Seanad debates

Thursday, 17 July 2014

Strategic Banking Corporation of Ireland Bill 2014: Committee Stage

 

Section 1 agreed to.

SECTION 2

12:45 pm

Photo of Kathryn ReillyKathryn Reilly (Sinn Fein)
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I move amendment No. 1:


In page 6, line 1, after "on-lending" to insert "and directly".
The purpose of this amendment is to allow for the possibility of the strategic banking corporation of Ireland, SBCI, lending directly into the real economy. I see no reason that provision should not be made for this in the legislation. If one of the aims of these provisions is to promote competition, we should set about it in a very straightforward way. If the model we are using is based on Germany's KfW, we should not exclude the possibility of the SBCI doing whatever that bank can do, including lending directly into the real economy.
As I pointed out on Second Stage, one of our concerns is that the retail banks will simply soak up the funding available from the SBCI and instead of passing it on to small and medium-sized enterprises, as is the intention, will favour preferred customers, which may well be larger companies. Allowing the SBCI the capacity to lend directly would, if nothing else, keep the banks on their toes.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I welcome the constructive intention of the Senator's proposal to amend the section dealing with the purposes of this legislation, but I am not in a position to accept it. The business model of the strategic banking corporation of Ireland is based primarily on the on-lending model which is operated successfully by KfW in Germany, ICO in Spain and others. The SBCI is being set up initially as a wholesale funder that will work with various on-lenders. The objective is to minimise the overhead expense of the operation and leverage the existing networks and capabilities of on-lenders for the benefit of SMEs.

In building any organisation from start up, it is practical to phase in its development. Where we are seeking to deliver funding to SMEs in the quickest and most cost-effective way, it is appropriate initially to have on-lending arrangements with institutions that have existing networks throughout the country. In a situation where commercial banks work with the SBCI and new competitors are facilitated and welcomed, an additional branch network on its own would add no value. Given that the vast majority of loans issued to the SME sector in this country are for amounts of less than €100,000, a cost-effective on-lending model works best. Direct lending is more likely to address larger borrowing requirements and can, therefore, be facilitated from the SBCI's own infrastructure.

In this way, the SBCI will ensure SMEs receive the best value possible. Critically, however, the provision of credit directly from the corporation is not precluded under the legislation. Although the intention is to facilitate indirect lending in the first instance, a combination of the provisions in subsections 2(b)(ii) and 8(1)(a) will ensure both direct and indirect lending are possible. Indeed, these sections legally empower the corporation to become involved in direct lending. This is likely to happen in the medium term once the organisation is up and running. Consequently, the amendment is not necessary.

Amendment, by leave, withdrawn.

Photo of Sean BarrettSean Barrett (Independent)
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I move amendment No. 2:


In page 6, between lines 16 and 17, to insert the following:"(j) to avoid procyclical investment cycles.".
I welcome the Minister to the House. When he was explaining the thrust of these proposals to us the last day, he placed great emphasis on the importance of avoiding pro-cyclical investment cycles. However, this objective is not included in the purposes of the Act, as set out in this section. The Leader said this morning, echoing the Minister's words, that this is the most important legislation since the creation of IDA Ireland. I thank the Minister's officials for the briefing they supplied. Unfortunately, we have been so busy in the House this week, I did not get time to go through it. I am putting forward this proposal in the hope that it will be of help to the Minister to include it. As I said, he referred to this issue in his Second Stage speech but it is not referenced in the legislation.

I think this amendment crossed with the Minister's speech. I know from his speech the Minister's concern about avoiding pro-cyclical investment cycles. Would it be of assistance to the Minister to include this amendment here? If he thinks it is covered elsewhere, that is fine by me. We must learn from the mistakes of the past. During that period the boom became "boomier" with 100% mortgages being given out and a massive expansion of credit. The Wright report states that the Department of Finance gave the appropriate warnings but they were ignored. Ireland obviously needs to avoid a repeat of what got us into the problem that the Oireachtas has been addressing since 2011. That is the spirt of my amendment. As we go forward with this major development, we must ensure that we do not go pro-cyclical, as this is the issue that will be on everybody's mind. Whether it is useful for the Minister to include what I propose in the amendment to the Bill is his call.

