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

Thank you very much, Mr. Chairman. I welcome the opportunity to appear before this very important committee. The banking crisis has had a profound impact on country and it is essential that we learn from the mistakes of the past to ensure that they are not repeated. It was unprecedented in its scale and the measures that were required to address it and I will do my best to help the committee in its most challenging and important task. You have my statement so I won't read it all out. Instead, I will focus on some key aspects of the crisis during my time as Minister for Finance.

At the time of my appointment as Minister for Finance in 2011, we were entering the fourth year of the crisis. Over €34 billion had been injected into Anglo Irish Bank, Bank of Ireland, and Ireland had entered into a joint EU-IMF programme the previous December. The country faced not just a banking crisis but a major fiscal crisis with public finances which were in a poor state. General Government debt had risen to over 100% of GDP and the general Government deficit reached was some 31% of GDP by 2010 or 10.6% on an underlying basis.

In the face of this crisis, I, as Minister for Finance, and my colleagues in the Government made a commitment in the programme for Government to fix the broken banking system, restore order to the public finances, regain and enhance our international competitiveness, support the protection and creation of jobs, radically reform our system of public administration and rebuild Ireland's reputation on the international stage.

We had the aim of renegotiation to secure a programme of support and solution to the banking crisis that would be perceived as more affordable by both the Irish public and international markets. We succeeded in a number of areas - achieving reduced interest rates, extending maturities, the promissory note arrangement, reversal of the minimum wage cut proposal, the jobs initiative and agreement on the use of some proceeds of asset sales for productive investment. We also replaced harmful revenue-raising measures with more targeted growth-friendly measures. And, of course, we also got an extra year for the adjustment.

Despite the large sums of taxpayers' money injected into the banking system at that point, there was still little or no confidence at home or abroad in the strategy pursued to this point. There were also serious question marks as to what the ultimate cost of recapitalising the banks would be and, indeed, whether or not it was affordable. It was made clear, however, any doubt over Government's commitment to recapitalising the banks would create a serious risk of severe financial instability.

The banking strategy announced on 31 March 2011 was designed to answer these questions, build confidence in the banking system and the country, and to draw a line once and for all under the cost of the banking collapse to Ireland. Building upon the advice of the Department of Finance, the NTMA and the Central Bank, I announced the Government's pillar banking strategy. The strategy set out the Government's plans in relation to what I would describe as the going-concern banks, that is, Bank of Ireland, AIB, EBS and Irish Life and Permanent. It was the Government’s response to the announcement by the Central Bank of Ireland of the results of their PCAR or stress tests. The objective was to have smaller, domestically-focused and well-capitalised banks operating in Ireland. A joint restructuring plan for the other banks, Anglo Irish Bank and Irish Nationwide, had been submitted to the European Commission by the previous Government in January 2011 and these institutions had no role in the strategy at that time. The memorandum to Government on 29 March 2011 made clear that any doubt over the Government’s commitment to recapitalising the banks would create a serious risk of severe financial instability. Building the banking strategy around a robust PCAR exercise was vital in my view to rebuild confidence in the Irish banking system. The Government was fully committed to the process from the outset. PCAR identified capital requirements of €24 billion and the recapitalisation of the banks announced in March 2011 proceeded later in that year.

We pursued a number of measures to reduce the cost of the €24 billion identified in the 2011 PCAR. We wanted to reduce the cost for the taxpayer, obviously, for ... and we intervened for AIB and Bank of Ireland with ILPs. The liability management exercises with subordinated bonds reduced the cost of the bailout and the recap of the banks. We had asset sales also and we had the injection of private capital. By the end of 2011, these actions on all three fronts had reduced the total cost of the 2011 recapitalisation to €16.4 billion. Burden-sharing with junior bondholders contributed €5.4 billion to this reduction. Since 2011 we have continued to work the pillar bank strategy in the best interests of the Irish taxpayer. Permanent TSB now plays an important role in this strategy as a strong challenger bank to AIB and Bank of Ireland. Bank of Ireland and AIB have returned to profitability and profitability for PTSB is forecast this year. All three institutions are well-capitalised, have completed the comprehensive assessment in 2014 and the State’s shareholding in these institutions are now valuable assets. We have started to recoup the taxpayer’s investment through fees and disposals and have seen the value of the taxpayer’s shareholding in AIB and Bank of Ireland and PTSB continue to rise. At the end of May 2015, we had recovered €5.5 billion from disposals and €5.5 billion in fees and income. In addition, our shareholding in AIB is currently valued at €13.3 billion and the market value of our shareholding in both Bank of Ireland and PTSB stands at €1.6 billion each; a shareholding in each bank of 14% and 75%, respectively. We will continue to manage the shareholdings in the banks in the best interests of the Irish taxpayer and I am confident that, over time, the full amount invested in these banks will be recovered and used to reduce Ireland’s debt levels. The timing of the recovery will be very much determined by the timetable and decisions taken in relation to AIB.

