Brian Lenihan Jnr (Dublin West, Fianna Fail)

Accordingly, the Government believes recapitalisation is not now the appropriate and effective method to secure its continued viability. Therefore, the Government must move to the final and decisive step of public ownership. Later, I will highlight in more detail the salient provisions of the Bill.

The House will be aware of the international context in which this action has been taken. I do not wish to dwell on old ground but it is important to note that the past 18 months have been unprecedented in terms of the pressure financial institutions, and banks in particular, have been under throughout the world. Traditional sources of funding have dried up and although there has been some improvement in recent times, the international financial system remains in a very fragile position.

Like every country in Europe, Ireland has moved to ensure the security and stability of its banking system. Market expectations with regard to the capital that banks hold have altered significantly. As a result, banks have had to vigorously compete for deposits and other forms of funding in a weakening economic environment. Banks have also been forced to seek capital in a market unwilling to finance banks, resulting in an array of state recapitalisation programmes across the developed world. In this challenging period, a bank's reputation, board and senior management and its good standing become ever more important.

The extended financial crisis we have experienced has brought home to all of us the pivotal role the financial system plays in supporting the economy. In turn, it has become clear to all that it is essential for Government to take appropriate action to maintain the stability of the financial system. Throughout this process our approach has been based on two basic principles. First, the State will not let any systemically relevant financial institution fail and, second, any State involvement in financial institutions will protect the interests of the taxpayer and have regard to legal and European law implications.

In this context and taking the best advice available, the Government acted in September last year with purpose and determination to guarantee the deposits and other liabilities of credit institutions. The principal Opposition party supported us in that enterprise, for which I thank it. This move was essential to allow banks to continue their normal business of providing credit in this country. The Government guarantee scheme succeeded in ensuring Irish banks have continued to do business and improved the amount of liquidity available to the various financial institutions. For banks everywhere liquidity, that is, the cash that comes in the form of deposits and interbank moneys, provides the basis for lending and the guarantee has ensured the banks can continue to access that liquidity.

The guarantee scheme gave rise to detailed engagement by Government with the banks. This process has involved my Department, the Central Bank, the Financial Regulator and the National Treasury Management Agency working with the relevant institutions and examining all options to maintain stability and the proper functioning of the banking system. It has been a comprehensive and structured process, addressing such issues as the business plans of the banks, potential private investment, market expectations and, above all, the role of the banks in supporting the real economy.

Notwithstanding that I have been clear about my intentions, there has been speculation that the action we are taking on Anglo Irish Bank somehow changes the position of the two other institutions on which the Government has announced plans. Both Bank of Ireland and Allied Irish Bank are fundamentally sound and solvent institutions. The Government reiterates that it regards these banks as central to the Irish financial system and essential to the proper functioning of the economy. The Government wishes to ensure that both banks remain as independent commercial entities.

The Government reaffirms that it is proceeding with the planned recapitalisation of Bank of Ireland and Allied Irish Bank on this basis and its firm intention is that both banks remain in private ownership. In particular, the Government reiterates its intent to provide €2 billion to each institution from funds already earmarked in the NTMA for this purpose. As previously outlined, this capital will be deemed to be core Tier 1 by the regulator and the terms and conditions when finalised will be framed to underpin market confidence. The Government reiterates its commitment to underwrite or otherwise support a further €1 billion in core capital to each of the banks. As Deputies will be aware, we are also in discussion with certain other institutions about their future capital needs, if any, and we will work through this issue with a view to early discussions.

It was recognised from an early stage that the challenges faced by individual institutions were not the same in each case and the necessary strategies to stabilise and strengthen them would be different. From the outset of the financial crisis, market sentiment towards Anglo Irish Bank was especially negative, as evidenced by the dramatic collapse in the bank's share price and continued pressure on its funding. While the bank's business model, which was heavily focused on commercial and real estate lending, had been profitable during times of strong economic growth and the steady expansion of the property sector, with the sharp contraction in both the Irish and United Kingdom property markets over the past 12 months, Anglo Irish Bank was perceived by investors as being more exposed than other institutions due to its less diverse business model.

Taking advantage of the space provided by the Government guarantee and with a view to stabilising Irish financial institutions and ensuring the flow of credit to the economy, discussions were held with Anglo Irish Bank with a view to ensuring it had adequate capital levels. The outcome of this engagement with the bank was a proposal by the Government for an initial and immediate capital investment of €1.5 billion in preference shares, with a commitment to provide further capital to support the bank's position, as required. The terms of the proposed €1.5 billion investment took into account the greater degree of risk inherent in Anglo Irish Bank's business. A higher rate of return was required from the bank than from the other two banks and the State was to hold 75% of the voting rights.

