Oireachtas Joint and Select Committees
Tuesday, 26 January 2016
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Banking Sector and Central Bank of Ireland: Discussion
I remind members to ensure that their mobile phones are switched off. This is important as it causes serious problems for broadcasting, editorial and sound staff. Today's business is the overview of the banking sector and issues relating to the Central Bank of Ireland. I welcome Professor Philip Lane in his new role as Governor of the Central Bank. While this may be last committee meeting before the much anticipated election, it is important that we have the opportunity to consider developments in the banking and financial services industry as well as developments within the Central Bank itself. The format of the meeting will be such that Professor Lane will make some opening remarks, which will be followed by a question and answer session.
I draw the attention of witnesses to the fact 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 the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.
I am stressing this because there is an issue about an inquiry within the Central Bank and I do not want people naming names.
Professor Philip Lane:
I thank the Committee for inviting me to present a selective overview of the work programme of the Central Bank of Ireland. I will focus in particular on the domestic activities of the bank. As part of the euro system and the EU system of financial regulation, the Central Bank has heavily engaged with a wide range of European policy committees. In recent years there have been considerable changes to the mandate and structure of the Central Bank in response to the many lessons learnt from the domestic and international crises. With the passing of the most intensive phase of crisis management, it is now time to establish new priorities for the Central Bank. Our recently published Strategic Plan 2016-2018 provides a detailed guide to our plans for the next three years. Our mission statement, "safeguarding stability, protecting consumers", encapsulates the dual priorities of the bank in the period ahead. These are to preserve financial stability and ensure that the financial sector operates in the best interests of its customers. I will focus on the domestic side of the bank's affairs, but having said that, allow me to spend a moment discussing our role in regard to European Central Bank, ECB, monetary policy.
In common with similar initiatives by the other major central banks, the ECB has recently adopted a number of unconventional measures in pursuit of its inflation target. These include the expanded asset purchase programme, which is intended to run at least until March 2017. In implementing this programme, the Central Bank of Ireland has been actively engaged in asset purchases. At the scale of the euro system as a whole, total purchases of euro area public debt securities were close to €500 billion by the end of 2015, and that includes €7.6 billion of Irish sovereign debt. At the ECB level, I would argue that the accommodative module policy has contributed to Ireland's excellent recent performance. The low interest rate environment has been a boon to many indebted households, while the Government has been able to issue debt at low interest rates.
More generally, as indicated in its press conference last week, the assessment of the ECB Governing Council is that the module policy measures adopted since mid-2014 are working. Noting the increase in downside risks since the beginning of 2016, the governing council will review and possibly reconsider the module policy stands in early March. In regard to the longer-term agenda for the euro area, the crisis made clear that the original design of the euro area suffered from a lack of risk-sharing and crisis management mechanisms. While there has been significant progress in reforming the institutional set-up of the euro area, the recent Five Presidents' report highlighted that further reforms could help to improve the resilience of monetary union. This reform agenda should be a high priority for European policymakers.
With regard to the Central Bank's domestic situation, our latest quarterly bulletin was published this morning. It projects that the economy will continue to grow strongly this year, with GDP growth expected to moderate only slightly, to around 4.8%. This reflects confidence arising from several positive factors, including the employment-rich nature of the recovery, a less constrained policy environment, the boost to purchasing power from lower energy prices, the ongoing easing of the balance sheet legacies of the crisis and broadly favourable conditions in the export markets. It is the combination of these factors that has helped the current recovery. However, while much is improved, vulnerabilities remain. The strong growth outlook provides an opportunity to address the legacies stemming from still-high levels of public and private sector indebtedness. Externally, the main current risk factor relates to economic and financial conditions in some emerging economies. Closer to home, the Central Bank is also keeping a watchful eye on Brexit-related risks to the economy and the financial system.
Even in a period of good economic performance, the core issue remains the fact that a small, highly-globalised economy such as Ireland is inherently more volatile than larger economies. We can grow strongly for extended periods, but we are also especially vulnerable to negative shocks.
For this reason it is essential that the bank is proactive in the deployment of macroprudential policies that can improve resilience and mitigate the pro-cyclical dynamics associated with excessive leverage. The new rules that impose loan-to-value and loan-to-income limits on most mortgages were introduced to protect borrowers and contribute to a safer financial system. A safer financial system will in turn contribute to a more stable economy overall in the longer term. Therefore, the bank is firmly committed to deploying these tools on an ongoing basis with periodic reviews to ensure that the measures are appropriately calibrated. As I mentioned last week, I expect the first review of the rules to be published by November this year.
Professor Philip Lane:
The review of the mortgage rules will be based on an analysis of the evidence provided by data on the first year of the operation of these rules while taking into account other factors that may have influenced the mortgage market during this time period.
The rules-based framework is intended to promote the resilience of both banks and households and should be viewed as a permanent feature of the system. As I have previously indicated, the bank is open to tightening or loosening the calibration of these rules in response to the evidence. Nevertheless, the value of stability in a rules-based framework means that the evidence threshold to justify adjustments to these rules is significant. Tools such as mortgage rules and the recently introduced system of counter-cyclical capital buffers would have mitigated the costs of the boom-bust cycle in the mid-2000s. The Irish economy remains vulnerable to adverse shocks so that limits to household leverage offer protection to households and to the banking system.
Turning from macroeconomics to microeconomics, with regard to financial regulation supervision, the banking sector is in the middle of a multi-year transition to higher capital requirements, reduced leverage and increased liquidity on the balance sheet. The Single Supervisory Mechanism has been in place for just over a year. It is the first pillar of banking union, implementing a common, area-wide approach to its supervision with centralised responsibility for the supervision of approximately 130 of the largest banking groups, including the main Irish retail banks. The second pillar, the Single Resolution Mechanism, SRM, has come into effect now. By ensuring that financial institutions can be resolved in an orderly manner, the SRM should significantly reduce the adverse impact of an institution's failure on the financial system and the taxpayer. The third pillar of banking union is the European deposit insurance scheme. This is still under negotiation at a European level.
Regarding the banks, a major topic is the treatment of mortgage arrears. The latest data show that the number of accounts in arrears of more than 90 days was just below 66,000 at the end of September. That is a high number, but there is progress to report. The overall levels of arrears started to decrease three years ago, and we are now starting to see a decrease in the number of households in long-term arrears, that is arrears of more than 720 days, in the third quarter of 2015. At the same time, the economic recovery is gaining pace, and we see an increase in the number of legal proceedings against mortgage holders. The role of a central bank in this area is to ensure the banks adhere to the code of conduct of mortgage arrears, meet the criteria for sustainable solutions and continue to engage with their customers to find non-repossession solutions where possible. The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 is important legislation in this respect as it seeks to ensure that borrowers whose loans are sold to unregulated transferees maintain the regulatory protections they had prior to the sale.
It is imperative that lenders continue to work with over-indebted house consumers to try to resolve any arrears situation and achieve sustainable solutions with co-operating borrowers. There is no quick remedy or solution to long-term arrears in many cases, therefore careful, empathetic but realistic approaches are required. In this context, I welcome the new co-ordinated programme of assistance for those in long-term arrears, with the Money Advice & Budgeting Service, MABS, acting as a one-stop shop for borrowers in need of advice and support.
