Oireachtas Joint and Select Committees

Wednesday, 31 October 2012

Joint Oireachtas Committee on Finance, Public Expenditure and Reform

Operations and Functioning of IBRC: Discussion

10:00 am

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I welcome Mr. Alan Dukes, chairman, and Mr. Mike Aynsley, chief executive officer, from the Irish Bank Resolution Corporation Limited. I remind members, witnesses and those in the Visitors' Gallery that all mobile phones should be switched off. This meeting is being broadcast by UPC on Channel 207 and mobile telephones that are switched on will interfere with the broadcast and seriously disrupt it so that those watching cannot follow or hear questions and responses.

I advise witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give this committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him or her identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable. I invite Mr. Dukes to make his opening statement.

Mr. Alan Dukes:

In addition to our CEO, Mr. Aynsley, I am accompanied by Mr. Jim Bradley, our chief financial officer, and Mr. Richard Woodhouse, who is in charge of special projects.

We are very grateful to the committee for its invitation to come and discuss a series of issues with it. The last time we were before the committee was on 15 September last year and at that stage we went through in some depth what the bank had been doing since nationalisation. Today, I would like to update the committee further on the progress the bank has made since September 2011 and on some of the challenges we face. Following my presentation, my colleagues and I will be happy to deal with any issues members of the committee want to raise.

As committee members know, the bank's mission is to deal with the assets of the former Anglo Irish Bank and those of Irish Nationwide Building Society since the merger of these two entities in July 2011. We now do this under the name, the Irish Bank Resolution Corporation, IBRC, and have been doing so for just over a year in a concerted and directed effort to minimise the overall cost and maximise the returns in the interest of the taxpayer. We operate on the basis of an approved restructuring plan which was submitted to the European Commission in January 2011 and which it is intended will bring about an orderly wind-down of the entity over a period of ten years up to approximately 2020. An additional objective since the merger of the two entities is to prepare the former INBS mortgage book for sale within a period of five years.

The IBRC is a regulated entity that is closely supervised by the Financial Regulator and the Central Bank of Ireland. In addition, it is supervised by a monitoring trustee which has been put in place to report to the European Commission on the bank's adherence to the terms of the commitment letter which accompanied the Commission's approval of the restructuring plan. The bank is subject to all of the relevant provisions of company law and also to a series of codes of practice relevant to State-owned entities and companies as well as to the provisions under which the original new entity was set up by an Act of the Oireachtas post-nationalisation. It operates in the context of overall banking policy as laid down by the Minister for Finance on behalf of the Government.

I reported last year that the board and management of the bank had effected considerable and dramatic change in creating a fit for purpose wind-down vehicle to deliver on its mandate and resolution objectives. The most significant of these since then has been the sale of the bank's US loan book, which was effected in October 2011 and saw a once-off balance sheet reduction of close to $10 billion in one of the largest ever single sale transactions seen in the US real estate market. This operation was successfully carried out without any negative effect on the bank's regulatory capital base. Following the completion of the operation, there remained a balance of approximately $1 billion of unsold assets, which fell out of the sale for a number of technical reasons. We have made substantial progress on the disposal of these assets since completion of the original sale, and all offices of the bank in the United States have been closed.

Further progress in planned and controlled downsizing of the bank has been made since. We have prepared a series of notes for the committee which show there has been a further reduction in our balance sheet, bringing the total reduction, excluding the promissory notes and bonds, to 78% since nationalisation. Deleveraging will continue, principally on a loan-by-loan basis, but with consideration being given, based on informed analysis, to portfolio or book sales in both of the banks' remaining jurisdictions, the UK and Ireland, where it makes economic sense. Deleveraging to date has been substantially ahead of the targets set in the restructuring plan and we hope to maintain that accelerated performance. I should add that our success in this endeavour will depend crucially on developments in property markets and the condition and liquidity of markets in both Ireland and the UK. Dealing with the most distressed parts of the bank's loan portfolio will be especially challenging.

We place a close focus on cost containment and reduction within the merged entity. Staffing is one of the main cost components. We have now reduced the number of employees in the bank by over 50%, from the peak staffing levels of Anglo Irish Bank and Irish Nationwide Building Society combined in 2008, which was approximately 2,250. By the end of this year, core staffing levels in IBRC, excluding the NAMA unit, will be below 800.

I take this opportunity to express, once again, my appreciation of the way in which bank staff have responded to the demands inherent in the restructuring process since nationalisation. It has been a very demanding process of constant change accompanied by a great deal of negative comment about their workplace. Staff have participated in a radical process of change and retraining. Without their active participation, the progress we have made in the face of considerable difficulties simply would not have been possible. While we are obliged to review staff numbers, we must also ensure the quality and skill levels of our staff match up to the extremely exacting demands of the market situation and the wind-down role of the bank. As I said, the staff response to those demands has been exemplary.

We have streamlined the operation of the merged entity with office closures and sales of premises. A process to evaluate the outsourcing of some support functions was initiated, and several functions have been outsourced. We have, inter alia,completed a significant exercise in the area of legal expenses attributable to ongoing litigation matters and in the area of the appointment of receivers. These are two necessary ongoing expenditures and we have taken steps to ensure, to the maximum extent possible, that we obtain value for money out of that expenditure. These and other measures reflect the bank's continuing commitment to ensuring its infrastructure and business processes are efficient and appropriate for the changing size of the organisation as we progress through the phases of the wind-down.

We have continued to strengthen the board of the bank. It consists of ten members, including the chief executive officer. One member was appointed in November 2008, one in February 2009, the CEO in September 2009, three directors in May 2010, two in 2011 and two this year. Fees for non-executive directors were initially reduced by 20% at the end of 2008 and by a further 15% with effect from 1 July this year.

The total balance sheet of IBRC has reduced from €101 billion at the time of nationalisation to approximately €53 billion today. This includes the €29.3 billion in support from the Government to the former Anglo Irish Bank and the €5.4 billion put into the former Irish Nationwide Building Society. IBRC is totally reliant on funding from the Central Bank and monetary authorities and from the Government. Funding from the Central Bank and monetary authorities stands at approximately €42 billion. If we exclude the Government's promissory notes, total assets are approximately €25 billion. Impaired loans on our books amount to almost €18 billion, with cumulative impairment provisions of almost €11 billion. Impaired loans now account for approximately 66% of our total loan balances.
We remain reasonably hopeful that the final cost of the operation will be closer to €25 billion rather than the €29 million to €34 billion estimated in September 2010. This is, of course, highly contingent on what happens to property markets here and in the United Kingdom. The outcome will depend on what happens in the general economy and may also be impacted by any restructuring of the promissory note. In addition, the banking situation is very vulnerable to what happens in the eurozone in general. Notwithstanding these qualifications, which are substantial, we are confident that we have reduced the expected final cost of the operation to the taxpayer by an appreciable amount.

The bank has made significant progress since nationalisation in spite of considerable and complex challenges. The task ahead is possibly equally challenging and the problems are different in many respects. Following the merger with the Irish Nationwide Building Society, we are managing a relatively small portfolio of residential and investment mortgages. We recognise that the situation for mortgage holders is very difficult in the current economic environment and that this is unlikely to change for the better in the short term. We noted with interest the recent comments on this matter by Ms Fiona Muldoon of the Central Bank. We agree that banks must be decisive and creative in dealing with the system-wide issue and with the stress being experienced by many ordinary borrowers. We acquired what I can only describe as a very challenging mortgage book in July 2011, as can be seen in the notes we have prepared for the committee. A significant amount of work has been undertaken in regard to this book as part of our mortgage arrears resolution strategy. The strategy is designed to deliver a range of forbearance solutions to support borrowers in financial distress or those likely to fall into arrears in the near future. We are tackling these issues and making progress. It is a complex matter and it takes times to construct solutions that work. We will roll out those solutions in accordance with the timelines agreed with the Financial Regulator. The real test is not simply in the launching of new products but in ensuring thereafter that the solutions work and have the intended effects. IBRC is considering the possibility of doing even more, where practical and possible, with some of the more difficult cases in our mortgage book.

Another notable challenge for the bank is staffing, to which I have referred. Ongoing restructuring as the bank is wound down brings constant uncertainty for all staff. No long-term future career can be offered to those we seek to attract or those who wish to stay. This creates difficulties in terms of retention and motivation of staff. We are losing skilled and experienced personnel to other institutions at an unacceptable rate. Those individuals must be replaced with high quality candidates who can do the job we require them to do. Some 25% of IBRC employees are on short, fixed-term contract, the number is increasing. A drain in corporate knowledge is a serious side-effect of this dynamic. Of the original 2,250 Anglo Irish Bank and INBS staff at the time of the bank guarantee, fewer than 575 remain working in the merged entity. This underlines further the dramatic change that has taken place in the workplace culture. The numerous comments to the effect that the bank does not need the number of staff currently employed simply are ill-informed. The challenge for management is to ensure we have the right number of qualified staff to complete our task, no more and no less.

I assure the committee that the objectives of the board and management team are to run the bank in the public interest in a manner which minimises costs, maximises the return to the Irish State and treats customers and creditors fairly in the context of policy as laid down by the Government. The work being undertaken at IBRC is critical to the economy. The work of an asset recovery bank is complex and not easily understood by the public. In particular, the nature of the management and staffing expertise required for the task is often insufficiently understood.

There is clearly a high degree of interest in what we do and say. Since our discussion with the committee last year, there have been, at the last count, 7,362 print articles on the bank's activities and a huge number of media queries. We feel very privileged to be the subject of so many parliamentary questions in the Dáil. We deal with those queries and questions in house. I acknowledge the need for the bank to engage in an open, honest and transparent manner with all of its stakeholder groups and to communicate clearly what it is doing.

In addition to fulfilling our statutory reporting obligations, we regularly communicate progress achieved and major milestones along the way to ensure what we are doing is understood by stakeholders, including the media and the public.

I also should add in parentheses that if the joint committee has some additional time available at the end of the session, I might go into detail on the number of statutory reporting requirements we must meet. It regularly keeps me awake late at night, shortly before our board meetings, to check that we have made all the statutory returns we must make. I sometimes am tempted to wonder, in the small hours of the morning, who reads the goddamned things when they get to the other side, but that is another day's work.

I wish to make three points of clarification in this connection before I conclude. The first relates to the bank's dealings with high profile borrowers, in which there frequently is a substantial amount of outside interest. We have strict legal and ethical obligations not to disclose the bank's dealings or relationships with individual borrowers in the public domain. We simply cannot discuss the specifics of any individual case with any third party. Following a call in the media from a member of this joint committee for these dealings to be investigated, the chief executive officer, Mr. Aynsley, has given the Chair a commitment to the effect that the bank is more than willing to discuss in detail its approach to managing both performing and non-performing borrowers and the multifaceted governance that applies to all decisions in this regard without exception. I repeat and fully endorse that commitment. I can state categorically that any debt restructuring decisions the bank has made have been in accordance with that governance process and in the best interests of the taxpayer at all times.

The second point of clarification concerns the bank's appointment of and the mandate given to advisers. The bank is in wind-down mode and the process will be pursued by selling, as I indicated, entire loan books, portfolios of loans or individual loans. It is, therefore, a matter of when and not if we so do, as we achieve full resolution under the Government and European Union mandates. Details regarding the individual appointments of advisers relating to any commercially sensitive areas of activity, such as the ongoing analysis or the sale or recovery of individual loans or loan portfolios, must be treated as commercially sensitive information, given the real risk that public disclosure might have a detrimental effect on the bank's efforts to maximise loan recoveries. Therefore we will disclose any specific information in this regard. In response to continuing interest in the matter on the part of particular members of the joint committee, I can assure them that the bank adheres to a structured procurement process for the appointment of all of its advisers. That process is open, objective and transparent and is subject to the bank's governance processes, including both the provisions of the relationship framework with the Minister for Finance and oversight, through a regular reporting process, through the board of the bank.

The third point of clarification relates to the bank's recovery of debts owed by the Quinn family. I am sure members will appreciate these actions are the subject of litigation and are a matter for the courts that will be before the courts again as early as tomorrow. We will not be able to respond to questions today on any matters related to that activity.

I can again assure the joint committee that all of the actions and decisions undertaken by the bank are, without exception, focused on maximising returns in the best interests of the taxpayer and we now are quite ready to deal with any issues the committee may wish to raise.

10:20 am

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I thank Mr. Dukes. I have a few items to deal with before we get things under way. Is it agreed that the opening statements made this morning will be published? Agreed. As this part of the meeting will conclude at 1 p.m., I must ensure that I will accommodate all speakers who present themselves. I propose that the first round of speakers from both the Government and Opposition sides be limited to 15 minutes and, depending on how time is being managed after that, I will readjust times, if necessary, to accommodate everyone.

