Michael Noonan (Limerick East, Fine Gael)

The Minister took until page 19 of his speech to mention the elephant in the room, to which Deputy Olivia Mitchell referred, namely, the issue of capitalisation of the banks. The Minister's speech contained a paragraph which stated that in return for the guarantees being given, the banks will be expected to do certain things. At the end of the paragraph, the Minister states: "In addition, I expect them to take all necessary steps to ensure their capital base meets regulatory and Central Bank requirements." If there was never a guarantee, they are required to do that under the law, but this is also to miss the point.

As the Financial Regulator told a committee of this House last Tuesday, the banks are adequately capitalised under existing rules. While I believe this, the problem is that existing rules in Ireland no longer correspond to best practice internationally. As Deputy Olivia Mitchell pointed out, tier 1 ratios in the UK have increased to 9% while in Europe they are increasing to 10% in certain countries. In Ireland the practice is 8% but the regulation is less. Therefore, quite a gap is emerging. It is not an issue of the banks not complying with the regulator or the Central Bank. The issue is that the Irish system of regulation no longer accords with best international practice. This is one of the reasons we see the value of shares and Irish banks continuing to fall in the market.

Second, and connected to this, is the issue of bad debts in Irish banks. We frankly do not know what is the level of bad debt. The regulator states there is €15 billion of loans to the building and construction industries which are only underpinned by the assets on which the loan was raised. These assets, whether commercial property or land banks, would have reduced in value by 30% to 40%. There is a huge lag between the nominal value of the collateral and the real value.

With regard to the other €24 billion to which the regulator referred when under pressure at the committee, he was not quite sure what the level was but stated there was a collateral other than the asset on which the loan was raised. When questioned, he could not say whether some of it was underpinned, for example, by portfolios of shares, which would have been collateral at the nominal value 12 months ago but which would not be anywhere near the real value now. He promised the committee he would carry out an audit to examine the level of collateral underpinning the loans.

This is the issue connected with the tier 1 ratios of capitalisation which is keeping the market down and which the Minister will have to address. We are only into phase 1. We were ahead of the international curve a fortnight ago when the Minister brought the emergency legislation into the House but things have moved on very rapidly since. The UK Government has moved to capitalise British banks and this has led to a trend of recapitalisation all over Europe.

There are different models. The United States Government decided to buy out bad debts and put €750 billion of taxpayers' money on the table. Rather than recapitalising the banks, it took, or is taking, out the bad debts, which has the same effect. In the UK, equity stakes are being taken. In some other countries, straightforward equity is being taken and in others preference shares are being taken with the intention of trading out of difficulty and selling the shares back again and getting out of the banking system when order is restored.

There is a suggestion here that the National Pensions Reserve Fund could be involved. The Minister would have to consider this very carefully before opting for it. First, he would be forcing it to go liquid on certain assets when the market is at the bottom. In addition, the purpose of the National Pensions Reserve Fund is to underpin certain pensions which the State will have to pay in the future. By taking equity in the banks, one will reduce and dilute the shareholding of the banks — if one took 50% one would effectively halve it. It is the shareholding in the banks that is underpinning private sector pensions so the Minister would be using a public sector pension fund to diminish the value of private sector pensions. That is a tricky line of country and that would want to be taken into account before anything is done along those lines.

There are other models. I am sure much advice is available to the Minister from the European Central Bank. As the Taoiseach said, thank God we are in the euro and we have the European Central Bank behind us and a very strong currency. However, this is an unprecedented and serious situation. Fine Gael is supporting the motion on the basis of trust because we know that unless there are proper credit lines in this country, we will be in a very bad state. Credit is the lifeblood of the economy and we cannot work without it.

As for the detail, however, it is over to the Minister. Fine Gael is taking him on trust and I make clear that it is his responsibility if it does not work out. Moreover, the other issue regarding capitalisation is outstanding. The Minister does not wish to discuss it and there are reasons not to so do. However, reasons to talk about it also approach. A point will come at which the Government will be obliged to show its full hand, because such secrecy is not impressing the market. The introduction of the Government's guarantees gave rise to an expectation that restoring liquidity would lift the banks' share prices. I will conclude by citing one of the hairiest statistics I have come across. Yesterday, the Irish banks being guaranteed by the Minister were worth €7 billion. Before Christmas 2007, AIB alone was valued at €21 billion, which provides an indication of the deterioration. If one matches a total value of €7 billion against a loan book, which may or may not be hairy, of between €15 billion and €40 billion, one can see the difficulties.

See this speech in context