Oireachtas Joint and Select Committees
Wednesday, 30 April 2014
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Mortgage Arrears Resolution Process (Resumed): Central Bank of Ireland
12:55 pm
Ciarán Lynch (Cork South Central, Labour)
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Before we resume, I remind members, witnesses and those in the Visitors Gallery that all mobile telephones must be switched off to avoid interference with the broadcasting of the meeting.
I welcome Professor Patrick Honohan, Governor of the Central Bank of Ireland, to this afternoon's meeting. The discussion with Professor Honohan is the last in our series of public meetings examining mortgage arrears and the progress that is being achieved in putting in place solutions to resolve difficulties in the sector. The discussion will begin with opening remarks by Professor Honohan, following which questions may be put to him by members. It is important that we manage our time well this afternoon in order to derive maximum benefit from the meeting. Each member will have a strictly limited time slot within which questions may be put and replies given. I am proposing that 15 minutes be allocated in the first round and ten minutes in the second round. Is that agreed? Agreed. Questions from members and the replies thereto should be clear and concise.
I advise Professor Honohan that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If he is directed by the committee to cease giving evidence in regard to a particular matter and he continues to so do, he is entitled thereafter only to a qualified privilege in respect of his evidence. He is further directed that only evidence connected with the subject matter of these proceedings is to be given and is asked to respect the parliamentary practice to the effect that, where possible, he should not criticise or make charges against any person or entity, either by name or in such a way as to make him, her or it identifiable.
I invite Professor Honohan to make his opening remarks.
Professor Patrick Honohan:
I thank the Chairman for inviting me to discuss progress and developments in regard to implementing the mortgage arrears resolution targets. When I was last before the committee in September, I noted that there were indications the mortgage arrears resolution process was working and, while there was still some way to go, momentum was building. Based on the evidence of recent months, that momentum has been established and we are starting to see progress by all banks in working to address mortgage arrears issues. It is still fair to say, however, that full resolution across the system will take a significant amount of time.
Under the mortgage arrears resolution targets imposed by the Central Bank last year, the banks are required to meet quarterly targets on the resolution of mortgage arrears. To date, we have received returns from the banks for three quarters, and we reported the outcomes of our first assessment in November. We recently concluded our audit and assessment of a sample of the banks' end-2013 target returns, which the committee discussed recently with the various institutions. Based on the information submitted, the banks have proposed sufficient numbers of solutions to meet the targets of proposing solutions for 50% of arrears cases and concluding 15% of them. I am aware that the term "concluding" risks becoming slightly Orwellian; as we know, there is still a lot to be done where a case is treated as "concluded". I am conscious of avoiding terminology that might mislead people and, as such, I am starting to think of these cases as "confirmed" as much as "concluded". Having said that, we might be best to keep with what has been published.
Our audit effort on this occasion was channelled towards what we viewed as the highest-risk areas. We focused on examining the areas and issues which have caused us most concern and which the banks must address now if they are to build a sustainable, long-term process to deal with arrears. The audit process involved examinations of individual loan files, based on institution-specific samples, distinguishing, for example, between situations where a bank could be perceived as still relying on short-term solutions and where a bank seemed to be relying on what might be called "bulk campaigns", that is, offering similar solutions across the board for a range of cases rather than tailored solutions. We zoomed in on such practices where we saw them as potentially being a problem.
I would summarise our findings by saying that although we noted a number of areas of deficiency in the course of the audit, as I will mention below, by and large, the evidence is consistent with a process which is working more or less to target. We should bear in mind, however, that the targets are limited and our conclusion does not mean everything is sailing perfectly. A number of key issues emerged in the audit, all of which have been communicated to the banks to address. First, in some banks, communications with borrowers on proposed sustainable solutions were too frequently verbal in nature and did not provide sufficient clarity to borrowers in respect of the ultimate solution proposed. Second, there is evidence that despite the requirements for proposed solutions to be sustainable in the long term, short-term loan modifications are still too prevalent in some banks. Third, affordability assessments were often not evident on files reported as sustainable. In a sense, this is a technical breach in that the assessments might actually have been done but were not evident on the files. We want to ensure, however, that the banks are doing them properly. Fourth, in a limited number of cases we found issues of potential breaches of the code of conduct on mortgage arrears, CCMA, relating to the timing of the letters in advance of legal proceedings for repossessions commencing. The code of conduct is an important underpinning to the targets process. The process is a prudential action and the code of conduct is there to protect the borrower. The two work in tandem. The Central Bank will commence a review of CCMA compliance in the second half of the year and these findings will be taken into account as part of the targets review.
We are communicating the specific issues and actions identified for each bank, including actions arising from our wider insights into the effectiveness of their strategies to resolve mortgage arrears. While these issues are significant and it is important that action is taken to address them, they should not impede progress on dealing with arrears cases. We expect the banks to continue to progress cases to sustainable and long-term solutions. In the meantime, we will continue to review their operations and strategies and where there are deficiencies or we believe things should be done better, we will let them know. Addressing mortgage arrears was never going to be a short-term issue. Our view has always been that it would take time to tackle the issues and a number of years to work out. We are now at a point were progress is evident and, notwithstanding specific areas for improvement by banks, we are moving along the right path. Mortgage arrears remain a significant priority for the Central Bank and we will continue our programme of intensive oversight of the progress made by the banks.
We are now at a point were progress is evident and, notwithstanding specific areas for improvement by banks, we are moving along the right path. Mortgage arrears remain a significant priority for the Central Bank and we will continue our programme of intensive oversight of the banks' progress.
1:05 pm
Ciarán Lynch (Cork South Central, Labour)
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I thank the Governor. He is the last of the witnesses to come before us in this series of meetings. When we held the first of those meetings last year, at which the Governor was present, there were no targets in place. On the next occasion on which we met him, such targets had been notified to the banks. In the interim, we have been examining how those targets are being met. The initial approach to the crisis in mortgage arrears was to offer everyone affected interest-only repayment arrangements. This was very much a wait-and-see approach. The next step in the process involved the Keane report, which prescribed a number of options, and the most recent developments relate to the changes to the bankruptcy laws and the establishment of the Insolvency Service of Ireland. I do not believe that those charged with compiling the Keane report were expected to come up with all of the necessary prescribed solutions or that there should be no other solutions outside of these. As the various problems are worked out, we would like other resolution processes to be put in place. This has happened in some cases. Ulster Bank has, for example, put discretionary mortgages and other mechanisms in place.
An obvious solution appears to be popping up at present. Is it correct that Professor Honohan's definition of a sustainable mortgage is one which is dealt with either by being cleared in its entirety or on foot of the property being surrendered and the legacy debt disposed of within the working life of the homeowner?
Professor Patrick Honohan:
It is correct, and that would be an ideal situation. However, we are not limiting it either. As the Chairman stated in the context of the Keane report and other ideas which have emerged, all possibilities must be explored. What we have been trying to do in establishing sustainable solutions is create situations in which borrowers know where they are going to stand and know that they are not going to fall into some terrible hole in one, two or three years' time. In the context of what the Chairman is saying, it would be ideal if a solution could be found that was affordable for a borrower and that at the end of the arrangement the property would be wholly owned by that borrower. However, that will not always be the case.
Ciarán Lynch (Cork South Central, Labour)
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We do not want a blanket scenario whereby interest-only arrangements will be put in place because such arrangements involve profits going to the banks without sustainable, long-term solutions being offered to customers whose mortgages are in distress. Professor Honohan is stating on the record that in some cases solutions can last into people's retirement.
Professor Patrick Honohan:
They can go into retirement. I see only a sample of people who comment on particular cases and there are those who are complaining that the banks are proposing solutions whereby their mortgages would not be repaid before they reach quite an advanced age. What we are discussing could be a sustainable solution if it can be shown that the relevant household can still service a debt into retirement according to the schedule that has been agreed. I will go beyond that and comment on a matter that may not be fully understood, even by the banks. There are circumstances - perhaps not in many cases - where one could imagine a bank stating that it will leave the homeowner in the house because he or she can afford to service the debt and that what is left at death might be sufficient to pay off the outstanding debt with a certain amount remaining.
Ciarán Lynch (Cork South Central, Labour)
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I wish Professor Honohan to comment on a case in point. Let us consider the position of someone in his or her mid- to late 50s whose debt will not be cleared before he or she reaches 65 or 66 years of age, whose property is in positive equity and who has a decent and secure pension for retirement. It would be less costly for that person to make interest-only repayments on that mortgage, with some sort of realisation being arrived at following the disposal of the estate upon his or her passing. The bank would continue to make a profit on the loan because the person would be paying the interest and the latter would have the security of remaining in the home which he or she had furnished, modified, extended or whatever over time. Interest-only repayments are certainly lower than the rents being paid in the private market. Would that to which I have just referred come within the scope of what Professor Honohan would consider as being a sustainable solution? Could it be applied on a case-by-case basis?
Ciarán Lynch (Cork South Central, Labour)
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No; I know that.
Professor Patrick Honohan:
A person might offer it as a solution but his or her bank would make its assessment on the basis of all the relevant information. It certainly could be a solution. We are not encouraging the banks to offer new loans on an interest-only basis, as happens in other countries. What we are discussing are distressed loans which borrowers are currently unable to service. It is within the sort of restructuring required in respect of such loans that what the Chairman outlined could be seen as a sustainable solution. It may not, however, be the best sustainable solution. We are requiring the banks to offer to borrowers the best sustainable solutions available.
Ciarán Lynch (Cork South Central, Labour)
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Have discussions taken place with the pillar banks in the context of this being an agreed resolution? I am aware that the banks are obliged to engage with the Central Bank on any new models they bring forward if they contribute to the number of solutions falling within the target figure. This is what Ulster Bank was obliged to do when it drew up plans to introduce concessionary mortgages. Has that to which I refer also been discussed with the banks - in the context of falling within the target figure - as being a sustainable, long-term solution?
Professor Patrick Honohan:
In the context of this audit, we engaged in widespread discussions within the Central Bank in order that we might understand what is happening. This is one of the issues that has arisen. We realised that the banks were assuming that the Central Bank was against interest-only arrangements. Of course we are opposed to situations in which banks say to people, "Make interest-only repayments for a year and then come back to us". We are certainly against such scenarios, because proper solutions must be arrived at. We are not opposed to the kind of solution under discussion. This may be news to some of the people who operate at the coalface within the banks. Obviously, it is not just a single point of contact and many discussions take place. There are thousands of cases involved.
Ciarán Lynch (Cork South Central, Labour)
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I wish to pin down Professor Honohan on this very critical point. Are the banks aware that this constitutes a resolution process? Mixed messages appear to be coming back. When some people enter into resolution processes, the banks seem to be saying that their arrangements must be wrapped up by the time they reach retirement age. A number of colleagues on the committee have expressed concerns to the banks to the effect that those whose homes are in positive equity are particularly vulnerable in the context of their being pushed into voluntary sale arrangements. The people in the group to which I refer - if they can move into interest-only arrangements - should not be forced into voluntary sale. Professor Honohan is sending out a clear message that if someone's home is in positive equity - they may be in negative equity in some instances - and if he or she can sustain payment of some type into retirement, then he or she will be allowed to remain in his or her home into retirement and that an element of the debt will be parked, that there will be an equity swap or that there will be a transfer down the line. He is stating that the Central Bank is giving the green light to this as a resolution process.
Professor Patrick Honohan:
In principle, that could absolutely be the case. I will acknowledge that setting out frameworks, etc., in respect of these cases has been terribly complicated. There is no international standard in respect of this matter and we have been inventing, improving and progressing this as we go along. I am sure it is the case that this is not fully understood. I am delighted to have the opportunity to clarify the position.
Ciarán Lynch (Cork South Central, Labour)
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When he came before us previously, Professor Honohan provided a very colourful response when we inquired about the absence of targets. I recall that he stated he was pulling the hair out of his head because of his frustration with the banks. Given that targets are now actually in place, is it time they were reviewed in order to assess how they are being met and whether they might be broadened? Ultimately, sustainable solutions allow borrowers whose mortgages are in distress to see daylight of one form or another.
Professor Patrick Honohan:
The Central Bank view is that there should not be any major overhaul to a system which is now working, even though there may be many deficiencies and despite the fact that we are not achieving everything we wanted to achieve. It is much better to improve the way the system works through the type of engagement and audit process to which I refer rather than throwing it out altogether and beginning anew. I forget what are the current targets but it was 50% at the end of quarter four. I think the proposed new figures are 70% and then 75%. They will increase further by the end of the year but we have not yet announced any final targets in this regard. That is the track on which we must remain. We need to improve quality rather than change course.
Ciarán Lynch (Cork South Central, Labour)
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There was a disproportionate number of voluntary surrenders when such surrenders were introduced. There was a great deal of argument between the committee and the banks with regard to whether an initial letter sent to someone containing a threat of repossession could be viewed as being part of a resolution process. Leaving that aside, a significant number of people are in the process of voluntary surrender. Is the requirement relating to the target creating the dynamic in this regard? It is for this reason that I ask whether we need to review how the targets are set up.
I have dealt with cases where the borrower wanted the property to be repossessed so that they could purge the debt of an unsustainable loan, and in the case of a one bedroom flat where there was no family living, which was unsustainable, and they needed to get out of it. Are we seeing a disproportionate number of repossessions taking place because of the targets?
1:15 pm
Ciarán Lynch (Cork South Central, Labour)
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Sorry, voluntary surrenders.
Professor Patrick Honohan:
-----but there are a lot of letters heading towards repossessions. That is not nice, particularly if it was not necessary and if there was a restructure available. One matter I have been pushing on is to find out, from our audit and from the information we have more generally, whether there is any danger these letters have been going out willy-nilly, regardless of insufficient contact with the borrower, and whether the bank did not try or did not try hard enough. This is where the code of conduct on mortgage arrears is underpinning. I am assured that, with only a few exceptions which I mentioned in the speech, in the vast majority of cases we are satisfied the bank has made the required efforts to engage. If the letters came out, it means either that engagement was not forthcoming from the borrower - he or she did not fill in the form or did not really respond - or the bank's initial assessment was that there was no viable solution.
