Brian Lenihan Jnr (Dublin West, Fianna Fail)

It goes without saying that the worst financial crisis this country has ever experienced requires an inquiry. The Government fully recognises that the public is entitled to a full examination of what went wrong in the banking system. More than that, an inquiry is needed to restore international and domestic confidence in our banks. As a country, we must understand the origins of this crisis to ensure that we do not make the same mistakes again.

Those mistakes required the Government to introduce the bank guarantee scheme in September 2008 and to make some significant interventions since then to ensure financial stability. These measures include the recapitalisation of our two biggest banks, namely, Allied Irish Banks and Bank of Ireland, the nationalisation and recapitalisation of Anglo Irish Bank, the establishment of the National Asset Management Agency and the recent introduction of the eligible liabilities guarantee scheme.

The State has been required to pour significant and scarce resources into our banks. As I have stated previously in this House, the banks owe a large debt of gratitude to the taxpayers of this country. It is essential that we learn the lessons of our recent experiences as we set about the task of refashioning our banking system to meet the needs of the economy and perform its proper duty to the citizens of this country. I welcomed the comments of the Governor of the Central Bank, Professor Honohan, when he appeared before the Oireachtas Joint Committee on Economic Regulatory Affairs just over a month ago and I made public that welcome on 4 January 2010. The Governor stated that he expected the Oireachtas would authorise some form of inquiry to try to understand the deeper underlying causes of this crisis in order that wider lessons could be learned for the future. The Government agrees with the views of Professor Honohan on the benefit and value of such an approach. The Government also agrees fully with the Governor on the need to engage a broad set of expertise to examine the events of recent years and to design and implement an investigation in such a way that a deeper understanding is arrived at of the root causes of the systemic failures that led to the need for extraordinary support from the State to the domestic banking system.

At its meeting today, the Government approved a framework for an inquiry and for its subsequent consideration by Dáil Éireann. The inquiry will have two stages. First, the Government will commission immediately two separate reports. One will be from the Governor of the Central Bank on the performance of the functions of the Central Bank and the Financial Regulator. A second will be from an independent "wise" man or woman with relevant expertise to conduct a preliminary investigation into the recent crisis in our banking system and to inform the future management and regulation of the sector. These reports also will consider the international, social and macroeconomic policy environment which provided the context for the recent crisis. I expect both reports to be completed by the end of May this year and laid before the Houses shortly thereafter.

The second stage of the inquiry will be the establishment of a statutory commission of investigation, which will be chaired by a recognised expert or experts of high standing and reputation. The terms of reference for this commission will be informed by the conclusions of the two preliminary reports. The aim will be for the commission to complete its work by the end of this year. Its report will be then laid before the Oireachtas for further consideration and action by an appropriate Oireachtas committee.

We are all aware the global international crisis has created extreme stress for the financial system worldwide. The drying up of funding in international credit markets and the huge write-downs of securitised assets has generated a financial shock, which has resulted in the most negative economic conditions since the Second World War. Ireland's exposure to the sharp deterioration in international financial conditions has been significantly exacerbated by practices that failed to address unrestricted credit growth in the domestic banking system. This growth was facilitated by access to wholesale financial markets with no exchange rate risk and low interest rates and was both driven by, and facilitated, an unprecedented property boom and an unsustainable increase in property development lending.

The proper functioning of the banking system is critical to the economy and, therefore, must be protected by the Government. We are not alone in this. Governments all over the world have had to make substantial interventions to protect their banking systems. These interventions have been difficult for all governments. They are not popular, they are not easy to explain or understand but they are necessary. In all the steps we have taken as a Government, our overriding objective has been to maintain a functioning banking system that will ensure a flow of credit to viable businesses and households in this economy. Today's Government decision to commission two preliminary reports, to be followed by the establishment of the statutory commission of investigation into banking matters, will form another important step in the continuing reform of our regulatory systems and structures, as well as the internal governance of our financial institutions.

These reviews will not take place in a vacuum. They will build on important work being done at international level. Over recent months substantial analysis of the failures of the banking sector has been undertaken elsewhere. The analysis the Government will commission will complement and build upon, for example, the European Commission's high level group on cross-border financial supervision - the de Larosière report - and the UK Financial Services Authority's Turner report. These reports have recommended an extensive programme of reform of financial regulation at EU and international level which is being put in place. These reforms will make a major contribution to underpinning the stability of the financial system both in Ireland and in the EU in the future.

The commission of investigation will examine and report on the causes of the systemic failures such as corporate strategy, governance and risk management in the Irish banking sector. The terms of reference for the statutory inquiry will be shaped by the conclusions of the two preliminary investigations and in consultation with the Oireachtas but, clearly, a number of broad themes ought to be examined thoroughly. These include the performance of individual banks and bank directors where wrongdoing and bad and lax practices have contributed considerably to the crisis; the performance and structure of the banking system generally; the performance of the regulatory and Central Bank systems; and the response of the relevant Departments and agencies, including the linkage between the banking crisis and overall economic management.

The two preliminary reviews will prepare the ground for the formal inquiry and will ensure it is effective and efficient. Over the next number of months, significant work needs to be completed to return our banking system to health. We need to complete the first stage of the critical "transfer of assets" to NAMA; agree the banks' restructuring plans and their future capital requirements; and progress consolidation in the building society sector. I remind the House that the banking system is still fragile and we are not out of the woods yet. It is important that the work I have outlined is completed before we turn our attention to the formal inquiry we all agree must take place. That is why the Government is proposing the multistage investigation, which will be completed by the end of the year.

The Oireachtas will be involved at each stage of the planned inquiry process. An appropriate Oireachtas committee - the Joint Committee on Finance and the Public Service seems the most relevant - will meet both the Governor and the independent expert at the outset of their work to be briefed on the members' priorities for investigation. The two preliminary reports, when completed, will be laid before the Houses of the Oireachtas and the Oireachtas committee will be invited to consider the findings in the reports. The terms of reference and draft Government order to establish the statutory commission will be laid before the Oireachtas and the commission's report, when completed, will be laid before the Oireachtas for further consideration by the committee. It is open to the appropriate committee to hold public hearings on the report.

There has been some reference to the DIRT inquiry as a possible model for the inquiry into the financial crisis but the investigative work in that inquiry was done by the Comptroller and Auditor General. An Oireachtas committee cannot constitute itself into a court of judgment on private individuals and cannot make determinations on disputed issues of fact. That is why the Government decided to adopt the commission of inquiry mechanism, which all Members will agree has done a good job in its performance to date in regard to the inquiry in the Dublin archdiocese. It could be argued that an inquiry should ideally await the conclusion of existing criminal and regulatory investigations into wrongdoing at certain financial institutions. I accept the public appetite for known and determined consequence for those who have engaged in wrongdoing in these institutions and these investigations may take a significant time. However, the Government is firmly of the view that the approach I am setting out will allow these criminal and regulatory investigations to proceed without the possibility of prejudice.

The Government's agreed approach will allow for the timely completion of expert, authoritative and structured examinations of the financial crisis. It will provide a comprehensive analysis, which will enable us to understand the origins of the crisis and help us to learn lessons which will inform our future management of the banking sector. The framework I have outlined will be transparent and constructive and it will involve the Oireachtas at each stage. It will be efficient and cost effective and, most of all, it will restore confidence in our banks in order that they can play their full and proper role in promoting economic recovery.

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