Before calling on the first speakers, I wish to put in context what we intend to do this morning. The two other banks the joint committee will meet today and tomorrow, namely, AIB and Bank of Ireland. They will make presentations on how they intend to trade their way out of their current difficulties and get themselves operating independently from the State. The mission of Mr. Dukes's organisation is quite different, as it is about winding down this bank over the next ten years in a sustainable and orderly fashion and in such a manner that the minimum cost is accrued to the taxpayer. That is a summary of the presentation Mr. Dukes has given. In so doing, I seek a point of clarification in respect of Mr. Dukes's position in the bank. Is it as a public interest director or is there a public interest director on the board of Anglo Irish Bank, as there is on the boards of Bank of Ireland and AIB?

Mr. Alan Dukes:

Before answering that question, may I add one brief remark, which was implicit in what I stated in the opening statement? The context of the bank's activity, as the Chairman observed, is to wind down the operation by 2020, including the preparation of the ex-Irish Nationwide Building Society loan book for sale, if possible, in five years. While that was implicit in what I stated, I should make it explicit. Moreover, one of our concerns is to maintain the capital base of the bank. It is part of the complex of decision making that we maintain the capital base in the interests of the shareholder.

On the matter of public interest directors, it is true that I was first appointed to the board of the bank in November 2008 as one of two public interest directors under the action that was taken by the Government at that time. The bank was nationalised subsequently and is now the property of the State, the Minister for Finance being the shareholder. I am unsure of the ceremonials of the issue but I would consider each director of the bank to be a public interest director at present. Our mandate is clearly to act in the interests of the shareholder, who I take to be a proxy for the public interest. The Government is obliged to act in the public interest and, consequently, I take the view that all our actions in the bank are to be seen in the context of pursuing the public interest, as it is defined for us by the regulations and policy framework laid down by the Government.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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In that context, the witnesses might provide the joint committee with a broader explanation or understanding as to how the Irish Bank Resolution Corporation, IBRC, operates at present. It also has a property portfolio, to which Mr. Dukes referred, in its capital base. How extensive is that property portfolio? Unlike the other banks that will appear before the joint committee and which are dealing with loans, borrowings and so forth, I understand the IBRC has a fairly extensive property portfolio. How many of these properties are located within the Irish State?

Mr. Jim Bradley:

Historically, it started in Ireland, grew into the United Kingdom and then went into the United States.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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How many of the aforementioned properties are located in the Irish State?

Mr. Jim Bradley:

Approximately 40% of the residual.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. For how many of those properties is the IBRC acting as landlord?

Mr. Jim Bradley:

In terms of mortgaging and possession?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, where IBRC has a landlord relationship with the client in occupation of the dwelling.

Mr. Jim Bradley:

Approximately 100.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The IBRC is landlord to 100 different businesses across the State that are renting.

Mr. Jim Bradley:

Properties.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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When the Minister for Finance, Deputy Noonan, made his announcement last year with regard to NAMA being obliged to deal with upward-only rent reviews and to take a more positive position in that regard, was that announcement extended to the IBRC?

Mr. Alan Dukes:

We take a case-by-case approach to the management of all the assets under our control, whether they are properties directly or loans. There is no general rule and we take a case-by-case approach, which is designed to ensure a maximum return.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Has there been an incidence in which a client or tenant of the IBRC has received a reduction in rent since headline rents were introduced in 2005 or 2006 or thereabouts?

Mr. Alan Dukes:

I will put it this way: there have been a number of cases in which we have recast the relationships between-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Have there been reductions?

Mr. Alan Dukes:

There have been reductions in some cases but, quite often, it has been more complex than that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I imagine because of the nature of companies that may be based in the State. The parent company might be located outside the Republic of Ireland and the bank's rental agreements may be signed with the parent company outside the State. In dealing with companies within the State I imagine all companies in the aforementioned property portfolio of 100 would be looking for a rent reduction as, given the nature and history of Anglo Irish Bank, those rents would have been set at a very high level at the outset.

How many of those 100 companies have sought a rent review?

10:30 am

Mr. Alan Dukes:

I could not give an answer on that directly, but we can seek out the information.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What percentage?

Mr. Alan Dukes:

I could not give you a percentage, Chairman. There are a number of different situations. There are cases in which we have an involvement in properties where there is a level of vacancy and we are looking for new tenants to come in.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I will be specific with Mr. Dukes.

Mr. Alan Dukes:

I have to make the point, Chairman, that we cannot discuss the details of specific cases.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I will be specific in a general way, if that is the case. A company that has been losing €20 million a year in Ireland, which employs several hundred people across the country - and in regions close to me employs 50 or 60 people - has an unsustainable rent agreement. Two independent rent reviews have said that the rent would be half of what it is at present if market rent were applied. In fact, the situation is so ludicrous that it would be cheaper for the company to close down, pay the IBRC rent and lay off 50 employees. However, the IBRC, and Mr. Aynsley in particular, have been in contact with that company asking for the parent company, which is based outside the Republic of Ireland, to keep paying that rent.

This committee may need to make a recommendation to the Minister for Finance, Deputy Noonan. He was very explicit, in regard to NAMA property portfolios, in stating that it was to deal with upward-only rent reviews and take a proactive approach to them. Can I put the accusation that, because the Minister has not made that direct recommendation to Mr. Dukes, the IBRC is not as proactive in this area as NAMA might be, given that the IBRC has quite an extensive property portfolio?

Mr. Alan Dukes:

I am not in a position to make comparisons. I can only say two things that I have already said. First, our concern is to maximise the return on behalf of the taxpayer; second, it is to deal with our counterparties in a consensual way where that is possible. I cannot go further than that in dealing with any specific issues.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I will conclude on this because I am going to bring some other speakers in. What makes the IBRC different from NAMA? Although the IBRC is a State-run bank, NAMA is probably even less of a State structure in many ways. If the committee needs to raise this issue with the Minister for Finance it will do so. However, given the Minister's instruction to NAMA last year with regard to upward-only rent reviews, why does the IBRC not seem to be proactively dealing with this? The information I have to hand is that the IBRC is chasing landlords based outside the State with whom it has agreements, while the companies concerned are losing money hand over fist. If the IBRC pursues this course in terms of its wider public interest it will close those companies down, which will also have a net effect for the taxpayer.

Mr. Alan Dukes:

Those are issues that we have to balance in making decisions on specific cases, but I cannot be more specific than that, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Can you be specific about some other methodology? I ask Mr. Dukes to give us supplementary information on the number of cases in which the IBRC is acting as a landlord in the Republic of Ireland. Can he provide us with information as to how many rent reviews have been sought from those properties and in how many cases a rent reduction has been introduced? That is statistical information, so he can provide it to us.

Mr. Alan Dukes:

I have already undertaken to give the committee as much information as I can on that. It will not identify specific companies.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I am not looking for the names of the 100 companies. I would like to know, however, in how many cases a rent review has been sought and in how many cases a rent review has led to a reduction.

Mr. Alan Dukes:

There have been cases in which there have been reductions in the level of rent without a process of rent review, as the Chairman has identified it, because it has been a wider part of the way we deal with those assets or counterparties.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I take it that Mr. Dukes will provide that information to the committee in supplementary form.

Mr. Alan Dukes:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I welcome Mr. Dukes, Mr. Aynsley and their colleagues from the IBRC. I thank Mr. Dukes for his opening statement and the schedule of information we received in advance. I will start on a broader level in terms of the overall cost and the final bill, which Mr. Dukes addressed in his opening. He said it would be close to €25 billion as opposed to the €29 billion to €34 billion that he estimated in September 2010. Can he clarify whether the estimate of €25 billion relates to the former Anglo Irish Bank - as opposed to the Irish Nationwide Building Society, INBS, element of the IBRC - or is he referring to the IBRC in its totality?

Mr. Alan Dukes:

It is Anglo Irish Bank. That was the figure in the calculation of which we were involved back in 2010. We were not involved in the calculation of the rest.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I am trying to get clarity on the overall figures. The estimated liability in INBS when it was recapitalised through the promissory note was of the order of €5.4 billion. As regards that element of the IBRC, is it anticipated that that cost will be broadly correct?

Mr. Alan Dukes:

Yes, somewhere in that region. This is not intended to be an inflammatory remark of any kind, but the committee should be aware that the carrying out of that calculation in September 2011 was inevitably a very speculative kind of exercise. I hope we will come nearer to €25 billion for the old Anglo Irish Bank than the €29 billion to €34 billion figure that was put out then. All of that is highly contingent on the condition of markets, the condition of the overall economy and, to a large extent, what happens in the eurozone generally between now and the final wind-up.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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That is entirely accepted. There are a whole load of moving parts here - I fully appreciate that - but we do have to probe what Mr. Dukes's best estimate is, based on certain assumptions at this point in time. His hope is that the final bill for the Anglo Irish Bank element of the IBRC will come in at around €25 billion. The INBS will still cost, as originally expected, in the region of €5.4 billion. That will be a total of €30.4 billion, if the figures are correct. The total amount that will go in by way of capital is €34.7 billion, so some money will be due back to the State in the event that what Mr. Dukes anticipates actually materialises - of the order of €4 billion to €5 billion.

Mr. Alan Dukes:

That is a reasonable deduction from the figures we have produced. As I mentioned in a supplementary comment just a few minutes ago, we are concerned to maintain that capital base for two reasons. First, it seems prudent that we should maintain a capital cushion as we go through a very uncertain market situation; and, second, we want to ensure there is some return at the end of the process out of what has been pumped in so far.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What types of assumption has Mr. Dukes made in coming up with that estimate? He referred to what will happen in the property market, which will obviously be a key factor in both Ireland and the UK, as well as the general economic performance. What assumptions has he made about property prices over the next ten years in arriving at the estimate of a final bill of €25 billion?

Mr. Alan Dukes:

That goes back to a very speculative set of assumptions made in September 2011.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I am asking broadly, in terms of a recovery in the property market.

Mr. Alan Dukes:

If property markets do not deteriorate any further from the levels they have currently reached in the UK and Ireland, I would be quite confident that we could meet those targets. If liquidity in both of those markets improves over that period, we might be more sure of realising those targets. If liquidity became available and property markets firmed up we could do better. There is a whole pile of conditions and speculations in there. On the other hand, if property markets deteriorate further there will be a serious downside risk. As I said in my introductory comments, as we go through it the deleveraging process will become more difficult because, of necessity, we will be getting down to the more distressed levels of the loan book, some of which may be difficult to dispose of.

10:40 am

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Can I ask about the impact of the promissory note? I understand the IBRC is a passive participant, as such, and the negotiations are between the Government and the European Central Bank. Mr. Dukes said the final bill for the Anglo Irish Bank element of IBRC may be affected by any restructuring of the promissory note. What did he mean by that? Is he involved in the discussions that have been under way for some time on redesigning the promissory note arrangement?

Mr. Alan Dukes:

We are not involved in the discussions on arrangements that might be made in the future. We have been able to participate in some of the background work in modelling solutions and approaches because we have the expertise in the bank to do it. As the committee knows, broadly speaking the promissory note as it is currently structured produces a level of income for the bank. If the maturity of or the rate of interest on the note were to be changed, it would have an effect on the amount of income accruing to the bank over the period. What those changes might be, I cannot say. I do not know what kind of outcome we can expect from the discussions. If there is a change in any of the major characteristics of the note, they will obviously have an impact on the bank.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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In his opening statement, Mr. Dukes stated the IBRC owes €42 billion to the Central Bank and other monetary authorities. The promissory note money the bank receives every year goes to pay down its emergency liquidity assistance, ELA, to the Central Bank. Is there a schedule agreed with the Central Bank on the repayment of that ELA? Obviously, the IBRC would be able to settle all its other liabilities from existing resources, apart from the ELA, which it depends on the promissory note to fund.

Mr. Mike Aynsley:

Broadly speaking, the promissory note sits on the balance sheet and is lodged with the Central Bank along with several other assets that we also can put into the ECB to generate funding to support the organisation. As we wind down the balance sheet of the bank, all of the funds we collect are used to pay down the ELA facility, without exception. What would be left out is a balance of borrowings which are secured by the promissory note. Success for us is the removal from the balance sheet of all the commercial and residential loans from Anglo Irish Bank and INBS, to the point where we are left with just a government instrument - in whatever form that ends up being restructured to - on the balance sheet.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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In his opening statement, Mr. Dukes spoke of how high-profile borrowers are dealt with, and he referred to me. I intend to raise the issue of the evidence that emerged in the High Court case in London involving Mr. Paddy McKillen and the Barclay brothers about text messages sent by Mr. Aynsley to Mr. McKillen conveying a board decision. Perhaps this was put into the public domain to embarrass Mr. Aynsley. However, it does raise certain questions as to whether it is common practice for the IBRC to liaise with its largest debtors. Was this an isolated case or is it common practice, as opposed to issuing an electronic memorandum? I am asking this question because we want to be reassured that what is left of the former Anglo Irish Bank and INBS has moved away entirely from the culture that prevailed in the past in which there were close relationships between those running the banks and their largest borrowers. Mr. Aynsley is involved in making commercial decisions involving hundreds of millions of euro. One can go through all of the governance process to which Mr. Dukes referred, but ultimately it does come down to judgment calls. It is not my job to say whether these are correct. It is my job, however, to seek assurance that it is been done in the right way, with nothing else influencing decisions.