As to the ratios in that case, I do not have a firm figure. However, by far the largest number are insufficient engagement. That gives hope in the form of a wake-up call to the borrower who is distressed and maybe reluctant to open letters from banks. Such borrowers need to engage because there could be a better restructuring solution available to them and a lot of these cases that are going down the so-called loss of ownership route can turn around and come back and have a more satisfactory restructure.
Ciarán Lynch (Cork South Central, Labour)
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One of the improvements we are looking for is consistency across the board, that is, not that there is the same approach to every given solution but that there is a level of consistency and a level of information flow so that borrowers can see what is happening. In terms of the Central Bank, it has been meeting the banks and the credit unions to see how secured and unsecured debt can be managed. How has that been going with the credit unions? It has been reported that there has been a lot of resistance from that sector.
Professor Patrick Honohan:
I see these as two separate issues. I will set aside the issue of consistency for the moment but speak about the credit union and other unsecured borrowers.
There are many routes for a distressed borrower in a multi-debt situation. There are routes that have been established in legislation, such as the personal insolvency arrangements. We have always thought that the bank and the borrower have an incentive to make a deal before getting into complex arrangements. We have been encouraging this from way back, but it did not happen much. To accelerate that in the case of multiple debts, we started down this route of a pilot programme, more or less facilitated or catalysed by the Central Bank. We tried to knock heads together. We tried to get the two representative bodies of the credit unions, some of the non-bank lenders, credit card companies and the banks to come in and discuss how to deal with a borrower who has multiple debts, how to allocate the secured and unsecured debt, and how it gets divided up. A lot of work was done on that. We drew from experience, in particular, that of StepChange, a British charity that deals with distressed debt in the United Kingdom, and it came along and operated this pilot.
We found a lot of resistance from some credit unions which were a little suspicious that the banks, with their secured debt, would get an advantage in such an arrangement. Some credit unions feel that by not going into such an arrangement, they will get repaid faster by multi-debt borrowers. They are not correct.
The pilot was instructive. It showed elements that work and elements that do not work, but at the end of the day there was no agreement round that table to go ahead and consolidate this into a formal arrangement between the credit unions and the banks. Only a few credit unions participated.
Ciarán Lynch (Cork South Central, Labour)
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I have a final question - other members may pick this up as we go over it in the afternoon - which relates to the issue of how the Central Bank collates its data on those in arrears. Is there a requirement to review same? We are seeing situations, or an implied consequence arising, where borrowers are in a mortgage arrears resolution process, MARP, but seem to be falling out of it, particularly into voluntary surrenders. We are not too sure how many of them are in positive equity and how many of them are in negative equity. We do not know how many borrowers have fallen into 90 days of arrears, bearing in mind that 90 days of arrears is not 90 calendar days but the financial equivalent of 90 days, and it could be over 18 months before one would hit 90 days. We do not know whether those borrowers have completed financial statements. There are other issues, as I stated, with regard to borrowers who have engaged with the assisted voluntary sale letter. Are these voluntary sales or is it that the mortgage arrears resolution process has been revamped into a voluntary sale and that is where the customer finds himself or herself with no other option?
Professor Patrick Honohan:
Getting accurate measures here is quite challenging. First, there is the question of what concepts we should use. We have had to develop these concepts, which are not well established internationally. Few countries have had such a massive scale of problems. When one defines the concept one wants to measure, one must communicate that accurately to the banks in order that they understand, can state their systems do not collect that but collect something else, and can ask if this is what we want. Getting consistency and accuracy has been a challenge. There have been a lot of revisions. The committee will note, for example, one of the numbers in the table I circulated goes up and then goes down again. Commentators ask how can it go down as it should have been increasing constantly, but it is a reclassification. On consideration, they state they see it as such.
There remain challenges in that regard. We are not hiding information. We have not got a mass of disorganised information. We are constantly trying to refine and improve, but it has been challenging. The banks' systems have not been geared up to providing the answers to these kinds of questions.
Ciarán Lynch (Cork South Central, Labour)
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Before I pass on to Deputy Michael McGrath, I must say that what Professor Honohan has done this afternoon is clear up something necessary, that is, that ambiguity with regard to a resolution process for that particular coterie of borrower I mentioned. Would it be too bold of me to ask the Central Bank to issue a statement along those lines so that it gets formalised, that it is not merely on the record of the committee and that it is something the banks note?
Ciarán Lynch (Cork South Central, Labour)
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I thank Professor Honohan.
Michael McGrath (Cork South Central, Fianna Fail)
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I welcome the Governor, Professor Honohan. During the course of our hearings with the banks in recent weeks, when we collated all of the data which were being presented, it became clear that in excess of 30,000 individual mortgage arrears cases were either in the legal process or had a threatening legal letter issued by their bank. It seems, from looking at the figures, that while the banks state they have reached the targets by the Central Bank, they have relied very heavily indeed on the threat of legal repossession to achieve those targets. Is Professor Honohan satisfied with that?
Professor Patrick Honohan:
We went into this with our eyes open because we knew there were going to be some cases that go, and end, down the repossession route. We also knew that engagement was a weak point. It is not a question of blame. It is merely a fact of life that engagement between distressed borrowers and their lenders was not happening. The question was asked whether we are going to allow the banks to treat the issue of a letter as satisfying what was proposed. The banks have to follow the procedures in the code of conduct on mortgage arrears before they issue that letter. They cannot merely state that they have another 500 to fill before the end of the month and they had better send out the letters. The banks must have gone through that process.
Although we would like to get the banks to do what they cannot do, if they cannot engage with the borrower, they cannot provide a restructuring, and we have had to allow them to do that. I would rather that it had not been so. I acknowledge it must be a frightening and upsetting experience to get such a letter from the bank, but this is not something we have created. This is something that was coming down the road. I think we all agree around here - I should not speak for the members of the committee - most analysts agree that getting to grips with the problem is essential, even if the process of getting to grips with it is initially unpleasant.
Michael McGrath (Cork South Central, Fianna Fail)
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I suppose the point is that in the lead-up to the targets programme being introduced, there were not many of these letters being issued.
Michael McGrath (Cork South Central, Fianna Fail)
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One might say there were not enough of them being issued.
1:25 pm
Michael McGrath (Cork South Central, Fianna Fail)
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But then the targets were set and, all of a sudden, there was a gush, with tens of thousands of these letters being issued by the banks. Professor Honohan said they did not do so just to meet the targets, but the consequence has been that they have met the targets because they have issued so many threatening legal letters. Professor Honohan might argue they had to be issued anyway.
Professor Patrick Honohan:
They had to issue them anyway. To let that drift for one, two or three years more would have left those borrowers is in a worse situation and in even more distress and grief. It is a question of biting the bullet and achieving engagement and a solution. In many cases, the solution will not be one involving loss of ownership in the end.
Michael McGrath (Cork South Central, Fianna Fail)
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May I raise the issue of consistency of treatment, which the Chairman raised with the Governor? There are dramatic inconsistencies between the various banks and their approaches to mortgage arrears with individual customers. The outcome for somebody in arrears seems very much to depend on what bank he or she is with. We are witnessing that in regard to the policy on debt forgiveness, for example. AIB is rolling out split mortgages where part of the debt has been written off. Bank of Ireland has a rigid policy of no debt write-off whatsoever. We are noting different treatments of split mortgages. Bank of Ireland is still charging interest on the warehouse portion, for example. We are witnessing serious inconsistencies, to say the least, in how the institutions are approaching the new insolvency service.
While nobody expects absolute uniformity, there are dramatic inconsistencies. Some options open to certain borrowers with certain institutions are not open to other borrowers with different institutions. That seems to be inherently unfair. The banks seem to be running the show because they are deciding what constitutes a sustainable solution. They are allowed to define it themselves. They can decide what solution is offered, including a threatening legal letter. If the solution is a split mortgage, the bank can determine its terms. Professor Patrick Honohan seems to be satisfied overall with the Central Bank's approach but he is not really getting into the nitty-gritty; he is letting the banks get on with it.
Professor Patrick Honohan:
It is an important question. It has not been our aim to achieve perfect consistency but to meet minimum, but high, requirements. We want to insist that borrowers get sustainable solutions and that these involve restructuring, where possible. It is all set out and I am only paraphrasing. We are setting standards that must be met by the banks but we are not saying how they are to meet them. If we said how they are to meet them, we would end up with a weaker solution. We have over 100 people dealing with banks, including the foreign-owned banks. We cannot specify exactly what should be done by each bank. We are setting minimum standards that I believe are good. The result may be that some borrowers will be fortunate enough to get an even better treatment than our minimum. As the Deputy implied, however, we open the door to many different approaches. As these approaches gain traction and we get more actual cases, banks will learn from one another what works and what does not. That is the current position. If we knew there was a very precise model that worked everywhere, we would be happy to impose it. However, to impose one at present would not be effective. On which bank would the Deputy like us to model our specification? It is not really like that.
Michael McGrath (Cork South Central, Fianna Fail)
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Can Professor Honohan see how that hands-off approach can result in inequities among individual customers? The institution one is with can be the difference between keeping one's home and not keeping it. If one bank is prepared to write off part of a mortgage to make it sustainable and another is not prepared to countenance that under any circumstances, there could not be two more radically different outcomes. It could mean the difference between keeping one's home and not keeping it. The Governor seems to be satisfied for that to continue.
Michael McGrath (Cork South Central, Fianna Fail)
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People from abroad?
Michael McGrath (Cork South Central, Fianna Fail)
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Has that happened?
Professor Patrick Honohan:
Yes; we are calling them out all the time. We examine their audits and say what did not work and identify what must be redone. We provide a list of examples of the sorts of issues that arise.
It is true that as this evolves, one hears different rhetoric from different banks. That may reflect communication style or the mix of types of business the banks are involved in.
Michael McGrath (Cork South Central, Fianna Fail)
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It is not just rhetoric because we are encountering individual cases that arise as a consequence. We had the advocacy groups here before inviting the banks. It is not just rhetoric. The groups gave us examples of what is happening in practice. Radically different approaches are being taken by the banks.
Michael McGrath (Cork South Central, Fianna Fail)
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Some are more ruthless.
Professor Patrick Honohan:
-----but may appear to be somewhat more generous. It is not much good to be generous if one is not being efficient in achieving solutions.
For the moment, I am not minded to complicate this matter by narrowing the options towards some more precise and indefensible subset of possible solutions. That does not mean the Central Bank does not have its own view on how to rank the various banks. There are different views. Some believe a certain bank is adopting only one approach but doing so well, while others are saying this is not the case and that it would be much better to adopt a different approach. There is no clear, single dimensional rank.
Michael McGrath (Cork South Central, Fianna Fail)
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Can I ask the Governor about the circumstances of many mortgage holders whose mortgages were originally taken out from a regulated financial institution but which are now held by an entity not regulated by the Central Bank of Ireland, with all the consequences, such as the code of conduct on mortgage arrears and various statutory protections not applying? Is the Governor satisfied to preside over that?
Professor Patrick Honohan:
I do not preside over that; I preside over regulated institutions. I am not pleased with this development because it seems the code of conduct on mortgage arrears has been a very important protection for borrowers. It has been the position of the Central Bank and it has been communicated to the Government that action should be taken to ensure an equivalent amount of protection for people who are moving out of the regulated area. Work continues in this regard but it is out of our control. We are not happy with it and we have communicated our unhappiness. As the Deputy knows, some action has been taken but it is outside our sphere.
Michael McGrath (Cork South Central, Fianna Fail)
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Have the statements of some hedge funds — US funds — that they will voluntarily comply with the code no standing in the eyes of the Central Bank? If a consumer or mortgage holder feels a fund is not complying with the code, the Central Bank has no enforcement role whatsoever at present.
Professor Patrick Honohan:
We do not have a formal role but we certainly keep track of it and make appropriate noises. Others who can exercise power may do that. We have informal ways of doing this but I am not saying I am happy with the position. We have called for work to be done on it. There are discussions taking place. It is out of our control but we will do what we can to ensure the code of conduct — the minimum standard we have set and which I have emphasised — applies to a borrower who falls out of the system simply because his institution has been liquidated. The loan sold should not suffer.
Michael McGrath (Cork South Central, Fianna Fail)
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May I ask the Governor about the outcome of the court case yesterday? I refer to the sentencing of two former senior Anglo Irish Bank executives.
Ciarán Lynch (Cork South Central, Labour)
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There are some very specific Standing Orders and rulings in that regard. I remind all present that the purpose of this meeting is to discuss the mortgage arrears resolution targets. I remind members that in the event of there being any reference in the course of the meeting to court proceedings that concluded yesterday, it is well-established that decisions or judgments of a duly constituted court cannot be subject to review a discussion in the Houses or, by extension, the committee as the committee is not a judicial body. Members of the Judiciary are independent by virtue of the Constitution and may not be criticised or have their rulings referred to except on a substantive motion.
As long as those rulings are respected, I will allow some degree of latitude to discuss matters that arise out of court proceedings and that relate to the role of the Central Bank in that regard. There will be some scope there.
1:35 pm
Michael McGrath (Cork South Central, Fianna Fail)
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I respect that. I want to again quote Judge Nolan when he said that it would be most unjust to jail these two men when he felt that a State agency - the financial regulator - led the two men into error and illegality. As the current Governor of the Central Bank and the financial regulator as such, what is Professor Honohan's reaction to that? Are there any consequences in respect of any individuals who may have been involved in presiding over that situation?
Professor Patrick Honohan:
The Deputy will recall that four years ago, I produced a report for the then Minister for Finance containing an assessment of the regulatory and supervisory system in Ireland over the previous years up to the bank guarantee. I documented and identified a number of very serious deficiencies. Although the specific aspects that were discussed in this case were excluded from the scope of that review, what was revealed in this court case does not, in general, come as a surprise to me. The consequences of such deficiencies have already been acted upon in terms of greatly expanded and refocused supervisory staff and new approaches and behaviours; so much has changed. This particular episode certainly could not happen again. Nothing like this could happen again. I cannot conceive of it happening in the newly restructured regulatory arrangements we now have because of the action taken over those years. I do not look at this and conclude that such and such must be done. My interpretation is that we have already done it.
The Deputy speaks about individuals but I do not want to talk about individuals.
