Brian Lenihan Jnr (Dublin West, Fianna Fail)

I move:

"—That Dáil Éireann:

commends the recapitalisation terms to be offered by the Government to Allied Irish Banks and Bank of Ireland, with €3.5 billion in capital to be provided to each bank, with an 8% annual coupon payable to the State;

notes and commends the bank customer package which has been negotiated with the banks in the context of the recapitalisation, which provides for commitments by the banks for the mortgage and business sectors; and places the code of practice on mortgage arrears on a statutory basis;

also notes that the banks have agreed that total remuneration for all senior executives will be reduced by at least 33%; that no performance bonuses will be paid for these senior executives and no salary increases will be made in relation to 2008 and 2009; and that the two banks have accepted that, for non-executive directors, fees will be reduced by at least 25%; and

believes that the recapitalisation package for Allied Irish Banks and Bank of Ireland will secure the position of these banks, providing for a well-capitalised banking system, able to maintain the flow of credit to the economy."

I am pleased to present to the House the details of the Government's recapitalisation package for Allied Irish Banks and Bank of Ireland. This recapitalisation of our two largest banks is a central element in the Government's broader strategy for addressing the financial crisis, ensuring our two major financial institutions remain sound and stable and in a position to fulfil their vital role in the economy. The Government has also progressed the other main elements of its approach to securing our financial system, including the package to address the concerns of ordinary customers of the banks, and I will later take the opportunity to outline to Deputies the position on these other measures.

I do not want to labour the point but in introducing the recapitalisation package to be offered to AIB and Bank of Ireland and the substantial State funds this involves, we must remember the unprecedented conditions which persist on international financial markets and in the international economy generally. These conditions have seen sources of funding for banks put under significant pressure globally, while the expectations of international markets on the levels of capital that should be held by banks to cover potential losses have increased. At the national level, the contraction in economic activity seen in the past year and the related fall in property price values places pressure on the asset side of the banks' balance sheets. All of these pressures, national and international, have come to the fore at a time when the need to maintain the flow of credit to the wider economy is more vital than ever. We need to ensure that funds are available for sound businesses and entrepreneurs to enable them to provide the employment and output which will be the base of our economic recovery.

The Government's strategy to address these various financial and economic pressures in the banking sector has been comprehensive. It was in a context of fear and uncertainty which beset international funding markets that the Government moved swiftly last September to introduce the guarantee of Irish bank liabilities which has provided certainty to depositors and investors alike in regard to Irish banks and which was successful in securing the liquidity requirements of our banks. The Government's recapitalisation programme announced in December addresses both the expectations of international markets on Irish banks' capital levels and the needs of our major financial institutions in covering potential loan losses in the coming years. Following the announcement of this recapitalisation programme, the Government initiated further intensive discussions with Allied Irish Banks and Bank of Ireland with a view to securing the position of our two largest banks. As a result of these discussions, the Government has decided on a comprehensive recapitalisation package for the two banks which will reinforce the stability of our financial system, increase confidence in the banking system here and facilitate the banks involved in lending to the economy.

The Government will provide €3.5 billion in core tier one capital for each bank. The capital to be provided was determined following detailed engagement with the banks themselves and with the benefit of survey information of the bank's loan books, which was conducted on behalf of the Government by PricewaterhouseCoopers. A careful assessment was made of the potential losses that the banks' face on their loan books in the coming years, taking into account the impact of likely trends in property values and various stress scenarios for the economy. While I was criticised in some quarters for taking too long to proceed with a recapitalisation of our major financial institutions, the time taken to assess as accurately as possible the capital requirements of each bank is worthwhile in terms of the assurance that can now be offered markets on the levels of capital in the two largest banks and the fundamental strength of their position in the coming years.

The level of capital being provided by the State will boost the core tier one capital ratio of AIB to 8.5% and that of Bank of Ireland to 9%. It is important to note these are high capital ratios by international standards and the banks will therefore be in a strong position to raise the funding they require on international markets and withstand loan losses arising.

In return for the substantial investment being made, the State will hold preference shares which have a fixed dividend of 8% of the total sum invested, payable in cash, or with ordinary shares in lieu in the case where the banks do not have profits to pay a dividend to its shareholders. The banks can redeem the preference shares to the State at par value within the first five years, or at 125% of face value thereafter. Also, warrants for the purchase of shares give the State an option to purchase in five years' time up to 25% of the ordinary share capital of each bank at predetermined strike prices based on the current market share prices. These warrants effectively provide the State with access to the future upside of the investment it is now making in the banks, as this will be reflected in future increases in the banks' share prices.

As part of the terms of the investment I will have the right to appoint 25% of the directors to the board of each bank. As Minister, I will also hold 25% of the total ordinary voting rights in the two banks in respect of certain key functions, including decisions on change of control and board appointments. These terms provide for an adequate degree of State representation in the corporate structure of the two banks given the substantial investment it is making. However, the Government has made it clear that it does not intend to take control of these banks and the terms of the recapitalisation carefully provide for this. Following this recapitalisation, the State will not hold ordinary shares in either bank other than existing NPRF holdings, while the option to exercise warrants in the future is capped at a defined level of shareholding.