12:50 pm

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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The SBCI needs to be able to lend to sectors of the economy as and when those sectors need support. Certain sectors may suffer credit droughts when all other sectors are experiencing healthy supplies of credit.
I fear that introducing Senator Barrett’s amendment would hamper the flexibility of the SBCI to act in specific areas when needed. There is a clear intention for the SBCI to act in a counter cyclical manner and I am informed by the Spanish model for their development institute, ICO, which acts in an accordion-like fashion, expanding and contracting their operations as need be. It is important to reiterate that the purpose of this Bill, when enacted, is to encourage the giving of credit in a prudent manner as set out in section 2(a) and to facilitate the availability of credit in the State to benefit the economy and economic well-being of the State.
As Senator Barrett highlighted himself during the Second Stage debate the pre-crisis credit boom was fuelled primarily by property speculation and asset-based lending with limited investment in the real economy.
In marked contrast the SBCI has been designed to increase the availability of longer-term flexible debt finance, which is appropriately priced, thereby providing SMEs with access to the type of patient intelligent capital that will increase productive investment, encourage growth and thereby generate additional employment opportunities.
The SBCI will at one level operate in a counter-cyclical manner in seeking to compensate for any constraints in the provision of financing to enterprises and in particular SMEs. In the years since the international financial crisis a number of Governments have utilised similar state-sponsored financial institutions to address cyclical financing constraints by increasing the scale and scope of their lending activity.
It is accepted, however, that regardless of the economic and financial cycle, there will always be structural problems in the market that constrain SMEs in accessing credit. This is a feature of SME funding across the OECD. In particular innovative firms, small firms and firms early in their life-cycle would appear to be more affected by such market imperfections.
These structural imperfections or constraints will also tend to be exacerbated by financial crisis as was the case with the impact of the international financial crisis since 2008. Crisis enhanced constraints may also persist beyond the return of broader financial stability.
Furthermore the SBCI will also operate with a broader developmental mandate that will enable it to channel investment towards key strategic sectors of the economy. Although the initial operations of the SBCI will focus on supporting SMEs other strategic sectors could also be supported in the future.
Arguably the financial crisis has also served to crystallise a longer-term developmental problem for Europe in terms of its capacity to finance productive investment, particularly in the SME sector.
By seeking to address cyclical and structural constraints in the credit market in a manner that provides benefits to the SMEs, the economy and indeed the State, the SBCI will avoid the speculative short-term approach to lending that characterised the period leading up to 2008.
While I endorse the sentiment behind Senator Barrett’s amendment we consider that the functions of the SBCI as outlined in this section of the Bill are sufficient to not only address his concerns but, more important, will ensure that the SBCI provides improved credit that is tailored to the needs of SMEs and in so doing contribute to the achievement of more sustainable and long-term economic and employment growth.
I will undertake to have my officials reconnect with ICO and investigate the inclusion of appropriate language covering counter-cyclical operations in the memorandum and articles of association of the company.
Rather than accepting the amendment, I am making a commitment that after consultation with ICO, we will include provisions to achieve what he proposed in the memorandum and articles of association of the company.

Photo of Sean BarrettSean Barrett (Independent)
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I am very much indebted to the Minister and for that reason I will withdraw my amendment.

Amendment, by leave, withdrawn.

Section 2 agreed to.

Sections 3 and 4 agreed to.

