Oireachtas Joint and Select Committees

Thursday, 7 March 2013

Public Accounts Committee

2011 Appropriation Accounts and Annual Report of the Comptroller and Auditor General
Vote 6 - Office of the Minister for Finance
Chapter 1 - Financial Outturn for 2011
Chapter 2 - Government Debt
Chapter 3 - Banking and Insurance Measures
Chapter 5 - EU Financial Transactions

Mr. John Moran (Secretary General, Department of Finance) called and examined.

10:10 am

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Before we commence I remind members, witnesses and those in the Public Gallery to turn off their mobile phones because the interference from them affects the sound quality and transmission of the meeting.

I advise witnesses that they are protected by absolute privilege in respect of the evidence they give to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are further directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a Member of either House, any person outside the House or an official either by name or in such a way as to make him or her identifiable. Members are reminded of the provision within Standing Order 163 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government, or the merits of the objectives of such policies. I welcome Mr. John Moran, Secretary General of the Department of Finance, and ask him to introduce his officials.

Mr. John Moran:

My officials are Ms Cep Carty, assistant principal in the finance office, Ms Ann Nolan, second secretary in the financial services division, Mr. Jim O'Brien, second secretary in the EU and international division, Mr. Derek Moran, assistant secretary in the fiscal division and Mr. Garrett O'Neill, our chief financial officer.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I welcome the witness from the Department of Public Expenditure and Reform and ask him to introduce himself.

Mr. Dermot Quigley:

My name is Dermot Quigley and I am from the Department of Public Expenditure and Reform.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I ask the Comptroller and Auditor General to introduce the accounts.

Mr. Seamus McCarthy:

The annual finance accounts present an account of the payments into and out of the Central Fund of the Exchequer, together with a set of statements that analyse the transactions. The financial statements of the national debt, prepared by the National Treasury Management Agency, are presented in full as Part 2 of the finance accounts. The chapters that are the subject of today’s meeting were compiled to highlight key aggregates and trends in Central Fund transactions and broader State liabilities, as well as overall financial transactions between Ireland and the European Union.

Chapter 1 summarises the Exchequer’s financial outturn for 2011, when Central Fund issues exceeded receipts by €25 billion. About €11 billion of the deficit was due to payments made in 2011 in respect of bank recapitalisation and promissory note payments.

Chapter 2 sets out trends in the general government debt since 2007, when it stood at around €47 billion. The debt has risen sharply since then, reaching €169 billion by the end of 2011. Official general government debt figures for 2012 are not yet available from the Central Statistics Office, but the Department of Finance, as part of its projections for budget 2013, estimated that it would be around €192 billion or 118% of GDP at the end of December 2012.

General government debt at the end of 2011 included the promissory notes issued by the Minister for Finance to IBRC and the Educational Building Society as part of the process of bank recapitalisation. These were not included in the NTMA’s financial statements of the national debt, and are disclosed only in a footnote on page 24 of the 2011 finance accounts.

IBRC had used the promissory notes it received as collateral for borrowing from the Central Bank. When the special liquidator was appointed to IBRC last month, the Central Bank became the owner of the outstanding promissory notes, to the value of €25 billion. Government bonds with a floating interest rate and an average maturity of 35 years were issued to discharge the liability under the promissory notes, thus adding €25 billion to the national debt. Because this was an effective reclassification, the overall general government debt balance was not affected by the refinancing.

The general government debt was the main liability of the State at the end of 2011, but there were other significant State liabilities that are not accounted for in the finance accounts. There are very substantial State liabilities arising from the future pension entitlements of public servants, relating to their past employment, but no estimate was made of that liability at the end of December 2011. The last available estimate, presented in a previous report, was an amount of €116 billion as at the end of 2009. Since that estimate was made, there have been significant changes in public service pay and pension entitlements. In addition, there may need to be revisions in the key assumptions underpinning the estimate, particularly in regard to projected future salary increases and the rate used to discount future estimated payments. These could have a significant impact on the estimate of the liability. I have recommended that actuarial reviews should be carried out at regular intervals to ensure that the State is aware of the long-term cost impact of public service pensions and the timing of outflows.

Future commitments under public private partnership contracts in place at the end of 2011 were estimated at €4 billion. The cost implications of these contractual commitments has been dealt with by the committee on a number of occasions. In my view, those financial commitments should formally be recognised in the finance accounts.

The purpose of chapter 3 is to provide a further update of the costs to the State of the range of banking and insurance measures implemented in relation to the ongoing crisis in the financial sector. The measures taken affect a number of sets of financial statements, and do not all impact on the Central Fund of the Exchequer. As a result, their full financial impacts can be difficult to ascertain. While the chapter contains information up to around mid-2012, the financial position is evolving. The Accounting Officer will be able to give a more up-to-date position on the cost of the bank guarantee, liquidity support for banks, recapitalisation and other restructuring measures.

By mid-2012, the State had made an investment of just over €65 billion in three financial institutions in which it had acquired full or almost full ownership - Allied Irish Bank, Permanent TSB and IBRC – and in Bank of Ireland, in which it has a minority interest. The adequacy of the funding injected by the State to meet the capital requirements of the banks that are still trading depends on the net losses they incur in the period 2011 to 2013 not exceeding those projected by the Central Bank. While no timeframe has been set for the State’s withdrawal from its ownership of the banks, there is a prospect that the State may in time recover some of its capital investment. The State’s residual value in IBRC, if any, will depend on the amounts realised from the disposal of IBRC’s assets.

Ultimately, the objectives of the banking stabilisation measures are to return banks to sustainable levels of profitability and to ensure that normal access to credit is restored for business, especially small and medium enterprises. Chapter 3 reports that AIB and Bank of Ireland have been meeting the lending targets set as a requirement of their recapitalisation by the State. At the same time, reviews of credit availability for small and medium enterprises suggest that normal access to credit had not been restored. In that light, the usefulness of setting performance targets for the banks in terms of gross lending to SMEs may be limited.

The insurance compensation fund, which operates under the control of the President of the High Court, was set up to meet liabilities of insolvent insurers. A significant additional funding requirement for the Exchequer arises from the administration of Quinn Insurance Limited, which has a requirement for funding currently projected at up to €1.65 billion. Related payments out of the Central Fund commenced in late 2011. Up to the end of June 2012, the Minister for Finance had advanced a total of just under €730 million to the insurance compensation fund to allow it to meet its obligations in relation to QIL. Receipts from a levy on insurance sales will ultimately be available to repay the Exchequer, but substantial additional advances from the Central Fund are likely to be required in the short to medium term.

Chapter 5 was compiled to bring together information on financial transactions between Ireland and the EU. The finance accounts reflect most of the payments to the EU, but substantial receipts from the EU do not pass through the Exchequer.

In 2011, Ireland continued to be a net beneficiary of EU funding, with contributions of €1.4 billion and receipts totalling €1.9 billion. Direct payments of €1.3 billion under the European agriculture guarantee fund accounted for around two thirds of the EU receipts.

The finance accounts are primarily a cash-based record of receipts and issues from the Central Fund and of borrowing undertaken by the NTMA on behalf of the State. Certain supplementary information is provided on State shareholdings in commercial bodies, Exchequer loan transactions and guarantees. While the finance accounts comply with the form specified by the Minister for Finance, there is scope for a more complete and transparent account of the financial transactions of central government and of the State’s financial position at year-end. I recommended in my report that the Department should review the level and quality of disclosure in the finance accounts so as to increase the transparency of public financial information. I understand that the Department is making a number of changes for the 2012 accounts. In addition, a broad-ranging review of Irish fiscal reporting is under way. The Accounting Officer will be able to provide details about those developments.

10:20 am

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I thank Mr. McCarthy. I now invite Mr. Moran to make his opening statement.

Mr. John Moran:

I thank the Chairman and committee members. Yesterday was the first anniversary of my appointment as Secretary General. It has certainly been a busy first year, but I had expected that. Members are probably aware that one of our early initiatives was to revise the statement of strategy that we inherited when the new management team took over. Its aim was to place a much greater focus on our objectives, namely, economic stability, growth and job creation. We set out five goals on which to focus our work. The first was the economy, the second was sound public finances, the third was improved living standards for all citizens, the fourth was a return to market funding and the fifth was a more secure and effective banking system. We also conducted a review and set out many ways in which we were going to change the way in which the Department operates.

Looking back at 2012, starting with the economy, we know that economic growth and a recovery in employment are crucial preconditions for a sustained improvement in living standards. Domestic demand is still constrained, as households and firms work off imbalances built up during the boom. Our job is far from complete. The unemployment rate remains at an unacceptably high level - 14.1% in February. While the household debt-to-income ratio fell to its lowest level since early 2007 in the third quarter of 2012, it is still at a high rate of 204%.

Not surprisingly, our 2013 programme reflects our continued focus on the steps necessary to work through those problems and in addition to focus in particular on ways to facilitate the recovery of the SME sector. This sector is key in order to achieve real reductions in the unemployment rate.

The challenges are significant but in facing these challenges, it is important to remember how different this country is from an economic perspective than it was only 12 months ago. We have now completed over 190 of the programme tasks, drawn down 83% of the funding under the troika programme and are working towards being the first euro area country to exit from a programme of financial support.

Anglo Irish Bank, the Irish Nationwide Building Society, the promissory notes and the bank guarantee are now all historical parts of the banking sector rescue. We have sold Irish Life back into private hands and traded €1 billion of the contingent capital we put into Bank of Ireland, both at a profit to the State. Central Bank support, which was a key part of the restoration of stability for the Government-supported banking sector, is down a further 28% year on year and stood at only €48.1 billion in Jan 2013. Following a return to growth in 2011, the Irish economy looks to have recorded a second successive year of growth - 0.9% in 2012 - contrasting with a contraction of 0.5% in the euro area. The composite purchasing managers index remains in expansionary territory and puts us, in effect, with Germany in a club that is showing growth in the area.

Recent Commission forecasts estimate that unit labour costs will have improved by 23% relative to the euro area over the period from 2008 to 2014, underlining the flexibility of the Irish workforce. Having increased in the third quarter for the first time since early 2008, the fall in domestic demand is showing signs of having bottomed out, with core retail sales having increased in each of the last six months and VAT receipts positive in the first two months of the year.

The level of exports is now well above that of the pre-crisis period, having increased by 3.2% over the first three quarters of 2012 to stand at a significant 106% of GDP. In the context of exports, the services export sector is particularly strong, having grown by 9.4% over the first three quarters in 2012. The current account of balance of payments has shown surpluses of over €3 billion in each of the last two recorded quarters. In 2012, taxes on a headline basis were up 7.7% year on year. All of that has contributed to a further reduction in the deficit. We expect a deficit of less than 8% for 2012, which is again significantly below the troika target of 8.6% for the year.

I understand that the fiscal adjustments are painful in many cases. They are, however, essential to the restoration of growth in the economy, our ability to go it alone after the end of the programme in December, and to the restoration of international confidence in the economy, which will be reflected in further investment and jobs. We are a very open economy. I have mentioned the size of GDP and our exports, and we are very dependent on the continued recovery in the performance of other large trading blocs.

In the last 12 months, we are however seeing strong external validation of the strategy. The IDA had a record year in 2012 and, most encouragingly, signs of stabilisation in the labour market finally emerged. Ireland is back in the markets, issuing conventional bonds of €4.2 billion, a further €1 billion of amortising bonds, short-term treasury bonds of €1 billion and bond switches of €4.5 billion. There has been with a dramatic fall in interest rate costs for the country as confidence in Ireland improved over 12 months. Treasury bill costs have dropped dramatically to between 20 and 25 basis points, compared with the first issuance in August 2012 at 1.8%. Our two and eight year spreads are now at 1.07% and 3.74%. It is worth recalling that only 20 months ago, these were at 22.4% and 15%. It is also worth noting in terms of the importance of this that with a stock of debt approaching €200 billion, even a 1% movement or reduction in interest rate costs can very dramatically improve the interest costs of our budgetary numbers.

In the past 12 months we are also seeing growing levels of investment in many sectors of the economy, particularly from outside, including commercial property. All told, €10 billion has been invested or committed in the past six months, mainly by international investors in transactions managed by the State or entities controlled by the State.

I mentioned at the outset in terms of our statement of strategy that we set out over the past 12 months to play our part in all of the events mentioned but in parallel to embark on a significant change agenda in the operation of the Department. More detail is contained in our review of 2012 which will be published later today. In brief, we have implemented a complete restructuring of the Department into four key policy areas, and two support office areas - a finance area and a corporate support office. We have restructured the operation of our management advisory committee, which now focuses more on business planning and objective delivery and on challenge sessions on key policy areas. We have an enhanced risk and control environment, including the creation of a chief risk officer position, which reports directly to me, and the implementation of a risk committee and a radically different approach to audit committee and internal audit support.

Along the way we have also tried to extract significant costs savings of approximately €750,000 through the reorganisation of accommodation, resulting in a reduced premises footprint, and through other initiatives from our colleagues in Tullamore, which is a shared services office, who have embarked on various reform measures such as the elimination of payable orders and the reduction in frequency of issuing payslips. Indeed, overall in 2012, we delivered our programme with approximately €7 million savings against budget, including by the deferral of costs where possible.

One of the other hallmarks of 2012 in terms of the change in the way the Department has operated has been a much greater openness. We have had much more frequent public speaking and media engagements, greater interaction with the wider public sector and the private sector, as well as the secondment of a number of specialised resources into the Department to assist with various tasks. We have also deepened our links with other Departments and State agencies in 2012 and have availed of resources from a number of them.

We are very proud of our achievements, but as I noted earlier, there is still much to do. We remain committed to that task. I have noticed especially of late a welcome growing appreciation of the effectiveness of the public sector and its contribution to the higher profile deliveries I have outlined above. I put on record my gratitude to the staff in the Department for their continuing help and support. I would particularly like to record the efforts of the unsung heroes who behind the scenes somehow make it all possible. Whether it is managing the legislative process, answering parliamentary questions, dealing with the scheduling of stakeholder visits, organising foreign trips, preparing strategic briefings, ensuring the preparation of financial accounts or payments across the system, printing material often at the last minute and late into the night or just keeping the offices and IT systems open and working well, all of those and other things are essential to the functioning of the Department and the delivery of the objectives we have set ourselves.

In this difficult time for all citizens, it is only fair that I recognise publicly their contribution and willingness to be flexible and adaptable in dealing with the many conflicting time demands on our Department. I look forward to members' questions and thank them for their attention.

10:30 am

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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May we publish Mr. Moran's statement?

Mr. John Moran:

Yes.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Mr. Moran and his team are welcome to the Committee of Public Accounts. I want to begin by echoing Mr. Moran's words of thanks to what he aptly described as the many unsung heroes in his Department. We all got some insight during the passage of legislation here recently, and during various efforts at a European level, of the amount of work being undertaken at a political level but also at an official level in his Department. Those to the fore in political life tend to get credit for that, and it is important to acknowledge the role played by a number of Mr. Moran's staff. The Taoiseach did that in the Dáil in recent weeks and I want to echo it today.

Happy anniversary to Mr. Moran on his first year in the job. He had a very busy year, and that is evident from his opening statement.

I want to hone in on some issues that have arisen from the Comptroller and Auditor General's reports, Mr. Moran's own statement of strategy, and other issues of public discourse. I will structure my questioning around six areas, first, the European situation with regard to our own debt; second, the banking division within the Department of Finance; third, the issue of bankers' pay and the ongoing Mercer's report; fourth, Mr. Moran's new revised statement of strategy to which he referred in his opening statement; fifth, the issue of IBRC; and, sixth, the ending of the bank guarantee scheme at the end of this month. I will put questions back and forth to Mr. Moran if he is agreeable to that.

On the situation at a European level, the promissory note was one stage, which I suppose is now dealt with. We have heard in the media, and comments from the Minister for Finance this week, about the ongoing efforts to postpone the repayment of the €40 billion bailout loans this country has received. Could Mr. Moran bring us up to date on the position with regard to that? Also, will he give the committee some level of detail on what the Minister referred to as options 1 to 5? The Minister said in media comments during the week that option 1 would be of very little benefit to the country whereas option 5 would be of massive benefit to the Exchequer. Mr. Moran might bring us up to speed on that, and also give the committee an overview of the difference we could see with regard to debt sustainability, depending on whether we get option 1, 5 or 3.