Furthermore, the terms of the recapitalisation provide that each bank will have the possibility of redeeming up to €1.5 billion of the State's investment by raising privately sourced core tier one capital prior to 31 December 2009. In this case the warrants held will be reduced pro-rata to that redemption to an amount representing not less than 15% of the ordinary shares of the bank. I have made clear on a number of occasions that the Government encourages the banks to access private sources of capital where possible and the banks are therefore incentivised to do so under the terms of this recapitalisation. Equally the terms of the deal convey a clear message internationally that the State will not inhibit private investors now or in the future in the Irish banking sector. As a small open economy, Ireland is by its nature dependent on the investment it can attract internationally and the key task now for the two banks is therefore to raise funds to enhance their funding and capital position and expand the contribution they make to our economy. The terms of the recapitalisation provide a clear path for the two banks to remain privately run and privately owned institutions, not least because this is by far the most efficient way to organise the vital role played by the banks in the economy.

While the State is clear in not seeking to take control of the banks, the terms of the recapitalisation provide an appropriate return to the State for the investment it is making in the context of current financial market conditions, while avoiding the mistake of placing overly stringent costs on the banks which would impede them from lending. The capital investment, therefore, brings a clear return to our economy. Our two largest financial institutions are in a strong position to withstand losses arising on their loan books and equipped to maintain the flow of credit to our economy. I will outline presently the commitments the Government has secured from the two banks in terms of their lending to the real economy.

The recapitalisation programme will be funded from the National Pensions Reserve Fund. Some €4 billion will come from the fund's current resources and €3 billion will be provided by means of a front-loading of the Exchequer contributions for 2009 and 2010. The necessary amending legislation to the National Pensions Reserve Fund Act 2000 will be introduced shortly.

The recapitalisation package for the two banks has been recommended to me by the Governor of the Central Bank, the Financial Regulator, my financial advisers and the National Treasury Management Agency. The Financial Regulator has confirmed that the preference shares qualify as core tier one capital, meaning that such funds are of maximum utility to the banks in terms of the buffer provided against loan losses. The recapitalisation package is subject to the approval of the ordinary shareholders of each bank at general meetings which will be convened without delay. The Government's proposals on recapitalisation have also been designed having regard to the European Commission recapitalisation communication and are subject to EU state aid approval.

With regard to the other banks, the Government is continuing its discussions with the other covered institutions, namely, Irish Life & Permanent, EBS and INBS, concerning their respective positions and capital is available where such is required. However, any possible requirement for these institutions would be of course substantially less than that for the two main banks. As Deputies are aware, Anglo Irish Bank is now under full public ownership. It will continue to trade as a going concern with appropriate Government support as necessary, following consultation with the EU authorities, to ensure its viability.

I will now address the other aspects of the Government's strategy for addressing the impact of the financial crisis in Ireland. The Government is committed to underpinning its recapitalisation proposals with further measures to strengthen and secure the Irish financial system. In that context and within the six month review of the guarantee scheme to be completed by mid-April 2009, the Government will examine how the guarantee scheme could be revised in ways which include supporting longer term bond issuance by the banks. This review will be subject to European Commission approval and consistent with EU state aid requirements and will be in line with international and EU trends where the average term of state cover for bond issues extends beyond 2010.

The Government is conscious that in current market circumstances there is a need to bring greater certainty and transparency to the operations of systemically important financial institutions, in particular in regard to specific asset classes currently perceived as carrying a higher than average risk. Irish institutions have engaged in lending for land and property development, which exposes them to specific risk at a time of falling property prices and difficult economic conditions.

In line with developments internationally where the UK and US have put forward specific proposals, and current discussions at EU level, the Government will examine proposals for the management and reduction of risks within financial institutions with respect to specific land and property development exposures. Ongoing work at European Central Bank level and in the EU will inform this process.

I have already outlined to Deputies the conditions attached to the recapitalisation proposals to protect and ensure a return for taxpayers. I would now like to highlight further measures committed to by the banks regarding credit supply and their interaction with customers. A continued flow of credit is vital for our economy. To establish the exact position regarding the availability of credit, the recapitalised banks have agreed to fund and co-operate with an independent review of credit availability which will be managed jointly by the banks, Government and business representatives. The recapitalised banks have agreed to work closely with the IDA, Enterprise Ireland and with State agencies to ensure the supply of appropriate finance to contractors engaged on major projects sponsored by them, to engage in a clearing group to identify specific patterns of events or cases where the flow of credit to viable projects appears to be blocked and to seek to identify credit supply solutions. They have also agreed to provide €15 million each to a new seed capital fund.

Statutory codes of practice on business lending and mortgage arrears have been finalised and will be published this week by the Financial Regulator. The codes to be put in place will ensure all banks operating here deal in an honest way with customers and that consumers in particular are treated in a reputable and respectable fashion. The business lending code will require banks to offer annual review meetings to inform customers of the basis for decisions made and to have written procedures for the proper handling of complaints. Where a customer gets into difficulty, the banks will seek to agree an approach to resolve problems and provide reasonable time and appropriate advice.