SECTION 5

Photo of Kathryn ReillyKathryn Reilly (Sinn Fein)
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I move amendment No. 3:


In page 7, between lines 21 and 22, to insert the following:“(7) The SBCI shall apply for a banking licence.”.
I discussed this issue on Second Stage and that is the reason I tabled amendments on Committee Stage. In the programme for Government a commitment was made to establish a strategic investment bank. There is a dire need in society for a lender to the private and commercial sectors. There is an appetite to establish a real State-led investment drive. A bank has a banking licence. The Bill proposes a strategic banking corporation, which to some may sound like a bank but as all Members of the House know, it is not a bank. We believe there should be a State bank lending to the real economy. By applying for a banking licence, the Strategic Banking Corporation of Ireland, which is being established under the Bill, will be able to play a wider range of roles than the narrow remit it currently has. I know there have been vague commitments that this might happen in the future but there is no reason that the application process should not happen straight away.
I will press my amendment.

Photo of Darragh O'BrienDarragh O'Brien (Fianna Fail)
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I will follow on from Senator Reilly's point. I mentioned this issue on Second Stage and while we support the Bill we have concerns along the lines Senator Reilly mentioned, which I put to the Minister on Second Stage.

It is still not clear to us how the money that the Strategic Banking Corporation of Ireland will give to the retail banks will be monitored, in terms of the level of lending by SBCI, the sectors to which it will lend, the mark ups and the terms of the loans. The best way of doing this is for the SBCI to have a banking licence and to do this itself. I think this is important. If the banks are not doing what the Minister expects them to do in terms of lending this money out into the economy, then the SBCI could do it. The only way that SBCI could do that is by having a banking licence. We strongly support this amendment.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I thank Senator Reilly for her amendment and her contribution. There is nothing in the legislation precluding the Strategic Banking Corporation of Ireland from applying for a banking licence if it deems it necessary in the future. It would seem therefore that our policy intentions are aligned on this matter.

The SBCI’s initial focus will be to use the successful on-lending model. The company can bring about benefits to the economy by being established as proposed in the legislation and can expand its operations to other areas in the months and years to come.

At present, seeking a banking licence would be an unnecessary burden on the new company, through increased expense and administration, that would not add value to its initial offering to SMEs. The corporation will not conduct banking business at the start of its operations nor do we currently plan for it to conduct any banking business within the short term. If, in future, its interests require a banking licence such as for taking in deposits to fund lending, the legislation is sufficiently broad to facilitate this anticipated growth of scope.

It would therefore need to be subject to the full Central Bank licensing regime and engage fully with the relevant authorities before commencing such operations. The amendment is not necessary and, consequently, I am not accepting it.

1:00 pm

Photo of Kathryn ReillyKathryn Reilly (Sinn Fein)
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I take on board what the Minister said in terms of the objectives and the future. However, in the short term we should include this in the legislation.

Amendment put:

The Committee divided: Tá, 15; Níl, 23.

Tellers: Tá, Senators Trevor Ó Clochartaigh and Kathryn Reilly; Níl, Senators Paul Coghlan and Aideen Hayden.

Amendment declared lost.

Section 5 agreed to.

Sections 6 and 7 agreed to.

SECTION 8

1:05 pm

Photo of Sean BarrettSean Barrett (Independent)
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I move amendment No. 4:


In page 8, line 9, after “credit” to insert “other than in personal loans, financial intermediation and for investment in property”.
I welcome the Minister back to the House. The Minister's formulation of words refers to "the provision of, additional credit in a prudent manner". My amendment was sent in before I heard the Minister's remarks the other day. That was the timetable we had and we were glad to comply with it. The purpose of my amendment was to ensure this bank would not be involved in personal loans, financial intermediation and investment in property. As I recall it, on Second Stage the Minister said this is precisely the approach being taken by these banks and that the rules of Kreditanstalt für Wiederaufbau and the European Investment Bank preclude the type of investments that this amendment is intended to preclude. Therefore, I understand from what the Minister said the other day that there is no possibility the corporation could be enticed into these areas which did so much damage to the Irish economy.
The last thing the Irish economy needs is a banking system obsessed by property, financial intermediation and personal loans. The Minister is trying to do something different. I gather that under the rules he is implementing from KfW and the EIB, this outcome is already addressed. Should the Minister confirm that this impression of mine is correct I will not be pressing the amendment. I was certainly relieved when the Minister told us the other day that the purpose of this corporation was precisely to avoid what caused so many problems and the destruction and daftness of Irish banks in the first seven or eight years of the last decade.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I thank Senator Barrett. The enabling legislation has been designed with flexibility in mind. Therefore, I would prefer to stay away from the inclusion of prescriptive prohibitions in the text. However, it is the case that two of the funders at the establishment of the strategic banking corporation of Ireland will contractually prohibit this funding from being put to use in investment in property. This will be reflected in the operation of the new corporation. I am pleased to confirm that what Senator Barrett has put on the record is the case in respect of KfW and the European Investment Bank.

