Oireachtas Joint and Select Committees
Thursday, 20 December 2012
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Role and Contribution of Public Interest Directors in Financial Institutions: Discussion
I welcome Mr. Tom Considine and Mr. Joe Walsh, public interest directors, Bank of Ireland. The format of the meeting is that Mr. Considine and Mr. Walsh will make some opening remarks, which will be followed by a question and answer session. As the meeting is being broadcast by UPC on channel 207 I remind members to switch off their mobile telephones and I advise members in the public gallery to do the same.
I wish to advise the 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 to this committee. If they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter to only 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 asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or persons or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.
I thank Mr. Considine and Mr. Walsh for attending and ask them to make their opening statements.
Mr. Joe Walsh:
I thank the committee for the invitation and the opportunity to make a short statement.
At the request of the then Minister for Finance, the late Deputy Brian Lenihan, I agreed to have my name included in a list of people who would be available to be appointed as public interest directors. I was appointed to the board of Bank of Ireland in January 2009. I have been a member of the board since then and a member of the nomination and governance committee. The committee oversaw the complete renewal of the board's non-executive directors, none of whose tenure at present pre-dates 2009. As a member of the committee, I contributed to the successful implementation of compliance with very substantial new governance codes, including the Central Bank of Ireland's corporate governance code for credit institutions and insurance undertakings which became effective from 1 January 2011; the revised version of the UK corporate governance code; the Irish corporate governance annex to the listing rules of the Irish Stock Exchange; and the Central Bank of Ireland's fitness and probity requirements.
Over that time 5,200 people in Bank of Ireland have been put through the required due diligence and assessment in accordance with these stringent fitness and probity requirements. As a public interest director I see it as my function to ensure continued monitoring of compliance with these standards.
The committee has presided over very significant change in the top echelons of the bank. Of the 61 people on the board, group executive and direct reports to the group executive, at 30 September 2008, 62% have left or will have left the group in the next couple of months and 28% are in new roles. All of the non-executive directors have left the group over that period as have five of the eight group executive team. We now have a new experienced board.
The Central Bank mandated a review of corporate governance at the Bank of Ireland by a major international firm in December 2010. It concluded:
The form of BoI governance complies with best practice guidelines. We have also found no evidence that there are any major weaknesses in terms of how governance is "lived" at BoI. Finally, when comparing Bol with benchmarks, we found its governance to be broadly in line with international banking peers, and Board effectiveness to be better.The external review of board effectiveness in the fourth quarter of 2011 concluded that "Board performance exceeded benchmarks on 45 dimensions out of 50 including critical areas such as knowledge, challenge and dissent". In addition, the Bank of Ireland's restructuring plan has been agreed with the European Commission.
I have been a member of the group remuneration committee from January 2009 to date and became chairman of the remuneration committee in January 2012. During that period, the committee oversaw a major change in remuneration levels and employment structures in the Bank of Ireland. Taking into consideration the changes in remuneration and reductions through voluntary redundancy in staff numbers, wage costs to the bank have reduced by about a quarter in the past four years. There have been major changes to pay structures in terms of absolute salaries, variable pay and pension benefits. More than 4,500 fewer people are working with the group since January 2009.
The remuneration committee has ensured compliance with the very stringent provisions set out by the Minister of Finance, under the subscription agreement in 2009 and his subsequent letter of July 2011. The latter was disclosed as part of the documentation in connection with the bank's successful recapitalisation, primarily from the private sector, in 2011.
The remuneration committee led the revision of remuneration structures to ensure adequate reflection of risk in remuneration. Specifically, it ensured the necessary changes were made to ensure compliance with the European Banking Authority requirements, in so far as possible in circumstances where bonus variable pay is not permitted in the Bank of Ireland. This has included the identification of staff with particular influence on the risk profile of the group, the implementation of mandatory risk goals for all executives and managers, and the updating of the group remuneration policy to reflect the focus on risk.
The committee ensured appropriate public disclosures on remuneration in the annual report and accounts and Pillar 3. The Central Bank of Ireland reviewed the group's compliance versus the EBA guidelines in 2011. In addition, the Financial Services Authority reviewed the UK subsidiary's remuneration policy statement for 2011. The remuneration committee made significant revisions to group remuneration policy and required management to conduct significant upgrading of the group's database of information on employees' remuneration.
As a board member and public interest director whose career has spanned both the business and political spheres, I take a keen interest in how Bank of Ireland has met its stated strategy of supporting and benefitting from economic recovery in Ireland. With regard to lending, I shall deal with mortgages first. With an existing share of about 20% of the mortgage market, Bank of Ireland has provided about 40% of the new mortgages in the market in the year to date. The mortgage market has increased by 7% in the third quarter of 2012 compared to the same period in 2011. This was the first positive year on year growth since 2006 and the third quarter in a row to show an increase. According to the Irish Mortgage Council, approvals in the third quarter of 2012 are up 14% year on year supporting the bank's expectation that this improving trend will continue.
Bank of Ireland continues to demonstrate its commitment to the mortgage market. For example, a €1.5 billion mortgage fund was launched in December 2011 to support first-time buyers and movers purchasing a home during 2012. Due to the oversubscription of applications to the fund a new €2 billion mortgage fund was launched in October 2012 to cover the remainder of 2012 and 2013. Other initiatives include the bank's negative equity mortgages for both those trading up and those trading down which was launched in April 2012, participation in the NAMA deferred payment initiative and hosting the Bank of Ireland's home buyers' week in October 2012.
I shall now discuss mortgage arrears management. Bank of Ireland has mobilised significantly around the management of mortgage arrears. It is a large-scale programme that is well under way in the bank and supports our customers who are facing, or are in, financial difficulty with their mortgage repayments. In the past year we have significantly increased the number of staff involved in our mortgage arrears programme. We now have more than 700 staff across the group involved in the management of mortgage arrears. We have made considerable investment in the training of our staff which is supported by internationally recognised experts in the field of mortgage arrears management. We have the largest bank branch network in the country and we have trained mortgage adviser experts in each branch. We also have mobile advisers throughout the country who can meet customers in their homes or an alternative location to their branches.
We offer restructure options to between 400 and 500 customers every week and have added more long-term solutions to our products. We have formally restructured more than 16,000 mortgages and more than 86% of those customers whose mortgages have been formally restructured are meeting their contracted payments.
We also have a significant number of customers on informal arrangements with us.
Bank of Ireland business banking has achieved, and will exceed, its €3.5 billion SME lending target for 2012. This figure represents the bank's approvals for new and increased credit facilities for businesses and farmers. Credit approved for customers seeking restructured facilities are excluded from these figures as reported by Bank of Ireland.
The €3.5 billion represents a 16% increase in approvals in the year to date when compared with 2011, which is as a result of increased demand from several sectors in the Irish economy. There has been increased demand from customers in the health care, manufacturing and hospitality sectors, and lending to farmers has also remained strong. Increased demand for asset and commercial loan finance has also been a feature. Of particular importance is the fact that lending to businesses and farmers has increased in all regions throughout the country, underpinning Bank of Ireland's confidence in its nationwide branch network. Lending to Dublin businesses was up by 27% compared to last year. With more than 40% of businesses located in the capital the bank believes this indicates that confidence is returning, as evidenced by the growth we have been seeing in credit demand from viable businesses in the second half of the year.
Bank of Ireland has just completed its seventh national enterprise programme in which we organised 80 events and networking meetings that more than 5,000 businesses and farmers attended. Some 1,500 businesses also took the opportunity to showcase their products and services in Bank of Ireland branches. In 2013, the bank will roll out a series of free SME lending clinics which aim to explain the lending application process primarily to start-up and micro-sized businesses.
We have an increased lending target of €4 billion for next year and we are determined to achieve it.
Mr. Tom Considine:
I thank the Chairman for the opportunity to appear before the joint committee. At the request of the then Minister for Finance, the late Brian Lenihan, I agreed to have my name included in a list of people who would be available to be appointed as public interest directors. I was appointed from that list to the board of the Bank of Ireland in January 2009.
As a board member I worked on the development of a strategy to stabilise the bank in order to safeguard the investment made by the taxpayer and to provide the public with an effective banking service.
As a board member I have contributed to the significant progress made by Bank of Ireland in reducing the risk exposure of the State and moving it ever closer to being able to fund its operations without State support. In September 2008, the State was guaranteeing €136 billion of liabilities for the bank under the exceptional eligible liabilities guarantee scheme, generally known as ELG. This amount was down to less than €26 billion in November 2012. In its trading update on 13 November 2012, the bank announced that it had prepared for and was ready for the expiry of the ELG scheme.
The bank has made significant progress in funding itself in the market without the support of the State guarantee. Let me give an example. Last week it raised €250 million in ten-year subordinated debt and last month it raised €1 billion in three-year asset-covered securities. Both issues received strong market support even though they were not supported by a State guarantee.
Bank of Ireland received a total cash injection of €4.8 billion from the Exchequer and is very grateful to the Government and the taxpayer for that support. The public interest directors and the board and management of the bank are making every effort to repay that money. Already the bank has made cash payments of €2.7 billion to the Exchequer. This is composed of guarantee fees of €1.3 billion, interest on the preference shares and on the contingent capital instrument of €500 million and €900 million in respect of warrants repurchased and recapitalisation fees. In addition, I am confident the remaining State holding of €2.8 billion of preference shares and contingent capital, which carry a coupon of circa 10% per annum plus the 15% of equity held by the State, will be profitable investments.
I have been a member of the board audit committee since January 2009. In that role I have taken a particular interest in ensuring the system of internal controls is fit for purpose and that the provision for bad and doubtful debts included in the accounts is well supported.
As a public interest director I was anxious to ensure that risk governance at Bank of Ireland would be developed to ensure as far as possible that taxpayer support would not be required in the future. In that context I was asked by the board to chair a group of non-executive directors to determine in the light of recent experience the most appropriate risk governance arrangements for the group and to recommend any necessary changes to the existing governance arrangements. That group was established in February 2009.
The work of that group had a strong public interest dimension because it was aimed at putting in place systems and structures that would avoid a repeat of the events that led to the taxpayer being called upon to support the bank. As chairman of this group, I worked to bring about significant enhancements to the way in which risk was managed in the group. The board readily accepted a recommendation that board-level engagement in risk oversight should be materially increased with particular attention being given to ensuring that risks were properly identified, assessed, controlled and managed and that strategy was informed by and aligned with the group's risk appetite.
To put these changes on a firm footing, the board agreed in July 2009 to establish a board risk committee of non-executive directors and to restructure the executive risk committees. To support the new risk structure, the board agreed to fund a programme of work designed to build up a uniform management information system across the Bank of Ireland group. As a result of these changes, the board of the bank is in a much stronger position to direct, control and monitor the business. As chairman of the board risk committee I played a key role in these developments.
The major enhancement initiatives identified in 2009 have now been implemented and the progress the group has made in enhancing risk management has been recognised by external advisers. In December 2010, Boston Consulting Group commented in its review commissioned in response to the Central Bank's risk mitigation programme that, "risk management at BoI is broadly aligned with peer best practice. There are no critical gaps and in some areas there is rapid improvement".
In April 2012, Promontory Financial Group commented that its review commissioned in response to the Central Bank's risks mitigation programme that:
...evidenced considerable strengths in the Group's risk governance framework reflecting a sustained focus from the Court in recent years. Following the crisis, the profile of risk within the Group has been greatly enhanced and the Court and the Executive team are clearly focused on risk issues which receive detailed attention.The board, the board risk committee and management are continuing to develop the risk governance structure to keep pace with best practice in the market and with the changing macroeconomic environment.
I am happy to answer any questions from members.
I thank Mr. Considine and Mr. Walsh for their opening statements. As this sitting will be very busy, I will invite the lead speakers to engage with witnesses for 12 minutes, and the second round speakers to engage for eight minutes, with the time reducing as we proceed. Before I call on the first member, may I confirm that both Mr. Considine and Mr. Walsh were appointed to the board of Bank of Ireland in January 2009?
Okay. There may be additional sums involved but Mr. Considine cannot account for them this morning. Basically, both directors can account for more than half a million euro but there may be other moneys which cannot be accounted for.
When you were appointed in 2009 and since that appointment, more than four years ago, were you ever given specific instructions or terms of reference in regard to reporting on how to carry out your tasks as public interest directors?
That is not the question I am asking of both witnesses. When you were appointed, were you given specific terms of reference or instructions regarding how you would report your behaviour as public interest directors?
Since 2009, you have not received terms of reference related to how you would report your activities as public interest directors. Since you were appointed in 2009, have you, on any occasion, in your capacity as a public interest director, reported your activities to any Minister for Finance or any specific structure within the Department of Finance or the Central Bank?
Mr. Joe Walsh:
The answer to that is "No". The current Minister for Finance, Deputy Michael Noonan, made it clear through a parliamentary question recently that his modus operandi for communicating with the board of Bank of Ireland was through the chairman and chief executive. Any views we have are conveyed to the Minister through the chairman of the board.
Mr. Considine, do not be evasive with me this morning. I am asking you whether, as a public interest director, you have reported to the Minister for Finance, the Department of Finance or the Central Bank. Mr. Walsh has not done so and was emphatic about that.
I am not asking you about your position as chairman of the risk committee. I am asking you a specific question, Mr. Considine. As a public interest director, appointed under specific legislation by the then Minister for Finance, the late Deputy Brian Lenihan, have you on any occasion given a formal report to any Minister for Finance, to the Department of Finance or to the Central Bank?
Mr. Richie Boucher, the chief executive officer of Bank of Ireland, appeared before this committee a couple of weeks ago. He said there was no difference between public interest directors and standard directors, except that public interest directors were not elected. Would you agree with that opinion?
I will repeat the question. When Mr. Boucher appeared before this committee he said the only difference between public interest directors and appointed directors of Bank of Ireland was that the former were not elected. He said that both types of director had the same duty of care and under company law had the same responsibilities. Would you agree that you are just directors, like anybody else? That was Mr. Boucher's opinion, as expressed to this committee.
Mr. Joe Walsh:
As I said, I am cognisant of my responsibility as a public interest director. That has been clearly outlined in both of the Acts to which I referred. In the public interest, as far as I am concerned, I bring my background as a public representative of many years, my involvement in industry and in dealing with the public to bear on that. There are several aspects to the public interest, as far as I am concerned. Number one is the State because the State has put a lot of money into the particular bank with which I am involved, Bank of Ireland. Number two is the citizens of the State because the taxpayers funded that and they will need-----
You are drifting. I need you to be more specific. I will invite Mr. Considine to answer the question and then come back to you, Mr. Walsh. Mr. Considine, what distinguishes you from the other directors on the board of Bank of Ireland?
Mr. Tom Considine:
First of all, Chairman, you are absolutely right that all directors have the same legal underpinning of their roles and are all charged with the same job of running the bank. Section 48 of the 2010 Act, with which the committee will be familiar, makes it clear that all directors of the covered institutions have an overriding requirement to take care of the public interest. As with all directors who are serving on a board, their particular background-----
Mr. Considine, you were appointed as a public interest director. You were not elected to the board but were appointed by the Minister for Finance in 2009 and have served on the board of the bank for four years. I am not interested in what other directors are doing. Bank of Ireland is partly owned by the State and those directors have a job to do. You also have a specific job to do and what I want to hear about this morning is what you have been doing as a public interest director.
Mr. Tom Considine:
Yes, I would be delighted to do that. As a public interest director I have done a large amount of work in developing the governance structure, and the risk structure in particular, of Bank of Ireland. The outcome of that has been to put very fundamental and far-reaching proposals to the board, which were adopted. As chairman of the risk committee, I have overseen their implementation. I am perfectly happy to stand over that. As a public interest director, I would consider that one of the main objectives of the State is to ensure that this never happens again.
Mr. Joe Walsh:
As a member of the bank's nomination of governance committee, I would have spearheaded an insistence that the Bank of Ireland comply with the various regulatory authority missives that I outlined in my original statement. Similarly, I was very strong on the fact that compliance was fully adhered to concerning the subscription agreement and the Minister's letter. As we know, there has been some public commentary about the lack of regulation in banking up to then. As a public interest director representing the State, which has a 15% holding in Bank of Ireland, I felt that I had to be strong on those areas in particular.
I have a final question. A number of measures have been put in place, both by the current Administration and the previous one, concerning banks engaging with small and medium enterprises and distressed mortgages. In his role, I am sure that Mr. Walsh is familiar with the level of despair that currently exists both in the business and residential sectors. On any occasion at board level, has Mr. Walsh taken up the task of dealing with either the forthcoming insolvency legislation or particular measures to provide credit for small and medium enterprises?
Mr. Joe Walsh:
Yes, I can confirm that I contributed strongly at board level, first of all in relation to SMEs. My background was as the manager of a small business in Clonakilty, a little town in west Cork with which the Chairman will be familiar. The fact is that a target of €3.5 billion was given for new and increased lending. Not alone have we met that but we have exceeded it.
As regards mortgages, like everybody else I was extremely concerned about those people who got into difficulties mainly due to factors outside their control. Because of the economic situation, processes were put in place in tandem with the Central Bank to ensure that they were treated fairly. Packages of measures were put in place to ameliorate the worst effects of the recession on those people.
Mr. Tom Considine:
First of all, in the case of business lending, the reality is that we want to be the number one business bank in Ireland. We want to lend money because if we do not do so, we will not put the bank on a sustainable basis.
Second, as my colleague has just said concerning the lending that we have done, to be absolutely clear, some €3.5 billion plus of new money has gone into the system. We talk about additional new money. In other words, if a person has an overdraft of €100,000 and he or she wants it increased to €150,000, we count the €50,000, not the €150,000.
