Richard Bruton (Dublin North Central, Fine Gael)

Everyone in this House will agree that huge mistakes have been made in Ireland in recent years that have undermined the successful model that we had. It was a model of an economy based on strong export growth, tight management of public finances and a financial sector that had a proper balance in its approach to funding. The problem was the dangerous flirtation with the property sector that occurred in recent years. Those who were in a position to exercise restraint on this, in my view, failed to act.

There is no doubt that the Financial Regulator repeatedly warned of some of the features that were exposing our banking sector in recent years. I recall in the 2006 stability report the regulator drew our attention to the excessive growth in credit, the excessive reliance on the wholesale market to support that credit growth, the excessive reliance on the property sector as a proportion of the loan book, the falling provision for bad debt and the limitations of stress-testing that were going on in financial institutions.

There was warning that our financial structure was going down a road that was dangerous but, in my belief, little was done to address that. Indeed, we have been exposed by dangerous levels of credit expansion, particularly in the property sector and by a false belief, often promulgated by Government, that this was based on sound fundamentals when the sound fundamentals of a small open economy clearly lie elsewhere. Indeed, the Government itself became excessively reliant on the product of this property boom and I am sure we will have another day to discuss that when we debate the budget.

The truth is that today, as a result of this serious change in the way we ran our economy, ordinary people are being hurt. That is the reality. There are now 75,000 extra people unemployed than there were 12 months ago. Young families are burdened with debts to pay for houses that they are unsure will ever be worth what they paid, and owe, for them. Sound businesses are beset with problems and some business people are having to face the tough decision that they will have to fold their business. People are facing foreclosure from banks where they struggle to meet repayments. Against that background, people will be wondering why the Dáil is moving to deal with a crisis in the financial sector. Why are we offering support, as people see it, in the financial sector when perhaps we are not being so generous with our support to some of these? That is an important question.

We are offering support to this Bill because we believe it is important that we copperfasten our financial system. We must all understand that a sound financial system is like the oil running through an engine. If that oil is drained away by a loss of confidence, then suddenly that engine seizes and the problems that beset people in our country who are facing the dole, who are struggling to meet their payments and who are encountering tough times in business, would get much worse. That is why we are supporting this approach. We believe it is timely to move and to deal with what would be a potential run on banks.

The difficulty with the banking system is that it is all built on confidence. One can have a sound bank that is being run on the most prudent principles ever but if people suddenly lose confidence, that sound bank goes down. That is the risk that we cannot afford to take.

The international crisis that has come along brutally exposed the weaknesses that have been building up in our financial sector, but that does not mean we cannot get into the blame game of asking what happened and why it happened. There will be a day for that and we must learn lessons from it. We must have a much sounder regulatory system, and a sounder approach to the way we manage our economy, on the back of this experience.

The immediate requirement that we face today is to ensure that, in the face of the loss of confidence that our banking system has suffered and the dangers, which no doubt existed and of which the Government became aware, this is the right thing to do, as I believe it is. We are better to take the approach of providing a guarantee to the depositors in all our financial institutions rather than allow what perhaps has happened in other jurisdictions where weaker banks were picked off to occur. I fear the approach taken elsewhere would not have worked in Ireland and I support the view of the Government that it is better to provide the broad deposit guarantee involved in this legislation.

I would not go along with the Government in seeking, as it has been doing, to play down the significance of this and say the taxpayer is very much in the background and that the rules are not being changed dramatically. The rules are being changed dramatically. From this day on, the taxpayer will be standing as guarantor for the money Irish financial institutions raise, thus changing the whole relationship between the taxpayer and those institutions. Banks can raise money with a guarantee from the Irish taxpayer and we therefore need to know what that money is used for. We cannot afford to have money guaranteed by the taxpayer used in a way that involves an institution which is exposed to risk gambling on the chance of "getting out of jail" and believing it will be home free with another roll of the dice. The lending practice or purchase of derivatives associated with this strategy cannot be allowed as a result of the new access to deposits we are providing for through the guarantee.