Mr. John Moran:

To put matters in context, the National Treasury Management Agency, NTMA, has explained that over the course of this year it needs to raise about €6 billion additional market funding. That will allow us to have funded the operation of the State to the end of 2014. We believe that is perfectly achievable in the current markets, but that is a very important platform from which to build an exit programme for the State after the end of the year when we will have drawn down all of the troika programme funding.

We then need to work with it in terms of the remaining profile of our debt because, obviously, when we have a repayment obligation coming up we must either go to the market or find an alternative way to source it. The repayment of the debt from the perspective of the State on the troika programme begins to start to bite at that stage. The idea is that if we can find ways in which we can defer the repayment obligations on those debts into the future, it allows us to have a lot less pressure in terms of the repayment obligations and, in effect, the markets respond to that.

The options 1 to 5 to which the Deputy referred are in effect a range of dates into the future in which we can do it. It has been explained that some of the options would involve pushing out the debt to a very forward date into the future, and others would involve simply dealing with some of what we call the peaks and troughs in the profile so that we would flatten them out. That would mean that in each of the years coming up over, say, the next ten years, the amount the NTMA would have to borrow from the markets would become a broadly level payment during the course of the years. Mr. Jim O'Brien is much more closely involved in it in terms of the European meetings, but the ability to say what that will mean for the budgetary process going forward is a little premature at this stage because in terms of what is happening in Europe, they are trying to examine a solution which would alleviate the repayment schedule for the Irish date and to do the same for the Portuguese debt at the same time. It is not possible for us to give any indication of what will happen.

More importantly, what is very difficult to do, and we saw that in the context of the IBRC situation as well, is to find a way of calculating the benefit for the State in respect of those because a number of different elements are at play. First, will the extension continue at the existing interest rates but to the extent it requires reissuance of debt by the Europeans to allow us to continue the funding longer? We will then be subject to market conditions at that time if the extension is the interest rate the Irish State would pay.

The other aspect that is very difficult is that the best way to describe the benefit of any of this, apart from the obvious market benefit of easing the repayment obligations, which is reflected in lower Government bond rates, is that we look at what we would have paid and compare it to the new interest rate. As we saw in the context of the IBRC, had we done that two days before the IBRC announcements we would have created a sense of a much greater benefit than if we did it two days later because the mere announcement of the deferral brought the interest rates on the Irish Government bonds down about 50 basis points. In some sense we could say there was less benefit in that transaction three days later, but it was actually the transaction that created the benefit. The maturities discussions that are ongoing are doing the same thing. Depending on the actual result of deferral, the amount of deferral and the interest rates, it could have an impact of a different magnitude on the Irish Government debt rates and, therefore, would change our budgetary process of itself. Mr. O'Brien might want to comment.

Mr. Jim O'Brien:

Mr. Moran has said a great deal in explaining the background, but a statement was issued by Ministers last Tuesday after they met in Brussels and in that statement it moved the process on to say that the work that has been advanced should continue. The Ministers agreed that we should consider the possibility of the adjustment of maturities, which is a positive move. It is not a decision just yet, and they will come back to it for both Ireland and Portugal. They agreed also to ask the troika to build on the work already begun at senior official level and to bring forward the best options for both countries. There is still a good deal of work to be done but as Mr. Moran said, the main point is to look at the peaks and troughs in terms of the maturity of the debt facing us in the years ahead. It would be very helpful, in terms of an exit strategy as part of a broader package of measures, to ease that out, which will give confidence to the private sector to invest as well. The options are not fully worked out yet but they range from a very short extension of maturities out to a much larger range of maturities. Obviously, from our point of view we would like to have a reasonably large extension on maturities so that there is confidence and a sustainable and durable exit from the programme underpinned by that.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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I thank Mr. Moran and Mr. O'Brien. That is very important. On the issue of the banking division in the Department that was established last year, how many staff currently work in the banking division?

Mr. John Moran:

Off the top of my head I would say it is about 25. It is important to understand that there are actually two divisions. We have what I refer to as a peace time banking policy division, whose staff will look at the sector as a whole. They analyse the supply of credit and the broad position. In effect, they would look at the banks equally, regardless of whether they are owned or supported by the State. In that division there are probably ten people in John's area-----

Ms Ann Nolan:

Yes.

Mr. John Moran:

-----if I exclude the credit unions from that. We then have a unit which is staffed by people who were either recruited directly, civil servants already in the Department who joined that unit, and people who originally were part of the NTMA banking division that was transferred to the Department about a year and a half ago. They all work together in dealing with the Government supported banking situations and with the National Asset Management Agency, NAMA.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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It would be interesting to have an insight into the way that works on a day to day basis. This is a key question to which people want to know the answer. What is the day to day interaction between the Department of Finance, through its banking division, and the banks covered by the State guarantee scheme?

Could we have some insight into what the ten people, approximately, are actually doing on a day-to-day basis in terms of interaction with the banks?

10:40 am

Mr. John Moran:

The first thing to remember – this is commonly misunderstood – is that there are differences between the relationship of the Department's shareholder management unit, SMU, and the banks and that of the regulator and the banks. The regulator has a relationship as regulator of the banks and, therefore, has much greater access to information in respect of the underlying operations of the banks. Our role is effectively as shareholder in the banks. The particular relationship with the banks is set out in a relationship framework which we put in place at the beginning of last year – in March, I believe. The frameworks, which are publicly available on our website, set out the negotiated position with the troika. The troika had views on this, as did the Department and bank management. We set out a level of engagement for involvement in the operation of the banks. In the case of remuneration, we have a different level of engagement than in respect of individual lending decisions, for example. The arrangements are designed to insulate the banks, which should be commercial operations, from any individual interference in respect of loans. If there are circumstances where people want to know what is happening in respect of a particular loan, it is not a role in which the Department should have a part. Our primary function as a shareholder is in respect of the appointment of the board. The board and management of the banks should, therefore, run the banks. What happens is that we have management meetings. I believe I outlined this at some stage, perhaps at a meeting of the Joint Committee on Finance, Public Expenditure and Reform. We meet the banks on a formal basis, a monthly basis. They lay out the performance that they-----

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Does Mr. Moran attend those meetings?

Mr. John Moran:

Either Ms Nolan or I will attend those meetings. After those meetings, we then have individual departmental challenge meetings at which we examine the information provided by the banks and, in effect, we engage in a peer challenge process to determine whether we believe they are performing well enough. We also make suggestions. In the interim, numerous meetings take place at all levels with officials, both officials from the SMU and those people in the banking policy section who are dealing with SME lending and mortgage arrears, for example. They are dealing with them on a system basis and they would have meetings with the management of AIB, for example, as they would have meetings with the management of Ulster Bank and others.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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At the monthly meetings, Mr. Moran or Ms Nolan represents the Department of Finance at the most senior level. Do the CEOs of the banks attend? The banks are represented by the CEOs.

Mr. John Moran:

Generally, they would attend.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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What about the chairmen of the boards?

Mr. John Moran:

What we are doing separately is that, typically with the Minister, we have started to meet the boards and, in effect, the chairman or CEO.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Where do the public interest directors slot into this? Some of them appeared before the Joint Committee on Finance, Public Expenditure and Reform a number of weeks ago. While I am sure they are well-meaning individuals, I believe they could not provide a tangible example of how their presence on the boards has made a difference. Through a range of parliamentary questions, I asked whether the Minister had met the public interest directors, and I believe the answer was "No". I might have asked whether Mr. Moran met the public interest directors also. Does Mr. Moran meet the public interest directors?

Mr. John Moran:

The position of public interest directors is somewhat difficult to define. In many ways, they are directors on the board and, therefore, have the same obligations as other directors. It is not as easy to distinguish them as one might think although they are appointed by the Minister. They were, in effect, a creation of a set of circumstances that obtained before we owned all of certain banks. In some respects, subsequent to the Department becoming the majority or almost 100% shareholder in Allied Irish Banks, we now, in effect, have the appointment power in respect of all the directors of Allied Irish Banks. Therefore, the distinction between public interest directors and the others is less relevant than it would otherwise be. In the case of Bank of Ireland, where we have only 15% of the shares, the power to appoint public interest directors is itself more relevant. In that scenario, as 15% shareholder, we could find that at an annual general meeting, irrespective of our beliefs on the appointment of directors, we are outvoted by 85% of the shareholders.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Mr. Moran is not responsible for policy but there is no doubt that if one examines the Dáil debates from the time of the establishment of the public interest directors through legislation, one will note that the context was such that there was to be somebody on the boards representing the public interest, the taxpayer. I understand that when one joins the board, one becomes part of the board. It is very difficult, however, to find a tangible example of how public interest directors are making a difference and acting in the public interest in a way that any other director is not. It was suggested that public interest directors should be acting differently or keeping an extra eye out for the public. I remain to be convinced that this is happening. In saying this, I mean no disrespect to the individuals concerned because I am not sure the structures allow for what I am suggesting. As Secretary General of the Department of Finance, what does Mr. Moran believe the role of the public interest directors to be?

Mr. John Moran:

Under the stabilisation Acts, all of the directors have a job to act in the public interest. This is why I say it is quite difficult to tease out the concept of public interest director and determine how the role might differ from others. All directors have an obligation to the company and to keep an eye on the shareholders' interests. At times, there is a conflict between what people might think is in the public interest and what is in the interest of the shareholder. Again, this is a further complexity because people might say it is in the public's interest to have very cheap loans made available or very high interest rates. Those who are benefiting from them across the economy may believe there is an advantage but it is very much anathema to the interest of the shareholder, whose interest is to see banks become profitable. From the summer of last year, as we became more aware from the discussions with the regulators of the lack of progress of the banks, we have had much more engagement with all the directors. We have asked public interest directors to focus particularly on lending to SMEs, for example, and mortgage arrears resolutions. We regard all directors of the bank as having a responsibility to solve the problems.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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It has been very difficult to try to differentiate between the two types of directors although the legislation at the time and much of the change since then clearly intended for that to happen. What is Mr. Moran's relationship in terms of communicating with public interest directors specifically?

Mr. John Moran:

I have not treated them any differently. At times, I meet some of the non-executive directors on their own and at times we meet the entire board together. Sometimes, not all the board members are there.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Mr. Moran stated he asked some of them to focus on lending to SMEs and mortgage arrears. Has he asked the boards of banks in general, as opposed to the public interest directors?

Mr. John Moran:

The Minister has also asked the individual public interest directors. I refer to specific reporting to him about the mortgage arrears situation and SME lending.

Ms Ann Nolan:

The Minister met all the boards and said he felt they should take a more active role in looking at the mortgages and SMEs. He believes the public interest directors should do that, but they do not report directly to him. There is not a legal line allowing him to seek reports that would be submitted directly to him. The legal position is that they are appointed by the Minister, but it is not a reporting relationship.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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So the Minister would have met all the directors of the boards.

Ms Ann Nolan:

He would have met all the directors of the boards in the past few months.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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That is fine. Is Ms Nolan now the head of the banking division?

Ms Ann Nolan:

I am head of the financial services division, which includes both of the banking divisions that Mr. Moran described and the EU financial services.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Did Ms Nolan succeed Mr. Torpey?

Ms Ann Nolan:

Mr. Torpey worked for me when he worked for the Department.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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I am sorry; I am just trying to understand the structure. When did Mr. Torpey stop working as head of the banking unit?

Ms Ann Nolan:

He was last working in the Department around 14 December but he was on a month's leave in December, as it happened, and handed in his resignation when he came back. We asked him to move straight back to the NTMA so he would not be in the Department so as to maximise the amount of time-----

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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I understand Mr. Torpey now works for Bank of Ireland.

Ms Ann Nolan:

He will be starting work for Bank of Ireland around 28 March or 1 April. I am not sure of the exact date.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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We wish him well as an individual. This is a discussion that the Joint Committee on Finance, Public Expenditure and Reform had with the NTMA. What are the guidelines in place for people who are currently working within the banking division, particularly heading that division, and who then proceed to work with the banks? In many private sector companies, garden leave is commonplace. What are the rules that are in place and are they being reviewed?

10:50 am

Mr. John Moran:

I mentioned the composition of the banking unit earlier, which in many ways confuses things a little or at least makes it more difficult to resolve easily. The people in the banking unit, or indeed the rest of the Department, who are civil servants are subject to the normal rules that apply to civil servants in that regard. There have been some changes and I think it has been suggested or may already be the case that I am supposed to spend at least two years not working in any sort of conflict situation after leaving my position. These rules apply to the civil servants in there. I believe John Corrigan spoke at the Joint Committee on Finance, Public Expenditure and Reform about the review he is conducting regarding the people he has in his area. We have started to think about whether anything specific to that situation is necessary given the nature of our position and, for example, have asked our colleagues in the United Kingdom how they handle these issues. However, while one can focus on the conflict that exists in the banking unit as a particular one that has focus, in some respects the same conflicts apply in almost everything we do as people who look at the economy, in that one could say such a conflict arises if someone leaves our Department to go into work in a professional firm. This is a new issue for the Civil Service to grapple with because we have started to encourage people to come into the Civil Service from outside, as opposed to previously, when that was less frequent. As a consequence and as we go through the situation, we also will see more people leaving. A number of people already have left the Department in recent months, which in many ways is reflecting that.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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I take that point and believe the influx of new people to a Department or to any walk of life to be a good thing, but I suppose this is the reverse. In the current climate in particular - these are not normal times and it is the difference between one's peacetime unit and the wartime we face in terms of the financial crisis - I refer to people working in a highly sensitive area, which hopefully will remain unique. Does the Secretary General have a view on the appropriate period of time that should elapse between such a person working in a sensitive area such as in the banking unit that engages with a bank with a significant public stake and then going on to the payroll of that bank? That really is the question.

Mr. John Moran:

A specific view means that one must look at each individual situation. However, were I to express a view - I will deal with this on a personal basis because it is easier - I could imagine a scenario in which, as seems to be suggested, I should have two years during which I would not actually work in anything of conflict. I imagine some questions might be raised here, were we to follow the practice that applies in the private sector in such cases of someone paying me for so-called gardening leave to sit at home for two years. As this might actually raise some additional questions, there is a delicate balance that must be taken. We have very strict rules in respect of confidentiality and the use of information that people have. Mr. Michael Torpey already had been out of the Department for a number of weeks in any event because he was on holidays and as Ms Ann Nolan mentioned, as soon as we were aware of it, that is, as Mr. Torpey announced that he was leaving, we asked him to desist from engaging in any files that would cause any conflict.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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To be clear, I do not question the integrity of anyone in this regard.

Mr. John Moran:

However, it is a very serious issue that we must consider.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Yes, but what I want to know is that if I worked in the banking unit today, could I leave the banking unit and go to work tomorrow in a commercial bank that is State-owned?

Mr. John Moran:

Subject to the notice period stuff we currently have in the contracts, yes.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Is that different from the position of those who work in the National Treasury Management Agency, NTMA?

Mr. John Moran:

Both have the same issues. The NTMA employees have a period of contract notice they must give and, in effect, people who retire from our system have the same. The Department of Public Expenditure and Reform has tried to consider this issue, as we see greater flexibility in respect of people coming in and out of the service. We really are dealing with a new issue in this regard and that Department has come up with new guidelines it is working through as to what that might mean. At the extreme, they are suggesting that some people might need two years before they can work in a situation that would create a sense of conflict.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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The NTMA is formally reviewing its guidelines at present.

Mr. John Moran:

And the Department of Public Expenditure and Reform is looking at such guidelines for the Civil Service.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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That is fine. On the issue of bankers' pay, I understand the Department commissioned a review by Mercer. The Secretary General should indicate when that report was commissioned and what were their terms of reference.

Ms Ann Nolan:

While I do not have the terms of reference to hand, they are looking at bankers' pay. As far as I can recall, it was commissioned in November. I can forward the terms of reference to the Deputy afterwards.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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I thank Ms Nolan.

Ms Ann Nolan:

While they probably are on our website, I will send them to the Deputy anyway.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Has that report been completed?

Ms Ann Nolan:

We expect the report to go to the Government shortly.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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It is with the Minister at present.

Ms Ann Nolan:

Yes. I am unsure whether the final draft or the semi-final draft is with the Minister.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Sure, no problem. This issue comes up repeatedly and obviously has come up at a European level in respect of bonuses, about which there recently has been significant progress, if that is the right word, in my view. Does Mr. Moran have a view on the balance between attracting talent into the banking sector versus reasonable cost? I make this point in the context of there being 3,000 staff working in the four bailed-out banks who are earning more than €100,000 per year, of whom approximately 27 are in receipt of salaries in excess of €500,000. As a nation, we have paid a huge cost in respect of these bailed-out banks and I seek Mr. Moran's thoughts in this regard. Based on his own external experience, what viewpoint does he bring regarding the correct balance between trying to attract talent and trying to protect the taxpayer?