There is no doubt that businesses have difficulties, but there are systems in place. First of all, we are getting about 1,000 applications a week. Approximately 82% of those are successful. Where people have a problem there is an appeals system. In addition, they can go to the Credit Review Office if they are not satisfied. The Credit Review Office is an innovative and useful addition but very small numbers are going there. In time, it will be possible to assess how credit performed that was granted as a result of that intervention. These systems are there and we can be judged by reference to that when the time comes, although it will take some time.
If anyone has problems with Bank of Ireland, I am happy to provide contact numbers with the committee when I leave here today. Those numbers can be called and if, in the unlikely event that it does not resolve the problem, I would ask members of the committee to give me a call. That is an open offer.
I welcome Mr. Walsh and Mr. Considine here today. I want to read one sentence to them from a parliamentary reply given by the Minister for Finance, Deputy Michael Noonan, on 9 October 2012 when he was asked about the role of public interest directors. His specific response on the Dáil record of 9 October was as follows: "Public interest directors do not have a formal reporting relationship to the Minister or the Department of Finance." The Minister made it absolutely clear that there was not a formal reporting relationship between the public interest directors and himself or with the Department of Finance. In view of the Minister's stated position, I would consider it inappropriate for the witnesses to have that relationship when the Minister has made it absolutely clear that there is not a formal reporting relationship. I suspect that it would have been in breach of the witnesses' duties as public interest directors to have a formal relationship with the Central Bank that was different from that of other directors. Would Mr. Considine agree with that?
I shall furnish Deputy Fleming with as much time as he wants. At each interjection I make, his time will be returned to him. I am saying, however, that the legislation allowed for the Minister to provide terms of reference, which he did not.
Mr. Tom Considine:
No, but I wish to be helpful to the Deputy if he could give me a minute. The way I look at the public interest is that there are a number of dimensions to it. At the State level, the first thing we have to do is repay the Exchequer and the taxpayer by remunerating the money they have loaned us - in other words, the €2.8 billion of preference shares and contingent capital at about 10% a year. We must enable the Minister to be in a position to cash in his shares if, in future, he so wishes. The second thing is to provide a stable banking system to support the economy. As the Chairman said, there is a real need to support enterprise and the rebuilding of the mortgage market. We are doing both of those things. Third, the governance changes I referred to are being made to ensure that never again will the Exchequer and the taxpayer be called upon to bail out the bank. The fourth matter at that level is to generate the capital we will need to support that lending to the business and mortgage sectors. In my view, they are top-level public interest requirements to which we must pay attention.
The next level down is the sectoral level, which is about consumers, business people and mortgage borrowers. While the Minister has not given us any specific directions in that area, it is clear from the guidelines that he has given us on lending to SMEs, that it is an area where he wants support for the economy. Equally, it is clear from all of the debate that is going on about mortgages that the Minister wants us to give attention - as the Central Bank has made clear, as well - to how mortgage arrears are worked out. That is what I see as the public interest.
On the investment by the taxpayer in Bank of Ireland in particular, it was mentioned that it was €4.8 billion, but approximately €1 billion has been paid off and the State is receiving an interest rate of 10%, which is a high rate, on most of the remaining investment. I estimate that approximately 5% of the €64 billion that has been put into the banking sector in this country has gone to Bank of Ireland – currently a maximum of approximately €4 billion at this stage. What was the maximum shareholding the State had in Bank of Ireland? The current percentage is 15%. Does Mr. Considine expect the percentage to reduce further?
I wish to separate Bank of Ireland from all the other failed banking institutions that we have had before the committee on various occasions such as Anglo Irish Bank, Irish Nationwide Building Society and AIB, which are totally State owned. Yesterday we had Irish Life & Permanent before the committee. The maximum State involvement in Bank of Ireland was of the order of 30%. It has now reduced to 15% and the bank hopes to reduce it further. Bank of Ireland is in a completely different category from all the other institutions in that the State has only a small and reducing shareholding in it. Mr. Considine was invited to join the board in 2008 and he joined it at the beginning of 2009. What were the bank’s annual losses then and what are the loss projections for next year?
Mr. Tom Considine:
As the crisis was evolving, it took time for the losses to work through because of the accounting rules with which Deputy Fleming is familiar. The peak underlying losses were not reached until 2010. We are now working our way through the process. The underlying loss in 2010 was €3.5 billion. It was down to €1.5 billion in 2011. The underlying loss in the first half of 2012 was €907 million. As the chief executive said, we hope to move into a better place in 2014 and to see the end of the loss-making period.
It would be remiss of me as an opening speaker not to mention the credit card interest rate increase. The public is annoyed with the increase in credit card fees coming up to the Christmas spend. Every member is dissatisfied with the announcement in recent days on the issue and is reflecting the public view. How many card holders does the bank have and how many people will be affected by the change? Will all the bank’s credit card holders be affected or only some of them? My good lady wife gave out to me last night about Bank of Ireland and the increase in credit card fees.
Mr. Joe Walsh:
Deputy Fleming got off lightly. It is a pity that the increase in interest rates on credit cards had to be introduced, especially in Christmas week. Bank of Ireland has approximately 500,000 credit cards in circulation. Approximately 91% of those are active. The vast majority of people pay what they owe on their credit cards each month. Under those circumstances people get 56 days interest-free credit. In addition, there is no annual account fee or transaction fee for purchases at point of sale. Neither was there an increase in the rates paid by those with student cards. On the Clear credit card – 4% of accounts - the increase rate will increase by 4%. The Classic credit card – 12% of accounts – will increase by 2% and the remaining personal credit cards will increase by 0.7%.
Of a total of 500,000 cards, 91% are active, which is approximately 450,000 active credit cards. I expect 250,000 of those pay up each month. Therefore, approximately 50% of people do not pay interest at all, which leaves approximately 200,000 customers paying interest on their credit cards. Mr. Walsh said 4% have Clear cards and there are also those who hold Classic cards. What is the increase for approximately 90% of remaining card holders?
Mr. Tom Considine:
The rate we charge on cards is reviewed fairly regularly and that particular one was considered to be below the competitive rate. It is always difficult, but as my colleague said it is particularly unfortunate at this time of year. The fact is that one of the things we must do is to return the bank to a sustainable basis. A continuous review is taking place of the rates the bank charges and the rates it pays on deposits. Without a functioning banking system that is able to stand on its own two feet, go out in the market and raise money, we will not be able to support the economy as we would wish.
Yes. I said “finally”. The bank expects to be out of the bank guarantee system early in the new year. Of all the banks that have come before the committee, the State shareholding in Bank of Ireland has reduced from 30% to 15% and the bank hopes to reduce it further. Our definition of the success of the public interest directors is that they will work themselves out of a job because of the hope that in a few years time Bank of Ireland will have repurchased all of its shares from the State and it will return to being a private company with no requirement for public interest directors when there is no public funding in the bank. I look forward to that day coming soon.
Mr. Joe Walsh:
Briefly, on the guarantee, the Deputy asked about progress made since January 2009. The amount under guarantee at September 2008 was €136 billion and that is down to approximately €25 billion now. Bank of Ireland has been in discussion with the Department of Finance and it has signalled its wish to be taken off the guarantee. The Minister extended the guarantee for the first half of next year.
A considerable amount of money is being paid under the guarantee. We have paid more than €1 billion already and last year it was approximately €450 million. We want to get off the guarantee in order to return to sustainability and reduce the risk to the taxpayer and the State. I hope the Minister will facilitate that early in the new year.
I welcome Mr. Considine and Mr. Walsh. We previously met with other board members of banks and it is fair to say that we were unhappy with significant parts of what they told us. Much of the tetchiness the witnesses may encounter this morning results from the fact that we were unhappy about the level of engagement by Bank of Ireland and Mr. Boucher in particular. It is true that we only own 15% of Bank of Ireland but that bank would not exist without the Irish taxpayer. I had hoped public interest directors would hold positions which differed from the other directors. While Mr. MacSharry, Mrs. Hayes, Mr. Walsh and Mr. Considine are undoubtedly fine directors, I have yet to see any justification for appointing public interest directors. I hope the witnesses will help me to change my opinion. Were they additional to the existing board or did they replace two other board members?
Mr. Tom Considine:
At the time that we joined we were additional to the board but there has been an almost complete changeover in the meantime. Bank of Ireland's board has included people from the public service in the past but they were not public service directors. They had careers in the public service. One such individual was on the board when we joined it in January 2009. Mr. MacSharry was on the board at one stage, as was Ken Whitaker. The idea that public servants could contribute to the board of Bank of Ireland is not new.
Mr. Tom Considine:
It depends on one's interests. As I noted in my opening statement, I have taken a particular interest in the governance structure of the bank and making the changes required to ensure the board has tighter control over what happens so that this type of situation does not arise again and the Exchequer does not have to step in. I can only speculate whether someone else appointed to the board would have taken the same interest. I am chairman of the risk committee because I took that interest. I outlined in my opening statement the type of changes we have made. We have validated those changes by getting people who are recognised in the industry to examine whether we are meeting best practice.
My overriding interest as a member of the board is to ensure the taxpayer is repaid and that the bank is developed in a way that enables it to support the economy. If the bank does not support the economy, all this will be more difficult for everyone.
Mr. Joe Walsh:
My background as a public representative and a person managing a small company in west Cork means that I insist on compliance with the regulatory authorities, including the Central Bank and the European institutions. The culture in banking is totally different compared with five or six years ago. Banks are now subject to freedom of information and they reply to parliamentary questions. Observers from the Central Bank provide oversight.
I ask Mr. Walsh to be a bit more specific because my time is limited and the Chair tends to be strict. Neither witness mentioned debt forgiveness or write-downs. Bearing in mind the insolvency legislation that is currently before the House do they not see their role as ensuring that the clearly stated ambition of the Government in terms of providing debt write-downs or forbearance is delivered? Surely it is their job at board level to ensure that the voice of the ordinary citizen is heard when people like Richie Boucher say there will be no write-downs of debt. They are the only two individuals who can do that in Bank of Ireland.
Mr. Tom Considine:
We have made arrangements with 16,000 people, of whom 86% are complying. We are working our way through this in a structured manner. It is important to acknowledge that the industry, with guidance from the Central Bank, has put in place a structure for working through this. When people have difficulties with their mortgages, they are asked to complete a standard financial statement. That is not intended to make life difficult for anyone. It is to ensure they are treated fairly and that their full circumstances are taken into account when decisions are made about them. A range of options have been developed to -----
I ask Mr. Considine to be more specific because we know all of that. When a dispute arises and it is clear that debt forgiveness is required, the bank takes the view that it is not willing to give it, whereas the Government, the taxpayer and the Oireachtas believe debt forgiveness should be provided for. Does Mr. Considine see his role of public interest director as batting for the bank's opinion or the taxpayer's opinion?
Mr. Tom Considine:
The public interest is much wider than that. The public interest comprises several dimensions. The first and most important element is a stable system. The State must be able to get out of this mess so that we can get back to normal.
That involves repaying the State, remunerating the debt to the State and making the changes I spoke about earlier and also generating the capital that will be needed to support the lending the State will require if it is to make a full recovery, which I believe it will.
At the sectorial level, there are a number of competing interests. On the one hand is the requirement to repay the State and remunerate the money it has lent us, which is a reasonable expectation for the taxpayer, but this must be balanced with the interest of the people who are in difficulty.
I fully accept that. We all want the banks to be able to return to lending. We all accept that the banks play a very important role in the economy. The personal insolvency legislation, of which I assume Mr. Considine is aware, is very targeted to the people in most difficulty. Mr. Considine has not answered the specific question on whether he sees a distinctive role for board member appointed in the public interest in the context of that legislation. Does Mr. Considine believe he needs more legislative support from Government to allow public interest board members to function differently? Clearly, at present, public interest directors function in the same way as every other board member.
Mr. Tom Considine:
I do not think one can frame the response to the mortgage crisis in that way. Our job is to put in place a rational structure for dealing with the issues that is fair to all the parties involved. As public interest directors, I think we must take the whole public interest into account and not just one section of it.
Mr. Tom Considine:
The Deputy can be assured that we will implement the legislation as soon as it is on the Statute Book. We have prepared for that. It will be part of the structure that is put in place to work through this problem. We will work through the difficulty in an organised and structured way, in a way that is fair to all the parties that comprise the public interest.
I do not see a need for new legislation. I have been clear on what the public interest is. I think we have had clear signals from the Government on its interests, including on the mortgage front. It is up to us to ensure the bank functions in a way that is consistent with that.
I welcome the witnesses to the committee. The people who talk to me across the constituency and in the country feel very hurt by the banks, in particular by Bank of Ireland. They see that people who are in distress with their mortgages are not getting the support in terms of debt relief from the bank. They see that the taxpayer has invested €5.7 billion in the bank, yet the bank has increased the rate of interest on credit card debt and has not reduced the variable interest rate on mortgages in line with the ECB interest rates. They also see bank services being reduced in rural communities.
They also know that Mr. Walsh was a former Minister and Mr. Considine was a former Secretary General and both retired prior to the age that normal people retire at and are in receipt of pensions from the public pay purse above €100,000. They will know from the details of this committee that they are the highest paid public interest directors in the State. To date the amount of fees paid to the two public interest directors totals €600,000. This is on top of the lavish public sector pensions. When the legislation was enacted to create public interest directors, the people believed that those who were appointed under the legislation would protect their interest. It is clear that is not the case. We dealt with this yesterday. Public interest directors are the same as any other director of a board. Given the amount of money they receive from the public purse - in particular Mr. Considine was granted the benefit of additional years in his retirement - is it appropriate that they have received an additional €600,000 since 2009 as a director of Bank of Ireland?
We will come to those points in a minute. I asked a specific question of both witnesses, as public servants in receipt of pensions in excess of €100,000 per annum, whether it is appropriate that in a four year period, Bank of Ireland paid a total of €600,000 in fees to both Mr. Walsh and Mr. Considine.
I must disagree strongly. I made this point yesterday, that this was a sweetheart deal. In 2008, the Minister decided to talk to the Opposition parties on public interest directors and they put forward nominees, but they had absolutely no strength, no mandate and no specific role outside what another director has. The Minister appointed four former politicians, from the Labour Party, the Fine Gael Party and the Fianna Fáil Party and three former Secretaries General. It allowed the witnesses to draw down hundred of thousands of euro in expenses over a period. I do not see any positive impact on the banks from the role they have played on the boards of the banks.
The former Minister, Mr. Walsh stated he was on the remuneration committee since January 2009 and that the remuneration was in line with the terms laid down by the Government. Mr. Walsh was on the remuneration committee when the bank paid out €66,370,000 in bonuses between September 2008 to December 2010. How can he stand over the fact that was allowed to happen when it was in complete breach of the Government guidelines that no bonuses were to be paid following the Government bank guarantee?
Mr. Joe Walsh:
A full statement was made on that matter in March 2010. The Minister sent a very detailed request in the subscription agreement governing the recapitalisation and followed it up by his letter in 2011 stating that it must be adhered to. I can state categorically that Bank of Ireland is in full compliance with the stringent demands of the Minister on remuneration.
It is in compliance now, but for two years, while Mr. Walsh sat on the remuneration board, the bank was in complete breach. The Bank of Ireland paid more than €66 million in bonuses to employees in complete breach of the direction of the guarantee that was given to the Bank of Ireland. The State fined the bank €2 million as a result of breaching that agreement and it lied to the Minister for Finance when providing information for a parliamentary question. Mr. Walsh may not have been responsible in regard to the parliamentary question but in relation to the remuneration-----
The bank provided incorrect information. The bank deliberately misled the Minister for Finance. Whether that is Mr. Walsh's responsibility or not is immaterial. The point is that he served on the remuneration committee for two years, while €66 million was paid in bonuses in breach of the agreement with the State. How did he stand over that? At any time during that period, did he question whether these bonuses were allowed? Was he aware of the bonuses being paid out during that two year period?
Mr. Joe Walsh:
I am in front of the committee and I am answering Deputy Doherty's question. We got very detailed directives from the Minister in the subscription agreement, followed by the Minister's letter. I want to categorically state on the record again that we are complying fully with those directives.
I again ask Mr. Walsh if, at any point during the two years he was on the remuneration committee, he raised the issue of the €66 million of taxpayers' money which was being paid to employees of the banks in the form of bonuses? My time for questioning is limited and I would welcome a response to that question.
With respect, Mr. Walsh and Mr. Considine are mirroring the behaviour of their chief executive officer at a meeting of this committee a month ago in terms of his pleading the fifth and stating he was operating in the bank's interests. Mr. Walsh and Mr. Considine are not even responding to questions this morning. I ask Mr. Walsh to respond to Deputy Doherty's question.
There is a specific question before Mr. Walsh. By way of clarification, I was correcting Deputy Doherty's use of language, not the question, which is valid. The bank provided information to the Minister for Finance which was incorrect. As a former Minister who has answered parliamentary questions, Mr. Walsh will know the significance of putting an answer on the record. Deputy Doherty has asked whether Mr. Walsh or Mr. Considine as public interest directors intervened in a particular matter.
Mr. Joe Walsh:
I made an intervention to ensure the record of the House was corrected. As I said earlier, one of the culture changes at the banks was their becoming subject to freedom of information legislation and parliamentary questions. Replying to parliamentary questions was a new matter for the bank, one in which I have invested a great deal of time given, as stated by the Chairman, I had already answered many parliamentary questions as a former Minister and understand the need for one to be factual and correct in such matters. A clarification was issued in relation to that matter. Many parliamentary questions have since been tabled, including by Deputy Doherty, to which concise, precise and factual answers have been given.
