Now, FT Alphaville reads a lot of central bank legal opinions. But the one released by the ECB at the weekend — regarding the Irish government’s draft emergency bank restructuring law, the Credit Institutions Bill — is causing us to scratch our heads a bit.
This law would allow the Irish finance minister to issue ‘direction orders’ forcing bust banks to make cash calls, issue shares to the government or dispose of assets and liabilities (among other things). These orders should be made after consulting with the governor of Ireland’s central bank, but that’s all — just consultation. The ECB’s worry here is that the direction orders might harm the central bank’s independence, obviously.
But back to these asset removals for a moment. After all, the minister is also given the power to make ‘transfer orders’ which (you’ve guessed it) allow assets to be transferred as well as disposed. Transfers where? We might well ask.
However, it’s the asset disposal idea that seems on a first reading of the opinion to have put a bee in the bonnet of the ECB. As the opinion states (emphasis ours):
The ECB would like to stress that, given the very short time in which it has been consulted on this important legislation, it has not been possible to assess all the many constitutional, other legal and regulatory issues which this draft law undoubtedly raises. In particular, the ECB has serious concerns that the draft law is insufficiently legally certain on a number of critical issues for the Eurosystem. For example, problems of legal uncertainty relate to the impact of, inter alia, Article 61 (effects of orders on certain other obligations) of the draft law on the rights of the Central Bank, the ECB and possibly other central banks within the ESCB, the scope of collateral rights of central banks given as security against ELA [Emergency Liquidity Assistance], as well as other issues. The ECB would expect that nothing in this Act would affect operations, rights or entitlements of the Central Bank or the European Central Bank, or any other central banks within the ESCB…
Basically — what happens if an Irish bank has pledged assets to the ECB or the Central Bank of Ireland which the government then expropriates?
Those assets might have been complete rubbish, but they’re collateral all the same for the purposes of the €136bn or so of ECB liquidity that Irish or Irish-domiciled banks are tapping at the moment. That’s a lot of credit risk if assets suddenly start walking and security on them becomes hard, next to impossible, to enforce.
That’s the interpretation of the ECB’s worries by the FT and Yves Smith, at any rate. But we wonder if you could also turn the concerns around.
For a start, Ireland’s banks already have a collateral shortage. Bank of Ireland witnessed corporate depositor flight in November, for example.
The wrong kind of asset disposal would clearly make this worse, but this context of collateral shortage also means the government might take care to transfer over assets at the same time in order to shore up the balance sheets of merged institutions.
Indeed — one of the proposed solutions to the problem of Irish banks’ asset weakness has been for the government to write guarantees to banks solely for the purpose of taking them to the ECB as collateral. Transfer orders as per the Credit Institutions Bill look like they might provide the vehicle for this.
And it would be very interesting to see what the ECB thinks about this.
On the one hand, government guarantees could furnish Irish banks with virtually unlimited collateral. On the other, the ECB doesn’t want to keep Irish banks on the drip-feed forever in any case — nor would guarantees from the Irish sovereign, of all governments, really escape the credit risk problem.
Above all, this is the indirect fiscal transfer we’ve been talking about — issuing bonds to banks that are then financed by the ECB, tying the central bank even more to government financing.Posts
Quite uncomfortable, that.
Related links:
Ireland’s threat to the IMF – FT Alphaville
Mechanics of a European capital flight – FT Alphaville
Luck of the Irish… promissory notes – FT Alphaville
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