Mr. Mike Aynsley:

There was nothing untoward in any way about the approach to Mr. Paddy McKillen to advise him of the board’s decision. We were going through a process, of which Mr. McKillen and the Barclay brothers’ representatives were aware, which culminated in a submission to the board and its approval of the maintenance of a process of consensual restructuring of Mr. McKillen’s loans rather than the sale of a portion of these to the Barclay brothers. When we came out of those meetings, my colleague Mr. Richard Woodhouse was given the authority to contact the Barclay brothers to inform them of the decision. I attempted to call Mr. McKillen but, of course, could not get hold of him. He does not do e-mail so I sent him a text. It was as simple as that. The reminder to him, following it up, was simply that this was a board decision and that it was a bank-client relationship that should not be divulged, as we were aware at the time that he was in litigation with the Barclay brothers. It was inappropriate, we felt, that he went to the press with that. Of course, it ultimately came out during the discovery process in that litigation. That is all there was to it.

It is very important that the Deputy is confident that this bank is operating in a different way from the old management of the bank before nationalisation. The key point is that there is no one individual in the organisation who has the capacity to influence or make decisions on any of these loans. We have a very well-structured governance process. It starts off with an account management team that is responsible for analysis, monitoring and oversight of the relationship every day to ensure the organisation has all the information that is required. That in turn is overseen by a client relationship manager for each one of these accounts. In the case of Mr. McKillen, Mr. Woodhouse is operating as his client relationship manager. We have a series of asset quality forums that examine these accounts on an ongoing basis, assessing the appropriateness of the various impairment levels or the performing loan portfolio, although it is a small one given what has happened to the bank. Decisions are processed up through a group credit committee that has representatives from the business, independent and risk management oversight units of the bank. There are two main operating committees in the bank - the transaction review committee and the investment product committee - which deal with the sale or holding of loans, equity participation or investment or divestment decisions, wealth management business and the protection of investor interests. These committees have various delegations that come down through the board. There are multiple people within the organisation that scrutinise every aspect of the loan decisions. For loans above certain levels, as in the case in question, there is a requirement to take these facilities in detail to the board to seek main board approval.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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One departure from the practices of the past in the institutions Mr. Aynsley inherited is how hospitality is dealt with. I know the bank has a very clear policy that, in general, directors and employees must not accept gifts or the conveyance of anything of value, including entertainment, from current or prospective banking customers or suppliers. Is that fully adhered to in IBRC?

Mr. Mike Aynsley:

We have a full entertainment and travel policy in place. We still maintain a situation in which we will have client entertainment in certain circumstances, which is controlled under the policy.

It is specified under the policy, as to what is appropriate and what is not appropriate. I have seen some of the anonymous notes that have been sent to various members and press that have been sent on to me. I can assure the committee that as far as I know in the organisation there is no participation by any member of the bank's management team or staff in any of the allegations that have been made about flying in jets, staying at people's personal homes, etc.

10:50 am

Photo of Billy TimminsBilly Timmins (Wicklow, Fine Gael)
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I have a number of questions on five or six issues. I will put them first before taking an answer.

I thank the IBRC representatives for coming in today. Mr. Dukes mentioned in his written submission that the remit is to wind down over a period of ten years. Can this be brought forward? Would it be in the interests of the taxpayer and IBRC if this period could be brought forward? What is the minimum amount of time needed to bring the bank to closure? He also mentioned that IBRC is preparing the ex-INBS mortgage book for sale within a period of five years. Can this task be achieved?

One of the issues where there may be difficulty in going through IBRC's properties is in tracking down the title deeds. Would Mr. Dukes elaborate on that? Is this process completed? As opposed to other financial institutions, I understand that the former INBS and the former Anglo Irish Bank may have had several solicitors around the country certifying the deeds and they all might not have been sent into a central location. Where stands IBRC's work on this? Who is tasked with it? Is it done in-house or is it outsourced?

It was mentioned in the submission that IBRC conducted an audit of legal costs. How does IBRC operate? Does it generally stick with the big practices or does it farm the matter out to smaller legal entities?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy Timmins should allow the witnesses to respond and then ask the remainder of his questions.

Photo of Billy TimminsBilly Timmins (Wicklow, Fine Gael)
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On that point, is IBRC's legal department adequately staffed? It was mentioned that there was a 50% reduction in staff since the peak. Obviously, IBRC has lost a certain amount of expertise. Is there any area where it is really exposed? Have any section heads left in the past six or nine months?

Mr. Alan Dukes:

On Deputy Timmins's first question as to whether we can accelerate the process, we would hope so. As I stated in my opening statement, de-leveraging so far has exceeded the targets that were set in the 2011 restructuring programme. If it turns out to be possible to do so in a shorter period of time than originally provided for, we will be happy to do that.

Having said that, we must pay attention, first, to the need to minimise the cost to the taxpayer and, second, to the capital maintenance issue. To put it crudely, we could sell the whole lot tomorrow if we did not have to worry about the price. If we were to do that - this is an unscientific way of saying it - and if we stated that we are not worried about the price and total return and we are prepared to burn all the capital, we could probably sell the whole lot tomorrow, and that would not be a good outcome for the State.

Deputy McGrath mentioned judgment calls. We must make judgment calls at the end of the day. The sale of the United States loan book last year was a very successful enterprise. It would not be possible in the market circumstances today to get anything like as good a result for that loan book. It may happen that next year market conditions in the United States might be such that somebody could come along and say to us that if we had held off our 2011 sale of the American loan book until 2013 or 2014 we would have done much better out of it - they might well be right - but we must make a judgment call at a point in time. In answer to the question as to whether we would accelerate it if possible, the answer is "Yes", if we could do it happy in the knowledge that we were maximising returns and that we were not burning capital.

The same applies to Deputy Timmins' question about the INBS mortgage book. I am not criticising any person when I say this, that the condition of that mortgage book when we took it over was rather bad. It is a difficult mortgage book.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Dukes did not have to come before the committee to tell us that. We knew that already.

Mr. Alan Dukes:

I am glad the Chairman appreciates my difficulty. It is a work in progress whether it will be possible to get it into shape where we can sell it or a big portion of it within five years respecting our overall objective or maximising returns but it is something we would like to do.

Deputy Timmins' next question related to some of the issues that are outstanding. On tracking title and ensuring the solidity of title, in both the former Anglo Irish Bank loan book, which we took over on nationalisation, and the INBS loan book, we have had to do a very considerable amount of work to ensure that we can be confident that we have good title and a good base on which to deal with them. There is ongoing work on that and the committee will be aware that a considerable amount of work had to be done in that regard in the transfer of chunks of the loan books to NAMA also. I am not sure we will ever be at the point where we can state with full confidence that every "i" is dotted and every "t" crossed, but we have put a considerable amount of effort into ensuring that the condition of the book is as good as we can make it so that we can make progress on the sales. It is probably fair to say that in none of the asset disposals in which we have been engaged so far have we met any substantial problem in that regard because the books have been properly prepared for the sales. The great majority of that work is done in-house.

On legal fees we said that there is a big volume of legal work that will need to be done on behalf of the bank and we invited a wide diversity of firms from across the country to make offers to us for the terms on which they would carry out this work. Our objective was to get the work done as cheaply as possible but ensuring that we got the quality of work that we required. We have broadened the field out considerably past the large firms in the business. Personally, I take the view that there are probably a good many legal practitioners all around the country who, if given the right opportunity, could be as big and as successful as any of the big four or five, and if they can do it in doing good value work for us, I would be happy with that as long as we get a good bang for our buck out of it. We have paid particular attention to legal practitioners and receivers in seeking to get value for money on that.

Our legal department is competently staffed. We could do with more staff. We are currently in the process of considering the best means of replacing our chief legal officer who, to my great regret, resigned amicably a short time ago. She wanted to get a life back again and we are looking to replace her.

Photo of Billy TimminsBilly Timmins (Wicklow, Fine Gael)
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Is Mr. Dukes telling me those who are left inside do not have a life?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy Timmins and Mr. Dukes can engage in discourse over the future of life over a cup of tea. Would the Deputy put some questions to the witnesses? He has five minutes left.

Photo of Billy TimminsBilly Timmins (Wicklow, Fine Gael)
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I thank Mr. Dukes for his response. That brings me on to two issues. First, he mentioned that he lies awake at night thinking of the statutory returns. Sometimes we put too much emphasis on something that was not policed and then we over police. Are there some measures the Government might take, or perhaps not take, that might include IBRC in its commercial remit? Perhaps there are some shackles on IBRC that it could do without and it would be of more benefit ultimately to the organisation and the taxpayer if there was a little less regulation, if I may use that term. What statutory returns could be dropped?

With regard to deleveraging, who is actually buying the properties? What is the profile of the companies involved? I understand many American companies and pension funds are buying properties here. Who are they and what kinds of properties are they seeking? Is it fair to say that as we go along it will be more difficult to sell because the prime properties are the ones that will be sold first? If IBRC manages to wind down within ten years - perhaps in eight or nine years - what will happen to the residual properties and loan books? How will they be integrated? What will happen to individual mortgage holders with a 20 or 30-year-old mortgage when the bank ultimately winds down?

My final question is-----

11:00 am

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Is this the Deputy's last question?

Photo of Billy TimminsBilly Timmins (Wicklow, Fine Gael)
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Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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In future I ask members to ask questions back and forth because if they ask five or six questions in a row it is impossible for the journalists to follow it; it is impossible for me to follow it and it is impossible for me to ensure members get responses. I ask the Deputy to break his questions down into sections.

Photo of Billy TimminsBilly Timmins (Wicklow, Fine Gael)
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That is fair enough. I would have thought the gentleman could take a note.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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No. What happens is that it just runs down the clock and in the time remaining the Deputy's questions might or might not get answered.

Photo of Billy TimminsBilly Timmins (Wicklow, Fine Gael)
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Mr. Dukes mentioned the issue with confidentiality. Does he have any concerns over IBRC's dealings with individuals being leaked? Issues relating to NAMA, IBRC, banks and property developers make news stories. Does he have concerns that people within his organisation might be leaking stuff? Is IBRC the subject of any legal proceedings from any individual or company who feels that confidential information has been leaked?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Dukes has three or four minutes to respond.

Mr. Alan Dukes:

I do not believe there are shackles that I would wish were taken from the bank. We have a number of restrictions, the most notable being in terms of the European Commission's commitments letter. We are allowed to lend a very limited amount of money to borrowers if that is a substantial part of rescuing the loan, so to speak, and making it viable. There is a percentage limit per facility that is extended and an overall maximum quantum for the bank. In every case so far we have been well within the limits for the given loan and we are well within the overall limit set for the bank.

I would very much like to have an opportunity of sitting down at some leisure with a regulator. I know my colleagues are a bit nervous of me saying this. It is a waste of time, energy and money for the bank to have to state, for example, on a monthly basis that the Minister for Finance has not required us to do A, B or C, and there is a good bit of that in regulatory reporting. I am not sure that it is really designed to put the focus on where the real problems are. That is a hobbyhorse of mine. I would like to see much more succinctly expressed and much more brutally applied regulation. I have been dealing with regulation one way or another for most of my working career and I find that the more elaborate the rules are, the more opportunity people have to get around them. The simpler the rules and the more brutally they are applied, the more we can be sure of getting the desired result.

I will ask Mr. Woodhouse to respond to the question as to who is buying.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We will have to conclude because we need to move to Deputy Pearse Doherty's questions shortly.

Mr. Alan Dukes:

I would like to deal with these issues because they do come up.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, but I am trying to get other members in to contribute. I will come back to Mr. Dukes later I need to be very disciplined in allocating 15 minutes per member.

Mr. Alan Dukes:

There are occasions when issues between the bank and borrowers leak out. There have been a couple of occasions when that has happened and it is not very convenient. When people approach me about those issues I usually ask what is the possible source of the leak and what is the motive. One rarely meets a happy under-bidder. Quite often information that comes out comes from a person who has been disappointed and is looking for another way around the process in which he did not successfully engage in the first place. It is a case of caveat emptor when it comes to taking up leaks.

Mr. Richard Woodhouse:

In terms of who is buying, it is a combination of US, continental Europe and UK parties - private equity houses, funds and private family offices looking for an up-tick in yield. We have been satisfied with considerable interest in the UK where - without giving any specific details - we are probably disposing of approximately €100 million worth of property per month. When one looks at the underlying parties there, one of the reasons for liquidity is cited as a hedge on the euro's collapse. People are looking at UK and sterling-denominated assets as part of their reinvestment portfolio. In the US, funds are being raised on a pan-European basis and an allocation of that European-wide fund is allocated to Ireland. It is a small part of the overall - perhaps 10% or 15% - but nevertheless for some of the properties we have in our portfolio the quantum that is available within those sub-divisions of the fund makes some of our assets of interest.

