Leo Varadkar (Dublin West, Fine Gael)

It is a pleasure to speak on the Central Bank Reform Bill 2009 and I support its proposal to establish a commission to replace the existing hybrid structure of IFSRA and the Central Bank. When IFSRA was first established, I questioned the need for such a body given that under the existing system the Central Bank was responsible for financial regulation alongside the Stock Exchange and other bodies. It appeared a strange decision to make at a time when the Central Bank was losing powers because of the introduction of the euro. It is right, therefore, that the bodies are being merged once again.

I have concerns about the transfer of consumer functions to the National Consumer Agency, which has a good staff and CEO but has not produced many benefits for consumers thus far. Given that it is the Government's policy as stated in the emergency budget of April 2009 and ours as stated in our streamlining Government document to abolish the National Consumer Agency and replace it with a new body incorporating the functions of it and the Competition Authority, it is strange that the Bill provides for the transfer of these functions. Does it remain Government policy to abolish the agency and, if so, why is legislative provision not being made for the transfer of functions?

My main problem with the Bill is not so much its proposals for reform as what these do not include. Reforming the architecture of financial regulation in this State is not enough on its own and we need the right people for a start. If people such as Mr. Elderfield or Professor Honohan were appointed to their current positions five years ago, different decisions would have been made even under the existing legislation and principle-based rules. Over the past seven years, the Central Bank and the Financial Regulator were the dogs that barked but did not bite. The Central Bank's Quarterly Bulletin and the regulator's reports repeatedly warned the public, media and political class that the economy was overheating and excessive property lending was creating huge risks but these organisations did not go public or take similar actions to those pursued by Mr. Elderfield in recent weeks.

Irrespective of the architecture developed, it is important that we have the right people. As a State, we rely on having a wise Minister for Finance who makes the right appointments. The current Minister has made the right appointments to these positions but his predecessors, the Taoiseach and Charlie McCreevy, made the wrong ones. I do not have confidence that future Ministers will make the right appointments and this is why we need some form of public or parliamentary scrutiny of people before they are appointed Financial Regulator or Governor of the Central Bank. We cannot rely on the Minister of the day to make the correct decisions and I fear that a future Minister for Finance will be somebody like the Taoiseach. The Bill before us does not address that danger. Parliamentary scrutiny would allow us to test people before they are appointed to these important positions.

I understand from the Minister's statement that further legislation is planned but I wonder why we are still waiting for it two years after the banking crisis erupted. We are still waiting for updated rules on the conditions and securities which should accompany mortgages and loans. It is shocking that the Government's banking policy lacks a proper resolution regime. The United Kingdom Act, which could almost be copied and pasted here, provides that insolvent banks can be taken into administration. It is unforgivable that two years after the bank guarantee and the insolvency of our banking system we have not yet introduced such legislation. I will not go into the rights and wrongs of the decision taken on Quinn Insurance but it is clear that the Financial Regulator acted under existing legislation which allows him to intervene where an insurance company is in danger of insolvency. Similar legislation which would allow him to take an insolvent bank into administration does not exist. The time that the bank guarantee bought us has been squandered by the Minister and his Government colleagues.

In researching for this debate, I studied the speeches on the bank guarantee scheme, which was held on 29 and 30 September 2008, because Deputies on all sides of this House have been rewriting history since them, particularly in regard to why they supported or opposed the guarantee. I am afraid to say that the quality of the debate was very poor, although we have learned a lot about banking since then. There was hardly any mention of bondholders, subordinated debt or whether it was appropriate that Anglo Irish Bank and Irish Nationwide were included in the guarantee. While the latter issue was discussed on subsequent days, it was not addressed in the period immediately after the announcement of the guarantee.

On 30 September 2008, the morning after the guarantee of the night before, the Taoiseach stated in response to Deputy Kenny:

The banking system in Ireland has assets which exceed its liabilities. The assets of the Irish banking system amount to approximately €500 billion and the guarantee liabilities are approximately €400 billion.

We now know that was absolutely untrue. The assets which the Taoiseach told the Dáil were worth €500 billion were actually worth two thirds of that figure if we are lucky. It is clear, therefore, that either he was wrong or he misled the House. He went on to state that the Government:

...has provided a State guarantee to deal with liquidity which was critical to the continuation and health of the financial system. By doing so, we are not exposing taxpayers' money to the provision of that equity.

Again, that statement was untrue because the decision taken by the Government completely exposed taxpayers' money to the provision of equity. Indeed, we have taken equity stakes since then.

In response to Deputy Gilmore, the Taoiseach stated: "The issue here is that solvent banks, which have assets in excess of their liabilities, are faced with an unprecedented situation whereby there is a credit crunch..." That was untrue. The banks were not solvent. Two of them were insolvent and it is likely another two were as well.