It is very important that the Government is aware that the rules have changed dramatically. I hope the Minister is correct that there is a buffer between the taxpayers' guarantee and any possible crisis in a financial institution. There is a buffer but it consists predominantly of shareholders' funds; it is not a huge buffer. The Minister reckons it amounts to €80 billion and I am sure we will see his analysis of this figure as the debate proceeds. However, let us not understate the position of the taxpayer because the taxpayer now has a new relationship with financial institutions. If one institution gets into difficulty, we will have a very different relationship with it as a result of this measure. It behoves us, therefore, to change the way in which we approach regulation.

What is missing from this legislation is a real indication that the Government has a new set of regulatory rules to apply. There is an indication that it is taking the power to introduce such rules, but there is no detail. As Deputy Kenny stated today, we believe the regulator should be represented on the risk committee assessing risks taken on by the banks. Thus, the regulator would ensure that bad decisions on the use of the money are not made by banks. The Government is taking on powers but not telling the Oireachtas, and consequently the taxpayer underpinning them, what those powers will be. This must be remedied before we conclude this debate.

It is clear that a different definition is being applied in the legislation from that indicated earlier. This morning it was just deposits and bonds that were to be subject to guarantee, while tonight there is a wider definition that includes the obligations of credit institutions. We need assurances regarding what the wider definition includes. Does it address circumstances in which the buffer of shareholders' funds may be somewhat narrowed by comparison with what we believed? If so, we need to know why the Minister is changing the rules.

Many people are concerned about the failure to include a number of financial institutions whose parent companies are not in Ireland but which have been operating in and are very crucial to the financial infrastructure of the country, particularly in certain regions. This begs the question as to whether the policy is sound. One must ask whether there is a level playing pitch and whether the approach to protecting our banking structure is appropriate. Are we creating difficulty for some of the institutions that are excluded as opposed to those that are included?

An issue also arises in regard to the legislation itself. For legislation to be robust and for the Minister to pick six institutions from a range of others that are in operation, there should be proper criteria deemed robust by a fair person examining them. The criteria employed by the Minister in picking the six institutions that are to be protected should be deemed proper and fair in the eyes of an outside observer, but I am not sure this is provided for in the legislation. The Minister does not provide any criteria for the selection of financial institutions for assistance. Six that we know are wholly regulated within Ireland are being selected but others are also regulated within the country. If we are to be robust against questions being raised as to whether this is indirect state aid or unfair competition, we need to make sure this has been thought through and that the legislation does not prove frail as it moves forward.

As a further general comment, there is extraordinarily high reliance in this legislation on secondary provisions through regulation. The courts have already raised doubts about legislation that relies so much on a Minister making provisions by secondary legislation. Some of this secondary legislation the Minister is taking on in order to impose conditions will be laid before the House. Under other sections, however, it will not be laid before the House and we will see rules produced by Ministers without even having a regulation laid before the House. Is this a wise way to go, given the view the courts have already expressed regarding reliance on secondary legislation?

Another issue causes concern. There is discretion, apparently, for the Minister to accept a below commercial rate of return in regard to the protection he is now offering. Again, to be robust in terms of state aid rules, there needs to be a commercial rate of return. The Minister should not be in a position to choose when commercial rates apply and when they do not. I acknowledge he is taking the option that he does not have to take the payment in cash, as it could be taken in equity, which gives flexibility, but the payment, the price or the fee for the service the taxpayer is offering must be a commercial one and must be applied uniformly.

An extraordinary power is being taken in section 5, where the Minister is effectively stating he can do anything to resolve any difficulties that arise in regard to the exercise of this Bill. The presence of that provision does not inspire confidence that we have exactly stress-tested every aspect of the Bill. We need to know what is the intention of the Minister in taking such a very wide power because he cannot override certain international obligations such as those regarding state aids and so on.

There is a last point that is not in the Bill which the Taoiseach plainly said would be included, namely, that the banking sector will make up a shortfall. The Taoiseach outlined earlier today three lines of defence before the taxpayer would be called into service. One was the shareholders' funds, another was the ECB loans and the third was that the banking sector would step in as another buffer. I do not see any provision in this Bill whereby the banking sector would make good a shortfall to which the taxpayer might be exposed. I do not know to what exactly the Taoiseach was referring, although, again, I suppose this will become clear in the course of the debate.

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