As the Deputy rightly acknowledges the difficulties of the portfolio shrinking and being left with a more difficult portfolio will be a challenge. Perhaps a little more reflective of where we are in the residential mortgage portfolio area, he asked what is to be done for people with 20 years paid down and five years to go at the point the bank is wound up. Almost certainly, with the residual rump of Irish property it will be sold in one shape or form on a block basis at that point in time, possibly to another bank here and possibly to funds that have raised a larger sum with greater confidence in the improvement in the Irish economy at that point.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I thank the witnesses for the presentation. I appreciate the job they have at hand. Along with other members of this committee, I ask many parliamentary questions, which are sometimes unrelenting as the witnesses mentioned in the earlier address. It is important that we, as legislators, do that. When we consider where NAMA has found itself in recent weeks, sometimes when we think the ship is sailing steadily it is actually on the rocks. It is important there is scrutiny from Oireachtas Members and the media in general and none of us should fear it.

Deputy Michael McGrath spoke about the ELA. Mr. Dukes mentioned that there would be a rebate to the State of approximately €4 billion based on his figures. If there was no restructuring of the promissory note and if the promissory note runs its course, in 2020 IBRC will have sold its loan books and would have had enough capital - €25 billion - and basically the rest of the promissory note would be written off. It would not be a case that we would continue paying the promissory note after that point because we would be paying to a bank that is just holding capital. Would that not be the case?

Mr. Jim Bradley:

The structure of pro-note is such that it generates income and as we sell down the assets there are changes in the timing of the cash flows of the pro-note versus when the disposals happen. So in fact we are forecasting some capital generation in the latter years because we have sold down the loan portfolio quicker than we had modelled a year or a year and a half ago. So it is timing based. Any disposals we do from a loan asset are used to pay down ELA.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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At the end of March each year, the State provides €3.1 billion, some of which is in interest given how the pro-note is structured and some of it is in capital. IBRC takes the €3.1 billion and transfers that to the Central Bank to pay down the liabilities it has to the euro system in the Central Bank of Ireland. The bank does not retain any of the interest paid.

Mr. Richard Woodhouse:

The interest goes into the accounts of the bank.

11:10 am

Mr. Jim Bradley:

In the last year we exchanged a Government bond which was then used as a repo with the Bank of Ireland to generate liquidity which was used to pay down the ELA liability.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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To be clear, every year when the payment is made by the State to the IBRC, it will be transferred to pay down the ELA liability. I just want to be clear about this to make sure there is no retention of some of it and that all of it is transferred to write down the ELA liability which is written down by a corresponding amount.

Mr. Jim Bradley:

That is correct. Structurally, the ELA is an emergency facility. Any income inflows are used to pay down the ELA liability, irrespective of where they are sourced from.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Based on the figure of €25 billion required from the State to the IBRC and the timeframe for paying it - capital plus interest minus the ELA that must be paid to the Central Bank - the interest is in respect of the period to 2020. If things run as normal, when the last €3.1 billion is transferred on 31 March 2020, the IBRC will have paid off all of the ELA liability and met all other liabilities through the sale of its loan books in the meantime.

Mr. Jim Bradley:

Except for the ELA we are using because we take the promissory note - whatever is the residual amount - to meet the ELA liability. Effectively, it is a wash.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Will Mr. Bradley explain that again?

Mr. Jim Bradley:

When all of the loans are gone, what will be on the balance sheet of the bank? A promissory note.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And an ELA liability.

Mr. Jim Bradley:

And an ELA liability against it such that it could be collapsed at that point. As long as we have external assets, we will still require funding.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Of course. It is based on the premise that the IBRC's loan book will have been sold off and wound down at that stage and that the IBRC will have nothing left by 2020 in terms of the ELA liability and the promissory note. If the figure of €25 billion is correct, 2020 will be the point at which this should have been achieved and the bank could be closed down.

Mr. Jim Bradley:

It is important to realise that the date of 2020 was agreed with the European Union and that there was a contractual understanding of the timing. We are well in advance of what we forecast and continue to move ahead to try to wind down the loan book as quickly as possible, given the capital constraints, because ours is a regulated entity which must maintain capital ratios for the Central Bank. There are many competing forces that drive the decisions we make.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Will Mr. Bradley tell the committee the total payment to be made in March, including the Government bond?

Mr. Jim Bradley:

In terms of what we can do with the €3 billion.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. Jim Bradley:

Last year we took delivery of a 2025 bond that will not come to maturity; therefore, all it is is the next instalment on the promissory note to be paid in March.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In respect of its purchase by Bank of Ireland, does the agreement stipulate that it will only hold it for one year?

Mr. Jim Bradley:

It was a one-year repo which expires in June 2013.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It is a payment of €3.1 billion on 31 March, with another payment of €3.3 billion in June 2013?

Mr. Jim Bradley:

No, that is a coming to maturity; if we do not find another counter-party or have Bank of Ireland to roll it over, we will have to use free ELA for funding purposes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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There has been much discussion about the restructuring of the promissory note. One of the suggestions involves the use of the ESM, although it is very unlikely, given what the Germans and others have said, or another agency for a long-term bond. This would mean that the €25 billion in capital the bank requires could be front-loaded as a long-term bond. If that was to happen, has the bank calculated how quickly it could deal with the other issues within it in terms of the loan books to wind down more quickly than the 2020 timeframe?

Mr. Jim Bradley:

We have not carried out any specific modelling and do not know how the discussions are going. It is only when they are sure of what the structure will look like that they will involve us. We carried out analysis in the past, but we are not doing anything at the moment.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It has been mentioned before at this committee that the restructuring of this note could cost the State more money in the immediate term and have an impact on the banks. Is the bank not directly involved in the discussions with the Minister for Finance?

Mr. Alan Dukes:

The bank is not directly involved in them. Mr. Aynsley wishes to make a point in that respect.

Mr. Mike Aynsley:

Mr. Dukes mentioned the completion of scenario analysis and the different ways this could be used. We regard this very much as a matter for the Government. It goes back to the formation of the promissory note, which was an instrument devised in the absence of an ability to go to the markets to raise cash to fill the black hole created. It was done through the arrangement of constructing a promissory note that could be lodged with the Central Bank ELA facility. It provides cash flow for the bank and has a coupon. It provides a margin for the bank and the Central Bank which sources funding through the ECB.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I am well aware of that. Sinn Féin recently met the troika which informed us that there was no common paper, that there was a number of individual papers. The Government and the ECB have their own papers. Has the bank's opinion been sought on any or all of these papers on how it would work for it?

Mr. Mike Aynsley:

Yes, this has occurred in the context of the completion of a number of scenarios on structures and how they may or may not affect the balance sheet of the bank as we go through the wind-down process.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Mr. Dukes said there had been quite a reduction in staff number-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The Deputy has four minutes left.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I will be quick. About 25% of the staff at the time of nationalisation are in place. This time last year the bank informed me that 22 of the top 50 executives within it at the time of nationalisation were still in place. A total of 19 of them were being paid over €175,000. Will Mr. Dukes give us an updated figure for how many of the top 50 executives at the time of the crash are still in place in the bank?

Mr. Alan Dukes:

I will have to come back to the Deputy as I do not have that specific information.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I note that staff costs have actually come down by 4% compared to this time last year, from €56 million to €54 million if my figures are correct. However, there has been a drastic reduction in staff numbers over a number of years. Are staff receiving pay increases or performance bonuses? Why are staff costs not coming down in proportion with the reduction in staff numbers?

Mr. Alan Dukes:

There have been no performance bonuses since nationalisation and no generalised pay increases for staff. There have been some increases in pay for a limited number of individuals who have taken on extra responsibilities. As I said, there have been cases in which we have had to replace staff who left with staff on short-term contracts. They are not always less expensive in pay terms than those who leave permanent positions.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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What is the highest paid position within the bank in monetary terms?

Mr. Alan Dukes:

The post of chief executive officer.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In monetary terms - I was not looking for the title. We could all have guessed it was the chief executive officer.

Mr. Alan Dukes:

That is who it is.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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What is the highest salary in the bank?

Mr. Mike Aynsley:

I am on a salary of €500,000.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Is that the base salary?

Mr. Mike Aynsley:

I have a base salary of €500,000 and receive an allowance of €38,000. There will be a pension of €125,000.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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As I know this is personal, it may be difficult, but does Mr. Aynsley think it is appropriate that the State should pay out that type of money when the country is bust? A report from the Society of St Vincent de Paul states 1.8 million people have less than €100 left over at the end of each month. Does Mr. Aynsley think it is appropriate that the State should continue to pay that kind of salary? I am not casting aspersions on the job or work Mr. Aynsley is doing.

Mr. Alan Dukes:

I must make a point that applies not only to the CEO but also to staff in the bank in general.

We need to be sure we have people capable of doing the type of job that needs to be done to maximise the return for the bank, and we must pay the market rate for the people we hire. We have done this with regard to the CEO, who was recruited in 2009. A number of discussions, to put it mildly, have taken place since then on levels of pay in various parts of the bank. It has been a problem for us as we retrain our staff in order that they can do the type of functions appropriate to a bank in wind down because we find that when people get to the point where they will be promoted to a new grade, they are head hunted by other banks which pay them more money than we can. We have a difficulty with pay levels from the point of view of staff retention and promotion. As far as I know, and this is an issue being constantly reviewed in the bank, we do not pay people more than we need to retain them. We probably pay people a bit less than would be needed to be sure we can retain the type of skill sets we need in the bank.

11:20 am

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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I join in the tributes paid to the staff members who remained. Approximately 1,450 members of staff lost their jobs, the majority through no fault of their own, because of what went on in Anglo Irish Bank, and we should acknowledge the work they did over many years only to be sold out by the previous Administration.

I worked in the private sector and when it comes to wind-down, closure bonuses can be given to those who stay with a company to the end. Has this been considered as a means of keeping key staff?

Mr. Mike Aynsley:

As Mr. Dukes stated, we do not have retention bonuses or any other type of bonus at this point. Having said this, the attrition rate at the bank over the past 12 months has been unacceptable. In an organisation such as ours, much of this comes about from the fact we do not provide a career future for people, but also because we are involved in a very specific type of work. We are contracting our organisation to a single focus, which is work out of loans and achieving the highest possible result for the taxpayer in every circumstance, either through refinancing performing portfolios or recoveries and collections on the poorer parts of the portfolio. We are not the only organisation in the country which has this type of portfolio. As we go through the process of building teams, they are at risk. They get poached, and not only by other State-owned organisations but also by foreign organisations which have difficult and distressed portfolios which they need to work out. The Department of Finance has realised this and it has in train a review of remuneration throughout all State entities. We are involved in this and as we go through the process, we hope it will contain measures designed to assist us retain people through to completion.

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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What was the loss on the US loan book sold for $10 billion?

Mr. Alan Dukes:

We have not revealed the details of the sale because it is commercially sensitive. Frankly, I do not want to set a benchmark for the next bunch of sales we do. I must say we were pleased with the outcome.

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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It is stated on page three of the submission document that the bank hopes the final cost will be closer to €25 billion. Will the witnesses outline the model of market conditions used for this forecast? What market conditions are required to achieve this outcome?

Mr. Jim Bradley:

We not only have an annual forecast, but we also forecast out to 2020 as part of our business practice. The UK and Ireland are where our core holdings and principal assets are based. In the UK we forecast stable but no real growth and in Ireland we forecast a slight downturn to 2013, then stability and then a slight uptick, but no hockey stick and nothing of a rapid increase in property prices, just a stable property market.

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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The proportion of the portfolio comprising residential and investment mortgages is described as small. What is the figure for this small proportion?

Mr. Mike Aynsley:

We have a portfolio of approximately €1.4 billion net, which is relatively small and is less than 10% of our overall net loans.

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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I apologise for moving rapidly but I am under time pressure. The comments of Fiona Muldoon of the Central Bank on decisive and creative dealings were referenced. I am a firm believer in examples and I ask the witnesses to provide me with an example of how they have been creative and decisive.

Mr. Alan Dukes:

As I stated, we are pushing ahead with the implementation of the mortgage arrears resolution strategy, MARS, and the range of forbearance products included in it. I would like to go further. It is something we have just begun to discuss in the bank. If we look at the most distressed part of the mortgage book, there will be cases where it will be impossible to envisage the mortgage being fully paid off in the contracted term. We will examine introducing another arrangement in addition to what is provided in MARS to bring some relief to people in this position. We have only just begun this reflection. Our first concern is to get MARS into action.

It is clear in a general way, as Ms Muldoon and others have stated, that if there is to be any type of domestic market recovery in the short term, measures must be taken to relieve some of the burden of debt on consumer expenditure. We are looking at a corner of this problem to see whether we can come up with creative ways of doing so. I cannot be more specific than this because we have only just begun our reflection.

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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I believe the Central Bank is frustrated with the slowness. Mr. Dukes stated the bank still has not worked out a procedure and has far to go down the road. The bank is only beginning to enter discussions.

