Michael Noonan (Limerick City, Fine Gael)

Last Thursday, I announced the Government's radical and wide-ranging plans to restructure the State-supported banking sector. When it published its plan, the Government had a number of objectives. First, to restore confidence in the banking system and in the economy of the country. Second, to recapitalise and restructure the banks and, third, to restore credit to the economy in order that growth will rebound and jobs can be recreated. All three objectives are being fulfilled.

The Government's plan set out to restore the confidence in the banks and economy. This confidence was lost by the indecision of the previous Government and quite frequently by plans that were quite aimless. The reaction at home and abroad to the Government's policies shows that confidence is being restored. Since the announcement last Thursday, Bank of Ireland shares have advanced for three consecutive days of trading and have increased in value by 45%. Allied Irish Banks likewise has advanced significantly and the total amount of deposits withdrawn from the pillar banks has been significantly reduced. Since Thursday's announcements, the net deposit position of the pillar banks has improved significantly. Irish ten-year bond rates peaked on 31 March at 10.322% and have since fallen back and now are trading in the nines, that is, below 10%.

Standard & Poor's has removed Ireland from credit watch, noting the outlook is now stable. Its statement reiterates its opinion that "the assumptions underlying the stress test conducted by the Central Bank of Ireland - in conjunction with the IMF, European Central Bank, ECB), and European Commission - are robust and that the expected €18-€I9 billion net cost to the Irish state of additional recapitalisation, plus the contingency buffer for the banking system, is within our range of expectations, albeit at the upper end". Standard & Poor's also noted that "we believe that the Irish economy has stronger growth prospects than the Portuguese and Greek economies considering its openness, its flexibility, and its competitiveness". Moody's stated: "We view the plans to deleverage the system as credit positive, as they will reduce the high reliance on central bank funding." It did, however, acknowledge, as Members are aware themselves, that the plans to deleverage will be a challenging process. The other agency, Fitch, described the stress tests as an important step in restoring confidence in the banking system.

Market participants also have responded positively. In a report on Monday entitled, "Ireland - Time to Buy", Morgan Stanley encouraged investors to buy Irish sovereign debt. The investment bank states that Ireland is still facing major challenges "but if there is one economy in the euro area that could meet these challenges, it is probably the Irish economy, we think". It went on to state that "the stabilization of the Irish banking system that we expect the stress test to facilitate should allow the economic turnaround already underway to boost investor confidence in Ireland's medium-term debt sustainability".

Members will note that across a range of commentators who specialise in these matters, the reaction to the announcements of last Thursday have been highly positive. They have commenced the building up again of confidence in the economy. However, while the response is positive and will help to build up confidence, I appreciate confidence is a fragile flower that can fade under the stress of international events. Members already will have noted the damage to the supply of energy globally that has been caused by the tsunami and the accident in the nuclear power station in Japan, as well as the impact on oil prices of events in North Africa and the Middle East. Consequently, in an open economy such as Ireland's one cannot control external events. In so far as we control our own affairs, last Thursday's announcements have received a positive response. The proposed reorganisation and recapitalisation of the banks has received widespread approval and involves a number of steps. In essence, our banks are to become smaller, more focused on core operations, better funded and better capitalised. The banking system is being reduced to a size appropriate to our economy. This involves the sale or run-off of in excess of €70 billion worth of non-core assets. It will be accomplished in line with detailed plans submitted by the banks and reviewed by the Central Bank and the Government.

In parallel, the system is being reorganised to create a banking system that has two universal full service domestic banks as its core pillars and a radically restructured Irish Life & Permanent. The first pillar bank is being created from the already strong franchise of Bank of Ireland and it is our intention to combine the businesses and strengthen the franchises of Allied Irish Banks and the EBS Building Society to form the second pillar. Overseas banks operating in Ireland will help to maintain the competitive fabric of the market.