Under the mortgage arrears code, where a borrower is in difficulty, the lender will make every reasonable effort to agree an alternative repayment schedule and will not commence legal action for repossession until after six months from the time arrears first arise. The two recapitalised banks will not commence court proceedings for repossession of a principal private residence until after 12 months of arrears appearing, where the customer continues to co-operate reasonably and honestly with the bank. In addition, the recapitalised banks have assured Government that in the normal course of events they will make every effort to avoid repossessions, as has been evidenced by the low level of repossessions by them to date.

It is important that I address the issue of remuneration in banks. The Government is of the view that significant reductions in the remuneration structures of banks is required. The banks benefiting from State capital, AIB and Bank of Ireland, accept that pay restraint is important in the overall context of the economy and the supports being provided by the taxpayer, and will act accordingly. As a step in this direction, they accept that the pay of senior executives will be curtailed. Total remuneration for all senior executives will be reduced by at least 33% and no performance bonuses will be paid for these senior executives and no salary increases will be made in relation to 2008 and 2009. The two banks have also accepted that, for non-executive directors, fees will be reduced by at least 25%.

The report of the Covered Institution Remuneration Oversight Committee, CIROC, is expected shortly. As Deputies will be aware, the role of this committee is to consider the remuneration plans of each of the institutions covered by the Government guarantee. I will be writing to the chairman of the committee, Mr. Eddie Sullivan, to ask him to examine whether an overall cap on executive remuneration can be introduced for the banking sector in light of the significant State support that is now being provided to the sector and the pay restraint which is now a feature of other sectors, including the public sector.

The banking sector, along with other sectors, will need to play its part, in reducing our cost-base to ensure our competitiveness in the years ahead. I will, therefore, bring forward proposals regarding remuneration in the banking sector on receipt of the CIROC's report. These proposals will be in addition to those I announced yesterday evening.

The Government's recapitalisation package for AIB and Bank of Ireland and the associated measures which I have outlined represent the taking on of a significant, and indeed unforeseen role by the State, in the securing of the banking sector. There have been important issues for the Government to address in taking on this role at a time when we have also to ensure fiscal prudence and make difficult decisions to ensure our competitiveness internationally. The proposals presented by Government crucially provide for an adequate return to the taxpayer which is making the investment, appropriate representation for the State in the banking sector and, most important, for the future health and viability of our banking sector.

A priority for the Government has been to ensure that all intervention in the banking sector has as its ultimate goal benefiting and securing the position of the customers of the banks, including account holders, mortgage holders, businesses and entrepreneurs. The Bank Customer Package will ensure that the interests and concerns of consumers are to the fore. In all, the Government's recapitalisation proposals for AIB and Bank of Ireland represent a comprehensive commitment by the State to maintaining the two main banks as strong, forward-looking, confident institutions, able to play their part as the primary financial services and credit providers in this country.

Prior to the making of the decision by Government, the Taoiseach and I welcomed the opportunity to consult on and discuss with the Leader of the Opposition, Deputy Kenny, and the Fine Gael spokesperson on finance, Deputy Richard Bruton, the issues that arose on the recapitalisation of these institutions. Likewise, yesterday morning before Government made its decision, I took the opportunity to brief the Leader of the Labour Party, Deputy Eamon Gilmore and the Labour Party spokesperson on finance, Deputy Joan Burton, on the Government's plans.

I appreciate that given the global financial and banking crisis, there can be dispute and argument within the House about many matters relating to banking. However, I believe we all agree it is of fundamental importance that we place these two institutions on a sound basis. The recapitalisation proposals accepted by Government put these institutions on a sound basis in so far as their capital is concerned. I appreciate that other ideas may be brought forward, in terms of the guarantee or the minimisation of the risks, and I will, of course, examine any such proposals in a constructive manner. As outlined in my speech, I am prepared to engage with the banks on these issues to see how we can move forward while fully protecting the taxpayers' interests.

It is important that, as a House, we work together to protect the position of these two institutions which are of fundamental systemic importance to our economy. The investment made by Government is a substantial one. As some Deputies commented, it is well in excess of their current market value. The Government could have gone down the route of full nationalisation. I do not believe that would have been in the interests of the country as it would have placed the substantial borrowing requirements of these institutions, which are far in excess of our national funding requirements, onto the risk of the sovereign State of Ireland. It is important that these institutions continue as private institutions as they need to develop and enhance their fund-raising capacity to enhance the liquidity of the Irish banking system.

As I stated, these two banks are of fundamental importance in our system. That does not mean we will not work to address the problems of other financial institutions. As far as these institutions are concerned, the Government believed it of vital importance to put their durability beyond doubt through the decision which it arrived at yesterday. It is of fundamental importance to Ireland that we remain as members of the European Monetary System through our participation in the European Central Bank which, throughout our financial crisis, has been a source of tremendous stability and strength in our banking system. It is important that message goes out around the world where on occasions unfavourable comparisons are made between Ireland and other countries. We are part of one of the strongest monetary zones in the world and the central bank of that system is a bulwark of support for our banking system.

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