Martin Mansergh (Tipperary South, Fianna Fail)

The banking crisis has once again given rise to vigorous debate in this House. The crisis, which was triggered internationally, found the banking sector and the entire economy badly exposed, and we have been dealing with the consequences ever since. Particularly since the sovereign debt crisis and the focus that has been trained on Ireland, from August on, what this country does and says is covered almost daily in the financial pages of the international press. For example, on page 4 of this morning's Wall Street Journal, an article entitled "Europe's debt worries return" gives some flavour of concerns. It begins:

Borrowing costs of weaker eurozone countries like Ireland and Greece are rising again as fears grow of debt restructurings that could saddle global investors with hefty losses.

Several factors are contributing to the misery of bond markets in countries on the geographic periphery of the 16-nation euro bloc. Ireland's bank bailout is getting ever more costly, and it now looks like taxpayers may have to take control of another large bank.

I do not endorse the accuracy of the report, but I am quoting a typical example of a reporting that is part of the challenge we face. The crisis we are experiencing in the banking sector has been unprecedented in its severity.

The catalogue of events unfolding over the past two and a half years represents a huge challenge not just to the Government but to every party in this House and to the country as a whole.

On 30 September last, the Minister for Finance outlined the Government's policy on banking, set out the position of the financial institutions and brought clarity and certainty to the situation. The costs of the banking crisis are considerable but the Government is confident that they can be managed within the overall context over the coming years. The Governor of the Central Bank, Professor Patrick Honohan, has also confirmed that this is his assessment of the situation.

The banking crisis grew out of a number of factors, including the over-reliance of the banks in this country on lending to property developers in the belief that the property market would not fall or fall much. The banks, in their reckless competition for profits and market share, abandoned all caution, certainly by the standards of the past, in a manner that seems utterly inexplicable; light touch regulation was woefully inadequate. Being a small open economy, the worldwide recession impacted more heavily in Ireland than in most other countries. This backdrop to our own domestic problems has exacerbated the effects of the banking crisis and made its resolution more difficult.

The Government's policy has at all times been directed to securing the banking system, while as far as possible sparing the taxpayer. There are no precedents in our history for dealing with a crisis of this magnitude. The Government had to develop a number of policies to deal with these problems as they rapidly emerged. The Government has acted expeditiously to address the failings in the structure of financial regulation and supervision that were central to the severity of the banking crisis in Ireland. The Central Bank Reform Act 2010 was signed by the President on 17 July 2010, and was commenced on 1 October. A second Central Bank Bill dealing with the powers of the Central Bank will be published shortly and the consolidation Bill will follow when that Bill has been enacted.

The Central Bank Reform Act implements far-reaching changes in financial regulation. Two new posts - head of financial regulation and head of central banking - have been established. The Central Bank is now a fully integrated structure with a unitary board, the Central Bank commission, chaired by the Governor. The Governor remains solely responsible for the European System of Central Banks-related functions.

New and enhanced accountability and oversight mechanisms have also been included, focusing on accountability for regulatory performance, international peer reviews, and appearance before a committee of the Oireachtas by the Governor and the heads of function. In addition, new statutory powers allow the Central Bank to remove or block the appointment of persons to senior positions in the management or on the boards of banks if they fail to satisfy the bank as to appropriate levels of fitness and probity.

The approach that the Government has taken to managing individual institutions in distress has also been rapid and effective. Having provided for the guarantee scheme in September 2008, the Government moved to set up an asset management agency, NAMA, into which the land and development loans could be transferred and the banks' balance sheets cleared of these exposures. This ensured the upfront recognition of the losses in the Irish banks in a transparent manner. The NAMA process ensures that the banks' balance sheets are being cleansed and the concerns about the level of their losses will diminish over time. The alternative would have been to turn a blind eye to the losses and allow the problems caused by the uncertainty about the banks to continue. The transparency and clarity achieved through the operation of NAMA has been recognised internationally as a significant strong aspect of the Government's strategy for the repair and the restoration of the banking system.

However, the European sovereign debt crisis during the summer necessitated that further clarification and certainty had to be brought to the situation to restore our banking system to health and to secure the long-term sustainability of our fiscal position. The statement by the Minister for Finance on 30 September last confirmed that additional capital support would be required by some of our banks and building societies. The Minister also announced that he would seek a contribution from holders of subordinated debt to support the costs of Anglo Irish Bank. To that end, Anglo Irish Bank has recently undertaken a liability management exercise to exchange subordinated debt for one year senior bond at a deep discount. This exercise does not impact on the work that is being undertaken by the Department of Finance and the Attorney General with regards to the reorganisation and resolution legislation to address the issue of burden-sharing with Anglo Irish Bank and the Irish Nationwide Building Society subordinated bond holders. The proposed legislation will be consistent with the requirements for the measures to be recognised as a "reorganisation" under the relevant EU directive in other member states.

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