Another important part of the credit system are the credit unions. New credit union regulations came into effect at the start of this year.
These regulations will enhance soundness and provide for enhanced confidence in the sector and support its role in providing important financial services to the community. The bank will continue to work with credit unions to support appropriate restructuring measures, the embedding of the strengthened regulatory framework and will facilitate prudent and appropriate development.
This is a landmark year for the insurance sector, with the Solvency II framework going live. Solvency II involves a whole-balance-sheet approach to capital calculation combined with the strong emphasis on a firm's risk management and a supervisory review process which will result in a much-transformed regulatory and supervisory framework. This year, the supervised firms and the Central Bank supervisors will be putting this framework into operation.
In December, we released new regulations on SME lending. These aim to strengthen protections for SMEs while also facilitating access to credit. The regulations provide for greater transparency around the application process and the reasons for refusing credit applications, greater protections for guarantors and an expansion of the grounds for an internal appeal.
There is growing international recognition that financial regulators should be more proactive in protecting consumers, in view of the complexity, risks and costs of financial products. It is not our role, as a central bank, to run the firms we regulate or to determine their business models or strategies, including in the setting of prices and rates charged. Rather, our work on consumer protection is primarily focused on increasing transparency to enable people make informed decisions with full clarity about the risks, costs and long-term impact of financial products. This year, we will further enhance our engagement with boards of the larger retail firms to push for a more consumer-focused culture within firms and will carry out on-site consumer risk assessments across a number of retail firms.
Firms must be able to demonstrate that their products are fit for purpose. This means that firms must ensure that products are fully understood by customers and are suitable for their individual needs. We therefore expect firms to conduct consumer testing on their products, including their product literature, and to simplify them where necessary; to use plain language; and to go beyond disclosure and caveat emptorto ensure consumers have a good general understanding of products before launch and also during the sales process. Firms must be satisfied that products remain suitable for the target market and provide the best solution for existing as well as new customers.
We also plan to continue our supervisory work on particular products, including the tracker mortgage examination, and reviews of structured products and health insurance. Another important initiative is to increase our firm-specific engagement with low-impact firms, including intermediaries and debt management firms. We also plan further work to strengthen consumer protection code requirements, including for variable rate mortgage holders, as well as carrying out an examination of the impact on consumer outcomes of commission payments to insurance intermediaries.
On regulation, members will have seen a good deal of enforcement activity reported in the press in recent months. This reflects our philosophy where high quality supervision must be underpinned by a rigorous approach to enforcement.
A new activity in the bank is the establishment of the central credit register. The credit reporting obligations will apply to more than 500 lenders, including banks, credit unions, asset finance houses, local authorities and moneylenders. It is in process this year and will be fully operational from 2017.
Taken together the expansion in the scope of monetary policy, the adoption of a more intrusive approach to financial regulation, the introduction of new regulatory mandates, such as Solvency II and the single resolution mechanism, the continuing expansion of the investment funds sector in Ireland and the professionalisation of corporate services within the Central Bank mean that our staff numbers are growing. This year we expect to recruit an additional 150 staff, bringing the staff total to about 1,650.
I hope we will move to our new headquarters on North Wall Quay at the end of 2016.
The layout of the new building has been designed to promote a collaborative working environment, which will facilitate the teamwork that is so critical to the delivery of the bank’s multifaceted mandate. In parallel, we are working on the redesign of the organisational and reward models and we hope to complete them in the next few months.
A greater level of openness about how the bank conducts its activities can help improve the level of public trust in our organisation. We believe that people will be more confident that we act independently and in the public interest if they have greater insights and understanding about what is going on inside the bank. Last week, I announced plans to publish the minutes of the meetings of the Central Bank Commission. While information on the supervision of regulated firms and some market-sensitive financial operations activities cannot be disclosed, the publication of these minutes will contribute to greater understanding of our corporate governance, internal debates and the initiatives we take to deliver on our mission. We also put on the website last week details of our salary structures, pay scales and HR policies. In this way we aim to enhance understanding about the Central Bank as a public organisation and prospective employer.
In summary, during my tenure as Governor in the coming years, my aim is to build on the progress that has been achieved in recent years in recasting the Central Bank as an efficient and effective Central Bank and Financial Regulator. The staff of the Central Bank can be proud of the new reforms, which were recently recognised by our international peers through the Central Bank of the Year award from centralbanking.comand the Central Banking Journal. I wish to also mention a number of recent peer reviews from various external bodies. A summary of those was put on the website last week. By and large, the reviews recognise the Central Bank’s consistent adherence in recent years to the highest international standards.
I thank Professor Lane. I propose that we proceed with questions from members and that we will adhere to the usual rules. The lead speakers for each of the groups will have ten minutes. They will be followed by other committee members who will have five minutes and then anybody else who wishes to ask questions will have five minutes. Is that agreed? Agreed.
Governor Lane is very welcome. I wish him well in his new role and congratulate him on his appointment. I will start with a domestic issue in terms of the new mortgage deposit rules and the loan-to-value and loan-to-income limits that apply to most mortgages. I put the case to him of somebody who is currently renting - an individual or couple - who may be paying €1,000, €1200 or €1,500 per month. People in such circumstances would find it impossible to save the required level of deposit and they are at a very serious disadvantage compared to somebody who is able to stay at home with his or her parents, for example, or somebody whose parents are able to help him or her come up with a deposit. Specifically on the issue of people who are paying rent, to what extent can the rules be reviewed to take account of people's track record in paying rent?
Professor Philip Lane:
What is at issue is one's track record of paying rent or good credit standards, for example, such as one's ability to repay a car loan. It will be easier to keep track of the situation when the central credit register is up and running as it will provide a fuller picture of the credit quality, if one likes, of an individual or couple. I imagine that banks would value that evidence in terms of the reliability of a given couple to make repayments. Rents, such as the examples Deputy McGrath gave, are especially relevant for loan-to-income ratios in the sense that if one demonstrates that one can sustainably pay whatever rent out of a given income, that is relevant in terms of the loan-to-income ratio more than the loan-to-value ratio. When we review the rules later in the year and issues relating to measures on what is a sustainable level of debt of a mortgage loan relative to income, we can definitely look at what Deputy McGrath said about the evidence coming from people's track record in paying rent as part of it.
It sounds sensible that a track record of paying rent would be relevant when approving a mortgage. Having said that, taking out a loan to buy a house is fundamentally different from renting in terms of commitment, namely, there is a quite irreversible commitment to manage a loan. The concept of having loan-to-income ratios or related ratios, such as debt-to-income and so on, is because it is fundamentally different from renting in the sense of allowing for the fact that over a 20-year or a 30-year mortgage, one has to allow considerable margin in terms of shocks to income levels and employment.
In line with elsewhere, we have been careful to allow some margin. I agree it is a 15% margin in terms of the mortgage value. Again, however, I imagine when banks are working out who can go over the thresholds, the track record on renting can help in that situation.
I welcome this response and the fact rent can be considered as part of the forthcoming review later in the year. The Governor said it is directly relevant to the loan-to-income issue more than the loan-to-value issue. However, in practical terms, if someone is buying a house worth €300,000, he or she will have to come up with a deposit of €38,000. He or she will have to find and save that money. The reality is that if he or she is renting and paying €1,000 to €1,500 a month, he or she will find it next to impossible. I welcome the fact this will be considered in the review. However, the Central Bank will need to take into account the simple fact that those renting privately are seriously disadvantaged compared to a first-time buyer who could be in a position, for example, to stay at home with his or her parents. Such first-time buyers can save at a much more accelerated rate.