Mr. Alan Dukes:

I will not get into an argument or discussion with anyone else. We took over a mortgage book in the middle of 2011. The Central Bank rightly required all of the banks to produce a programme to implement MARS by the end of this year. We are on track to meet the requirements of this programme. There are other measures we would like to take once we have it in place. If people are impatient with the programme, perhaps they displayed too much patience in setting out the deadlines in the first place.

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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The matter of parliamentary questions was touched on in The Irish Times this morning. The Minister indicated he contacted the board on the €1 million bonus to Mr. Fingleton. Overall it is quite small when one considers the losses, but it is very important to the public. Will the witnesses give us an update on regaining this money for the taxpayer?

Mr. Mike Aynsley:

The legacy matters with regard to Mr. Fingleton and Irish Nationwide are no different to the other legacy matters. We do not want to go into great detail.

All I can say is that I assure the committee that we are proceeding down the path of recovering every cent we can get from these legacy issues.

11:30 am

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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The Irish Bank Resolution Corporation, IBRC, is proceeding with this particular process.

Mr. Mike Aynsley:

It is on the list of processes being actively pursued.

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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Is it near the top of the list?

Mr. Mike Aynsley:

I will say nothing further about the process we are going through.

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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Questions have been asked in the media about whether we are duplicating a process. Has the IBRC considered a merger? Has the idea been raised at board level? Has the board discussed what path would give the best value to the taxpayer? The loan books are reducing. Is there an argument for considering a merger with another agency?

Mr. Alan Dukes:

The IBRC and the two pillar banks carry out a number of operations for the National Asset Management Agency, NAMA. We run a unit that is an outsourced part of the NAMA operation under a service level agreement. I am happy to say that it works well. NAMA has gradually devolved more and more of the decision making on this part of the portfolio to the IBRC. It has been suggested to me that NAMA believes that outsourcing some of its operation is effective for it. Policy on this issue will not be made by the IBRC, but by the Government.

Our modus operandi includes and will include for some time to come an occasional reflection on whether it would be better to outsource some parts of our operation. Some of them have already been outsourced.

In the final analysis, we will have shrunk the bank to the point where it would be conceivable to sell the entire thing in one or two chunks if we could find a buyer. This is how we would work it out. Merging with other entities is not something that we are contemplating. If someone wants to make me a proposal, I would be happy to consider it.

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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Sometimes, the lower paid workers take all of the pain of companies downsizing. Given the business being done by the bank, has the board considered whether it needs ten members? Costs should be assessed at every level. Too often, they are only assessed at the lowest level. Does the board examine its own operation and size?

Mr. Alan Dukes:

Yes. We have an annual process of examination. Recently, we appointed two new directors, each of whom has a specific background in banking and brings valuable expertise to the board. Three board members will come to the end of their term of appointment in May 2013 and the board has started considering what we need to do to make it the right size for the bank's condition. This will include a consideration of what skillsets we will need. We will give our opinion on this matter to the shareholder, but the shareholder is the final decision maker. We review the board's competences and functions. We are not obliged to have more than five members, as we are a non-major financial institution. Given the type of work we do, though, we need a particular selection of capacities. We will reflect on this in generating the opinion that we will give to the shareholder, which he will or will not take into account as he sees fit.

Photo of Kevin HumphreysKevin Humphreys (Dublin South East, Labour)
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I thank Mr. Dukes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I apologise for stepping outside briefly. If I am repeating someone else's question, please tell me that it was answered and I will move on. I do not want to waste anyone's time.

I will ask a general question first. We are four or five years down the road from the crash, but I have put a question to everyone, including the troika, to which I have not received an answer. Perhaps Mr. Dukes, a public interest director, will be the first. Anglo Irish Bank was a nest of speculation to an acute degree. Fortunes were made by private individuals while the going was good. When it crashed, it was landed on the shoulders of the working class - the poor, the pensioners and the workers. What is the moral justification for crucifying our taxpayers with destructive austerity to bail out speculators?

Let me protest in passing. When many people are suffering so much, that any bank, be it private or public, is paying hundreds of thousands of euro, much less €500,000 or millions, to top executives is obscene.

Ordinary people, including me, can be bamboozled by discussions on promissory notes and the merry-go-round of bonds, notes, etc. If €3.1 billion must be paid each March, and setting aside the various manoeuvrings in that regard, what are the mechanics of it and how will it be paid? In a few sentences, will Mr. Dukes reprise the story of the €31 billion that constitutes the promissory notes? Where did it come from and where has it gone in recent years? If the State asserted that the amount was a burden too far on the people and that it would stop further payments, what would the consequences be apart from apoplexy in the EU establishment and among the sharks in the financial markets?

Mr. Alan Dukes:

I am not being smart, but the Deputy has asked questions about the promissory note and the payment of €3.1 billion in March. I will take the Deputy at his word, as this issue has already been addressed. If the Chairman will permit it, I will ask Mr. Bradley to discuss it again in one moment.

The Deputy will not be surprised to find that I will disappoint him again. To put it at its simplest, my job and that of the bank's board and management is to pick up as many of the pieces left after Anglo Irish Bank and Irish Nationwide went bust as we can. I take no responsibility for the bailout or for decisions on the guarantee. I would be happy to engage in a philosophical discussion with the Deputy about other issues, but I must deal with the situation on the basis of current Government policy with all of the influences that come to bear on it. The IBRC has met the repayment of bonds falling due in accordance with current policy and legislation. Had we been told or legislatively obligated to do something different, we would have done so. We are like the legionnaire - do this and he does it. We are subject to other peoples' orders.

We do not pay IBRC's executives millions of euro. I am not being smart with the Deputy, but we dealt with the issue of the chief executive's salary a few moments ago. We will happily rehearse it if the Chairman will allow us.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I heard what Mr. Dukes stated, but I wanted to lodge a protest on behalf of taxpayers. I am sure that when Mr. Dukes lays awake at night trying to prepare for statutory requirements, etc., he sometimes muses over the morality of this situation.

I will move onto residential properties. From scanning the submission, the witnesses provide the amounts. Do they have a figure for the absolute number? I take it these are owner occupied homes that came with the building society. Is that correct?

11:40 am

Mr. Alan Dukes:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Can the witnesses provide the number of single homeowners this groups comprises?

Mr. Jim Bradley:

It is approximately 14,000.

Mr. Mike Aynsley:

It is not just personal dwelling homes but also buy to let properties.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Are these included in the figure of 14,000?

Mr. Mike Aynsley:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Are these landlords with portfolios?

Mr. Mike Aynsley:

I do not have the breakdown of the figure to hand.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I am mainly concerned with owner occupiers, people who purchased a home in good faith when they were being blackmailed by rampant speculation in the property market but needed a home for a family. The submission states that the bank repossessed 23 properties in the six months to June 2012. What is the story in those cases? Did the owner occupiers fight the bank and did they want to maintain their homes? If they did, why did the bank not settle an agreement with them rather than taking the roof from over people's heads?

Mr. Mike Aynsley:

Generally, repossession of any personal dwelling home is an absolute last resort. By policy, we do not want to go there. Normally, it is a situation where the borrowers will not co-operate with the bank in any shape or form. These are long-term delinquency situations with no hope of recovery. We try to work with clients and try to put them in a position where they can get back on their feet. We have a number of products coming online, with the mortgage arrears resolution strategy, to assist us through forbearance. The chairman alluded to IBRC being in a process of forming a strategy for the most distressed parts of our loan book for the most distressed clients. For want of a better name, we could call it a residential intensive care unit, designed to focus on the most needy. It is an initiative that will come online within the next few months.

Mr. Alan Dukes:

In some cases, very few, we have repossessed properties with the agreement of the previous owner. The owner comes to the conclusion that it is not sustainable to maintain the property. There are very few such cases.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I refer to individual mortgages, not portfolios. People were caught in an impossible situation at the height of the boom, with what are now unsustainable monthly payments because jobs have been lost. Why could IBRC, as a State-owned bank, not come up with a revolutionary approach? The solution is simple and involves reducing the value of the home to the current market value and reducing the monthly payment to the equivalent of that. It would make the loan sustainable for the vast majority of people who are now in difficulty. IBRC would then be leading the way for what would happen generally. Instead of the massive amount of money going to the banks, through huge suffering from people in these difficulties, money would be released into the real economy, which may help to overcome the disaster of austerity. Would the IBRC consider something like that?

Mr. Alan Dukes:

There is no release of money into the real economy from that. If we follow the process suggested by Deputy Joe Higgins, a lower level of mortgage repayment would still be paid. As Mr. Aynsley has said, we have only just begun the intensive care system for homeowners. Useful as it is, the mortgage arrears resolution system cannot be the final answer to the mortgage problem. It is pretty clear that the final shape of the personal insolvency legislation will have an impact on action in this area. I do not know what the impact will be but it will emerge over a period of time. The kind of proposal made by Deputy Higgins would have an effect on the capital position of the bank and would have to be assessed on that basis. I understand why Deputy Joe Higgins is making the suggestion. One of our concerns, and one of the requirements, is not to erode further in the capital position of the bank. It is a conundrum.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We have just under five minutes left.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Is it not fictional capital? The value is presumably the value at which the properties were bought, which they have not retained.

Mr. Alan Dukes:

I am not talking about the capital value of the asset but the capital reserve of the bank. If we are to write down an asset past what it has been written down to at this point, we will take a capital hit on it. That must come into the reckoning.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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What solutions is the bank moving towards?

Mr. Alan Dukes:

I cannot say at the moment. We are perfectly happy to talk to the committee when we have worked it out. We are making the point that we see the value of the solutions included in the mortgage arrears resolution process, some of which will resolve a large part of the problem, if not the whole problem, for many people in difficulty. It will not deal with the whole problem and we are anxious to find a way to make progress beyond that point.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The timeslots are shrinking, so Deputy Twomey has ten minutes.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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If we take out the residential, buy to let and loans to SMEs, does IBRC deal with a very small number of people for the vast majority of loans?

Mr. Richard Woodhouse:

I run the specialised asset management group. For want of a better description, it is the cash flowing businesses as distinct from commercial real estate loans. In that area, we have approximately 100 regulatory groups or companies equating to approximately €5 billion on the bank's balance sheet. It is a fairly small number. It represents a significant discreet portfolio of high net worth, in the sense of company exposures. I operate the cash flow elements and another individual, Mr. Mark Layther, runs the unit dealing with smaller individual loans. He has approximately 2,000 connections in the commercial real estate space and there are thousands of individuals who borrowed less than €10 million for a number of projects embarked upon in 2005 and 2006. Many of them are now in need of care and attention. If one is looking for large groups, there are 100 companies in the €5 billion group, €7 billion comprises 2,000 representatives and the balance is a much wider spread. In the UK, it is a few hundred connections making up almost £8 billion of loans.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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Within that, some of the companies are connected, which makes it a smaller number.

Mr. Richard Woodhouse:

Yes. Of the 100 I referred to in my work, one can get down to less than 60 regulatory groups because of the connections within that.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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Are these responsible for at least €5 billion?

Mr. Richard Woodhouse:

Yes.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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The IBRC has been fairly flexible and proactive in how it has been achieving objectives over the past number of years. Does IBRC have connection with asset management companies such as Certus, which is involved in getting out of the Irish market as quickly as possible on behalf of some of the major UK banks?

There is a NAMA unit within IBRC. NAMA is much bigger than IBRC in the overall context of asset management in this economy and in other economies and even the other banks, like Allied Irish Banks and Bank of Ireland, which are in a similar position to IBRC. Do the banks pool information? Do they discuss how they will move forward in the context of the big boys and the MARS programme? For this to be sorted out, something must be done. This has been mentioned by others as well. Buy to let is a big problem. The SMEs are finding it difficult to move on because, to some degree, they are burdened with a property debt. People are genuinely suffering because of the residential property market, and that is very much a moral consequence of where we are. Does IBRC discuss this with the other banks to see if they can move this forward?

When other banks have appeared before the committee, we have often found that some of them have a very negative attitude towards doing something about debt write-down. I do not get that impression from IBRC. It seems to be a bit more proactive. Is it pushing the MARS programme? Is there some connection with other banks when trying to push for a resolution to this? I speak about this from our point of view as legislators because the insolvency legislation has been criticised by some of the banks which feel we are helping people to get off the hook. If the banks are not proactive, we may well have to become proactive in the context of the legislation. As IBRC knows, it is much better for the banks to look at things case by case basis rather than having prescriptive legislation which may not deal with the problem in an appropriate way. What is IBRC doing to move this forward?

11:50 am

Mr. Alan Dukes:

There is no concerted view among all the banks on how they deal with their particular loan books. I imagine any attempt to do that would be frowned on by the authorities. We regard ourselves as policy takers. We operate within the framework of policy as it is. The Government said it wanted the MARS policy, the Central Bank laid down guidelines and we put that in place. The shareholder told us to wind down the bank in ten years without burning the capital reserve and that is what we set out to do. Within that framework, we deal with each particular connection we have in the way that seems to us to get the best return out of the situations we find. It is not always easy to figure out how to do it.