Mr. John Moran:

It certainly is a very difficult issue. I am getting all the difficult questions today. I have seen an earlier draft of the Mercer report and one question we asked the consultancy to consider was to gauge the remuneration in the State-owned banks against those of the broader sector because one thing that is important is that we can continue to deal with the State-owned or Government-supported banks, which therefore would include Bank of Ireland, in a way that does not create a disadvantage for them. Consequently, if in fact there are dichotomies of pay between the State-owned banks and those in the broader banking or financial services sectors, this issue must be considered. On the other hand, we have banks that have not yet returned to profitability and, therefore, this also must be taken into account when the management of the banks consider the road to profitability - towards which we encourage them to go - to make sure they are, in effect, treating the compensation issue with that backdrop against the situation. We clearly have this situation in a lot of other areas and other sectors because the competition is not just between people working for the State-owned banks and the broader financial services but also applies to those who are going to join any of the other industry sectors in which work is available at present.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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The Department expects the report to go before the Cabinet shortly, that is, in the next couple of weeks.

Mr. John Moran:

Yes, in the next couple of weeks.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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That is fine. I will move on to the issue of the Department's revised strategy statement. It is extremely appropriate and highly welcome that it is revising its strategy to reflect the changing times. However, having read some of the goals contained therein, they are ambitious and no one in politics should criticise Departments for having a vision. However, the third goal refers to an improvement in the living standards of our citizens and to a fair resolution of the problems of excess debt of citizens. Obviously, this is a strategy for the period up to 2014 and I struggle to meet many of my constituents who believe they have had or expect in that period of time to have an improved standard of living. The nub of this issue is that, as Mr. Moran quite correctly noted in the statement, it is linked to the need for the fair resolution of the problem of excess debt. The Department's strategy goes on to discuss two areas, namely, distressed mortgages and sustainable levels of personal and mortgage debt. First, how many distressed mortgages are there? For the purposes of clarity, the Secretary General should outline the definition of a distressed mortgage. Thereafter, he should clarify what the Department's estimate of the number of distressed mortgages in Ireland is at present.

Mr. John Moran:

The parameter at which most people are looking in respect of distressed mortgages, as the Deputy referred to them, essentially is the inability of people to pay. In effect, they are placed in three different buckets by the Central Bank, which provides these statistics on this issue. Therefore, people who fall into arrears are in what is referred to as the zero to 90 day category. The second bucket refers to people who are in the greater than 90 day category, which in effect reflects an inability or unwillingness to repay the mortgage over a period of longer than three months, which suggests a growing and more serious problem. Third, there are people who have been in that position for longer than six months. These are the three buckets that people consider and that we therefore analyse, because we then get the statistics from the Central Bank for all three buckets on a consistent basis.

Sometime later this morning, the Central Bank will be releasing the latest statistics. It will probably happen while we are here, so we can come back to that.

Essentially, we are talking of somewhere in the region of 15% of the balance of mortgages in the greater than 90 day amount, and a little over 11% if one does it by number.

11:00 am

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Is the 11% in the six months plus?

Mr. John Moran:

It is in the greater than 90 days, which would include the other category as well.

In terms of monitoring these, we have seen significant attention given by banks in the last couple of months to the collection process. The first priority for the banks had to be to identify the risk at the beginning of the process. The risk is that if somebody stays in arrears for too long, without having it dealt with, in effect the problem gets worse rather than better. Therefore we have encouraged them to try to work particularly hard on the zero to 90 day bucket, so that we can see an effective reduction there, which stems the flow of significant new mortgages getting into arrears problems. In doing so, it will more actively - than was the case beforehand - focus on the financial statements that come in from customers to understand those customers who are genuinely able to pay their mortgages, and should be doing so, but are taking advantage of the hiatus. There are also those who are suffering a temporary shock to their system, for example, a loss of employment of one or both members of the household, which means that one has to find a temporary solution pending their resumption of employment. In addition, there are those who have much more deeply embedded problems. For example, they may be in the construction sector where incomes tended to be high and by moving back into employment they may find themselves in a lower income bracket and therefore the mortgage is unsustainable.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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I understand that we will have targets shortly, which I welcome. Mr. Moran may comment on that in a moment. I know that Governor Honohan has commented on it and has asked if we should be setting specific targets. I am concerned about one group, however. There are a lot of people in this country who did not get mortgages from banks, but from mortgage companies. We all know the names, they had advertisements on the television at the time and people borrowed excessive sums. They generally were people who were not eligible to get a mortgage even though, during the boom times, mortgages were not that hard to get. Does Mr. Moran have any estimate of how many mortgages held by Irish people fall into that category - that is, mortgages that are not with Irish banks but with mortgage companies?

Mr. John Moran:

I do not have the statistics here. In fact, even though we do get some sight of those, it would be difficult for me to release them because they would be categorised bank by bank.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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I do not particularly mind which bank.

Mr. John Moran:

It is almost more by category of bank than anything else. For example, some companies like Permanent TSB have referred to their mortgages in certain books by category. Springfield books are typically of a similar type as opposed to their normal mortgages. In regard to those mortgages, those institutions are very often taking the lead in implementing some of the other schemes in place, like the mortgage to rent scheme. In terms of the size of the house and the person's income, in many ways they are more typically suited for some of those schemes, like the mortgage to rent scheme. We have therefore seen greater traction from those lenders over the course of the last six months in working through those schemes and using up the capacity from the Department of the Environment, Community and Local Government in moving people on in that respect.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Can Mr. Moran send us a note on the amount in the category of mortgage companies, as distinct from banks?

Mr. John Moran:

We can try and do something that does not disclose confidential information.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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I do not need data that breaches commercial confidentiality, but it is an interesting one.

Was the liquidation of IBRC a quid pro quo for a deal on the promissory notes? We liquidated IBRC, but as the Secretary General of the Department of Finance and given Mr. Moran's understanding of the moves in Europe, was the liquidation an essential part of receiving a deal on the promissory notes?

Mr. John Moran:

That is a slightly different question to the quid pro quo one.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Okay, then we will do both.

Mr. John Moran:

I might even re-phrase it a third way. I think it was an integral part of finding a solution to a structure that was capable of not falling foul of the prohibition on monetary financing.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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So let me try it a different way. In Mr. Moran's view, would it have been possible to receive the deal we got without the liquidation of IBRC?

Mr. John Moran:

There may be another solution out there which we did not think about, but I do not think we would easily have found an alternative solution that would have qualified under Article 123 of the treaty, without that feature.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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It is useful to put that out there because it is obviously an issue. This committee has discussed - including at Mr. Moran's first appearance here - a lot about the issue of those who audit our banks. From 2006 to 2009, Irish Nationwide was audited by KPMG. From 2006 to 2011, AIB was also audited by KPMG. KPMG is now the special liquidator for IBRC, which encompasses Irish Nationwide. What were the criteria for establishing who should be the special liquidator for IBRC?

Ms Ann Nolan:

As regards the special liquidator, there are only a small number. It would be a great idea if we could go for auditors that had not audited any of the constituent companies. In fact, however, there are only a small number of auditors in the country who could possibly take on a liquidation of this size, which is considerably large. A number of those were absolutely conflicted, so we had to rule them out. Obviously, we could not advertise or do a tender which would be the ideal solution, so we went to our colleagues in NAMA who had a list of qualified liquidators who had tendered on that basis. We picked KPMG from the list of tendering in NAMA and arranged that they would give us the same price as they had offered NAMA.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Ms Nolan said that a number were absolutely conflicted.

Ms Ann Nolan:

People who are currently auditing IBRC, for example, or with whom IBRC has a legal case on the question of auditing.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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So one was ruled out as being the special liquidator if IBRC was involved in legal action?

Ms Ann Nolan:

In certain types of legal action.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Or if one was currently auditing IBRC.

Ms Ann Nolan:

Yes.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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What is the fee for KPMG acting as the special liquidator?

Ms Ann Nolan:

I think that is probably commercially sensitive, but it is exactly on the rates that they tendered to NAMA.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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There has been a lot of talk about IBRC staff being transferred to NAMA. Do we have an estimation of how many staff will be required?

Ms Ann Nolan:

No, we do not have that estimation because it will depend. As the Deputy knows, all the loans will be offered for sale to anyone who wants to bid for them. The number of staff which NAMA will require will depend on how much of the loan book they actually acquire. For example, if they get all of it, they will need far more staff than if they get half of it.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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What was the process in deciding to transfer loans and assets to NAMA? Was some sort of impact study done? What was the decision-making process in deciding to transfer to NAMA?

Ms Ann Nolan:

When the question was discussed on the possibility - and Mr. Moran talked earlier about it - we looked at many options. We have been in discussions with the troika on what to do about the promissory notes for over 12 months. We looked at many different options but when this particular option was being looked at, if we put IBRC into liquidation one had to think what one would do with the loans. Fire saleing them would clearly not be to the State's advantage since we had guaranteed the emergency liquidity arrangement, and the floating charges the Central Bank had over the assets would be unlikely to be sufficient if they were fire sales. So we had to put some sort of floor on the sale to make sure the price was held.

We considered briefly setting up a new NAMA-type structure but we decided on consultation. Obviously, it is a policy decision in the end for the Minister. The decision was taken by the Minister and, ultimately, by the Government that we would use the structure we already have - the organisation which is functioning to our satisfaction in the field - and transfer the assets there.

11:10 am

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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There was a report in The Sunday Business Post on 10 February stating that some loans of former Anglo Irish Bank executives, such as Mr. Seán FitzPatrick, will not be transferred to NAMA and will remain with the liquidator due to a special provision in the legislation. Would Ms Nolan explain the rationale for that as well?

Ms Ann Nolan:

The value of those loans is not clear and the timing in which they can be collected is not clear because some of the cases against them are tied up with criminal cases, etc. We felt that it was more appropriate that the special liquidator would act for the company in those cases and that they would be separated out from the plain recovery job which NAMA has, which is sort of a vanilla recovery of assets similar to the job it already has.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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If IBRC had engaged in the write-down of loans, was there sanction sought from or required from the Department of Finance for a write-down of loans from IBRC?

Mr. John Moran:

Does the Deputy mean in terms of the provisioning they would do?

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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For example, there is one instance of a write-down of €105 million of a loan from IBRC. Does the Department have a role in approving such write-downs?

Ms Ann Nolan:

No.

Mr. John Moran:

No.

Ms Ann Nolan:

On IBRC, our relationship was covered by a relationship framework which is available on the website.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Would the Department have had a role?

Ms Ann Nolan:

Only strategic. Very strategically significant decisions would come in.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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But not on any specific loan write-down.

Ms Ann Nolan:

Not on individual cases.

Mr. John Moran:

The only thing that we would have been doing is to the extent that the management were looking at blocks of loans. We would have our team that would follow what they were recommending on various loans and disposals of them. The provisioning is a matter for the management of the board themselves.

We did, and would typically, attend some of these meetings at which issues would be discussed. For example, before Christmas, I had a discussion with members of the board and some other people presenting on different blocks of business of the bank and how they might address whether they would sell or hold and things like that, and the provisioning would have come up in those discussions.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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Would the Department have had a decision-making role in those meetings?

Mr. John Moran:

No. We were there simply because it was just information. It was not a formal board meeting. It was a sort of workshop, which is how I suppose it would be described.

Photo of Simon HarrisSimon Harris (Wicklow, Fine Gael)
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I thank Mr. Moran.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I call Deputy O'Donnell. Deputy Ross will resume when he returns.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I want to touch on a few areas. I want to go back to the issue of Mr. Michael Torpey. Is it something on which the Department is working through? When did Mr. Torpey transfer from the NTMA to the banking unit in the Department of Finance?

Mr. John Moran:

From memory, I am not sure. There was a decision taken in early April or late March 2011 to transfer the banking unit to the Department. I am not sure on what date exactly we completed the transfer. Physically, I know it did not move into the building of the Department until after we had completed the Bank of Ireland July transaction. I recall that we did that one.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Would Mr. Torpey have been involved? Would he have day-to-day dealings with Bank of Ireland itself, let us say, when he came over into the banking unit?

Mr. John Moran:

Michael's role was head of the shareholder management unit. In that respect, he would have been responsible for the teams of people who were looking after the shareholding of the State in AIB, Bank of Ireland and Irish Life and Permanent.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Would he have been dealing on a day-to-day basis with Bank of Ireland?

Mr. John Moran:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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He went out on holidays on 14 December last year, he had a month's holidays and he gave the Department notice when he came back. Since he joined Bank of Ireland, has he represented the bank in dealing with the Department on the various banking transactions?

Mr. John Moran:

He has not yet officially joined Bank of Ireland, as in he is still on his gardening leave.

Ms Ann Nolan:

I understand he is not starting with Bank of Ireland until either 28 March or 1 April next.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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There is a question to which I am leading and it is obvious. The Department is looking at the corporate issue and I am purely fleshing it out. Looking at it from the public's viewpoint, the Department had someone who headed up a division that dealt with shareholders within the banks, one of them being Bank of Ireland, who is now joining Bank of Ireland. Will he be in a position to represent the bank in dealing with the Department as gamekeeper turned poacher? Will the procedures allow that to happen?

Mr. John Moran:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Effectively, he will dealing with staff with whom he would have worked in the division in the Department two or three months earlier or staff who would have reported to him.

Mr. John Moran:

To the extent that he is dealing with areas of his new responsibility and we are concerned about those areas, "Yes" is the answer. He would be coming. On whether he will get an easier deal from us because of that, I do not think so.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I would have concerns in that regard. I understand how it operates. This is in no way about the individual or the Department. In terms of something that is so specific, the restructuring in the banking sector here is unprecedented. Here we have an individual who was heading up a division which was dealing with the banks and who, within a month's time, could be dealing with the same Department and officials who were reporting to him. The ordinary person looking in would question that. I understand the procedures and that it would not have been expected to occur. What can the Department do to allay the public's fear of conflicts of interest in the procedures of dealing with Bank of Ireland in future? Bank of Ireland is entering a critical phase because it is looking to return to being a private institution, which is Government policy. How can the Department give assurance to the public in that area? The Department is looking at procedures. What can the Department put in place in that area?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I ask Mr. Moran to give a direct answer to that question and then we will move to Deputy Ross.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I was acting as substitute.

Mr. John Moran:

One of the things we would like to do is to try to look at this situation in the context of the changes that are taking place for the broader Civil Service and the changes that are taking place at the NTMA, and then look at our own context which is somewhat different in respect of both of those because we should also be looking at staff who are working in this unit.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Agreed.

Mr. John Moran:

Whether they work for the NTMA or whether they work as a civil servant, they should, in effect, be subject to the same rules.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I preface that by saying that I have no issue with staff going from the public to the private sector. We need that interaction. Mr. Moran referred to whether they were entering something that is new. For that, there must be corporate governance structures or, for want of a term, "procedures", of which the public can be confident.

Mr. John Moran:

There is a focus at present on this particular situation, but in some respects the same issue has been part of the system for many years, but perhaps less prevalent before, in that it is not just a question of banking. There could be staff leaving another line Department and going to work in another company where they have issues, such as going to work with a consulting firm or whatever else it might be. We have to look at those issues. We will need policy direction as to how we deal with the period of time. The normal solution for this in areas where it has occurred more commonly, which is in the private sector, has been to require persons not to engage in their new employment for what I would call a cooling off period where the information they have is no longer as sensitive. In some respects, in areas like banking it can come quite quickly to a point where one no longer has sensitive information, and we are very aware of that. The solution in that respect is typically because one can neither allow the persons to continue working nor deprive them of the right to earn a living, that one has to pay them for whatever is that period.

That in itself creates dynamics which are difficult for people to understand because we would then have a situation in which people continue to be paid while we do not want them to work in another area. Given that we could not allow Mr. Torpey to continue working in the banking sector once we knew he would be leaving us, rather than lose his services to the State during the period of time in which we were going to continue paying him, he was happy to move physically out of the Department and back to the NTMA so that he would have less exposure to information. He assisted the NTMA on other tasks during that period.

11:20 am

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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If somebody is appointed to a sensitive role, as was the case with Mr. Torpey, procedures should be put in place to prevent the individual going to a covered institution with the knowledge he or she gained in that role.