Ciarán Lynch (Cork South Central, Labour)
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Outside of the order of the-----
Ciarán Lynch (Cork South Central, Labour)
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I call Deputy O'Donnell who is sharing his time with Senator Paul Coghlan.
Paul Coghlan (Fine Gael)
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Professor Honohan is as welcome as ever. Given a lack of uniformity arising from the different treatment of mortgage arrears by the different financial institutions, I am particularly concerned about the unsavoury practices of those banks which are exiting the Irish market. Professor Honohan might want to comment on that. I think he has answered the other part of my question in answering Deputy McGrath because I was going to ask him about his view of the regulatory system. Given the appalling mistakes of the past - I did not want to refer to any court case - has Professor Honohan anything further to say about that and the oversight arrangements he believes are now in place to ensure, as he said, that this could never happen again? Professor Honohan can hold anything further he might wish to say until Deputy O'Donnell is finished.
Ciarán Lynch (Cork South Central, Labour)
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Does Professor Honohan wish to respond?
Paul Coghlan (Fine Gael)
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I did not want to interfere in respect of Deputy O'Donnell's question.
Ciarán Lynch (Cork South Central, Labour)
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I will let Senator Coghlan get a response and move on to Deputy O'Donnell.
Paul Coghlan (Fine Gael)
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I am only referring to those banks exiting the Irish market.
Paul Coghlan (Fine Gael)
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I think it extends-----
Paul Coghlan (Fine Gael)
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There are only about three institutions. It relates to more than mortgage arrears. I wrote a letter to the Chairman before the meeting so that the committee could discuss it in due course. I do not want to push Professor Honohan but I believe there are very unsavoury practices involved.
Professor Patrick Honohan:
There have been discussions in the UK context regarding the practices of the banks in dealing with SME borrowers. It was alleged that they dealt very harshly with them and looked more to the question of generating fees for those involved rather than the viability of the firms. We have noticed this and were concerned that this would not affect the subsidiaries of such institutions in Ireland. There is ongoing work on that. Allegations have been made about SME lending and clean-up of SME loans. One hears this all the time. I would very much like to get concrete evidence because I know that we are dealing with the banks that are a going concern and are making sure their SME restructuring and resolving practices are very good. Informally, I would like any information the Senator has.
Paul Coghlan (Fine Gael)
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I will come back to that.
Kieran O'Donnell (Limerick City, Fine Gael)
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In respect of mortgage arrears, various financial institutions have appeared before us recently. Deputy McGrath made reference to the total number. A total of 50% of the so-called resolutions being provided for mortgage arrears by the institutions involve legal proceedings and legal letters. Is Professor Honohan satisfied that this is a basis for a sustainable mortgage arrears resolution mechanism?
Light touch regulation was what got us into trouble with regard to the banking sector. Professor Honohan said the Central Bank would keep an eye on it but figures never lie. Professor Honohan is looking at banks meeting their targets. They have met their targets because they have issued legal letters. With all due respect, they are not sustainable solutions. Could Professor Honohan feed into that mix the upcoming European stress tests for the banks? Are they impinging in any way on the type of approach the banks are taking to mortgage arrears resolution?
One feature that appears to be coming up is the paradox of positive equity whereby people in positive equity who are in arrears appear to be in a more vulnerable position than those in negative equity who are in arrears. Is it not fair to say that if a bank proceeds to sell an asset that is in positive equity with a loan that is in arrears, that could improve its balance sheet so one might just do it in terms of its capital ratio. We are getting down to the nuts and bolts here. We need to look at it in this context. The banks came before us. A total of 50% of their proposals involved legal letters and two of the major institutions told us that they did not do mortgage debt write-off in respect of personal insolvency arrangements. We are trying to find something that is sustainable, particularly in terms of keeping people in the family home. Could Professor Honohan deal with that?
I spoke about light touch regulation because there are times where one must get down into the nitty gritty. Could Professor Honohan give me his overall view of that area, feed it into the stress tests for the banks and give us his view of the banks in terms of the pending stress tests? Is their caution on their capital ratio feeding into their approach to mortgage resolution and sustainable solutions?
Kieran O'Donnell (Limerick City, Fine Gael)
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How can it be effective for 50% of the banks' mechanisms - the so-called sustainable solutions for mortgage holders - to be legal letters?
Professor Patrick Honohan:
When I started talking to the committee about targets, I put down a few markers and warnings that there will be some unexpected side-effects.
This is not an entirely unexpected side-effect; it is part of a process. If I am back here in two years and committee members can say to me 50% of these properties ended up being repossessed, I will have to agree that they were right and I was wrong and that this was a disappointing outcome. However, what I expect is that the consequence of these letters will be engagement by borrowers with the banks that will lead to sustainable loan modifications. The banks did not just send the letters; they stated-----
1:45 pm
Kieran O'Donnell (Limerick City, Fine Gael)
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With due respect, many of the letters were sent for the purpose of meeting the targets set. Let us deal with the facts. This issue has been ongoing for the past five years and the banks knew that this mechanism was being put in place. It is a little like cramming for an exam - one knows one year ahead that it is coming up but studies for it the night before and one is inclined to motor through it. That is what the banks have done in the case of the legal letters.
Kieran O'Donnell (Limerick City, Fine Gael)
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With what part does Professor Honohan agree?
Professor Patrick Honohan:
That the banks, having made efforts to be compliant with the code of conduct on mortgage arrears, have asked themselves what they are going to do with the people in question. They have not received any response from them and have asked themselves whether they have gone through the process. They see that they have gone through it and that they must meet the targets set and that they had better send the letters. I am sure that is happening, but I am not particularly upset about it because the letters would have had to be sent in any event. As the Deputy said, we have been sitting here for five years, with the banks wondering what they would do with the people in question but doing nothing. They did nothing, but now, at least, they are sending letters.
This is becoming a matter of concern. It is not just about letters but civil bills and other legal proceedings.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, it has all to do with legal proceedings.
Professor Patrick Honohan:
It is getting close to a situation where borrowers who have not engaged may find themselves not achieving a sustainable restructuring. Therefore, it is an important issue and we wanted to solve the problem. Both the committee and I wanted the problem to be solved and pushed the banks and set targets. I was not quite sure about them, but we set them. This has generated action, but it has not yet delivered the full result. However, we have sustainable solutions for a substantial number - 50% - in the context of restructuring. I think of the others as being in a separate box for special treatment and hope they are-----
Kieran O'Donnell (Limerick City, Fine Gael)
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In a kind of purgatory. Will Professor Honohan tell me about the stress tests, how they are conducted and how they feed into the process? How does he think the banks will perform in the upcoming European stress tests?
Professor Patrick Honohan:
The stress test parameters and the details were announced yesterday. The Central Bank was involved in the process and tracked the particular scenario being developed for Europe. We were attentive to ensure the way this was modelled in the Irish economy in terms of its implications for unemployment levels, house prices, commercial property prices and interest rates would be a realistic representation of the economy in order that we would not get caught out in an unrealistic scenario that might end up in a costly solution for the Government in the context of the banks. We worked hard on getting this right.
I will not give any guidance on what I think will happen or whether the banks will pass the tests. I will not answer the question for two reasons. First, I do not want to be found to be wrong, although I have a better idea of what the outcome will be than before the parameters were set. A second and more important reason is that this is happening in 28 countries in Europe. Every central banker is being asked about this and they are all saying they will have to see. The matter is complicated.
Kieran O'Donnell (Limerick City, Fine Gael)
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Is Professor Honohan confident that the banks -----
Kieran O'Donnell (Limerick City, Fine Gael)
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Is Professor Honohan satisfied that the Irish banks are ready and prepared for the stress tests?
Professor Patrick Honohan:
I am broadly satisfied with the way the stress test has been designed, but I will not be drawn on whether banks will pass.
On the question of whether the banks have been adjusting their behaviour in order to pass, my impression is that they have not. In other countries there has been this element. In some of them big banks have been stating they must ensure they pass the stress tests and should go slow in lending and adjust their international portfolios. Banks here have been going through an adjustment of their portfolios since before the troika arrived. There have been massive sales, downsizing, deleveraging and so on and it is on these that they have focused their attention. I do not see their decisions on new lending and particular designs of loan restructuring as having been a major consideration. One might read in an English newspaper that this issue is affecting English banks and wonder whether that is happening here, but our banks have been focusing on their problems independently of the stress tests and do not believe they are the issue.
The Deputy asked specifically about cases of positive equity. I am as concerned as he is about such cases. The best sustainable solution for a borrower who wants to stay in a property is to continue in it. I do not like to see situations where it is being turned into a forced sale unnecessarily. There are complications because we never hear the full story, only about the highlights. I have a concern in that regard. If any bank thinks it will flatter its balance sheet by such actions, it should be very careful-----
Kieran O'Donnell (Limerick City, Fine Gael)
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The Central Bank will not put up with it.
Kieran O'Donnell (Limerick City, Fine Gael)
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I wish to ask two brief questions. When were the banks first made aware that they would have to put sustainable solutions in place?
Ciarán Lynch (Cork South Central, Labour)
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That is a long question.
Kieran O'Donnell (Limerick City, Fine Gael)
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No, it is brief.
Professor Patrick Honohan:
The sustainable solution terminology was only introduced at the same time as the targets. The Deputy has suggested this solution was a long time in preparation. We approached the issue slightly differently earlier but then decided we needed to define "sustainable solution" and set targets for the banks. They were made aware of this in the spring of 2013. Before that we were doing other things.
Kieran O'Donnell (Limerick City, Fine Gael)
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I take a slightly different view. It is unacceptable that at this point, five years down the road, 50% of the so-called sustainable solutions provided by the banks involve legal proceedings or legal letters. This suggests we must question the validity of the process. What level of engagement does the Central Bank have with the banks at the micro level in terms of being able to ask them why they have reached the point where these legal letters are being issued and why they were not putting sustainable solutions in place prior to this? There are inconsistencies. It is unfair that individuals with two institutions are treated differently. Professor Honohan has said he likes to see diversity, but people are entitled to consistency of treatment with similar types of mortgage. They are not getting this. We have had the banks appear before us to discuss the issue. As Governor of the Central Bank, will Professor Honohan get them to put sustainable solutions in place quickly? Depositor equity is important. Will Professor Honohan find out why we are at this point with the banks?
Ciarán Lynch (Cork South Central, Labour)
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The Deputy should wrap up.
Kieran O'Donnell (Limerick City, Fine Gael)
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My question concerns a lack of consistency in the treatment of borrowers.
Professor Patrick Honohan:
I talked about that issue with Deputy Michael McGrath. On what some of the banks have stated, I did not read all of their testimony to the committee, but I heard some statements. I find it unsatisfactory, in particular, that some banks would make categorical - almost ideological - statements about their position. I do not think ideology helps in this instance. Some of the positions taken by the banks are not in the interests of their shareholders and sooner or later the boards of the banks will tell management to be more realistic and take advantage of the solutions which are working for other banks. If there was no example of another bank achieving solutions, we would not be able to do this.
I see a convergence. We have only solved a relatively small proportion of distressed mortgages through restructures. Some 13,500 or the like have been concluded with restructures. There is much to play for in terms of landing on the model that works well. As to the question of people having a right to consistency, I did not read it in the legislation. If it is there, I will apply it.
1:55 pm
Ciarán Lynch (Cork South Central, Labour)
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I thank Professor Honohan. With the committee's permission, I will excuse myself and Deputy O'Donnell will take the Chair temporarily, after which the Vice Chairman will assume the Chair for the remainder of the meeting. Is that agreed? Agreed.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Without trawling through everything that happened in the banking collapse, something became apparent, namely, senior bankers regarded the regulators and the Central Bank as patsies. The Governor is not a patsy for the bankers, is he?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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The Governor referred to angry bankers being in contact with him. Briefly, what caused their anger and why did they get in touch with him?
Professor Patrick Honohan:
I could mention a foreign banker - I will not say who - who expressed great concern about the personal insolvency arrangement, PIA, regime as undermining fundamental principles of secured debt. The personal insolvency regime is good and practical legislation and I hope it will be extensively used by those who need it, so I rejected the banker's concern. Our legislative and regulatory arrangements are not comfortable for the banks.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Has anger been expressed to the Governor by domestic bankers?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I could be wrong, but my strong impression, having listened to the Governor's previous contributions at this committee as well as today's, is that the Central Bank and he as its leader have not just taken a hands-off approach to the banks, but have also adopted a hands-off mentality. The Governor has brushed off the issue of the tens of thousands of legal letters that are dressed up as sustainable solutions. The Minister for Finance, Deputy Noonan, places responsibility for the definition of sustainability at the Governor's door. He has told us that he is not happy with the situation, but that it is a matter for the Central Bank. Today, the Governor went nearly so far as to say that the banks were doing the families and householders a favour by sending them the letters, in that, while the letters might be unpleasant, at least they had been sent. He went a step further and suggested that many of the people in question were perhaps the authors of their own misfortune because they had not been in contact with their banks. That is what I heard the Governor say.
Professor Patrick Honohan:
It is a pity, but I did not say it. I do not take the Deputy's comment seriously. I cannot believe someone is claiming that the Central Bank or I have taken a hands-off approach to the banks. The committee and I have dealt at great length with the question of the letters being sent. I am not satisfied with the letters being sent, but I accept responsibility for a process that is accelerating the conclusion of sustainable solutions. I have no sympathy for the lenders, but a lender is not in a position to construct a loan restructuring if it does not have information on the borrower's current situation.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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It is not my objective to set a collision course with the Governor. I have sat and listened-----
Mary Lou McDonald (Dublin Central, Sinn Fein)
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If the Governor does not mind, I listened to what he said. He made those statements. If we had the benefit of the transcripts at this moment, I could rewind his contribution for him. He stated that borrowers had not been in touch with the banks and he accepted the unpleasantness of receiving the letters, but that householders had at least received them. Interestingly, his initial written submission noted a key number of issues that had emerged, one of which was that communications between borrowers and some banks regarding proposed sustainable solutions were too frequently verbal in nature. He acknowledges the deficiencies in the banks on the one hand but, on the other, he apportions blame to householders in receipt of letters with which he asserts he is not happy, but which he defines as constituting a sustainable solution. This is very odd.