In regard to personal insolvency legislation, I do not know, and nobody can know, at this stage how it will work out. We have to see the final shape and how things move through it. I believe it will have some effect on how the MARS programme works when we see how the dynamics of the process work out. We will have to review our financing models when we see the results of the programme. There is clearly going to be some margin of choice in individual cases as to how they work out, but we will have to make the same kind of commercial judgment on how we treat the loan as we do now with some new factors coming into play. I do not know if there is any appetite on the part of policymakers to impose a single set of approaches to any part of this. I have not seen any evidence of it.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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In regard to the legislation, there is a perception among the public that there is a general tardiness on the part of the banks to do something about this crisis of mortgage arrears in the residential market and SMEs. The consensus is that the banks to do not seem to be moving it on or do not want to deal with this issue which is considered to be a huge one in us moving forward.

Mr. Alan Dukes:

As I have said, we are meeting the MARS target set for us by the Central Bank and we are considering what, if anything, we might do in addition to that to meet the problem in the worst part of our portfolio and we will do it as quickly as we can.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Is Mr. Dukes now of the view that property is arriving at its real value as opposed to still being undervalued?

Mr. Alan Dukes:

I would not be confident in saying we have reached the bottom of the property market.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I did not ask if we had reached the bottom. I asked if we are approaching its real value, which is different.

Mr. Alan Dukes:

What is real value? The real value of any asset-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I can give Mr. Dukes a typical example. A standard three bedroom house is worth somewhere between three to four times the average industrial wage. That is what good lending practice is based on.

Mr. Alan Dukes:

When I bought my first house, it was two and half times the basic salary.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There we go. We are talking about between three-----

Mr. Alan Dukes:

I do not know whether that was an accurate reflection of the real value of the house.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It is, according to the Central Bank, because it issued a report in 2009 stating this is what lending practice should be. The question Deputy Twomey asked, and to which we would like to hear the answer, because it reflects IBRC's property book, is whether we are approaching real value in the property market.

Mr. Alan Dukes:

Real value is what somebody is prepared to pay for the asset. My gut-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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In the residential property market-----

Mr. Alan Dukes:

My gut feeling tells me that I should not be surprised if I see residential property prices going a bit lower than they are now. I may be wrong. I am no expert and I do not profess to any punditry in this. I read the reports which come from the people who operate in the market. Some of them are saying that residential property prices have bottomed out in Dublin and in some parts of Cork and Galway. When I read these, I ask myself cui bono. I wonder if they are talking up the market in order to generate a bit more money.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I agree with Mr. Dukes.

Mr. Alan Dukes:

I tend to be sceptical.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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That is more or less all I wanted to ask. I wanted to know Mr. Dukes's feelings on this.

Photo of Aideen HaydenAideen Hayden (Labour)
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Page 5 of the IBRC document refers to the bank's dealings with high profile borrowers. It goes on to state that it is willing to discuss in detail its approach to managing both performing and non-performing borrowers, presumably high profile ones, and the multifaceted governance that applies to all decisions in this regard without exception and so forth. It refers to debt restructuring decisions, presumably in regard to these high profile borrowers. Will Mr. Dukes indicate the volume of debt that has been written down for what are termed high profile borrowers? For people outside the House, in particular the 7,000 or so distressed borrowers, will Mr. Dukes's indicate, in terms of what is sauce for the goose is sauce for the gander, the amount of debt written down for distressed mortgage holders?

Mr. Alan Dukes:

On the broad figure side, I refer the Senator to the middle paragraph on page 3 of the document. Impaired loans on our books amount to €18 billion with cumulative impairment provisions currently at almost €11 billion. Impaired loans are 66% of our balances. We have impaired loans of all sizes on the balance sheet and we have a rigorous annual discussion on the kind of provision we make for impairment which is closely discussed with our auditors. So far, looking back at our realisations on the market compared with the kind of provisions we have made on loans, we feel we have been reasonably near to the mark in making the provisions in the first place. It may vary a bit on individual loans.

Photo of Aideen HaydenAideen Hayden (Labour)
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Impaired loans now account for approximately 66% of the total loan balance.

I refer to the section of the document dealing with mortgage debt. According to page 9 of the document, which sets out the profile of residential mortgages, the bank increased its specific provisions for impairment on the owner-occupied section of its loan book from €206 million on 31 December 2011 to €235 million on 30 June 2012. Is that correct?

12:00 pm

Mr. Alan Dukes:

Yes.

Photo of Aideen HaydenAideen Hayden (Labour)
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It seems to me the bank's failure to deal with this issue is costing the taxpayer money. I appreciate that the bank did not take on the Irish Nationwide loan book until 2011. I am sure it is still responsible for what happened earlier. Perhaps the person who was dealing with Irish Nationwide will respond on this point. To what extent has the provision for impairment had to be increased over the past three years?

Mr. Mike Aynsley:

The condition of the market, rather than the bank, is the key driver behind this. As the market falls, one needs to assess the value of the underlying collateral and the likelihood of repayment by the borrower. These are the main things that drive impairment in a provisioning process.

Photo of Aideen HaydenAideen Hayden (Labour)
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I suppose I am looking for an answer to a specific question. Having examined the balance sheet, my impression is that the bank's failure to deal with impaired domestic owner-occupied debt is costing the taxpayer. The bank has had to make higher provisions for impairment over this period. I was somewhat concerned to hear one of the witnesses say, in response to a question that was asked by my colleague, Deputy Kevin Humphreys, that the bank is formulating a strategy as we speak. It does not appear to be formulating a strategy for its high profile debtors. Why is it taking so long to formulate a strategy for owner-occupied domestic mortgage debt?

Mr. Alan Dukes:

We are doing several things. We are not losing taxpayers' money by sitting by and watching loans gradually get more impaired. That is not an active act on our part. If the market keeps deteriorating, we will have to make a bigger provision because more loans will get into trouble. If we move quickly, it will not necessarily make a difference to the level of impairment. If we move quickly and we find a borrower or mortgagor cannot pay, the impairment is going to happen anyway. We are not generating impairments by doing anything or failing to do anything.

Photo of Aideen HaydenAideen Hayden (Labour)
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That is a very meaningful answer.

Mr. Alan Dukes:

I am delighted the Senator finds it so.

Photo of Aideen HaydenAideen Hayden (Labour)
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I want to be clear on this. As far as the bank is concerned, the longer this goes on, it is not damaging to the bank.

Mr. Alan Dukes:

I have not said that at all.

Photo of Aideen HaydenAideen Hayden (Labour)
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Clearly, there is an incredible amount of damage to the individual concerned.

Mr. Alan Dukes:

I have not said that at all. The impairment provision we have to make in our accounts is a source of considerable worry and concern for the bank and for the taxpayer. The more impaired the loans, the less likely it is the taxpayer is going to get a return. We are not just sitting there and allowing impairments to drown us out. We have to do something about it. One of the drivers of impairment is the condition of the market, which is not something we decide. The Senator asked why it is taking us so long. First, we took over the mortgage book for residential mortgages and investment properties in the middle of last year. As I have said, it was a pretty bad book. We had a lot of work to do before we could figure out what condition the book was in. It was not like a normal takeover in which one would carry out a due diligence operation before taking on the book. It was simply transferred to us as it was and we had to deal with it. We had to arrange and organise ourselves to begin to implement the MARS process, which we have done.

Photo of Aideen HaydenAideen Hayden (Labour)
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On that point-----

Mr. Alan Dukes:

On the other part of the book, there is no single strategy we can put in place to deal with all the groups Mr. Woodhouse has been talking about. It is done case by case.

Photo of Aideen HaydenAideen Hayden (Labour)
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Can I revert to one of my previous questions? Has the bank written down any domestic mortgages to date?

Mr. Alan Dukes:

We have-----

Photo of Aideen HaydenAideen Hayden (Labour)
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Has the bank given debt forgiveness-----

Mr. Mike Aynsley:

Let me just clarify-----

Photo of Aideen HaydenAideen Hayden (Labour)
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-----to any mortgage holder to date?

Mr. Mike Aynsley:

The Senator is asking a different question.

Mr. Alan Dukes:

That is a different question.

Mr. Mike Aynsley:

Is the Senator asking whether we have written off any debt or written down any debt?

Photo of Aideen HaydenAideen Hayden (Labour)
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I am asking whether the bank has written down any debt.

Mr. Mike Aynsley:

The writing down of debt is done through the provisioning line.

Photo of Aideen HaydenAideen Hayden (Labour)
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It has been written down. Okay. My mistake.

Mr. Mike Aynsley:

We have written down these loans through the provisioning line.

Photo of Aideen HaydenAideen Hayden (Labour)
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Has any debt been written off?

Mr. Mike Aynsley:

I understand where we are at now.

Mr. Alan Dukes:

We have not yet written off loans. There are several products, as they are called, in the MARS procedure. I do not believe anything in the financial sector should be called a product. That is part of the problem we have. There are provisions that allow one to defer interest or to park part of the loan or part of the interest for a time.

Photo of Aideen HaydenAideen Hayden (Labour)
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The MARS process has not been implemented yet.

Mr. Alan Dukes:

We are deploying those solutions.

Photo of Aideen HaydenAideen Hayden (Labour)
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What I am trying to get at-----

Mr. Mike Aynsley:

The first of those products will come on line in December.

Photo of Aideen HaydenAideen Hayden (Labour)
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Okay. Before I ask a further question about the MARS process, I would love to know how many write-downs have been given to high value or high profile borrowers. Perhaps the witnesses can tell us how many write-downs are given to them.

Mr. Alan Dukes:

We do not-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Excuse me, one second-----

Photo of Aideen HaydenAideen Hayden (Labour)
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Perhaps I should have referred to write-offs.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The Senator has a couple of minutes left. Does she want to ask about the MARS process or does she want to move on to a different topic?

Photo of Aideen HaydenAideen Hayden (Labour)
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I will go back to the MARS. I understand the bank is in the process of rolling out the strategy. Will the bank publish its MARS solutions on its website? One of the difficulties borrowers have is a lack of clarity on what they have, or will have, available to them. The witnesses have said the strategy will be rolled out in accordance with the timelines agreed by the Financial Regulator. Can they indicate what timelines have been agreed?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The Senator is asking too many questions.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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She has just a couple of minutes, so she should be focused.

Photo of Aideen HaydenAideen Hayden (Labour)
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I would like answers to the two questions I have just asked.

Mr. Mike Aynsley:

The MARS process in which we are involved is the same process in which the other banks are involved. The first product roll-outs will take place in December. As Mr. Dukes said, products such as the split mortgage product will give relief. In response to what was said about the provision numbers going up, I would like to refer to what will happen if we accelerate the process without a process of debt forgiveness. I know much of this will come back to views on debt forgiveness. At the moment, the bank does not have any debt forgiveness capacity. The Senator asked whether we write down loans for customers. We have a policy of not writing down loans for customers. We will take write-offs when we sell a loan to another party. A number of loans have been auctioned through a process. Their value is driven by that public process. It depends on what people are prepared to pay for the asset or loan at that particular time.

We do not write that off when selling a loan facility. We do not go through that process with the residential part of the portfolio. It is very much a measured process of working out a consensual solution with the borrower, where we can, as long as the borrower co-operates. As we bring this series of products on line through the MARS process, we hope to address many of the difficulties people are having. Products like the spilt mortgage product, which will give people the capacity to resize the amount of money they spend on a mortgage and park the other part of the resized mortgage, will help people to manage their cashflows as they go through the recovery. Unfortunately, we do not have any mortgage forgiveness or debt forgiveness products that we can offer.

As we said earlier, we are going to look at the very distressed end of our book. We hope to be able to develop a different series of products around that intensive care unit. We have to go through that process. It is difficult because we have inherited what is probably the worst residential book, with the worst system constraints, in the Irish marketplace. We have had to reconstruct much of what one would normally hope to find when one takes over one of these books. We are going through a long and lengthy process.

Photo of Aideen HaydenAideen Hayden (Labour)
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I also asked about the timeframe.

Mr. Mike Aynsley:

The first roll-out of products under the MARS process will take place in December. After that, we will have an ongoing timeline for rolling out products over the first and second quarters of next year.

Photo of Brian StanleyBrian Stanley (Laois-Offaly, Sinn Fein)
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The first question I will ask relates to the number of IBRC borrowers that are paying their staff more than €200,000 per annum. For example, it has been reported that Siteserv, which is hopelessly insolvent, is paying one of its staff €450,000 per annum. After that question is answered, I will run through the four or five other questions I have.

12:10 pm

Mr Alan Dukes:

We have no control over what client companies pay their staff.

Mr. Richard Woodhouse:

This was not decided by us; the sales process was done at arm's length. The Deputy might be getting at a question of pay grades within the company. The bank had no influence on that. At the end of the day, "a little" was the chief executive's answer earlier on to the pay grades within the company here. These businesses are mainly cashflow-based and the best assets drive home at night. If people are to continue to create value in the business in which they operate, it is the same for a bank as it is for an oil company, a trade or anything else, the board of that company would determine pay levels and their appropriateness. We had no involvement at all.

