Brian Cowen (Laois-Offaly, Fianna Fail)

The motion put forward by the Labour Party offers no solution to the banks' bad debt problem. It focuses entirely on the ownership and governance of banks; there is no proposal on how to clean up banks' balance sheets. Banks with damaged balance sheets, whether they are private, partly State-owned or fully nationalised, will not lend to the real economy. Moreover, bank nationalisation does not improve the access of banks to funding but would likely make external funding more challenging.

International experience shows that the cost to the taxpayer of banking crises rises quickly over time unless bad loans are dealt with and developers with troubled projects and the bankers who funded them are likely to gamble in that respect. In the case of a nationalised bank they are gambling with taxpayers' money. That is why a standard tool for dealing with bad loans is to establish an asset management company to separate out the questions of the developers and the bankers. The asset management company acts in the interest of taxpayers. This approach has been used successfully in resolving banking crises in the United States and Sweden in the early 1990s and in several eastern countries during the Asian financial crisis in the late 1990s.

Deputy Gilmore seeks to quote an eminent economist in this area but one of the top banking economists in the country, Professor Honohan, told the Joint Oireachtas Committee on Finance and the Public Service on 6 May that under State ownership banks might be under pressure to provide finance to failing firms that have no prospect of repayment. He went on to say it would be a catastrophe for the public finances if, on top of what has been done by the banks and the regulator in regard to the property bubble, a large new wave of unrecoverable loans was made. He also said that one cannot ignore the extensive international evidence showing that Government-owned banking systems serve their economies poorly, tending to result in higher interest rate spreads, less private credit and the credit there is going to larger firms.

Greater state ownership has long been associated with more crises. The only country to engage in wholesale nationalisation of its banks in the current crisis is Iceland. Is that what is being suggested - that we should follow that model?

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