This is the last time I am going to put this question because I have questions to ask in relation to other issues. I will try to be as precise as possible. During the two year period when Mr. Walsh was on the remuneration committee, the bank paid out €66 million in bonuses to employees, which was in breach of an agreement of the State. The bank was fined €2 million for breaching that agreement. Was Mr. Walsh aware during 2009 to the end of December 2010 that the bank was paying bonuses or quasi-bonuses to employees? If so, did he at any time during that period raise any objections?
Mr. Walsh has failed to answer the question. The question I asked was whether Mr. Walsh was aware during the two years he was on the remuneration committee that the bank was paying out bonuses, which was in breach of the agreement, and whether he raised that issue during that period. I have read the statement and know what was said therein. We need to move on.
In fairness, Mr. Considine was not on the remuneration committee. For that reason, I am directing my question to Mr. Walsh. The Bank of Ireland has increased interest rates in respect of cash advances on credit cards to 26%. Mr. Walsh will be aware that there is no interest holiday on cash advance fees. Do Mr. Walsh and Mr. Considine, as public interest directors, intend to object to this increase? Many of the people using card credits are the same people who are in mortgage distress and financial difficulty. Do Mr. Walsh and Mr. Considine, as public interest directors, intend to raise with the bank how this increase will impact on taxpayers?
Mr. Tom Considine:
It is unfortunate that these charge increases must be introduced. Bank of Ireland operates a credit card business, which is competitive. How much the bank should charge for services in the market is a matter for management of the bank. We want to remain in that market and to be successful there. The interest rate in respect of the Clear credit card, which accounts for 4% of all accounts, will increase by 4% to 17.8%. The Classic credit card, which accounts for 12% of accounts, will increase by 2%. Interest rates on the remaining cards will increase by 0.7%. We would like to be in a position not to have to announce increases. However, if the Bank of Ireland is to remain viable, it is necessary to increase charges. We do not like doing this but this is what is required to ensure a viable banking system in Ireland.
Was the decision to sell Bank of Ireland Real Estate Investment Management to Kennedy Wilson a board decision and did the sale of Bank of Ireland's UK commercial loan portfolio to Kennedy Wilson arise during the discussions in 2011 in that regard? Was mention made of Kennedy Wilson becoming a future investor in the private investment consortium which invested in the bank?
Mr. Considine will be aware that the loans were sold to Kennedy Wilson, which was funded by Deutsche Bank, and that Deutsche Bank subsequently sold some of that business to Wilbur Ross, who is an investor in the bank. Questions arise as to whether the investment by the consortium was a deliberate asset stripping of Bank of Ireland. Are Mr. Walsh and Mr. Considine concerned that Mr. Ben Hoey, the person responsible in Bank of Ireland for selling what Ernst & Young research stated at the time was the largest European real estate portfolio acquisition completed in 2011, which cost the taxpayer approximately €268 million, is now managing director of the same private equity fund which purchased the portfolio from him?
Mr. Tom Considine:
It is necessary in all of this to start at the beginning and to ask why we are deleveraging. We are deleveraging because we want to reduce the risk to the taxpayer. This goes back to the PCAR exercise conducted by the Central Bank of Ireland, which led to the recent recapitalisation of the Bank of Ireland. Assessments were made at that time as to what type of discount to book value would be needed to do this. As a board, that is our main concern. The actual discount was less than what had been allowed for in the PCAR exercise. Therefore, the deleveraging exercise was capital positive.
One of my responsibilities as a board member is to ensure that the processes used to sell or buy and so on stand up to scrutiny. In my experience, since taking up my position on the board, those processes are very thorough. I have no knowledge of anything that would suggest that anybody was acting other than in the best interests of Bank of Ireland.
I appreciate that there are rules and procedures in place and that Mr. Considine is satisfied with them.
To get to the crux of the issue, in this case which was the largest real estate portfolio acquisition completed in Europe in 2011, the head of the non-core division of Bank of Ireland, Mr. Ben Hoey, which was responsible for selling it to Kennedy Wilson is now the managing director of that same loan portfolio. He is now the managing director of Kennedy Wilson in Europe. Kennedy Wilson is one of the investors within Bank of Ireland. It is part of the consortium with Fairfax and Wilbur Ross. As public interest directors, do alarm bells not start ringing? These people know Bank of Ireland has to deleverage and sell its assets and is involved in a fire sale and in my view these people are asset stripping the company and, therefore, are asset stripping the taxpayer.
Mr. Tom Considine:
The facts do not seem to support the Deputy's argument. As I said, the PCAR exercise conducted by the Central Bank made an assessment of what discount would be required to deleverage. The discount achieved was better than what was assessed. In the business world, people are head hunted. If one is doing a deal with a company and sees a person one likes and that person is offered a job, does that raise a suspicion immediately? As a member of the board of directors, all I can tell the committee is what I see, and what I see are rigorous controls. I know nothing that would in any way raise the kind doubts being implied.
I welcome the witnesses. It may not feel that way, but they are welcome. I am delighted that the communications deficit has finished between the public interest directors and such interests as the Joint Committee on Finance, Public Expenditure and Reform. I compliment the Chairman as the rest of us sat around here for 18 months without the ability to invite in the witnesses. That is a plus for the committee.
We are looking at new board to the extent that 38% remains of what existed around Bank of Ireland. Why have the others been removed and what role have the witnesses played in that?
Mr. Joe Walsh:
In relation to the board, the Department of Finance, the Central Bank and the regulator let it be known that there was a need for renewal of personnel at board level and senior level in the banks generally and in the covered institutions, in particular. In relation to the board, in virtually all cases their term was coming to an end. The facts are that there has been that generation of new people at the higher echelons post-2008, including the board of Bank of Ireland.
Mr. Joe Walsh:
I would not think there was a deliberate removal, but there certainly was an indication by the Department of Finance, the Central Bank and the regulator and the media commentary in respect of those people who were at a high level in banking in Ireland up to 2008 and during the bubble that a new generation of people would be desirable at the higher levels.
That is not going to wash here because the public interest requires justice to be seen to be done for what is ultimately felt by those in mortgage arrears or employed by small and medium-sized enterprises that are haemorrhaging staff and money or are near closure. There are consequences but these should ultimately look towards justice. As the role of the witnesses is that of public interest director, I am not suggesting they have brought the public interest into disrepute. On the contrary, I am of the opinion that the bank is in a far better position now. The market capitalisation of the bank is about €3.6 billion. The reason for the increased value of a bank such as Bank of Ireland is that there were projected earnings to be made on the loans that were given out. As the witnesses are aware, many of the mortgages given out in Ireland from 2005 to 2007 are 62.5% in arrears in the city of Dublin. People have been given loans that will be paid back over 25 to 40 years. It was a form of lending that had no basis in reality. However, the repayments have a basis in reality when people's relative incomes have decreased and their capacity to repay those mortgages have decreased.
The substantial element is that we as a generation, who are not represented on the board, are the people who are feeling the brunt of it. I do not think there is anything in Bank of Ireland or any other bank to recognise debt forgiveness or debt write-down. As my colleague Deputy Dara Murphy pointed out, this is the generation that is supposed to drive the economy and, at the same time, it is not getting a break out of what was a form of lending that had no basis in reality other than trying to achieve the bottom line in profit. Where is the justice in the business model that Bank of Ireland is pursuing and if it is worth €3.6 billion, as we have been told, how is it that it worth that amount and where is the profit to be made? Perhaps the witnesses will explain where the justice will be for the people who are hurting.
Mr. Tom Considine:
I do not think it is that simple. What happened in Ireland and in Bank of Ireland was that the structure of the banks was not able to withstand the change in the environment. They were too reliant on wholesale funding for a start. When pressure came on the market and the price of property fell, this caused difficulties for the banks. At the end of the day, I am not sure where this leads us.
Does Mr. Considine agree that it is based on the cashflow, especially of mortgages in negative equity on which people will pay a margin over 25 or 30 years? To me, that is an injustice. This is one of the issues I would like the witnesses to stand up for. There should be a moratorium on any form of profit-making on those mortgages lent out between 2002 and 2007.
We must be aware that for a period there will be no margins on any mortgages between those periods. The sense of justice does not seem to exist. The public interest might be served in that the Bank of Ireland is paying back the €4.8 billion the State pumped into it. That is not the kernel of what the public wants. It wants to see the benefit going to households more than to the State.
Mr. Tom Considine:
Deputy Spring is in a better position than I to know what the public wants. From where I sit, the bottom line has a number of different constituencies, including the State insisting - and rightly so - that the money it gave to the Bank of Ireland is remunerated at a significant rate of interest and that the Government gets back its money on the equity it holds, whenever it chooses. The State has a critical interest in ensuring the bank is sufficiently strong to support the development of the economy. Unless there is a banking system that can support and lend to the SME as well as the mortgage sectors, we will not have an economy.
I can give examples of people in arrears that show the reality of a generation that is not being dealt with by the upper echelons of the banks.
The sale of the Bank of Ireland and the other banks is of key importance. Funding for the banks will determine where it can be sold. The IMF made a recommendation that the banks should use the vehicle of the ESM. Are the witnesses of the opinion that the banks should be parked with the ESM or that the private vultures can have a go at increasing the worth of the bank in the private sector? How will that play out for people who are suffering as a result of taking out loans?
I am not sure of the purpose of a public interest director on the board of the Bank of Ireland if he or she cannot communicate the best strategy for the bank from the perspective of the public interest.
May I now ask Mr. Walsh about his relationship with Mr. Boucher? What is his perception of the ethos of Bank of Ireland under the stewardship of Mr. Boucher? Is Mr. Walsh comfortable that he is doing the right things by the country and by the bank? Following Mr. Boucher's attendance at this joint committee, I sent a letter to the Minister for Finance asking him to withdraw his support for Mr. Boucher as the chief executive of Bank of Ireland due to his contemptuous attitude to the members of the Joint Committee on Finance, Public Expenditure and Reform. Mr. Boucher was on the board that drove Bank of Ireland on to the rocks. I wonder if that culture has changed? Is that part of Mr. Boucher's culture and how much influence does he still have on the board?
With all due respect, the performance of the bank is assessed on the balance sheet. The public interest is not decided by the balance sheet. The people have bailed out the banks and given them a life line but there does not seem to be an equitable approach to dealing with people who are bearing the brunt of bad banking. In any other form of business, an entity with the debts of Bank of Ireland would have been wiped out and disappeared, but we helped it to survive. I am not happy with Mr. Boucher's attitude. I do not like the attitude that it is the bank's balance sheet that ultimately matters most. There is far more at stake. I am concerned about the public.
Mr. Joe Walsh:
Let us be clear about this, Deputy Spring, I did not say the balance sheet was the most important thing. I said the performance of the bank was important. The State invested €4.8 billion in equity in the Bank of Ireland and the bank has made repayments to the tune of €2.7 billion. As the next year goes on, I think it will reduce that much further. In relation to a number of other matters, it was given a directive to allocate €3.5 billion to SMEs and has exceeded that figure in new and increased lending. The Bank of Ireland has earmarked an increased amount for next year, some €4 billion for small businesses. The Bank of Ireland made provision of €1.5 billion last year for mortgages. That was fully taken up and a further €2 billion is allocated for mortgages at the end of this year and for next year. They have built up the number and capacity of people dealing with arrears to 739 staff and a trained person to deal with mortgage arrears provides this service in every single branch of the 250 bank branches throughout the country. There is a menu of products to deal with mortgage arrears. Let me add that Bank of Ireland has the least worst mortgage arrears. Some 90% of 161,000 people who have owner-occupier mortgages are meeting their commitments fully. By any of those yardsticks, Bank of Ireland is contributing to the development of the economy. The indications are that Ireland Inc. is slowly returning to economic development. Bank of Ireland will be there in the new year to assist the Government in developing the economy further.
I thank the witnesses for appearing before the joint committee. Would they agree the reason the State is in the most severe economic crisis it has ever faced is due to a combination of the then ruling political party, the Fianna Fáil Party, the people leading the Department of Finance, the bankers and the developers?
When a crisis like this occurs, does the party in power, the people at the top in the Department of Finance, the most important Department in terms of the economy, and the bankers not share a very considerable amount of responsibility for the mess?
Mr. Tom Considine:
No. It is a qualified "Yes" because the world is a lot more complex than that. There are 4.5 million people at most here. It is a big world and developments outside this country have a huge influence on what happens here. I know that is not always a popular view but nonetheless that is the case. There is no doubt there was a particular culture in regard to how regulation should be conducted and it covered most of the western world. All that is in the mix of how this mess came about. Obviously, all the institutions bear some part-----
Can the witnesses forgive people for finding it difficult to understand how people in Bank of Ireland representing the public interest who were at the helm of important parts of government when the crisis developed are still at the helm of one of the most important financial institutions in the State and being paid pretty handsomely for it? Can Mr. Walsh understand people being pretty annoyed about that? The insiders who were at the helm when the crisis blew are still on the inside, still at the helm, while the people are suffering the consequences of the crisis that has developed.
Mr. Joe Walsh:
I retired as Minister in 2004, and I am not wringing my hands of anything. Fianna Fáil was in government and it has apologised on many occasions for its role in the disruption and demise of the economy. Thankfully we live in a democracy. The people had their say in that regard and the result had a devastating effect on the make-up of Fianna Fáil in the House. That reflects the anger the Deputy mentioned because the people gave their opinion and I do not disagree with that.
Given that, does Mr. Walsh understand people's rage about this? They have put €4.8 billion into the Bank of Ireland. The chief executive is still paying himself 20 times the average industrial wage, and more if one includes his allowances and expenses. Since the crash the witnesses have got €0.5 million for being public interest directors on the board and yet the people who paid for the bailout of the banks, and effectively for the salaries of Mr. Boucher and the witnesses through that bailout, are still on their knees in mortgage distress and in small and medium businesses that have been crushed. The witnesses tell us they have to preserve the best interests of the bank and that somehow that will be good for us all in the end. Do they not understand how people view that and why they believe nothing has changed, that they are still being screwed and the same people who were in charge are still in charge and are well protected? Do the witnesses understand how people feel?
Mr. Joe Walsh:
I certainly do and I am sure my colleague, Mr. Considine, does as well. As I said earlier, I was a public representative for many years. I went before the public on 14 or 15 occasions and, thankfully, I had an extended time in public life from 1974 to 2007. I understand at first hand how the public react to matters and, on the matter of the economy to which the Deputy specifically referred, the public made a decision and the impact was devastating. I do not blame the public for that because they had a right to do that.
I took up my current role in early 2009. The Deputy mentioned small businesses and mortgage holders and the record will show that the Bank of Ireland demonstrably has made greater facilities available to small businesses and mortgage holders than any of the other banks in the country. It has acceded to and complied with requests from the Minister and the Department from time to time not alone to the letter but to the spirit of the directives that were given.
It is galling for people that the insiders are still on the inside. Given that, does Mr. Walsh not think the very least that people could expect is that there would be a clear and transparent line of accountability between their public interest directors and the public and their public representatives? The witnesses are there to champion the interests of distressed mortgage holders, the public and the taxpayers first and foremost before any priorities the bank as an entity might have. Do the witnesses not think that is the very least people would expect from them and if that is not the case there is no point in them being there?
Mr. Tom Considine:
I would say we do that, but the Deputy's interpretation of the public interest and mine is different. I have a wider interpretation of what is the public interest. It is in the public interest that the State gets paid back the money it gave to the Bank of Ireland and in the meantime that it is remunerated at a rate of around 10% for that part of it which is not equity. It is also in the interests of the State that the governance of the banking system should be strengthened to ensure we do not have a repeat of what happened previously. It is in the interests of the State that the bank should be strong enough to lend to SMEs and mortgage holders, and the Bank of Ireland is doing that. The bank has about 20% of the mortgage market and currently the rate of approvals is about 40%. In the case of the SMEs, as we have said, we have exceeded our target of €3.5 billion. It is not because we were given that target that we are lending that money, we are lending it because we want a bank that functions. We want to be in the business-----
I will be slightly more specific. Does Mr. Considine think it is in the public interest that the CEO of his bank earns 20 times the average industrial wage, more than €600,000 a year, and that that same person came before this finance committee and said there would be no debt forgiveness for the bank's distressed mortgage holders? Does he think that is in the public interest?
Can I ask Mr. Walsh the same question? Does Mr. Walsh think it is in the public interest that the CEO of the Bank of Ireland - that would not be standing if we had not bailed it out - is getting 20 times the average industrial wage at a time when he is saying there will be no debt forgiveness for distressed mortgage holders with the bank? Does he consider that to be acceptable or in the public interest?
Mr. Joe Walsh:
The position is that in any modern democracy it is important to have a stable banking arm and, demonstrably again since 2009 under the leadership of Mr. Boucher, the Bank of Ireland has transformed itself and is in a position to be supportive of small businesses and mortgages and to assist distressed mortgages and a range of areas. The bank has been supportive of the development role of the Government in the economy and that is in the public interest. Some might not like to hear it, but the fact of the matter is the economy is slowly recovering. That information is coming from a number of economic commentators and researchers whose job it is to examine such matters. What we have done with mortgage arrears for example is to train, recruit and put in place more than 700 people to restructure mortgages to the tune of 400 to 500 per week. We have retained our branch structure throughout the length and breadth of the country and trained personnel in every single one of those branches to give intensive care to people and provide a menu of packages because we want to keep as many people as possible in their homes. Of the 161,000 mortgage holders, 90% are meeting their targets.