Mr. John Moran:

I fully agree but the point I am trying to make is that, while we can focus on Mr. Torpey and the role he played in the bank, it is equally important in respect of all other policy areas. Moving from any policy area into the private sector may give rise to similar conflicts, which is why the Department of Public Expenditure and Reform is examining this as a reform matter across the entire Civil Service. We will input into that process.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I read Mr. Moran's opening statement with interest. It was so up-beat and optimistic, it would make the Taoiseach blush. In regard to the recruitment policy, when the banking division was being established is it correct that it employed a large number of people from the NTMA?

Mr. John Moran:

There were people who were already employed by the NTMA and in order to facilitate the operation of the Department, we decided to bring them together with the people who were formerly in the banking sector of the Department.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Did they have a different pay structure when they came into the Department or did they retain the NTMA pay structure?

Mr. John Moran:

They retained the NTMA structure because most of them were on contracts that were not normal contracts. They may have been two year or three year contracts. They remained in the NTMA as NTMA employees seconded to the Department.

Photo of Shane RossShane Ross (Dublin South, Independent)
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They are working under a completely different remuneration regime.

Mr. John Moran:

It may not be as different as the Deputy thinks.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Are they paid more?

Mr. John Moran:

Not necessarily.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Are some of them paid more?

Mr. John Moran:

I do not have all the details on the staff in respect of their payments.

Photo of Shane RossShane Ross (Dublin South, Independent)
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They are paid NTMA rates rather than Department of Finance rates.

Mr. John Moran:

They are paid NTMA rates under NTMA contracts.

Photo of Shane RossShane Ross (Dublin South, Independent)
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How did the Department recruit the other banking division staff?

Mr. John Moran:

A number of people joined recently. We pursued a recruitment campaign in the Department over the last year. We tried to upskill people in the areas of economics, banking and law. A number of people have come to the Department at administrative officer level from a panel that was established by the Public Appointments Service. Some of these individuals were assigned to roles in what I referred to earlier as peacetime banking policy areas.

Photo of Shane RossShane Ross (Dublin South, Independent)
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They should be redundant.

Mr. John Moran:

We hope they will be very busy soon. The rest are assigned to the NTMA unit as vacancies arise. The NTMA unit also has a number of vacancies that it is working to fill. For example, we discussed Mr. Torpey's departure. He will be replaced through the same sort of structure.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Did the Department advertise for these positions?

Mr. John Moran:

We have not done so yet.

Photo of Shane RossShane Ross (Dublin South, Independent)
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None of the banking positions was advertised.

Mr. John Moran:

We advertised for some of them. I was referring to Mr. Torpey's position.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I am not asking about Mr. Torpey.

Mr. John Moran:

All of the administrative officer positions were filled under normal recruitment processes. A competition was held to build an administrative officer panel with certain skills in economics, banking and law, and we were able to select from the panels once the short-lists had been drawn up.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I contacted the Department yesterday to ask for a chart. As Mr. Moran probably understands, the Department is a mystery to the outside world. We do not know how it operates. I asked for a chart of who does what in the Department and was told "No". Is there any reason for that refusal?

Mr. John Moran:

I think the Deputy would find it very unusual.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I was told I could find out the identity of the top guys on the website but beyond that I was not going to get any more information. When I asked the reason for the refusal, I was told that the public might contact the Department to ask questions. Is it not possible to get a breakdown of who does what in the Department of Finance? If Mr. Moran wants to retain officials' anonymity - I am not sure that he should - he could at least advise us on how many people do what in each area.

Mr. John Moran:

We can certainly create a structure and provide information as to how many people are in each division. We have tried very hard to address the question of the public not understanding how the Department operates. In the last year we have produced a statement of strategy and today we have just issued a document which sets out exactly what we have been doing under every goal and how we have changed the operation of the Department. We are publishing more on our website than ever before. However, if the Deputy would like a breakdown of the people in each area, we are happy to provide it.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I would like to see everybody's function.

Mr. John Moran:

I would prefer not to do it by name.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Why?

Mr. John Moran:

We would have to get consent from individuals as to whether they are willing to provide such information. I do not have a problem and I do not think anyone here has a problem with the public knowing who they are because they are senior people. When people turn up at meetings there are numerous people at the table interacting with the public. We also move staff around frequently because we want to break down the sense of individuals being in one particular policy area. We have a chart of our own, and it is a big exercise to maintain it in the IT area because people move around quite regularly. There are 350 people.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Mr. Moran can and will provide that.

Ms Ann Nolan:

There will be some details by division in the Revised Estimates volume three when it is published.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Could we have a full breakdown of what happens in the Department?

Mr. John Moran:

I do not have a problem with that. Allow me to check with people to ensure nobody has a particular issue with trying to break this down to a certain level, for example, assistant principal level. We plan to redo our entire website in the next couple of months and part of that will involve a breakdown by division and unit of what each is doing and how it ties into the business plan. If there is a desire to find out who to call more frequently in respect of specific matters, we can provide that information.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Does Mr. Moran understand what I mean? I am looking for a complete and utter breakdown - let us park the anonymity issue for a moment - of what happens, how many people are working in each section and who is reporting to whom. I want to know how it works.

Mr. John Moran:

Two different questions arise. The question of how the units work and to whom do they report is slightly different from the question of who is reporting to whom.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I am not in favour of retaining anonymity but I understand why Mr. Moran wants to do it. However, I ask him to provide information on how many people in each area are doing what.

Mr. John Moran:

The Deputy will see in the statement of strategy and certainly in the document we published today that we have broken the Department into six areas, comprising four policy areas and two support areas. I have no problem going below that to provide more information on what sub-committees exist and various other issues, as well as how they stitch together. I have, for example, no problem in showing which areas report to Ms Nolan, Mr. O'Brien and Mr. Nolan, respectively.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Will Mr. Moran go right down?

Mr. John Moran:

That would move quite a long way down.

Photo of Shane RossShane Ross (Dublin South, Independent)
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How far?

Mr. John Moran:

As I suggested, the idea of hitting assistant principal level is probably appropriate. Officially we go to principal officer level in terms of delegation of responsibility.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Why will Mr. Moran not do the lot?

Mr. John Moran:

I would first have to make sure everybody is willing to co-operate. If I went to the website of any organisation I would find it difficult to find everybody in the entire organisation listed by name.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Do not list them by name. Just give us a chart or a tree setting out exactly how many people are employed all the way down to the bottom of the Department.

Mr. John Moran:

Let me try to do something.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I am interested in the Department's relationship with the banks for which he says he has responsibility. How does it reach a decision on voting at their AGMs?

11:30 am

Mr. John Moran:

When the AGM agenda is decided, effectively we give advice to the Minister who then decides how he wants the representative of the Minister to vote on these issues.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Is there consultation with the banks or not?

Mr. John Moran:

No, because------

Photo of Shane RossShane Ross (Dublin South, Independent)
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Does the Department have an input into the resolutions put forward at AGMs?

Mr. John Moran:

If we felt under company law that there was something that should be addressed, we would be able to do so.

Photo of Shane RossShane Ross (Dublin South, Independent)
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But the Department does not have an input into anything else.

Mr. John Moran:

As we are about to go through AGM season, we will have to look at it in terms of what we see. Up to now, we felt the actual resolutions had been sufficient.

Photo of Shane RossShane Ross (Dublin South, Independent)
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When the Department is deciding on whether a director should be re-elected, which is very much in its power, how is that decision made?

Mr. John Moran:

Again, as I said, it would be a question for the Minister; therefore, it is a policy decision in that respect.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Does the Department give the Minister advice on it?

Mr. John Moran:

Everybody knows that in the past when we appointed directors, we publicly tried to create a panel of interested people in order that he would have available choices from whom he might want to appoint. That gives one option, but there are others. He may prefer to appoint somebody separately-----

Photo of Shane RossShane Ross (Dublin South, Independent)
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When directors are up for re-election, does the Department give advice to the Minister?

Mr. John Moran:

Yes.

Photo of Shane RossShane Ross (Dublin South, Independent)
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What criteria are used?

Mr. John Moran:

We look at their performance.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Are there meetings about the issue?

Mr. John Moran:

I do not know if the Deputy was present, but we have just said that in the past couple of months we have been engaging much more with the boards and the Minister typically in respect of our two operational priorities for all banks - SME lending and mortgages. I suppose we have three. There is also profitability.

Photo of Shane RossShane Ross (Dublin South, Independent)
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These are important matters and the Department gives advice to the Minister on the resolutions every year, as there were last year and the year before when the State held this large share in AIB and Bank of Ireland. Are there meetings to discuss whether the people concerned should be re-elected?

Mr. John Moran:

We are about to go to-----

Photo of Shane RossShane Ross (Dublin South, Independent)
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No, has the Department had meetings in the past?

Mr. John Moran:

In the past we met when there were AGMs and we have a constant discussion-----

Photo of Shane RossShane Ross (Dublin South, Independent)
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On that issue.

Mr. John Moran:

We discuss lots of issues, of which that is one. When we get to an AGM, we have to discuss what we are going to do with respect to votes.

Photo of Shane RossShane Ross (Dublin South, Independent)
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That is fine.

I refer to the mortgage issue. Mr. Moran's review of AIB mentions significant progress being made in 2012, with mortgage arrears increasing at a much slower pace. He says cost restructuring is under way and that 50 branches have been closed, which he regards as an achievement. He also refers to 2,500 staff departing and significant changes to benefits, which means they are being downgraded. He also regards this as an achievement. Is it likely that there will be more repossessions this year?

Mr. John Moran:

On the question of repossessions, we have a technical problem to overcome in terms of the decision of Mr. Justice Dunne, but it is surprising to us that they are so few repossessions in the system, given the extent of the crisis we have been going through. We have had an unemployment rate that has been as high as 15% and it is very uncharacteristic to have a situation where I think our repossession rate is running at less than 0.25%, whereas if one looks at what is happening in other jurisdictions, it is 3% in the United Kingdom and perhaps as much as 4% or 5% in the United States. It would be typical to see in a crisis as severe as we have more situations, both voluntary and, in effect, through the court system, where people decide the economics of paying their mortgage no longer work and that, in effect, the maximum mortgage they are able to support, given their economic position, is less than the value of the house. When I refer to repossession, I include voluntary surrender. That is not a situation where the person should continue to remain in the house but should try to seek an alternative arrangement.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Mr. Moran is correct that there is a technical problem because of Mr. Justice Dunne's judgment, but it can be solved at the drop of a hat by legislation, which is taking a long time to be published. Do I take from his comments that the Department will encourage the banks to repossess this year?

Mr. John Moran:

We will encourage, as we do already, the banks to seek a resolution of the mortgage issue. That will require a large range of options. We have always said there is no one solution to fit every situation. In a scenario where somebody works out the maximum value he or she can support as a mortgage in a sustainable way -- I am talking about somebody who when one looks at the medium to long term in terms of the mortgage he or she can repay on a sustainable basis, not a situation where somebody loses his or her job and there is a temporary shock to his or her income - and if the value of that mortgage is less than the value of the property he or she is in, irrespective of whether he or she is in negative equity, that is a situation where essentially there should be a voluntary surrender of the house. It is not one in which there should be a write-off because that would not be in the interests of the taxpayer or the banks and, therefore, not in the interests of those who are currently paying their mortgages.

Photo of Shane RossShane Ross (Dublin South, Independent)
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At what point will there be legislation to resolve the Dunne judgment issue?

Mr. John Moran:

Our colleagues in the Department of Justice and Equality are primarily responsible for it, but a memorandum is being prepared for the Government to resolve the issue.

Photo of Shane RossShane Ross (Dublin South, Independent)
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What is the timetable?

Mr. John Moran:

I expect it is a matter of weeks.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Once that legislation is passed, it will be a free-for-all in terms of repossessions.

Mr. John Moran:

No, first, the technical amendment that needs to take place does not cover all mortgages. That is important. We are seeing the surrender of some houses and some repossessions in the system. Temporary measures were put in place under the code of conduct from the Central Bank to defer the repossession of houses, frankly, until such time as we were able to put in place all of the rest of the machinery needed to resolve so large a crisis. The personal insolvency legislation is in place; the system is being put in place and will be operational towards the middle of the year. That will be a very important part of the toolkit to resolve this issue and the Central Bank is looking at its code to see what is the appropriate balance, but it is always important to remember that the decisions of the banks should also be made with respect to their profitability. As I said, if there is a situation where somebody has an unsustainable mortgage, it needs to be resolved. Equally, in a situation where the debt is unsustainable, the bank needs to resolve the issue.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I take it from what Mr. Moran is saying that he is anticipating a large increase in the number of repossessions in the next year or two. Is that correct?

Mr. John Moran:

I have just given the Deputy some statistics. The Irish repossession rate is less than 0.25%, whereas the number in the United Kingdom is about 3%. Depending on how one wants to play with the statistics, one could consider moving from 0.25% to 1% as a very large increase because it would be four times as many, but one is starting from a base which is uncharacteristically and unnaturally low relative to the scenario in other similar situations. I could give the Deputy numbers. I could look at and imagine what would happen and, depending on how I wanted to present the numbers, could describe that, as the Deputy did, as a very significant raise in the number of repossessions because even in moving to a figure of 1%, which is still only one third of the number in the United Kingdom, we would have four times more.

Photo of Shane RossShane Ross (Dublin South, Independent)
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To where does Mr. Moran anticipate us moving?

Mr. John Moran:

One of the things we have been trying to do----

Photo of Shane RossShane Ross (Dublin South, Independent)
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Will we move to a figure of 1%?

Mr. John Moran:

I will not pick a number. I have told the Deputy what has happened in other jurisdictions and maybe we might move to those figures. We have had as severe a crisis as anyone else. What we are still missing - the Central Bank may have a better focus on this - is the individual breakdown per customer. That is what is required to answer the question the Deputy posed because we need to know what the position is for each individual borrower because this is a situation where there is no magic wand or which does not have a one-size-fits-all solution. Until such time as one can get the SFS from every customer, including those not currently engaging with their banks to produce it, it is impossible to predict where repossession or surrender should take place.

11:40 am

Photo of Shane RossShane Ross (Dublin South, Independent)
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If we make the comparison with the UK and say it is 3%-----

Mr. John Moran:

One would expect to see more.

Photo of Shane RossShane Ross (Dublin South, Independent)
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----- and Mr. Moran is saying it is 0.25% here. Undoubtedly what he is suggesting is that the banks are sitting waiting for this to happen as is the Government and they will kick people out of their houses pretty quickly once the legislation is passed.

Mr. John Moran:

No. I think it is fair to say that the situation has not been resolved, but for the 1% we talked about, there are also a lot of people who will in fact see banks move in terms of giving them appropriate relief. We have set out the various types of relief we would recommend, including split mortgages and dealing with interest only for periods of temporary loss of income. There will also be significantly larger numbers of people who will avail of those solutions once the banks start working through person by person where they need to go.

Photo of Shane RossShane Ross (Dublin South, Independent)
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It sounds like this debt resolution will be a pretty grim scenario for some people if repossessions are set to increase fourfold.

Mr. John Moran:

With respect, I would describe the situation as a grim scenario at the moment for people.

Photo of Shane RossShane Ross (Dublin South, Independent)
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That is not what Mr. Moran told us earlier.

Mr. John Moran:

With respect to the people who have a problem with their current mortgages and are not able to pay their mortgages, it is not a happy situation. What is required is that the banks engage with those people and that those people engage with their banks. We have seen the Central Bank explain that 70% or 75% of the people, who are currently going through the MARP, describe it as satisfactory. We also have a large group of people who are not engaging with their banks at the moment, today, and they need to engage. It is only by working between those people, the regulator and the banks that we will finally get to a situation which produces a better resolution for everybody. In some cases that will require people, who are living in houses that are much larger than they are capable of supporting with their income, to in fact potentially trade down from that house or move to rented accommodation, but that is not necessarily, as the Deputy describes it, a grim situation. That is a recognition of their financial position and a resolution because ultimately it is the other people in the country who are paying for those people to remain in those houses as long as they are not paying their mortgages. If they are able to pay the mortgage and if the mortgage that they can support is at least equal to the value of the house in which they are living today so they are paying their mortgage like their neighbours, then in that scenario the bank needs to also resolve any portion of the historical debt that is unsustainable for those people.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I take it from that response that we can expect more repossessions - a large increase.

Mr. John Moran:

I have already said the repossession numbers are at an unnaturally low level because of the fact that we have been trying to put all of the various pieces in place for a proper resolution of this across the system. Now that those pieces are falling into place the banks can actually move - or should move - forward to resolve more and more customers, to up their level of engagement with customers so that we can seek resolution of it across all the different scenarios and solutions we have proposed.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Okay.

