Ms Ann Nolan:

Okay. Thank you, Mr. Chairman, and thank you for having me here today, and I will do my best to help the committee in its difficult task. You have my statement and I won't read it all out but will summarise a few important aspects of crisis management and the new legislative framework.

When I started on the banking side at the beginning of November 2008, the task at hand was the assessment of the size of the problem and the possible tools to handle it. The liquidity aspects were well measured at that time and fairly stable. The Irish economy had been contracting all that year and by the autumn of 2008, following the Lehman Brothers collapse, the property market had collapsed, with activity ceasing and prices falling. The solvency of the Irish financial institutions depended on the performance of the economy overall and the value of the property assets against which the institutions had lent money. Therefore, it was clear, as the property market continued to decline, that future losses on the property would be greater than had been previously expected and future profitability would be less than previously anticipated. This meant that the capital position of the banks had to be addressed. The PwC analysis showed clearly that there was a serious problem with land and development loans, both because of the total volume of such loans across the system and because of the small number of developers who had huge debts across the system. The Department immediately began discussions with the bankers on the need to bolster their capital position. The policy parameters within which the Department approached the recapitalisations throughout the period were as follows: banks should take action, where possible, to reduce the capital need by making changes to their balance sheets; assets should be sold; subordinated debt holders should be bailed in as far as possible; money should be raised on the markets, if available; the risk to the guarantee should always be considered; the systemic risk, that is, the risk of contagion, if capital were not provided, should also be considered; State support should only be considered as a last resort.

The initial recapitalisations of Bank of Ireland and AIB, consisting of €3.5 billion in preference shares, was agreed and implemented between December '08 and May '09, with detailed discussions on the amount and the terms and conditions in these capital injections. AIB also agreed at that time to sell their US and Polish subsidiaries.

The chairman and chief executive of Anglo Irish Bank left in December '08 and Donal O'Connor was appointed executive chairman on a temporary basis until a new CEO could be recruited. In view of what we knew about it and had discovered, once the announcement of our intention to recapitalise the banks was made on 21 December '08, we prioritised legal due diligence of Anglo. Arthur Cox carried out the due diligence and their first report was with us on 15 January '09. The options which we had at that point were to continue with the original recapitalisation, either by preference shares or ordinary shares, to nationalise or to try and disengage. The latter was not realistic in view of the guarantee, the expectation that European governments would stand behind their banks and the extreme likely contagion effect across the Irish system. In the event, it was decided to nationalise and replace the board and management.

The problem of land and development loans was dealt with, following a study by Peter Bacon, by setting up NAMA. An asset management agency was necessary because this loan book was so big and dysfunctional that it would have been very difficult for the banks to deal with these loans while continuing to provide banking services to the rest of the economy. NAMA has proved efficient in dealing with these loans. However, the slow, detailed method of valuing them individually and moving them over in tranches, which was developed to meet the requirements of the European competition ... European Commission, the competition directorate, increased the pressure on Irish banks and on the Irish State throughout 2010. The effect of this should not be exaggerated. The size of the losses was the major issue and overvaluing NAMA loans in 2010 would have resulted in losses materialising for the State later. Nonetheless, the transfer of loans based on discounted ... a discount calculated on a broadly stratified sample of loans for each bank would have been a better methodology and would probably have left ... given us the same result.

Another major issue was the haircuts for loans was significantly higher than we had estimated. This was mainly because of lack of equity in the developments. In addition to this, the continued recession meant that other loans, including both mortgages and loans to SMEs, were registering an increase in arrears. The first PCAR stress test run in March 2010 by the Financial Regulator found that the banks had very significant capital needs. Bank of Ireland met this need through a combination of raising capital on the market and a conversion of €1.7 billion of their Government preference shares. AIB sold their overseas assets, with the balance of capital - €3.7 billion - being provided by the Government.

Following our entry into the EU-IMF programme, the second PCAR stress test in March 2011 resulted in further capital demands for the banks.

Once again, Bank of lreland was able to raise money from the private sector, but the other banks, AlB, PTSB, EBS relied mainly on the State.