The strategic banking corporation is not intended to fund personal loans. The general practice throughout the OECD is for these development institutions to eschew such uses of their funding although some have been known to play a policy role in protecting households from structural gaps while providing for their funding needs. For example, KfW has a stated role in providing credit for housing. I do not foresee a need for SBCI to become involved in this area. Again, the flexibility to be able to react to a given credit need in the economy at some point in future is desirable.

I am also wary of introducing text which may put sole traders at a disadvantage. While SBCI is not being established with a banking licence at the start, it may develop in that direction and financial intermediation may become a part of its operating model as it seeks to match its expanding operations with more diverse funding sources. I am pleased to give the assurance Senator Barrett seeks and I thank him again for raising this issue on Committee Stage.

Amendment, by leave, withdrawn.

Question proposed: "That section 8 stand part of the Bill."

Photo of Katherine ZapponeKatherine Zappone (Independent)
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This is a fine Bill. I am in favour of it and what the Minister is doing so quickly. My question relates to section 8(1)(h), the function to provide finance to projects which promote the economic development of the State. Has the Minister given any consideration to whether the strategic banking corporation could serve as a resource to promote social and environmental development?

As the Minister is probably aware, KfW, one of the sources to supply the strategic banking corporation, has functions in addition to lending directly to SMEs. These can drive not only economic development but social and environmental development by providing finance to housing and environmental protection. The House has had many debates on the promotion of social and environmental enterprise and social innovation. In the context of this particular corporation, is there any opportunity for those sponsoring such initiatives to access finance from this source? Oftentimes, given the overall objectives of these enterprises it is difficult to access the finance.

Photo of Fidelma Healy EamesFidelma Healy Eames (Fine Gael)
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I wish to follow up on the issue Senator Zappone has raised, namely, whether the banking corporation could have a role in social entrepreneurship. Not everything has the hard-and-fast approach of SMEs but yet in communities throughout the country social entrepreneurship can have a wonderful impact. It can have strong social as well as economic outcomes. At a time when a country has been through a recession and high unemployment it is so important to give life throughout the country. We often hear many worthwhile proposals in the form of social entrepreneurship. From that point of view I am keen to establish if the strategic banking corporation could have a role in that regard.

1:15 pm

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I thank both Senators for their contributions. The best thing to do is to describe briefly how I envisage the new credit institution, SBCI, will operate. First, it will be a wholesale bank. That means we will receive funds from KfW bank in Germany, from the European Investment Bank and also from our own strategic investment fund in Ireland. It will do that each year and on-lend, but it will not set up a network of high street bank branches. Its model will be to provide wholesale funding in tranches to banks such as AIB and Bank of Ireland, and also to other lending institutions, which will on-lend. We will see it developing and increasing its functions over time.

Let us suppose one has an SME, in whatever activity one likes to select, and one wants to expand it. Traditionally, one could not get ten-year money from AIB, Bank of Ireland or any of the other banks and one could not get an interest holiday. If the person knows the business will not be profitable until year three or four, he or she can get an interest holiday up front and a new type of lending. Then AIB, Bank of Ireland or any other agent bank will be bound by the contract it has for the provision of funding from SBCI and it will on-lend. It is envisaged that at a later stage the SBCI will get involved in a wider range of activity. It is mandated in the legislation that it will be involved in projects which have an economic or environmental dimension and return to the country. That means they are not excluded but enabled to do so. We see it as a further development, as the model works in practice.

