Bank failure is an unfortunate reality of the financial world, and understanding the intricacies of this process can be crucial for international bank creditors. Banking law in Ireland is governed by both domestic legislation and European Union (EU) regulations, as Ireland is an EU member state. The Central Bank of Ireland is the primary regulator and supervisor of banks, and it operates under the Central Bank Act 1942 and subsequent amendments. Key laws regarding bank failure in Ireland include the Credit Institutions (Stabilisation) Act 2010, the Credit Institutions (Resolution) Act 2011, and the EU Bank Recovery and Resolution Directive (BRRD) of 2014.
Irish banks have also faced significant fines for various wrongdoings over the years. Notable Irish banks that have received fines include Bank of Ireland, Allied Irish Banks (AIB), and Permanent TSB. The penalties imposed on these banks have ranged from millions to hundreds of millions of euros, depending on the severity of the wrongdoing.
The wrongdoings that led to these fines include breaches of anti-money laundering and counter-terrorist financing regulations, mismanagement of tracker mortgages, and failure to comply with regulatory requirements in areas such as risk management and internal governance. Despite the severity of these wrongdoings, Irish banks have not been shut down for several reasons. Irish banks have faced significant fines for wrongdoing but they have not been shut down due to their systemic importance, efforts to remediate the issues, and ongoing regulatory oversight to ensure compliance and stability.
Bank failure in Ireland is defined as a bank’s inability to meet its obligations to depositors, creditors, or the general public. This may result from insolvency, illiquidity, or other factors that undermine the financial stability of the institution. The determination of bank failure in Ireland is a multifaceted process involving the assessment of various financial and operational factors. The Central Bank of Ireland, as the supervisory authority, evaluates a bank’s capital adequacy, asset quality, management quality, earnings, and liquidity. A bank is considered to have failed or be likely to fail when it no longer meets regulatory requirements, cannot restore compliance within a reasonable time, or faces a significant risk of insolvency or illiquidity.
The Central Bank of Ireland is responsible for determining whether a bank has failed or is likely to fail. It does so by monitoring the financial health of banks and ensuring that they comply with regulatory requirements. The bank supervisor has the legal mandate to intervene when necessary to protect depositors, creditors, and the stability of the financial system.
Following the conclusion of bank failure, the Central Bank of Ireland initiates a resolution process, aiming to preserve the critical functions of the bank and ensure the continuity of the organization. The most common reasons for bank failure in Ireland include inadequate capitalization, poor asset quality, weak corporate governance, and external shocks such as economic downturns.
Bank supervision in Ireland involves continuous monitoring of banks’ financial health and compliance with regulatory requirements. Resolution planning is a proactive measure to prepare for potential bank failures. It includes the development of resolution strategies and tools to preserve critical functions and maintain financial stability during times of distress. When a bank fails, the resolution authority in Ireland, which is the Central Bank of Ireland, takes several steps, including:
- Assessing the systemic impact of the bank failure
- Determining the appropriate resolution strategy
- Implementing resolution tools, such as the sale of the business, bridge bank, and asset separation, to reorganize, recapitalize, restructure, or dissolve the failed bank efficiently.
The resolution authority in Ireland has various options at its disposal to address failed banks. These include the sale of the business, where assets, liabilities, and operations are transferred to a healthy bank or investor; the establishment of a bridge bank, which is a temporary institution to continue the essential services of the bank until a permanent solution is found; and an asset separation procedure where the problematic assets are separated and transferred to an asset management vehicle to streamline the resolution process.
In Ireland, the Deposit Guarantee Scheme (DGS) protects depositors’ funds up to €100,000 per depositor per bank. This safeguard applies to both individual and corporate depositors. Additionally, the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 provides an unlimited guarantee for certain eligible liabilities of participating institutions.
The resolution authority ensures that non-viable firms exit the market in an orderly manner, minimizing disruption to the financial system. This process involves the application of resolution tools and may include the orderly winding down of the failed bank’s operations.
In cases where resolution is deemed unfeasible or undesirable, liquidation is the alternative. Bank liquidation in Ireland is governed by the Companies Act 2014 and the Insolvency Regulation (EC) No. 1346/2000. The liquidation process involves appointing a liquidator to wind up the bank’s affairs, realize its assets, and distribute the proceeds to creditors in accordance with the statutory order of priority.