The joint committee will be aware of AIB’s interim results announced recently. Following discussions between my officials, AIB and their respective advisors, the bank sent a submission to the SSM requesting permission to make changes in their capital structure. The purpose of the request is to make the bank’s balance sheet fit for purpose under the new regulatory rules and to start the process of returning cash to the State. We await a response to this submission, which will be granted ... which will not be granted until the SSM informs the bank of its minimum capital requirements, but this should happen in the next few weeks.

As AIB’s finance ... chief financial officer indicated recently when the bank announced its results, between the contingent capital instrument we hold, dividends and the redemption of preference shares, it is easy to see over €3 billion being returned to the State in the near term, if the restructuring was to go ahead as planned. Some market commentators are obviously predicting it could be nearer to €4 billion. We can’t be definite on the final quantum involved yet and neither do we know the exact timing. Some of the money could be returned to us by the end of this year or it may all fall into next year. Obviously, the sums involved are quite large though and they will help reduce the national debt. It’s important to remember that this is before one takes into account any receipts from the sale of shares in AIB.

It would be inappropriate for me to make any further comments on the matter at this time bar to say that once we hear from the Single Supervisory Mechanism I and my officials will take stock of the situation and decide appropriate next steps.

The role of the Minister for Finance is broader than simply ensuring the banks return to profitability. The financial system must function day in, day out and must serve the country and its people by providing access to credit at affordable levels. As a small, open and trading economy it is absolutely vital that our payment systems work efficiently for citizens and business. The Government recognises that small businesses play a central role in the sustainable recovery of the Irish economy. To facilitate this, Government policy since 2011 has been focused on ensuring that viable SMEs have access to an appropriate supply of credit from a diverse range of bank and non-bank sources. As part of the 2011 recapitalisation exercise, the Government imposed SME lending targets on AIB and Bank of Ireland for the three calendar years 2011 to 2013. Each bank was required to sanction lending of at least €3 billion in 2011, rising to €4 billion in 2013 for new or increased credit facilities to SMEs. Both banks have achieved these targets. Activity in the economy is now driving the demand for credit and lending in the first six months of the year. My Department received and, indeed, continues to receive annual lending plans from the banks. Meanwhile, the banks continue to meet my officials on a quarterly basis on SME sector issues.

In terms of mortgages, the amount of new mortgage lending has increased from a low point of €2.5 billion in 2011 to almost €3.9 billion in 2014. In the first six months of this year the level of new lending has continued to increase by approximately 50%. The current scale of lending is, nevertheless, well below the levels that prevailed before the property and credit bust. However, that market and those credit levels were not sustainable and accordingly gave rise to the property crash. It is important that appropriate policies and banking practices are put in place to ensure that the bad experiences of the past are not repeated and that in the future new lending is affordable for the borrower and sustainable for the lender. The Government is committed to working with the Central Bank, with mortgage providers and other relevant parties to ensure that this happens.

I'll turn now to IBRC. The decision to recapitalise and nationalise Anglo Irish Bank and Irish Nationwide was taken by the previous Government and €34.7 billion had been injected in these banks in 2009 and 2010. IBRC was at that time reliant on some €41 billion in emergency liquidity assistance, known as ELA, from the Central Bank and a revised restructuring plan for IBRC submitted by the previous Government in January 2011 assumed a funding strategy of €50 billion. In the absence of any alternative funding model from the ECB it was essential that the merged institutions retained its banking licence and access to ELA. As such, maintaining Central Bank funding to support the wind-down of IBRC was the most prudent approach to protect the taxpayer. Various alternative sources of long term funding were explored but did not prove possible. It was only when a long-term viable solution for the promissory notes was found and the system more generally had stabilised, that we decided to liquidate the bank.

The issue of burden-sharing with IBRC was considered. There was €3.7 billion of unsecured unguaranteed senior debt in Anglo and INBC in early 2011. As IBRC was different from the other banks, the Government pushed for burden-sharing for these bondholders, conditional on the support of the ECB. In advance of my statement on banking matters on 31 March 2011, I had sought ECB support and the initial speech that I made to the Dáil ... the draft of the initial speech that I made to the Dáil included a statement on burden-sharing for this €3.7 billion. However, despite our best efforts, it was made clear to both the Taoiseach and myself and my officials that the ECB would not support such a statement or moves to burden-share with IBRC. Weighing up the potential savings of €3.7 billion that would accrue to IBRC against the immediate and devastating impact of withdrawal of ECB support on Ireland, the Government took the decision not to proceed with the burden-sharing with senior bondholders.

