Brian Lenihan Jnr (Dublin West, Fianna Fail)

I move:

That Dáil Éireann approves the terms of the draft scheme entitled Credit Institutions (Financial Support) Scheme 2008, a copy of which draft scheme was laid before Dáil Éireann on 15 October 2008.

This draft scheme is being presented to the House under Section 6(5) of the Credit Institutions (Financial Support) Act 2008. The legislation was enacted on 2 October 2008 following debate in this House and the Seanad between 30 September 2008 and 2 October 2008. On the basis of the amendment made in the Bill during its passage through the Oireachtas, the draft scheme does not come into effect until it has been approved by both Houses.

I appreciate the co-operation and support Deputies extended to me and the Government during that week in respect of the urgent debate on the Bill, which provides a legislative basis for the provision of the guarantee issued by the Government on the morning of 30 September. As the House will be aware this guarantee, eligibility for which was subsequently extended by the Government on 9 October to subsidiaries with a significant retail customer "main street" presence in Ireland's banking market, has played a crucial role in maintaining financial stability in Ireland and confidence in our financial institutions over recent weeks during a period of unprecedented turbulence and uncertainty in the international financial system.

It is important for me to be clear to the House on what legal obligations are imposed on the State by virtue of the scheme. The State is unconditionally and irrevocably guaranteeing the covered liabilities of the participating institutions until 29 September 2010. The Minister will pay forthwith any valid claim on the guarantee. Should an institution be removed from the scheme, all of its fixed-term covered liabilities outstanding at that time will continue to have the full benefit of the guarantee. For all other covered liabilities, such as deposits, there will be notice of at least 90 days before the removal of an institution from the scheme.

This support, granted in the strongest and most explicit legal terms, is being provided in the public interest to maintain the stability of our financial system and hence to protect the real economy from the consequences of the severe financial disruption that would otherwise arise. In accordance with the principles of the legislation, the scheme is designed to safeguard the interest of taxpayers. In specific terms the guarantee to covered institutions is being made available at a significant charge to the institutions that avail of it. It is subject to terms and conditions under a legal contract that will engender behaviour that will progressively reduce the risk of the guarantee ever being called upon while supporting these institutions in undertaking the change required to adjust to the new commercial and regulatory realities of international finance. The terms allow the State to reclaim from a covered institution any payments under a covered institution's guarantee

It is currently estimated that the State will be remunerated by the covered institutions for the guarantee by an amount of at least €500 million per year for each of the two years of the guarantee. The scheme being considered by the House is an integral element to the Government's approach to the guarantee. It serves two primary functions: to mitigate the risk to the Exchequer from having provided the guarantee by placing significant contractual responsibilities and obligations on the covered institutions; and to steer the Irish banking system through the current period of turmoil to make certain that when it emerges from the guarantee regime in two years, the system will have both the purpose and capacity to successfully meet the needs of the real economy and the community at large.

The guarantee of the designated liabilities to depositors and creditors of and lenders to the relevant covered institutions has as its central objective the removal of any uncertainty on the part of counterparties and customers of the covered institutions. In particular it is crucial to give absolute comfort to the investors in debt securities of Irish banks that their debts are guaranteed in full by the State during the period of the scheme and that depositors know that they have the full protection of the State.

The stringent and demanding conditions the covered institutions will in turn be subject to under the scheme are sharply focused on ensuring that there is no abuse of the guarantee, that balance sheet growth is measured and in accordance with prudent banking practice and that risk is properly measured and managed. This approach will strongly complement the heightened and intensive scrutiny of the covered institutions that will be undertaken by the Financial Regulator using its statutory regulatory powers.

The Financial Regulator has advised the Minister that, in light of the severe difficulties faced by credit institutions arising from the crisis of confidence in the global credit market, it will continue to intensify its on-site and off-site supervision of credit institutions. The Financial Regulator will focus on liquidity requirements, capital adequacy, risk management, balance sheet structure and corporate governance. This may involve setting additional regulatory ratios as appropriate to reduce the risk in the balance sheet, reflecting the current domestic and global conditions.

In recent times, confidence can be said to be more precious than gold on international markets and on occasion just as difficult to find. This scheme will build over the next two years from the current circumstances that gave rise to the need for this safety net provided by the State to the entire domestic banking system. The goal at the end of the two-year guarantee period laid down in the legislation is a banking system that is fit for purpose in the transformed financial environment in which it will find itself operating in the coming decades.

As I have stressed repeatedly over recent weeks, the financial sector is undoubtedly a key element of our national economic infrastructure. Finance is the lifeblood of business, economic and household activity on a day to day basis. It was for this reason the Government took prompt and decisive action in providing the guarantee at the end of last month.

