Michael Noonan (Limerick City, Fine Gael)

In recent years, the excessive attention focused by bank management on the need to recapitalise and repair broken balance sheets has been a failed policy. With banks under pressure to delever quickly, new lending suffered considerably. Despite the efforts by the Credit Review Office, business and retail confidence in the availability of credit was completely eroded. Our decisive plan will provide a powerful support to encourage investment and return people to work. We must break the vicious cycle whereby limited access to credit hurts economic growth by restricting investment and consumer spending, which in turn causes further job losses and, therefore, further limits spending. Our plans will provide credit to encourage investment and consumer spending, thereby instilling in the economy a confidence that will lead to increased employment and even further consumer spending and confidence.

As I have stated for the past three years and up until last Thursday, banks were under extreme pressure to delever and restructure their balance sheets. It is impossible to consider new lending as a priority when one has capital and funding problems. With inadequate capital, the pressure came first from a need to avoid new lending activities that would have used up scarce capital resources. We have solved this problem by committing to capitalise the banks properly to deal with losses in their legacy books and to withstand all foreseeable shocks to their businesses even in extremely pessimistic scenarios. With funding difficulties, the banks were under pressure to delever assets to repay the funding due to the ECB and the Central Bank. We have solved this problem by working with the ECB and the Central Bank to provide for liquidity coverage for the deleveraging plans while accommodating in those plans more than €30 billion of new lending between now and 2013.

The key to creating the potential for new lending is to be found in a full understanding of the deleveraging process. It is this dynamic that presents the catalyst for new lending and a clear change of direction from the failed policies of the past. The Central Bank has estimated that small and medium enterprise and mortgage credit of €11 billion to €16.5 billion of gross new lending will be required in total over the next three years. Our plan creates capacity for the pillar banks to lend in excess of €30 billion over the same period.

Over the period to 2013, to resize their balance sheets and achieve acceptable loan to deposit ratios, the pillar banks need to delever their balance sheets by in excess of €55 billion of loans. Each year, on average, €10 billion of existing loans get repaid in the pillar banks' core businesses, which is more than €30 billion over three years. If the banks restrict new lending in their core banks, achieving the plan could have required an identification of just €25 billion or more of additional non-core assets to be sold or run off. New lending would be zero but the banks would delever to the desired size and could commence new lending in 2014.

The Government might have stopped there but that would have continued the failed policies of the past and we cannot wait until 2014 for new lending. The €30 billion or more of expiring lending over the three years had to be saved for the Irish economy. The banks could not come under pressure to pocket the cash and use it to repay the ECB and it must be recycled into the economy. We are overcompensating on the deleveraging of non-core assets. We have identified a full €57 billion of assets which were not required to rebuild the economic growth of the country and these are the assets to be wound down or sold.

By taking out or deleveraging extra assets, the reorganisation plan retains a clear capacity across the two pillar banks to recycle the expiring core lending to create new lending in activities which would spur economic growth. Down €57 billion and up €30 billion gives the same net reduction of €27 billion or more but critically, a key target of more than €30 billion for new lending now is part of the system. To put it very simply, if we deleverage beyond the equilibrium point, we provide the headroom for the new lending to occur over the next three years. The plans to be implemented by the banks will provide headroom for extra credit in the economy of in excess of €30 billion over three years.

The second feature of the programme is that lending in the core banks does not need to be increased to service the economic needs of Ireland but it needs to be redirected. We know the Irish banks have lent excessively to their clients in recent years, especially for foreign real estate purchases. The credit allocation has become skewed towards real estate lending and genuine borrowers in manufacturing and agriculture, for example, have seen their percentage share of lending reduce annually over time since the 1990s in a progressive trend.

It is important that we veer away from lending on the real estate side and put it into the productive areas of the economy. We will do this by implementing the policies as stated with the Central Bank, the National Treasury Management Agency and the Department of Finance monitoring what is happening in the banks. They will ensure lending is directed to the productive areas of the economy. The Credit Review Office has commenced operations and has done some good work. I compliment my predecessor for putting this institution in place because it has helped, and we will build on the work that has been done.

I will deal with the cost of the recapitalisation of the banks. The total capital required for the Central Bank stress test exercise is €24 billion. The net impact of this to gross debt is significantly reduced by measures we are taking. In total, the impact on gross debt may not exceed €2 billion, which is less than 1.5% of GDP. It is not at all the exaggerated figures claimed by commentators. Of the total amount of €24 billion, €3 billion will be a contingent buffer or COCO contingent capital instrument paying a market coupon to the State, which will reduce the cost to the Exchequer of financing this investment. The agreement with the external authorities provided that the State would provide €17.5 billion of funding towards the programme of support for Ireland. It is proposed therefore that the National Pensions Reserve Fund will provide an additional €10 billion and that the State will fund a further €7 billion from cash resources. This will reduce the additional debt service cost to the State associated with new capital injections.

Additionally, as we have already announced, the Government will require burden sharing from subordinated bond holders, capital generating asset disposals by banks and it will endeavour to raise capital from private investors to alleviate the burden on the domestic taxpayer. We expect that the impact on gross debt will not exceed €2 billion, which is much lower than the figure in comments.

We see the restructuring of the banking system as the first measure to restore confidence in the economy and to provide credit lines to make the economy grow again. It is only a first step and we must move on to consider the domestic economy, where savings figures are over 11%. There is money out there but people are afraid to spend it. If we can get people back to a normal pattern of spending, the service sector in the domestic economy will begin to grow. Our strategy is to change the thinking of the Irish people by introducing a jobs initiative by way of a budget some time during May. That will be the second plank in trying to return confidence, move the economy forward and get people back to work.

I thank those in the House for their attention. We claim to have made a good start on the banking side but it is only a start. It is only one plank in an ongoing programme to restore confidence and build the economy.

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