We must conclude this session by noon because AIB is coming in at 12.30 p.m. and those of us who have been present since 9.30 a.m. this morning will need a break. I will allocate strictly five minutes to each of the remaining speakers which will bring us up to noon.
That is a matter for the Fine Gael Party. If Deputy Mathews wishes to speak first or second he must raise the issue with his party. I will not deal with the matter. I do not accept the criticism. It is for the Deputy’s party to decide who gets prioritised within the party.
It is not a criticism; it is an observation.
The witnesses are welcome. Yesterday, I said I had a feeling of unreality listening to contributions. It was akin to the film “The Truman Show”. Today, I feel I am in a fog. The reason is that this is the first opportunity to have an appraisal of the job of national interest directors on the board of Bank of Ireland. They have been in place since 2009. One could ask what has happened in that period. First, what is the job description of the national interest directors? We have discovered they do not have one; it is vague.
Second, what has happened in the period to be appraised? The bank effectively went bankrupt and the biggest exercise that had to be carried out was, first, to get an injection of share capital from the State, which it did. I was at the annual general meeting where it was approved. It was a joke that the life-saving injection had to be approved by the shareholders. It is similar to having a formal meeting to approve life support for a patient in a hospital. It was absurd, but people went through the charade.
The next big exercise was the transfer of the NAMA loans to see how it would affect the bank. They are the overview parameters. The Bank of Ireland had a line-up on foot of the PwC exercise of €16 billion of loans to go into NAMA and in the three months before the end of 2009 that figure was, unbelievably, revised downwards to €12 billion. I asked myself why. The question was if €4 billion less loans are being transferred to NAMA at a 30% discount it meant there would be a €1.2 billion less requirement for capital, which would keep the bank out of State majority control. That was the first thing. As board directors, perhaps collectively and individually, they should have spotted that and wondered if it was a good judgment call. It was a bad judgment call because the prudential capital assessment review that took place in March 2009 indicated that if Bank of Ireland got approximately €5 billion before the year end all would be well and it could stay outside State control. That was not a very honest exercise. It would be much better if the bank had sufficient capital to do what it needed to do.
Other speakers this morning asked where the bank stands now as regards writing down to honest collectable amounts the loans it had advanced over the period up to 2008. The answer to that lies hidden somewhere in the fog of what the executive management, Mr. Richard Boucher, brought to us a few weeks ago. Does either of the witnesses know the overall loan book of the bank off the top of their heads?
Yes, it is €105 billion gross and €7 billion worth of provisions. Of the €105 billion, €81 billion or 74% is in mortgages, buy-to-let loans, development land loans, development loans, property investment loans and the building construction sector. To date, the loan provisions amount to €7 billion.
Certus, the loan work-out vehicle for Lloyds Bank has written off €22 billion of the €40 billion peak gross loans that the Bank of Scotland (Ireland) wrote in the period up to 2008. That is more than 50%. The bank must look long and hard into its heart, heavily diluting the last PCAR in March 2011.
Reference was made in Mr. Walsh’s submission to the CBI-mandated review of corporate governance in Bank of Ireland by a major international firm. What was the major international firm?
Mr. Joe Walsh:
Thankfully, I have not breached the law up to now and I do not think I will start at this hour of my life. In other words, the public interest is what I am concerned about and public interest concern is what I bring to bear in deliberations at board level. As I have sought to demonstrate, over the previous three years Bank of Ireland has been a responsible bank in the context of the economy and its development.
Where there is a conflict between the interests of the bank and the interests of the public, do the witnesses agree the interests of the public supersede their legal obligations towards the interests of the bank?
No, it does not. Regardless of how one defines it, my question is, when a public interest director perceives there is a conflict between the public interest and the interests of the bank, do the witnesses agree their duty to act in the public interest supersedes their duty to act in the interests of the bank?
Where it is perceived that there is a conflict between the public interest and the interest of the bank covered under its obligations under company law, does Mr. Considine agree that his legal position is that he should act in the public interest, even though it might be contrary to the interests of the bank?
Thank you. Within the context of public interest versus the interest of the bank, I want to come on to the personal insolvency legislation. As I am sure both witnesses are aware, it is the clear intent of the Minister for Justice and Equality, Deputy Shatter, and the Government that there would be debt forgiveness as part of the personal insolvency legislation. Mr. Boucher is reported in Monday's newspapers as "categorically ruling out reducing a portion of the personal debt of any of its customers". Can the witnesses tell me their position? Do they agree with Mr. Boucher or, as public interest directors, do they disagree with his position?
Mr. Tom Considine:
First of all, when the legislation is on the Statute Book, the Bank of Ireland will abide by it, of course. That is always the position in relation to any legislation that is put on the Statute Book.
As regards how we deal with distressed mortgages, there is a structure in place-----
I am very short of time. I do not need Mr. Considine to describe the process. The question I am asking is very specific. The personal insolvency legislation foresees the Bank of Ireland engaging in debt forgiveness. On Monday, Mr. Boucher categorically ruled out the Bank of Ireland doing that. As a public interest director, does Mr. Considine agree with Mr. Boucher's position or oppose it in this instance?
Mr. Tom Considine:
Basically, what Mr. Boucher is talking about is consistent with the bank adhering to the terms of the new legislation when it comes in. Essentially, we have a structure in place which is overseen by the Central Bank. We will follow that structure and deal with mortgage arrears under that structure.
All Stages of the personal insolvency legislation were voted through this House last night. The Minister, Deputy Shatter, is on the record as saying that he foresees debt forgiveness as part of that legislation. The chief executive of the Bank of Ireland has publicly and categorically ruled out any such debt forgiveness. As public interest directors, do Mr. Considine and Mr. Walsh support Mr. Richie Boucher categorically ruling out debt forgiveness as part of the engagement with the personal insolvency legislation?
I am sorry but I am not going to let Mr. Considine stonewall me on this. Mr. Considine and Mr. Walsh are public interest directors. It is relevant and reasonable for me to ask them whether they agree with Mr. Richie Boucher's position on this most critical of issues.
I am going to make an intervention here because, unfortunately, this is reflecting a similar situation we had with Bank of Ireland when the bank's representatives appeared before us. Deputy Donnelly is not asking about blanket forgiveness. He is asking that on a case-by-case basis, in situations where people cannot meet the full sum of their mortgage, with regard to any forbearance that can be given to them, will there be situations where there will be debt adjustment, debt write-off, debt write-down or debt forgiveness, whatever vernacular or vocabulary we apply to it?
The personal insolvency legislation is about getting people out of their current difficulties and back functioning in the economy. There are people in despair who cannot see daylight on the horizon because of debt that is shored upon them. The question that is being put to you, Mr. Considine and Mr. Walsh - and Deputy Mathews has pointed out that the CEO is a servant of the board - is whether you, as public interest directors, envisage a situation where people who are in insurmountable debt will be able to avail of the insolvency legislation and have some of that debt lifted off their shoulders.
I am not interested in the board. I am interested in Mr. Considine's role as a public interest director and what he is going to do. You are not going to stonewall this committee. What are you doing, as a public interest director, on this matter? Do not talk to me about the board or the CEO. Tell me what you are doing on this matter, as a public interest director, and stop stonewalling the committee.
Mr. Tom Considine:
I am making sure that there is a structure in place which will operate the new legislation when it comes in. Where individuals have debts that are unmanageable, it is a matter for the executive of the bank to deal with that within the structure that we are putting in place. I am a non-executive director; I am not an executive director.
I can read out the rules of what a non-executive director is. I will read them to you, if you give me one moment. "A non-executive director is a director who does not have a contract of service with the company and normally serves the company on a part-time basis." Your role is that you were not actually elected to the board; you were appointed by the Minister of the day and have been there for the last four years. As a non-executive director, you will have a management function in the running of the business other than assisting in the deliberations of the board. You have a running function as a non-executive director. You direct how the bank operates. None the less, your legal powers and duties are identical to those of executive directors and for this reason you should ensure you have the same ability to obtain information from within the company as other directors, even though in practice you may use mainly summarised information submitted in the reports of the board. How you gather the information on which you make your decisions can be in detail or in summary.
More specifically, you have a duty of care which is required both by executive and non-executive directors. In your situation, your duty of care is in reference to being a public interest director. Your duties as a non-executive director will be intermittent and, as a result, you are not expected to give the same continuous attention to the company's affairs as that given by other executive directors. We accept that. However, Mr. Considine and Mr. Walsh are both there, having been well remunerated for four years to the tune of €500,000 each. On behalf of this committee, I am asking you what are you doing in the public interest. You are servants of the State, operating on this board. I can put out all the information here. It says quite specifically that your duty under the legislation is owed to the Minister on behalf of the State. That is why you are in there. Your duty takes priority over any other duty you have as a director, even if it becomes inconsistent with the duty of the bank. That is what it is.
Legislation has been passed and people are hanging on by their fingernails, hoping for hope. I am not interested in what Bank of Ireland is doing. I am interested in what the public interest directors are doing with respect to the legislation. That is what the committee wants to know. I apologise for interjecting but we have arrived at the kernel of the roles and responsibilities of public interest directors. Tell us what you are doing.
Yes, and we will. Please, Mr. Considine, stop stonewalling the committee and tell us what you are going to do in this instance as a public interest director. I apologise but I must push this question on behalf of the committee.
The kernel of it is whether the public interest directors support Mr. Boucher's position. The personal insolvency legislation is where the public interest and the interests of the bank are in conflict. The whole point of the public interest directorships is to act, as compelled by legislation, in the public interest where there is a conflict with the interests of the bank. Mr. Boucher's position is contrary to the spirit of the personal insolvency legislation. Therefore, the public interest in this case is defined by the Government.
Mr. Joe Walsh:
The insolvency legislation was passed last night and I have not seen it. However, I can state categorically that Bank of Ireland will comply with its provisions. As a public interest director, I will ensure that happens. When all avenues have been exhausted in respect of people who have distressed mortgages and a loan is irrecoverable, it will have to be accepted that one cannot knock blood out of a turnip, as they say in my part of the country.
I welcome the witnesses. There is a sense of déjà vu about this meeting. The CEO of Bank of Ireland, Mr. Richie Boucher, was before the committee a couple of weeks ago. The witnesses today must be using the same PR people. They have the same approach. They are going all over the shop and stonewalling. The public is looking in and I suspect is immensely frustrated. The witnesses are seasoned professionals who have attended before many committees and know how to handle them. They should have left that way of doing things at the door and attended with the intention of telling the public what it needs to hear. The witnesses joined the board of the bank in January 2009 and Mr. Boucher was appointed CEO in February of the same year. My understanding was that his appointment was unanimously agreed by the board.
I was mystified at the time by the approach of the public interest directors. Mr. Boucher was deputy CEO of the bank and responsible for introducing 100% mortgages. Mr. Considine mentioned arrears, which are at nearly double the rate they were in 2005-06. How do the public interest directors stand over that appointment? They spoke about a cultural change in the bank, but the manner in which Bank of Ireland has dealt with the committee demonstrates that no change in culture has taken place. The witnesses were appointed as public interest directors to ensure a cultural change. How did they then contribute to a unanimous decision by the board to appoint Mr. Boucher?
With due respect, I have very little time and that is not what I asked. How did the witnesses come to approve the appointment of Mr. Boucher when they were supposed to effect a change in culture as public interest directors? When he was appointed, his remuneration breached CIROC policy and the board had to row back on that. I want an explanation of their decision as public interest directors. Did the witnesses see much of Mr. Boucher's performance before the committee?
Mr. Tom Considine:
On the first question, I was completely satisfied that Richie Boucher was the best person to do the job that had to be done in the bank. The performance of the bank in the meantime towards recovery and the fact that we are able to raise money in the markets without guarantee are evidence that we made a good decision.
The public interest directors were satisfied notwithstanding that they were seeking a cultural change in a bank which piled into 100% mortgages. They do not get it. The bank does not get what is required by the public. I have listened to this. I do not think the witnesses understand the role of public interest director. Mr. Considine mentioned the 2010 Act which provides in section 48 that the Minister may publish guidelines. Guidelines should have been published. When the witnesses interviewed Mr. Boucher, did they take into account the issue of 100% mortgages in 2005-06 in respect of which the rate of arrears is almost 15%, nearly double the rate in respect of other loans? Did the effect of the appointment on the image of the bank and public perception cross the minds of the witnesses and did they consider as public interest directors that it was the wrong thing for the bank?
Mr. Tom Considine:
We needed someone who would lead the Bank of Ireland executive team in the hard work required to restore the viability of the bank. While I hear what Deputy O'Donnell is saying, the judgment of the board has been vindicated. When one is working through a crisis, one must make the decisions which will get one to the other side in good order.
The witnesses are missing the point. Bank of Ireland was provided with almost €5 billion of taxpayers' money but is acting as if there was no public interest in its operations. The public interest directors have effectively gone native.
Mr. Walsh was appointed chairperson of the remuneration committee. Ray MacSharry, a former Minister, appears to have been appointed in Permanent TSB. He did not answer the question about the bonuses of €66 million. He dodged the question very well. Was Mr. Walsh on the remuneration committee when a remuneration package of €650,000 a year was approved for the former CEO, Brian Goggins?
Mr. Joe Walsh:
As a public interest director, I was one of the people on the board who interviewed Mr. Boucher and was satisfied that he was the best person to lead the bank. Following that, the process led through fitness and probity in the Central Bank, and all aspects of his contract, including remuneration, were submitted to the Department of Finance.
Mr. Joe Walsh:
The Minister for Finance has said categorically that people's pensions are private property. That was in a reply to a recent parliamentary question. He said it is analogous to taking away a portion of a person's farm. There is, however, a Mercer group review of remuneration and pensions in the Bank of Ireland and we are complying fully with that review. According to a recent reply to a question in the Dáil, that review will be completed by the end of this year, a matter of a few days. We will seek to address a number of the issues that the Deputy has raised on foot of that review and report.
I thank the witnesses for coming to this meeting. I have never in 30 years come across a committee meeting like this where we are getting no answers and seeing the complete obfuscation of what is really happening in the bank. Deputy O'Donnell is right: these guys do not get it. This situation is critical and when they talk about a change in ethos, I do not think they understand that it has not changed at all. For them to sit here and tell us that Richie Boucher was a good appointment and that there is a change in ethos is absurd. The other appointment they made, the governor of the bank, Mr. Kane, shows no change in ethos. Mr. Walsh was appointed by the Minister. To whom is he accountable?
Mr. Joe Walsh:
The Minister replied very comprehensively to the question about public interest directors. He stated categorically and clearly, as the Official Report shows, that his line of communication with the bank - and I can speak only for the Bank of Ireland - is through the chairman and the CEO. That is his single point of contact. He sees no other way of making credible contact with the Bank of Ireland.
On a point of order, I did indicate that I wanted to speak. I told the Chairman that I had to leave to attend to other business. It is unfair of him to say that he has not seen me all morning. That is outrageous.
Mr. Walsh was appointed chairman of the remuneration committee, which means that he is in charge of Mr. Boucher's pay. Could he tell us how he works out that he is worth €620,000 a year plus all his perks?
Mr. Joe Walsh:
The Bank of Ireland has been in receipt of €4.8 billion. It has made payments to the Exchequer of the order of €2.7 billion or €2.8 billion. We have complied absolutely with the directives and agreements with the Department of Finance and the Central Bank, one of which was a target given to the Bank of Ireland to provide new and increased lending to small businesses. Uniquely, the Bank of Ireland has not alone reached that target but has surpassed it.
For next year we will increase the amount of money going to small businesses from €3.5 billion up to €4 billion. I can only speak for Bank of Ireland but, uniquely, it is the only bank that is doing that. A total of €1.5 billion was put aside for new mortgages. That has been fully taken up and a further €2 billion has been provided for people who want to buy their own homes.
On the risk to the State, we had a guarantee about which much has been written and said. Bank of Ireland has pleaded with the Department of Finance to get off the guarantee. Shortly before I became a director on the board of Bank of Ireland, the risk to the State was €136 billion. It is now down to €25 billion.
The loans to deposit ratio is critical. It was one of the reasons Bank of Ireland and other banks got into trouble. It was 175%. It is now down to 128%.
Mr. Walsh has come before the committee and waffled to us in a head-in-the-clouds way and justified paying a salary of €620,000 a year. He is chair of the remuneration committee and he is damn well paid for it and he has gone native, just as the others have gone native. To hear the two public interest directors who are present telling us that the ethos has changed is insulting.
I wish to turn to Mr. Considine in the three minutes I have remaining.
Perhaps we will move on as we have very little time. Was Mr. Considine aware of the fact that Mr. Kane, the new governor, had lost his bonus from Lloyds Bank, which is pretty well unique in world banking terms? He got approximately €10 million but he lost his bonus before he was appointed to the Bank of Ireland because it was on his watch that the bank got involved in the PPI scandal and had to write off £3 billion. Was Mr. Considine aware of that?
Mr. Tom Considine:
Yes, we are aware of all aspects of Mr. Kane’s career. There is a rigorous fitness and probity system in place. For anyone to be appointed to a senior position in the bank requires clearance from the Central Bank of Ireland and, in our case, the FSA because we have a lot of business in the United Kingdom. Mr. Kane has been cleared through that system and they are the structures that are in place.
Does Mr. Considine stand over the appointment, despite the fact that he had lost the bonus, that the scandal is continuing to unravel and that Lloyds had to write off £3 billion as a result? I stand to be corrected on the amount.
I thank Mr. Joe Walsh and Mr. Tom Considine for coming before the committee this morning to deal with the Bank of Ireland module of the public interest director module with which the committee is dealing. I appreciate their coming before the committee and giving of their time. From what I have gathered, this is the first opportunity they have been given since their appointment in January 2009. I propose that we suspend the meeting.
