Friday, 17 October 2008
Approval of Credit Institutions (Financial Support) Scheme 2008: Motion
Pat Rabbitte (Dublin South West, Labour)
I wish to share time with Deputy Morgan. The past conduct of the banks, the cost of this unprecedented insurance policy and the greed of some of the people at the top in the banks have naturally attracted much attention in this debate. Reckless lending policies, valuation of bank assets, capital adequacy ratios and the efficacy of the regulatory system are important issues, but in the brief time available this morning I wish to raise some other issues.
Will approval of this extraordinary scheme restore a functioning, prudential, accountable banking system that will serve the needs of our economy and of our consumers? If there is a call on this unprecedented guarantee, underwritten by the taxpayer, will the country be plunged into deeper financial crisis? The truth is that we do not know. The Government decided on this gamble on that fateful Monday night because of black Monday on the Stock Exchange. According to the Tánaiste, there would have been "a total collapse" of the banking system if the Government had not acted as it did.
We might never know what transpired that night but if falling share prices on the Stock Exchange was the trigger for this unprecedented guarantee, look at what has happened on the ISEQ since then. If one compares the share prices of the financial institutions on 30 September with the prices on 15 October, in all cases, with the exception of Irish Life & Permanent, they are seriously worse than on 30 September. We now have a statutory instrument that, like the enabling Act, is vague and aspirational on key issues. I hope it works. However, what reality is attached to some of the critical paragraphs? The scheme nominally provides that if there is a call on the guarantee, the bank in trouble will be rescued in the first instance by the other five covered institutions, or whatever number signs up to the guarantee acceptance deed.
Perhaps the Minister can reassure me. If a bank, and we will not name the bank, defaults and the court of the Bank of Ireland is convened to make its contribution to the rescue, why should they do it? Will they do it? Will they be able to do it? What happens if they resile from the deed entered into? Will the Government sue and towards what end? Will a bank headquartered outside the State, such as a bank in which the British Government is a stakeholder, pony up to rescue an Irish financial institution that might be deemed to have taken unacceptable risks?
In paragraph 37, a covered institution shall be required, for example, "to improve liquidity, solvency and capital ratios" in circumstances where this is required. However, if the covered institution is in trouble, how is it proposed that it will do these things? What reality is behind this injunction? Again, in paragraph 28 the Minister has power to direct a distressed institution "to draw up a restructuring plan" and the Minister may direct the institution "to make changes" in it and so forth, and the "covered institution shall comply with any such direction". What if the institution cannot make the changes sought? Who pays; the taxpayer, the bank customer or both?
There are many other paragraphs which tend to suggest that the focus will be to try and ensure that the guarantee is never invoked. I can understand that objective but can the Minister explain what will happen if there is a call on the guarantee and what would be the economic and financial implications? I am especially interested in the Minister's explanation given that the Taoiseach is believed to have set his face against injecting capital in any circumstances into the banks. What is the Minister's explanation for the tumbling financial shares on the stock market? Can he explain why the valuation put on the banks by the market is so wildly different from that of the banks themselves and the Financial Regulator?
For 48 hours after 30 September, second-tier Ministers were rolled out to extol the virtue of the two Brians' splendidly innovative blanket guarantee. However, a couple of weeks later Ireland is the odd man out, aside from Greece, and the markets are still falling. When the Bill was introduced I asked several times if the reason for the falling share prices was that several of our banks might in reality have a capitalisation requirement. The Minister said that was not the case and that it was a liquidity crisis. What does he think now? Why is the Government opposed to taking an equity stake that would be likely to reward the taxpayer in the future? In today's global conditions would it not be justified for the National Pensions Reserve Fund, for example, to invest in our lead banks for an equity stake or other beneficial arrangement?
I hope the scheme works. It confers many powers, but in a vague and general way like the enabling legislation. The Minister is not bound by the scheme to deal with any specific issue in any specific way. The scheme is binding on an institution as a matter of contract, not of statute. The remedies for non-compliance are an increase in the charge, the imposition of an additional condition or revocation of the guarantee. The scheme does not provide the capitalisation many commentators believe the banks need but it subjects them to a great deal of oversight. If the view is taken that the banks are at risk of being restricted in their ability to trade their way out of their current difficulties due to excessive and over-cautious second-guessing of normal commercial decisions, while still suffering from the core problem of inadequate capital, there is a danger that a scheme such as this could leave us with the worst of both worlds.