It is a simple practical reality that affects thousands. People want to have hope and many aspire to owning their own home. We are meeting them on the doorsteps and they inform us they are feeling trapped. They can never see their way to saving that level of a deposit to buy a home. They have to be given some hope.
Professor Philip Lane:
These rules affect different groups quite differently. When one thinks about what happened in the mid-2000s when credit was more readily available, we know the disaster of people taking on too much debt. Again, the banks were offering these generous mortgages to them. However, we have to have a system which limits that risk. One way in which the sector will adjust is, essentially, the pricing of homes will moderate. There is much evidence, especially from the Irish situation, that when there is not a complete but a partial adjustment and when credit is less available, part of the adjustment over time will be that the bidding war on houses will be less intense. Accordingly, people will be able to buy houses at lower price than if credit were unregulated.
Many of the reductions announced in standard variable rate mortgage rates over the past 12 months are new offers for new customers. The reality is that there are tens of thousands of existing mortgage holders still paying between 4% and 4.5% on a standard variable rate product. In some cases, it is closer to 5%. We do not have an active mortgage switcher market. Even if there were one in place, many mortgage holders are trapped because of negative equity or because their financial situation has changed and, accordingly, they would not qualify for a new mortgage. It is fundamentally unfair that the rate reductions given to new customers are not extended to the existing customer base across the banking system.
Professor Lane is the new Governor and I hope this is an issue he will tackle. I note his comment that he is not there to run the business of regulated entities. However, this is a clear case of discrimination against existing customers vis-à-visthe offers of which new customers can avail and it is simply not fair. I put the case to Professor Lane and challenge him on what he can do to address it.
Professor Philip Lane:
Many markets have this characteristic of discrimination. When they can do it, firms like to differentiate in pricing across different groups. I fully understand the perception that it is unfair, if one has been in that position. At the same time, the Central Bank will hold to the position that banks have to be run on a commercial basis. We can discuss the level of competition in the banks and whether the existing high rates are likely to persist, but the Central Bank cannot interfere in the contracts between lender and borrowers.
The Deputy mentioned switching. I agree that there is not a lot of switching taking place. The Central Bank's research indicates that there are more options than one might think where households could benefit from switching. One of our goals is to make the switching process easier. In the same way as mobile phone contracts and so on, the more one makes it easier for customers to switch phone company or bank, the less a company or bank will be able to separate existing customers and charge them a high rate. The Central Bank can work on making the switching process easier. However, on insisting a bank treat new and existing customers the same, that is not really within our power.
On mortgage switching, a practical step the Central Bank could take would be introducing a code of conduct. There is a code for those who want to switch their current account and one might save €20 or €30 a month as a result. Those who are in a position to switch their mortgage should be shopping around and they could save a few hundred euro every month as a result. The Central Bank needs to make it easier for them to do so and the introduction of a code of conduct on mortgage switching would be relevant in that regard. I repeat the point that at a time when the cost of funds for banks in Ireland has fallen to between 1% and 1.5%, it is unjustifiable that they continue to charge rates that are multiples of these figures - between 4% and 4.5%. The perception is that they are targeting their existing variable rate customers to make up for losses they are incurring on their tracker mortgage book. They are offering more attractive deals to new customers and there is some evidence of competition in the mortgage market for new entrants, first time buyers and so on, but if one is an existing variable rate customer, seeking to remortgage and move to another bank is not an option. One is then trapped, despite the fact that the cost of funds for banks is a fraction of what they are charging customers. In its role as consumer watchdog - it has a key statutory role to play in consumer protection - the Central Bank could do more on the issue.
The Governor is most welcome and I wish him well in his role.
Like other members of the committee, I have been concerned for some time about foreign equity firms or vulture funds, as they are more commonly known. We have all come across instances where they have acted aggressively and unfairly against both personal and corporate borrowers. Some of them have sought committal orders against borrowers who are struggling with their debts and in at least one case of which I am aware they flagrantly breached the terms of a personal insolvency arrangement. Businesses are being placed at serious risk of failure because of the activities of these funds and the way they are treating businesses. We were snubbed by them in early December when they refused to come before us. It seems the are are able to act and conduct themselves with impunity.
They are accountable to nobody in this jurisdiction and they make decisions to suit themselves. They are totally unregulated here. Will the witness comment on that? They are only accountable to their own shareholders and investors, and they are, naturally, outside the jurisdiction. Are additional legal measures required for homeowners and small and medium enterprises in these cases? Will Professor Lane give us the benefit of his views on the matter?
Professor Philip Lane:
Okay. I tried to point out in the opening statement that the new Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 seeks to maintain regulatory protection for borrowers whose loans are sold to these types of firms. I agree that there was a gap in the legislation but it has been filled. I note that various credit servicing firms are currently seeking authorisation from the bank. That process is in train, at least for the treatment of mortgages. These firms may well act differently from the local banks and so on and one difference is probably in terms of the level of regulation. Taking the entire process by which they have come into the market from a global level, the fact that Irish banks and various creditors were able to transfer some of their troubled loans to global investors is a very common pattern in many crisis countries. Essentially, the risk for a loan being repaid is transferred from the original creditors to these firms. In many cases, the issue is politically controversial because there is less of a domestic stake than with a local bank but it is part of the crisis management process. It is definitely part of the method by which the Irish economy has recovered; this was done by the transfer of some amount of the troubled loans to outside investors. To the extent that we can, we will ensure these companies treat their debtors in the same kind of way as they would under domestic regulations. The new Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 does that to an extent.
I have a supplementary question. That sounds grand, with respect, but we know these companies bought these loans at knock-down prices and that they are screwing the people. They have been able to carry on with impunity because we are powerless. I accept Professor Lane's comments about a gap being filled but when will there be an effect and when will we have some control over the practices involved and the way these companies conduct their business?
Professor Philip Lane:
The Act is now law and the authorisations are happening. Perhaps the Senator could tell me afterwards if he has particular examples because I am interested in them. When the power of law was not there, perhaps there was excessive behaviour, but now the Act is in place, the bank will follow up and examine the issue.
I welcome Professor Lane and congratulate him on his appointment. I wish him every success. He has probably followed reports in the media in recent days which indicate that the banking inquiry is due to report tomorrow. It has been stated that the inquiry's report is critical of the institution that Professor Lane now leads. What assurances will he give the committee and, more importantly, the Irish people that he will, as Governor of the Central Bank, intervene in instances where intervention is necessary and that the necessary resources and powers are in place to facilitate such intervention?
Professor Philip Lane:
That is the key to my job - the reason I volunteered, if one likes, to move from my position in Trinity College to join the Central Bank. I believe it is essential that the bank is proactive. Looking back over time, one view of what was going on in the mid-2000s is that, very rapidly, in 2004, 2005 and 2006 there was this incredible credit boom, not just here in Ireland but internationally. Therefore, it is not the case one can take years to decide what should be done. One has to have the toolbox to hand and be willing to use it.