We resume in public session with our examination of the role of public interest directors. The joint committee will hear in this session from the two public interest directors of Allied Irish Banks, Mr. Dick Spring and Dr. Michael Somers, whom I welcome to the meeting. I understand Mr. Spring and Dr. Somers wish to make opening statements and I invite Mr. Spring to make his first.
Mr. Dick Spring:
I thank the Chairman and members of the joint committee for inviting me to appear before them in my capacity as a Government-appointed public interest director on the board of Allied Irish Bank. I have always valued the role played by Oireachtas committees as a forum for real engagement with agencies and organisations from outside the Houses. I genuinely appreciate the opportunity to, I hope, provide the committee with insight into my role in AIB.
I understand the chief executive of the bank, Mr. David Duffy, and members of his team had a constructive meeting with the committee in October. I assume as a result of that meeting members are probably au fait with the current overall position of Allied Irish Bank in terms of the progress achieved in returning the bank to viability and the work ahead that must be completed.
It is important for me personally and as a director of the bank to acknowledge the enormous debt owed by AIB to the Irish taxpayer, without which the bank would not exist. As a member of the bank's board, all my efforts have been focused on actions to stabilise the institution, to help it regain viability and, by definition, to ensure the bank plays a critical role in the recovery of the economy and returns, over time, as much as possible of the State's investment. This is a long and difficult journey. Painful lessons have been learned from the financial crisis, lessons that are helping us in the reshaping of Allied Irish Bank as a strong bank, functioning without State support, keeping the impact on the customer central to all decisions.
Like everybody else in this room and beyond I would like the bank to reach its goal quicker. However, the current issues in the economy are unprecedented and unique and will take time to resolve. The bank is vigorously implementing a strategy that will result in its return to viability while ensuring it plays a fundamental role in the recovery of the Irish economy. Since my appointment to the board of AIB in January 2009, I have witnessed enormous and positive change in the organisation. This re-organisation has ranged from a fundamental restructuring of the bank to a revised strategy to rebuild sustainability. AIB has, at every stage, worked closely and constructively with the Central Bank and the Department of Finance through the relationship framework agreement. I am pleased to say that AIB's relationship with Government and the regulator is constructive, open and marked differently from that which existed when I joined the bank in 2009.
When invited to join the board of AIB by the late Minister for Finance, Brian Lenihan, I was extremely conscious of the tumultuous effect the financial crisis had on the bank's relationship with Government. That relationship is now much more constructive as the bank navigates a path back to viability. The bank is in daily contact with the Department of Finance, senior management meet formally with Department of Finance officials on a monthly basis and the bank reports continuously to the Central Bank. Like other company directors in the bank, I am, as a director, subject to the requirements of company law in the discharge of my duties. My responsibilities are the same as those of other directors and I carry the same duty of care to our shareholders, namely, the Irish people, through the Government. These duties are to protect and enhance the value of the company for the Exchequer. The board has full responsibility for all operations and business of the bank in accordance with its legal and fiduciary duties. It must ensure the bank is in compliance with all regulatory and legal obligations and must at all times, working with the management team, ensure business is conducted in a prudent and sustainable manner.
I am also a member of Allied Irish Bank's board risk committee, which was established in the past two years, and a member of the nomination and corporate governance committee. The bank's work is continuous and painstaking. However, progress is evident on the ground. A total of 2,000 bank staff are now employed in supporting customers experiencing difficulties with their loans. We expect to see a rapid increase in the resolution of these types of loans in the next six months, where customers are working collaboratively with the bank. I recognise the critical role of AIB in contributing to the resolution of unsustainable debt. However, it is important to note that this is a complex issue and the bank's decisions in respect of debt restructuring must be based around the fundamental principle of any underlying affordability for the customer. Any other outcome creates an expectation that debt will be written off, which is not economically viable. In the year up to end October 2012, AIB approved €1.2 billion in new mortgages, which is comfortably in excess of the bank's internal target for the year of €1 billion. The approval rate in the year to date is in excess of 70%. During the same period, AIB's year-to-date SME lending reached €3.75 billion, which is in excess of the Government's target for the year. Approval rates for formal applications in the SME sector are in excess of 90%.
There is constant debate in regard to whether the banks are lending. Allied Irish Bank must lend to ensure it returns to a sustainable operating model that will allow it to generate its own capital and increase lending into the economy. As a director, I acknowledge that the bank has more to do in terms of improving its processes and customer engagement on lending to viable customers. However, the dynamics of the demand for new lending in the economy are complicated given the sheer volume of legacy debt which remains. It is incumbent on all of us to change the message and to ensure people are not discouraged from seeking credit on the basis of perceptions. The bank is continuously engaged in a process to promote lending through business initiatives for SMEs and mortgage holders and this will accelerate into 2013 as the bank seeks to implement its strategy more broadly. I am determined to ensure Allied Irish Bank supports the economy in its return to financial health in an expedited manner which demonstrates genuine leadership on the many complicated issues ahead while at the time treating customers fairly. This is being done in full co-operation with the Department of Finance and the Central Bank.
I understand the committee requires information in terms of my background. I have a strong connection with the labour and trade union movement in Kerry.
I also have a strong connection with the farming community in north Kerry, as my late mother came from a small-holding in Lixnaw. There was, and is, a strong work ethic in my genes. From the age of 14, I undertook summer employment in factories in Tralee, building sites in Birmingham or warehouses on Long Island. This was all to help with defraying the expenses incurred in educational pursuits.
I am a graduate of Trinity College and qualified as a Barrister of Law at King's Inns. I spent a number of years practising on the Munster circuit in the 1970s. In 1979, I was elected to Kerry County Council and Tralee Town Council. I was elected to Dáil Éireann in 1981 and became a Minister of State in the Department of Justice at that time. I became leader of the Labour Party in November 1982, a position I held until 1997. I was Tánaiste, Minister for the Environment, and Minister for Energy during the coalition governments of the 1980s. At that stage, I experienced difficult enough economic times. I was again Tánaiste and Minister for Foreign Affairs from 1993 to 1997, at which stage I stood down from the leadership of the Labour Party after 15 years.
Since exiting public life in 2002, I have been active in a number of business areas, especially in financial services and technology. I have helped companies to develop business in the Middle East and Asia in particular. I am particularly proud of my involvement with two companies based in Kerry, FEXCO and Altobridge, which are major employers in our region.
I have also devoted an amount of time to my chairmanship of the Réalta Global Foundation, which is a charity involved in addressing the serious problems of HIV-Aids treatment for large numbers of people in Uganda. In the past six years, we have raised over €5 million, mainly for research in the area of anti-retroviral drugs in an effort to assist HIV-Aids sufferers in that country. We also fund and manage an orphanage. We have built three health centres in conjunction with the Ugandan government and have made a meaningful contribution to the quality of life for many citizens of that country.
Since my appointment to the board of AIB in January 2009 there have been 139 meetings of the main board. There have also been 25 meetings of the board risk committee and nine meetings of the nominations and corporate governance committee since my appointment as a member.
In terms of my remuneration levels, in which I understand the committee is interested, I have received the following amounts of money since joining the board in 2009. First, I would remind the Chairman that the first decision at my board meeting was to reduce directors' fees by 25% at that time. I received the sum of €26,000 in 2009, €47,000 in 2010 and €59,000 in 2011, bringing a total of €132,000. After a taxation level of about 54%, which brings it down to €64,000, it would average about €21,000 per annum for my services to the bank.
Dr. Michael Somers:
I am pleased to have this opportunity to meet with the Chairman and other members of the joint committee and to discuss any aspect of my role as a Government-appointed director of the board of AIB.
The committee has already heard details of the functions and duties of public interest directors. Even though I am not a public interest director, as such, my position with AIB does not differ from that of my colleague Mr. Dick Spring. I have carried exactly the same fiduciary responsibilities and onus of trust since I was appointed to the board in January 2010 as a Government nominee under the terms of the National Pension Reserve Fund Commission's preference share investment. I am also deputy chairman of the AIB board and chairman of its risk committee since November 2010. In this particular role I lead questioning of, and challenges to, the bank's risk tolerances levels, risk appetite on lending, and internal controls and procedures. For my own part, I am clear that significant progress has been made in these areas since I joined the board.
In addition to the clear legal imperatives that govern our functions, I am very much aware of the weight of expectation among the public that banks, particularly those in receipt of such large State support, should apply the utmost stringency and pragmatism to all their decision-making. We have two critical goals here - to turn AIB around and restore it to viability, whilst ensuring that the bank contributes to economic recovery, both in terms of new lending and in resolving the significant challenges of customers in difficulty. I believe that, as these goals are fully achieved over time, public sentiment will change and we will convert negative perception into positive reality.
There is no clear definition of what is in the public interest at any given point in time. Critically, however, the public interest can be served by ensuring the achievement of a sound, prudently-run banking system that can drive economic recovery through appropriate lending and offering security for deposit holders. The duty of all of the board's directors is to safeguard the shareholder's interest which is, by definition, the Irish taxpayer who has supported this bank to such an enormous degree. Without a return to viability and the reduction of dependency on the State, the common good will not be well served.
I joined the AIB board almost three years ago, two years after the economic crisis broke. In my time on the board I, too, have seen significant stabilisation and recovery in the bank and the pursuit of policies that will enable recovery: reduced funding costs; the aligning of loan pricing to funding costs; the reduction of bad debt provision levels; putting in place processes to allow for the systematic tackling of the mortgage arrears crisis, while assisting large numbers of customers in difficulty; and the achievement of lending to business targets, as set out internally and by the Government.
Following the banking collapse and the unfolding financial crisis that businesses, individuals and families confronted, AIB has had to mobilise significant resources by way of response. Untangling debt issues for businesses and home-owners does take time and the bank is coming to grips with the complexity of these problems and expediting an appropriate response.
I acknowledge that the bank has more to do in these areas. However, the complexity and scale of the problems cannot be underestimated and there is no simple and easy solution to these issues. The bank must continue to work diligently, methodically and as expeditiously as possible to ensure viable long-terms solutions are put in place.
Perception is a powerful force and AIB is also battling against the widespread view that it is still not lending to business. However, the reality is that AlB's SME and mortgage-lending targets are being met and exceeded. The perception that exists will, in large part, be changed by the continued focus of our staff in engaging positively with customers as they make formal applications for credit. After almost three years on the board of this bank, I am confident that in time it will reach the objective of making a return to the Irish taxpayer while ensuring economic recovery.
Since my appointment to the board in January 2010 there have been 102 meetings of the main board where I serve as deputy chairman. There have also been 25 meetings of the board risk committee of which I am chairman.
I gather that the committee is interested in my background, as well as that of Mr. Spring, so I will briefly go through that. I joined the civil service in 1960 as an executive officer. I was appointed to the Department of Industry and Commerce and was immediately sent to an outfit called An Foras Tionscal, which at that stage was the grant-giving agency of the IDA. In mid-1963, I was successful in a competition for administrative officer in the Department of Finance. I was assigned there to what was regarded at the time as one of the worst sections - the pensions section - which actually turned out to be quite interesting.
When Dr. Ken Whitaker was appointed governor of the Central Bank he invited me down and I spent two years there which gave me some knowledge of monetary policy. I then came back to the Department of Finance and was in the finance division, which dealt with all the financial affairs of the State. I was also involved with the EU when we joined in 1972. In 1985, I was appointed secretary of the Department of Defence when these positions were opened up to people generally in the public service. On the change of Government in 1987, I was brought back to the Department of Finance by the then Taoiseach. I was appointed as secretary of national debt management there, with a view to doing something about the national debt, which was a huge issue at the time.
In 1990, under legislation passed by the Oireachtas, I was asked to establish the NTMA, which I did. The aim was to try to get debt service costs down. At the time, the debt-service was a huge burden on the Exchequer. It was a question of whether to cut health, social welfare and education or the debt service costs. Politically, the debt service costs were obviously much more acceptable. That was the main reason for setting up the NTMA. It went on to establish the State Pension Fund which at its peak had €25 billion in it. We also set up the State Claims Agency which dealt with anybody who wanted to sue the State or hospitals. We also set up the National Development Finance Agency. I ran that organisation for 19 years. I retired, or resigned, just over three years ago.
During the course of my career I was a member of the EU monetary committee in Brussels and was on the board of the European Investment Bank. I was on other committees. I was a member of the OECD's capital markets committee. I was also part of the delegation to the IMF and World Bank boards. I was chairman of the group that set up the European Bank for Reconstruction and Development, EBRD, to bail out the countries of the former Soviet Union when it broke up.
I have a diploma in public administration, a B.Com, a master of Economic Science and a PhD in Economics from UCD. The President of France made me a Chevalier of the Légion d'honneur for my efforts in setting the European Bank for Reconstruction and Development, EBRD. At present, apart from the board of AIB, I am on a number of other boards, both pro bono and others. In terms of remuneration, which is available in the bank's annual reports, I received the following amounts in the execution of my various roles. In 2010, I received €98,000; in 2011 I received €150,000. I should add, as Dick Spring has said, roughly half of that amount goes back to the State and I never see it, the differential in the amounts between the two years is due to my appointment as deputy chairman and chairman of the risk committee with effect from 1 June 2010.
I am happy to answer any questions.
Thank you Dr. Somers. Let me outline how I propose to conduct the meeting. The first round of questioners will be allocated 12 minutes with the allocation for the second and subsequent rounds depending on time.
To summarise, Dr. Michael Somers was appointed in 2009 by the then Minister for Finance, the late Brian Lenihan. Is that correct?
May I put the following question to each witness? Mr. Spring was appointed in 2009; since then has he ever been given any instruction or specific terms of reference in regard to reporting or how he should carry out his task as a public interest director?
Mr. Dick Spring:
I received a phone call from the late Brian Lenihan, asking if I would make myself available to take on a role as a public interest director at a time when there was practically a breakdown between the banking system in the country and Dáil Éireann, particularly with the Department of Finance, the Central Bank and the Regulator. I told Brian Lenihan that I would obviously need to consider it and check the amount of time the role required. He said he would really appreciate it if I could get back to him ASAP. I think I got back to him within about two days, having considered it, discussed it at home and having tried to check out the time commitment it required. I was informed that the time commitment would be about 40 days per annum. I have since then communicated with the chairman of the bank that I would make myself available for 60 days per annum because of the amount of work that is required. We had a briefing from the Department of Finance, a collective briefing for all the directors who were being appointed at the time.
Mr. Dick Spring:
For all directors being appointed to all the banks, in fact to all the institutions. We also had a briefing from the senior partner in Arthur Cox on company law requirements and fiduciary responsibilities, some of which I would have recollected from my days in the Kings' Inns, but it was useful to get an update on it. Effectively, we did not receive what I would call instructions on how to conduct business on a day-to-day basis from the Department of Finance. In my time as a director I communicated at least on one occasion with the late Minister for Finance and on another occasion I communicated with the Taoiseach directly.
Mr. Dick Spring:
At that time there was a level of mistrust, or to put it bluntly, the trust between the Department of Finance and the banking institutions was at an all-time low. I think neither side trusted the other. The Department was not happy with the information it was getting. Within two months of my appointment I was beginning to form opinions, to the effect that the crisis was deeper than the Oireachtas, the Government or the Department realised and I communicated that to the Taoiseach and certain actions were taken at that stage. I had one formal meeting with the present Minister for Finance, Deputy Michael Noonan. My then colleague, Mr. Declan Collier, who is no longer on the board as he left to take up an appointment in London some months ago, and I asked to meet the Finance for Finance. The Minister was accompanied by the Secretary General of his Department.
Mr. Dick Spring:
Not with me, but he has had other meetings. We met the Minister for Finance. We basically wanted to find out if he wanted us to continue, as there had been a change of administration. It would have been Deputy Noonan's prerogative to request us to step down, which we would have been quite happy to do. The Minister assured us that he wanted us to continue in our roles as public interest directors, which we have done.
Let me put this question to both Mr. Spring and Dr. Somers. It is becoming apparent - since the public interest directors were appointed in January 2009 - that this is the first formal report that was made to the Oireachtas. Do the witnesses consider that strange?
There were no specific terms of reference, no formal recording mechanisms and no formal reporting to the Minister for Finance, the Department of Finance or to the Central Bank. Now four years since the appointment of the first public interest director, this is the first formal report to the Oireachtas. Is that not peculiar?
Mr. Dick Spring:
I will answer that question. If the situation which pertained when I joined the board of the bank had continued, I think it would have required a very formal reporting methodology. The situation has changed quite dramatically. It is primarily governed by the relationship framework document, with which I am sure the Chair is very familiar. That is the bible on the relationship between the bank, the Department of Finance, the Central Bank and the troika. There is continuous reporting of the bank meetings I have attended. I think I attended all the board meetings. The Central Bank has had a member of its staff sitting in on the majority of those meetings. The minutes of each meeting is given to the Department of Finance and I think it is given to the Central Bank as well, but the Central Bank is present. There is a continuous information flow. The management of AIB meet the Department of Finance on a monthly basis. The chief executive and his colleagues meet the economic management council on a fairly regular basis. There is a continuous flow of information between Allied Irish Banks and the Department of Finance and the Central Bank.
I accept that, Mr. Spring. The purpose of these series of meetings is to deal specifically with the role and activity of the public interest directors. What we would like to learn from both Dr. Somers and Mr. Spring is the actions in which they have been engaged that makes them distinctly different from any other director of the bank. When Mr. Richie Boucher came before the joint committee in November last, he stated emphatically that directors of the bank, public interest or otherwise, are directors whose job under company law is to serve the interests of the banks. That question has been under discussion by the committee because others have stated that the appointment of public interest directors is governed by specific rules, which allows public interest directors to take a conflictual position from other directors.
