EU dithers over depositors’ future

The EU still has to decide what would happen to uninsured depositors in the event a bank collapsed.

Proposals for an EU banking union, which will have huge implications for each member state, are being put together by the European Commission and the ECB.

Officials from the Department of Finance and the Central Bank were before the Oireachtas Finance Committee yesterday to provide an update on banking union.

The aim is to ensure that any future banking collapse will not put taxpayers on the hook. The collapse of the Irish banking system eventually cost the State €64bn.

But there are a number of hugely contentious issues that still have to be agreed. Proposals for a Single Supervisory Mechanism (SSM) — under the direct control of the ECB — are close to being finalised. But negotiations are ongoing on how the resolution process would pan out.

As it stands, banks will have to hold a number of capital buffers under new guidelines. The SSM will have sweeping powers for a much more intrusive style of supervision with the hope that any bank facing potential difficulties will be caught at an early stage.

However, authorities still have to agree a framework on what to do if there is a gap between a bank’s assets and liabilities. Current proposals for a ‘bail in’ of creditors would see shareholders and subordinated bondholders get burned at the initial stages. But if there is still a hole in the capital base, the next step is causing divisions between different parties. In Ireland, depositors under €100k are covered by the deposit guarantee scheme. But depositors over €100k are on the same legal footing as senior bondholders. If an Irish bank collapsed the Government would decide whether depositors or bondholders would get burned.

Aidan Carrigan from the Department of Finance said proposals for an EU-wide resolution regime are scheduled to be in place by the end of June. It still has to be decided whether the ESM can be used to recapitalise beleaguered banks.

The Government has repeatedly called for the ESM to directly recapitalise the banking system.

There would have to be a centralised resolution agency for eurozone banks because many financial institutions had cross-border activities.

Besides an ESM and a resolution regime, the third prong of a banking union would be a common deposit insurance scheme.

The hope would be there would be a mutualisation of funds across the eurozone to cover this scheme, said Mr Carrigan.

Finance Committee chairman, Labour TD Ciaran Lynch, asked Mr Carrigan whether Bank of Ireland chief executive Richie Boucher’s 2012 salary and bonus unveiled last month has breached either EU or Department of Finance guidelines.

Mr Carrigan said the issue was outside his remit but he would supply an answer over the coming weeks.