The next phase will be like the amendment that Senator Reilly tabled to allow the bank to be involved as a retail lender. They are empowered under legislation to be a direct lender to businesses rather than going through the on-lender process. Again, we see that as a development down the line and not in the first year or two of operation. It meets the various suggestions that various Senators have made, but later in the timeline. It does not exclude, anywhere in the legislation, lending for social entrepreneurship. That is a possibility as well, but it is not specifically mandated.

Question put and agreed to.

Sections 9 and 10 agreed to.

SECTION 11

Photo of Marie MoloneyMarie Moloney (Labour)
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Amendments Nos. 5 and 7 are related and may be discussed together by agreement.

Photo of Sean BarrettSean Barrett (Independent)
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I move amendment No. 5:


In page 9, to delete line 38.
The purpose of the amendments is to afford the Minister the option of a mixed model rather than the current set-up as stated in the Bill, which states: "The Minister shall be the sole shareholder." I commend him on getting AIB and KfW involved. Does a mixed model facilitate the Minister in the goals we share? That is the purpose of the amendments that the Leas-Chathaoirleach asked us about. Does a mixed model strengthen the Minister in the objectives of the Bill? If it does, then that is the objective of the amendments.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I thank Senator Barrett for the effort he has clearly put into his consideration of the Bill. It seems our general intentions in this area are well aligned. However, on this particular point of detail, I cannot change the text of the Bill as it is.

The particular subsection deals with the potential payment of callable capital if required. It is desirable to use callable capital as it facilitates the provision of funding by the SBCI to external funders without the need to guarantee that funding. This is the method by which EIB gives comfort to its lenders that their funding is secure. The use of such callable capital by the SBCI may be possible in future but will not be possible at the start.

Callable capital operates on the basis that the borrower sets its level of capital at a level high enough for its lender to be comforted by the fact that the borrower has sufficient loss-absorbing capacity. This capital does not need to be paid to that level from day one but rather simply enabled to be paid at that level. Crucially, the borrower must not be restricted from paying in capital to agreed levels if the pre-agreed circumstances arise. The borrower must respond within a contractually agreed timeframe by injecting the callable capital into the company, and section 11(6) enables such an injection. Given the importance of the subsection for giving effect to the time-limited action, it would not be helpful to require the Minister to seek other sources of funding at the time when she or he needs to act without delay. Furthermore, the Minister may be in a less than desirable position in terms of being able to negotiate a price at the point where the capital has been called.

I have already outlined why, in general, it is important that the SBCI be established with the Minister as the sole shareholder. In short, it is important for public financial institutions such as the SBCI to be bolstered by public ownership so that they can be kept in place to meet the needs of the State and the economy and not disposed of when a private shareholder no longer sees a value in the institution as a profit centre.

Let me reiterate that it is not anticipated that the Minister's shareholding in the SBCI will be sold or otherwise disposed of at any time.

Photo of Sean BarrettSean Barrett (Independent)
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I thank the Minister for his reply. The objective was that they might help the Bill, and I accept his response that they are not helpful at this stage. I wish to give notice that I shall not move amendments Nos. 6 and 8, as both have been covered by the Minister's reply to this amendment.

Amendment, by leave, withdrawn.

Amendments Nos. 6 to 8, inclusive, not moved.

Section 11 agreed to.

SECTION 12

Photo of Marie MoloneyMarie Moloney (Labour)
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Amendments Nos. 5 and 7 are related and may be discussed together by agreement.