May I ask both Dr. Somers and Mr. Spring whether they have been in a position in which they proposed a matter that was in conflict with the bank? Have they put the issue to a vote or achieved a consensus on the issues?
Dr. Michael Somers:
Let me answer some of these issues. As Mr. Spring said, I was approached by the then Minister for Finance, the late Mr. Lenihan. I decided to resign from the National Treasury Management Agency approximately two years before my term of office expired. He asked me about various appointments to the public service. At that stage I just wanted to make a clean break of things. I had worked for 49 years in the public service. He asked me if I would join the board of AIB and I said no to that request. He then rang me in November, which I remember very well because I had come back from a dinner in the Dutch embassy and I got a call at 11.45 p.m. asking me to join the board of AIB. He asked me for my immediate response.
My time is limited and so will the time of members of the committee. I run a very strict time regime. While the background to the appointment of Dr. Somers is very interesting, I am asking him to outline his behaviour since his appointment. What proposals did Dr. Somers put before the AIB board that would reflect matters of public interest, such as issues relating to small and medium sized enterprises getting credit, as many complaints have been made that small businesses cannot get that type of credit?
There are also issues regarding mortgage arrears, managing these arrears and debt settlements coming down the line after the enactment of the insolvency legislation. Have Dr. Somers and Mr. Spring being to the fore in raising these matters with their board at times when they might be in conflict with the other directors' interests?
Dr. Michael Somers:
There was no risk committee when I joined AIB. It was a pretty chaotic organisation. There was no chief risk officer, which was quite extraordinary. I set up a risk committee from scratch, which is essential in a bank. We had great difficulty in getting a chief risk officer. The first two people who took up the post lasted about six months each. We then had to get another risk officer and staff the organisation up. Quite a number of people who had appeared on the risk committee when I first joined it disappeared, resigned, retired or whatever. We now have a fully functioning risk committee that looks at every risk the bank runs.
Regarding providing funds for industry, many people telephone me when they have financial difficulties. I do try to help them but I cannot interfere in credit decisions in the bank as that is not my role. When someone who has been turned down credit contacts me, I first ask them if it is AIB. If it is, then I ask them how they applied-----
With respect to Dr. Somers, I am not asking about telephone calls but about his behaviour at the board table. What has Dr. Somers done at the board table that would reflect his duties as a public interest director? I am putting the same question to Mr. Spring.
Dr. Michael Somers:
I have urged that money be lent to small and medium-sized enterprises, SMEs. I am not particularly proud of the amount of new money the bank has lent. I would prefer if it were more. When I ask the bank about this, it says many people do not want more money as they are already trying to deleverage, and for the others, one would not lend them the money anyway. I am not a credit expert so I have to take the bank's word on this. I am told, however, that money is readily available for good projects.
We have spent hours going through the remediation attempts to deal with the mortgage crisis. We have come up with a good solution. We are not repossessing people's homes. We are not out to get people but to do our best for this economy, which I have done all my life.
Mr. Dick Spring:
To add to that, there were two particular areas in which Dr. Somers and I were particularly active. One was ensuring the bank made contact with former executives who had retired on large pensions. We felt very strongly that they had a contribution to make. As the Chairman knows, this has been done. It was not done as quickly as we would have liked but was done consequent upon last year's annual general meeting. I understand progress has been made in that respect.
We both have an aversion to the presence of consultants in the bank. The bank has spent a lot of money on consultancy fees over the past several years. We are determined that will end as quickly as possible and reduce the cost of same.
When Mr. MacSharry was before the committee yesterday afternoon, he commented that there should be a shelf life for the duration of service of a public interest director. He had the strong view that there needs to be a rotation of public interest directors. Do Dr. Somers and Mr. Spring agree with this?
I welcome the two public interest directors and thank them for their presentations. I have some considerable sympathy for them and those public interest directors before us already. They took on the role at a time when it was clear the banks were in a very difficult position. Both Dr. Somers and Mr. Spring have considerable reputations, as indeed do the other bank public interest directors. There was a bigger risk to their reputations if matters had not worked out. Much of this is lost in an effort to highlight the difficulties that exist with their terms of reference which I would contend are not of their making. They are doing the job that was set out for them at the time. From my vantage point, I believe they are doing it to the best of their abilities.
In the context of the Oireachtas providing advice to the Minister for Finance at a later stage, how would Dr. Somers and Mr. Spring build on the role of a public interest director? As they are the pioneers in this role, how would they define and develop the role so that the next group who takes on this onerous task can discharge their duties to the State? How would they develop a broader and more comprehensive set of guidelines that would not necessitate future public interest directors having to justify everything they do before a committee or the media? How does a public interest director balance fiduciary duties in line with company law and the obligation to the taxpayer, the main shareholder of AIB?
Dr. Michael Somers:
Every director is now effectively a public interest director. Under the 2010 Act, everybody was told their first obligation was to develop credit and so forth, legislation with which the committee is familiar. I am the second longest serving director, after Mr. Dick Spring, on the board. All the people appointed were new to me. They were all on a list that the Minister for Finance had or were recommended to him by the chairman of AIB. They all had to be cleared by the Minister for Finance. Unless they were cleared by him, they were not appointed. These directors are as much appointed by the Minister for Finance as I am. By the way, I offered to go up for election, the same as everyone else, because there was an issue about whether we were regarded as independent non-executive directors. I do not believe there is a significant difference between what we are trying to do, how we were appointed and the others on the board, four of whom are not resident in the State.
We are all trying to get this bank back in order again. It is essential for the economy to have a working banking system. We have spent ages at this. As this is an extraordinarily complex area, one needs people who know about financial affairs. I heard Mr. Spring say on occasion that there are an awful lot of moving parts in this. We are trying to keep track of all of these. We are trying to get the bank funded and get more deposits in. At the same time, we are trying to lend because a bank only makes money if it is lending. We are trying to solve the problem of all the people that are in debt. It does not come easily.
One arrives on these boards and is presented with all of these issues. If one has a financial background, it makes it easier. If one does not, it is more difficult as one is on a steep learning curve. Future appointees will need some financial background or, at least, know the terminology involved, as well as being prepared to spend an awful lot of time at this.
What about the structure of communication? Concern has been raised about this. Does Dr. Somers believe there is a necessity to have those appointed by the Government to have separate communication channels with the Minister? Mr. Spring has outlined how, in an informal way, as information became available, he felt he had a duty to communicate with the then Taoiseach and Minister. Should there be a formalised structure?
Dr. Michael Somers:
In my own case, I have known the Minister for Finance for many years. Sometime after he became Minister, I rang him and said I would like to drop over to talk to him just to explain what I was doing. I spent about an hour or so with him and then he asked me to talk to some of his officials, which I did.
I met him casually on other occasions when I mentioned things to him. He has my telephone number - I have his telephone number - if he wants to ring me about anything. All the papers we see go to the Department of Finance and the Central Bank. There are no secrets and they know we are around if they want to get elaboration on anything.
Mr. Dick Spring:
Obviously, if we can improve communications, that is all the better. To pick up on what the Chairman asked about, namely, the fact that we had not come before the committee, we are quite happy to do so. We are happy for the committee to formalise an exchange on an annual basis. It is important in an exchange such as this that we can get information to the public that might not normally be disseminated. I am not sure how interested people are in reading bank annual reports.
Apart from our fiduciary duties under company law, the Credit Institutions (Stabilisation) Act puts it all into a new ball game. As Dr. Somers has said, all directors are now practically public interest directors. I look on the public interest concept as being very wide in terms of making sure AIB is able to function. It is a pillar bank and a major bank in the State. It must be able to give credit. If a bank is not lending, it is not making money, and if it is not making money, then it is not viable. Without a functioning bank in the State, this country will not get back on its feet. To be blunt, it has been a horrendous journey from the crisis of 2008. The deputy governor of the central bank in the United Kingdom said that this crisis was of such magnitude that no politician, banker or economist currently alive has any experience of a crisis of such seriousness.
A total of 48 of the top management in the bank who were there during the crisis are gone. We are taking costs out of the bank on a daily basis. We aim to take out approximately €400 million between now and 2014 to bring our costs-to-income ratio down so that the bank will be viable. At the end of all of that, apart from having a solid pillar bank, I hope we will be in a position to repay the taxpayer because the bank would not exist without the money that has been put in through the Oireachtas by the taxpayer. However, it is one hell of a difficult journey. We are giving it our all. In fairness, we have a new team. As Dr. Somers has described, we could not get a chief executive of the bank for a long time. We had a number of chief risk officers who effectively ran out of the place. They did not want to stay. We now have a solid risk officer, a new internal auditor and a new chief operations officer. We were lucky to get David Duffy back from Singapore to work in an Irish bank. He has shown a high level of commitment to try to ensure that we put the bank back on a solid footing.
The witnesses are welcome. I thank Mr. Spring and Dr. Somers for their presentations. Yesterday, we had a feeling of unreality. It was a bit like “The Truman Show”. This morning we had fog. The fog is lifting. I thank the witnesses for the refreshing tone of their opening statements and the free-flowing conversation they have had with the Chairman during the opening remarks.
In the three years the witnesses have been in situ, the bank has come from a situation where the PwC listed NAMA loans of €24 billion, which would be the first indication of capital requirement, and it was indicated that the discounts would be heavy. That was the first body blow and winding of the bank for losses. Subsequently, there was the PCAR of March 2010 where the figures that stick in my head were that AIB needed €7.8 billion before the year end. That was hopelessly wrong. It was 100% wrong. Another PCAR in March 2011 was again wrong. To date, the amount injected has been approximately €20 billion. Could the witnesses please outline their experience as they observed what was happening and Boston Consulting tinkered around with governance, probity and capital requirement issues?
The assets will determine the remainder assets, having got rid of-----
Dr. Michael Somers:
I first came across the problems in the banking system when I was still in the NTMA when the first PricewaterhouseCoopers report was done. At that stage it was a question of lending to developers and builders. I was shocked when I saw the figures. It was lending of billions to, effectively, individuals. I had a difficult enough relationship with AIB in the NTMA because it was not particularly supportive of our bond issuance. We were borrowing as little as €100 million to try to fund the State and suddenly I found that AIB and the other banks had lent billions to those people. I was in a state of absolute shock. I could not believe it. Then the pension fund which we had carefully built up to meet the pensions of people in this country over a long period had to be raided to capitalise AIB. Approximately €15 billion of the State pension fund went to it.
That was July 2011. I wish to go back a little to examine the situation as the picture was emerging. Mr. Spring said that shortly after joining, he was horrified by the scale of the losses. I am amazed that the accounting firms did not have some anticipation of that but they seemed to be dulled in their minds as to what had happened to the balance sheets of banks. They should have seen that the engineering ratios were going all wrong. Loans to deposits were crazy. Lehman Brothers had nothing to do it. It was a self-orchestrated disaster. What is the approximate total of gross loans on AIB’s balance sheet?
Are there provisions against that? I apologise for having caught Dr. Somers off guard. The reason I ask is that I have a benchmark picture in my head that Certus, which is doing the loans work-out for the Lloyds Bank subsidiary, Bank of Scotland (Ireland), has, to date, written off €22 billion of the €40 billion where its loans peaked. That is colossal. The bank’s loans were in a sector that was predominantly property-based for property investment and development. AIB had a good helping of that type of loan portfolio as well. I would expect that loan provisions, cumulative to date, having got rid of all the NAMA stuff, should be probably at a level of approximately 15% for the remaining book. In the case of Bank of Ireland, it is under 7% at the moment, which is far too low.
Technical people in March 2010 and March 2011 got it 100% wrong on both occasions. That is my fear. Our best argument for getting capitalisation from the euro system through creditor write-down for all the banks - the dead ones and the survivor ones - is by getting the picture accurate, making the provisions right and substantiating it with what will be arriving down the tracks in the next 24 months as the resolutions of the customer loans with the bank are dealt with and resolved. If the bank can do a good estimate now of what households and businesses need in loan write-down to get back to repayable amounts over their normal expected income levels in the next five to ten years, then it can present its best argument to the euro system that this is it and we are getting it right. It is not a case of drip, drip, drip as it has been for the past three or four years. It is important to say that we are going for this and we are insisting on it because we were trashed by those guys in 2008 and 2009. That is our best argument.
This is my one opportunity to ask the witnesses because I know they have presented their case and their update report, and I am delighted that they understand these things. Therefore, they are our best articulation and validation and their credentials and backgrounds are good. They are persuasive because they line up the facts. It is a case of res ipsa loquitor when they meet Mr. Draghi and others. They should offer their services to the Minister for Finance, Deputy Noonan.
I say that specifically for this reason: to get the ELA owed by the IBRC written off.
This would mean the promissory notes could be torn up. In the case of AIB - and the Bank of Ireland may be too foggy-headed at the moment to articulate it - it can do it. AIB can articulate that for the triangle of banks - the two big remaining banks and Permanent TSB as a smaller add-on - to get the indigenous national economy going. There will be a need to write off debts for households and businesses which are otherwise viable but are smothered in legacy debt which weighs down their existing good businesses. This would enable them to get off the ground.
In addition, the insolvency legislation will put a line through this matter of the banks having a veto on insolvency. That is like trying to sail a boat with the anchor down. It is just silly.
Dr. Michael Somers:
We deal with what we can. Obviously, we have no influence over the other banks but certainly our intention is that this should work properly. We have no interest in seeing people being slung out of houses or anything like that.
In my last job, when we were trying to invest some of the pension fund, a property company in the United States told us about repossessions of houses there, which was a disaster. First of all, people did not want to buy the houses and by the time they paid for maintenance and insurance, they reckoned they got back about 40% of what the houses were worth. It is a disaster.
Yes, Dr. Somers is quite right. Some 99% of people are honourable and decent and want to pay back what they can. It is therefore up to both parties to sit down and work out what can honourably be repaid over income expectations. We are all agreed on that.
However, as the bank with which we have met and conversed, I am asking AIB to spearhead the requirement of the effort in that negotiation with the banking sector's creditors, because we have run out of money. As Dr. Somers said, the pension fund that was built up for the people of Ireland has decreased. They stupidly raided it. They gave Wilbur Ross 35% of the other bank for €1 billion, when our State paid €5 billion for 15% of the bank. A junior certificate student would know that is stupid.
Mr. Dick Spring:
Just to add to what Dr. Somers said, I certainly welcome the Deputy's remarks. I am glad that the insolvency legislation is eventually getting through this House. I was hoping it would have happened a lot earlier because that is obviously the ultimate denouement of solving a lot of the problems which we are facing. As I said in my opening remarks, we now have 2,000 people addressing this situation. Given the combination of the public insolvency legislation and the forbearance that is on offer from the banks, we will get to grips with a very difficult problem.
We are starting on a second journey but we are now in a far better position. Our numbers are going in the right direction and, even if one looks at the losses over recent years, we are going in the right direction.
As regards the bigger issues the Deputy raised, I am not sure that Mr. Draghi would be overly impressed if I asked to meet him, but that is for another day. I accept that there are bigger questions to which the State must respond, as well.
I think the survivor bank system needs further capitalisation. In the case of Bank of Ireland it could be €10 billion minimally to get its provisions right so that it can start the sort of work that would follow from the insolvency stuff. I think that AIB will need more, too, as will Permanent TSB. The IBRC issue is being lumped onto the main national debt. In all, we are talking about a minimum of about €60 billion. However, we need people who really understand it and who can, without having to shuffle through opening statements with simultaneous translation, get it across, eye to eye, with the other person.
Dr. Michael Somers:
As regards needing more cash, we have been through numerous stress tests on the future of AIB and have looked at different scenarios, including interest rates moving and economies not growing. In other than extreme circumstances, the expectation is that we will not need any more capital from the State. I hope that is correct and that we do not have to come back looking for any more capital, but one can never be absolutely certain.
If that is the case, why is the bank's management - and AIB has 10,000 or 11,000 staff at different levels - not getting on with the job of writing down collectable amounts, one by one, with customers? Is it because the capital or the people are not there, or is it both?
I welcome our guests to the committee. In response to the Chairman's questions, Mr. Spring talked about the time involved in taking up the position as a public interest director. He estimated that would be 40 days and then indicated to the bank that he would be available for 60 days. Is that a figure for days attending meetings or is there other work involved?
Mr. Dick Spring:
It would be both in the sense that there is a lot of work in preparing for meetings, including briefing oneself. Then there are meetings and also there is a lot of work currently in terms of what I would call continuous education and training which we are now undergoing. I will give an example. Last week, we had our board risk meeting at 2 o'clock on Wednesday afternoon, which lasted for four hours. We then had a working dinner with the board of the bank. We started our board meeting at 8 o'clock on Thursday morning and that lasted until 2.30 p.m. We then went into a training session which lasted until 6.30 p.m. that day. On Friday we resumed the training session which lasted from 8.30 a.m. to 1 p.m. That is the bank's working week and there are obviously other meetings in between.
The figure of 40 days was indicated as the Central Bank's requirement. One would want to commit oneself to being available, which I was in a position to do. I saw, however, that there was extra work involved and I put it in writing to the chairman that I was quite prepared to do extra days.
