Brian Lenihan Jnr (Dublin West, Fianna Fail)

The Central Bank of Ireland is taking its position at the centre of financial supervision and financial stability oversight. Professor Patrick Honohan will succeed Mr. John Hurley as Governor later this month. I thank both of them for their assistance.

A new head of financial supervision will be recruited shortly. New resources and additional expert staff will widen skill sets and expand and enhance the capacity for the reformed institution. I expect the draft legislation providing for the reform of the regulatory system to be published before the end of the year.

As part of the reform package for financial regulation and longer term planning, I am looking options for a legislative regime to deal systematically with distressed financial institutions. I want to ensure that the State has in place a range of tools to protect deposit holders and ensure we can deal effectively with problem institutions and at the same time maintain the confidence of international markets. My officials and the relevant authorities are examining the scope of such a regime. I hope to bring forward proposals in this area early in the new year.

Everybody in this House is aware of the effect of the crisis conditions of the last year in the availability of credit to businesses and households. The flow of credit is essential to the proper functioning of the economy. All of the Government's actions in stabilising the banks have been undertaken to ensure that the financial system continues to fulfil its essential functions in providing credit for businesses and individuals. The establishment of NAMA and the removal of identified risky assets from the balance sheets should in itself improve credit supply. The basic business model of a bank - and what generates profits - is on-lending at a margin appropriate for the risk involved. This proposal allow banks to focus on this and addresses the two key existing limitations to new lending. First, it will strengthen and improve the funding position of the banks meaning they have available funding to on-lend. The simple fact is that every euro lent by a bank to a customer must be drawn from deposits or borrowed by the bank from somewhere else. The agency will pay for the loans by giving the banks Government bonds that can be swapped for cash in international markets and at the European Central Bank. Second, the removal of higher-risk assets will allow banks to focus their human and capital resources on their core business rather than trying to work out problem loans. Every new loan requires new capital and banks in their current position need to maintain existing capital buffers to absorb current and future losses.

Specific credit supply measures were incorporated into the Government's recapitalisation packages for AIB and Bank of Ireland. Credit for small and medium-size enterprise - SME - has been a particular focus of concern. As part of the package each bank committed to increasing capacity for SME lending by 10%, established a €100 million fund for clean energy and environment-friendly investment and a further €15 million for seed and venture capital. The banks report on all of these commitments quarterly and their reports are monitored by the Financial Regulator. The reports clearly show that new business lending is taking place month by month, although at a lower rate than last year, and that substantial numbers of new business accounts are being opened each month.

The Department of Enterprise, Trade and Employment has established a credit clearing group involving business groups, banks State agencies and Departments which is examining cases of credit refusal referred to it and an e-mail postbox has been set up to facilitate referrals. In addition, that Department is operating the stabilisation fund and the temporary employment subsidy scheme to help viable businesses get through their current difficulties.

To summarise, the Government has made lending to small and medium-sized enterprises a major priority. Various actions have been taken to support viable businesses, to track the real situation and to facilitate access to credit on a proper commercial basis. In terms of specific credit supply measures attaching to NAMA, the Government continues to examine options in this regard and I look forward to the debate in the House.

Some have argued for alternative approaches. As I discussed earlier the risk to the taxpayer of overpaying for assets by paying an allowance for long-term economic value can be mitigated by risk sharing mechanisms and the levy. I wonder if those who argue that NAMA should ignore the fact that the market is currently distressed and that the institutions should be paid current market value realise the cost implications of what they are proposing. The additional capital required by the institutions compared to what might be required under the NAMA approach would be in the region of €4 billion to €7 billion. The capital would have to be provided-----

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