I ask Mr. Moran to deal with recapitalisation of the banks. The general Government and Department of Finance line is that recapitalisation of the banks as a result of mortgage arrears will not be necessary. Is that correct?

Mr. John Moran:

The banks were recapitalised when the PCAR occurred on the assumption of - the Deputy knows this as well as I do - or based on a stress scenario. We have not fallen below the stress scenario at this stage. If that were not to happen, then the recapitalisation should be sufficient for the banks as they go through the next PCAR.

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The next stress tests are due this year.

Mr. John Moran:

That is correct.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Why were they put off?

Mr. John Moran:

The stress tests at the moment are aligned with the EBA stress tests because our banks as we see it for some time now have continued on this path of normalisation and therefore should be treated the same as other European banks.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I am not sure that they should be. Many global commentators, including Martin Wolf of the Financial Times, have been very vocal about this recently in saying that we will certainly need to recapitalise our banks further, contrary to the political line that is being peddled here. Does Mr. Moran believe he is wrong?

Mr. John Moran:

He did not say it to me when I met him in London recently.

Photo of Shane RossShane Ross (Dublin South, Independent)
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No, he might not have, but Mr. Moran might not read everything he writes either.

Mr. John Moran:

There are lots of commentators who say lots of things. There are some who say we should absolutely default and the economy would never go back into growth. We rely upon-----

Photo of Shane RossShane Ross (Dublin South, Independent)
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Mr. Moran does not believe we will need to recapitalise the banks.

Mr. John Moran:

I have said that we have seen a recapitalisation of the banks which was based on a stress test. If one looks at where property prices are and where unemployment is, we are within the parameters of those. On how exactly one sets up the stress tests, we would like to see the banks - I mentioned it earlier, I am not sure if the Deputy was here - move on their cost structures. That will also help the profitability of the banks and their ability to, in fact, raise capital on their own by self-generation. So there are a lot of moving parts in respect of this and it would be certainly not wise of me to try to imagine what the situation would be in nine months' time.

Photo of Shane RossShane Ross (Dublin South, Independent)
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The Minister, Deputy Howlin, has stated quite categorically that he does not believe the banks would need any further recapitalisation.

Mr. John Moran:

He may be right.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Does Mr. Moran agree with him?

Mr. John Moran:

I said he may be right.

Photo of Shane RossShane Ross (Dublin South, Independent)
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However, does Mr. Moran agree with him? Mr. Moran is in an important position to be able to make a judgment.

Mr. John Moran:

At the moment, what we are assuming is that if the external parameters that are at play here continue to go as they are, we can see where the stress tests were and we are within that. The Deputy may be aware that some of the banks have had a situation where considerable capital has been saved as a result of the deleveraging taking place at prices that were not as severe as we expected and therefore they have a buffer of capital. Even the decision we took in the last couple of weeks to remove the guarantee has itself changed quite dramatically the capitalisation projections of the banks because there is an additional €1 billion of, in effect, value in the banks each year.

Photo of Shane RossShane Ross (Dublin South, Independent)
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What effect has the removal of the guarantee had on the banks, particularly Bank of Ireland? Does it give them more autonomy?

Mr. John Moran:

The relationship framework for the bank has not changed at all so the autonomy is the same.

Photo of Shane RossShane Ross (Dublin South, Independent)
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The autonomy is the same.

Mr. John Moran:

The autonomy and the level of engagement are the same.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Is that because they still have the same shareholding?

Mr. John Moran:

We still have the same relationship framework.

Photo of Shane RossShane Ross (Dublin South, Independent)
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So the guarantee does not make any difference in that way.

Mr. John Moran:

The removal of the guarantee does not have impact, except that it should improve the profitability of the bank and therefore it should improve the value of our shareholding.

Photo of Shane RossShane Ross (Dublin South, Independent)
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So it does not give them any more commercial freedom than they had beforehand.

Mr. John Moran:

We have not changed or amended the relationship framework with Bank of Ireland at all in the context of that.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I move on to the deal brokered in Europe early last week on bonuses, about which the Government made some play - it claimed it was completed under its Presidency. Mr. Moran can correct me if I am wrong on this, but I do not believe I am. The deal brokered was that bonuses should be basically on a one-for-one salary-to-bonus basis for bankers, but it should be two for one if it had shareholder agreement.

Mr. John Moran:

That is the broad parameter.

Photo of Shane RossShane Ross (Dublin South, Independent)
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How will that apply to Ireland?

Mr. John Moran:

In terms of the-----

Photo of Shane RossShane Ross (Dublin South, Independent)
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Will it apply to Ireland and Irish bankers?

Mr. John Moran:

The rules would apply to all Irish banks and indeed to all operations. They apply to all European banks to which the directive applies, including Irish banks-----

Photo of Shane RossShane Ross (Dublin South, Independent)
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So bonuses-----

Mr. John Moran:

----- but we have a situation where there are no bonuses in Irish banks at the moment so it is relatively easy to apply the rules.

Photo of Shane RossShane Ross (Dublin South, Independent)
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However, bonuses will be back then.

Mr. John Moran:

That is a matter ultimately for the remuneration committees and the management. If one has an Irish bank which has nothing to do with the State, it can pay bonuses if it would like - they probably are at the moment.

Photo of Shane RossShane Ross (Dublin South, Independent)
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What about the State banks?

Mr. John Moran:

At the moment we still have the same restrictions we had in respect of bonuses and the banks.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Yes but when these rules come into effect which Mr. Moran and his colleagues brokered-----

Mr. John Moran:

These rules are like a cap or a maximum situation. They do not permit bonuses.

Photo of Shane RossShane Ross (Dublin South, Independent)
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They do.

Mr. John Moran:

Sorry, they do permit bonuses - they do not require bonuses to be paid to those levels. So the Government is perfectly within its rights despite these rules to take a view that they do not still want to see bonuses as part of the landscape of the covered banks until such time particularly as they are back in profitability.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Profitability and bonuses are not necessarily related, as Mr. Moran knows.

Last week, RBS, Lloyds TSB and many other banks had huge losses and handed out massive bonuses to people. They do not seem to be related across Europe. Banks making losses still pay bonuses. Will this new rule, which is a two-to-one rule or even larger, open the floodgates again for bonuses in Ireland?

11:50 am

Mr. John Moran:

The rule is simply a cap on the maximum that can be paid.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Yes, but they are bonuses?

Mr. John Moran:

It relates to the structure of compensation but does not open the floodgates in respect of bonuses in the covered banks until such time as the Government decides to open the floodgates, as the Deputy puts it, and permit bonuses to be paid. There are currently restrictions which operate in parallel to these rules which apply across the rest of Europe and in effect are designed to act as a limitation on the structure of payroll where bonuses are paid. Therefore, it has no application at the moment where it is not permitted.

Photo of Shane RossShane Ross (Dublin South, Independent)
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They are likely to come in here if they are European-wide, were brokered here and the Irish Government-----

Mr. John Moran:

There are bonuses being paid at the moment and bonuses were paid last year and the year before across Europe. That does not make it any likelier that we will be paying bonuses in 2013 in Ireland. The fact that they changed the rules to control those bonus provisions or structures does not make it likelier that we will suddenly see bonuses in Ireland.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I remind Deputy Ross of the time.

Photo of Shane RossShane Ross (Dublin South, Independent)
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In respect of the public interest directors, to which Deputy Harris referred, does Mr. Moran have any input into the auditors?

Mr. John Moran:

The Deputy will be pleased to learn that since the last time we had this discussion-----

Photo of Shane RossShane Ross (Dublin South, Independent)
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It was KPMG.

Mr. John Moran:

All of the boards were asked to review the situation relating to their auditors. They were already planning to do so but it was commercially sensitive at the time and I could not reveal that some of them have changed their auditors.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I noticed that and I am sure Mr. Moran claimed the credit for it.

Mr. John Moran:

I did not claim credit. I was perfectly happy to leave the credit.

Photo of Shane RossShane Ross (Dublin South, Independent)
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It is an interesting point that very soon after that, AIB put it out to tender, for which I congratulate Mr. Moran as it was a great development. KPMG suddenly turned up as the special liquidator for IBRC. How did that happen?

Mr. John Moran:

We had a conversation about this earlier.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Sorry, I was not here as there was a vote.

Mr. John Moran:

The selection of a special liquidator, as would be obvious, was not something that could be done by public tender because of the sensitivity of the situation. What we did to protect the situation as far as possible was to approach NAMA management which already had in effect panels of liquidators that had gone through a process in terms of setting rates and their suitability to act as liquidators. We then dismissed from that panel those people who were in what we considered to be inappropriate conflict situations. For example, those with significant litigation relating to auditing were dismissed and the selection was made by the Minister and ultimately the Government.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I half understand what Mr. Moran is saying. I do not fully understand it. Did not the record of KPMG, having been auditors to Irish Nationwide from 2006 to 2011 and auditors to AIB during the same period when the books were questionable to say the least, not make the Department say "hey, we might go and use another firm, these guys are flawed"? KPMG has been fined huge sums of money by IASA. Is that not a consideration when the Department is making the choice?

Mr. John Moran:

Everything is a consideration in terms of choice. We gave advice as to the choices of who could be picked to the Minister and Government. There were other firms in town where if I wanted to look into particular parts of the operation of those firms, I could see something. One of them was in litigation with the bank. There are the current auditors of the bank who I do not think would necessarily have stepped in. Does Ms Nolan have anything to add?

Ms Ann Nolan:

No, other than to say that there is a relatively small number of liquidators with sufficient size and spread internationally to be able to handle the IBRC liquidation. We were choosing from among a relatively small number of firms, all of which have in some way or another some connections with some of the existing banks, Ireland being what it is. It was a question of a choice that was made.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I accept that and I know the Department has a problem but this is a company with a deplorable record, particularly with the banks. It is a company that let the AIB accounts through and let the Irish Nationwide accounts through with full approval of all those extraordinary valuations it had. It then becomes the liquidator of IBRC. Does Ms Nolan not see the problem an outsider has with seeing the same name popping up with a flawed record?

Ms Ann Nolan:

That is the choice the Government made.

Photo of Shane RossShane Ross (Dublin South, Independent)
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I presume it was on the Department's advice?

Ms Ann Nolan:

Absolutely, yes.

Photo of Shane RossShane Ross (Dublin South, Independent)
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Does the Chairman wish me to finish?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I will ask the Deputy to finish.

Photo of Shane RossShane Ross (Dublin South, Independent)
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That is fine. I might come back later.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In respect of the bonuses to bankers, can we take it that no bonuses will be paid within banks during the period when the Irish taxpayer and State support covered institutions?

Mr. John Moran:

I cannot give the Deputy a guarantee on that because it is ultimately a decision that the Government must take. While it is very important for any shareholder, what we have said is that it is particularly important that while the State is a shareholder in the banks, the banks' management find ways to return the banks to profitability and be very careful about the levels of remuneration they pay.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Including bonuses?

Mr. John Moran:

Including bonuses but I would point out that in some respects, there are scenarios in which the idea of paying people based on the delivery is also an important way of restructuring compensation. I do not want to tie the Government's hands in respect of how compensation structure is set up.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In respect of the mortgage issue, context is everything. I am linking into the mortgage issue. The context is that during the period from 2003 onwards, particularly from 2006 and 2007 onwards, ordinary people were given mortgages by banks that they could not afford. We have now found that many of them were in jobs that were unsustainable and built on a property bubble and the banks were doling out money. Bank of Ireland were giving out 100% mortgages in 2006. If one looks at the rate of arrears, one will see that it is far more acute in that cohort. Mr. Moran referred to when the amount of sustainable mortgage for an individual mortgage holder is less than the value of the home. I would probably look at it from a slightly different perspective. The banks got us into this mess, not the mortgage holders or the ordinary punter. The banks need to find creative ways to make mortgages sustainable. By that, I mean they should be looking at 40-year mortgages and every conceivable possibility. I accept that they will be voluntary situations but there is a moral and financial onus on the banks. I feel strongly on this issue because the banks have repeatedly appeared before the Oireachtas Committee on Finance, Public Expenditure and Reform and I have seen them coming in from as early as 2007. The banks have a responsibility here and must find every possible solution to get to a point where mortgages are sustainable.

Are they going to look at extending the level of mortgages? Will every possibility be examined to keep people in their homes? The comparison has been made to the situation in the United Kingdom, but this is a different country and different issues arise in our banking system. I want the Department to consider that the onus must be put back on the banks to find a formula and a mechanism. There are countries where there are mortgages with 40 and 50 year repayment periods. Why not move to that system? The banks were recapitalised under PCAR to make provisions for mortgages. Can the witnesses give an indication as to whether the Central Bank figures to be published today show an increase or decrease in mortgage arrears? I call on the banks to approach this in a way that makes mortgages sustainable rather than to go solely down the repossession route.

12:00 pm

Mr. John Moran:

I agree fully with Deputy O'Donnell that the onus is on banks to use all efforts to find the right solution for customers.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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This is against the backdrop that in a great many cases, mortgages were provided by banks which had become like betting shops. They gave out the betting token, which was the mortgage, and they became salesmen. The rank and file bankers who engaged in prudential lending were pushed aside and the salesmen took over. The problem here is that it is not good enough for banks to now come along and say that normal commercial criteria must resume. In many cases, the banks put people in the position of having mortgages they cannot now afford. It is not good enough for banks to walk away from this. Can I take it that in discussions with the banks, the Department will forcibly make this point?

Mr. John Moran:

There are a number of points there. It is absolutely a key part of the resolution that banks engage and find all the solutions they can to allow people to stay in their houses if it makes sense for those people to be in those houses. This is where I mentioned earlier the concept of what is a sustainable mortgage and the key relationship between the maximum amount of the sustainable mortgage and the value of the house. It is not in anybody's interests to see the banks kicking the can down the road in respect of people but there are numerous scenarios in which, for example, interest only may be the right solution for people, particularly if in the future one can imagine a scenario in which those people will find themselves with more disposable income to pay a larger mortgage and to start to pay back the value of the mortgage. The obvious example is where two people were working and one lost his or her job. It is conceivable that the second person will come back into employment and the household income will increase to a point where the repayment of the principal may be possible. If we are in a scenario where people cannot even afford to pay the interest portion of the mortgage payment, given that rates are currently at particularly low levels, the appropriate solution, which must be looked at on a case-by-case basis, may not include kicking this out to the future but to resolve it now to ensure that the weight of the excess debt is no longer on them.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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This cannot be a licence for the banks to engage in wholesale repossessions. The banks did it in the United Kingdom in the early 1990s. Irish citizens have bailed out the banks to the tune of €64 billion. While we want to put people on a sustainable basis, we must remember that if people lose their homes, there will still be a charge on the State in certain circumstances. The Irish public places enormous store in the family home. It is probably a throwback to our history. It occupies a position in Irish society that can never be underestimated. The banks must play their part. Banks will be banks so it is down to regulation and direction. Where two similar cases land on a banker's desk, different results can follow. The banks must work with homeowners many of whom are under enormous stress. I am very conscious of this as a public representative and I have no doubt that in its deliberations with the banks, the Department will express this forcibly.

Mr. John Moran:

Yes. We are adamant that the banks must resolve these issues by looking at all possible solutions, not just one in particular.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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To keep people in the family home.

Mr. John Moran:

Yes. But it is also important to recall that some of the large members of the banking sector are owned fully by the taxpayer. We talked about public interest directors earlier and these banks must be conscious that they are spending taxpayers' money. It is appropriate for them in using the capital with which they were provided to recognise losses in the banking system that are the difference between the total amount of the mortgage and the amount of the mortgage that is sustainable or, if it is larger, the value of the property. They have a loss built in. It is not necessarily appropriate that banks use taxpayers' money to subsidise people who are living in accommodation - even if it is a family home - that is beyond their means. There are many people who do not fall into that category who need assistance whether it is from the State or the bank. However, there is a balance to be drawn here, which is quite delicate, in terms of deciding the scenarios in which an individual or family should continue to live in a particular house as opposed to any house. It is the extent to which that is a standard of living that they are reasonably and fairly capable of supporting themselves or whether it requires taxpayers' assistance to do that in the form of mortgage interest supplement or rent allowance or other provision.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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My point is that a 20 year mortgage might be sustainable over a 40 year period. That operates in the context of the State.

