John Perry (Sligo-North Leitrim, Fine Gael)

There may be a problem with bank solvency in the medium term. There are conflicting opinions about this. The message from the Central Bank and the Financial Regulator is that the banking institutions have assets that exceed their liabilities, which certainly concerns regulation. Only time will clarify this situation. Other independent commentators are more pessimistic, so it is important to clarify this issue.

My main concern with the proposed legislation is that it has a potentially serious risk for the taxpayer in the medium to long term. Given the banks have a Government guarantee, I worry that we might be setting ourselves up for a crisis like that which happened in the US over 20 years ago. The history of the savings and loan crisis in the US of the 1980s and 1990s had its origins in a federal guarantee system to a section of the US banking sector. It is important to put on record that the ultimate cost of this disaster was approximately $150 billion.

The federally chartered savings and loan banks were originally only allowed to make a narrowly limited range of loans. They were tightly regulated and there was a ceiling on the interest rates they could offer depositors. Under various economic and competitive pressures, the financial performance of savings and loan banks began to suffer. The US Government's response was to increase the federally guaranteed insurance amounts, raise various caps on mortgages and deposits and ease regulation. The savings and loan banks were permitted to engage in new business lines and were generally allowed to take greater risks to work their way out of their financial troubles, including taking on the ownership of assets.

A key message that comes out of the savings and loan scandal was that regulatory structures were inadequately resourced and lacked adequate legal powers, and the staff lacked the cutting edge market knowledge, experience and skills. This is an important point which we must clarify in the context of regulation in this country. The regulators were always working from a position of being several steps behind the banks, which is an issue here at present. Where was the Central Bank and the Financial Regulator for the past six months or the past number of years? All of these problems resulted in fatal delays and indecision in the examination and supervision processes. Many institutions which ultimately closed with big losses were known as problem cases for a year or more, and it sometimes appeared political considerations delayed necessary supervisory action.

My concern with this guarantee system for Irish banks is that the more pessimistic picture of bank solvency may turn out to be closer to the truth. Then, as the financial pressure mounts up for Irish banks, there will be a very strong temptation for them to engage in fancy footwork that will see the taxpayer eventually having to pick up the bill.

A simple point is that regulation is not enough in this situation. With so much taxpayers' money at risk, Fine Gael proposes that the Government would insist on appointing officials to the risk management committees of the banks involved. I remind the Minister of the cynic's definition of a good information and reporting system, namely, that it can take a disaster at the bottom of the organisation and change it into triumph by the time it reaches the top. If the Government is to have adequate control of these guarantees to the banks, it must have its people on the inside. I would go further and propose that the Government appoint officials to the main bank boards for as long as the taxpayer is providing a guarantee.

See this speech in context