As I mentioned earlier, one element is the mortgage rules. A second element which we now have, although it did not get huge publicity, is that across Europe every country now has a system of counter-cyclical capital buffers. This system is reviewed every quarter under European law, so it is not something we say we will do in December every year. Every quarter we look at this and ask whether we are concerned that a credit boom is starting to happen or whether we should insist the banks raise more capital because the risks are increasing. Around Europe most countries, including here, have it set at zero because the market for credit is not booming. Some countries outside the eurozone are also using this method. Therefore, we now have the toolbox in the sense that we have a process of review.
Deputy Michael McGrath raised the issue of the mortgage rules. The reason I am committing to a review of the mortgage rules is that we should have a system where we take a look at the rules every year in order to avoid a situation where we simply watch a major development in the financial system and do nothing. The challenge for me going forward is that, as the crisis recedes, one can imagine there might be forces towards complacency which take the view this will never happen again. For the bank to have those tools, and to have a method by which we are not just talking about financial stability but also asking what we can do about it in terms of capital buffers, mortgage rules and the supervision of individual banks means I am much more confident going forward that we will be able to proactively intervene.
The possible cost of that, and everyone has to get used to this, is that we will get the counter-argument that there is no need to intervene because there is no current evidence that the country is melting down. This goes back to the independence of the Central Bank. I anticipate there will be quite a bit of chatter about why the Central Bank is intervening now - if there is no crisis, why intervene? Of course, the issue is to pre-emptively intervene to minimise the risk of a crisis developing.
With the changes in regard to banking union, some of our larger banks are being supervised at a European level through the Central Bank. To take three large institutions with large loan books, what type of staff numbers are involved in supervising AIB, Bank of Ireland and Cerberus, which has €20 billion of Irish loans on its books?
Professor Philip Lane:
I prepared many numbers before coming here but I will have to come back to the Deputy with those ones. All I can say is that the way the banks under SSM, such as AIB, Bank of Ireland and so on, are regulated is called a joint-supervisory team, JST. The joint-supervisory team has officials in Frankfurt who are working jointly with the people here in Dublin and there is a lot of traffic between Frankfurt and Dublin, in terms of both telephone calls and meetings. The people in Frankfurt come here and vice versa. I do not think there is any shortage of resources being put into supervising the largest firms.
Since Matthew Elderfield's time, supervision in the Central Bank is organised under a model called PRISM, or the Probability, Risk and Impact System, which looks at the proportion of risk. Through another regulatory innovation across Europe, large banks such as AIB and Bank of Ireland have been named by the Central Bank of Ireland as "other significant institutions". They are so big - though not globally significant, such as JP Morgan, for example - that they are required to hold extra capital. We have announced extra capital ratios for those firms. Cerberus does not come under the Central Bank's supervision, except indirectly if it has-----
Professor Philip Lane:
There is supervision of all kinds of financial firms but the method by which global private equity firms with loan books in this country are supervised is in terms of consumer mortgages and new credit servicing, and there is a method by which to do that. Fundamentally, on the regulation of the banking system, Deputy Doherty is right: it is about protecting depositors. If a firm is financed by the world's financial system, it is not coming through the Irish banking system or other banking systems. Cerberus is not a bank, it raises its money through non-deposit forums. There are all kinds of regulations for public financial firms but privately-held firms choose to remain outside that.
We will probably discuss the regulation of those unregulated firms in the same way as the regulation of deposit-taking banks at a later stage.
Turning to the mortgage rules that the Central Bank introduced last year, there have been different suggestions about how they should be amended, changed, or scrapped. One proposal being put forward is that the Government would provide a grant of up to 25% of the mortgage rate to people to try to circumvent these rules. How does the witness believe that would affect the spirit of the rules the Central Bank has introduced? For example, if somebody had to raise €20,000 as a mortgage deposit, the Government would provide 25% of that figure as a grant to help them to reach the deposit minimum.
Professor Philip Lane:
We are not out to burden individuals. If a person receives a fiscal grant, the risk has essentially been absorbed by the State. It slightly cuts across Deputy McGrath's issue about showing a track record of regular payments. That element would have to be separately tracked. That is more about the loan to income ratio. In terms of the loan to value ratio, if the Government decided to offer a fiscal subsidy to a group of people, from the banking sector's point of view, the banks would be made safer by that lower reliance on debt funding, but that in turn would come at a fiscal cost to the Government. Therefore, I think that is for the political system to debate.
The witness referred to the credit-fuelled bubble that arose. We know from the Nyberg report, for example, that commercial property was the main reason for the collapse of the banks. Given the fact that we have seen an increase in the supply of commercial property - over 21% in the last year - is the witness concerned, or how concerned is he, in regard to this rise? People understand houses and mortgages, and when we talk about the banking crisis people think it was all to do with 100% mortgages and tracker rate mortgages because maybe they may not be as familiar with commercial property. Are alarm bells starting to ring in the Central Bank in regard to commercial property in the country?
Professor Philip Lane:
That is a very good point.
The Deputy is correct in terms of its role in the past.
The fact that commercial property has recovered so strongly in Ireland raises the issue of what level it is at compared to what may be the level that is sustainable in the longer term. This shows up in two ways, one of which is how these acquisitions are being funded. Many of them are not being funded from the Irish banking system. Therefore, in terms of the risk associated with new lending, so far it is limited. The secondary issue is that the recovery also affects the bank's thinking about existing loans, the history of these loans and the value of the collateral against these commercial property loans. I am sure bank supervisors are engaging with the banks on how they should think about this. The recovery is so visible in Ireland that this is definitely one of the big numbers at which we look.
I will take the opportunity to ask a few questions.
We are all happy to see a decrease in the numbers in mortgage arrears. However, as Professor Lane said in his opening statement, the number of mortgages heading towards the courts has increased quite substantially. He did not raise the issue of buy-to-let mortgages and the number of those in arrears for more than 720 days. The statistics released on 11 December 2015 indicated that there were over 6,000 buy-to-let properties subject to receivership. I am sure the professor is aware that there is significant dissatisfaction with the actions of receivers, particularly their behaviour towards tenants in properties subject to receivership.
Professor Lane mentioned the role of the Central Bank in consumer protection. Does he see any role for the bank in examining the possibility of introducing a code of conduct in the context of the actions of receivers in the case of buy-to-let properties, in particular their actions against tenants? I know from personal experience that some tenants have found themselves outside the door with their belongings in black sacks. There is definitely an issue with the actions of some receivers, although others have not behaved in that way. Is there a role for the Central Bank in regulating the actions of receivers?
It would be great if the professor could send us an answer in writing which we could circulate to committee members.
I want to reiterate the point made by Deputy Michael McGrath about rental properties. There has been a massive increase in rents in the past year and a half. There is no question but that people who are renting are trapped and will be for the foreseeable future if the deposit rules for house loans are not amended. Professor Lane mentioned the credit boom in 2004, 2005 and 2006. What we have now are an 80% LTV ratio, income to loan values and deposit requirements, following a situation where we practically had loan to value ratios of 120%. Sometimes the figure was even higher. To some extent, are we not comparing apples and oranges, rather than apples and apples? My concern is that the definition of what is sustainable is very narrow and does not really take into account the realities of the alternatives people face when they cannot access mortgage finance.