Professor Patrick Honohan:
I do not see how the Deputy can find it odd, except possibly for the terminology, which I have already admitted could be interpreted as Orwellian partly due to our relationship with the troika, which wanted a terminology proposed and concluded. What can a lender do to propose a sustainable solution if it does not have the information? That is the question.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Tell me this much-----
Mary Lou McDonald (Dublin Central, Sinn Fein)
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What proportion of the cases in which letters were issued owed to a lack of information? Has the Central Bank drilled into this phenomenon?
Professor Patrick Honohan:
Yes. We are trying to get a precise number. We do not have an exact number, but my impression is that the ratio is approximately 4:1 or 5:1, the one being where there has been an assessment and there is information but the bank believes no sustainable solution is possible.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Why would the Central Bank not have an exact figure at this stage?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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That is right.
Professor Patrick Honohan:
We have not audited 31,000 cases. We are trying to get accurate information from the banks, which produce what information they can, although it is not complete or satisfactory. I am quite dissatisfied with the presentation, which suggested that the Central Bank was in some way sitting back and waiting for the banks to do something. We have pushed the banks, the consequence of which is action being taken, including the sending of letters where that was going to happen anyway or where the banks did not have information sufficient for them to restructure loans. If we had told them that we would give them a pass to do nothing in such cases, we would never solve this problem and it would continue to drift as it has done for five years. It is in the interests of solving the problem. What I am saying is that it is in the interests of the borrower that this be solved instead of left to grow. I am not saying that I am happy that borrowers are being hit with these letters, as I am not, but it is better than a larger problem happening subsequently.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Many people in receipt of those letters would take a different view.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I wonder whether the Central Bank has factored into its analysis of this scenario the fact that some people are almost intimidated by banking institutions. In many instances, people are asked to engage despite having very limited, if any, financial or legal advice or support. The Central Bank does not have exact figures, although the Governor has stated that it has drilled into the scenario to establish the phenomenon of non-engagement.
The position of the distressed person facing an institution - institutions that have a track record of absolute arrogance against power regulatory authorities in this State - should also be factored in.
I could take the witness up on a comment he made earlier, when he talked about people going down the so-called loss of ownership route. I do not know what that is. I presume the so-called loss of ownership route is where there is a threat of one's house being taken from one. It is not in the witness's script, but he said it earlier. What is a so-called loss of ownership route?
2:05 pm
Professor Patrick Honohan:
First, I very much agree with the Deputy on recognising that the borrower, especially the distressed borrower, is in an awful position. Whether they receive a letter or do not receive a letter, they are intimidated by banks. This is a real problem. I am not neglecting that problem and various solutions have been proposed, be it through a personal insolvency arrangement, PIA, or one of the banks engaging Mr. Hall and so forth, in an effort to solve it. I recognise that it is a very serious problem. What I am rejecting in the Deputy's analysis is the idea that we at the Central Bank in some way do not care.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I would go further. Whether this is accidental or deliberate, I sense a level of flippancy, almost, in the presentation.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I am simply saying it. This situation is not unique to me as a public representative dealing quite regularly with people who find themselves in a distressed situation facing an intimidating banking system. It is not helpful if I hear a flippancy in the witness's presentation, and I hope it is only me. For people who are in this awful position to hear a flippant attitude or remark from the Governor of the Central Bank would be most unsatisfactory and unacceptable. Describing things as "so-called loss of ownership" routes is not good.
Professor Patrick Honohan:
The table that was handed over to the committee contains a very peculiar heading, "Loss of Ownership" route, so I called it the so-called loss of ownership route. Honestly, everybody knows my style of speech. If the Deputy is making a point to suggest there is no substance behind what I am saying, I am always cracking jokes. That is the way I have been in this committee many times and nobody said to me that it is not serious speech.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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We are dealing with the prospect of people losing their family home-----
Mary Lou McDonald (Dublin Central, Sinn Fein)
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-----so I do not want the Governor to come here and crack jokes or to use terms such as "so-called loss of ownership" routes.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Right, and I am the person the Governor is dealing with. I am marking his card, as it were, because that does not sit well with me. For his information, it also does not sit well with the people I represent. I will leave it at that as I have made my point.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I very much doubt that.
We have been given the health warnings surrounding the judgment yesterday, and I appreciate that. What is the number of staff still in the Central Bank who would have worked with Patrick Neary?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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What is the story at the more senior levels of the bank? Patrick Neary is gone but the Governor does not operate as a sole trader or lone ranger. He has a senior team around him.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Would it be possible to provide the committee with more substance and detail on that? I am not looking for individuals to be named but just to develop a sense of the churn within the institution under the Governor's watch as against the watch of Patrick Neary. That would be helpful.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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It would be useful and instructive for the committee to have some detail on that. Can I ask-----
Liam Twomey (Wexford, Fine Gael)
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This will be the Deputy's last question.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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With regard to the transparency surrounding the arrangements or solutions that are tabled between a borrower and the financial institution, and there will be scenarios that are acceptable and can fly while others are rejected and so forth, the Free Legal Advice Centres, FLAC, agency has been very critical of the fact that there is no database that sets out in substantive terms the nature of those arrangements, those that are accepted and reach viability and those that are not. What is the Governor's view on the concept of such a database, why is it not there and does he propose to do anything about that? FLAC has also raised a second, crucial issue, the effect of these agreements and arrangements on people over a period of time, that is, how it affects their quality of life and so forth. Perhaps the Governor would comment briefly on that.
Professor Patrick Honohan:
On the question of transparency of the internal rules and practices of the banks in dealing with borrowers, I do not have control over it but I would like to see the banks being much more transparent about what procedures they follow and what is and is not available. The idea that deals can be made but that nobody knows about them and there is a pretence there are no deals is destructive for everybody, including the banks. I have advocated to the banks that there should be more transparency regarding their rules, but it is not something I have power to enforce.
With regard to transparency about who and what types of people got what deals or restructures, the Deputy can see that the data is all in development. We have the wrong terminology, of which I have made criticisms - flippant criticisms. This is very much a moving target. My aim is to communicate more about this. We have just conducted a large survey of household debt, income and wealth and we are researching that. We conducted a smaller survey a year ago and we have produced some output from that. This is more in the research area so it will evolve over time. I am very much in favour of transparency. When there is no transparency I worry about the sense of injustice people feel. The committee here is talking about unequal treatment. It is much worse if the unequal treatment is not even known than if people might say, "I was fortunate I went to this firm" or "I was less fortunate that I went to that firm" or "I paid a higher rate of interest but I got a better deal", and so forth.
Kevin Humphreys (Dublin South East, Labour)
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I seek clarification on something that was said earlier. I agree with the clarifications the Governor gave earlier about the sustainable solutions and that in certain circumstances the payment of interest only is a sustainable solution. A deal that would run into retirement in certain circumstances is also a sustainable solution,-----
Kevin Humphreys (Dublin South East, Labour)
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-----depending on the issues. Could that be circulated to the banks? The Governor mentioned that he had communicated on occasions to the banks but that he deals with different people at different levels and often the messages are not conveyed across all sections. Is there a mechanism that would allow him to communicate that clearly to them?
2:15 pm
Kevin Humphreys (Dublin South East, Labour)
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I have one other question before I pass over to Senator Hayden. I had an interesting engagement with the chief executive of Bank of Ireland, Mr. Boucher, at the last meeting. He made a blanket policy statement on the manner in which he will deal with personal insolvency practitioners. He said there would be no write-down ever and that it was not the bank's policy in any circumstances. I will paraphrase the Governor words: this is not in the borrower's interests, it is not in the shareholders' interests and it is not in the taxpayers' interests to make these blank statements, especially with regard to the way the bank deals with personal insolvency practitioners. Furthermore, page 5 of the opening statement states that the agency disagrees with him.
What does the Governor have in his toolbox to deal with Bank of Ireland and other agencies which made such statements during the hearings? Mr. Boucher seems to have taken particular pleasure in explaining his position to the committee.
As far as I can see, this is against Government policy and it is against the Governor's opinion on the interests of the bank and the borrower. Does the Governor have in his toolbox a mechanism to deal with these rogue agencies which are operating in the banking sector? That is a strong word, but this is Government policy and it is in legislation. It is against Central Bank policy. The Governor has articulated how it is in conflict with his view. Does the Governor have a mechanism for pulling these into line?
Kevin Humphreys (Dublin South East, Labour)
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I wholly agree, but what can the Governor do about it?
Professor Patrick Honohan:
I wish to put on record that I think it is wholly unsatisfactory. Now, it is a private institution. The Government has some shareholdings in it. The Central Bank has some degree of control with regard to prudence. At the moment, Bank of Ireland has several distressed debts, although fewer than others. It is dealing with the easy-to-deal-with cases which can be resolved using small modifications and term extensions. It may also be dealing with cases that are hopeless from the bank's point of view, as well as repossessions. When the bank comes to the middle and to the more complicated cases of multiple debts, there may be a certain amount of eating of words, and if there is not eating of words then an entity that consistently adopted that line would definitely fall foul of our code of conduct, which is law, or it would be unable to deliver on the targets. The tools are there. How many proposed personal insolvency arrangements has that institution rejected so far? I do not know.
Kevin Humphreys (Dublin South East, Labour)
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Two.
Kevin Humphreys (Dublin South East, Labour)
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If it is two then it is too many.
Kevin Humphreys (Dublin South East, Labour)
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No, exactly. It is a stated policy. Mr. Boucher has made a statement. I have no wish for any homeowner to be a test case. The bank has stated the position on the public record at this meeting. The Governor has now explained that if the bank follows through on that statement and policy then it would be a breach of the code of conduct.
Professor Patrick Honohan:
Not per se, but I believe he would be unable to satisfy the code of conduct - in other words, to give the best solution available to the borrower - and to get through all the cases satisfactorily without using the tool of the personal insolvency arrangement. The PIA can be a very effective tool for knocking the heads of lenders together to get a solution, if that is not too flippant for Deputy McDonald.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Do not be so sarcastic. I do not appreciate it.
Kevin Humphreys (Dublin South East, Labour)
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I am not Deputy McDonald.
Kevin Humphreys (Dublin South East, Labour)
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I have no wish for anyone to go through unnecessary worry, stress or hardship. The bank has made the statement clearly. The Governor can look back on the record. I believe the representatives treated this committee with great disrespect in their manner and considering the code of conduct and the legislation. We are all big boys and girls around the table and we can take it, but I have no wish to see anyone who engages in a personal insolvency arrangement in good faith be treated in that way.
At this stage, I am really asking the Governor to clarify the code of conduct of the banking institutions, to clarify that if they proceed according to the statements they have made on the public record in this committee then they cannot fulfil their obligations to the Central Bank, and to reaffirm that the Central Bank is watching and that whatever actions need to be taken will be taken instantly. We should not have to wait for another committee meeting to analyse it. Mr. Boucher has stated his policy categorically. The insolvency service and the personal insolvency practitioners have said they are not satisfied with it. The Governor has said he is not satisfied with it. I am asking the Governor to act before some homeowner is put through that distressing situation. The Governor should put it to Mr. Boucher that his policy statement made at this committee is unacceptable. That is what I am asking.
Kevin Humphreys (Dublin South East, Labour)
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I thank the Governor.
Aideen Hayden (Labour)
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I thank the Governor for the clarification earlier on what defines a sustainable mortgage, as well as the clarification on interest-only arrangements being a sustainable solution in the longer term. Many older couples who are in positive equity are deeply concerned at the way the whole situation with positive equity mortgages is going.
I am keen to raise several issues which have not come up so far, specifically in respect of buy-to-let properties. One thing we are all aware of is that the number of people now living in the rented sector has risen substantially. One in five Irish families now live in rented housing and in urban areas the number is far higher. Yet we know there are significant numbers of distressed buy-to-let mortgages. I wish to focus on the issue of receivers. Since 2013, approximately 3,700 receivers have been appointed to buy-to-let properties. I wish to draw the attention of the Governor to a case I had today. A lady received a letter dated 25 April advising her that a receiver had been appointed to a buy-to-let property and that she was to have vacated the property by the end of April. I wish that was an unusual situation, but it is not. The manner in which receivers are treating people who live in buy-to-let properties is outrageous. It shows not only a complete and total disregard for the law but a disregard for human beings for whom these properties are homes.
I am asking the Governor to do two things. It is necessary to have a code of conduct for buy-to-let mortgages, similar to the code of conduct on mortgage arrears for homeowners, which would protect the interests of tenants in those properties and in particular respect the Residential Tenancies Act 2004, which provides for security of tenure.
We have poor data on the scale of buy-to-let receiverships, the number of tenancies that are being potentially impacted and the actions that are being taken on the part of lending institutions. I call on Professor Honohan, as the Governor of the Central Bank, to take this issue seriously. We are at a point at which the market is rising. We are seeing receivers being appointed with the sole intention of sale, and there are rising rents and so forth. This could possibly undermine the lives of many thousands of people who live in rented properties. I do not expect the Governor to respond to this; I am simply putting it to him that this matter must be addressed urgently and something must be done in this regard.
Another issue that I am dealing with on a regular basis is the code of conduct on mortgage arrears. I can see that the code of conduct on mortgage arrears is falling down significantly in terms of people being deemed to be non-co-operative borrowers where there is marital breakdown or a relationship breakdown and one party to the situation is co-operating while the other is not. I suggest that we need to revisit the code of conduct on mortgage arrears, particularly in respect of relationship breakdowns, which are the case in many arrears situations. It is clear that in relationship breakdown situations we have a particular difficulty with the code of conduct on mortgage arrears and people being classified as non-co-operating borrowers.
Professor Honohan referred, as did other speakers, to the interbank aspect and how difficult it is to have parity across institutions. What is of particular concern to me, however, is the treatment of individuals by particular banks, in so far as there is no evidence that people are receiving fairness and equality of treatment. There is no effective appeal process within the banking sector where the solution offered to a customer has been determined to be a sustainable solution. I was particularly concerned when the delegates from the Money Advice & Budgeting Service told us that in more than 50% of the cases they dealt with, what they regarded as sustainable packages for clients in terms of what they were capable of paying were overruled by lending institutions. It was the MABS delegates' view that what people are signing up to as being sustainable solutions are not actually sustainable solutions in the long run and, as such, there is a real necessity to have some element of independence in the process of determining what is, in fact, a sustainable solution.
