Professor Patrick Honohan:

A wide range of questions have been asked. I will start with the Chairman's question because we were dealing with that point. It is not an easy one with which to deal. He gave the analogy of a teacher and a headmaster or headmistress who would say a teacher was being too hard on the students and ask the teacher to lift their scores and to score them on a curve. Our role is not exactly like that because in the Central Bank we do not claim to be super duper bankers. We are trying to ensure the banks are run properly, that they are not moving towards a situation where they will cause losses for everybody and that they deal fairly with their customers. We have all of the consumer protection mechanisms in place. However, if a bank does not have the capacity to make good lending decisions, it will fall back in its profit performance and lose out on other customers, which would not be good for it either. We do not pretend to check everything they do, but we do monitor how they go about their business. Their big business in SME financing is to work with the customers who are exposed through over-indebtedness. Members may ask what about new people, but the customers who are over-indebted are also the potential phoenixes and many of them have a variety of businesses. One or two or perhaps a core business could move forward but it is being dragged down by a property development on the side and the borrower as a whole is not creditworthy. What the bank has to do and wants to do in such a case - it takes many resources and a long time to do it - is to get a picture of the borrower's situation as a whole and decide that it cannot pay that amount. It could have a good business in terms of the rest of it and sort it out in that way.

Deputy Joe O'Reilly spoke about write-downs and write-offs, but more broadly what is required is a restructuring of relationships. Borrowers may be able to pay off the debt over a longer period of time, but it needs to be structured in such a way that the viable elements can move forward. We are so long into the crisis that one would think the banks would have done this by now. They are getting on top of it and some banks are better than others. However, some are very behind to this issue, while some are motoring ahead, but it is complex. That is the area about which probably many of the complaints may have been heard. People said they were not getting money from the banks. The reason was they were deeply under water and their situations were complicated to work out. We have been monitoring and pressing the banks to improve the position and get their hands around this aspect. Very often it involves indebtedness to different banks or lenders, which is also true of the household sector. There is unsecured and secured lending. As members will know, in such cases we have been facilitating dialogue between the secured and unsecured parties to get them to agree to deal with the matter in a way that they will not be blocked and to avoid them saying they will not do anything until the other party does something first. We have been getting them together. We are working on the matter, but it is not a question of saying to the banks they have to ratchet up their approvals ratio. If we do this, they will say the Central Bank told them to lend and then when things go bad, they will say the bank told them to do it and that it should bail them out. They have to make the credit decisions. That is not a great answer, but it is the best I can do.

I note Senator Terry Leyden has left. The establishment of the Credit Review Office was an innovation introduced by the late Brian Lenihan. It was innovative. Some inspirations from operations in other countries fed into it, but it was a home grown idea. It is a small office, but Mr. Trethowan has done a great job to sensitise the banks that the nation will be dissatisfied if they keep on turning down viable credit customers. When an applicant refers what he or she considers to be a proposal that was turned down by the banks to the Credit Review Office, Mr. Trethowan will examine it and say it was not such a good proposal and that the applicant should go away or, in many cases, he will say it is a good proposal and that he will contact the banks and often they will say they will have another look at it. It involves a surprisingly small number of cases. SME lending forms a small part of the business of the banks, as they were into property and other things. I do not know if I can say much more on the issue.

Deputy Joe O'Reilly asked about European funds being used to augment measures. The European Investment Bank is assisting. There were blockages up until now because suddenly the ratings of Ireland and other countries were lower and started to block some of the programmes of the European Investment Bank because these programmes required a co-guarantee from the national government. Some of these blockages have been removed and that lending is going ahead. That is a wider initiative. I do not expect banking union per se to lead to turning on a flow of resources in that way.

I will come back to Deputy Paschal Donohoe's question about democratic accountability and removing all of these items - bank supervision and resolution - from national control. That is one way of thinking about it. Another way is that we all use the products from Microsoft Corporation, Apple and so on, but we do not expect to have national control over software, although there is some. We buy in these services and, to some extent, should get away from the re-nationalisation of banking which has tended to come with the crisis and use banking services as if they were a Europe-wide service. In the 1980s the first banking directives envisaged a pan-European banking system, such that if one received a licence in France or Ireland, one could bank anywhere in Europe. The designers of that system imagined that eventually there would be a lot of cross-border banking activity, even at the retail level, and that we would move to a state where we would buy our computers from Dell, Microsoft, Apple and so forth and our banking services from whoever else was strong in the marketplace and that it would not be a national but a European system. I do not see any problem with this. However, we did not reach this for market structure reasons. It was not the way banking went. If it had been all foreign banks which had lent to us for the purchase of residential property and so on, we would be laughing. We had a number of foreign banks lending, including Ulster Bank, Bank of Scotland Ireland and so on. What happened to them? The Government did not bail them out. They were bailed out by their shareholders and the British Government had to put its hand in its pocket also.

I refer to getting to a situation where banking union is not just centrally controlled in terms of supervision and resolution. I am not against a degree of local banking. International banking concerns have been no less anonymous than the large banks we now have. Of course, one has community banking also, but for the big ticket items, if it is seen as mechanical rather than something tied in with national political pressures, banking works best.