My question relates to some of the concerns raised about the Central Bank's policy by organisations such as, for example, the Society of Chartered Surveyors. They state the Central Bank's rules are hindering and hampering the recovery of the construction sector.
My next question relates to the construction sector. There is an issue with the lack of bank financing for development. This is part of the overall picture in terms of the failure of the construction sector to recover.
Again, does Professor Lane see any role for the Central Bank in dealing with that issue, where there is clearly a distressed construction sector - there are no two ways about it - in the same way that there are distressed borrowers and people who have been distressed in terms of their credit card debt, their car loan debt and so forth? There is a generation of people who have been subject to distress financially. We are depending on the construction sector to get back into business, but the lenders do not want to go there in terms of funding more than maybe 60% of the debt that is required.
Professor Philip Lane:
That is the kind of number with which I am also familiar. However, going back to what I said earlier, the really big losses during the crisis were on development loans, which is such a troubled category. The banks cannot go back to having very high ratios of debt finance because developments take so long, from purchasing a site to planning and so on to the final sale of the housing, commercial outlets or whatever is being developed. That is an intrinsically risky prospect and my understanding is that the international norm, for example in a very developed financial system such as the US, is for maybe around 40% of the financing not to come from debt but from equity. This is a big cultural shift for the Irish development sector, and if that sector has not been making money for a number of years, how is that equity generated? In this situation it is important to have a better equity market so that small developers can raise equity financing, possibly through the entry of foreign investors into that market coming into Ireland with innovative schemes. Therefore, I agree that such an equity market, for development, needs to grow. Another way of saying this is that I would not be in favour of the banks overly relaxing their attitude to how much debt should go into a development project. The counterpart to that is that in the same way that at the European level the capital markets union project tries to improve equity financing across Europe, I am sure much can be done here by the Government to improve that market.
Professor Philip Lane:
Yes. In the housing market there are many dimensions of policy relevant to housing, but on this purely financial issue, debt is not the only way to fund something. When the debt ratio gets too high it gets too risky, so we must develop and change the culture and the system here to address that.
I am sure there are many who take the view that given the way these operators were bailed out, it is time for them to step up.
I have one final question and it relates again to Professor Lane's role in consumer protection. There has been some dissatisfaction with the action of banks relating to vulnerable customers, particularly, as I am sure Professor Lane will know, the introduction by Bank of Ireland in the latter part of last year of rules that set the minimum over-the-counter withdrawal amount at €700. This discourages customers from interfacing directly with bank staff. There is an issue here with vulnerable customers and those who do not use their Bank of Ireland 365 online or AIB interfaces when doing their banking business. Does Professor Lane see a role here in protecting such vulnerable customers?
Professor Philip Lane:
There is a mix there, so I am sympathetic to that issue. Clearly, as a society, it is important to recognise that not everyone is Internet-expert or has a big-data mobile telephone contract to make it easy to do online banking. The question is what the relative responsibilities of the banking system are, as opposed to our responsibilities as regulator of the banks, and whether there are other possibilities in terms of social banking. There are various options but again, it is probably safer for me to inquire whether there is any specific issue here that we can deal with.
I thank Professor Lane. On 10 January I received a communication, including a protected disclosure in respect of the Central Bank, from somebody who describes himself or herself as a whistleblower. I am assuming it is the same communication Deputy Mary Lou McDonald received prior to Christmas because they sound pretty similar. Obviously, the person in question is not happy with how the protected disclosure process is proceeding but it obviously relates to a serious matter. I would like Professor Lane to tell us what is going on. As he probably knows, this person is alleging that while conducting an internal audit within the Central Bank, they were instructed to delete parts of that audit. The person consulted the professional body of which they are a member, which told them that under no circumstances should they ever suppress any findings in a report. Nonetheless, those more senior to them wanted these findings suppressed and deleted from the report. I understand that, subsequently, this person was let go from the Central Bank. That person reports further that having been let go from the Central Bank, and he obviously sees a connection with what happened in the bank, he was warned he would find it difficult to get work elsewhere in the financial sector, having made a protected disclosure against the institution. He obtained employment at another financial institution but, shortly after he lodged his case with the rights commissioner, he was also let go by his new employer, at which a former director of human resources in the Central Bank was employed.
These are pretty serious allegations. I wonder whether Professor Lane could respond, in light of the whole question of proper oversight, internal reporting, whistleblowing and so on is of enormous importance and everything that has happened and given the failings of the Central Bank during the period of the economic madness that, frankly, crashed this economy. In any event, it is a very serious matter. If Professor Lane-----
I wish to make a brief point that applies to both Professor Lane and Deputy Boyd Barrett. I have to advise both not to make references in a way that would identify any particular individual who could be identified either from the question or the answer.
Professor Philip Lane:
Let me make a few points. I do not really want to talk about that individual case. I understand there is still an ongoing case in front of the Workplace Relations Commission. Let me provide as much reassurance as I can. When I heard about this matter before Christmas, we did examine it. Internal audit is a vital function. The first point is that the Central Bank - in line with many other corporate areas that any organisation will have - is investing quite a bit to expand its internal audit team. In this period of reform, reorganisation and improvement, we have no reason to not take on board any suggestions coming from the internal audit process. This year, routinely, there will be 14 internal audits. The process is there in order for the bank to learn from any shortcomings.
This matter relates to an internal audit on governance.
All of the issues identified in the internal audit were about how the Central Bank organises itself and whether the process of governance adheres to what it should be. It identified several issues. The implementation of the identified recommendations is virtually complete. In terms of substance, the process worked, the internal audit was done and the recommendations have been taken on board. In terms of how the internal audit was handled, of course when an allegation is made and given that it is an internal audit, this was handed over to an external firm to assess how it was handled. That external firm concluded that the bank had a reasonable process to deal with that internal audit. Going beyond that, the individual and the bank are engaged at the Workplace Relations Commission and I do not want to get into the individual issues. This is not the right forum to deal in too much detail with the allegations and the risks the Deputy identified.
I will not pursue it any further except to say I have read the Deloitte & Touche report and it did not shed any great light on the rights and wrongs of this situation. It does carry a lot of weight with me that a professional association would advise somebody not to suppress findings. If Professor Lane is saying that reforms took place subsequently in the areas identified in the audit, that gives more weight to the whistleblower’s allegations. Maybe we can pursue that another day. It is entirely justified to flag it.
I have been involved, as have many Deputies, in trying to assist people in mortgage arrears as a result of the mad lending by banks and in many cases encouraged by them, including this case, during the period of economic madness. At the end of very protracted negotiations in the case, finally a deal was done, payments were made, arrears were written off and an arrangement was reached between the bank and the individual. When this person, who was self-employed, with a small business, went back to the bank to get a small loan to keep the business going, the bank said the person was blacklisted for further credit because the original terms of the loan had not been fully discharged. Is that common practice? People who were caught up in a situation, created by the banks with reckless lending in the period of economic madness, and who have done their best to negotiate deals with them and have come to a resolution with them are blacklisted when they return to those banks. Is this going on and if it is, should it be? Is it allowed? Is it fair? Do we need action on it because it seems absolutely unacceptable?