Since that course of action was outlined in the week before Christmas, it has become necessary to take the ultimate step of nationalisation. I will explain the reason. At the time of the recapitalisation announcement, I made clear that the Government's offer to Anglo Irish Bank represented the last step short of nationalisation for the bank. The commitment of Government support to Anglo Irish Bank was designed to boost market sentiment by bolstering its capital to a level which would ensure the bank's ability to withstand losses on its loan book that may arise over time. Such losses are dependent on the effects of the worldwide economic outlook. The objective was to enable Anglo Irish Bank to trade out of its current difficulties under its existing ownership structure.

However, the disclosure of the unacceptable practices which took place at Anglo Irish Bank in relation to loans to its former chairman and the consequent resignation of the chairman and a number of the bank's senior management team, including the CEO, compounded the weak position of Anglo Irish Bank in the eyes of investors and debt providers. Market confidence in the bank was eroded and this was reflected in a limited weakening of its funding base in recent weeks and the increased risk of knock-on effects on its credit ratings.

Anglo Irish Bank is a major financial institution. While I outlined some of the elements of its accounts earlier, its balance sheet is in excess of €100 billion. There is no doubt that the viability of an institution of this scale is of systemic importance to Ireland. Contrary to the impression being put about, the bank lends to a wide range of customers, providing funds for investment and employment in such areas as retail, office, leisure, health care, tourism and other services. It is also a significant lender to construction and development which is a very important part of its balance sheet.

Thousands of customers rely on Anglo Irish Bank for credit, while hundreds of thousands of depositors are involved. All my advice is that letting the bank fail would lead to very serious disruption of our financial system. It is not a question a saving a few developers from going to the wall, it is a matter of underpinning deposit and wholesale funding throughout the financial system. The developers will have to pay their loans.

The nationalisation of a financial institution is not a step which can be taken lightly or as a first solution because it results in a significant degree of State intervention in normal market processes. In recent months, the Government has provided the support required to stabilise Anglo Irish Bank in the shape of the Government guarantee. While the recapitalisation proposal in respect of the bank would have helped underpin it, even greater certainty can and will be provided through taking the bank into public ownership.

There has been some recent media debate regarding the effect of this measure on Government accounts. Taking Anglo Irish Bank into State ownership should have no immediate impact on either the general Government debt or current deficit as the bank is a going concern and will continue to operate as a commercial bank. As with other commercial State companies, its debts and assets will remain on its own books.

Deputy Kenny stated on the Order of Business that it was somehow improper to suggest that Anglo Irish Bank should continue as a going concern. In commercial practice the alternative to a going concern is a liquidation business. Naturally, the Taoiseach and I have been anxious to stress that Anglo Irish Bank will continue on a going concern basis. When the board assumes its duties as a board of directors appointed by me tomorrow, it will have to return to me with a strategic plan for the future of the bank and the part it can play in the wider Irish banking scene in the public interest.

The Government's actions have been made on the basis that the health of the economy is inextricably linked to the banking sector. The Government is committed to protecting our sovereign rating through restoring order to the public finances. Immediate action is required and the Government has agreed that expenditure savings of €2 billion will be made in 2009, in addition to the measures contained in the October budget. Other important work is continuing, including a root and branch review of public service numbers and expenditure levels and a report on the taxation system by the Commission on Taxation. The decisions we make in that regard will have the most vital and important bearing on our sovereign rating around the world.

I will say a few words on the impact of this decision on various stakeholders. The immediate impact of the Government's action is to provide certainty to all of Anglo Irish Bank's depositors and other customers, across all of the bank's operations in Ireland and internationally, that the bank is secure and stable and will continue to conduct its business on normal terms. Depositors and other creditors of Anglo Irish Bank continue to be protected by the Government's guarantee and creditors, including bond holders, can be assured that it is in a position to continue to fulfil its obligations and repay its debts at maturity. The suggestion canvassed in some quarters that the State should repudiate the €20 billion it owes the bond holders, an action taken in the case of Lehman's Bros. Bank in September, is an unacceptable course of action for the State. Added to this, all customers of Anglo Irish Bank have the assurance of stability that full State ownership of a financial institution brings.

It is important to be clear that the day-to-day running of Anglo Irish Bank will continue as normal and employees remain employed by the company. The bank will be managed on a commercial basis at arm's length from the Government, allowing the full potential of its business to be realised. The legislation I have put before the House provides for a relationship framework. The Government will appoint a new board to oversee the running of the bank and prepare a comprehensive business plan to enable Anglo Irish Bank to continue as a going concern. This business plan will be required to demonstrate how the board will oversee the continued commercial operation of the bank in the best interests of the bank, financial sector and taxpayer.