I note the number of meetings Mr. Spring attended last year was 24, while Dr. Somers attended 22. Of the four public interest directors who are former Ministers, Mr. Spring is in receipt of the highest Government pension. He is in receipt of €121,108 per annum. Last year, for example, his fees were €59,000. Excluding last year, he has received fees of €132,000 since the time of his appointment. That is on top of the fact that he has got what I think is a lavish pension. I genuinely do not believe that any public servant should be in receipt of pensions of €121,000 - never mind the fact that they are getting fees of €59,000. The 60 days to which Mr. Spring referred, equates to €1,000 per day. That is his fee as a public interest director on the board of AIB. That is a very heavy fee for his involvement, given the fact that this State is already paying him €121,000. I know that everybody pays tax on their incomes. Mr. Spring has said before that he is a socialist. Does he believe it is appropriate that people like himself who are serving in the public interest are claiming such an extraordinary amount of money from the taxpayer?
Mr. Dick Spring:
I think the fees which I have outlined are reasonable for the effort and time that I put into working at Allied Irish Banks. My pension is as a former Deputy - which Deputy Doherty will be entitled to in time - and as a Minister. Deputy Doherty will obviously get a ministerial pension if he ever achieves ministerial office and I think he will be perfectly entitled to it.
There is another way of looking at this. I have turned down numerous invitations to take up other positions, which would be equally if not more lucrative than working for Allied Irish Banks. In fact, I have turned down two in recent months because I do not have the time and am not available. I think the payments are reasonable for the time and effort put in.
I think Mr. Spring's answer to whether he is worth the €1,000 per day fee on top of his pension, rings similar to Dr. Somers's answer - if he does not mind me saying so - when he was receiving more than €1 million in payment as chief executive of the NTMA.
Dr. Somers may believe public servants should receive lavish pensions plus €1,000 per day to serve on the board of AIB, but there are many who do not believe it serves their interests, in particular, the one in four who are in mortgage distress and those who have seen increased fees and increases in variable interest rates out of line with ECB rates. I share their view that it is inappropriate.
The Personal Insolvency Bill provides that those in mortgage distress can restructure their loans. They will be able to reduce their debt burden and to have their debt written off after a process is gone through. Is it the view of the public interest directors that this is something which needs to be done and that AIB must ensure that debt write-offs take place? Will they ensure that AIB does not use the veto contained within the legislation? I draw the attention of the public interest directors to what Mr. Fergus Murphy of AIB said in answer to me when he was before the joint committee. He said the sum written off thus far is €600,000. He said any write-offs will be minuscule or near zero. He said that on a balance sheet of €95 billion, €600,000 is zero and that AIB was not writing off debt. Do the public interest directors agree with that and do they believe that is the position the bank should take after the Personal Insolvency Bill is enacted?
Dr. Michael Somers:
AIB will comply fully with the terms of the legislation. I am not an expert on it and only heard this morning about the five-year provision, having listened to a programme on the radio. The aim of AIB is to deal with customers without having to go near the legislation. There is no upside in trying to get blood from a turnip. If people do not have money, they cannot pay up. There has been a great deal of discussion of debt forgiveness and what forgiveness means exactly. I am long in the tooth and a Roman Catholic and forgiveness has a certain meaning to me. It means one goes to confession and one's wrongdoings are forgiven. While the bank is not going to engage in divine mercy, it will deal with individuals and consider the totality of their liabilities and their income and leave them with a sufficient amount of cash to have a reasonable quality of life. It will then deal with them regarding what will happen with outstanding debt. If restructuring involves eliminating debt, so be it. If money cannot be got, it cannot be got.
People have been in mortgage distress for a number of years. This has not happened today or last week. People are in serious mortgage distress. The Government has had to introduce far-reaching legislation, which is nevertheless flawed because it provides for a veto by banks. Dr. Somers can say the bank will act under the law and, of course, that is true because the law provides it with a veto. Government, politicians and people generally do not want the bank to use its veto but rather to engage in debt write-down after the process provided for has taken place. The problem for the public interest directors is that to date only €600,000 has been written off for distressed mortgage holders out of a total of €95 billion. What comfort can the witnesses give the joint committee and people watching that there will be a new direction in AIB on writing off debt? If AIB was doing its job properly, there would be no need for the legislation.
Dr. Michael Somers:
I do not know the detail of the discussion the joint committee had with AIB representatives on the €600,000 or whether they undertook to provide further information. It appears to be a very small figure. When loans are written off, it is somebody else's money. Money does not come from nowhere and in this instance has probably come from the State pension fund.
Dr. Michael Somers:
Yes. Bank officials must be careful that they are not hoodwinked. There are approximately 37,000 people who must be dealt with individually on the basis of the totality of their financial circumstances. It is equivalent to three quarters of the capacity of the Aviva stadium. Some people are in distress on foot of their house loans, some on the basis of buy-to-let properties and some have SMEs. I hear all sorts of stories on how people got themselves into a mess by borrowing too much from banks. It is not AIB's intention to throw people out on the streets. Some deal with have to be cut and if it requires the writing down of debt, so be it.
It has not happened to date or only to the extent of €600,000. A director of the Central Bank made a widely reported comment to the effect that the banks are behaving like spoiled children and asked what they are waiting for. Does Dr. Somers agree with that in respect of the bank and its directors? What is the bank waiting for and why is it not dealing with the mortgage crisis? Representatives of the Central Bank and the regulator have told the joint committee they are not happy with the banks' efforts to deal with the mortgage crisis. Does Dr. Somers believe AIB is behaving that way?
Dr. Michael Somers:
I do not. I do not know what the context for those comments was. I read about them in the newspapers where they got great headlines. Anything to do with bashing banks gets very good headlines. It is only recently that the bank has put together this team of 2,000 people, all of whom had to be retrained. The problem is that the banks were used to lending money and much less accustomed to getting it back and dealing with those who got into distress. We all know we got into this mess because money was being made too freely available. Bank staff have had to be retrained and reprogrammed to clean up the mess. It has only been done in relatively recent times since Mr. Duffy came on board as CEO. We are ready to go and Mr. Duffy has put these people to work.
I dispute Dr. Somers comments earlier about lending to small businesses. New lending stands at €600 million, not the €3.5 billion target which was supposed to be reached. I cannot go into that, however. Bank of Ireland paid out bonuses in breach of the State contract, which is a matter I put to the directors earlier. In the first nine months of 2010, during which year Mr. Spring was a director, the bank paid €700,000 in bonuses to two senior executives. A total bonus package of €3.06 million was paid to 41 managers and €60 million was paid out by the bank over two years. How do the public interest directors stand over large salaries and bonus payments by a bank which has cost the State so much money? How many senior executives have responded positively to the request for a reduction in pensions?
Mr. Dick Spring:
I suspect there would be a difficulty with that on grounds of confidentiality in respect of executives' pension entitlements. Most of them understand they are privileged and should make some repayment to the State. We will certainly keep the joint committee informed on that. I do not have the figures before me on bonuses paid in 2010 but I suspect they related to contractual obligations which had to be honoured on the basis of legal advice. From memory, AIB was taken to court and a ruling was made that the payments had to be made.
Did Mr. Spring raise this with the Minister? The Minister found out at a later stage and rushed legislation through to introduce a 90% tax on bonuses to bankers. Did Mr. Spring raise this with him?
I welcome the witnesses here today. I followed this yesterday and this morning and it struck me very clearly from hearing the submissions made earlier that many of the public interest directors had gone native. This does not refer to those present. Could the present witnesses define the term "public interest directors"?
Mr. Dick Spring:
I take my definition from the Credit Institutions (Stabilisation) Act 2010, section 48, I think, which states that it is to facilitate the availability of credit in the economy of the State, to protect the State's interest in respect of the guarantees given by the State under the Government guarantee and to support the steps taken by the Government in that regard, to protect the interests of taxpayers, to restore confidence in the banking sector and to underpin Government support measures in relation to that sector and to align the activities of AIB and the duties and responsibilities of its officers and employees with the public interest and other purposes of the Credit Institutions (Stabilisation) Act 2010. That, effectively, is our bible. As we said in our opening remarks we both have considerable experience of working in the public sector and a strong commitment to public service.
Mr. Spring mentioned that he hoped to see the taxpayer or the citizen fully repaid. Has he done any forecasting to say when he could see the citizens or taxpayers being repaid the billions of euro going into AIB?
Mr. Dick Spring:
Many fences. This has been a really difficult journey. I believe we are going in the right direction. Dr. Somers will speak for himself. We are reducing our losses year on year. We are stabilising the bank. I hope we get some fair winds behind us too, not just in Ireland. We need some European winds behind us as well because we are a small player in a very big pond.
Mr. Dick Spring:
We need economic recovery. I was very relieved to see that we had growth in recent months, albeit 0.2%. At least it is going in the right direction. We need consumer confidence to be restored. I am probably as familiar with rural Ireland and the city as most Members of the Oireachtas and there is a definite constraint on people wanting to borrow at the moment compared with the rush for borrowings during the Celtic tiger years. Savings are at an all time high. People want to pay down debt. Even in respect of remarks about lending to SMEs, the chief executive of the bank, in his many meetings around the country with SMEs and business people, will always ask whether there are people in the room who want to borrow money and he will invite them to come and talk to the bank. We need to give credit. That is the function of the bank. If it is to be a viable bank we must issue credit, take in deposits and give out loans in a prudential manner, not like the chaos of the Celtic tiger when, as Dr. Somers said, there was no risk assessment. We did not have a risk committee. I do not think there was even a chief risk officer in the bank during that crisis. AIB came late to the crisis but by God it came fast and furious to catch up with the other banks which were making a 39% return on investment at that time.
I had a discussion with someone running a small business last week who could not get access to money. I am not in a position to say what kind of risk would be involved in that SME. When the two bank CEOs appeared before this committee, the CEO of Bank of Ireland told us that its figure referred to new lending, not re-financing, because the €3.5 billion had hit the Government target. The CEO of AIB said the bank's figure did not relate to new lending. The witnesses have given the figures again in their presentation today. Can they give me a breakdown of what is new lending and what is refinancing? What is the €3.5 billion that is being lent out to the SMEs?
Dr. Michael Somers:
AIB has said that €600 million of the €3.5 billion, or whatever the figure is, is new lending. The rest is refinancing, turning over existing loans. That is just as important in many ways as new lending because many people are complaining that they cannot get their loans refinanced. I hear complaints all the time, and I am sure the Deputy does too, from people who go into the banks and find that their loan is due for repayment and they are obliged to repay it. If they want to roll it over, the bank refuses to do so. They cannot go anywhere else because when one's own bank turns one down, there is nowhere to go. I would much prefer if there was more lending. I am told that it is just as important to roll over existing loans as to give out new lending.
The bank is prepared to lend to viable projects. It keeps saying so to us because we raise this regularly at the board. As Mr. Spring said, the CEO has gone around the country and asked people if they want money. In the past week or two we introduced a new provision whereby the banks would lend €25,000 to individuals on a turnaround of either 24 or 48 hours. I know this is a small thing but we are doing our best to push this matter. We cannot get this economy moving if there is no credit being provided. We are determined to do everything we can to get credit into the system.
Does Dr. Somers not even worry on a business model basis if the Bank of Ireland says it has lent more than €3 billion in new loans and AIB is lending only €600 million in new loans to SMEs? Is there not a differential in market share or is Dr. Somers worried that Bank of Ireland has returned to its old model?
Mr. Dick Spring:
In the year to date we have sanctioned 92% of applications received in the SME sector. At that rate we are obviously meeting the demand. Like Dr. Somers, I do not know the Bank of Ireland figures or how they classify them. I would say it is extremely unlikely that there is €3.5 billion of new loans in the current economy.
Mr. Dick Spring:
We are 28% ahead of the targets we set at the beginning of the year in terms of lending to the SME sector. We have also initiated a whole range of other incentives, including as late as last week with the European Investment Bank, which was here. We are promoting very strongly in the agri-sector which must build capacity because the milk quota will be abolished in 2015, so farmers need credit for that. We are supporting the Government initiatives - the temporary partial loan guarantee scheme launched on 24 October and the Microfinance Ireland Fund. We have several joint funds, for seed capital, development capital and social and finance capital, and the European Investment Bank fund too. We are trying.
Dr. Somers said this is the first time he was asked to report to the Joint Committee on Finance and Public Expenditure Reform. This has been worthwhile and should be repeated because, after all, we represent the taxpayers and the shareholders who ultimately own AIB and several other institutions. I would put it to the Chairman that we should consider doing this annually. I thank the witnesses for their straightforward answers which I appreciate.
I put it to the public interest directors in their capacity as representatives of the ordinary citizens of the State suffering the disasters of austerity caused by the greed and profiteering of the banking and property scenes that, after four years on the board in the case of Mr. Spring and three in the case of Dr. Somers, no formal structures to make them accountable to taxpayers are in place. It is a farce, is it not?
Dr. Michael Somers:
As I was explaining earlier, everybody on these boards at this stage is in effect a public interest director. They all have the same obligations as we do. To revert to Deputy Humphreys's point, the joint committee might call in some of the other directors of the banks as their obligations are no different from ours. I have appeared before many Oireachtas committees over the years. Deputy Higgins and I have discussed matters, in particular in the Committee of Public Accounts. I do not have any issue in talking to people about the situation. Under company law, one answers to shareholders and appears before their AGM, which we have done. I am quite happy to talk to anybody else who wants to discuss anything to do with the bank.
Dr. Michael Somers:
I have no problem about reporting to the Minister. I have been to see him. Different Ministers have different ways of doing things. The Minister has access to every piece of paper we see. He has access to the board's reports and knows what we have said at meetings. It is not as if things are being done in secret.
Mr. Dick Spring:
I assure Deputy Higgins that if it is the wish or recommendation of the joint committee that there should be a formal reporting structure, I do not have a difficulty. The more information in the public, the better it is for everybody. There are many misconceptions on what the banks are and are not doing. As Dr. Somers said, all the information is available to the Department currently. We were appointed by the previous Minister for Finance, sadly no longer with us, and the current Minister wishes to retain us on the board. I assume the joint committee will prepare a report after these meetings. If its recommendation is for a formal reporting structure, we will strongly support it.
Alder Capital is a currency speculator and has speculated heavily against the euro over a number of years, reportedly making massive profits as a result. Its co-founder Brian McCarthy boasted "we have capitalised on the weakness of the euro". Does Mr. Spring accept that there is a fundamental and fatal conflict of interest in representing the Irish people as a public interest director in AIB while wearing another hat as chairman of a company active in the financial markets system - the casino economy - which seeks to profit at the expense of the Irish and European people?
Mr. Dick Spring:
There is absolutely no conflict. As Deputy Higgins will be aware if he has the company's reports, I do not engage in day-to-day trading with the company. I assume Deputy Higgins has some information about this and it was made perfectly clear when the question was asked before. I have no conflict of interest whatever because I have no involvement in the trading by Alder Capital on a daily basis.
With respect, I did not suggest Mr. Spring was on the trading floor manning the phones, but he is the chairman. According to the Credit Institutions (Stabilisation) Act 2010, the remit of the public interest directors is to address the serious and continuing disruption to the economy and the financial system and the continuing serious threat to the stability of certain credit institutions in the State and the financial system generally. The activities of Alder Capital and its like - vulture capitalists - are precisely opposed to that. They thrive on instability and profit massively from the creation of instability through currency speculation.
The ordinary people Mr. Spring represents would see it very differently. I accept that within the banking club it might be fine. There are very incestuous relationships among all the top tiers of the financial and economic elites. The ordinary taxpayer-----
Mr. Dick Spring:
I assure Deputy Higgins that I am not part of any banking elite or club. I do this work at the behest of the Minister for Finance on behalf of the Irish taxpayer. I am not a banker and have no ambition to be one. I will continue to do this work as long as I have the strength to do it.
Let facts speak for themselves. From previous exchanges, we know what Mr. Spring earns annually from the public purse. Apart from his fees as a representative on the board of AIB, what other public funds does Dr. Somers receive annually?
I put it to both public interest directors that given their public emoluments and being recipients of hundreds of thousands of euro a year, they are in difficulties in representing ordinary people. Mr. Spring also has a lucrative sideline in private companies, although I am not sure about Dr. Somers. How can they feel the pain of the people who are at the mercy of AIB in the context of the mortgage crisis, which we will come to in a minute? Can they really represent those who are hurting?
Dr. Michael Somers:
I have four children. I am well aware of the difficulties people have. I was not always well paid. I entered the Civil Service as an executive officer and was paid a very modest sum. I pulled myself up and obtained marketable skills. Nobody has to hire me.
Mr. Dick Spring:
I understand. I continue to live in rural Ireland, as Deputy Higgins is aware, and I interact with many customers of the bank daily. Many people are hurting. Of our mortgage holders, 90% are paying their way and 10% are in serious difficulties. We are addressing those difficulties. Deputy Higgins is implying that I should not be out there working or earning money, on all of which I pay my taxes. I am proud to do so and will continue to work on behalf of people who are in difficulties in the banks. We did not cause the crisis, but we are trying to find a solution. We are giving a great deal of our time to work with the bank to find a solution for the many people who are hard pressed to pay their debts each week and to provide for their families. It is only when the economy returns to viability that we will be in a position to solve many of the problems we face.
When the bank's chief executive was before the joint committee, it was set out that this year 34,000 mortgages are subject to forbearance, of which 66% are interest only. That is the huge suffering. Those people are in essence slaves to the banks. Have the public interest representatives considered or discussed with the board a different approach rather than to torture families and individual home owners?
I am speaking of a more general write-down of mortgage debt for single-owner occupiers rather than multiples to reflect the values today of those properties and, therefore, a calibrating downwards of the monthly payments which, on the one hand, would ease unconscionable pressure on people and, on the other, free up hundreds of millions, perhaps of billions, of euro a year, thus allowing the real economy to develop and more jobs to be created as that money would be spent in shops and on services. Has this issue been discussed or bought to the attention of the board?