The promissory note for IBRC required a payment of €3.1 billion each March to the Central Bank. I discussed proposals in consultation with the Central Bank, the NTMA and the troika to restructure the banking sector, to improve the terms of the debt associated with the IBRC promissory note and replace the ELA funding provided to IBRC. I also sought the support of my European counterparts to bolster support at political level in the EU for our approach to IBRC. Because of these efforts, agreement was achieved on the strategy to liquidate IBRC. This involved the appointment of a special liquidator to IBRC to accelerate the winding down of its business operations, discharging the liability of IBRC to the Central Bank in a way that ensured no capital loss for the Central Bank, while the remaining loans of IBRC would be sold on the market or, if necessary, transferred to NAMA and, finally, converting the IBRC promissory note to a portfolio of fully marketable long-term Irish Government bonds. Through these actions the promissory notes and IBRC were to be eliminated from the Irish financial landscape with consequent reputational benefits.

The success of the liquidation to date has far exceeded expectations and has been critical to the restoration of confidence in Ireland. In March 2014, I announced that the debt acquired by NAMA as part of the promissory note transaction was now expected to be repaid in full following the successful conclusion of the sale of the majority of assets in IBRC. This debt was fully repaid in October 2014. The success of the loan sales processes negated the need to transfer any assets to NAMA as part of this process and removed any residual risk of further calls on the Exchequer. The outcome illustrates the strong confidence of investors in the Irish economy and its future prospects with 355 parties across 13 countries interested in the various portfolios. In addition, the special portfolio of Government bonds held by the Central Bank continues to accrue significant savings to the Exchequer compared to the cost of servicing the IBRC promissory notes.

It is important to emphasise that the crisis was not limited to the banking sector only but also due to the crisis in the public finances which ran in tandem. This hugely contributed to the problems faced by Ireland. In fact, the cost of cumulative fiscal deficits since the onset of the crisis has been considerably in excess of banking costs. Following a very difficult period the public finances are continuing to move in the right direction. The underlying general Government deficit in 2011 was nearly 9% of GDP. The deficit for this year is expected to be closer to 2% of GDP. The consistent over-achieving of the deficit targets over these years was key to restoring market confidence in Ireland. I am pleased to state that we are very much on course to exit the EDP at the end of this year. As you will be aware from the spring economic statement which estimated that a fiscal space of between €1.2 billion and €1.5 billion may be available for public spending increases and tax reductions in budget 2016, while achieving an underlying deficit of below 2% of GDP. The continuing improvements in the general Government deficit has helped reverse the trend of increasing debt in recent years from a peak of some 120% of GDP in 2012 to below 100% next year.

The employment recovery has been jobs rich. In the second quarter of this year we saw continued employment growth of 3% on an annual basis, bringing total employment back to levels last seen in the early part of 2009. This growth represents an annual increase of 57,100 jobs which is almost exclusively full-time contracts. Unemployment has fallen significantly from its peak of 15.1% in 2012 to 9.5% in August of this year. Relative to peak levels, this represents 120,000 fewer persons unemployed and a rate which is 5.5% lower.

Growth has recovered following the contraction in output in the early years of the crisis. Ireland has re-emerged as the fastest growing economy in the European Union, with growth of 5.2% in 2014.

The economy has rebuilt on a number of strong sectors and the level of GDP last year exceeded its 2007 pre-crisis peak, with a more sustainable composition. Actually, with today's very strong growth figures, with the economy growing at 7% in the first half of the year in net terms, per capitagrowth will also exceed the 2007 level ... would have exceeded it now this year.

The actions I have taken as Minister is part of the overall desire of the Government to ensure that we learn the lessons of the previous crisis. The effectiveness of the current governance regime has been enhanced by a suite of reforms to the Irish banking and regulatory system, initiated at both an Irish and EU level. Such reforms include the European banking union, which will provide for centralised supervision and will help to rebuild trust and confidence in the European banking sector. Importantly, the link between the banks and the sovereigns has been broken and the bailouts of banks has been replaced with bail-ins. At the domestic level, a significant amount of reform was undertaken in the financial regulation, with increased resources and a substantial amount of the legislation, including the creation of a statutory central credit register. Similar reforms have been implemented for fiscal policy, with the Fiscal Responsibility Act, the establishment of IFAC, and enhanced EU monitoring and governance. These reforms will form the foundation of a strong and effective governance structure, which will go a long way to making sure a boom and bust-type of cycle will not reoccur.

In conclusion, over the past few years it has achieved a considerable amount as a result of hard work and sacrifice of the Irish people. It is important that we learn from past mistakes and that we consolidate and build on our successes, which are now bearing fruit, to provide a better future for all of us. Thank you very much, Chairman and members.