Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

There would be general agreement that the country needs strong banks that are profitable and that can provide the credit lines necessary for private citizens and businesses in the country. We are down to two banks with leverage and clout, Bank of Ireland and AIB. It is in everyone's interest that those banks are strong and do not operate under disadvantages that no other bank in Europe is asked to operate under. I think we would have some level of agreement on that.

Deputy Doherty tabled amendments which are quite helpful to the debate but unfortunately they were ruled out of order. That is normal. We do not know what will be ruled out of order and what will not.

I will read the briefing note and reply to Deputy Pearse Doherty's proposed amendments.

I note that Deputy Doherty has proposed an amendment No. 104 to increase the amount of the bank levy payable by the banks that would benefit from lifting of lost restrictions under section 33. This amendment was ruled out of order but I would be happy to address the substance of his proposal at this stage. It is important to highlight that the financial institutions who stand to benefit from the removal of section 396C are AIB and Bank of Ireland only. As the Deputy is aware, the State has substantial investments in both banks through its equity and debt holdings. When section 396C was first introduced, the State involvement in the banking sector was far more limited and critically, equity stakes had not been acquired by the two banks. The State now has substantial shareholding in both banks. I am obliged now to review the decision that was made when the NAMA legislation was introduced with the interests of the taxpayers, as shareholders in both banks, in mind. Each of the banks is carrying significant amounts of unused losses. The future value of these losses to the banks is recognised on the banks' balance sheets as deferred tax assets. Under the new capital rules known as CRD4, these deferred tax assets are gradually deducted from capital, over time. Hence, the problem with the lost restriction contained in section 396C is that it has the effect of lengthening considerably the period of time over which the losses can be utilised and so the deferred tax asset stays on the balance sheet for longer. Thus, it negatively impacts on the capital of these two banks and the value of the State's shareholding in the banks which is directly linked to the value of these deferred tax assets. Lifting the restriction in section 396C will reduce the period of time over which the deferred tax assets are to be carried on the balance sheets. I believe that the cash flow and tax receipts will be offset by the improvement in the valuation of the State's equity and debt investments in both banks. That is the complete note in reply to Deputy Doherty.

In reply to other questions, core tier 1 is the principal reason for removing an exceptional and unique restriction of normal loss relief which applies to AIB and Bank of Ireland but to no other company in the country. Capital adequacy rules changed after the restriction was introduced, such as more tax from, for example, AIB, less value in State investments, impact on the capital adequacy of the banks. The last factor has become more significant after the loss restriction was introduced.

I was asked what was the situation in other countries. I have a note which I will read to the committee in reply. On the question of deferred tax assets, DTAs, Italy and Spain have similar issues with large DTA balances and their impact on bank capital ratios under the new CRD4 rules. Measures that have been introduced include converting certain components of DTA balances into tax credits which would be honoured by the State should a bank face liquidation. The effect of this is to preserve the pre-CRD4 treatment, that is, no capital deduction for these components would be required. These measures go a long way beyond what is being proposed in this Finance Bill with the repeal of section 393C which can be seen as a normalisation of the system. The repeal serves only to remove a restriction placed on the utilisation of NAMA losses which does not apply to other trading losses in the tax code. It is worth noting that the losses subject to these measures in other countries relate largely to deferred tax assets arising from timing differences and not those arising from trading losses. In Spain we understand that up to 40% of DTA balances may fall into the timing difference category. The position in Ireland is different but the vast majority of DTA balances at AIB and Bank of Ireland relate to trading losses. That is the fullest information I have. There is no hidden agenda. This is a straightforward judgment about the value of the banks and how to restore our banks to full health in the interests of the taxpayer.