I welcome the decision of Mr. Donal O'Connor to accept my invitation to be the bank's Chairman. As I stated when Mr. O'Connor was appointed, he has a substantial and impressive commercial track record and is a natural choice to lead this financial institution in what is a challenging period for all financial institutions. Mr. O'Connor did sterling service in the past with financial institutions which were going through turbulence. The outgoing board, before it appointed him, consulted with me to consent to his appointment.

I am also pleased to acknowledge Mr. Maurice Keane's appointment to the board and to thank Mr. Alan Dukes and Mr. Frank Daly for their continued valuable contribution to the board. I will announce further appointments in the near future.

While the €1.5 billion preference share purchase is not now immediately required, the Government is committed to providing the support to ensure Anglo Irish Bank's continued commercial viability. There is no question of moving the bank into a wind-up scenario which would create the potential for an under-priced realisation of the loans and other assets held by it. All borrowers from the bank remain subject to the same terms and its new board will place a particular focus on ensuring that all debts are fully pursued by the bank in a commercial way, as any other bank would.

While the Act provides for the transfer of Anglo Irish Bank into State ownership, shareholder rights are protected under Irish law, and accordingly I have provided for the role of an independent assessor under the Act to assess what would be fair and reasonable compensation for shareholders. The assessor will take into account a wide range of factors before making a recommendation on the level of compensation.

There has been a great deal of commentary about the bad debt position in Anglo Irish Bank. Deputies will be aware I received from the Central Bank and Financial Regulator a report undertaken by PricewaterhouseCoopers on the financial position of the institutions participating in the Government's guarantee scheme. We had the time and opportunity to supplement that work with an examination by independent valuers Jones Lang LaSalle, which generally confirmed the conclusions reached by PwC with regard to Anglo Irish Bank.

The bank is large in Irish terms and its assets include approximately €70 billion in loans and advances to customers. These are not bad debts, as many try to suggest. As with any bank, there is a mixture of good loans and some that are distressed. Many people have asked what the implications will be for the State if there are very significant losses on loans in Anglo Irish Bank, and it is clear that there will be losses on some of the loans.

It is important to clarify to the House that in the first instance there are significant moneys within Anglo Irish Bank to take the strain of loan losses arising over the next three or four years before State support is engaged. There are approximately €7 billion of shareholder funds and other capital available to offset any losses on the loan book, in addition to ongoing pre-loan loss profits which have been very significant in the case of Anglo Irish Bank. Its position is secured by nationalisation, and the Government can work with the new chairman and board to extract the optimal value from its loan book and minimise the taxpayer's exposure.

The Government has estimated that for the Irish banking system as a whole and allowing for a large degree of stress, it would be appropriate to allow for capital injections into the main banks in the order of €10 billion in total. Within this €10 billion, I would have allowed for a capital injection into Anglo Irish Bank to offset potential loan losses, maintain its capital base on a sound footing and leave a prudent margin for error in current circumstances. As it is now a nationalised entity with the State behind it, rather than make an immediate upfront capital injection we can provide appropriate funds as necessary over time to complement its own resources if required.

Looking beyond Anglo Irish Bank, I would like to address what the Government sees as the future of the banking system in Ireland. The Government is committed to providing a platform for a well regulated, profitable banking industry of high repute in Ireland that operates in a national and international financial services environment.

The nature and thrust of Ireland's regulatory regime needs to adjust to the new realities. Lessons must be learned from mistakes made and from the international experience of the recent period of worldwide financial disruption. We need a regulatory regime which fosters probity. I welcome the review now being undertaken by the authority to that end and we are not alone in this process. Work has begun on forging a new model to govern the conduct and behaviour of the financial sector both here and internationally.

I can assure the House that Ireland will play its part internationally and especially at EU level in seeking to ensure that the redesign of the financial system, and in particular of financial regulation, is consistent with the objectives that underlie a strong, stable and functioning national banking system. Our vision for the banking sector is that banks will serve borrowers, small and medium-sized enterprises and all stakeholders in an honest way, and ensure customers and consumers are treated in a reputable and respectable manner.

I will now deal with the main provisions of the Bill. Section 2 sets out my functions in the public interest as Minister for Finance under the Bill. These functions are granted on the basis that following consultations with the directors of the bank, the Governor and the authority, I have formed the opinion that there are concerns about the viability of Anglo Irish Bank and that the exercise of these functions is necessary to preserve its capacity to continue as a going concern.

Section 3 provides that the Minister may specify a relationship framework to govern the relationship with the bank recognising the separation of it from the Minister and limiting the Minister's intervention in the conduct of the bank's business to actions necessary to protect the public interest. Section 3 gives the Minister a power to issue general directions to Anglo Irish Bank where it is necessary or expedient in the public interest, subject to regulatory requirements.

