being satisfied.
National Asset Management Agency Act was enacted to acquire the so-called” bad” principally development assets of the six participating institutions. The purpose of the legislation was to facilitate the availability of credit in the economy to resolve the financial crisis to protect the taxpayers’ interest and to remove uncertainty regarding the valuation of assets of credit institutions which were systematically important and to restore confidence in the banking system.
NAMA as to acquire eligible assets from participating institutions. It was given prior to compulsorily acquire eligible assets to hold manage and realise. Eligible bank assets comprise development loans, their security and guarantee and loans associated with development loans.
The participating institutions were obliged to make full disclosure of all matters relevant to their assets. They were not allowed to deal with the loans without NAMA’s consent after a certain date. They could be requested to provide services in connection with loans on behalf of NAMA. They were obliged to comply with certain requirements and act in the utmost good faith.
Acquisition of Development Loans
A process of acquisition was undertaken under the legislation by which the development / eligible bank assets were acquired by NAMA compulsorily at a value as determined under the legislation. It was based on their long-term economic value.
The Minister for Finance could designate non-development linked assets as eligible assets if they were of a magnitude which was such as to render necessary for the purposes of the legislation.
Assets were valued at their long-term economic value. The criteria were specified in the legislation. Long-term economic value attempted to capture normal prices or yield of assets over long periods prior to the distortions of the mid-2000s taking account of prospective factors, such as demographic interest rates, economic growth, et cetera.
A discount rate was prescribed to link future projected cash flows to present values over a certain time horizon. The relevant time horizon and the consequent discount factor were determined by the variation between the long-term economic value relative to the nominal amount of the loan.
The regulations were later amended to allow for more expeditious methodology. This method provided a less precise methodology that took account of the general type or characteristic of the asset, its location, existing valuation, discounts represented by previous acquisition and standard or individual discounts based on experience in the acquisition process to date.
Upon acquisition of the entire assets including the benefit of the loan agreement, security and guarantees become vested in NAMA. Where a lender enjoyed a right of set-off against an account held that the institution NAMA could acquire the right to payment of the relevant sum.
Alleged side agreements or representations affecting the terms of loan agreements were not to be binding unless set out in writing and specifically disclosed at the acquisition phase. If any such rights existed they would create a right to compensation against the lender only.
The participation institutions had limited right to object to the acquisitions or to challenge valuations. In practice valuations were not challenged to any extent. Ultimately, by the time the acquisition process was completed several of the main lenders were in fact state-owned.
In addition to the general set-aside of transactions under bankruptcy law, the NAMA legislation provides that only transfers of assets by debtors, guarantors, or others for the purpose of avoiding enforcement by NAMA may be set aside on application to the High Court.
Persons connected with the debtor may not acquire the assets. Similarly, a debtor who was in any way in default in relation to a bank asset may not acquire directly or indirectly any interest from NAMAs.
NAMA has the power to sell free from equitable interests. The power of overreaching enjoyed by two trustees under the Conveyancing Act was applied to sales by NAMA. NAMA has the power to sell free from lower-ranking charges. However, it must provide for the discharge of higher ranking charges.
Stabilisation of Banks
The Credit Institution (Stabilisation) Act was signed as to deal with the insolvency of credit institutions. It was enacted in the context of the so-called EU IMF program of financial support (bailout). It gives its powers to the Minister of Finance to reorganise banks and credit institutions for a two-year period.
It applied to banks to which financial support has been given, the legislation works by means of ministerial orders subject to court approval. The court’s ability to override the order is limited. The effect of requiring court approval is to make the decision virtually unchallengeable.
A direction order enables the Minister for Finance to direct an institution to take or refrain from taking any action. This may include issuing new shares the list increasing in issuing the share capital, changing its memorandum and articles and disposing of assets, shares and undertakings.
A special management order allows the Minister to appoint a special manager to take over management of the institution due to preserving and restoring its financial position. The special manager may exercise wide control.
Subordinated Liabilities of Banks
A subordinated liabilities order may include modification of rights and obligations. It may grant subordinated liabilities holders, shareholdings in the institution concerned.
Once the subordinated liabilities order is made a winding up or action may be taken by the subordinated creditor based on the failure of the institution to comply with its obligations. In effect, the normal winding up insolvency and enforcement tools for creditors of lending institutions may be modified entirely.
The making of the order must be required for preserving and restoring the financial position of the relevant institution. In considering whether to make a subordination order the Minister may must have regard to a range of matters including
- the level of indebtedness relative to assets,
- the extent of financial support provided by the state relative to the institution’s own asset.s
- viability in the absence of support
- ability to raise funds in the open market.
- likelihood of payment on winding up.
The order once confirmed by the High Court, by a one-sided application becomes absolute or best chance within five days.
A transfer order enables the Minister to transfer assets and all liabilities. Under this legislation, the deposits of Irish Nationwide and Anglo Irish Bank were transferred.
The legislation entitles the Minister to remove directors from office and appoint directors with positive obligations
- to facilitate the availability of credit
- protect the State’s interest under the guarantee
- protect the interests of taxpayers and
- restore confidence in the banking system.
This duty is to take precedence over all other duties including duties to the company itself.