My final point relates to the role of the Financial Services Ombudsman. We do not have a level playing field between lender and borrower in this country and the ombudsman is not doing anything to address that. I have been flooded with letters from people who are entirely dissatisfied with the lack of any independence in this process. In the course of my work as a solicitor, I never encountered a case where the resolution of a distressed mortgage was what I would call freely negotiated. In fact, in every single case, the legal fees were paid by the borrower, as were the valuation fees, the purpose of which are to protect the bank's interest. It is outrageous that there is no independent financial or legal advice available to people who find themselves in mortgage distress. I am asking Professor Honohan to consider putting in place a bank levy to fund independent advice services. We must have transparency within the financial institutions so that customers know how a solution that is deemed to be sustainable was arrived at. Under the current code of conduct on mortgage arrears, the Governor might be able to find out why an individual was offered a particular solution but the individual cannot access that information. We do not have a level playing field either within institutions or between them, and something must be done about that.
2:25 pm
Professor Patrick Honohan:
The Senator has made some very important points regarding problems that have bubbled to the surface because of the scale of debt distress. I absolutely agree that we cannot regard the current situation as excellent or even good. There is the possibility of getting €250 to pay for an adviser who tells one what the bank is doing. Is that enough? I would have to say "No".
Professor Patrick Honohan:
I understand the Government is considering improvements in that regard. MABS could require more financing. The point about the Financial Services Ombudsman is an issue for that office.
Senator Hayden is absolutely right that the process is not good. One point that is sometimes made is that the more process we put in, the longer it takes to get a solution. I am not sure that is a good argument. We had hoped that by defining targets for the banks in terms of what we are calling sustainable solutions - I realise that heading in the table includes letters, but that is not where it will end up - we would be tying their hands in a way that forces them to do something that actually is good for the borrower when combined with the code of conduct on mortgage arrears. That does not give a level playing field, but it does constrain the banks relative to what they might otherwise do. They might, for example, have preferred to get out quickly in many cases or do nothing at all. The latter is the more likely because in our experience of the banks, they did nothing for years and years. We have tried to move down the route towards sustainable solutions. As part of that, we have considered the idea of trying to provide a better level of information for customers. The personal insolvency arrangement, PIA, process is part of that, with the personal insolvency practitioners helping borrowers to put together a package that can deal not just with one creditor, but with many. While the process is not satisfactory, we should not rush off in every direction. Most of these issues are not specifically matters for the Central Bank, but we have tried to work with the banks that are under our control. I hear what the Senator is saying and take it on board.
On the issue of tenancies and so on, the Senator has raised it with me before and I looked into it. She knows the situation perfectly, namely, that it is an entirely separate piece of regulation. All of it applies to banks, but in respect of their compliance with the law rather through any particular code the Central Bank establishes. The consumer protection code is relevant to the extent that the banks themselves are dealing with tenants. In many cases, however, they are dealing with the rent receiver and not a regulated entity, so it is outside the remit of-----
Aideen Hayden (Labour)
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On a point of information-----
Liam Twomey (Wexford, Fine Gael)
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I cannot allow a point of information, even were it to qualify as such.
Aideen Hayden (Labour)
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What the Governor has outlined is not a valid legal interpretation of the law. I will write to him about it.
Stephen Donnelly (Wicklow, Independent)
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I thank the Governor for his time today. I begin by referring to the judgment yesterday in the Anglo Irish Bank case. I understand there are constraints in what we can say, but not in respect of the particular point I wish to make. Judge Nolan said in court yesterday, "It would be most unjust to jail these two men when I feel that a State agency had led the two men into error and illegality." The most important words here are "led the two men into error and illegality". This is a very serious finding and I am sure the Governor is examining it with great interest. Now that we have a judgment saying that the Central Bank led two people to break the law, is it not time to call in An Garda Síochána and have a criminal investigation?
Professor Patrick Honohan:
All I will say is that the Central Bank commenced an investigation into these matters - in 2009, before my time - including the matter that was dealt with in court yesterday. Arising out of that investigation, the Central Bank passed all of the information available to it to the Garda on the suspicion that there had been some criminality. The matter is now entirely in the hands of the Garda. No additional data or searching are required from the Central Bank's side. We have handed the matter over entirely to the Garda.
Stephen Donnelly (Wicklow, Independent)
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On the basis that the judge in this case has publicly stated that the Central Bank led people to break the law, does Professor Honohan expect the Garda to look at prosecuting the bank?
Liam Twomey (Wexford, Fine Gael)
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The Governor might have difficulty answering questions on behalf of the Garda or the DPP.
Stephen Donnelly (Wicklow, Independent)
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I thank the Governor. Before making my next point, I emphasise that I have the height of respect both for the position the Governor holds and for him as an individual holding that position. However, in light of the testimony we have heard from the banks and from organisations which are trying to help borrowers in distress, and from everything I have seen come through my own door and through various discussions we have had, I was very disappointed with Professor Honohan's opening statement. Were I a banker, on the other hand, I would be reasonably happy with it. The message is that things are more or less going according to plan, that the Central Bank has identified four areas in which change is required and is working with the banks to ensure it happens. That certainly does not represent any type of call to arms.
It does not indicate that any alarms went off in the Central Bank to warn that something was going quite seriously wrong and that the approach needed to be changed. If I were some of the banks who came before the committee two weeks ago, I would be pretty happy. My interpretation would be that the Central Bank is more or less okay with the way the banks are proceeding to deal with this matter. If I were a borrower whose mortgage is in distress or an individual who was trying to assist such borrowers - not to mention the fact that I am a Deputy - I would be extremely disappointed with what I have heard today.
I am of the view that the Central Bank is taking a hands-off approach to this matter. Let me explain why I believe this to be the case. We know the banks are allowed to define what constitutes a sustainable offer and that they do so within parameters set by the Central Bank. However, the banks have quite a broad remit in the context of what they view to be sustainable. The banks now have more or less unlimited contact with their customers as a result of the changes to the code of conduct on mortgage arrears. We are aware that not only can the banks veto any insolvency proposal, but two of them have stated that they will - as a matter of policy - veto any such proposal which includes a write-down of secured debt. We know that the banks are allowed to categorise customers - Irish citizens - as being uncooperative. This is not Professor Honohan's fault; it is as a result of the changes introduced in the legislation. It is outrageous that Irish banks are allowed to deny Irish citizens access to the legislative process of insolvency by stating that they believe them to be not co-operating. If a borrower wants to make an appeal against the actions of a bank, it must go to the bank itself.
I believe everything I have just said to be true. We are also aware that there is absolutely no consistency. Representatives from the four main lenders came before the committee last week. A previous speaker already outlined the interactions that took place with Mr. Richie Boucher, and Bank of Ireland has stated that it will veto any PIA which includes a proposed write-down of unsecured debt. We know that Bank of Ireland's split-mortgage concept is a farce. This is because it charges the same interest on the shelved portion as it does in respect of the non-shelved portion. The figures presented by all of the banks show that Bank of Ireland's rate of legal proceedings initiated is two to four times higher than the other three institutions. We all know that the difference between financial recovery and financial ruin for those in Ireland who are dealing with unsustainable debt largely comes down to the bank one is dealing with. A person can be really unlucky and have his or her loan sold to LoanStar, Oaktree Capital or any of the other unregulated entities. He or she can also be unlucky in that he or she might be obliged to deal with Bank of Ireland as opposed to one of the other three banks, from which he or she might obtain a deal. We are aware that there is very little quality on offer and that thousands of legal letters have been sent out. The vast majority of the so-called sustainable proposals take the form of either legal letters or extend-and-pretend measures such as interest-only arrangements, recapitalisation of arrears and so forth. I do not believe that the approach to take in dealing with an unsustainable debt crisis is to increase the total payments due during the course of the type of arrangements to which I refer. Essentially, the latter is actually what is happening.
I hope Professor Honohan's sense of urgency and that of the Central Bank are greater than what has been outlined here. Does Professor Honohan find it acceptable that there is so much inconsistency across the banks in the context of how they are dealing with people? Does he find it acceptable that several of them are publicly stating they are going to go against the spirit of the insolvency process? Does he find it acceptable that so few insolvency agreements have been concluded to date? Does he find it acceptable that the vast majority of so-called solutions involve either legal threats or an increase in the total amount that borrowers will be obliged to repay?
2:35 pm
Professor Patrick Honohan:
I can see how the wording of my statement may have informed what the Deputy just said. As I was reading it, I thought it was coming across as a bit more complacent than I would have intended. The Chairman referred to the fact that when I came before the committee just over a year ago, I had referred to tearing my hair out, etc. After the meeting in question we introduced this regime or process and I thought it would not be productive to make empty gestures of frustration, particularly when the process started to generate actual results. The glass is either half-full or half-empty, or an eighth full and seven eighths empty in this regard. Deals are being done, split mortgages - some more effective than others - are on offer and there are numbers in four figures in respect of term extensions and arrears capitalisation. The Central Bank has engaged outsiders and is using its own staff to try to probe the latter to see whether they are really viable. We have rejected some, but viable arrangements are being reached. I accept, however, that they are not all perfect. I am sure the quality of both the engagement and the communication, which is so crucial for the well-being of the borrower, is very mixed and uneven. I am of the view, however, that the process is gaining traction. The more cases that are dealt with, the more people will learn from them and converge on the most effective types of arrangement.
It will be a long haul. After what Deputy McDonald said, I am afraid to use particular words. If I use the word "unpleasant", people will be of the view that I am being condescending or something of that nature. I accept that it is an extremely difficult process for borrowers and it is not being handled well. However, it is being handled, and something is happening. I have no doubt that the Deputy and his colleagues are being approached by constituents - particularly those whose arrangements are not working - who want to relay what has happened to them. I am sure there are numerous cases in which the arrangements reached are not working. We reviewed a small sample and we found some that were not working.
Stephen Donnelly (Wicklow, Independent)
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There is anecdotal evidence, but let us focus on the lack of consistency. We are all aware of anecdotes and we must be extremely careful with regard to surmising conclusions from them. However, there are far more than anecdotes available. The banks came before the committee and we know that there is inconsistency because it is their stated policy. Is it acceptable to Professor Honohan, as Governor of the Central Bank, that Bank of Ireland, for example, does not offer a 0% rate on the warehoused portion of split mortgages when all of the other institutions do offer such a rate? If it is not acceptable, why does he not insist that Bank of Ireland do what the other banks are doing?
Professor Patrick Honohan:
We could change this and develop it, but the approach that the Central Bank and I are advocating is that a standard should be created and that this should then be allowed to be met. If that appears to create differences, so be it. I do not find it objectionable that there are differences, as long as an acceptable and sustainable standard is achieved in respect of restructuring. If we manage to arrive at a sustainable solution that really works, then the fact that there are some differences between one person and another would constitute much less of a problem.
Stephen Donnelly (Wicklow, Independent)
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Why? There is an obvious problem here in that there is a substantive unfairness in how people are being dealt with by the different banks. The Central Bank can solve this. It has power under the Acts we passed last year to insist on consistency of solutions. Why is it not insisting on consistency? What is the downside to consistency?
Professor Patrick Honohan:
I am not sure I want to develop the point in this regard, but my perspective on this matter is that if we imposed a particular solution - which would involve a one-size-fits-all approach - down the track the banks could push back and there could be a constitutional challenge.
Stephen Donnelly (Wicklow, Independent)
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I am not suggesting that there should be one solution for everybody. I understand that a certain amount of variance is required, but what is the downside to informing Bank of Ireland that, just like everybody else, it must charge 0% on the shelved portion of split mortgage debt?
Professor Patrick Honohan:
Let us consider the case of someone who could very nearly pay his or her entire debt. Why should Bank of Ireland be placed in a position by the Central Bank of Ireland whereby it cannot collect on the debt?
It may decide the person can afford to pay the debt if it makes what might be called a baby split mortgage arrangement but now it is being told by the Central Bank that it has to give away a lot of value. It is moving away from regulation into property rights. However, I am not precluding that we could move tighter in that direction but there has been a merit of allowing a variety of standards to meet different cases and exploit different ideas in various parts of the banking system.
2:45 pm
Stephen Donnelly (Wicklow, Independent)
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I agree that a suite of solutions is needed but the unfairness and the inconsistency-----
Stephen Donnelly (Wicklow, Independent)
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That is well in theory but that is not what is happening on the ground. What is happening on the ground is that the banks are coming in with their financial, legal and procedural expertise and they are more or less bullying these borrowers into solutions, although not in every case and not in every bank. I believe a level of leniency is being allowed by the Central Bank which has resulted in at least one chief executive coming in here with an attitude that the bank can do pretty much what it wants, that it can squeeze people, and the more it squeezes people the more its share price goes up, which it believe is a good outcome. Professor Honohan appears to be comfortable allowing that to happen.
Stephen Donnelly (Wicklow, Independent)
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To give an example, in terms of legal proceedings Bank of Ireland is two to four times the rate of the others. That is the data.
Professor Patrick Honohan:
It depends on the types of cases they are taking. There is no way this is working out perfectly. I am listening closely to the comments of the Deputies, as I listen to other comments, but I believe progress is being made. It is not going backwards. It is going forwards, and as the quality of the engagement and the selection of solutions improves, I believe that progress can accelerate but I am not excluding a tightening or strengthening of our code and our definition of sustainability.
Stephen Donnelly (Wicklow, Independent)
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I thank Professor Honohan.
Heather Humphreys (Cavan-Monaghan, Fine Gael)
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I want to ask a few questions on the issue of credit unions in the role of mortgage arrears resolution. Why has the Central Bank not eased or shown more flexibility in terms of credit union lending? For the credit unions to start lending, as the Minister has said, the Central Bank must ease or lift unreasonable or inflexible lending restrictions. Serious consideration must be given to the role credit unions can play in helping to return prosperity to communities and the mortgage arrears resolution process must take into account that even when people have committed to prioritising and meeting mortgage repayments, there may be a need for a small line of credit to assist with essential expenditure. For example, if somebody's only means of transport to go to work is a car and that breaks down they cannot get to work and they do not get paid, which has an impact on their ability to keep their mortgage repayments up to date. It is important that the Central Bank recognises the need for this service and supports credit unions in providing it. I am aware an emergency loan of €500 is available but that is not much use these days, particularly if an emergency arises.