Photo of Brian StanleyBrian Stanley (Laois-Offaly, Sinn Fein)
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Would the bank be concerned because these people are borrowers? They are driving home at night with very large salaries of up to €500,000.

Mr. Richard Woodhouse:

The driving home at night is the bit that concerns me because unlike a commercial real estate loan, where there is a building that will stay in the same spot in perpetuity and its value will go up and down, for a cash-flow business, the staff will either create value or destroy it.

Deputy Twomey's asked how we look at the restructuring of these companies. We are different from the other banks for several reasons but our strategy remains the same. We are different because the bank tended to lend all of the money; if it liked a transaction it would do 100%. When looking at Bank of Ireland or AIB's portfolio, there are more syndicated loans and other players. Often we would also provide mezzanine finance. The bank's concentration in each investment is much higher. The fact the assets drive home at night gives rise to enormous risk in realising the best long-term economic value for the shareholder. As a consequence, the preferred platform is a consensual restructuring wherever we can get that done. Going through the courts and other recovery mechanisms is extremely costly and a consensual outcome is by far the best, and dealing sensitively with the employees and the management of the company is how we stimulate the best possible bid from a third party buyer.

Coming back to Deputy Higgins's earlier question, albeit phrased differently for residential mortgages, many of these companies on our books were financed and constructed at the height of the boom and the level of debt in those companies is unsustainably high. Part of the creativity we want to bring to bear is the "right-sizing" of that debt, not writing it off, to make the company of capable of sustaining a portion of the debt and packaging the company in a manner that will allow a buyer to realise precisely what he is buying, having certainty about staff and debt levels and an appreciation of the forward look of the company. We utilise experts, often accountancy firms which help us with an independent business review on a particular product, and the solutions are, therefore, both bespoke and discreet. The collusion that was asked about earlier does not arise. We must be nimble and sympathetic to each case and operate within those parameters to achieve the best price on sale.

Photo of Brian StanleyBrian Stanley (Laois-Offaly, Sinn Fein)
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I asked because the taxpayer who is going home with €14,000 is looking at this and the buck stops with him for those loans. Has the bank called in any loans that were performing, loans that were not in arrears and where payments were being met? If so, why?

Mr. Richard Woodhouse:

We have not done that I cannot think of a single example of such a thing. Why would we do that?

Photo of Brian StanleyBrian Stanley (Laois-Offaly, Sinn Fein)
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It is reported the operational costs of IBRC are 50% more than NAMA for 2011 even though NAMA has a much larger loan portfolio. I recognise the bank's operational costs have fallen from €157 million to €129 million, a fall of 18% in the last year. Is IBRC, despite its small loan portfolio, less efficient than NAMA? Is that why operational costs are so high?

Mr. Jim Bradley:

It is important to realise that there are 260 staff in these costs who are being provided directly or indirectly to NAMA.

Photo of Brian StanleyBrian Stanley (Laois-Offaly, Sinn Fein)
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How many staff are there in IBRC?

Mr. Jim Bradley:

Just over 1,000, and of those, 175 are directly employed in NAMA, along with a number who work indirectly in support of NAMA in IT and HR capacities.

Photo of Brian StanleyBrian Stanley (Laois-Offaly, Sinn Fein)
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Why has IBRC outsourced debt collection to Certus for the INBS mortgage book?

Mr. Mike Aynsley:

We have not outsourced part of our mortgage book to Certus; we have sourced some staff from the company. It is effectively a body shopping operation, where we have taken ten qualified staff to assist us in our activities around strategy and recovery activities for the residential book. We are using the company as a source of people to supplement our operation where we could not hire enough people in the market to undertake that activity directly.

Photo of Brian StanleyBrian Stanley (Laois-Offaly, Sinn Fein)
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Given there are more than 1,000 staff, could the bank not find those ten people in IBRC?

Mr. Mike Aynsley:

We try to run this as tightly as possible.

Going back to the NAMA situation, it is important that people understand the model used. About 250 staff are directly or indirectly associated with the supporting of NAMA. NAMA has around 200 staff but that number does not include the staff sitting in those participating banks who provide services to NAMA. NAMA has effectively outsourced those services. If we transfer loans to NAMA on day one, this represented a transfer from one set of accounts on our computer system to another set of accounts that were sectioned off. We still undertake all of the loan management operational work associated with the management and maintenance of those loans. We have teams of people who are operating under a service level agreement with NAMA to support those loans and the needs of NAMA. To look at the total number of individuals and the costs associated with that, we must take not only the NAMA staff but the staff in each of the banks that support the agency. We have just less than 800 in the core of the institution by year end to support the wind-down activities of IBRC.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Instead of compositing a number of speakers and questions together, we are on the third round of questions so I will assign six minutes per questioner. Deputy Peter Mathews, Senator Paul Coghlan and Deputy Kieran O'Donnell can use the six minutes to speak or to ask questions.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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I hope it will be a conversation, with a mixture of speech and questions. I thank the witnesses for coming in.

The story of how Anglo Irish Bank and the Irish Nationwide Building Society merged to become the IBRC is amazing.

In 2006, in Davos, the world's richest, most powerful and so-called most intelligent people lauded Anglo Irish Bank as the best banking model in the world, with a balance sheet of approximately €100 billion, as shown in these excellent bar graphs which I find very helpful for seeing at a glance what has happened on the balance sheet from then to now. The bank had €100 billion of assets and was lauded as the best bank in the world. Now, under Mr. Dukes's chairmanship and executive management, this has been shrunk to just over €50 billion, which includes a large chunk of the remaining €28 billion of promissory notes, the asset that was created to allow the emergency liquidity assistance, ELA, to be advanced to redeem the losses of the investors or bondholders. As Deputy Higgins pointed out, he was one of the first on the European stage to put the case to Mr. Barroso that it was wrong for Irish citizens to be saddled with investor losses.

The €31 billion of promissory notes, now reduced to €28 billion, has a headline rate of interest that is the income for IBRC. According to Karl Whelan, over the period of the promissory notes, that will amount to approximately €18 billion. Therefore, that €18 billion in projected income is offset against the estimate of losses to the end of IBRC's life. If we take even half of that €18 billion and add it to the €25 billion - the estimate of losses that will be found buried in the Anglo experience - that will amount to €34 billion as the losses that originated out of Anglo. That brings us to the stage now where the funding has changed and the citizens of Ireland are administering a drip to inject money to redeem the losses of the replacing creditor, the euro system and the Central Bank of Ireland, who gave the investors the get-out-of-jail-free card. This is not pleasant.

This brings me back to a question for the IBRC. Is it not logical, financially and arithmetically, that it should be possible to negotiate on this? It should be possible to make the case to Europe that we plugged the hole in the framework, stopped it falling to the ground and, therefore, deserve some reduction in the bill that is being laid totally on the backs of the Irish people. We deserve that on the basis that the arithmetic can do it. This is not a financially complex process that will take 40 or 30 years. It simply requires the creditor - the Central Bank - to agree to buy in and not seek-----

12:20 pm

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The Deputy has three minutes remaining. He may continue speaking or may use that time to allow the witnesses to respond.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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This is very important because-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It does not matter how important it is the Deputy has only three minutes remaining. He may prioritise what he wants.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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I thank the Chairman for reminding me, but I am aware of that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Dukes may only have time to nod at the end as I may not be allowed to bring him back in to respond to Deputy Mathews's comments.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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The witnesses are responding by nodding.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Fair enough.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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If we exclude the Government's promissory notes, total assets amount to approximately €25 billion. I am down to the core of the engineering of this balance sheet and have a few quick questions.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The point is whether the Deputy wants them answered.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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It is important that this financial arithmetic can be argued and agreed. That would save the taxpayer significant money. On the nuts and bolts issues, God help the IBRC on having to take Irish Nationwide Building Society under its wing, because it is a can of worms. Are any Garda inquiries taking place on that or is the Director of Corporate Enforcement investigating or inquiring into it? On the issue of investments and wealth management, which Anglo Irish Bank used to do, are any large legal claims outstanding?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Those are all the questions we can take from the Deputy.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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Is there legal or solicitor advice?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The Deputy must obey the Chair. Only two minutes remain for a response and I wish to allow the witnesses to come in. I will bring the Deputy in sooner on another occasion if the Deputy behaves himself.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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I was here first.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Perhaps, but the Deputy does not behave himself here.

Mr. Alan Dukes:

I would love to sit down and talk to Deputy Mathews about the first set of issues he raised, but in my current function as chairman of IBRC, it is not my job to think about those questions. I refer the Deputy to a paper I wrote recently for the Institute of International and European Affairs, IIEA, and suggest he look at it on the website. My colleagues in management are not allowed to speak on issues of policy such as this. However, they are interesting issues and I would love to have that discussion with the Deputy.

As far as I know, there are no ongoing specific Garda or ODCE inquiries into the INBS. A number of administrative inquiries are being conducted by the Central Bank and these come under the general heading of legacy issues. What was the third issue the Deputy raised?

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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It concerned wealth management. Are there claims by investors of mis-selling of investments in projects promoted or funded by Anglo Irish Bank?

Mr. Alan Dukes:

We are dealing with a number of complaints.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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Would there be large contingent liabilities?

Mr. Alan Dukes:

So far, in the case of complaints escalated to the Financial Services Ombudsman, few have been found against the bank.

Photo of Paul CoghlanPaul Coghlan (Fine Gael)
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I welcome Mr. Dukes and the team from IBRC. It was good to hear their report. We are aware of the high profile litigation in England, but perhaps IBRC is only a witness in that. We understand that decision is to be appealed. In how many other cases is IBRC involved, if any? If there are other cases, how significant are they or how much of the remaining loan book is exposed?

With regard to the question raised by Deputy Stanley, I understand IBRC must function on an agency basis for NAMA, but how many of its staff are engaged full-time in managing loans on behalf of NAMA and how does NAMA recompense IBRC for them? Dealing with NAMA must be a huge part of the business of the IBRC and I assume large numbers are working in the IBRC on its behalf. Is NAMA involved and does it take the advice of the more senior people acting in that capacity on how to proceed with the number of receivers who have been appointed? I have in mind a case I believe is pretty hopeless. It seems as though NAMA is playing along - perhaps there are big salaries going to some of these people - but I see no prospect of a return at all. Obviously, every case is different and each must be taken on its own merits.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The Senator should put his questions now.

Photo of Paul CoghlanPaul Coghlan (Fine Gael)
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I have finished. I will always abide by the Chair.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Is the Senator just making a few comments?

Photo of Paul CoghlanPaul Coghlan (Fine Gael)
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That was not a comment but a question. I was asking about the relationship between IBRC people acting on an agency basis and NAMA and about advising NAMA on how to proceed with receivers.

Mr. Alan Dukes:

I cannot forecast how much litigation will be in the pipeline. I referred to a major piece of litigation the bank is taking, which is back in court tomorrow, but I am not sure we will see the end of that any time soon. As far as our NAMA operation is concerned, there are approximately 170 people directly employed and probably another 70 or so equivalents, indirectly, in support of those. We reckon there are effectively 230 full-time people in the bank working on the NAMA portfolio.

As we have gone through the process, NAMA has gradually delegated more and more of the decision making regarding that bloc of loans to our dedicated NAMA unit. We are remunerated up to a maximum of ten basis points on the total gross quantum of loans.

12:30 pm

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Mr. Dukes. I will now bring in any members who have supplementary questions.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The Chairman indicated that I was next to speak.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I apologise, the Deputy is correct.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Thank you, Chairman. In the limited time available to me, I will focus on some specific points. Mr. Dukes referred in his opening statement to the final cost of the wind-down operation. What does he anticipate will be the residual value of Anglo Irish Bank's balance sheet when it is wound up? The context to my question is, of course, the promissory note. When does Mr. Dukes expect that operation to be completed?

Mr. Alan Dukes:

Mr. Bradley spoke about this earlier. If matters proceed as we are currently forecasting, we expect to end up with approximately €8 billion to hand back to the shareholder at the end of the process.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Does Mr. Dukes anticipate that will happen in 2020?

Mr. Alan Dukes:

We expect the process to be completed some time in advance of 2020.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can Mr. Dukes be more specific?

Mr. Alan Dukes:

I cannot at this point.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Will he give us an estimated time?

Mr. Alan Dukes:

I would love to tell the Deputy that it will be on 16 August 2017, say, but it is not possible to do so.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Dukes has indicated his expectation that it will be done in advance of 2020. I am simply asking for a more specific estimate.

Mr. Alan Dukes:

As I said, we will probably do it sooner than 2020. The reason I am circumspect about saying how much sooner is that as we go through the process, we are getting to the increasingly difficult parts of the loan book. If we are doing well, we will be in a situation where it is conceivable to take the remaining rump loan book and package it in a way that will allow us to sell it to three or four buyers without damaging the capital and still ending up with €6 billion to €8 billion to hand back to the shareholder. That is what we see happening.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What was the anticipated residual value at the time the promissory note was put in place? I am trying to ascertain whether that estimate has changed in the interim.