Professor Philip Lane:
One of the issues that became obvious throughout the resolution of the banking crisis is the importance of separating personal debt from corporate debt. In this kind of case, where a small firm looks for credit, the way a bank assesses that firm’s prospects is one of the big challenges for the Irish banking system, for example, does it have credit assessment policies that can assess small business loans on the basis of the prospects for that firm, as opposed to asking who owns the firm and what is that individual’s credit history.
I share the aspiration that there should be a much bigger separation between personal debt and the kind of credit available to a small firm. In any individual case where the finances are co-mingled, I would need to know the details. There is an ombudsman appeals process, and this is helped by the new regulations for SMEs. I would encourage the person involved in this case to pursue the appeals process to see what can be done.
That is reasonable advice, but are banks allowed to do this? Having done a deal, is a bank within its rights to blacklist a customer because of a failure to discharge the conditions of an original loan, a loan which everybody knows was problematic? This is not somebody who ran off and did not pay, this is somebody who has put in financial statements, who has made their precise economic position known to the bank, somebody who knows that in order to maintain the income and even repayments to the bank itself, certain things are needed to make the business function.
Professor Philip Lane:
There is a new set of regulations for the protection of small businesses in how they are treated by the banks, which involves a lot more formality than previous regulations. Deputy Boyd Barrett indicated a case where a bank, perhaps in an arbitrary way, says it simply will not give a loan. Under the spirit of the new regulations, the reasons a loan is not given have to be laid down in a structured way. In turn, that documentation could be brought to the ombudsman or the appeals process if the customer does not accept the bank's reasoning. A customer may feel that he or she has made a resolution of a mortgage and that it is a totally separate entity from the small business loan he or she is looking for. With a more formalised, transparent approach, a bank's ability to rely on that kind of casual reasoning will hopefully be in the past.
Professor Philip Lane:
The issue here relates to taking the macro view. One approach to supervising banks is to look at the individual bank, its behaviour, its data and so on. Another approach, in the spirit of the macro-prudential view, looks at the whole system. If one looks at the whole system, as was happening in the mid-2000s, and one sees extraordinary rates of collective credit risks, one might think: "I do not know which bank is taking more risks and which is taking less risks, but collectively this is excessive." From the macro data, a determination is made that, collectively, there is too much lending going on and it must be insisted that banks reduce their risk-taking collectively and hold out more capital against their lending. If that is done promptly - and the Central Bank is obliged under EU legislation to look at this every three months - the hope is that this can be a help in reducing the risk of a future crisis.
Professor Philip Lane:
It is in a start-up phase at the moment. We have an Italian firm which runs the infrastructure for credit registers around the world and has the technology to do this. We are currently in important consultations with the Data Protection Commissioner because there are a lot of issues to do with privacy, how to handle data and so on. It will be a phased implementation starting with the main banks but, over time, including anyone making loans above the threshold of €500. There is a lot of engagement in the process because the banks and the other firms must have the technology systems to track these data and hand the data over.
I agree that it is a bit below the radar at the moment but I think one of the big projects for the Central Bank is to communicate about this as we go live later this year. This is a big change to the way the financial system runs. There is a clear reason for it; many countries have this kind of system. For the banks, the customers and the other financial firms involved, it is a significant change to the how the system will work.
Professor Philip Lane:
Let me mention two points on that issue. I am sure in terms of those involved in the supervision of firms, that is a clear risk factor that is going to be looked at. Currently, at a European level, one of the big projects is called AnaCredit. Its aim is to build a very detailed sectoral data set of loans across Europe. This is led by the ECB - I believe they were at the European Parliament yesterday - as it is a big issue. That is not going to be available for a number of years. The principle there is that knowing more on a loan-by-loan basis about which sectors are concentrated, not just in Ireland - because there are correlations between Ireland and the property markets elsewhere - but across the European system, will help in the future. It will help debtors who are not in high-risk sectors to be differentiated from those in high-risk sectors. Both in terms of the bilateral relationship with banks, and also in the macro view, that is definitely a big priority area. Another application of this is in climate change. One can think about which types of firms are more or less exposed to weather risks and so on.
Cuirim fáilte roimh an finné agus gabhaim comhghairdeas leis. I want to return to the internal audit report on compliance with governance with State bodies which the Central Bank helpfully published just before Christmas, on foot of the controversy to which Deputy Boyd Barrett referred. This report made very bad reading. Partial compliance and non-compliance was the order of the day. I thought it was quite shocking given that this is the Central Bank and we should expect the gold standard from the body that oversees all others. Some of the issues included a lack of risk expertise on the risk committee; not subscribing to the code of remuneration or pay; a general disregard for risk management in internal controls; an internal audit that had not been updated since 2011; not subscribing to the code for tendering or procurement; and so on. According to its website the Central Bank has remedied some of the issues that arose. Would the Governor accept that the report made very bad reading?
Professor Philip Lane:
I agree with the Deputy that the Central Bank should aspire to be the gold standard. When we regulate firms, a lot of it is about internal culture. I agree with the goal that the Central Bank should be held to the highest standard but how does it get to the highest standard? The process includes this kind of internal audit which makes sure that if there are areas where that standard is not being reached, the issues are identified and fixed.
That is the process that worked. The nature of audit reports is that they describe risks in the different categories of high risk, medium risk and low risk. The bank definitely has responded in the appropriate way, and generally speaking-----
I suspect also that some of the issues that arose in this document had been identified previously. I would like Professor Lane to provide to the committee any previous governance audit that was done so that we can see for ourselves just how prompt the Central Bank was in addressing the issues that arose.
I do not believe that any of this was news. In other words, I do not believe Professor Lane read this audit report and was struck with shock at what was going on. I believe it was known within the institution, and I think the bank was very slow to identify such fundamental issues as risk expertise for the risk committee. I mean, I ask you.
Professor Philip Lane:
Let me make a few points on that. I do not know the history of those reports, and we can get back to the Deputy about what is possible. This goes back, maybe, to something that I stated in my speech last week and restated in the introductory statement today - one way we are responding is that the Central Bank is significantly expanding its corporate staff. This includes the internal audit function itself, the organisational risk department, the legal department and the communications department. As a policy organisation, the temptation is to focus on the policy issues, but one also has to make sure the organisation itself is well run.
Professor Philip Lane:
The most important part of our response has been the decision that we must spend resources on a much larger internal audit function. We were among the first central banks in the world to appoint a chief operating officer, which other central banks are now doing. We have built up the idea that we must take seriously that the organisation itself has to be run to the highest standards.
I am relieved to see that that realisation has dawned; it had dawned on the general public quite some time ago. Nonetheless, I am pleased to hear that.
My time is very limited so I will move on. I do not have time to explore the issue of pay with the Governor. For the life of me I do not understand why it is deemed appropriate that the Central Bank be outside the public pay framework of the State. That is arrogance on the Governor's part and on his organisation's part. He might reflect on that.
When the whistleblower came forward - and I appreciate that we cannot get into the specifics or identify people - his view was that he was leaned on and encouraged to change a previous report which made for even worse reading than this. The Governor said in response to an earlier question that he brought in an independent body to adjudicate on that. That was Deloitte & Touche, is that correct?
Yes, I know so, it was. What other work does Deloitte & Touche currently do with the Central Bank? Would I be right in saying that that was the same firm that the bank brought in subsequently to work on the implementation or the rectifying of the final audit report?