The restrictions in section 35 of the Credit Union Act limit or prohibit a credit union from granting credit to a member whose repayments were rescheduled due to a change in financial circumstances but whose ability to repay has improved. In other words, the section 35 restrictions are preventing members from benefiting from improvements in their financial circumstances. That should be revisited and revised because some people are being disadvantaged as a result of their membership of credit unions.
On the tiered regulatory approach, the proposals in Consultation Paper CP 76 mark a significant departure for the Central Bank from its role as a regulator. The proposals, if implemented, would give the Central Bank an operational role in the day to day management of credit unions impacting directly on the core areas of lending, savings and investments. The intention behind the tiered regulatory approach was to have the appropriate regulatory burden on credit unions, not to micro-manage them. If this intention is to be realised, the Central Bank would need to take full consideration of the feedback received and revise its proposals before the next phase of consultation.
In terms of engagement with credit unions, I speak to people involved in credit unions on a regular basis and I am being told that the Central Bank is not responding to individual credit unions in a timely manner, which is impacting on the operational management of credit unions. I have been told about instances where individual credit unions have submitted information required to move forward to the annual general meeting, AGM, or sought agreement for necessary expenditure but they are facing inordinate delays in getting a response from the Central Bank. They may not even get a response for a status update on their query. What supports is the Central Bank putting in place to ensure the necessary back-up is available to assist credit union chairpersons and directors? Directors of credit unions are not the same as directors of banks but in certain cases they are being treated like directors of banks. Instances have been brought to my attention regarding the treatment received by credit union directors from the Central Bank, which is appalling. I met one person who was very upset by the treatment received in the Central Bank, and it has impacted on the person's health. That is very unfair in terms of some of the people I know very well. They are decent people who are trying to provide a voluntary service in their community and it is unacceptable that people should be treated like that by officials in the Central Bank. I ask Professor Honohan to comment on that type of behaviour.
Professor Patrick Honohan:
I re-emphasise that we regard the credit union sector as something that should grow and be a more important and stronger part of the financial sector, particularly in dealing with households, microbusinesses and so forth. We have been taking steps to help the process of strengthening the sector. We have been working with the Credit Union Restructuring Board, ReBo. We have had an attempt to save the Newbridge Credit Union in a new structure through merger. That did not work but we managed to achieve another merger. Weaker credit unions consolidation into stronger but still locally based credit unions is ongoing. That is not what the Deputy raised but I want to emphasise that we regard that as important.
I believe the credit union movement can become much stronger but I am not sure that the necessary strengthening of the credit union sector will be welcomed by some excessively narrow localism that leads credit unions to be too small to be effective. That is my own view, and I believe it is a view of some people within the sector but also some outside it. In most other countries the credit union sector consolidated somewhat 30 years ago. It is very small here.
There are some restrictions and there is a perception that they apply to more credit unions than is the case. I understand that fewer than 10% of credit unions are under restrictions for the total amount of lending they will do in a particular month. The vast majority of credit unions are not restricted in the amount of lending in aggregate they would make in a particular month. Some credit unions have individual loan size restrictions but the level at which the limit is imposed ensures that the vast majority of those credit unions can continue to make loans that are significantly more than the average loan for the sector, which is €6,000. That is the average loan size for the sector as a whole. The restrictions in place on a large number of credit unions tend to be for amounts between €10,000 and €30,000. Where a credit union has restrictions in the size of individual loans because of issues the Registrar has with them those loan sizes are sometimes €10,000, €30,000 and amounts in between. The Deputy mentioned €500 but in most cases the figure is much higher than that. Some cases are worse.
2:55 pm
Heather Humphreys (Cavan-Monaghan, Fine Gael)
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The emergency loan is €500. If one has a loan and it has been restructured-----
Heather Humphreys (Cavan-Monaghan, Fine Gael)
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-----section 35 applies. The problem is that if somebody has a difficulty in that they need to replace their car to get to work, which also feeds into their mortgage arrears arrangement, they cannot get a loan from their credit union.
Heather Humphreys (Cavan-Monaghan, Fine Gael)
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There needs to be discretion and common sense in such cases.
Professor Patrick Honohan:
One could rely on common sense. Of course, it is a protection for the other members of the credit union that the credit union does not get caught in the situation where borrowers are in financial difficulty and need a restructuring of their debts. I note Deputy Humphreys' comment on section 35. However, I am sure the concern is that a generalised release of that could bring credit unions into more difficulty and then nobody would get loans from them.
On a tiered regulatory approach, it would not be the intention of the Central Bank to get into micromanaging. In fact, from the earlier discussion about banks, while micromanaging is what some would like us to do for banks, certainly not credit unions. We would be prepared to go more into the micromanaging of banks than of credit unions, given their size and scale and the appropriateness of it. I note the Deputy's comment on it.
The other point the Deputy makes I hear with concern. I will take it back and see what is going on. It would be terrible to think that borrowers would not be treated with respect. That cannot continue and I will make sure it does not.
Dealing with borrowers in a timely manner should, of course, be done. I could comment that we are contemplating expanding, and probably will expand, our staffing in the area of credit unions. The observation has been made that, since most credit unions are small and of relatively low impact on the economy because they are local in impact, we have applied a limited amount of regulatory resources. We should increase that. I expect, although the decision has not been finally taken, that we will substantially increase the number of staff dealing with the credit union sector.
Heather Humphreys (Cavan-Monaghan, Fine Gael)
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Professor Honohan stated the average credit union loan is €6,000. The problem here is that there are aggregate loans and contingent liabilities and these all are being aggregated to come up with a figure that is away above €6,000 and well outside the lending restriction in the credit union. That is causing a lot of problems. When one takes in all the other connected borrowers, such as extended family members, that is an issue. That needs to be looked at.
Liam Twomey (Wexford, Fine Gael)
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Deputy Humphreys' time is finished.
Heather Humphreys (Cavan-Monaghan, Fine Gael)
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I thank the Vice Chairman.
Sean Barrett (Independent)
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I welcome the Governor, one of my former colleagues. Regulatory capture comes to mind. This must be the worst ever illustration of it. Ireland has an unwanted position in economic journals for the kind of performance which Professor Honohan's predecessor gave. The late Professor George Stigler won a Nobel prize for pointing out that regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating. That is what we have been listening to in the High Court.
Liam Twomey (Wexford, Fine Gael)
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The Senator should be careful how he uses words like "special" and "corruption".
Sean Barrett (Independent)
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That was a quote from a Nobel prize winner, the late Professor Stigler. Public interest directors would form the subject of my first question. Public interest directors were supposed to deal with that. My impression is that they are useless, like a lighthouse on the Bog of Allen. Do they ever come to Professor Honohan? They were meant to redress that balance between the public and the interests which had captured the regulator, such as in the case to which the Vice Chairman referred.
Professor Honohan mentioned that we have 13,000 plus cases, or 15%, resolved. Does that mean there are 85,000 to go? That is question two.
When the bankers were in, I asked Mr. Boucher his present policy. He is lending up to 90% of the value of the property and up to 4.7 times income. I would put the question to the Governor that this is unsustainable. The 10% deposit should be 20%, which, as Professor Honohan will be aware, works much better in Denmark where there is a much lower rate of default, and it should be 2.5 times income. If, however, Mr. Boucher is operating in this way, does this mean a problem will occur? There are already signs of a property bubble. As principles regulation does not work with those without principles, the Central Bank should have quantified rules, such as the ones I have mentioned, where if the Governor feels the market is overheating, he would want to raise the 10% deposit requirement to 20%, which I would certainly do, and reduce 4.7 times income to 2.5 times income. Otherwise we will always have this problem.
That brings me to the next question. Where borrowers have gone widely outside even those limits, which I regard as too loose, have we ever made the decision that the bank loses because it was engaged with reckless lending, that is, lending somebody multiples of income where the income was not properly checked? Professor Honohan mentions in his presentation that too often the relationships were "frequently verbal in nature" and "affordability assessments were often not evident on files reported as sustainable". Bankers have to bear some of the responsibility in these matters and we should at least be able in the theoretical case of Mr. Bloggs, where the bank was totally irresponsible and there was no way Mr. Bloggs could ever have repaid the loan, to decide against the banks in that instance.
On the buy-to-lets, Professor Honohan mentioned property rights. We have to be insistent on that. The debt is against the person who borrowed, not against the person who lives in the house. Professor Honohan should, as the regulator, tell the banks they may pursue whoever built the buy-to-lets, but if we can prove the person has been paying his or her rent the whole time, they cannot evict, directly or indirectly, that person. It is a long time ago since Charles Stewart Parnell was looking for fixity of tenure in Parliament.
As we have Professor Honohan here, I ask that the Setanta Insurance issue would be pursued in Malta, not here. I am getting tired of bailing out insurance companies, as I am sure is Professor Honohan. We have had Quinn, PMPA and ICI. Professor Honohan may have seen an article in The Sunday Business Posttwo Sundays ago about how Ireland has made a great leap forward and is a wonderful place for insurance, and then two days later yet another insurance company goes bust. I hope there is no case that the Irish would have to bail out a company that was regulated in Malta.
On all the mistakes we saw to which the Chairman alluded, I presume we have rules that one does not play golf, dine or socialise with the sector one is supposed to be regulating, minutes are kept, persons are checked in and out, and it is put on a proper basis. Knowing Professor Honohan as a former colleague, I am sure he is doing all that, but the public needs assurance. This was not loose touch or light touch regulation. It was merely non-supervision. It has done €64 billion and counting worth of damage. Professor Honohan even mentioned we have been at this for five years. I am disappointed at the progress. This Parliament has been here for three years. We really need to have more than 15% of the cases resolved at this stage.
Having said all that, I wish my former colleague every success. However, we need to speed it up. The problem Professor Honohan must address with all his 1,300 staff is that the tradition of regulatory capture, which was appalling, has no place ever again in the regulation of the financial sector in Ireland.
Professor Patrick Honohan:
I will take the questions one by one. Of course public interest directors are appointed by the Minister for Finance. From time to time, I have had occasion to have meetings, usually at their initiation and, occasionally, at my instigation, with public interest directors, more in the early days of the crisis and not so much now. However, these are public interest, not Central Bank, nominees.
Senator Barrett is correct in saying if one has 13,000 restructures out of 127,000 arrears of more than 90 days, there is an awful long way to go.
I refer to 13,000 concluded or confirmed, while some 62,000 are proposed. We know where they are going but we do not really know with half of them. They will be starting down the legal route and, as has been extensively discussed, we hope and expect they will deviate back towards restructuring arrangements. However, the Deputy's numbers are right and there is still a big task ahead. The only question is whether it is fruitful to complain rather than build on what exists.
The Deputy asked a very interesting question about loan-to-value ratios and debt-to-income ratios. These are the tools of choice that I would have thought the Central Bank could bring into play well before the emergence of another property boom. There has not been a need to employ them. Even if property prices jump up in Dublin during most of 2014, it is not representative of a credit-driven set of circumstances. The use of loan-to-value and debt-to-income ratios, which remain controversial worldwide, represents the way to go. Now that there are standards and procedures in Europe for macro-prudential rules, there are ways of saying to Europe we are going to introduce certain measures although they may not be in harmony with those in the rest of Europe. As long as Europe does not say "No", we can do that. This is not a matter for today or tomorrow. I refer to a framework that will need to be created for the long haul.
With regard to the condition of tenants, I will be told that we do not have the power in the Central Bank to restrict the use of rent receivers and the consequences for tenants and that this is governed by other laws. Senator Aideen Hayden suggested that the interpretation I adumbrated was not correct. Perhaps she is correct; perhaps there is something that could and should be done. I take it as an action point to dig further into the issue but I am not optimistic.
On the Setanta case, let me offer some points of information that might be of use. The company had a licence in another part of the European Union and started operating here in 2007. Although the Central Bank had no information about the company's balance sheet and finances, and the fact that it had grown to a sizeable scale, by November 2013 we had become concerned and had some concrete suggestions that there could be problems with this. We drew this to the attention of the Maltese regulatory authorities, and they took a series of actions over the following weeks. That has led to the circumstances in question. We were not behind hand in using the information we had, communicating it to the prudential regulator and getting the action. If we had known earlier, had information earlier and acted earlier, perhaps it would have been a smaller hole. If we had not done anything, it would no doubt have become a bigger hole. It is a partial result. The insurance compensation fund is established under legislation to provide for Irish-based risks. That is a matter for the courts and any change in legislation that might occur. In principle, that is what would be used. It is not a matter for the Central Bank anyway.
3:05 pm
Arthur Spring (Kerry North-West Limerick, Labour)
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I thank the Governor for attending. I was listening to him in my office. I wish to deal with three specific areas. I appreciate that the discussion is revolving entirely around mortgages at present. I will try to drill into it from a couple of different angles.
Around March 2011, we looked at recapitalising banks. BlackRock identified approximately €9.4 billion had to be poured into the banks to shore up the hole that existed at that point. What kind of funds were identified as required for Bank of Ireland and AIB, in particular, at that point?
Peter Mathews (Dublin South, Independent)
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Was it €6.5 billion or €6.7 billion?
Arthur Spring (Kerry North-West Limerick, Labour)
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Around €2.5 billion each. It might be higher.
Peter Mathews (Dublin South, Independent)
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It was €6.5 billion followed by €2.5 billion.
Arthur Spring (Kerry North-West Limerick, Labour)
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For both institutions. Were there terms and conditions attached to the giving of those funds? We hear quite often, particularly from Bank of Ireland, that the bank was provided with funds from the Government for the purpose of recapitalisation. We are told Bank of Ireland is repaying those funds and doing so at a profit to the Central Bank and State. I have a fundamental problem with that. We might be able to address the mortgage crisis partially through this. I would have believed recapitalisation was for the betterment not of the shareholders but of the citizens of the country. The fundamental role of a board of directors is the protection of the shareholders according to its fiduciary duties. However, when a state steps in and recapitalises the banks, it does so for the betterment of the public so any funding provided to recapitalise banks should be provided with strict conditions attached. There should be no early repayment of the loans. What I propose should be done particularly for the purpose of debt write-down.