Section 4 provides that the provisions of the Act will have effect regardless of any provision in the Companies Acts, any other enactment or any provision in Anglo Irish Bank's memorandum and articles of association. Section 5 is a crucial provision, the effect of which is to transfer all of the shares in Anglo Irish Bank to the Minister on the commencement of this Act.

Section 6 provides that on enactment, the bank will convert from being a public limited company to being a private company limited by shares. Section 8 provides that the Minister may transfer some or all of his shares in the bank to a nominee at any time on such terms as the Minister specifies.

Section 9 deals with instruments to which the bank is a party. Commercial instruments may provide for their termination or other consequences, for example accelerate payment not otherwise due to be paid until some future time, where the ownership or control of one of the contracting parties changes. This section provides that specified consequences shall not arise solely as a result of the enactment of this Bill unless I provide by order that they shall.

It is important to stress that Anglo Irish Bank will remain fully liable to all of its creditors. However, it is important that creditors do not suddenly become entitled to the early repayment of moneys or the termination of contracts because of the State's necessary intervention. Steps have already been taken to guard against such an action, but this section provides an appropriate backstop. There is a hardship provision where I may reduce the effect of the restriction by order where otherwise the section might be unduly onerous.

Section 10 extinguishes certain legal rights, largely enjoyed by directors, senior managers and employees in Anglo Irish Bank to subscribe for shares in it. Section 11 deals with situations where someone has an equitable interest or security interest and any sum paid as compensation will be held in trust. Section 12 provides for the discontinuation of any listing of shares.

Sections 13, 14 and 15 provide that specified provisions of the Central Bank Acts, Companies Acts and competition legislation shall not apply. Section 16 disapplies a number of legislative provisions which would impose procedural, notification and approval requirements. Section 17 facilitates timely and expeditious decision making by me or my nominee when acting as shareholder.

Sections 18 to 20, inclusive, provide powers that facilitate swift action to make necessary changes in the administration of Anglo Irish Bank. They provide for changing of the financial year, removal and appointment of directors, officers and employees from their positions within it and its subsidiaries and appointment of their replacements. These powers are exercisable only in the public interest.

Section 21 provides that specified persons shall not be regarded as de facto or shadow directors of the bank or its subsidiaries. Sections 22 to 32, inclusive, address the issue of the amount of compensation that should be payable. Section 22 provides for the assessor. Section 23 provides for the payment or reimbursement of remuneration or expenses. Section 24 sets out who may make submissions.

Section 25 lays out the criteria to be applied by the assessor. Section 26 provides that before making a report the assessor will circulate a draft of it. Section 27 provides for a report by the assessor to the Minister on the determination of fair and reasonable compensation.

Sections 28, 29 and 30 address the practicalities if the assessor determines that compensation is in fact payable. Section 31 provides for appeals to the Irish Financial Services Appeals Tribunal. Section 32 provides that leave will not be granted for judicial review of a determination under section 26 unless the application for review raises a substantial issue and the time limits for such application.

Section 33 provides that expenses and expenditure incurred by the Minister in the administration of this Bill will be paid out of moneys provided by the Oireachtas. Section 34 provides for the creation and issue of securities for the purposes of the Bill. Section 36 provides that the Minister may make regulations for the purpose of facilitating the exercise by the assessor of their functions. Section 37 allows the Minister to make regulations.

Section 38 amends the Finance Act 1970, the National Treasury Management Agency Act 1990 and the Central Bank Act 1942 to facilitate the achievement of the purposes of the Bill by enabling the Minister to delegate the borrowing powers in section 34 to the National Treasury Management Agency.

The purpose of this Bill is to address a major systemic threat within the banking sector. Anglo Irish Bank presents a particular problem. Increasing uncertainty and concerns about corporate governance have threatened its ability to access necessary funding and the concentration of its lending to the building sector exposed considerable risk to its loan book.

The regrettable and unacceptable corporate governance issues surrounding the bank further damaged its reputation and had the effect of neutralising any positive boost which the proposed recapitalisation would have generated.

The Central Bank, the Financial Regulator, the NTMA and our legal and financial advisers were unanimous in their advice to the Government that strong and decisive action in the form of the nationalisation of Anglo Irish Bank was needed to maintain its commercial viability and that a failure to support the bank in this way would damage our financial system generally.

I was disturbed that an article appeared on page 14 of The Irish Times today suggesting that when the Government made a previous decision on a matter of this character on 29 September last it did not act on the advice of the Central Bank, or the officials at the Department of Finance, or the Financial Regulator. The suggestion made in the article is not in accordance with the facts, and that matter has been attended to.

The decision to nationalise is a clear indication that the Government is fully prepared to stand behind the Irish banking system and to demand and ensure proper governance. Our actions send one clear message to customers, investors, credit rating agencies and the markets generally that Ireland is a safe, secure place to do banking business.

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