Given how much the State had to invest in the banking system, the policy throughout the period was to burden-share where appropriate. All of the original shareholders in the covered institutions saw their share value diluted to nothing, or almost nothing. At peak in 2007, the total share value of the institutions was €53.7 billion. In addition, €15.5 billion capital was raised through burden-sharing with subordinated debt holders. Much of this was done through liability management exercises where debt holders were asked to voluntarily sell their debt back to the banks at a reduced price. We also passed legislation to allow the Minister get a special liability order, SLO, from the courts to change the terms of the bonds. This forced the bondholders to sell into the liability management exercise, or have their bonds extended for a long period and interest suspended. The SLO was only used in AlB, but, undoubtedly, the existence of the legislation contributed to the success in burden-sharing with the sub debt holders in the other institutions.

The question of extending burden sharing to senior bondholders was considered seriously twice that I remember - first, in October and November 2010 when the guarantee had lapsed and the programme of assistance was being put in place. A number of lMF officials were strongly in favour of burning any unguaranteed and unsecured bonds in Anglo. This was opposed by the EU and ECB officials. In the event, the matter was considered at a more senior level in the IMF and, as a result of a US Treasury veto, the IMF also came down against any such action. It would not have been possible for the lrish Government to act without troika consent. The question was considered again in March 2011, but it was ruled out this time, as I understand, by the ECB.

The financial crisis ... to look at the regulatory supervision and government issues. The financial crisis lead to a reassessment of the legislative framework for the financial services, both domestically and internationally. I will give a brief summary of the changes made. I will divide my comments into domestic and EU, though obviously the two programmes were developed in tandem and the Department worked to ensure they were consistent to the greatest extent possible.

On the domestic side, the first action was to amalgamate the Central Bank with the lrish Financial Services Regulatory Authority. Separating the supervisory and financial stability functions, albeit with a requirement to cooperate, had undermined the importance of the macro prudential aspects of the role of both organisations. The amalgamation was effected through the Central Bank Reform Act 2010. This was followed by an extensive renewal of the supervision and enforcement powers of the Central Bank through the Central Bank (Supervision and Enforcement) Act 2013. This latter legislation streamlined, enhanced and modernised the powers of the Central Bank. Again, while this was a necessary and welcome improvement in the legislative framework, the Central Bank had significant powers before it was enacted and, indeed, used them extensively in the crisis management period, 2008 to 2013, prior to the new legislation.

The third major strand of legislation was providing for resolution powers. This was done initially through the Credit Institutions (Stabilisation) Act 2010, which gave extensive temporary resolution powers to the Minister for Finance to deal with the six covered institutions, as necessary, during the crisis. Subsequently, the Central Bank and Credit institutions (Resolution) Act 2011 was passed. This provides for the orderly resolution of a financial institution in financial difficulties. The Central Bank is the resolution authority.

A final major piece of domestic legislation in the Credit Reporting Act 2013. This is to enable credit institutions check what loans potential borrowers have from other institutions and organisations. This should prevent a reoccurrence of a situation where a small number of people can have large loans from many different institutions and pose a systemic risk. The credit register is currently being set up by the Central Bank.

On the EU front, the crisis lead to significant changes to the international regulatory framework also. The 2009 de Larosiére report recommended the establishment of a new European systemic risk board and three new supervisory authorities, the European Banking Authority, the European lnsurance and Occupational Pensions Authority, and the European Securities and Markets Authorities. These bodies set technical standards, resolve disputes between supervisors and assist in developing consistent interpretation of European law. Major legislative directives were also put in place for all the financial services areas, including the capital requirements directive, CRD lV dealing with bank capital, solvency ll dealing with insurance, and MIFID ll dealing with markets. This was followed by the banking union proposal which centralised banking supervision and resolution for euro area countries, with a possible opt-in for non-euro countries. The Single Supervisory Mechanism, SSM, was set up as a new branch of the ECB with responsibility for supervising the top 130 banks in Europe. The bank restructuring and resolution directive, BRRD, was also agreed to provide for a single resolution mechanism to resolve financial institutions in difficulties.

All of these changes represent a major reconfiguration of the regulatory and supervisory framework. Many of them have only just been implemented and some are not yet operational. It will be some time before their effectiveness can be assessed.

And I'll stop at that, Chairman, and allow you ask your questions.