Michael Noonan (Limerick City, Fine Gael)

I thank the Deputies who participated in this Second Stage debate for their thoughtful contributions on what is undoubtedly an important piece of legislation. Many expressed a welcome for the provisions of the Bill, recognising the importance of the State having available to it a comprehensive toolkit to address financial institutions that are in distress.

Turning to some of the specific issues raised, many Deputies referred to the situation in Greece and drew comparisons with Ireland. There are significant differences between the positions in Ireland and in other peripheral economies. Ireland is a dynamic economy with a strong medium-term growth potential. Irish goods, services and Irish labour and capital markets are flexible, a fact borne out by various OECD studies. As one of the most open economies in the world, Ireland is well positioned to achieve export-led growth even when domestic demand is contracting. The current account of the balance of payments in Ireland moved into surplus last year. This means that Ireland as a whole is no longer increasing its external liabilities and is in surplus.

The roots of our problems are also different. Ireland's loss of market access is mainly related to the fiscal costs associated with supporting the banking sector. Other peripheral economies' difficulties are more of a structural nature, such as inbuilt rigidities and weak competitiveness, that will take longer to rectify. Like Ireland, however, these countries are taking and continue to take determined steps to resolve the difficulties they face. We have the features of a north European-type economy and not a Mediterranean one. Our model is entirely different from that found in the other countries experiencing difficulties.

A number of Deputies raised the related issues of the Government's proposed approach to burden sharing with senior bondholders in the banks and the fact that the Bill does not provide for powers to impose losses on senior bondholders. The Government's position on imposing losses on senior bondholders has not changed from the position I set out in my statement on banking on 31 March. All senior bondholders in the pillar banks of AIB-EBS and Bank of Ireland and in Irish Life & Permanent, whether guaranteed or unguaranteed, will be repaid in full. As I stated in March and a number of times since, this is essential to maintain the market reputation of these institutions and to ensure their return to market funding in due course.

However, I also indicated that the position regarding the bondholders in Anglo Irish Bank and Irish Nationwide Building Society, INBS, institutions in different circumstances from the remainder of the banking system, would be considered following the completion of the independent review of the capital requirements of both banks last month. While the Central Bank has concluded that no additional capital is required for them, this does not remove the onus on the Government to consider all options to reduce the cost to the taxpayer of resolving these institutions. Therefore, in the autumn I will raise the issue of burden sharing to allow for the imposition of losses on unguaranteed and unsecured senior bondholders in Anglo Irish Bank and INBS with the IMF and EU authorities.

A number of Deputies pointed out that the Bill does not contain any provision for burden sharing with holders of subordinated debt, as is the case in the CIS Act enacted at the end of last year. It is important to understand that the Bill is intended to put a mainstream conventional resolution regime in place consistent with international good practice where it exists. The covered or guaranteed banks that are being restructured are not within the scope of the Bill at this time. Rather, the Bill will apply to credit institutions that have not been the beneficiaries of major public support during the past two and half years or so.

The burden sharing powers under the CIS Act provide the legal basis for actions under way for these institutions as part of the restructuring of the banking system. As Deputies are aware, the CIS Act already provides for the making of subordinated liabilities orders to allow for burden sharing with subordinated bondholders and I have already used this power in respect of AIB. The banks being restructured have already received significant State support in advance of any contribution from bondholders and the Government is seeking to reduce further the cost of recapitalisation of these banks through imposing appropriate losses on subordinated bondholders.

As Deputies will be aware, liability management exercises, LMEs, are under way in Bank of Ireland and Irish Life & Permanent. Ensuring that holders of junior debt in the banks make a significant contribution to the overall cost of recapitalising the banks following the results of the prudential capital assessment review, PCAR, exercise is a key policy objective supported by the external authorities. Once the LMEs are complete, the authorities will examine the further steps required to support this objective, including by utilising the legal powers available to the Minister under the CIS Act.

The resolution Bill is forward looking with a wider scope than the stabilisation Act. It provides the Central Bank with tools for the resolution of institutions and is focussed on ensuring that the resolution, rather than stabilisation, of an institution does not impact of the stability of the financial system.