Here is the problem, Governor. An issue arose; it had to be independently adjudicated on - we absolutely agree on that - but it was adjudicated on by a firm that was subsequently used by the Central Bank to address the issues in the audit report. I have no doubt that the same firm does a myriad of other work for the bank.
That gives rise to a question regarding the capacity to really rigorously and independently make a judgment on a very sensitive disclosure. The final report is by no means definitive in acclaiming the rightness of the actions of the Central Bank. Professor Lane is correct in stating that the whistleblower has an action before the Workplace Relations Commission. We are limited in what we can say on that. However, what I can tell the Governor is that the individual in question took a second case against Pioneer Global Investment Management limited - the second employer - in respect of wrongful dismissal and actually won it just after Christmas. There is a major concern here regarding the quality of internal governance. The Governor referred to the culture of organisations. What is that culture? Is it to ballyrag people if they step forward and are critical? Is it the culture of the Central Bank to let people go if it does not like what they are saying? Is that the culture and, if so, what does Professor Lane propose to do about it?
Professor Philip Lane:
I will not be drawn into the issues relating to this individual case, which is before the Workplace Relations Commission. The bank has absolutely no reason to aspire to anything but the highest standards and is and, I am sure, will be in the future totally dedicated to its very important public service mission of maintaining financial stability, protecting consumers and performing its other functions. As I said last week, part of that means being self-critical and involves the bank being as open as it can be in how it does its business. I see no reason for the bank to want to suppress awkward issues in any way, especially those, such as internal governance, which it can fix. These are issues on which everyone can agree, particularly those relating to internal audit. I imagine no one would argue against the points being made in the internal audit report on governance.
If we leave aside the whistleblower for a moment and just take this report, which was issued by the Central Bank on 29 January 2015, the difficulty is that it does not speak of an organisation that is committed to absolute compliance and the gold standard. It says something very different. To give due recognition, one area in respect of which the bank is compliant is that relating to travel and travel expenses. Sin é. On everything else, the bank is either partially compliant or non-compliant, and Professor Lane thumbs his nose at the idea of compliance in terms of pay. That is obnoxious on the part of the institution he represents.
Professor Philip Lane:
There are only two areas where we do not comply. Essentially, we consciously do not comply in those areas because of our responsibilities to deliver our mandate as an independent central bank and as part of the euro system. I agree with the Deputy: we consciously do not comply with the State salary levels. I emphasise that Central Bank staff accepted all the cuts relating to the Financial Emergency Measures in the Public Interest Act 2015, so that aspect of the public sector adjustment made during the crisis was completely implemented. We consciously make the decision that if we need to hire at certain rates in order to fulfil our mandate, we will do so. The other area where we do not comply relates to a relatively minor difference in the limit for public procurement. Again, the decision in that regard was made and the difference involved is not gigantic. On all other elements of the code, the aspiration is to comply. At this stage, my understanding is that all of the other points have been dealt with. It is not the case that-----
I would like to sit here for a few hours and ask questions. Having spent the past two years sitting on the banking inquiry, one of the big lessons is that we should have a proper engagement at committees with the Governor. Unfortunately, we usually have to skim over a number of important subjects and we do not get to the nuts and bolts of anything. I hope if some of us are returned following the general election that there will be a deeper relationship between the Central Bank and this committee, which will be more meaningful. Many of the reports and speeches delivered to this committee have been delivered to other committees without getting below the surface. That is a disservice to the people unless we delve deeper.
I refer to economic growth rates and the bank's role in financial stability. Professor Lane has identified vulnerabilities in the context of the growth rates. Will he elaborate on them? I am sure he read last week's IMF report, which cautioned against the erosion of the tax base and called for sustainable public investment, which the fund claims would lead to more sustainable growth in the long term. He made comments recently about the fiscal space and what should be done with that. Is he concerned about stability? Does he support the IMF's view regarding the erosion of the tax base and sustainable public investment? Will he comment, in particular, on the vulnerabilities affecting Ireland's economic growth in the years ahead given the storms on the horizon in China and other factors that are emerging?
Professor Philip Lane:
It is always important for us as central banks and for other parts of the financial system but also for governments to take on this risk-based approach. This morning, in the bulletin, we gave an optimistic view of Ireland this year and that is our expectation but we could be wrong on the upside or on the downside. The collective view in Europe, and Mario Draghi also spoke about this yesterday, is lots of the dynamics within the euro area look okay at the moment - not fantastic but okay. However, there are big concerns about whether the adjustment in China from exporting to domestic activity will go smoothly. One manages risk by asking what happens if one is wrong. For us, it is to say to the banks, "You need to have enough capital so if you are wrong and you are taking losses, it is not disastrous". No matter who is in the next Government - and this is in the spirit of the fiscal treaty - we must not only forecast the spending and tax levels for next year but also, "What if I am wrong". This approach says a system is needed under which public debt comes down. It has come down a good amount in the past couple of years and it will come down more but the idea that public debt should be left at approximately 100% of GDP is too risky. I agree it is hard to explain to people that we could cut taxes this year but we want to get the public debt down because it is in the background in comparison to taxing and spending. It will be an ongoing challenge to get the public debt down because, as the Deputy said, while policies relating to pensions, social welfare and so on are important, there is a public investment issue regarding how a good amount of such investment is funded on top of everything else. Members are about to go into election mode but I hope the next Government takes seriously the need to reconcile not just a genuine public spending need, but also the importance of getting back to a safe level of public debt, which is no easy task.
I fully agree with the Deputy that though the Central Bank is independent, that does not mean it is unaccountable. Accountability through Oireachtas committees and other dimensions is important. I would welcome a more rigorous exchange between the Oireachtas and the Central Bank.
I refer to the issue of mortgage arrears. Professor Lane said there are 66,000 mortgages in arrears of 90 days or more. Overall, the number of residential mortgages in arrears was approximately 98,000 at the end of the last quarter. This does not include buy-to-lets. Behind each statistic is a family. I have spoken to families in which individual members have contemplated taking their own lives as a result of these pressures. Unfortunately, some people have done so. Others are struggling to get by or they are sticking their heads in the sand hoping the problem will go away. Some are making difficult choices in terms of the priorities for their families and their lives.
I am critical of the Central Bank and the banks about this. Banks are allowed to treat voluntary surrender as a sustainable solution and the European Commission says it is being applied in up to 40% of these cases. This is not acceptable. It is also not acceptable that almost eight years since the beginning of the crisis, this number of people are still in arrears. For example, if one took the principal mortgage holder out of each family, they would not fit into Croke Park and this is more than seven years later.
While Professor Lane said there was positive news in the results, the trend is that we will still be talking about unsustainable levels of mortgage arrears in five years. This affects families and it affects the banks in terms of cleaning up their balance sheets. It also has an impact on the wider economy. The Central Bank can make a fresh start with the new Governor. I do not criticise his predecessor who did a good job in many areas at a difficult time. Will the bank take a strong approach to dealing with this crisis for once and for all? It is unacceptable that this number of families is still in mortgage arrears.
We know the banks accrued their losses on commercial property because NAMA wrote them down but the write-downs for ordinary families are few and far between. I have a theory which revolves around supporting the increase in house prices to allow the value of assets to increase, therefore, helping the banks' balance sheets as people move out of negative equity and so on. The Government is involved in this. However, the arrears remain and the banks are moving in because the repossessed homes are more valuable, which is why the number of repossessions is increasing.