Mr. John Moran:

I was just going to say that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It is exactly the analogy I am using. The laws of finance apply whether one is referring to the State, a bank or an individual. Banks are extremely creative when the have to be. The fact that taxpayers' money has been invested means banks must be creative and proactive in considering measures for people who want to remain in their family homes. There will be occasions when people will decide otherwise. Where they want to remain in the family home, every option must be explored, including the extension of the repayment period of the mortgage. Intergenerational repayment happens in other economies and could be considered. The old rulebook is gone. It provided for lending at a rate of two and half times one's salary plus one times the second salary but banks ended up lending at a rate of six times salary and more. They did not act in a prudent fashion.

The banks have a moral, financial and ethical responsibility to the Irish taxpayer and to the mortgage holder of a family home to make every conceivable effort to ensure that if people wish to remain in their homes they work with them - parents or single people - up and down the country to come up with a range of creative measures. There is an analogy with the State which is seeking to extend its repayment period to make it more sustainable. That is a welcome measure. The banks need to do likewise with mortgage holders. I ask that they bring that into the mix. Will that be the case?

12:10 pm

Mr. John Moran:

That is the key. The structure Deputy O'Donnell described as the State's debt solution is exactly in many ways the key to the split mortgage solution, where appropriate. We want the banks to engage with customers but it is equally important that customers engage with their banks because as long as they are doing so we will find solutions.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Moran probably saw reports to the effect that the special liquidator of IBRC did not meet the staff representatives yesterday. It has now been appointed receiver of the Examiner group. If the Department interacts with the liquidator, can it ensure that the meeting takes place with the staff?

How will the valuation process in respect of the loans in IBRC apply? Where do the speculators who are circling the planet feed into this process? Can Mr. Moran tell us what will be the methodology for valuing the loans in the wind-down of IBRC versus NAMA?

Mr. John Moran:

That has already started.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can Mr. Moran first conclude the point about the staff?

Mr. John Moran:

We will take that up with the liquidator. We have already expressed the view through the financial services division that it needs to be sure to deal with the staff who are part of the bank.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The Department will go back to the liquidator and the engagement will take place.

Mr. John Moran:

We will take that up particularly, at our normal meetings with it.

The liquidator has begun to divide the assets of IBRC into different tranches that have similar characteristics and has also issued requests for public procurement reasons to people who are interested in engaging in the work of valuing those assets. I am not sure he has done it for all but he was going to start with those that have particular characteristics.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Does that mean going out to tender?

Mr. John Moran:

Yes, it involves going out to tender for people to assist him in valuing the assets. Once that is done the liquidator will then in effect sell the assets to realise the maximum value that we can have. It will happen over the next couple of weeks and we have indicated that we think the entire process should finish within six months. If we can do it more quickly we will. To prevent the risk that might otherwise arise in a liquidation as complicated as this of people perceiving this as a fire sale and therefore bidding very low for the assets we have put in place a structure whereby in effect NAMA's participation in the process will set a floor on the value. Only if people are prepared to bid more than the value that NAMA sees in the assets by winding them down or running them off over a longer period will the liquidator in effect sell them to third parties. Once they move to NAMA the process will continue and it may be at that stage that the realisation of the best value for the taxpayer may include a subsequent sale by NAMA of the assets. The importance of NAMA's participation is to prevent the perceived notion of a liquidation as a forced sale with values therefore at rock bottom and a buyer descending on it. That is critically important because the point that is often missed, although we referred to it earlier, is that the State is in effect guarantor for the value of those assets given that it is guarantor to the Central Bank of IBRC's borrowings in the first place.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Will the valuation that is now being arrived at, and the work on which is due to commence soon, be agreed with NAMA?

Ms Ann Nolan:

That valuation will be done by an independent valuer and NAMA is required to pay that price if nobody bids more. NAMA will have some input into the valuation methodology but once the independent person decides what the value that is what the bank and NAMA will pay.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Is Ms Nolan at liberty to say what will be the valuation methodology used in this process?

Ms Ann Nolan:

It will be a normal commercial valuation methodology drawn up by the special liquidator. We will be involved in the discussions. It has not been set in stone yet.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Does Ms Nolan think that IBRC has made sufficient provisions in the sense that the values currently booked in IBRC's accounts will reflect the independent valuations?

Ms Ann Nolan:

It is difficult to tell with absolute certainty whether that is the case. Our best estimate from the information available to us before we put it into liquidation is that it would just about break even, that the value would be about equal to the value of the loans.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What was the date of that valuation of IBRC's accounts?

Ms Ann Nolan:

That was based on information the IBRC gave us. It was not a valuation of its accounts. It did its own valuation for the end of the year so it would be off its end year, pre-audited figures.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was that December 2012?

Ms Ann Nolan:

Yes, December 2012.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In other words it was based on up to date figures.

Ms Ann Nolan:

Yes it was based on up to date figures but pre-audit.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Would the auditors have done interim audits, such as rolling audits?

Ms Ann Nolan:

I am honestly not sure what interim audits it did. We certainly had not seen the audited figures when the liquidation happened.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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When will the independent valuation be complete? Will it be six months from today?

Ms Ann Nolan:

There will be a rolling process so some of it should be done much sooner than that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Will it go into NAMA in tranches or will it go in as one large transfer?

Ms Ann Nolan:

It will probably go in tranches but that will depend. I am not sure how big the tranches will be. We hope the special liquidator will appoint the valuers for the first tranche by the end of this week. This is the stuff that is most ready for sale and for which therefore all the information is available.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Does Ms Nolan have any indication about the future of the staff in IBRC, for example, how many will transfer to NAMA or how does she see that process evolving?

Mr. John Moran:

It is as much a function of where the assets go as anywhere else. We could envisage that if parts of the assets were sold to a third party it may involve a purchase in which the purchaser is interested in the loan office and the staff working on those assets. If they do not transfer then in effect the assets will go to NAMA and the more assets go to NAMA the more staff it will need.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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I welcome the officials this afternoon and thank them for coming along. I thank Mr. Moran and his staff for all the work they do. We operate for perfectly understandable reasons in an unsympathetic environment, given the vast difficulty the country is in and the challenges people face. I know that all public servants do their best in very difficult circumstances and that the Department of Finance has of late delivered things of great value to our State, particularly in respect of the promissory note. I acknowledge that work and all the officials involved.

I will put to Mr. Moran a figure of which I do not believe he is already aware. The independent Credit Review Office overturned between 55% and 59% of original bank decisions on business credit applications. What does Mr. Moran think of this figure?

12:20 pm

Mr. John Moran:

I have two reactions. I would prefer if there were no decisions to be overturned. It is also very important to put in context what Deputy Donohoe has said. If our numbers are correct, 184,000 loan applications were made to banks. Of these, 160,000 were approved and credit was made available and 24,000, which is approximately 13%, were declined. The Deputy gave the correct number on those overturned but what is disappointing to us when we look at the process is how few people go to our Credit Review Office, which has a success rate of more than 50%. Low credit is a key economic issue. We are conducting a review to understand how to improve the Credit Review Office, but such an office has been established and has a success rate of approximately 50%. We do not understand why 97% of people who are refused credit do not use the Credit Review Office. I am concerned about drawing too many conclusions with respect to the numbers mentioned by the Deputy because they represent such a small sample of the total process. Part of the work we are doing with the small and medium enterprise funding body is to try to understand certain parts of the chain in particular. One of these is blockages in the system between a person going to the bank seeking credit and making a formal credit application. The success rate in the credit application process is relatively high.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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This is once one moves beyond a discussion with the bank manager and makes a formal application.

Mr. John Moran:

Yes.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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Mr. Moran is speaking about the stage after this.

Mr. John Moran:

Precisely. From the point a credit application is made, a very comfortable percentage of the applications are given credit, relative to the state of the economy. What is not easy to understand is why such a low number of those refused credit at this point look to the Credit Review Office or the internal process of the bank.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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My understanding of the process is that if an application is refused it first goes to an internal review body and if one is unhappy with this one goes to the Credit Review Office. Is this correct?

Mr. John Moran:

That is correct. Recently, we issued a paper on the Credit Review Office. We conducted a review on these issues because it seems to work well in some scenarios and allows credit to work. In many cases the process of overturning the bank's decision involves the borrower assisting the Credit Review Office with regard to the strength of the business plan or the documentation supplied. It is not necessarily a problem with the bank process; it can often be a problem with the application. This does not concern me in the sense that what is important is that we find a solution for the business to get credit. If the Credit Review Office is able to help in this process the question becomes why more people do not use this resource. We have suggested that perhaps we can do something at the point at which an application is declined to increase awareness of the credit review process and perhaps remove the internal appeal so one can go directly to the Credit Review Office. We can imagine borrowers who might decide that as they have tried it once with the bank there is no point to an internal review. We could allow such people go directly to the Credit Review Office and ensure this option is highlighted well in any communication. Perhaps it is too far down the letter to be obvious.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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How does Mr. Moran assess the general capacity of the banks to deliver the credit objectives set forth?

Mr. John Moran:

The banks have been set targets and are meeting them. From one perspective one can take it they are doing well. Two years ago, when I first came before the committee and we were examining this issue, we found the banks were not equipped to be able to lend to customers, particularly on a cashflow basis as opposed to more traditional lending based on security. They have done quite a good job. There is always work that can be done, but they have done quite a good job in training staff - and continue to do so - to understand better how to make loans in scenarios where no real estate security is available. This is incredibly important in an Irish context because so many of our new and growing companies are in sectors which are light on real estate.

We have started to divide the population of borrowers into at least three broad categories, namely, microcompanies, larger successful companies with good financial strength and small and medium enterprises still struggling with a legacy debt problem which has come about either because of a real estate venture attached and intermingled with a good company, or because of the company being tied into personal guarantees and a large debt exposure hanging over it. Each category needs different solutions. For microcompanies, we have tried to introduce a microfinance fund-----

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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And credit insurance.

Mr. John Moran:

-----on the credit insurance side and to speed up the process. We have found very low quality financial management in microfinance companies. Many of these companies would admit they do not even do cashflow. The problem is in marrying cashflow lenders with people not necessarily doing cashflow management.

Banks are moving with regard to productive small and medium enterprises, but as is the case with personal mortgages, they are still struggling with how to separate legacy debt problems and release a good business from the overhang of another debt.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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I will feed this back into the discussion we had on mortgages. Incidentally, figures have come out while we have been speaking and there has been an increase to 11.9%. Apparently this is a lower rate of increase than we have had in previous quarters. Earlier Mr. Moran offered the definition of a sustainable mortgage being a person's income versus the current market valuation of the property. Did I understand this correctly?

Mr. John Moran:

The most important test of sustainability is to start with the person's income. It is not a problem of negative equity. One starts with the person's income and works out from that the monthly payment the household can sustain. As the Deputy mentioned earlier, the term can be extended or the principal amount can be reduced.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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We then relate this back to the current market valuation of the property. Is this correct?

Mr. John Moran:

In a way the current market valuation of the property is irrelevant, as long as it is not above the sustainable mortgage.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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In terms of what the person can afford.

Mr. John Moran:

Yes.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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I wish to explore this point. What happens the gap between what the person can afford and the amount of the original mortgage taken out?

This gap, which in many cases is big, is the blanket of personal debt which weighs down economic activity so much. What should happen to this gap?

12:30 pm

Mr. John Moran:

There are a number of different-----

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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I am aware personal insolvency legislation will be introduced, but it appears that for a large group of people who will not come under its parameters, the difference between what they can afford to pay and the value of the mortgage as registered on the bank's balance sheet is very big. They can still afford to service the mortgage and keep the home. What would happen to this difference under the options on the table at present?

Mr. John Moran:

I am wary of giving a single solution but it would be helpful to give an illustration as to what might happen. Somebody may have bought a house with a mortgage of €300,000 and due to changing circumstances that person may now be able to afford a mortgage of only €200,000 while the value of the property may have dropped to €150,000. In this scenario, concepts such as the split mortgage, which we have suggested, would have perfect application.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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A split mortgage would consider the difference.

Mr. John Moran:

Yes. The person would begin to make repayments on a mortgage of €200,000, which is still above the value of the house but they will pay more because they bought the house at greater value. The person will continue to pay the maximum amount possible on a sustainable basis. The difference between the €300,000 and the €200,000 in the split mortgage concept, like we have done with the State debt, would get pushed out to a future point where either because of the passage of time, because the other mortgage has finally reached an end or because of an unexpected change of circumstances the person would then be able to repay this part of the mortgage to the bank. It is important that people pay their debts if they are in a position to do so, but they would not be expected to pay this part in their initial monthly payments. Varying views exist as to what should happen with respect to interest roll-up on the amount.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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Do we know how many mortgages have been split in this fashion?

Mr. John Moran:

As of the end of last year it was approximately 50. It is probably in the numbers that came out today. I have not had long enough to look over these numbers. Is it 52? It is certainly a low number and it should be higher. We do not yet have access to a breakdown of the details of enough individuals to know.

Another point worth making is that when considering sustainable mortgages it is also important we respect the hierarchy of payments, and this will be easier to understand with the introduction of the personal insolvency legislation. A mortgage is not an optional debt which allows people to continue paying unsecured debt without paying the mortgage. In deciding what is a sustainable mortgage for a customer, unsecured creditors should be required to participate in effecting the resolution of the debt because the priority should be given to the secured creditor, which is the bank with the mortgage. We have seen this blockage in the system and recently the Central Bank stated it plans to engage with banks, credit unions and other unsecured creditors with regard to dealing in a streamlined way with a borrower who has unsecured debt from credit cards or credit unions. We need to have a better understanding of who should bear what pain.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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My understanding of the split mortgage model, which Mr. Moran confirmed, is that it could play a pretty big role in allowing people to deal with their difficulties. I am interested in the figure Mr. Moran has given. Mr. Moran has stated a number of times that we still do not have access to case by case financial information to allow us understand how far this solution could go. Why do we not have this? Why does the Central Bank, the Financial Regulator or the Department of Finance not have access to this information, given that it will be two years this month since the last significant recapitalisation of our banking system?

Mr. John Moran:

The Central Bank would be closest to this information but our understanding is it does not have the full picture because the banks do not have the full picture.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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Why not? This is the nub of my question.

Mr. John Moran:

I am coming to it. We have changed the CEOs of two banks in the past year and we have seen considerably more progress in respect of engaging with this problem than was the case previously. We needed to see improvement on the collection side, and this has started in how new people entering the system are dealt with. There is a much more robust process of engagement with prospective customers.

We have had much discussion and commentary on blockages in the system, for example the code of conduct the banks follow in respect of the number of calls they can make. We have certainly seen some scenarios in which customers and borrowers do not engage with their banks and therefore we have no ability to get information from them in respect of their personal situation and whether their income has increased or decreased and whether they have other assets they have not revealed to the rest of the household or to the bank. Until we have all this information about this group of customers it is impossible to know the full picture.

We have had an unfortunate situation whereby although this problem has been getting worse the banks have not invested quickly enough in either personnel or technology to deal with this situation. Considerable progress has been made in this regard in recent months but there is still work to do. Until such time as we have this we will not be able to answer the questions the Deputy is putting. I would love to have all the answers on what percentage of arrears belong in split mortgages and what percentage belong in mortgage to rent. The banks have grossly underinvested in technology and we saw another example of this last night. We are living with the consequences of this and trying to repair the situation. Some banks are dealing with it faster than others. The regulator has primary responsibility for chasing them down and it is on the case. We will continue to work with the regulator in this respect. The number of split mortgages I discussed its low relative to what we should have in the system. I mentioned some of the blockages as to why we cannot move faster.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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It has been two years. This, along with unemployment, is the biggest personal challenge many people face. The banks were capitalised two years ago for a number of reasons, one of which was to deal with this. They still cannot tell us how applicable these solutions would be. If they cannot tell us this, it means not enough people are being helped.

Mr. John Moran:

The frustration is shared.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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It appears to me that split mortgages should be used as a solution. I deal with people in this plight regularly but I do not meet people to whom this is being offered. If Mr. Moran is telling me this is because we do not have the information, I am glad the frustration is shared. It is two years since the banks were given funding to deal with this issue. We have made the point.

Table 2.4 of the report of the Comptroller and Auditor General on page 17 is, along with that on trends in unemployment, the most depressing table we must look at in terms of our country's difficulty.

It shows what has happened to our national debt in the past four years. The helpful review of 2012 strategy document contains a good table that examines the trend in sustainability during the coming years. This table is found on page 18 of the report, which completes the 2013-15 picture.