The issue of burden sharing with senior creditors, or "bail-in mechanisms" as they are generally referred to, remains under discussion internationally but as yet no clear consensus has emerged. Any pre-emptive action on our part by including such tools in our "steady-state" special resolution regime in advance of agreement at EU and international level could have significant negative consequences in particular for the international banks within the scope of this Bill; for example it could lead to ratings downgrades for these banks. It also would be expected to generate negative sentiment among market participants towards Ireland owing to the perceived uncertainty regarding our commitment to an agreed international methodology on bail-in mechanisms.

A number of Deputies mentioned the resolution fund to be established under the Bill. A clear lesson from the crisis has been the importance of ensuring that there are mechanisms in place to ensure the financial sector makes an appropriate contribution to the cost of resolving institutions in difficulties. The introduction of a bank levy is one of the objectives set out in the programme for Government and this Bill will provide for the introduction of such a levy, through the establishment of a resolution fund, based on contributions from authorised credit institutions. However, it is important that the timing of the imposition of this cost on the financial sector, and its potential impact on the financial position of authorised credit institutions is considered carefully and not rushed into, particularly given the difficulties still facing the sector overall. For that reason, and to allow for an appropriate flexibility in the level of contributions individual institutions are required to make to the fund, the Bill provides that this detail be set out in regulations.

I will be requesting the Central Bank of Ireland to undertake an analysis of the appropriate calibration of the banks' contribution in relation to base and rate and for its possible phased introduction having regard to the financial position of the Irish domestic banks in particular and the plans outlined in my statement of 31 March on the future structure of the sector.

The fund may be used to finance the cost of the resolution tools provided for in the Bill including providing capital for a bridge bank and reimbursing the Minister for any financial incentives provided for the transfer of assets and liabilities. Of course it will take time to develop a fund which holds a significant level of funds while ensuring that the level of contribution for the banks is commercially sustainable and in line with international norms. To take account of this lag, the legislation provides that the Minister may also make contributions to the fund; this would allow the fund to be used even if industry contributions do not meet the requirements of a particular resolution. However, the legislation provides that the Minister will be reimbursed for any such contributions to the fund. It is very important to stress that ultimately it will be the industry rather than taxpayers that will bear the cost of resolutions in the future.

Deputy Pringle had concerns regarding the intervention conditions. The intervention conditions are a cornerstone of the approach to resolution set out in this Bill; transfer orders and special management orders can be made only where certain conditions are met. These conditions include a requirement that the Central Bank is satisfied that the institution is failing or is likely to fail to meet a regulatory requirement or a requirement or condition of its licence or authorisation. The intervention conditions in the Bill take into account work underway in the EU and the resolution regimes that have been put in place in other member states. In particular it is generally recognised that there is a balance to be struck between "hard triggers" which require action to be taken and "soft triggers" which allow for some flexibility.

The intervention conditions in the Bill look to achieve this balance while allowing action to be taken by the Central Bank at a sufficiently early stage. It is a major priority to ensure the Governor is persuaded that the use of the resolution powers is in the public interest rather than winding up of an institution.

I have noted the concerns of a number of Deputies regarding the need to take into account the special role of credit unions within the community and the difference between them and the commercial banks. The Programme for Government 2011-2016 recognises the importance of credit unions as a volunteer movement and that strong credit unions with a community focus and volunteer ethos should remain a central part of the Irish financial landscape.

The Government has established a commission on credit unions which has begun its work. Having regard to the particular nature of the credit union sector, the commission will review the future of the credit union movement and make recommendations to Government on the most effective regulatory structure for credit unions, taking into account their traditional role. This is to be achieved while paying due regard to the need to fully protect depositors' savings and financial stability.

The Government has also included in the terms of reference for the commission a requirement to make recommendations in respect of any immediate policy proposals on foot of our work under the EU-IMF programme of support for Ireland. Ireland's commitments under the programme include undertaking stress tests on credit unions and carrying out a review of credit union loan books. This exercise has been completed by the Central Bank of Ireland. Under the programme, I have also prepared a strategy to underpin the solvency and viability of any undercapitalised credit unions and my officials are in further discussions on the detailed aspects of implementing this strategy.

By the end of 2011, and in line with the EU-IMF programme of support for Ireland, the Government will submit legislation to the Houses of the Oireachtas to assist the credit unions with a strengthened regulatory framework including more effective governance and regulatory requirements. The commission on credit unions will provide me with an interim report at the end of September which will contain proposals in this regard. The Government has requested the commission to submit a final report by the end of March 2012.