The essential step taken by the Government on 30 September in announcing that the State stood behind all deposits and extensive other liabilities of the institutions concerned has transformed the nature of the relationship between the banking sector and the citizens and taxpayers. This scheme is intended to provide a detailed framework for the positive and constructive changes that must flow from this to restore and uphold for the future the traditional banking values of prudence, responsibility, and controlled and managed risk-taking leading to long-term sustainability.

Subsequent events, particularly those close to home and that have recently occurred right across the European Union, have demonstrated that the significant challenges we currently face to secure the long-term viability of the banking sector are as common to the EU as they are to the developed world as a whole. This is evident, for example, from the declaration issued following the unique euro area meeting last week where, for the first time, the Heads of State and Government of the euro countries gathered. Yesterday, the European Council affirmed that it is determined to take co-ordinated and thorough action to restore the smooth running of the financial system, thus ensuring the normal and effective financing of the economy and a return to the path towards growth and employment.

Work must now begin on forging a new model to govern the conduct and behaviour of the financial sector. Ireland will play its part internationally and particularly at EU level in seeking to ensure that the re-design of the financial system and in particular of financial regulation is consistent with the objectives highlighted in the scheme.

As I have emphasised on several occasions, the over-arching objective of the original Government announcement, the legislation that followed it and the scheme that now arises from it is to remedy the serious disturbance that might have otherwise unfolded for the economy. It is about taking whatever steps are necessary to ensure we have a banking system that as a whole works effectively, efficiently and competitively in facilitating all the day to day ordinary economic transactions of commercial, business, family and social life.

The Government's guarantee has already helped ensure that credit institutions in Ireland have access to the normal liquidity and funding they require to fund their operations. The Government, on behalf of the community at large, has therefore performed a major service for the banking community. The onus is now on the boards and senior executives of the banks to meet the legitimate expectation that now exists that they will see as their first priority the goal of ensuring the flow of finance is channelled appropriately to support and underpin sustainable economic activities on the necessary prudent, responsible basis that is clearly in the interest of both the bank, the borrower and the wider economy.

The reporting and information requirements of the scheme are powerful. They enable intensive scrutiny and the closest possible oversight of the covered institutions' activities. The rights available to the Minister and the Financial Regulator under the scheme and the wide range of controls and requirements that can be imposed on the covered institutions under it have been put in place to protect the public interest in a manner consistent with helping to secure the future of the banking system in view of the critical role of finance in supporting the real economy and risk-taking and major household financial decisions. The chief executive and chairman of each covered institution will be required on a quarterly basis, to certify compliance with the scheme.

It is not the Government's purpose in this scheme for the State to directly interfere with or step into the commercial decision making role and responsibilities of the boards and senior executives of the banks. Rather, we are putting in place a structure that ensures the assessment and commercial decision making of these institutions is at all times shaped by the broader public policy objectives underlying the scheme. In the scheme an overlay of detailed rules, strengthened corporate governance and reporting rules is being superimposed on what will be an intensified regulatory engagement.

Our financial services legislation provides the regulator with extensive regulatory powers to supervise the conduct of credit institutions' affairs. Our company law provides a strict legal framework governing the performance of the fiduciary responsibilities of boards and executives. Clearly, this scheme had to be drawn up in the context of that fiduciary obligation, which is a duty of trust which a director has in regard to his or her company. The Government, therefore, is fully satisfied that, alongside the powers provided directly under the scheme, the relevant public bodies and in particular the Financial Regulator have the authority and legal power to take whatever steps are necessary to continue to look after the interests of all depositors and customers of these institutions as well as that of the State and the taxpayer which now arises on account of the guarantee.

The House will recall that during the passage of the Bill through the Dáil, several Deputies made the case that the Oireachtas should be given the opportunity to consider through a positive resolution the detailed provisions of the scheme applying to those institutions benefiting from the guarantee. I listened carefully to those views and, as I signalled in the Dáil, the Bill was amended in the Seanad so that section 6(5) requires a draft scheme to be approved by both Houses of the Oireachtas.

I hope Deputies will acknowledge that the scheme has been formulated to reflect many of the issues that were highlighted during the debate and in the amendments put down on the legislation in both Houses. In light of the significance of this issue to all Deputies, it has been a priority for me in developing the scheme to seek to reflect as far as possible in its design the many positive and constructive suggestions made by Deputies during the course of the debate on the Bill. I trust that the House will accept my assurance that I have sought at all times to strike an appropriate balance between the various and sometimes competing objectives of the scheme to seek to deliver the best possible outcome for the country at large both now and for the longer term.

I am pleased to say that the scheme fully conforms to our European Union responsibilities in regard to State aid and competition law and has been formally approved by the European Commission on that basis. As a small country which has benefited so significantly from the European Union Single Market, it is essential that any steps we take conform fully to our obligations in this respect. It will be an important task for us — working with our EU partners — to ensure that the integrity of the Single Market, particularly in the area of financial services, continues to be supported and maintained notwithstanding the diversity of national responses within the framework of the common principles that recently has been agreed.

