Michael Noonan (Limerick East, Fine Gael)

A photo finish is still a win.

When I spoke here recently on the recapitalisation of Bank of Ireland and AIB, I stated that I did not believe the Minister's proposals would be sufficient to restore the lending position of the banks in order that they could again provide a credit flow, which is essential to restoring the health of the economy. Now that the Minister is taking the necessary statutory power to give effect to his proposals, I am even stronger in my belief that his proposals are not fit for purpose.

My belief is based on a number of factors. First, the markets have rejected the proposal. The value of shares in both AIB and Bank of Ireland have collapsed. I checked the closing prices of those shares today before I came to the Chamber and AIB shares closed at 42 cent while Bank of Ireland shares closed at 19 cent. One could buy five Bank of Ireland shares for €1 and still have change. Those share prices do not reflect confidence in the recapitalisation proposals brought forward by the Minister. This is the judgment of the investment community at home and abroad. The Minister may agree and even argue that the reality is different, but in matters of investment perception is king. The perception of the investment community is that the proposed recapitalisation of the banks is insufficient. Therefore, it will not work and it is not fit for the purpose. As I said, when we debated this proposal initially, the Minister will be back here before too long taking other measures, which he signalled today in terms of this Bill and which he is partially taking.

Second, my belief is reinforced by the fact that most analysts and bank commentators view the proposals as inadequate, that the figure of €7 billion will not be sufficient to recapitalise the Irish banks because the weakness of their loan books requires far more capital than that. In the property and banking collapses in Switzerland and Sweden in the early 1990s, 8% of the banks' loan books was written off. If the write off of these two banks is of a similar proportion, then the figures are completely inadequate.

Third, the European Central Bank advised that the best way to proceed for eurozone members who need to recapitalise their banks is to recapitalise them but to bring in proposals in parallel for a bad or toxic bank together with provisions for insurance against bad debts. The Minister has not done that. He has taken no action. He has promised to consider these options, but while he waits confidence slips away. The main problem with the Government is that its decisions are always behind the curve. Matters are moving forward at a very rapid pace and the Government is chasing after events. Consequently, it never turns the trend and inspires the confidence that is necessary to get things moving again.

My fourth reason for believing the Minister's recapitalisation proposal is fatally flawed is that banks internationally, and in Ireland, will shortly have to move back to a more traditional type of banking. In the boom years the Irish banks operated on a loan to deposit ratio of, in theory, 160%; the ratio probably went higher than that. In simple terms, for every €100 they had on deposit, they loaned €160. They borrowed on the wholesale money market to make up the €60 gap. In the current process, known as deleveraging, the lending to deposit ratio will have to be reduced to between 80% and 100%.

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