Deputy McGrath made reference to businesses being forced to convert an overdraft facility into a term loan and Deputy Halligan referred to the pillar banks not meeting businesses need for credit. These issues can both be referred to the Credit Review Office. Under their review regime, "refusal" includes a decision by a participating institution to reduce or withdraw an existing credit facility as well as an outright refusal. The Credit Review Office will, on application from the borrower, carry out an independent and impartial review of a bank's decision to refuse or reduce credit. I would strongly advise anyone who has unsuccessfully appealed through the bank's own internal appeals process to seek a review by the Credit Review Office.

Deputy Ross raised issues about a lack of change in the prevailing culture and board renewal at the covered institutions. The figures quoted by the Deputy on the number of pre-crisis directors remaining at Bank of Ireland are not wholly accurate. Following its recent AGM, where the resignation of several directors took place, four pre-crisis directors are still in post, although higher figures were mentioned by the Deputy. These, along with all other directors, at all of the remaining covered institutions, irrespective of date of appointment who intend to be in office on 1 January 2012, will be subject, as announced by the Central Bank of Ireland, to assessment against the new fitness and probity standards for such appointments which the CBI envisages being implemented by 1 September 2011.

Subsequent to the July AGM of AIB and consequent on the recent mergers involving EBS and INBS only ten pre-crisis directors will still be in post - a reduction of almost 90%. The Government has sought board renewal plans from the institutions and has committed to establishing a pool of qualified candidates who would be suitable for appointments to bank boards subject to appropriate regulatory approval. Work is on-going in this matter and the Deputy can expect new and fresh appointments in coming months to ensure the boards are fit for purpose to play their vital role in the necessary restructuring of the banking sector.

The Government programme commits the Government to introducing a comprehensive special resolution regime for dealing with bank insolvencies and a bank levy. The Central Bank and Credit Institutions (Resolution) (No.2) Bill provides a basis for achieving these important commitments in the Government's programme on a SRR and bank levy to ensure that the financial industry contributes to the cost of any resolution measures in the future.

I propose to bring forward a number of amendments to the Bill on Committee Stage to enhance the Bill's provisions in the light of further deliberations since its publication, including discussion with the EU and IMF authorities. I look forward to a detailed engagement with Deputies on Committee Stage and thank Deputies again for their contributions to the debate on Second Stage. I have heard with interest the contributions of Deputies. Deputy Maureen O'Sullivan and Deputy Dara Murphy spoke about the importance of credit unions, and I dealt with that subject in my reply. Deputy O'Sullivan also mentioned the difficulties that small and medium-sized enterprises are having in accessing credit. As I pointed out, the Credit Review Office takes appeals. Just some days ago, I raised the limit for its consideration from €250,000 to €500,000 because it was brought to my attention that many of the small firms in difficulty found themselves above the ceiling of €250,000. The main difficulty arises for firms with working capital requirements of between €250,000 and €500,000 so that is now within the remit of the Credit Review Office and appeals can be made there.

There is a lot of anecdotal evidence about credit, but some of it does not seem to be accurate. In the period of office of the credit review officer, only 83 appeals were made to that office by persons with credit requirements under €250,000. We will see where it goes when the new limit is put in place. Frequently, worse cases come to our attention as public representatives. There seem to be as many problems with the lack of demand for credit as with the lack of credit supply in the economy at the moment.

Deputy Arthur Spring made a good analysis of the situation, as did Deputy Seán Kenny, in referring to events in Brussels today. I hope everything works out well, but such negotiations are always difficult. Unanimity is required, so what is put forward in the first proposal is not necessarily what comes out at the end. I hope everything will go well. We have brought about a situation where the main policy instruments we require are up for discussion but, as I said, it requires unanimity to get things over the line. We will know the situation later tonight, I presume.

Deputy Stephen Donnelly had a strong analytical approach to the Bill as well and I agree with many of the points he made. I will be open to considering amendments to improve the Bill. It is the kind of legislation that should be constructed by Members on all sides of the House before Final Stage is reached. It is an evolving debate and Committee Stage will take place in the next session. I intend bringing forward some amendments on the basis of the debate that has already taken place. We will look on their merits at any amendments Deputies may wish to table.

I thank all the Deputies who contributed to the debate. As Deputy Spring already said, I hope Deputies will have a good break. It has been a long year for anyone who started campaigning well before the election, worked their way through the election and then on to the first session of the new Dáil. I think a break will be welcomed by everybody.

See this speech in context