Since the original announcement by the Government on 30 September, many other European Governments have taken initiatives in this area. These initiatives have reflected a variety of approaches and technique, referred to by the Taoiseach as a toolbox of techniques, which have been agreed upon at Heads of State level in the European Union. Deputies will appreciate that many other states are now on a learning curve that we have already travelled. I am very pleased the Commission was in a position to approve our scheme, and I thank it for the speed and expedition with which it did so. Naturally, our discussions at European Central Bank level continue and we will ensure we have an appropriate dialogue with the bank to secure our interests in that regard in the future.

I want to describe the main provisions of the scheme to the House, first with regard to the guarantee. For an individual credit institution to avail of the guarantee, I must make an order under section 6(1) of the 2008 Act specifying the credit institutions in the scheme. Following the making of this order, the credit institution must execute a guarantee acceptance deed, after which it will have the benefit of the guarantee of the Minister of Finance. By entering into a guarantee acceptance deed, the institution agrees to pay a quarterly charge and indemnify the Minister for Finance for any payments the Minister makes under the scheme. In addition, there are to be specific restrictions on subordinated debt issuance by a covered institution. There will be a quarterly publication of covered liabilities in aggregate under the scheme in Iris Oifigiúil. In the case of subsidiaries participating in the scheme, the Minister may impose specific obligations under the scheme to appropriately ring-fence the activities of a covered institution to minimise the covered institution's financial exposure to its parent credit institution.

The covered institution must pay a charge for its guarantee, which will be calculated and paid quarterly. The charge is risk-adjusted and is to be set at a level based on the long-term cost to the Exchequer of providing the guarantee. The risk to the Exchequer is reflected by the collection of this amount over the two-year time frame. Moreover, the scheme is designed to be self-financing, that is, any financial support under the relevant legislation is intended to be recouped from the institution concerned.

In specific terms, the charge is to be based on Government funding costs and will be set at an appropriate level, given the current financial environment. Current estimates indicate that over the two years of the scheme approximately €1 billion will be yielded from the charge to banks for the guarantee. If the cost to the Exchequer were to exceed €1 billion the charge to the covered institutions will be adjusted accordingly. I am satisfied that the Central Bank, the Financial Regulator and the covered institutions, acting in conjunction with the Government, will ensure that no claims on the State will arise.

There will be full scrutiny and careful observation of the operation of the scheme. This will be carried out by the Financial Regulator in the first instance on my behalf. This will be done by way of quarterly compliance reports received via the Financial Regulator, a biannual review of the scheme and the guarantee charge methodology, monitoring of the banking institutions who use the scheme and reporting on the covered institutions' compliance with certain codes, including those relating to consumer protection and corporate social responsibility. There will be consultation between covered institutions and the Financial Regulator on the development of a code of practice for risk management for the covered institutions.

The balance of executive and non-executive board members of a covered institution will be examined and the covered institution will be required to appoint one or two non-executive directors from a panel nominated by me. Under the scheme I also can direct the attendance of observers chosen by me at key board-level committees such as the credit, remuneration, audit and risk committees. This will help ensure effective oversight and supervision of the objectives of the scheme.

In addition, the scheme provides for the establishment of a covered institutions remuneration oversight committee. This three-person committee will oversee all remuneration plans for senior executives of the covered institutions and will report to me on same within three months of an institution availing of the guarantee. As I have made clear, where remuneration proposals are not in keeping with objectives of the scheme, they will be changed.

Senior executives' salary, bonuses, termination payments, pension contributions and other benefits will be controlled and linked to adjustments in guarantee charges and measurable actions to address excessive risk taking and to improve the long-term sustainability of the covered institution.

The Financial Regulator, in consultation with the Minister, will impose conditions regulating the commercial conduct of a covered institution's business to minimise any potential competitive distortion that may arise and to avoid any abuse of the guarantee or any use in a manner irreconcilable with the purpose of the guarantee. This will require covered institutions to appropriately manage their balance sheet in a manner consistent with the purposes of the Act and put in place improved structures to ensure long-term stability of funding. Covered institutions can also be required to restructure their executive management responsibilities and strengthen management capacity and corporate governance, as well as improving liquidity, solvency and capital ratios in circumstances where this is necessary. There also is an onus on the covered institutions to take such measures to minimise any risk of recourse to the guarantee and, if necessary, the introduction and application of a restructuring plan.

There will be close and intensive engagement by the regulator with the covered institutions, whereby conditions are imposed by the regulator on a covered institution's capital, liquidity and solvency ratios, its balance sheet items and its permitted growth. Dividend policy will be part and parcel of this. I expect the institutions to ensure that the costs of the guarantee are not passed on to the customers of covered institutions in an unwarranted manner.

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