Dr. Michael Somers:
I would not tolerate the torture of anybody. I am not in that business. The bank treats people with respect etc. If otherwise was happening, I would be concerned. On a general write-down of debt, money does not come from nowhere. If the bank writes down people's liabilities this hits investment in the State pension fund, into which we have all paid, thus reducing the amount that will be available in due course to pay the pensions of people in this State. There are many chancers in the economy who would be only too happy to have their liabilities written down. Our aim is to deal with genuine cases and to do so sympathetically, leaving people with a reasonable standard of living while trying to restructure their indebtedness. I assure the Deputy we are sincere about this. We are not out to cause unnecessary pain or to torture anybody.
Mr. Dick Spring:
I do not wish to repeat what Dr. Somers has said. I believe the chief executive may have explained the broad forbearance being applied to people by the bank. Our short term forbearance includes interest only repayments, reduced payments, payments holidays, arrears capitalisation or deferred interest. The bank's long term forbearance strategy includes term extension, interest rate reduction, split mortgages, interest rate only payments, reduced payments or a combination. There is also then the ultimate resolution treatment which includes voluntary sale, trade down or mortgage to rent. In the case of Allied Irish Bank, repossessions have been on an exceptional basis only. A small number of its repossessions have been voluntary, with people simply wishing to get out of their homes.
I would ask that Mr. Spring and Dr. Somers re-examine this imaginatively with the board rather than within the parameters of the thinking in banking circles. They will be well aware that the domestic economy is in a dreadful situation, with mass unemployment etc. and the taking of money from people's pockets-----
-----leading to less money being spent in the shops and on services. A general write-down, not for chancers but for ordinary people who were the victims of the gouging and speculation that went on in the profiteering markets, is required. Mr. Spring, when Tánaiste, had no problem writing off a €1 billion or €2 billion for tax cheats, including criminals and gangsters yet the same cannot be done for the ordinary people of this country.
I would like to apologise to the witnesses for the unfair question I asked earlier about the bank's lending rates. I based my question on the submission we received, which stated that the Bank of Ireland exceeded the €3.5 million in lending to small and medium sized businesses. It is stated in that submission that credit approved for customers seeking restructuring facilities is excluded from these figures. It has been just pointed out to me that on 17 December the Bank of Ireland stated the opposite. As such, my question was unfair, for which I apologise.
I welcome Mr. Spring and Dr. Somers, with whom I would like to raise a couple of points. This is the third set of hearings on this matter. The context is simple - a general distrust of the public in the banking system and a lack of understanding or faith in the public interest directors. Section 48 of the Act has been quoted at length. There is clearly a need for the Minister to put in place guidelines for transparent lines of reporting, which is currently lacking in the system.
I would like to touch briefly on the €600 million referred to. We met previously with officials from the Bank of Ireland and Allied Irish Bank at which time officials from the Bank of Ireland stated emphatically that the figure of €3.5 billion represented new lending. Mr. Duffy from Allied Irish Bank stated that €600 million of the €3.5 billion was new lending and the remainder represented restructuring. Be that as it may, €600 million in new lending is very little. I do not concur that there is no demand for lending. The problem is the type of lending available. The banks have become extraordinarily risk averse. We are trying to get the SME sector going. What I am hearing on the ground from the SME sector is that much depends on the individual within a bank with whom an applicant is dealing. I believe there is a need for the banks to put in place defined communications structures in regard to dealings with customers. I am astounded to hear there was no risk committee in the bank.
I would like to hear from Mr. Spring and Dr. Somers regarding the type of structures around loans that were in place in AIB when they took up their appointments on the board. Dr. Somers referred to his relationship with AIB when employed by the National Treasury Management Agency in terms of its capacity to invest in Government bonds. What is the current position in that regard? I would like if the witnesses could give us a flavour of what they found when they took up their appointments. For example, if the bank had no risk system in place at that time, it should offer some leverage in terms of its dealings with people in difficulty with mortgage loans etc.
Dr. Michael Somers:
What shocked me when I took up my appointment was the size of the loans which came before the board for consideration. Only loans in excess of €750 million came before the board for consideration, which shocked me. I thought many of the smaller loans would go before the board for consideration.
Dr. Michael Somers:
I presume it would be total exposure.
It was an enormous sum of money. The board was not really focusing on loans. In years gone by the main focus of the board would have been on making loans, to whom it was lending and why, and in to what sectors etc. but that all seemed to fall by the wayside and the board was otherwise engaged. Some of them told me they were becoming experts in Basel II and so on which may be very laudable but it does not get one very far in terms of pushing money into the economy.
That has all changed now. There are very few sizeable loans.
Finally, what further measures will be taken? A total of €20 billion of taxpayers' money has been paid to AIB. This has not come up for discussion. It is an incredible sum of money. What more will the public interest directors do to restore AIB to health while taking into account their remit, to ensure it will not be done at the cost of mortgage holders and SMEs?
Dr. Michael Somers:
We have to bring down the cost of running this institution. The banks had to go through almost every account to see whether people were over or under-charged interest and fees etc. Doing that and dealing with restitution and the regulatory requirements of the banks is taking 25% of the banks' resources. That must be brought down. We are reducing staff numbers to a more reasonable number. AIB was one of the few multinationals of which we were proud but now we are reducing it to what some would say is almost a local utility.
I have a few questions, as we all do, to ask of AIB. There is a marked contrast between the attitude of Dr. Somers and Mr. Spring towards this committee, in their willingness to answer questions and their greater sensitivity to some of the issues we are raising, and that of the public interest directors from the Bank of Ireland. Would the witnesses agree this contrast has something to do with the fact their bank is 100% owned by the State which shows the merits of nationalised banks over those in which we have only a minority share holding and people like Mr. Boucher think they can treat public representatives with contempt?
Mr. Dick Spring:
Dr. Somers and I have made it clear that we come from a public service background and respect the entitlement of this committee to invite us here. We would appreciate if there was a formal structure for doing so. The bank is owned by the taxpayer and our responsibility is to the taxpayer and the Members of the Oireachtas represent the taxpayer. We are trying to be as open as possible with the committee in the situation we face and with which we are dealing. We are giving it our best shot to bring this bank back to viability in the shortest possible time. David Duffy told this committee he hoped to have this bank back in profitability by 2014. That certainly is our target.
Mr. Spring is not going to say it but it needs to be said. It speaks for itself. I was nice in my first question but while this is not a matter of chasing individuals I have worked out from the witnesses' answers that Mr. Spring receives approximately €1,000 per meeting and Dr. Somers receives €3,000 per meeting. Carers work just as hard as Mr. Spring and Dr. Somers and their function in our society is just as important. The witnesses earn for one meeting what carers earn for five weeks and that payment is being cut. Do the witnesses think that is fair? Do they understand how angry people are that because of the behaviour of banks and the very wealthy the people are suffering cuts which will put them in a worse position?
Dr. Michael Somers:
The number of meetings does not in any way represent the total effort that any of us make in this bank. Rarely a day goes by that I do not have to spend several hours dealing with AIB affairs. I have been beaten up by various Oireachtas committees over the years about what I was paid and what I paid other people when I worked in the NTMA. I fully accept there are people who are hurting badly.
Does Dr. Somers think he works harder than a carer and deserves to receive for one meeting, even allowing for preparatory work, five or six times what a carer earns in five weeks?
Dr. Michael Somers:
With due respect, the Deputy could put that question to many people, lawyers and accountants and so on. If that is the sort of society we move to that is it but we are not moving towards that sort of society. I was often paid very little when I was a young fellow and going to university at night.
Mr. Dick Spring:
We have taken steps in the bank to reduce salaries. The management have reduced their salaries by 15% in the past few months, the next level of management have reduced their salaries by 7.5% and there is effectively a pay freeze in the bank. We are taking steps primarily because we must take out costs. The bank works in an international environment and when we sought a new chief executive the then Minister for Finance, the late Brian Lenihan, instructed us to find somebody who was not an insider. We trawled around the world to find a chief executive and having interviewed many we found an Irish-American who we felt was suitable for the job because he had vast experience of retail and investment banking.
I am not being rude but I have very little time and I was concerned about the contrast between what a carer does working long hours and what a banker does. Does Mr. Spring really think that people like him and Dr. Somers or bank executives are worth multiples-----
Dr. Somers has ruled out what he calls "divine mercy" in respect of debt forgiveness on the basis that there are too many chancers, and Mr. Duffy has referred to moral hazard. Will Dr. Somers please explain what would be hazardous in writing down to current market value the mortgages of owners of principal private residences who took out their mortgages between 2000 and 2008 when those mortgages were so high they were through the stratosphere, not through any fault of those who took out the mortgages but through the fault of the banks?
Dr. Michael Somers:
Yes, it is the public's money. We are spending the State pension fund which is intended to pay pensions, hopefully for decades to come. If the Government decides to do so, that is fine. It is not a decision that would fall to the likes of us to make. That would be a general policy decision. If something like that happened one would find an individual who had all kinds of property and incomes on the side but who got his or her mortgage reduced and we would be hung out to dry. This is a very difficult situation. There are no easy solutions.
Dr. Michael Somers:
From what I know, people's financial positions are rarely that simple. They may have a mortgage and all kinds of other loans, such as mortgages on buy to let properties. I have heard of fellows with garages who were doing very well, then they built an office block on top of the garage and suddenly they are bust, because what they built does not cover the expenditure.
I am not talking about apartment blocks. My question was very specific. Will Mr. Spring answer it?
In the period 2000 to 2007, before the collapse of the property bubble, people borrowed to put a roof over their head. What is the moral hazard of writing down their mortgages to current market values? I can see nothing morally hazardous about doing that.
Mr. Dick Spring:
I do not think it is a viable solution. I do not think it is possible. If it were possible, I assume the Government of the day, or the Oireachtas would decide to do it. If we attempted to do something like that it would lead to further recapitalisation of the banks and we would be coming back to Government to look for more money.
Do the witnesses know how much it would cost to do? Perhaps the witnesses would be able to provide that information. TSB said it would look into it and provide the joint committee with the information.
In the interest of further transparency, I believe the Clerk to the Committee wishes me to acknowledge a relationship. Mr. Dick Spring is my uncle and we are currently talking to each other, and I hope we will be talking after this meeting.
In a spirit of fairness, I am putting the same questions to them as I put earlier to the witnesses from Bank of Ireland.
The resale of the bank will be ultimately determined by the level of interest from the private markets. They will look at the cash flow and the ability of the borrowers to make repayments. The ESM is the potential mechanism by which the bank can be recapitalised and refunded and ultimately taken over by an institution that can firewall it and provide it with the ability to accelerate growth in our economy. I am sure they have seen what the IMF had to say about the ESM yesterday. Have the witnesses a strategy for the way the bank should go forward? Should it be sold to the private market or is the ESM the preferred route?
I know that Dr. Somers had a great deal of experience in the funding of the banks. The funding of banks can come from the European Central Bank, deposit holders, the wholesale markets and so on. The current multilayered approach is more suited to the private market. However I, together with some of my colleagues, believe that if we could access further ECB funding we could ultimately reduce the cost of funding to the banks and pass on that to the stressed borrowers. Will the witnesses comment on that?
Dr. Michael Somers:
The ECB is doing a great service for the State in that it is providing a very large amount of money at an interest rate of 0.75%. It has also provided three year money, which is quite unusual for a Central Bank. Usually the period of lending by a Central Bank is much shorter. It has also undertaken to buy up bonds. Many people say the ECB should take some of the pain for what has happened. There is an issue about the ECB and I am telling members what I understand the scene to be because there may be subtleties that are lost to me, but its share capital is €10 billion, and effectively if it loses money it has to be recapitalised in some way or another. It can be recapitalised by the regional Central Banks and if it cannot do it, it will have to come from the Exchequer. It does not have the ability to take on board losses. People have also spoken about the ESM and some people have suggested that the €20 billion put in by the State could be taken over by the ESM. Frankly, I do not think it can because the ESM will have to borrow its funds on the international markets. It needs a good rating. As far as I know, it has been downgraded to AA plus and it does not even have a AAA credit rating. It cannot afford to take any losses either or else it will not be able to raise money at a reasonable rate on the market. The idea that the EMS would be the solution to our problems in taking on board the losses of the Irish Banks would not work. I do not think there are any free lunches in this game.
Dr. Michael Somers:
In theory, as I do not know whether there are other legal problems, if the ESM were to take over AIB it would not pay €20 billion for it. It might pay, I am guessing €8 billion, and that crystalises a loss of €12 billion. It could take over something at its market value, it cannot pay over the odds for it.
To that end, in relation to the market value of the bank, the market value will be determined by the loans that exist, particularly the mortgage loans that exist. Built into the loans that have been given for 30, 35 and 40 years is a margin and the margin will be disposable income of my generation more than, with all due respect, the generation of Dr. Somers. I am not of the belief that any bank should be in a position to capitalise on what I consider to be negligent lending to a generation. I am of the belief that there should be a moratorium on margin-making gains for the banks until a point in time that the generation has caught up with the natural progression of society. If that were implemented under the watch of the witnesses in the bank, the value of the bank would be less, but it would ultimately mean society would be able to kick start the economy. That is a fairer solution to it. People are looking for justice.
Dr. Michael Somers:
I think we are moving very much into the area of public policy and what the Government wants to do. Obviously, whatever happens, when the Government decides to move on any of these areas, it will not be just with AIB but with all the institutions.
The Deputy refers to what different generations paid for their homes. I had a mortgage for very many years and I do not think I ever had an interest lower than 8%. People complain about interest rates of 4% but I suffered under a rate of 8% and more. I recall in 1992 and 1993, when we had the currency crisis - Mr. Spring will recall this as we both sat around the same table at that time - one of the reasons was that the banks were charging 14% for mortgages and were about to jack up the rate to 18%. At that stage, we threw in the towel.
The point is that there was never the level of arrears or stressed mortgages in Dr. Somers's generation as there is at present. That is the acid test.
My last question is in relation to the role of the witnesses as public interest directors. They ultimately have a responsibility to the shareholders. The point has been made that 48 staff of the senior management grade have stood down or have been removed. In the witnesses' estimation, if the bank is left literally bankrupt and with no resaleable value, are they culpable as directors for leading the bank to that position? In their estimation, is it appropriate that these senior people are remunerated with lucrative pensions in light of the fact that under their stewardship the banks were essentially destroyed? I put this question to both Dr. Somers and Mr. Spring.
I am going to bring this to an end. A vote has been called in the Dáil, which gives us eight minutes and allows Deputy Donnelly in for the next six minutes so that we can bring things to a conclusion rather than having to bring back everybody after a vote.
I thank Mr. Spring and Dr. Somers for accepting the invitation of the committee. In the interests of time, I will skip straight to the core issue, which is the pension top up of €1.1 billion. Can each outline his role in that decision?
Dr. Michael Somers:
This arose out of the need to reduce substantially the number of staff in the bank and to provide both for early retirement provisions and for redundancy, or for whatever term one wants to put on a reduction in the number of employees.
The trustees of the pension fund required that additional funds be put into the pension fund by the bank to meet the additional pension liabilities that would accrue as a result of the early retirement arrangements. The amount of funding required was fixed at €1.1 billion. The Department of Finance did not want the bank to put any cash into the fund. As such, it put in loans which hopefully will generate funds over time. The proposal came to the board in the context of the restructuring and downsizing of the bank and the board approved the arrangement. I should point out that the bank had no option but to approve it.
Mr. Dick Spring:
As stated by Dr. Somers, in terms of reducing costs in the bank we took on the early retirement severance scheme under which 2,500 employees will leave the bank between now and 2014. The pension trustees pointed out to the bank that the pension fund would not be adequately funded if we did that to pay existing pensions. It was the only option open to the board of the bank. Obviously, all pensioners benefit but our main focus in the actions we took was to ensure the pension fund for the many thousands of pensioners of Allied Irish Bank would be adequately funded.
As I understand it, what the witnesses are saying is that the €1.1 billion was necessary to facilitate the voluntary redundancy of approximately 2,500 staff. Is it the case that, had the State not rescued the bank, these people would not have received voluntary redundancy packages?
Is it not reasonable then to say the State, the people of Ireland, should not have paid €1.1 billion to facilitate voluntary banking redundancies when, had the State not stepped in, those people would not have received those packages?
Dr. Michael Somers:
I will respond to that question on a few different levels. If the State had not bailed out Allied Irish Bank, the situation would have been disastrous. In terms of the cost of these redundancies, I understand the pay-back period is one year. This was part of the action to reduce the overall cost of running the bank. As a result of reduced staff numbers and a reduction in the size of the bank, €400 million per annum will be saved. We are caught between a rock and a hard place on these matters.
With the greatest of respect for both of the witnesses, whom I thank for attending today and for their public service, I put it to them that in this case they oversaw a €1.1 billion payment to facilitate voluntary redundancies for staff who, had the State not intervened, would not have been afforded voluntary redundancy and that that was a bad call and a bad use of public money. I believe it would have been acceptable to let go those people and for them not to have been paid voluntary redundancy packages by the people of Ireland because, had they not stepped in, those staff would not have got any packages. I say that with great respect for the witnesses. However, I believe the call made in this case was a bad one.
Mr. Dick Spring:
I thank the Deputy for his words of welcome. I must disagree with him in terms of the options with which we were faced. Many of the people involved were middle ranking bank officials who had served 30 or 40 years in the bank, in respect of whom I believe a little human decency was required.
I thank Mr. Spring and Dr. Somers for appearing before the committee and for assisting us in our examination of the role of public interest directors. I propose that we suspend for 30 minutes, following which we will scrutinise EU legislative proposals in regard to the European banking union.