Each of the Irish banks has already begun to reorganise its operations into core and non-core functions and to implement a carefully managed programme of deleveraging. As the non-core assets that do not serve growth on the island of Ireland disappear, the pillar banks will become even better able to serve the economy as functioning banks rather than the oversized, overleveraged banks we now have.

A key element to a successful plan for reorganisation is funding. If one cannot fund the restructuring, one cannot do it. This was the key debate with the European Central Bank. Shortly after we presented our radical plans to resize and reorganise the banks, the ECB issued a number of important announcements relating to the continued availability of euro system funding for our banks. First and of most importance, the ECB confirmed that, against the background of our decision to recapitalise the banks in line with the Central Bank's "rigorous assessment of the capital needs of the Irish banks", the euro system or ECB will continue to provide liquidity to banks and also "supports the Irish banks' plans to deleverage and downsize their balance sheets". Given the ECB's statement about supporting the deleveraging plans and continuing to provide liquidity at 1%, it is clearly committing to ongoing medium-term funding.

Second, the ECB confirmed that all marketable debt instruments issued or guaranteed by the Government will be deemed as fulfilling the credit standards required for collateral in euro system credit operations irrespective of ratings. In the absence of such a statement, the risk was that the banks' access to ECB funding would have been restricted were there downgrades of the sovereign. Confirming the availability of liquidity for the Irish banks allows them and the banking sector to avoid all too speedy deleveraging in difficult markets. This means the Irish taxpayer avoids upfront losses from system-wide fire sales that would have cost the Exchequer an estimated €45 billion. This is critical in minimising the losses in the banking system. Selling assets in a rush where the world knows one needs to sell them to repay a bank demanding its cash immediately is never a way to maximise the sales price.

Equally important, the banks will continue to access the cheaper interest rates of this funding to transition to less difficult times as compared with the 5.8% interest payable on alternative European Financial Stability Facility, EFSF, funding amounts. Those in the House and elsewhere who advocated a switch of funding for liquidity purposes from the Central Bank to an appropriate fund along the lines of the EFSF may, in the theory of monetary and fiscal policy, be correct in their assessment but a switch on the source of funding risks the interest rate going from 1% to 5.8%. We are not prepared to take that risk and are quite happy with the funding arrangement with the ECB, whereby considerable amounts of money are provided to the banking system at 1%. That the ECB has committed to accepting all Irish banking paper as collateral and to continuing its funding in the medium term is important.

Credit is essential for the economy. I will now describe how the credit flow will be reorganised and reintroduced into our economy. It is nice to have positive market reaction, but the test of the restructuring will be whether credit lines are available again to households and businesses. Our plans take a new approach and will spearhead economic recovery through the provision of necessary credit. Economies cannot function without access to credit and cannot grow without access to the credit required to permit such growth. As consumer and business certainty recovers, credit demand always improves. Householders feel less insecure about income and employment prospects and businesses feel more comfortable about making investment decisions. If improvement in credit conditions helps to stabilise asset prices, credit demand will increase further, but none of this can occur without access to lending and credit.

The wise shopowner who cuts costs and gets his or her business running even in recessionary times needs to be able to invest in new equipment to make things work even more efficiently. He or she may want to open up a second shop across town and employ three or four more people. Nothing is possible without reasonably priced loans from the banking system.

It is not just a problem for small and medium-sized enterprises, SMEs. One cannot buy a house down the road for which one has the deposit unless the bank is willing to grant a mortgage to fund the rest of the purchase price. The house buyer cannot move to buy, the house seller panics, reduces the price even more and still the buyer cannot buy. The floor falls from under the price at even unreasonably low levels simply because no one can get a mortgage. This is essentially what is occurring in respect of Irish house prices. Everything stagnates without a credit supply. The scale of the drop in activity has been noted in the recent Home Bond announcement that only 87 new homes were registered last month. This directly relates to a banjacksed banking system that is unable to provide mortgages.

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