Opening Statement by Paul Molumby, Head of Payments and Securities Settlements, to the Oireachtas Joint Committee on European Scrutiny

Introduction

Good Morning. My name is Paul Molumby. I am Head of the Payments and Securities Settlements function of the Central Bank of Ireland. I am accompanied here today by my colleagues Stephen Giffney and Eoin O’Brien.

I am also joined by Anne Troy, Chief Operations Officer of the Investor Compensation Company Limited (ICCL) and her colleague from the ICCL, Neasa Counihan.

We are here today in response to your invitation to discuss EU proposals on deposit guarantee and investor compensation schemes.

I will give a short opening statement on the Deposit Guarantee Scheme and then Anne will present on the investor compensation proposals. We can then take questions.

The Central Bank of Ireland is responsible for the administration of the Irish Deposit Guarantee Scheme and within the Central Bank I am responsible for the operational aspects of the Irish Deposit Guarantee Scheme.

We have reviewed the latest Commission proposals with a view to assessing the impact they may have on the Irish Deposit Guarantee Scheme. The Department of Finance is primarily responsible for policy aspects and the Central Bank has submitted its views to the Department.

Background

By way of background the Irish Deposit Guarantee Scheme protects eligible deposits in banks, building societies and credit unions authorised in Ireland. The scheme is funded by the credit institutions through deposits with the Central Bank. In the event of a credit institution being unable to repay its depositors, the compensation amount payable is the total amount of deposits held by a depositor with the failed institution, subject to a maximum amount of €100,000 per individual.

Under regulations, the compensation payment process is initiated where:

The Central Bank has determined that a credit institution is unable to repay deposits due to its financial condition; or

A court has appointed a liquidator or examiner to a credit institution.

Currently, were such a process to be initiated, the Central Bank is obliged to pay compensation within 3 months. This payout period will shorten to 20 working days from 31 December 2010, under the terms of Directive 2009/14/EC.

At the outset I think it is very important that we make a distinction between the Deposit Guarantee Scheme and the Government guarantee provided under the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (the ELG Scheme). The latter is a separate scheme which protects deposits in excess of €100,000 and other liabilities in participating institutions. This scheme is sometimes known as “The Government Guarantee”. We have no responsibility in the Central Bank for the operational aspects of the Government Guarantee Scheme. The EU proposal for a recast Directive, which we are discussing today, relates to the Deposit Guarantee Scheme rather than the ELG Scheme.

The proposal

Like many other reforms, the proposed directive has its origins in the financial crisis of recent years. The proposal is a comprehensive reform of EU Deposit Guarantee Schemes and follows on from the EU “emergency measures” taken in 2009, through Directive 2009/14/EC, which principally dealt with increasing the level of coverage to €100,000 for all schemes.

The four key elements of the draft directive are:

1. The simplification and harmonisation of the scope of coverage
2. Faster payout times
3. Revisions to funding arrangements
4. Enhanced cooperation between deposit guarantee schemes across Europe.

Let me briefly discuss these four elements.

Harmonisation of coverage

Under harmonisation of coverage, the maximum level of compensation will be set at €100,000 per customer per credit institution. This is already the case in the Irish Deposit Guarantee Scheme and so has no implications for us.

In addition, cover would be extended to deposits of all non-financial companies, whereas at present, only the deposits of small companies are eligible for compensation. This has the effect of simplifying the eligibility rules and the associated administration.

The proposal excludes from protection certain financial products with an investment character, in particular those that are not repayable at par and those whose existence can only be proven by a certificate. It should be noted that these exclusions would be negligible in the context of the overall level of depositor protection.

Faster Payout Times

Payout times will be reduced from the 20 working days that comes into effect at the end of this year under Directive 2009/14/EC, to seven calendar days proposed to be effective from end 2013.

The proposal also imposes obligations which are pre-requisites for faster payout - such as improved access by the DGS to customer data in institutions and requirements on credit institutions to hold depositor data in necessary formats (for example, a consolidated, or single, view of each customers deposit data, and tagging deposits for classification).

The ambition of achieving a faster payout to depositors is supported by the Central Bank. Achieving a payout in a matter of days will require investment in systems and processes at both the operations of Deposit Guarantee Schemes and within credit institutions. We fully support the supplementary measures in the draft Directive such as the tagging of deposits and the requirement that credit institutions will have to provide Deposit Guarantee Schemes with aggregated depositor information. The Central Bank considers these measures essential pre-requisites to achieve the reduction in the payout period and we will be working with credit institutions to facilitate implementation of these.

As a small caveat to the Commission’s proposal for a seven day payout we would note that in any event of payout there is likely to be a small number of accounts/depositors which may require an element of investigation and verification. It would not be feasible that every single one of these accounts would be paid out on within seven days and therefore we would advocate that there be allowance for some exemptions from the seven days payout proposed for end 2013, for such circumstances.

Revisions to funding arrangements

The proposed revisions to funding arrangements include that all schemes would be pre-funded, with the proposal setting a target level for this funding of 1.5 per cent of eligible deposits to be reached by 2020. This fund would be based on annual premiums from credit institutions and based on the risk profile of the institution.

This represents a significant change from the current funding mechanism in Ireland, where credit institutions maintain a deposit with the Central Bank equivalent to 0.2% of their total deposits. The new funding arrangement will impose an additional cost on credit institutions as it is phased in by 2020. Committee members may be aware that a broad range of reforms are being discussed internationally in the aftermath of the crisis. It will be important that the interactions and synergies between these reforms are taken into account and a holistic view is taken to implementation so that the full effect on credit institutions is understood.

The draft directive proposes an obligation to establish a mutual borrowing facility between Deposit Guarantee Schemes. The Central Bank believes this is worthy of consideration. However we consider the current proposal by the Commission needs to be revised. In particular, the general obligation on Deposit Guarantee Schemes to lend may not be appropriate in all circumstances, for example, where a DGS fund has already been diminished due to payouts or could be required in the short-term to meet its obligations to its own depositors.

Enhanced cooperation

Proposed enhancements to the level of cooperation between Deposit Guarantee Schemes in cross border situations would allow the Irish DGS (the host scheme) act as ‘single point of contact” for depositors at branches in Ireland of a failed institution covered by the DGS in another member State (the home scheme). The responsibilities of the host scheme include communications and payout on behalf of the home scheme. This will require sharing of information between schemes.

The Central Bank supports this approach as it has potential benefits for both Deposit Guarantee Schemes and depositors. However, the Central Bank has suggested some small revisions, particularly in regard to the obligation of the host scheme to pay out on behalf of the home scheme in advance of receipt of any funds from the home scheme.

Conclusion

In conclusion, the Central Bank welcomes the broad aims and ambitions of the proposed recast Directive on Deposit Guarantee Schemes. The proposals are beneficial from a depositor’s perspective and give confidence in Deposit Guarantee Schemes to assist in maintaining financial stability. In particular, depositors would receive compensation quicker than was previously the case.

Investment in processes and systems across the DGS and the credit institutions is required to facilitate the faster payout, the new funding mechanism and the closer co-operation between Deposit Guarantee schemes. These developments will have to be planned and managed with the industry to ensure that deadlines can be met. We are already working on that.

This is a draft directive, and certain aspects may be clarified or changed as it progresses through the EU approval process. The Central bank will closely monitor developments.

Thank you.