Kieran O'Donnell (Limerick East, Fine Gael)

No, our solution requires the setting up of good banks. Is the Minister saying he regards the level of bad debt in the banks to be in the region of €15 billion? What exactly is the Minister saying? This is about finding something the markets will believe in, in respect of the banks, their solvency and dealing with bad debts. The Minister may disagree with the model Fine Gael proposed but we believe it will work. What is proposed here is extremely worrying.

With regard to positive aspects of this legislation, I welcome the fact that the Minister is dealing with contracts for difference. The Quinn group was not legally required to disclose its dealings with Anglo Irish Bank to the Financial Regulator and this caused major difficulties for the bank. I hope the legislation will have substance and we will examine the matter on Committee Stage in order that contracts for difference are required to be disclosed and what happened with the Quinn group and Anglo Irish Bank will not happen again. I welcome the fact that the Minister will establish an interdepartmental committee to establish how bodies make investments.

Fine Gael takes issue with a number of aspects of the scheme. I refer to the announcement by the Minister for Finance on 11 February that the shares would be perpetual non-cumulative growth preference shares for €3.5 billion core tier 1 funding. The Minister should have considered these shares being cumulative preference shares and that the Government would have discretion in any year to decide whether the bank could afford to pay the dividend. There are two worrying elements to this. The banks will pay €280 million per year as a dividend for preference shares. If the banks redeem €1.5 billion of this State investment, the new preference shares, before 31 December 2009 the markets would worry that the banks would not be able to afford to do that. This puts unsustainable pressure on the banks and the Government should have opted for cumulative preference shares with discretion on the matter of whether the banks are in a position to pay dividends. The option of redemption by 31 December 2009 should not be included because it puts undue stress on the banks. The Minister referred to the banks redeeming up to €1.5 billion of the State investment in new preference shares from privately sourced capital prior to 31 December 2009. The worry we have is that it will put pressure on the banks. It is unlikely that they will be able to source tier 1 capital from private sources.

AIB is capitalised to the value of €406 million and Bank of Ireland has €201 million. We are putting €3.5 billion into the two banks for a 25% potential stake if the coupon dividend is not paid. This values the banks at €14 billion but that is not the case. With regard to the money being invested in the banks, we are worried that we will end up with zombie banks because the main concern of the banks will be the shareholders and funds will not flow to small businesses and first-time buyers. Overall that is the essence of the recapitalisation scheme and that is why we proposed the good bank model. This would allow a bank to function as a fresh bank and to go to the market in terms of liquidity and raising private funds. The State could consider putting ordinary shares into a good bank because it would be viable and the State could receive a return in future years. The problem is that we have a bank with assets that comprise a combination of toxic debts and good debts. We still do not know what is the position.

Fine Gael has concerns that the State is putting €1.6 billion from the Exchequer and borrowings into the National Pension Reserve Fund on a yearly basis. That is creating pressure and the Minister should consider a holiday until we reach 3% of Government deficit to GNP. There does not seem to be criteria on how the NTMA will account separately for the performance of normal investments along with directed investments. There must be transparency and accountability because this concerns €7 billion being invested in the banks under the direction of the Minister for Finance rather than a decision by the National Pension Reserve Fund. Fine Gael will refer to this matter on Committee Stage.

The Bill gives the Minister the power to bring forward payment to the fund from future years. This allows immediate recapitalisation of AIB and Bank of Ireland. This power should be curtailed for this reason only. The Minister has referred to the Government's contribution to the National Pension Reserve Fund being in the form of cash from the Exchequer or investments in lieu. The Minister must clarify what he means by these investments and whether he refers to shares in companies such as the ESB. This measure is clearly specified in the legislation and we require clarification on it.

The good bank model is critical for the international markets. Deputy Richard Bruton has espoused this point of view. In the context of the international markets, State capitalisation should require a clean-out of existing management teams and the appointment of new boards. There should be a cap in the order of €250,000 on executive pay. The CEO of AIB is still receiving approximately €670,000. In giving confidence to the public about the recapitalisation scheme, there should be a new broom.

We need a full overhaul of financial regulation in Ireland. I note the Taoiseach's comments at the weekend about effectively merging the Central Bank with the Financial Regulator. We await specifics on that but what is required is that the board of the Financial Regulator be removed and that a new financial regulator — preferably someone with international experience — be appointed. We are all singing from the same hymn sheet in that we want the banks to work. We want recapitalisation to work; we do not want the two main banks seeking further State investment in a few months' time. The worry is that the measures provided for here could bring about that. I refer to the announcements by AIB and Bank of Ireland about their bad debt provision for 2009 and 2010 and the situation they will face in terms of paying the coupon, which they can roll into ordinary shares. They will certainly try to repay the preference shares by the end of 2009. The buy-out of preference shares by the end of December will create pressure. We must get this right. A model should be put in place that will work and give confidence to the international markets, that will not bring about zombie banks but a situation where funds will flow to small business and mortgage holders.

In the terms of the recapitalisation scheme the Minister speaks about an increase of 10% in capacity for small business and 30% for first-time buyers. The worry I have is that proposals from small business will be looked at up to a particular sum and that funds will not be given beyond a certain capacity. It is critical that the Minister looks to have published the number of small business loans approved by banks versus the number turned down and the level of funding provided. The terms should also be made public. I have people coming to me who are involved in small business. They may require restructuring facilities but the banks are increasing the interest rates charged to the customer. Every other loan is being restructured at much higher rates. The problem is that the people concerned cannot go to other banks, as competition is effectively dead and banks are concerned more with protecting themselves than providing funds for small business.

The Minister should take our concerns on board. We have argued that we want a good bank and a cap on salaries for top officials in banks. We are not getting value for taxpayers' money but must get some guarantees from banks with regard to the flow of funds to small business and first-time buyers. We may find ourselves in a position where we will have to come back here in a number of months because funds will not have flowed to small business. What view will the Minister take if the banks come back in three, four or six months and indicate they require more funds? That is the decision we are taking today with the model proposed. The worry is that the banks will look for extra funds and that the required statement will not be sent to international markets. We will deal with this issue in much more detail on Committee Stage.

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