Mr. Jim Bradley:

We undertake an annual forecasting exercise which takes into consideration such issues as market performance and interest rates. The latter is an important factor because we are talking here about a fixed-rate instrument and interest rates will having a bearing in terms of how much capital will be generated. It is an ongoing forecasting issue.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The delegates were engaged in the design of the promissory note back in 2010. I am asking about the residual value that was factored into the note at that time.

Mr. Jim Bradley:

We have an obligation to maintain certain capital levels. It was a function of what the interest rates were at that time-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The promissory note was based on flows back - that is, a discounted value of funds that flowed over a period of time back to a current market value. This has huge significance in terms of the cost of the banking recapitalisation to the State. Was the residual value built into the estimated cost at the time of €34.7 billion? I am sure the delegates understand the point I am raising here.

Mr. Mike Aynsley:

Unfortunately, it is difficult to consider only one aspect of it in isolation, because there are so many interrelated factors. For example, when the promissory note was put in place, assumptions were made about the wind-down of the portfolio in the context of the macroeconomic assessment at that time. The eurozone had not deteriorated as far as it has since, there was the uncertainty regarding the property market and-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In the limited time available to me, I have put a straightforward question. This is a critical point.

Mr. Mike Aynsley:

It is.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The point I am making is that if the expected residual value of €8 billion was not factored into the valuation of the promissory note, there is an opportunity now to factor it in.

Mr. Mike Aynsley:

I do not have the figure to hand, but there was a positive number built in, in terms of planned return to the taxpayer.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was it €8 billion?

Mr. Mike Aynsley:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was it much less?

Mr. Alan Dukes:

It was €4 billion.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It was €4 billion rather than €8 billion. This means that in the context of our deliberations with Europe, there is now an additional €4 billion to play around with. That should be factored in as part of our efforts to bring down the overall cost of the promissory note to the State.

Mr. Jim Bradley:

We must bear in mind that the initial estimate was based on interest rates at that point in time.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I accept that. However, the fact remains that the residual value has increased by €4 billion over the estimate at that point in time.

Mr. Alan Dukes:

To clarify, we are not expressing any view on what the Deputy is proposing-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I am merely soliciting information to enable me to make the proposal.

Mr. Mike Aynsley:

These figures, whether €4 billion, €6 billion or €8 billion, can move around dramatically, depending on where interest rates go and where we are at with recovery rates and so on.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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For me, it is very straightforward. There would seem to be a window of opportunity at this moment in time in that the estimate of the residual value is now €4 billion greater than it was at the time the promissory note was put in place. That is the point I am making. Unfortunately, my time is up. It has been a good six minutes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Deputy O'Donnell, I appreciate your co-operation. We are now moving onto the final round of the discussion. I will facilitate any member whose supplementary questions are short and succinct, beginning with Deputy Spring.

Photo of Arthur SpringArthur Spring (Kerry North-West Limerick, Labour)
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Thank you, Chairman. Citizens and taxpayers are concerned above all that there be fairness in this process. Last week representatives of NAMA indicated to the committee that two thirds of the agency's clients are co-operating with it. Will the delegates indicate the percentage or portion of IBRC clients who are not co-operating? The NAMA delegates also indicated that 90% of rental income is now directly mandated straight into the agency. Will the delegates comment on that in the context of IBRC's engagement with its clients?

Finally, there is a general view that many people with substantial assets transferred some of them to children, siblings and spouses in the lead-up to the crash. Have the delegates consulted the relevant registration authorities with a view to ascertaining the level of that type of activity? Have they drilled down into the loan books that were historically produced on a quarterly basis? As a former employee of Anglo Irish Bank, I am aware of the level of detail that would have been recorded.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy Spring should proceed with caution.

Photo of Arthur SpringArthur Spring (Kerry North-West Limerick, Labour)
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In group situations, loans would have been given for properties without the security being taken into account. Have the delegates pursued these issues?

Mr. Mike Aynsley:

In terms of co-operation, I do not have a figure to hand but I will revert to the committee with that information. It is fair to say that we have a very good record generally in our dealings with clients who work consensually with us. That consensual approach is core to the way we operate and has consistently proven more effective at producing higher returns than would be achieved by way of an adversarial approach to customers. It also helps to avoid litigation. As I said earlier, we will do everything we can to avoid litigation because of the sheer cost. A consensual approach is conducive to achieving the highest possible return to the taxpayer, which must always be our focus.

Photo of Arthur SpringArthur Spring (Kerry North-West Limerick, Labour)
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What about rental incomes?

Mr. Mike Aynsley:

We pin down rental incomes as part of the consensual operating process. There are processes and protocols in place to ensure we capture them. We monitor and limit the amount of leakage on all accounts, whether at the residential end or at the top end of the business that Mr. Woodhouse runs.

Photo of Arthur SpringArthur Spring (Kerry North-West Limerick, Labour)
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Are rental incomes mandated directly to IBRC or do clients have autonomy over them?

Mr. Mike Aynsley:

It depends on the situation. It is much more important to have direct control over them in circumstances where one does not have a consensual restructuring or working out of a situation with a client. In many cases, clients have operating businesses and will require control over cash flows in order to operate those businesses successfully on a day-to-day basis.

12:40 pm

Photo of Arthur SpringArthur Spring (Kerry North-West Limerick, Labour)
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I have one last question on the transfer of titles and how Irish Bank Resolution Corporation, IBRC, has examined that.

Mr. Alan Dukes:

We have some experience in dealing with that.

Photo of Arthur SpringArthur Spring (Kerry North-West Limerick, Labour)
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I will not refer to any single case if that is all right. Is there anything IBRC is doing to ensure it is capturing all the properties that were transferred and has it examined the securing of those properties?

Mr. Mike Aynsley:

Again, this obviously is a key process through which we go in terms of the business planning stage with any of the accounts, regardless of whether it is a consensual or non-consensual operation. There is more concern that people who do not co-operate with us have been through that process. We are very diligent about the way we go about it and the manner in which we investigate to track down assets that may have been moved to gain control of them.

Photo of Arthur SpringArthur Spring (Kerry North-West Limerick, Labour)
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Historical credits, etc.

Mr. Jim Bradley:

In addition, we have had in place for 18 months a programme called lending data management. It involves making sure we do the security analysis in respect of where it is and who holds it, to populate a database in order that we have that information.

Photo of Arthur SpringArthur Spring (Kerry North-West Limerick, Labour)
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What if it was not taken as security but if a credit was produced for the purpose of lending the money? Has IBRC also gone back in that regard?

Mr. Jim Bradley:

Where we can, we go back.

Photo of Arthur SpringArthur Spring (Kerry North-West Limerick, Labour)
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As all that information is there, IBRC should be able to get to ascertain if the money was lent to begin with, and I urge the witnesses to do that.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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In a dissenting judgment, a Supreme Court judge more or less stated, if I have it right, in respect of the litigation between IBRC and the Quinn Group, that there were two of them in it. Will the witnesses comment in this regard? Second, I read a suggestion that the court action may move onto mediation. Will the witnesses comment on that?

Mr. Alan Dukes:

In response to question A, the answer is "No" and in response to question B the answer is also "No". As I stated previously, I do not wish to be impolite but-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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No comment or no move?

Mr. Alan Dukes:

No, it is not any part of my function to comment on dicta from members of the Supreme Court Bench. On the second part, as I have stated, in our dealings with the Quinn family we do not intend to enter into any details on that subject today.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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I will take up the point made by Senator Hayden. Huge stress is building up in respect of the buy-to-let mortgages and a problem will arise regarding the non-allowability of a certain portion of the interest on funding for portfolios that are in buy-to-lets. I ask the witnesses to make representations to the Minister for Finance and his departmental officials that this be reconsidered. A great many of these valid portfolio holders of residential property and so on, who have been in this business for a long time, are the tipping point of going bust. The interest on their loan funds is not allowed fully as an expense against the rental income. Rental income has shrunk, interest non-allowability against a shrunken rental income is causing deep problems and the taxation implication is that their liabilities are still there.

Mr. Alan Dukes:

I listened to an interesting discussion on radio recently about the manner in which pre-budget submissions are treated. I will give the joint committee the reference and it might-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Perhaps Mr. Dukes might give it to us in January.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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My point is IBRC is looking after loan books that probably will creak even more.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I also wish to come in and ask, following on from the Keane report, about one of the many actions that were outlined as part of the mortgage arrears resolution process. One of the more radical approaches contained therein was the buy-to-rent scheme. Has IBRC given consideration to this proposal with regard to its mortgage book? If so, how many proposals are currently under consideration and is there a likelihood that any of them have been converted from mortgage to rent?

Mr. Mike Aynsley:

The short answer is the first range of products will roll out in December. It is one of the solutions we are working through to create.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There are a number of proposals at present in respect of specific properties. Without naming the properties, can Mr. Aynsley confirm that a number of specific properties are under consideration at present for conversion from mortgage to rent?

Mr. Mike Aynsley:

Analysis is under way in the portfolio, which seeks to segment the portfolio by solution. We are looking to ascertain which particular solutions we are moving to launch will be most applicable to various client groupings.

Mr. Alan Dukes:

There is loan-by loan-analysis.

Mr. Mike Aynsley:

One solution that may be appropriate to one group of clients or one individual is not necessarily going to apply to others.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I may wish to recall the witnesses on that issue. I would appreciate it were they to keep the joint committee informed as to what progress or what sort of delivery is being made on the option of mortgage to rent, if possible.

Photo of Aideen HaydenAideen Hayden (Labour)
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My question pertains to the buy-to-let market. While I am aware that IBRC's loan book is more biased in favour of the domestic standard home mortgage, to carry on with this point, it has come to my attention a number of times that the behaviour of receivers, where a property has been possessed, towards tenants has not been to treat them as though it is a landlord-tenant relationship but simply to receive the rent. Does IBRC have a policy in this regard? Second, does IBRC have-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I cannot allow second questions.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Dukes may have touched on this already but I refer to the scenario in which he maintains it would be possible to wind up Anglo Irish Bank earlier. Second, is IBRC required to maintain the same capital ratios as a normal commercial bank?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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One question. Which one does the Deputy want to use? I must conclude the session by 1 p.m.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It was more on the aspect whereby Mr. Dukes spoke of maintaining the capital base. Were IBRC not required to maintain the capital ratio at the same level, it would provide opportunities for the State.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The witnesses should respond to the questions from Senator Hayden and Deputy O'Donnell. We will come to a conclusion thereafter.

Mr. Mike Aynsley:

The answer to the second question probably is shortest. Yes, we are required to maintain a minimum capital level of 8%. We are capitalised for some degree of stress, given the state of the markets and given our mandate to sell down the portfolio. Our strategy is to stay within that regulatory capital threshold as we wind down. On the question as to whether we can close this earlier, yes we can. The way we look at it, this is a very black and white situation. Yes, we can but there is a capital consequence. We are into what we refer to as the "hard yards" part of the portfolio, that is, individual line-by-line work-out. That is in the absence of markets opening up and offering us an opportunity such as we saw in the United States. That was a strategy we began in October 2010 and which was concluded in October 2011. An enormous amount of work was completed to get the book in shape in order that we knew exactly what we had and we could take individual loans or parts of that portfolio to market. As the market opened up and the commercial mortgage-backed securities, CMBS, markets reopened, we had the opportunity to market the entire portfolio and of course all of it went, bar roughly €1 billion, which now has been worked down to approximately €400 million. If markets offer opportunity, our strategy is, in the meantime, to continue through this process of preparation and maintenance of data tapes, etc., in order that as markets operate and open up, we can put portfolios or more individual loans into the marketplace and close it earlier.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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With a fair wind, how early could IBRC wind down?

Mr. Mike Aynsley:

To give the Deputy an idea, it always is difficult. We do not like to forecast because there are so many moving parts. However, our net loan book is roughly €15 billion at present. By the end of 2014, we probably can get that down to between €6 billion and €7 billion.

Photo of Peter MathewsPeter Mathews (Dublin South, Fine Gael)
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There probably will be some competition from Certus.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And from NAMA.

Mr. Mike Aynsley:

A couple of years after that, one would be in the realm in which one could start to consider stub portfolio sales.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Aynsley has suggested IBRC could more than halve its loan portfolio by the end of 2014.

Mr. Mike Aynsley:

Certainly, by the end of 2014, we hope to have exited fully the United Kingdom portfolios.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That brings proceedings to a conclusion. I thank Mr. Alan Dukes, Mr. Mike Aynsley, Mr. Richard Woodhouse and Mr. Jim Bradley for their attendance and for helping the joint committee with its deliberations on this specific banking module.

Is it agreed to go into private session to deal with some matters and to return to public session at 2 p.m.? Agreed.

The joint committee went into private session at 1 p.m. Sitting suspended at 1.05 p.m. and resumed at 2.05 p.m.