Of the different options that the State is pursuing in terms of its solvency, for example, the promissory note arrangement, and apart from what will occur on the income side of the equation, what factors will play a role in reducing our national debt? Is the rescheduling of programme debt on options 1 to 5 the kind of arrangement that will make a difference to the profiling of our national debt in the next few years?

12:40 pm

Mr. John Moran:

The most important aspect of putting Government debt on a downward slope is reducing the deficit.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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I understand that.

Mr. John Moran:

A second major contributor will be growing stability in the European scenario and growing confidence in Ireland. We will find that the cash position that we need to hold to protect the State against market shocks can be scaled backwards. While we have showed the numbers on a gross basis, it is important to remember that the cash number for the State is in excess of €25 billion. It is close to €30 billion.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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The net figure would be lower than this.

Mr. John Moran:

If we worked on that basis, the figure would be significantly lower at close to 104% or 106%. Next year, we will move into a capital account surplus. It is important that we reduce the deficit and increase growth levels.

Progress has been made on an important ingredient in terms of where we are going. The more that people have faith in our ability, willingness and commitment to repay our debt, the lower the interest rates become and, therefore, the greater our ability to start reducing the debt total. We would pay less interest and be able to use more of the available resources to start reducing the debt.

The last element in achieving significant reductions is continuing the process of the disposition of investments that the State does not wish to retain.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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For example, shares in banks.

Mr. John Moran:

Yes, and the Irish Life trade, etc.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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Would the potential renegotiation of repaying our programme money have a material effect on these figures in the coming years?

Mr. John Moran:

No. I should have remembered to send the committee another diagram, this one on the profile of the debt. It is not that there would be an effect on the exact amount of debt. Rather, we would not need to replace the programme debt with market debt in the short term.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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I will leave it at that for the time being and allow other Deputies to contribute.

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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I will start with a question on standard variable rates, SVRs. Many people with these are feeling victimised. On the one hand, the Taoiseach stated yesterday that the issue of mortgage arrears was one of our greatest problems while, on the other, the CEOs of AIB and Bank of Ireland have teed up another increase in SVRs. These banks are wholly or partially owned by the State. The public ask me what influence the Government has with them over increases in SVRs if the issues of arrears and repossessions - Mr. Moran mentioned these - that see terminally ill people dragged from their homes are so important to it.

Some might say that people should get fixed rates, but they cannot afford them. If one is on 4% or 4.25% now when it used to be 3.5% or 3.25%, one would be lucky to get a fixed rate of 5.5%. People cannot afford this and, according to the CEOs of both banks, are stuck facing increases in SVRs. I am often asked about what influence the Department of Finance has with these banks if repossessions and the lack of ability to repay loans and mortgages comprise such a large issue for the Government. What interaction and influence does the Department have with the banks?

Mr. John Moran:

I will make a couple of important points. We referred to the relationship frameworks, our level of engagement with the banks and the importance of their operating as commercial entities with a view to moving to profitability. The most important influence that we can have on the rates that banks charge their customers is at a level above the banks, in that we should do what we can to reduce the cost of the State's borrowing. This would feed into the banks' ability to borrow money more cheaply. On page 37 of the annual review document that we produced this morning, there is a clear illustration of the correlation between the cost of funds for banks and the cost of funds for the State. The more one reduces the cost of funding the State, the more one reduces the expenses side of the banks' balance sheets.

It is clear that the banks must manage themselves on the basis of profitability. The State should not interfere in that regard. For example, we should not dictate what maximum interest rate they should charge on mortgages or what minimum interest rate they should pay on deposits. They also need to be able to compete with one another.

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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That is fair enough. The number of people in question who are on variable rates versus tracker mortgages is small. There is an element of injustice. They believe that they are being targeted constantly, in that their rates are being pushed up while tracker mortgages are protected from the banks by the European Central Bank, ECB. Does Mr. Moran understand my point?

The line is that we must allow the banks to become more profitable. Variable interest rates continue to increase. Simultaneously, the Government claims that this situation is its greatest issue. It comes down to people's ability to pay. In their opinion, the Government must step in and exert some influence on the banks to prevent them from increasing an already unpayable rate. I understand what Mr. Moran means as regards-----

Mr. John Moran:

Yes, and I understand that.

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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-----the Department helping by reducing borrowings, which would filter down to the banks. Bankers have complained to me that they cannot borrow money cheaply. The small cohort of 50,000, 60,000 or 70,000 people are feeling victimised. If one believes what one reads in the newspapers, they are facing another increase.

Mr. John Moran:

Sometimes, people can have difficulty understanding why we are pursuing an austerity programme, trying to reduce deficits and getting the national economy back into shape.

The reason is it impacts on the ground via these mechanisms of the banks and semi-State bodies in terms of the cost of funds. One must do the maximum one can in this regard, which then flows into everybody's pocket through the rates charged by banks and so on. Approximately one third of all mortgages are at the standard variable rate, which is a significant proportion of the mortgage population. The Deputy is correct that an historical book of tracker mortgages in the banks includes people who negotiated or were given good deals in the past and that new pricing models for mortgages must be on a more rational basis. It is important to remember that while mortgage arrears are a significant part of the problem, about which we are concerned and which we want to solve, more than 85% of people are paying their mortgages. To the extent that they are taxpayers and the banks are not able to operate profitably, we would be facing the spectre of new capital needs for the banks into the future. From the perspective of the Department, relationship frameworks have been put in place and management has been given the ability to set commercial rates on a commercial basis and will continue to do so.

12:50 pm

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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The Department needs to take a look at its policy in this area and its constant targeting of this particular cohort. It should perhaps engage with the banks on how else they could become profitable-increase their profit base by other methods as opposed to raising variable interest rates steadily over time. The figures I have seen suggest the norm before too long across the board will be 5.5% SVR. Mention was made of the repossession of homes in respect of which people have an inability to pay. However, in terms of this occurring, there is a contradiction. The Department must have a position on this issue and should at least engage with the banks on the effect it will have on those with SVRs.

Mr. John Moran:

Primary responsibility for ensuring one group of customers is not being disadvantaged by another lies with the regulator in his regulation of the banks. To the extent that there are situations where people are being charged a rate of interest on their mortgage which puts them in a position where they are not able to pay it, the banks must, as stated, engage with these customers in working out what is an appropriate mortgage. There are two ways to do this. One can move back some of the principal and apply the normal rate of interest or return to a split mortgage if the average rate is too high.

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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My next question relates to property tax and where the money collected will go. Media reports differ on how it will be apportioned. A figure of 60% has been mentioned when it comes to funding local authorities, with the remainder going into a general fund. What is Mr. Moran's understanding of where property tax receipts will go and how they will be used?

Mr. John Moran:

Mr. Derek Moran has more detail on this matter.

Mr. Derek Moran:

The money raised from property tax will, from next year, go to the local authorities. The Thornhill group suggested approximately 65% go directly to the local authorities, with the remainder being put into an equalisation fund. The Government is reflecting on this recommendation. Discussions are ongoing on what proportion should go to the local authorities. No decision has yet been made on whether it should be 65%, 70%, 75% or 80%, etc.

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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No determination has yet been made on where the money will go.

Mr. Derek Moran:

A decision is imminent. The great proportion of the money will go to the local authority area in which it was raised, with the balance being used for equalisation purposes.

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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My next question relates to the Finance Bill and the definition of the living city initiative in respect of Limerick and Waterford. I previously raised the issue of the definition of a Georgian house during the debate on the Bill in the Dáil. The definition in this regard as per the Bill is "a building constructed in the period 1714-1830 for use as a dwelling and comprising at least two storeys, with or without basement". I refer, for example, to Waterford Civic Trust. My inclination which was backed up was that the footprint of Georgian buildings in the centre of Waterford would not come within this definition. Many of them were built in the period 1830 to mid-1840 in a style of Georgian architecture. The difficulty is that if the definition is adhered to tightly, there will be no impact on Georgian Waterford. I was sent a copy of the submission made by the Irish Georgian Society on the issue which supports my argument. It refers to Limerick, in particular, where there is a large proportion of Georgian houses dating back to the 1840s and 1850s. The definition will need to be looked at again if the provision is to have a real impact.

I have spoken to people who are knowledgeable in this regard. Their view is that the cut-off date should not be 1830 as Georgian style houses were built well into the 1840s. When I first raised this issue, it generated some mirth and I was given a lecture on history. However, it is an important point if the living city initiative is to have any impact. It is a good idea and badly needed in the residential and retail sector of the city. However, further thought needs to be given to the definition and the impact it may or may not have as a result.

Mr. John Moran:

I have learned a great deal today about Georgian houses.

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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I apologise, I did not mean to lecture Mr. Moran.

Mr. John Moran:

We will draw the Deputy's concern to the Minister's attention.

Mr. Derek Moran:

The Minister spoke extensively on this issue on Committee Stage yesterday. The objective is to put in place something different from the exemptions in place. We will see how it works. There is a lot to be learned. We are trying to remove passive investors and end speculative development, both of which actions are to be welcomed. We are engaged in a learning process and given the nature of the scheme, we will need to seek EU approval. It will probably be late this year or early next year before we obtain it. Also, an ex ante cost benefit analysis will also have to be made in advance of implementation of this measure which will probably be a condition of approval. Therefore, we have some time to think further about this issue. We have the framework for what we are trying to achieve, but there is room to alter it.

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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I am seeking some leeway. Perhaps the Department might give those with expertise in this area a chance to make an input before a decision is made. I am aware that once the consultant's report is finalised, the Department will have to go through the EU approval process and then take another look at it before the commencement order is signed. I am slightly concerned that if definitions are tightly written, this may not have the impact necessary.

I read recently that deposits in Irish banks in 2012 had reduced by approximately 13%. Is that Mr. Moran's understanding?

Mr. John Moran:

As I understand it, they increased by approximately €9 billion over the course of the year.

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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Therefore, there has not been a reduction.

Mr. John Moran:

No. There are two issues involved. We report on the basis of covered banks. Often deposits so categorised in the IFSC can impact on the numbers.

Another important dynamic in the system is the value of sterling. Over the course of the year, the number I have in my head is an increase of 9%.

1:00 pm

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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Both the Department and Enterprise Ireland raised the matter of banks' interaction with small and medium enterprises, SMEs, in particular. The comment from one of the Enterprise Ireland officials a few weeks ago was that the banks were, frankly, not fit for purpose when it came to dealing with non-financial issues. It was made clear that in some cases there was a geographical challenge, and although there may have been some knowledge of UK markets, they did not know how to assist people beyond that with exports and methods to improve. They had major issues in information technology and, generally speaking, the ability to assist SMEs was lacking.

The last time Mr. Moran was here he made it very clear that the Department puts together systems to ensure that crazy decisions are not made in isolation. That was explained very well but there is a proactive side to what is being done, particularly when it comes to the banks, to ensure that they are doing what needs to be done when it comes to dealing with small and medium businesses, assisting them with the kind of information and expertise that is necessary if money is to be loaned and the processes going with that. The Department has a pivotal role in ensuring the banks engage in the process so what has the experience been in the past couple of years with regard to the banks and that area?

Mr. John Moran:

I was heartened this morning to hear certain comments on CNBC in another jurisdiction as they suggested we are not the only ones having that problem. Banks are in the business of providing credit to companies but are not necessarily in the business of providing capital. One of the focuses in the past year in this respect has been how we can work on the provision of alternative balance sheet repair mechanisms to banks. I mentioned earlier the categorisation we have of the three types of companies, with micro-companies on one side, exporting and good companies on another and the companies in trouble on the final side. We have been working with the folks in the National Pensions Reserve Fund, with close to €1 billion now provided in respect of three types of funds, with one targeted at the issue of restructuring medium to large companies' balance sheets. When that feeds through the system, there will be greater flexibility in people's borrowing choices and the ability to take funding from the system.

We will still be faced with a problem that we did not have in the past that must be addressed and we have identified it as in need of attention. We are a very open economy that is significantly dependent on the ability of companies to export. Nevertheless, our banking system has, in effect, gone in the opposite direction. As European banking systems going through the resolution of the banking crisis have become national rather than international, our banks have been put in that position as well. We need more mechanisms and are working to try to provide supports so that banks can either be teamed with external banks in markets to which our companies wish to export or, alternatively, that banks in those jurisdictions are encouraged to have operations in Ireland.

The members mentioned some of the elements we intend to use to break through these issues. A group meets every two weeks, which involves people from Enterprise Ireland, our colleagues in the Department of Jobs, Enterprise and Innovation and the Department of Education and Skills, which has an important role to play in teaching the managers of companies how to run businesses. Other State-based stakeholders, including the National Pensions Reserve Fund, NPRF, and the National Treasury Management Agency, NTMA, are also involved in trying to drive all these various initiatives.

We have also taken advantage of a programme we are running in the Department where we bring in people from other treasuries to work with us on the international area. That is so we can do bilateral reviews to compare the banking systems in Ireland with other jurisdictions. This is not in a broad sense but just to focus on whether companies and trade between two jurisdictions have the right level of support. We are starting by examining France and Ireland and the UK and Ireland.

Photo of John DeasyJohn Deasy (Waterford, Fine Gael)
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I will reiterate what Deputy Donohoe said before he left. We appreciate the work done by the Department of Finance, and it is a high-stakes game for Ireland right now. There has been much progress in the past year and I thank the witnesses for their work.

Mr. John Moran:

We appreciate that.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Before asking a number of questions relating to the Comptroller and Auditor General's opening remarks this morning I join other members in complimenting the Minister, Mr. Moran and his staff on the progress made in the past 12 months. We have picked up intelligence and information, although it is not easy from a legal or banking point of view to understand all of what is happening at a quick pace, particularly when one's back is to the wall and one is trying to learn as markets are moving. The Department has made much progress.

The Comptroller and Auditor General mentioned the figures of general Government debt since 2007. The estimated debt was €192 billion for 2013. Will Mr. Moran comment on the figures to date for the indebtedness of the country and the amount of money to be repaid in order to service the debt over the next few years, taking into account the deal done so far on the debt and what a possible deal might mean for repayments?

Mr. John Moran:

There are a couple of comments to make. The chart in our document suggests where we think the debt will peak. We are now at an interesting juncture where the cost of funds from the programme is approximately 3.36% on average. We are getting to a point where borrowing rates for the State at large have come within that bracket. Any additional savings that we can make will represent a positive for budgetary projections. We have made an assumption on the cost of funds that comes from information from the NTMA. As it goes to the market, we will see that feed in a positive way back into our fiscal numbers.

We have indicated that we expect the debt to peak at the end of this year and to start to decline thereafter. Unfortunately, that decline will be on a slow basis. In 2007, debt in the Irish position was only 25%-----

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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What are we repaying in interest year on year? The year 2013 provided a sum of €8 billion. From 2008, what were we paying up to the figure for 2013, which is the highest point on the graph? We can see the growth pattern to that point. How long will it stay at that level and what part of this is moveable? Will the number be €7 billion or €8 billion and will it be changed by the deal or interest rates on the other side?

Mr. Garrett O'Neill:

I will refer to the budget 2013 document, which projects the Government interest expenditure to 2015 as a percentage of GDP at 5.5% in each of the three years to 2015.

1:10 pm

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Which is €8 billion.

Mr. Garrett O'Neill:

That is table 11 on page C.20 of the document.

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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The Chairman is asking what the cost is.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Yes. In euro, what will it cost to service the debt?

Mr. Garrett O'Neill:

From the same table the number for 2013 is €9.3 billion, for 2014 it is €9.65 billion and for 2015 it is €10 billion.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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What will be the impact on that of the markets? That €8 billion from 2013 up to €10 billion in 2014 or 2015 is affected by the cost of funds and so on. What fluctuation will take place in that market to reduce the figure?

Mr. John Moran:

One will see very little impact on historical debt. The traditional way of issuing Government debt is as a fixed rate. That is one of the features in the new promissory note replacement bonds. It is somewhat unusual that they are floating rate bonds. Where the savings come in, I do not think that we have a document that I could show the committee is in the debt as it is replaced by the State. To the extent that it can be replaced at a cost that is less than the interest currently being paid on the debt, we will start to see a recovery.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is that 2015 onwards?

Mr. John Moran:

As soon as we start. Yes, we have some debt that we will replace even at the moment. For example, as debt would be rolled out.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is that in significant sums?

Mr. John Moran:

Yes, significant sums because most of it has been rolled out.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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One could say, as a yardstick for the next number of years to 2015, the debt repayment figure will range between the 2013 figure of €8 billion and the suggested figure that Mr. O'Neill gave us of €10 billion. Is that not going to change?

