Concerns over Irish bank bailout law

The
European Central Bank has expressed “serious concerns”
that a new law in Ireland could force the central bank to take losses
on the collateral it accepts in exchange for loans to commercial banks.

Ireland
parliament approved legislation which will give the government extensive powers
to restructure the banking sector, including the power to impose losses on
subordinated bondholders and transfer deposits.

Opposition
politicians have warned that the law, which fulfils Ireland’s pledge to
overhaul its banking system as part of a $100 trillion EU/IMF bailout
package, will turn Finance Minister Brian Lenihan into a “one-man
legislature.”

Analysts
said they expected Dublin officials would work out the issue with the ECB and
that for now they did not expect it to lead to any major upheavals or threats
in the capital being provided to Ireland and its banks.

The
bill, however, has yet to be ratified by the Irish president, who will hold a
meeting today, Tuesday, to decide whether or not to refer it the Supreme Court
amid concerns about its constitutionality.

In
a legal opinion published on its website, the ECB said legal flaws in Ireland’s
bank aid legislation could affect its rights over collateral and demanded the
law be clarified.

“The
ECB has serious concerns that the draft law is insufficiently legally certain
on a number of critical issues for the Eurosystem,” according to a paper
published on the ECB website.

The
issues include “the scope of collateral rights of central banks given as security
against ELA (emergency liquidity assistance),” as well the rights of the
ECB and possibly other central banks in the euro zone.

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