The ECB said it had not had enough consultation time on the bill and that while it welcomed being consulted on the Irish Credit Institutions Stabilisation Bill and understood the need for an accelerated legislative procedure, “it would have appreciated being consulted by the authority preparing the draft legislation at an earlier stage”.
It said in an opinion published on Friday that as a result of the lack of time, it had not been possible to assess all the constitutional, legal and regulatory issues which the draft law raised. In particular, the bank is worried about article 61 and the potential impact it could have on the rights of central banks on collateral given as security against ELA (Emergency Liquidity Assistance), as well as other issues.
The ECB has become the lender of first resort to Irish banks as a result of the sovereign crisis — and their reliance on the central bank reached Eu136bn at the last count.
An ECB spokesman said the bank was worried about what could happen to what the central bank had lent.
ECB figures show that more than 20% of assets deposited for use as collateral in eurosystem credit operations are unsecured bank bonds. Covered bank bonds make up just over 10% and ABS accounts for around 25%. The figures are based on averages for the first and second quarters of 2010 when lending reached between Eu700bn and Eu900bn.
While the market view is that the government would not use its new powers to enforce losses on senior debt holders, some are worried about the powers given by the bill.
“This piece of legislation could have been drafted by Hugo Chavez,” said one bank’s head of FIG DCM in London last week.
“The weapons granted by it which don’t just apply to banks but could stretch to corporates, is almost a piece of legislation that you could have seen in wartime. It is so far reaching compared to other jurisdictions.
“However, there is a big difference in saying that you have the ability to do something and you doing it. It is a bit like having a nuclear weapon: the circumstances under which you would want to use it would have to be very special as the collateral damage would be immense.”
The ECB said that when adopting measures to deal with the financial crisis, member states should act in a coordinated manner to avoid differences in national implementation becoming counter-productive.
It also said that the new Irish framework may have to be adapted in the light of the forthcoming European Commission’s legislative proposals on a Union crisis management and bank resolution regime.
In October, the EC released a document An EU framework for crisis management in the financial sector. It said it was considering the design of a debt writedown mechanism as an additional resolution tool to resolve too-big-to-fail financial institutions. However, it also warned that the inclusion of such mechanisms posed many difficulties and challenges that would be difficult to overcome.
The Commission said at the time that it would begin a public consultation in December 2010 with legislative proposals to be made in the spring of 2011.