The Minister for Finance, Deputy Brian Lenihan, speaking on the guarantee Bill stated: "There is understandable concern that the Exchequer is potentially significantly exposed by this measure." He want on to state that the "exposure from this decision is significantly mitigated by a very substantial buffer made up of the equity and other risk capital in the relevant institutions". That also was not the case. We found out subsequently that the banks were considerably under capitalised. On that occasion the Minister was so unable to manage the facts or manage his brief that he either did not understand the facts or he misled the Dáil. He went on to state: "It is estimated that the total assets of the six financial institutions concerned exceed their guaranteed liabilities by approximately €80 billion." That also was not the case.

The Minister for the Environment, Heritage and Local Government, Deputy Gormley, in the same debate, spoke of what he described as a bold move the Government had taken and stated: "I am very proud of the role the Green Party was able to play in providing this innovative solution." This is something he will live to regret.

Even though I do not like to say it, one of the more astute contributions made during that debate was one that I made. At the time, I stated:

I do not agree that the main problem with the banking sector is liquidity. I think there is a capital problem as well. The banks have squandered their capital on mistaken loans to the property sector and I really wonder whether, in all cases, their assets exceed their liabilities. I will be interested to see how the Minister has been assured of that and how he has come to the conclusion that their assets ... [exceed their liabilities by] €80 billion.

I went on to state:

I am disappointed that there are no consequences or punishment for some of the people who are, in part, responsible for this situation - bankers who made inappropriate loans, the Central Bank to a certain extent, and also Ministers who had the opportunity to act to rein in the financial sector, but did not do so for various reasons...

We have a national crisis and on this side of the House we are doing our best to offer responsible and patriotic opposition. As a result, and because this Bill changes other pieces of legislation, we are by and large supporting this Bill on trust. The Government has asked for bipartisanship and a Tallaght strategy, and they will get it on this one Bill. However, the responsibility for this lies on the heads of Government Ministers and woe betide [any of] them if any banks fall or if taxpayers are left with significant liabilities.

It is nice to be right about issues but, at least on this occasion, I wish I was not. What shocks me is that I made that speech 18 months ago on the night of the bank guarantee when I could see what was happening and what the true situation was, and the Government, the Minister for Finance and the Taoiseach either could not see the wood from the trees because they were so incompetent at doing their job or, alternatively, deliberately misled the Dáil on those occasionsd.

What needs to be done now seems clear to me. There is a bank guarantee. It was probably still the correct decision to take, although perhaps it would have been wiser to guarantee the liabilities and not the assets. At the very least, it was two years in which we could buy time and in which to repair the financial system but those two years have not been used wisely. Essentially, there have already been five bailouts already - the guarantee, the first recapitalisation of AIB and Bank of Ireland before Christmas of 2008, the second recapitalisation of AIB and Bank of Ireland, the nationalisation of Anglo Irish Bank, NAMA, and the recapitalisation of Bank of Ireland and AIB now planned. They have not worked and what we need now is a very different approach.

We need to clear out the banks of their top brass. Second, we need to set salary caps across the banks, not only for the positions of chief executive. It is absurd that there are bank chief executives whose salaries are capped at €500,000, and yet there are people under them who are allowed to earn €600,000 and €700,000. For so long as there is a Government shareholding in those banks, the salaries of senior bankers should be capped at public service levels, perhaps linked to Civil Service salaries as ours are, and they should only be allowed to set their salary limits again or to break those caps when they have repaid in full, and bought back from the Government, all the shares that the State has taken.

Third, we need to wind down Anglo Irish Bank and Irish Nationwide Building Society. I am encouraged by the large number of independent commentators who did not agree with my party's position on this eight months ago and who now are very much coming around to that view, be it Mr. Willie Slattery of Citibank, Dr. Constantin Gurdgiev, David McWilliams, Moore McDowell and Morgan Kelly. Increasing numbers of people are coming to the view that we can save up to €15 billion with our banking policy by winding down Anglo Irish Bank and Irish Nationwide Building Society. That does not mean letting them collapse or allowing them to call on the guarantee. It means essentially a debt for equity swap, saying to the bondholders that they will not get all their money back and they will have to share in the pain by only getting the market value for their bonds, perhaps 30 cent or 40 cent in the euro.

We also need to put in place a bank levy for future bailouts because if one looks back over history, asset bubbles come and go while banking systems do collapse. This has happened on several occasions throughout history. Even with the right architecture, the best people and the best regulatory structures in place there is likely to be future banking crises similar to the one we have now. They may not be as great, or they me be similar in scale to what happened in the 1980s. A permanent banking levy needs to be put in place to build up a fund of money that can be used should a similar situation arise in the future.

We also need a new bank, a national recovery bank, as advocated by my party and now supported by the Labour Party. We need to introduce a banking resolution law to give the Financial Regulator the power to take over insolvent banks and bring them into administration. We also need a decision by the Government as soon as possible on the guarantee and on what it intents to do with it. I accept it cannot be ended overnight but a plan is needed to see how it can be unwound over time, especially as it has acted as a constraint on all banking policy.

Some 18 months after the introduction of the guarantee and five bailouts later, with the best part of €25 billion to €30 billion added to our national debt, we have the Bill before us. It does not address the issues in our banking crisis that need to be addressed. That is why we need a new approach to banking. The sooner we have a new Government to do this the better.

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