Brian Lenihan Jnr (Dublin West, Fianna Fail)

The stress test assumes that house prices will return to 2002 levels by 2040. It also assumes that marking to market should take place on all investment properties, irrespective of the reliability of the tenancies and their payments. I was delighted the Minister outlined that the stressed cases represent definitively a worst case scenario. I hope so because were those stresses to materialise it is not a scenario under which this economy can survive.

I am glad to see in his announcement that some of the capital being provided is contingency capital and not definitively committed to the banking system. It seems to me that with these stress tests it is inevitable that a figure of this size would be found to be necessary for the banks. What is being proposed is that the banks be stuffed with capital as part of an effort to ensure international credibility for them. I hope the strategy succeeds.

Clearly, it has been discussed with the European authorities. However, if I have one area of reservation about the Minister's speech it is the nature of the consultation which has happened with the European authorities. I intend to return to this issue. The clear assumptions of the stress tests are very dangerous for this economy because unless our house purchase market revives and investment takes place in the property sector generally we will not have any economic recovery.

We will continue in a vicious rather than virtuous cycle of decline, in terms of the economy generally and the banking sector. It is very important that we all make it clear that these stress tests are just that, namely, testing an extreme scenario. The response of the Government following international consultation, which it now welcomes and accepts, should ensure that the stresses are provided for even if they do not materialise.

As the Minister said, it is proposed to redeem some of the capital if it is not required for capitalisation purposes in the future or was established to be surplus to requirements. It is important that is clear. The Minister went on to outline the future of the banking landscape. He envisages it being provided by two pillar domestically owned banks, as I understand it, with vigorous competition being provided by banks from overseas.

He signalled today that it is his intention that EBS and AIB be merged to form one of the pillars and the Bank of Ireland will form the other, with the future of Irish Life & Permanent somewhat uncertain, not in financial, funding or reliability terms but in terms of where it fits into the landscape over time. I take it the Minister envisages that it too will be assimilated into a larger bank.

In its manifesto Fine Gael indicated that it proposed to sell EBS to a private party but I gather yesterday the NTMA confirmed that it did not believe that the terms and conditions of the offer were feasible from a State point of view. It is worth noting why and why private investment cannot be attracted into the Irish banking sector. It is because the assumptions in these stress tests are so radical they would have involved an exposure to the State in the underwriting of the private capital that would otherwise have gone into EBS.

In other words, the stress test is so pessimistic compared to any stress test carried out in any other European country that, in effect, was the State to have promoted the private investment in EBS, subject to various backstops or guarantees being sought from the State, the State would immediately expose itself via the stress to a liability. For that reason, the banking system, based on these stress test, cannot attract private investment from overseas.

That has been a persistent problem with the attraction of investment from overseas, apart from the funding of the banking system in recent years. Funding is absolutely fundamental. The fundamental difficulty with the Irish banking system since September 2008 is that funding has dried up. Banks which became unsustainably large in the period leading up to 2008 have seen a persistent withdrawal, not of bond or debt finance but more crucially of deposit finance. That funding has been replaced by support from the European Central Bank, as we all know.

The Minister has to grapple with this and has done his best to date, save with one respect to which I want to return. I am not sure I should fault the Minister, the Taoiseach or whoever decided last weekend to brief our newspapers about an imminent arrangement which was alleged to have been concluded with the European Central Bank. It was reported on Saturday last in The Irish Times that: "The European Central Bank is working on an emergency plan to deepen its support for Ireland's ailing financial system with a new scheme to provide banks with more than €60 billion in medium-term 'liquidity' loans", and that that initiative was being prepared in anticipation of bank stress results today, and that it would significantly expand the reach of the ECB's operations in Ireland.

This Government has made a great deal of its commitment to European matters. I can assure the Government I maintained close relationships with both the European Central Bank and the eurogroup at all stages.

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