In some of the questions, particularly those of Deputy Donnelly, I noted the view that an interest-only mortgage is an acceptable form of functioning loan. I do not believe it is acceptable that somebody could be in debt for 30 to 50 years in some cases and paying off large amounts of interest although not having an asset at the end of it. There has to be capacity to pay and to be released from the debt.
If I were to ask a question on the recapitalisation of the banks in particular, I would ask what conditions were attached, whether the Central Bank understood it was for the purpose of writing down debt and whether it would involve a liability on a balance sheet for the medium and long-term for the institution. From my perspective, the only people who have been fundamental winners consequent to the recapitalisation of the banks by the Government in 2011 are the shareholders. We have seen an exponential rise in the share price, particularly in Bank of Ireland.
Professor Patrick Honohan:
The Government injected capital into the banks. There are various Acts, including the guarantee legislation, that gave the Government various powers to acquire information and seek compliance with certain standards. However, as far as I understand it — I am sure I am right — there was no specific intention to attach that as a subsidy or write-down of particular loans. It was, instead, a reserve amount to meet losses that might be unavoidable. I am not describing my policy but just stating what the Government put in place.
Arthur Spring (Kerry North-West Limerick, Labour)
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I appreciate that.
Arthur Spring (Kerry North-West Limerick, Labour)
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Could I stop the Governor there? He stated the funding was provided for the purpose of meeting losses that might be unavoidable.
Arthur Spring (Kerry North-West Limerick, Labour)
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I am of the opinion that many of these losses are essentially unavoidable under vanilla-style banking. However, when parking part of a loan and applying an interest rate to it, one is ultimately putting the debtor on the line forever and a day. If one were to apply logical banking terminology to this, one would not see a person being treated in the way that Bank of Ireland, in particular, is treating people. AIB seems to have more of a conscience in regard to writing down debt and trying to achieve sustainability. We have seen some statistics suggesting 194 deals have been done to date.
My generation include those who are struggling to pay mortgages and those who cannot pay them. More than 30,000 people are over two years in arrears at the moment. Any capital that has been provided to the banks has a roll-over period and I presume that it has been administered through the Central Bank. Is the Government in a position to attach conditions to that roll-over period? I want to see that €2 billion being used for the purposes of debt write-down. I do not want to see it coming back into the central Government. Yet all mortgage holders will carry the can while the banks' share prices are growing. The corollary of that is that big borrowers who ended up in NAMA got massive write-downs. It is totally inequitable so I wonder if we can put an appendage to the roll-over period of that capital.
3:15 pm
Professor Patrick Honohan:
This is a budgetary matter. The Government hopes to get back the money it has advanced as the banks stabilise, but it will never get some of it back. It will never get it back because different loans have been written down in different ways. If the Government wants to adopt this approach and lower certain loans by a certain amount, then it has to decide that is what the money is for, but that will eat into its other ability to spend. It is entirely a matter for the Government.
Arthur Spring (Kerry North-West Limerick, Labour)
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I understand and I thank Professor Honohan for clarifying that. It is a policy that can arise from taking a different approach. Rather than us trying to get to the banks, the Government can come from above and tell the banks what to do.
Professor Patrick Honohan:
This is the whole point. Our approach to sustainable solutions is not to tolerate an arrangement which is so onerous that people cannot have a proper life and cannot get out from under these debts. That is the whole concept of sustainability. The Deputy may say, and he will be right, that there are some cases which purport to be sustainable and are not. Some institutions may be worse than others at that. The Deputy would be right in saying so. However, the Central Bank is setting out intuitively to oblige the banks to act and call them out when they do not.
Arthur Spring (Kerry North-West Limerick, Labour)
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I am conscious of the time. The pressure element of interest-only does not give people breathing space; there is still the weight upon them. Essentially, that is what I am trying to get people to avoid.
To drill into this aspect a bit further, Mr. Martin Schultz has been in town for the last two days with the leader of my party and some MEPs. Mr. Schultz talks about the prospective recapitalisation of the Irish banks in a meaningful way. I do not know how we are going to do this. Does Professor Honohan have any thoughts on this matter? If the ECB allows the European Commission to recapitalise our banks retrospectively, how would Professor Honohan see that blending into the mortgage holder in real terms?
Professor Patrick Honohan:
First, I do not see that as something that is coming down the track very soon. I know the Government has kept it on the agenda and it is right to do so, but let us be realistic about it. I do not see it coming down the track. Any such action would put the Government's finances in a stronger position. It would allow the Government to do things it cannot afford to do now. Whatever it chose to spend that on - be it some form of relief to this or that person, or for some other purposes - it would put the Government in a better position to do the things it needs and wants to do. It is not specific to banking.
Arthur Spring (Kerry North-West Limerick, Labour)
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So it will have a budgetary knock-on effect. If we are dealing with banking debt, in Professor Honohan's opinion, should it be passed on to those people who have been burdened with that banking debt initially?
Arthur Spring (Kerry North-West Limerick, Labour)
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I acknowledge all of that. I would like to raise one last issue with Professor Honohan. The Central Bank issues licences to banks in order to participate in the Irish economy. Has Professor Honohan, at any stage, given an instruction to bank directors to conduct an internal inquiry as to whether they were in breach of their fiduciary duties at the time the banks collapsed? Some of the directors have appeared before us here and said that they have had no inquiry into why the economy collapsed. They have no idea why the property cycle collapsed or why their own banks collapsed because they have not done an internal inquiry. That is not appropriate. If there was a problem in any institution governed by this State, there would be an internal inquiry immediately, whatever about an inquiry at a higher level. This committee will possibly be asked to look at a banking inquiry. Why has an internal inquiry not been done?
The Director of Corporate Enforcement has to analyse whether the people of Ireland have been well served by the Companies Acts over the years, particularly in light of the view that nobody is being made accountable for the collapse of the banking sector. Ultimately, every man, woman and child is feeling the consequences. Professor Honohan knows this and I am not trying to be too populist about it. However, why has there not been an examination as to whether the directors, at that point in time, were in breach of their fiduciary duties? One of the kerbstones of the directorship of a bank is to protect the asset, yet they destroyed the assets. The assets would not exist without the State having intervened.
Professor Patrick Honohan:
We know that there will be a public inquiry on the banking matter. What has happened up to now? There have been a number of inquiries. The Nyberg report looked into the banks. My own inquiry implicitly looked into the banks, even though it was looking at the regulatory system, but it threw a lot of light on it.
From recollection, the two biggest banks did conduct look-backs. They got external people to look back at their internal processes and they made good and fine recommendations. How on earth could such apparently clever and able people have got it wrong? Was it a lack of communication and what were the incentive structures? It is still hard to understand how it could all have gone wrong, but we sort of know.
When Mr. Nyberg came to do his inquiry, the Central Bank suggested to him that we could perhaps fund an extensive look-back because he would need that. Mr. Nyberg's approach was not to involve the Central Bank. He probably considered that the Central Bank was part of the problem so he did his own inquiry. When he undertook his own inquiries, it did not seem as if we had a lever to do something that would get to grips with it in any way.
Arthur Spring (Kerry North-West Limerick, Labour)
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I asked that question because of the housing crisis that currently exists in the country. It is unbelievable that we are talking about this three years later and how things have changed. As regards the affordability of houses, we are now back to 100% mortgages and stamp duty is being paid again. The banks are doing a great job of repairing their own balance sheets following the increases on the property side and because the contingent liabilities are being compressed on the other side. The share price is going up as well. Overall, therefore, the banks are weathering this storm whereas a new generation will be put into what I consider to be an inappropriate amount of debt to purchase a fundamental item like a house. That needs to be addressed by Professor Honohan's own institution.
Arthur Spring (Kerry North-West Limerick, Labour)
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From what I can see at the moment, the idea of stamp duty being paid by the bank is inappropriate.
Liam Twomey (Wexford, Fine Gael)
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Just before I call on non-members of the committee, I would like to ask the Governor a few questions. This committee has had a number of discussions on the matter, and we are hoping at the end of all this that we might put together a short report on it. As Professor Honohan said, addressing mortgage arrears was never going to be a short-term issue, but on the other hand we did not expect it to become a long-term issue. There is a sense, however, that it is dragging on. People are now talking about austerity fatigue because they feel this crisis is dragging on. Mortgage arrears have had a significant effect on the psychology of people one meets daily. It even concerns people who are not as affected as the thousands who still have to work out their own arrears situations.
Would Professor Honohan recommend any changes? How does he define his own role in this? Is it simply to implement policy or does he see himself as having a leadership role, making strong recommendations to us and getting them moved on?
There is a real need.
It is funny. When we had the banks in here, they took up a very strong commercial position, which Professor Honohan would expect them to have. They are there to respect their shareholders rather than Government policy. Many of the organisations who came here the week before the banks did were focused on the question of what we were really doing to help people out. They seemed to present, although there were variations on the theme, a sense that things were not moving fast enough for people in arrears, that banks were prevaricating, holding back and seeing if they could squeeze a last drop out of those in serious financial trouble. Deputy O'Donnell raised the issue of banks going after those individuals who have positive equity. Can Professor Honohan tell the banks to tidy up those issues where there is negative equity and arrears before going after positive equity? It appears that what we used to call the "low hanging fruit" is being exploited very quickly by the banks to see what they can grab and pull at. Perhaps, in ten years time the people who really are in serious financial trouble and are now having psychological and emotional trouble as matters drags on will be discarded. I do not like the approach being taken by the banks and I wonder if it is our fault as regulators or if there is more the Central Bank could do with the legislation it already has.
3:25 pm
Professor Patrick Honohan:
It is partly an organisational issue, which is improving. Part of what the committee is seeing is also partly the result of ineffective engagement by the banks and a failure to design the best solutions and implement them quickly. They are actually doing it now whereas a year and a half ago, they were not. The area of advice to borrowers is one which has been a gap and it is gradually being filled from various sources, including the personal insolvency practitioners, which is why it is very important the banks do not behave in a way that is suggested in relation to personal insolvency arrangements. It is partly an information thing, therefore. It is partly an improvement in the quality of the design of sustainable solutions so that people are not offered so-called sustainable solutions which were never going to be sustainable and would actually re-emerge as problems in five years time or within an even shorter period.
Liam Twomey (Wexford, Fine Gael)
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What can the Central Bank do where it sees solutions which are not sustainable beyond three to five years? What can it say to the banks?
Professor Patrick Honohan:
On the basis of the very small number of audits - it is very costly to do an audit and one does not want to waste money on this - we can and are going back to the banks and saying: "This is not going to work. Do not give us any of those and redo any of the ones that are being approached in the same way. They are not sustainable." They will need to respond. They are learning as well. They say they never understood anything about sustainable mortgages and made loans on the basis of rules of thumb and never encountered situations of mortgages which were barely affordable by persons or had to bring them down to that level. That was not their model. This interaction should get us to more satisfactory solutions so that constituents will not come to members to point out that banks offered them something impossible with which they cannot live.
It is a slow process involving tens of thousands of cases and banks that are learning. We know all the problems. The model we are developing will improve all the time but it is the right framework.
Liam Twomey (Wexford, Fine Gael)
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In regard to those cases you refer to where people present to us, does the Central Bank review them when they are passed on by members?
Professor Patrick Honohan:
The Central Bank is not the entity which would deal as a clearing house between a borrower and a bank. Several speakers have suggested that this is a gap in the State's infrastructure. However, to an extent it is being filled by PIPs, MABS and what we have tried to create with StepChange who would be honest brokers. There is David Hall's group and others.
Liam Twomey (Wexford, Fine Gael)
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True, but they may find that they are dismissed by the banks.
Liam Twomey (Wexford, Fine Gael)
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That is the complaint that they are making. They are being dismissed by the banks.
Liam Twomey (Wexford, Fine Gael)
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I am referring to what we do to fill the void and give them a little more power.
Liam Twomey (Wexford, Fine Gael)
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Are there any recommendations?
Liam Twomey (Wexford, Fine Gael)
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It would be great if the Central Bank could pass on some ideas to us. There are two Members offering who are not members of the committee. Deputy Mathews was in first.
Peter Mathews (Dublin South, Independent)
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I thank the Vice Chairman for noticing me. I thank Professor Honohan for attending. I am not formally a member of the committee any more for reasons which have nothing to do with finance or financial analysis but involve party Whips and how they are applied in the country.
Professor Honohan will recall that in the summer of 2009, the late Mr. Brian Lenihan, who was then Minister for Finance, had asked PricewaterhouseCoopers to do a listing of bills of lading of loans for transfer to NAMA. I want to give a chronology and at points along it to ask a question. I hope it will be a good prompt and an opportunity to ask questions.
We met in the summer of 2008 in Professor Honohan's offices in Trinity College. I remember having done a bit of analysis on the six Irish-owned institutions and a very clear picture emerged as to how they stood at the time the music stopped and where they had come from over the preceding four years. There had been €200 billion of turbo-charged lending. As Professor Honohan stated in one of his answers earlier, it was a credit-fuelled bust, which is something which had not happened before at this scale. The €200 billion on what was the starting €200 billion was a 100% increase in the size of the balance sheets of the six Irish-owned institutions in less than four years. That is red hot. It is like looking at the needle in the thermometer of one's car going into the extreme of red. Does Professor Honohan agree that the boards of banks, on which sit the people of probity to run banks under a licence to take deposits given by the Central Bank, should have been aware at an early stage that there had been an abandonment of prudential balance sheet management? It is measurable in 2008 by looking at the loan-to-customer deposit ratios of the six Irish-owned institutions, which were AIB, Bank of Ireland, PTSB, Irish Nationwide Building Society, EBS and Anglo Irish Bank. The ratio stood at a weighted average of 173%, which was 83% above the prudential norm of 90% that should apply to high street banks. That is a form of measurement of the contribution of the banks and their boards to the asset price bubble which was built on the credit bubble. As a proportion of 90%, 82% is 92%. It is measurably and objectively right to say that the Irish-owned banking sector created 92% of the asset-price bubble.