I beg the Governor on behalf of these families to adopt a stronger approach with the banks. I have spoken about using a carrot and stick approach in the past but the problem is that only the carrot was used. Additional capital requirements were imposed but when the Central Bank allowed the banks to seek voluntary surrender or repossession, it put the stick back in its pocket.
Professor Philip Lane:
One element emerging from the Government's efforts is a new approach. I am sure there are many counter-examples but the firm belief is the more those in deep arrears engage seriously with their bank, the better. This may require a great deal of assistance from MABS and other advisers to help them present their case about whether a viable solution is possible, insolvency is better or whether repossession should happen in limited cases. I do not necessarily agree with the Deputy's comment about five years from now. Many of these cases are coming to a conclusion. Given the way the legal system works, there are some years to go on this.
I believe the Central Bank ensures that the supervisory teams who engage with the banks are achieving sustainable solutions. That is a significant effort. We also make significant efforts to ensure the banks follow the code of conduct on consumer protection.
My predecessor towards the end expressed deep regret that it was taking so long to deal with the issues. It is taking a long time to deal with it. Let me also emphasise that this is a strategy that maximises what is possible for the Central Bank in terms of the capacity of the political system to help these people. There are other ways to help these people, but from the point of view of the Central Bank, I think through these strategies, the Central Bank is doing as much as a central bank can do.
Professor Philip Lane:
Part of the code of conduct is to do the best that can be done. If there are issues about enforcement, perhaps Deputy Pearse Doherty would explain to me in more detail what he has in mind. The firm intent of the Central Bank is to ensure we have sustainable solutions. I think it is important that MABS and other advisers can help individual customers to negotiate with the banks.
Having read over the Deloitte report again, as alluded to in the earlier round of questions, KPMG had done a quality assessment which identified problems in governance inside the bank. If I understand this correctly, this led to the setting up of the internal audit. The person who carried out the internal audit has stated that information is being suppressed and was then subsequently let go. It is a sequence of events that stinks.
Professor Philip Lane:
That is not a fair characterisation. We are constrained because this person is in front of the workplace commission. I am trying to be as respectful as possible about the differing views.
In terms of the substance of this internal audit process on governance, the process worked as intended, the internal audit process identified a list of procedural issues that need to be dealt with and the bank has been dealing with the issues up to the limits of what it can do. In terms of the process, this is the way internal audit is supposed to work.
It is not a correct description to state that this person was the internal auditor on this project. There was a team of people, of which this individual was one person. The language the Deputy is using is not exactly precise about the role of the individual versus others involved in that project.
I think it is quite worrying. The time lag is an issue. The whole process began in 2012 and yet by the of 2015, we still have not rectified the problems that were initially identified. It is still a work in progress.
Professor Philip Lane:
I am told there is one last issue which involves recoding of some programmes, which will conclude by early 2016. At the end of quarter 1, 2016, all of the issues that were identified that can be fixed have been fixed.
In other areas, there is a conscious choice that the bank holds itself outside of that code. In terms of the internal audit process, I take the opposite view of the Deputy. The message I take is that this process works. In terms of speed and so, we are expanding the internal audit team to ensure it has the capacity to deliver this year 40 internal audits. That is quite a lot of work and the bank is committed to it. We have no reason not to achieve the excellence we want to.
We fully support internal audit and internal audit projects will be fully respected. It is part of the bank we are fully behind. I do not see why we would try to damage the internal audit function.
It is perfectly understandable that, given the dispute, we remain to be convinced.
I view the Government's growth projections for the economy as fanciful, to put it mildly, given what has been said about the likelihood or possibility of an international recession. Is Professor Lane in a position to comment on this? Is it not a dangerous game to be playing, to be predicting very impressive growth figures and basing election promises on them when all of the commentary internationally is that big clouds are gathering on the horizon and so many will say this is a small open economy which is very vulnerable to what happens in the international economy?
Professor Philip Lane:
Again, it is really important that everybody does not overly focus on the forecast. It is what we think is most likely to happen. It is still the case that possible risks in Brazil, China and so on are emerging. Whether they will really shake up the world economy is open to question. Again, the philosophy of a central bank has to be to protect the financial system by stating that if bad events happen, it will try to keep the system stable. Equally, in terms of manifestos for governments and so on, it is a good question to ask as to what would happen if one is wrong? If it turns out the world moves back into recession - it is not the main forecast, but one cannot rule it out - what would the strategies be in that case? One needs to have a risk plan also.
Professor Philip Lane:
To an extent, because the rules are differentiated and there are more relaxed rules for houses up to €220,000 for first-time buyers. During the review process we can consider this issue in greater depth. The aim is to establish the risk factors. One risk is a person buying a trophy house on which a bank can make a massive loss versus taking smaller losses on a greater number of medium priced houses. There are different risks at which we can look.
There is a report in the Financial Timestoday stating the factor of house prices to average incomes in Hong Kong is 19. I think the factor in Ireland at the top was 12. There was the era during which houses cost 2.5 to four times average income. Would this be a goal to help us to solve a lot of our housing problems? I am worried about excess credit growth causing bubbles.
Professor Philip Lane:
The Hong Kong economy is always a good one for us to look at because it is locked in, in that it has a strong fix to the US dollar and does not have an interest rate policy. From very early on it has been much more interventionist in the mortgage market. Let me emphasise that in how we design our own rules we definitely look at the experience of the Asian economies.
I had Canada in mind. No. 48 on today's Seanad Order Paper is the National Mortgage and Housing Corporation Bill 2015 which has been designed to try to emulate the Canadian mortgage and housing corporation in reflecting the low cost of government borrowing in lending for low price houses, if only it could be done.
Professor Philip Lane:
I hope this is concluded quickly. It would be good if they do have the referendum in June so that, either way, we will know what we are dealing with. With China, we more or less know the nature of the risk and what would happen if there were a big slow-down there or a big devaluation of the yuan renminbi, RMB. The issue with Brexit is that there are so many different scenarios following it. I am definitely on the side of those who say the cumulative impact on Ireland would be quite adverse. It is something for which we do not wish from an economic and financial perspective, let alone as regards the politics and so on. I would hope that the vote is taken quickly and that they vote to stay in, although it is obviously up to the UK electorate to decide on that.
There is some evidence that there is already nervousness about Brexit in terms of the location of firms within the United Kingdom, and that there is already some fallout from that uncertainty. Are we seeing any evidence of that in the Irish economy?
Professor Philip Lane:
I have no doubt that it has to be the case. Any sensible major firm considering a location decision in which the competition is between the UK and Ireland will, I am sure, stall for a few months. I would say the number one issue is delay. The uncertainty is going to delay decisions about projects. I think we are seeing sterling weaken in recent weeks, which is partly the result of speculation as a hedge against the Brexit risk. As for what happens after that - whether firms decide to come here instead of the UK and so on - there are a lot of different scenarios. It is hard to make strong predictions about it.
On behalf of the committee, I thank the Governor and his team for attending today. As we have no further meeting scheduled, on behalf of the Chairman of the committee I would like to thank all members for their contribution to the committee over the term of this Oireachtas.