Photo of Kathryn ReillyKathryn Reilly (Sinn Fein)
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I move amendment No. 9:


In page 10, to delete lines 38 and 39 and substitute the following:“(4) The Minister may not dispose of any shares in the SBCI without the approval of the Houses of the Oireachtas.”.
My amendment is straightforward. It aims to strengthen the role of the Oireachtas in holding the Minister to account and means the relevant Minister would have to get the permission of the Oireachtas before selling off the SBCI. The body has the potential to be very important. As a lot of taxpayers' money would be involved, the least we can expect is a full debate before the SBCI could ever be disposed of. We think it should be kept in public hands and developed into a permanent asset that we hope will return profits to the people each year.
The last thing we would like to see happen is for the Government to invest in the body, build it up, do all the hard work, put in the legwork and then sell it to the banks that failed us in the first place. My amendment is straightforward and seeks Oireachtas accountability or, at the very least, consultation with the Oireachtas before any potential sale could happen.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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The proposed amendment would require the Minister to seek the approval of the Houses of the Oireachtas in order to dispose of shares in the SBCI. Let me be clear: it is not anticipated that the Minister's shareholding in the SBCI will be sold or otherwise disposed of at any time. Section 11(5) specifies that the Minister for Finance shall be the sole shareholder. The Minister has freedom of action in relation to the company and will need to account to the Oireachtas afterwards for his or her actions. Normal ministerial accountability will apply. This is wholly appropriate and is in accordance with normal practice where the Executive acts and is then accountable to the Oireachtas for those actions.

It is usual in circumstances where a Minister holds shares in a company, enabled or established by Statute, to specify that the Minister in question may sell or otherwise dispose of the shareholding or part of the shareholding.

Despite the fact that we do not intend to sell the shares in the SBCI, it was agreed with the Office of the Attorney General that it was best to provide for this section in its current form and thereby specify in legislation certain restrictions on how a sale would be effected.

Question, "That the words proposed to be deleted stand", put and declared carried.

Amendment declared lost.

Section 12 agreed to.

Sections 13 to 17, inclusive, agreed to.

SECTION 18

1:25 pm

Photo of Sean BarrettSean Barrett (Independent)
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I move amendment No. 10:


In page 13, between lines 19 and 20, to insert the following:"(5) No letters of comfort will be issued pertaining to Ministerial guarantees under this section.".
The purpose of this amendment, which relates to ministerial guarantees, is to rule out the kind of informality that has been criticised by the Comptroller and Auditor General and the Committee of Public Accounts in the past. I refer to the system of nods and winks whereby letters of comfort are introduced. I support what the Minister is doing in the four subsections of section 18 as it stands. However, I am suggesting that as we put the public finances together again, we should use legislation to firmly rule out this form of ministerial guarantee, which has led to many legal costs and troubles. If ministerial permission is to be given, it should be of the form specified in section 18 as it stands. There should be no more letters of comfort. I do not know whether this happened during the Minister's time as Chairman of the Committee of Public Accounts, but it certainly happened in earlier times. We cannot have these informal ways of giving away tens of millions of euro in public money. This amendment seeks to prevent such haphazard arrangements from being reached.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I can confirm to the Senator that our intentions are aligned once more in the case of this amendment. It is not intended that the SBCI will have any capacity to issue letters of comfort which are legally binding guarantees. This term - "letters of comfort" - is used to describe assurances provided to lenders or other institutions where there is no legal or statutory basis for a guarantee, or where a limit on a guarantee has already been reached. As such non-binding assurances do not have a legal basis, they would have no effect. The issue the Senator is attempting to deal with is adequately provided for in section 18 of the Bill, which provides for the issue of guarantees and subjects that power of guarantee to limitations so that any letters of comfort issued cannot legally become a call on the State. As regards the application of the State Guarantees Act 1954, it is considered preferable to include the power to issue guarantees in the legislation setting up the SBCI, rather than inserting the SBCI as a body covered by the State Guarantees Act 1954, as amended.

Photo of Sean BarrettSean Barrett (Independent)
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I thank the Minister for his reply. As he has said, this is being provided for on a much firmer basis. It would be a great day for the country if the Oireachtas were never to mention "letters of comfort" again and if they were not to exist anymore.

Amendment, by leave, withdrawn.

Section 18 agreed to.

Sections 19 to 23, inclusive, agreed to.

Title agreed to.

Bill reported without amendment.

Sitting suspended at 2.25 p.m. and resumed at 2.30 p.m.