When the bubble collapsed, like a Ponzi scheme, the question was: "What is left?" It was the wreckage of assets and the banks' insistence on collecting all the credit they had advanced into the asset price bubble.
To me, that is all wrong and I hope Professor Honohan agrees.
When I met Professor Honohan in October 2009 after his appointment, I said that it was apparent from the balance sheets of the banks that losses of the order of €50 billion would probably need to be pencilled in for just the commercial and land development bubble and that in addition to that, there could be up to €35 billion on the mortgage loan books, and give or take that we were going to be in the order of €92 billion to €100 billion. Five years later, that is exactly where we are. Yet back in March 2010 at the time that the first prudential capital asset review was carried out, Mr. Elderfield insisted that the modelling of the three B's - Blackrock, Boston and Barclays - indicated that their model was very reliable and showed that AIB would need €6.7 billion before the year end, that Bank of Ireland would need €3.5 billion and that AIB would sell off the Polish bank, which was the best capitalised part of the group and was cash-flow sustainable, into an economy that was not asset price-blown by a credit price bubble. That was the decision. The Pied Piper story was told and everybody fell for it. Fast forward to March 2011 when there had to be another prudential capital asset review. This was going to be final because on 30 September 2010, the final figures had emerged. The late Brian Lenihan said it was €50 billion but it was wrong again.
All this could have been avoided if people stopped and looked at the balance sheets and the recoverability of assets that had been created out of a credit-fuelled bubble. Let us take the example of Bank of Ireland. How much of the funding for Bank of Ireland's balance sheet in 2008 was from senior secured bonds alone, leaving aside the subordinated loans? The answer is €61 billion. That is 40-something percent of the Irish national income. It is mind-blowing and is on top of the 173% of loans to customers' deposits.
Today we hear that a Chairman for the impending banking inquiry has been appointed. I might be excluded from the inquiry. It is not that I wanted to do it but somebody who understands these things needs to be on the committee to say, "Here are the balance sheets of the banks from 2001 to 2008. Let's calibrate them and see what was the credit creation, what was the funding behind that asset bubble and where do the responsibilities and accountabilities lie?" I do not want scalps or people shot at dawn. I want boards of directors who are in situand getting very good fees to talk and perhaps look thick if they do not know the answer to the question of why they abandoned the policy of fractional reserving. It needs to be done. It is a simple exercise. We do not need a Nyberg report and with respect, we do not need Professor Honohan and his team to carry out a big exercise. Nor do we need a Watson or Regling report. The balance sheets give the answers. That is what frustrates me.
When we come back to macro-prudential rules, they are the ones that will stop a credit bubble. The Danish economist Niels Thygesen swivels around the world visiting all the prudential meetings of the banks and various countries. Do members remember the meeting in The Four Seasons hotel about three years ago? At lunch time, I asked Mr. Thygesen about what could have happened if at meetings with the banks, he and his regulator colleagues had asked to look at the short-form balance sheets of the banks and loans to customers' deposits. I asked him whether if they had been kept at below 100%, this massive credit bubble could have occurred like it did. He said "No" and I agreed. One knows mathematically that one keeps back 10% of a deposit that comes in, one lends out 90%, that 90% comes back, one lends out 81% and one keeps back 9% and so on. Add them all up and it comes to the original deposit of 100% and one has lent out 641%. That is it. If on top of that, one adds something like three and a half times' income as a macro-prudential rule for preventing a credit-fuelled asset price bubble, this is the sustainable income of the customers because there is now so much short-term contract employment that one does not know what can be maintained. One could take another approach in terms of loan-to-value ratios when the value of a property is the consideration.
3:35 pm
Liam Twomey (Wexford, Fine Gael)
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I must interrupt Deputy Mathews.
Peter Mathews (Dublin South, Independent)
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This always happens. It is not fair. Does Professor Honohan believe it is fair?
Liam Twomey (Wexford, Fine Gael)
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We are not into fairness here. We are into the rules of the committee. When I assumed the Chair, I stated that the main speakers of the parties spoke for 15 minutes-----
Peter Mathews (Dublin South, Independent)
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They are gone. I am not imposing on them.
Liam Twomey (Wexford, Fine Gael)
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Other members of committee speak for ten minutes and non-members speak for five minutes. Deputy Mathews has nine and a half minutes so there is a certain element of fairness there. I will give him one more minute.
Peter Mathews (Dublin South, Independent)
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Thanks a lot.
Liam Twomey (Wexford, Fine Gael)
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If it does not suit the Deputy, we can terminate his speaking time now.
Peter Mathews (Dublin South, Independent)
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Does the Vice Chairman think that would be helpful?
Liam Twomey (Wexford, Fine Gael)
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The Deputy is the one who has the problem with it. I have given him four and a half minutes above his speaking time.
Peter Mathews (Dublin South, Independent)
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We talk about the value of property. I think Professor Honohan would agree that it is the capitalisation of the yield. In other words, if one has a semi-detached house, it yields €2,000 rental per month. That is €24,000 per year. At a 7% yield, that is a value of €360,000. Let us do a quick check. What is the average income of a family if such a house was to be owner-occupied? It could be €80,000. What is four times' that? It is €320,000. One is in the ball park. They are the macro-prudential templates that keep everything safe but the members of boards were where it all went wrong. These members probably did not even understand balance sheet structure and engineering. If they had, somebody would have said "Stop". Alternatively, perhaps they were greedy and wanted a return on equity. This meant that they piled in by issuing bonds at €61 billion in the case of Anglo Irish Bank to get an extra return on equity. Then they are not bankers. Only 18 months to two years ago, one of the directors of Bank of Ireland came from the betting industry. It is funny, is it not? Twenty-five years ago, that would have been unthinkable. A representative of the largest betting organisation in this country that offers online gambling is brought on to the board of Bank of Ireland. One could not make it up.
My last point concerns advisers and auditors. Where where they? Were they asleep? Did they not recognise balance sheet structure and loans-to-deposit ratios? In England, the weighted average loans to deposits was about 135%.
Fidelma Healy Eames (Fine Gael)
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Professor Honohan is very welcome. I have a number of questions and if I could get answers as we go through them, I will do my best to maximise the time. I am very impressed with the MARP tool. It has very specific steps - communication, the standard financial statement, the assessment resolution and appeals. Does the Central Bank have figures from each of the banks regarding the people who are in arrears and how many of them are at each step of the process?
Fidelma Healy Eames (Fine Gael)
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It is a problem.
I understand that Professor Honohan is talking about progress regarding an overall sustainable solution. I am working with many people in this area such as David Hall. At a meeting in Galway on 12 April 2014, I met 65 people who are in serious difficulty and had one-to-one meetings with insolvency people. There is huge stress and disarray. I will alert Professor Honohan to a number of problems relating to how the banks are dealing with people in difficulty. It is our aim and that of Professor Honohan to help these clients in difficulty reach a sustainable solution. It should be the aim of everyone. I challenge Professor Honohan to say here that the Central Bank protects the integrity of the banking system and the people in arrears and will tell banks to cough up and tell it how many of the 20,000 people in arrears are now at the standard financial statement stage.
How many are at resolution stage and how many are at appeal stage? Call it micro management if one likes, but the Central Bank needs to get down and dirty at that level. Why is that not happening?
3:45 pm
Professor Patrick Honohan:
I agree that it would be better to have more information of this type. However, because of the systems of the banks, they are unable to deliver on all of our data requests. We ask them a lot of questions, but I am not equipped here to tell the committee exactly what questions are asked. We know some of the answers we get are incomplete and, therefore, we cannot say we have the full data.
Fidelma Healy Eames (Fine Gael)
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Can the Central Bank force their hand to get this information?
Fidelma Healy Eames (Fine Gael)
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Then how can they resolve the mortgage crisis?
Peter Mathews (Dublin South, Independent)
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They are not doing that.
Fidelma Healy Eames (Fine Gael)
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Professor Honohan is telling me the banks do not have a grip on the problem yet.
Fidelma Healy Eames (Fine Gael)
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Let me move on to solutions. I am sure Professor Honohan is aware that some of the so-called sustainable solutions are for no more than six months.
Fidelma Healy Eames (Fine Gael)
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The problem is not a six-month problem at all. Does Professor Honohan realise that the figures, which include those solutions as sustainable solutions, skew the results positively in favour of the banks?
Professor Patrick Honohan:
This is why I am very cautious and spend more time being cautious about making a generally positive statement and have not made a categorical statement that they have met all the targets. I did not make such a statement. I made a statement that said the process was broadly on track. Unfortunately, this was taken up - perhaps my fault for drafting it - as a great blanket endorsement, but it was not.
Fidelma Healy Eames (Fine Gael)
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I think the Central Bank is being too decent to the banks, in the sense that it takes the holistic view there has been some progress. I accept there has been some progress, but if we drill down into the results and consider the length of time people have been in crisis, there is no progress at all. We are talking about huge numbers of people.
Let me give another example. Sometimes the banks write to the customer in arrears and the customer responds to the specific request. However, in the meantime, the bank continues to send out computer generated letters, for four or five months. This piles stress upon stress on customers. This is the type of story I hear at our meetings.
Fidelma Healy Eames (Fine Gael)
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What is the Central Bank doing to prevent that?
Professor Patrick Honohan:
The Senator knows what we have been trying to do. We have been putting together the code of conduct on what they can do and the limitations on their engagement. We tried one route in that regard which was ineffective and the current route is better. We hear stories like those the Senator has described.
Fidelma Healy Eames (Fine Gael)
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May I say-----
Liam Twomey (Wexford, Fine Gael)
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Please allow Professor Honohan complete his response.
Professor Patrick Honohan:
I wish I could say I am running the banks and that I will tell them not to do what they are now doing and that this will work. I do not have that close a connection to them. It is not a question of being able to micro-manage them if I choose to do so. I could not micro-manage them.
Professor Patrick Honohan:
I cannot do so, because they cannot micro-manage the issue. The problems the Senator has identified are multiple, such as why the computers generate unnecessary letters. I have no idea why this happens, but one can assume this is because of a deficient operational process which, no doubt, the banks are trying to improve. The banks would like to get it right and do not want to mess around their customers. They may not be as concerned about this as the Senator or I may be, but they would like to get things right. It is an operational challenge.
Fidelma Healy Eames (Fine Gael)
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With respect, all computer generated letters are programmed and there is a way to stop them being issued. We need empathy to be introduced into the system. The Central Bank has done good work on the issue of harassment of customers but one client of mine is still getting four calls a day from one bank. We knew this was happening some time ago, but it is still happening. What will the bank learn from call number three that it has not learned from call number two or one? Will the Central Bank intervene with the banks in regard to behaviour that is unacceptable and unhelpful? Will it intervene in that way?
Fidelma Healy Eames (Fine Gael)
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What are the sanctions?
Liam Twomey (Wexford, Fine Gael)
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The Senator should not interrupt. I am all for to and fro debate, but I do not want anybody to feel harangued.
Fidelma Healy Eames (Fine Gael)
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To be fair, Professor Honohan has been very helpful and has helped me by providing detailed responses to questions to his office regarding unsustainable solutions offered to people into their 80s, past their life expectancy. I am very grateful he has done that. However, what sanctions are being imposed on banks that continue to be unhelpful to clients?
Professor Patrick Honohan:
The position currently, which may not remain the position, is that we see sufficient positive progress to ensure we do not need to talk sanctions. We see banks moving in the right direction, and ask them to get things even better. Sanctions could be introduced but that is not where we are at now. If the system was not working at all - I know there are deficiencies - we would take action. However, that action while it might be more drastic, might not be effective and could have bad side-effects. We have things up our sleeves which we will not do if this system works. It seems to be working but at a pace which is unacceptable to all of us. However, it is probably the best approach.
Fidelma Healy Eames (Fine Gael)
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What I hear from that is that the Central Bank is giving the banks time. That would be helpful if the same time was given to their customers. Sanctions are being imposed on customers, such as repossession and putting them out on the street. It is not a two-way process. Is Professor Honohan aware that some people move from pre-arrears into arrears because the banks do not come back to them quickly enough?
Fidelma Healy Eames (Fine Gael)
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Exactly. Again, what can Professor Honohan do to improve the situation? If I did not have to deal with so many people in such situations -----
Liam Twomey (Wexford, Fine Gael)
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I am sorry, but I must ask Senator to put her last question.
Fidelma Healy Eames (Fine Gael)
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I have one or two more questions.
Liam Twomey (Wexford, Fine Gael)
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The Senator may ask just one more question.
Fidelma Healy Eames (Fine Gael)
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Professor Honohan is probably aware that we in the Reform Alliance have just launched a new policy document, Fair Value Lending, which is concerned with preventing reckless lending in the future. Has he had a chance to study this policy, a copy of which he received and acknowledged with interest? This policy would require the Central Bank to implement it. In Professor Honohan's view, what is the correct ratio between income and mortgage size that will ensure we never again reach a stage where people will be lent 16 times their income?
Professor Patrick Honohan:
The policy the Senator outlined is very much consistent with what I have been talking about - with prudential tools, loan-to-value limits and debt-to-income limits. Often debt-to-income limits are neglected in favour of loan-to-value limits. I will not name a specific ratio now, but as I said to Senator Barrett, this plan is part of the tool-kit we imagine using in the future. In the current situation, in the case of the distressed mortgages, the ratios are not valid. What we are talking about here is about re-underwriting loans at loan-to-value ratios that in many cases are still well above 100% because of the situation. Therefore, this plan is not really a tool for the immediate present, except for new fresh lending, where one could imagine it coming in more quickly.
Fidelma Healy Eames (Fine Gael)
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Our policy is about fresh lending. I thank Professor Honohan for his time.
Liam Twomey (Wexford, Fine Gael)
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We must finish the meeting.
Peter Mathews (Dublin South, Independent)
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May I put a supplementary question?
Liam Twomey (Wexford, Fine Gael)
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No, we must finish the meeting by 6 p.m.
3:55 pm
Peter Mathews (Dublin South, Independent)
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Will the Vice Chairman ask the Governor whether he would like to take one question, please?
Liam Twomey (Wexford, Fine Gael)
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No, I am chairing the meeting. I thank Professor Honohan for his contribution and giving us his time. I have no problem with robust engagement, nor does he. He can take engagement in the spirit in which it is meant.