Mr. John Moran:

That should not change very significantly.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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That is the level of repayment of debt that we must meet. It just helps things.

Mr. John Moran:

I am willing to accept that.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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The openness of the Department is one of the things that Deputy Ross raised and I want to address it. A greater openness does exist than previously. With regard to his question, he encouraged it to attach to the table contained in the report, given by the Department this morning, some names of its senior people so that we know who is reporting to whom. One does not want to get into names of people at middle management downwards. Such a measure would give a greater openness. I wish to add to his request. The Department should do the same because it is moving in that direction. I want it explained, in terms that can be understood by the public, exactly what debt and repayments we will be faced with. That figure will help us to understand. Regardless of what happens between now and 2015 our debt repayments will range between €8 billion and €10 billion. The historical situation meant that we were tied into an interest rate which was fixed.

Mr. John Moran:

We have no problem producing that analysis. One of the reasons we are a little vague is that the numbers are run by the NTMA and in that sense we only get the complete or total numbers. I will talk to Mr. John Corrigan and we will work out how we can produce something.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Let us have those numbers.

Mr. John Moran:

That is no problem.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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They would also help us to understand. Like the Department, we are on a steep learning curve when it comes to the Department of Finance, the European Union and troika funding and all the rest of it. We want to keep pace with the Department.

Mr. John Moran:

Yes.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Let us have the information.

Mr. John Moran:

We will produce something. That is no problem. Another important metric is also the percentage of tax revenues that are used up in interest. In fact, relative to the 1980s we are in a better situation now than we were at a time when we also had a very extreme debt situation. We will produce something on that.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I wish to raise the issue of liabilities and future pension entitlements. An estimate was provided in 2009 that the amount was €116 billion. According to the Comptroller and Auditor General's comments this morning lots of changes have taken place in public service pay, commitments and so on. What is the current liability?

Mr. John Moran:

I do not want to necessarily dodge the question but that is a question for the Department of Public Expenditure and Reform because it is responsible for examining the matter. There was a recommendation in the report. That Department is dealing with the matter in terms of redoing it.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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That was my second question. Who deals with the Comptroller and Auditor General's recommendation? Is it the Department of Finance?

Mr. John Moran:

It is the Department of Public Expenditure and Reform.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Does Mr. Quigley have the figure?

Mr. Dermot Quigley:

I do not have the figure. No, not off-hand. Work is being undertaking in the Department. I suggest that the subject could be discussed at the same time as the superannuation and retired allowances Vote and I recollect that it will arise quite quickly. I suggest that it would be more appropriate to deal with it when we deal with the cost of public service pensions and public service pension policy generally.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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As we prepare for that, can Mr. Quigley ask his Department to give us some information on the figure of €116 billion for 2009? I also ask him for any other information that his Department might have that would inform us beyond that point-----

Mr. Dermot Quigley:

Certainly.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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-----that is relative to the figure and the exposure of the State. Has the Department taken up the recommendation of the Comptroller and Auditor General regarding the actuarial reviews that should be carried out?

Mr. Dermot Quigley:

Certainly.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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If the Department has, and reviews have been carried out, then he might let us know the outcome?

Mr. John Moran:

Certainly.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Are the banks showing signs of not needing State support? Is there a light somewhere in that dark tunnel that tells us things are improving?

Mr. John Moran:

We certainly see a light and it is reflected in our decision to take off the guarantee this quarter. To us that was the big statement. The underlying liability has considerably reduced, from memory it was over €250 billion and was down to about €75 billion by the end of last year. We are now in a situation, and we have been for some time, that we felt that this was the quarter in which we could release the State from the contingent liability. While monitoring the deposit flows of the banks we have not seen any negative impact in respect of that. We feel that is recognition that the public are looking at the banks in terms of their strength rather than necessarily the banks needing to be supported for deposits. We must bear in mind that there is already a deposit guarantee system in place of up to €100,000. Therefore, our next focus in terms of continuing to break the link between the two will be to try to reduce, as we started earlier this year, the investment that the State has in the banks. We have started with the instruments that are the easiest in many ways, the contingent capital instruments. We will work from that to the preference shares and ultimately to the equity of the banks.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Does the Secretary General see the banks being in State ownership for a number of years?

Mr. John Moran:

It depends on which bank we are talking about. We certainly must assume-----

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Obviously, AIB.

Mr. John Moran:

There is a very significant restructuring job to be done with AIB. We have a scenario where the international banking sector is not particularly strong. I know that the UK Treasury is struggling with the same issue. It is difficult to see a full transfer of a large bank like that into private ownership in the short term. We will continue to work, as we have done with Irish Life, with the parts of the system that we think that we can manage.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I do not want to pin the Secretary General to time. To me short term means years.

Mr. John Moran:

I know.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Does the Secretary General agree?

Mr. John Moran:

If we can find somebody quicker we would be very happy to do that.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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All right. I shall comment on the public interest directors because other members have passed comment. At the time I presumed that the term "public interest directors" meant they would examine the activities in the bank to ensure that as far as the State was concerned and, therefore, the citizen, the banks behaved correctly. Instead the banks behaved badly in terms of their governance, their activities with customers and clients, their lending criteria and all of that. To be quite frank, the public interest directors are not doing a very good job. They get paid well for what they do.

They have a particular role which need not necessarily clash with their duties as directors. What I would expect from them is what I imagine the citizen would expect, and that can be equated to good governance. It is not a big deal. Without wanting them to interfere with the SME sector, when we talk about lending to the SMEs the truth is that they are not lending. That has been said by the national bodies representing businesses and economic commentators in general.

The figures we are getting are massaged to a degree. Deputy Donohoe made the point this morning, for example, that people make an application but they do not become part of the analysis until their application has been looked at and they are told they can continue with the application because it is likely to be approved. They are outside the analysis. When a business goes to a bank, it could emerge with a restructured overdraft, termed a loan, and no overdraft to continue the business, or one could present requesting a loan and be analysed without being brought into the system itself. In other words, the bank will talk to a person about the loan but it does not process one's application. Therefore, one is not part of the statistics that are eventually presented to the Department of Finance or elsewhere. I thought the public interest directors would have called the banks' bluff with regard to that activity.

Likewise in respect of their legal services departments, it appears that the process is held up, and can be held up, for years. I am breaking this down relative to High Street, Ireland, and the retailers who are in difficulty and who need an overdraft to continue. It can be extended into an industry with which I am familiar, the transport industry. It can be extended to people who already have debt with the banks because they have built up a property portfolio on the back of a good business. The banks do not deal with it, and the public interest directors do not blow the whistle on these banks. We cannot do much with them because the statistics being presented to us do not include this activity. The banks, to a degree, have their heads in the sand about much of this. I would have hoped that the public interest directors and the Department of Finance would be a little more difficult in dealing with the banks to get them to respond, because they are closing businesses in this country and ruining the potential of good entrepreneurs to create employment. I am presenting that as a fact based on information gathered at my clinics or from listening to business people expressing this in their organisations. We received a submission from RGDATA recently which discussed this, and the banks were central to its criticism. Is this something you will take up with the public interest directors, or that you would bear in mind with regard to the policy as it is being developed by the banks?

1:20 pm

Mr. John Moran:

As I mentioned earlier, in the case of the banks we are now meeting with as many of the board members as are available on a regular basis, most typically myself and the Minister. We have an agenda that includes not just mortgage arrears but also lending and SMEs. We raise it at the level of the boards to ensure that they are putting as much pressure as they can on the banks. We also do that indirectly by virtue of the fact that we want and insist that the banks should move towards profitability. The banks understand that the only way they can become profitable is by lending money. There is no point in not doing any sales, in terms of loans, as they will not be able to generate any profits. I mentioned earlier the shared frustration on the mortgage arrears. Equally, in this area we continue to try and figure out what we can do with this. We are not the only treasury struggling with this. We have hosted conferences with people across Europe to try and understand if they have any tricks or techniques that we are not using here.

We have an SME funding group which involves people from across the system to ensure there is a whole-of-government approach to this. It meets every two weeks in my Department. We have a stakeholders group where we bring in the banks, all of the participants and the representative bodies for these various companies in the tourism sector, SME sector and everything else. I have almost threatened to start publishing the minutes of that meeting so people can understand where we are going. We send out consultation papers to see if there is anything else we could do, and we do not necessarily hear all the solutions, even from the industry bodies, as to what more we could be doing in this sector.

The banks have come from a position where they have not been well positioned to do this lending. Certainly, two years ago the banks were in much worse shape than they are today. The difficulty we still face in respect of a lot of companies we talk about is a more complex issue about high rents, overhang of debt and balance sheets that in many respects are also lacking enough equity for banks to be able to make loans. That is not to say there are not still issues in the banks. The fact that we engage with the Credit Review Office as much we do on situations shows that. When we get a customer who has had a problem with a bank where it is not appropriate for us to intervene in respect of that customer, we can pass it on to the Credit Review Office. Even in scenarios where it is not statutorily entitled to engage, because, for example, the loan is above its limit, it has assisted us by then engaging with the banks to try to understand the situation. In some cases that has also resulted in solutions. In other cases it has resulted in an analysis which says the bank's decision was right.

I believe there is a complexity to this discussion. The funds we have introduced with the NPRF should add very welcome and necessary equity type funding into the balance sheets, so we can try and work out the more important employers. We still have the scenario I mentioned earlier of smaller companies not necessarily running themselves as well as they should to get loans, and their situations are tougher. However, we have scenarios that we cannot understand. We have a micro-finance fund with almost no applications. That is very strange in the context of what we are hearing about small companies not being able to access funding. There are perhaps 100 or 200 applications to the micro-finance fund. We were initially worried that we would be inundated with applications but we are not getting any. AIB issued a new product at the end of last year where up to €25,000 of lending is available to existing customers with a 24 hour time approval. Again, there is just a handful of applications. Therefore, there is also a serious issue with demand. It could be that the demand has been weakened by people's belief that banks are not lending. Banks want to lend. Whether they are well equipped to do it or not, I do not know, but it is important that this message is conveyed.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I believe the business sector got that message. My concern is that having received the message, the business examines its state of affairs to prepare for a bank loan. What is not being acknowledged by the bank is the historical debt that is there. A business might have diverted from its core activity. I am talking about family owned businesses, single entrepreneurs and so forth. They might have bought another property and the property might not be performing, so it is hindering the growth of the core business. The bank is not dealing with that. It is simply allowing a business to struggle on. A business might be sustained on that basis for two years or more but it is not possible or feasible in the long term, and the banks do not address that. My issue is, and this was said by Enterprise Ireland with regard to another sector, that the banks do not appear to understand the new tools that are necessary to deal with the business problems that exist. That is my point.

In simple terms, we give the banks money. By and large, they have been supported by taxpayers' money. Your Department and the Minister negotiate deals in Europe and you extend the mortgage term for the State debt and the bank debt. We assist the banks at every turn, but they are not delivering that type of assistance to their own clients.

That is what the citizen and the entrepreneur require. Otherwise, they will never recover. The banks do not seem to understand that and I wonder if they are getting money too easily. Do they not understand the policy on the money they are getting? Are they not capable of driving the necessary changes as quickly as is needed by business?

That takes us back to public interest directors. In answer to Deputy Ross, Mr. Moran said that bonuses were about performance. Maybe we should look at not paying public interest directors if they are not performing. They were given a certain role to play and they do not seem to be playing it. The banks are receiving money because of the necessity to rebuild yet they do not appreciate that they must turn around and help the other end of the economy. That point can be applied to mortgages and repossessions because I share the views of other members on repossession. When the legislation is passed, there will be a steep climb in repossessions. The pitch will be cleared, the banks have identified their customers in trouble and it will not be a happy sight.

Mr. Moran raised the issue of rent and upward-only rent reviews. I would like to get the view of the Department of Finance on this. The Department has leased properties that are locked into upward-only rent reviews. A number of clients locked into those leases have tried and failed to negotiate with the relevant Departments. This applies particularly to ports and one individual sent the keys back to the Department of Agriculture, Food and the Marine. While we talk politically about dealing with legislation to cover the private sector in respect of upward-only rent reviews, the Government has quite a number of them. I ask Mr. Moran to provide a note on the Department's view on this. Perhaps the OPW has a role. Will the State enter into negotiations with tenants with upward-only rent reviews in leases, to establish whether the Department can assist them, as we are doing in the private sector by reducing rents and providing breathing space for people to get out of difficulty?

1:30 pm

Mr. John Moran:

The only part of the system within our framework is NAMA leases. The management of NAMA has already been mentioned, in other scenarios, that it has granted over 200 rent abatements on properties.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Are these private properties?

Mr. John Moran:

They are properties NAMA has taken over as part of taking buildings out of banks' loans.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I am talking about properties owned by the State.

Mr. John Moran:

I realise that. The Chairman asked for a note on the subject and I can ask Mr. Robert Watt to produce a note on this subject but we do not have direct responsibility. It is with the Department of Public Expenditure and Reform.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Can I ask Mr. Quigley?

Mr. Dermot Quigley:

We can prepare a note on the subject and send it to the Chairman. What is the Chairman's exact query?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I am asking about the number of properties owned by the State and leased with upward-only rent review clauses in the lease where tenants have attempted and failed to negotiate. In one instance in Donegal, the tenant sent back the keys in the post.

Mr. Dermot Quigley:

We will follow it up and provide information, mostly from the Office of Public Works.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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We will go back to the comments of the Comptroller and Auditor General. When can we expect the budget, in October or December?

Mr. John Moran:

We will not get a break this year, we will finish the Finance Bill and go straight into the budget. Because of the European semester changing, we are looking at a budget in October.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Will this be in late October?

Mr. John Moran:

It has to be done by 15 October.

Mr. Derek Moran:

The Government will make a decision in the coming weeks but legally it cannot be any later than 15 October.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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This morning the Comptroller and Auditor General made a comment on the money being provided to Quinn. Can we have an up-to-date position on this?

Ms Ann Nolan:

Some €889.75 million has been given, including €154 million given to Quinn by the Exchequer as loans in January.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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The requirement is for €1.65 billion.

Ms Ann Nolan:

That is the maximum requirement. The best estimate they have given us is somewhere between €1.1 billion and €1.3 billion.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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So that has not changed.

Ms Ann Nolan:

No.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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The committee is dealing with this matter at the moment. It relates to the work of the previous Committee of Public Accounts, which asked the Department of Finance for documentation on the bank guarantee, the night before it and how decisions were reached. The committee received a considerable amount of documents from the Department but never finished a report on it. This committee intends to complete a report, linking it to what happened, bringing it up to date and linking it to a report from the Comptroller and Auditor General. Many of the documents were heavily redacted. I can understand that they may have been redacted at the time on the basis of commercial sensitivity or a legal issue with regard to particular documents. Will Mr. Moran undertake to examine the documents provided to the previous Committee of Public Accounts at the time and consider giving us the document without redaction? Will Mr. Moran examine the other documents that may have been uncovered, whether between Ministers or between officials, that may be of interest to us in the context of the report on the banks, the financial collapse and the bank guarantee? It always puzzles me that we do not know who was in and out of the Department on that famous night. Will Mr. Moran examine the records of the Department in case it is of help to us for the report?

Mr. John Moran:

I am more than happy to release as much information as we can. I can certainly say I was not in or out of the Department that night. We will try to see if we have records of people coming in and out. With regard to the commercial sensitivity issue, there is merit in examining the documents again because documents may have been commercially sensitive in the past but, because of the passage of time, may be less sensitive now. We will endeavour to go through that.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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My intention is to put Mr. Moran on notice about the report and the work we are undertaking. We hope to do that over the coming few months. The documents are important to us and, since the documents were released, people have talked about letters. This may include the pressure the Minister was under from Europe, correspondence about that and internal correspondence with officials that may be helpful to us in respect of the report.

The Department, reflecting on it now, would know exactly who was at the various meetings and the Committee of Public Accounts would certainly like to know so that it can include that in its reflections on that period from then until now.

1:40 pm

Mr. John Moran:

We will try to do what we can.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I thank Mr. Moran. We have come to the end of our discussions. We were dealing with Vote 6 and chapters 1 to 3, inclusive, and 5. We will postpone disposing of them until our next meeting when we will deal with them. I thank all of the witnesses for attending.

The witnesses withdrew.

The committee adjourned at 1.55 p.m. until 10 a.m. on Thursday, 14 March 2013.