Irish Banking Law in New Budget Up for Scrutiny

As part of last week’s approval of the new austerity budget for Ireland, its Parliament also gave its finance minister broad new powers over the banking sector. Those powers were called into question on Friday, when it was announced in a Reuters report that President Mary McAleese might refer the law to the Supreme Court to determine its constitutionality.

On Monday Ireland defended the law from criticism from the European Central Bank (ECB), which has concerns about the breadth of the powers and potential for the finance minister’s use of them to create financial exposure for the ECB. The law applies to banks that have received state support, credit unions, and building societies. It allows the government, via the High Court on a case-by-case basis, to impose losses on junior bondholders.

The part that concerns the ECB is the fact that the law also grants exceptional powers to the finance minister, who is empowered by it to transfer banks’ assets and liabilities, and also “take or prevent any actions in order to support the government's banking strategy.” The nature of this authority is so unusual that the powers have been set to expire at the end of 2012.

A finance ministry spokeswoman said in a statement, “In view of the framework for the exercise of the minister's powers under the Bill, there is no question of the central bank, ECB or any NCB as creditors to the guaranteed institutions being exposed financially by the exercise of the minister's powers under the bill.” Though the statement reiterated that it would be inconceivable that the minister would move to transfer assets or otherwise take specific actions without the ECB’s blessing, concerns remain—and not just at the ECB.