Thursday, 21 July 2011
Central Bank and Credit Institutions (Resolution) (No. 2) Bill 2011: Second Stage (Resumed)
Stephen Donnelly (Wicklow, Independent)
The Bill goes some way towards ensuring the required legislative process is in place to enable effective action to be taken if a bank is threatening to fail. However, I do not believe the correct culture is in place. Deputy Spring highlighted in his contribution the culture which led to our banking failures. We still have a way to go before we can ensure that banks are far less likely to fail and that if they fail, the resolution process at the heart of this Bill will produce the best possible outcome for the people.
I welcome the Bill and had this legislation been in place in 2008, we might have avoided some of the horrendous decisions which have to be made. Any resolution process to deal with banks which are about to fail must be timely, transparent, effective and fair. It must allow for reasonable due process. The ECB is broadly happy with the timeliness and effectiveness of the Bill but it has expressed some reservations about fairness, some due process issues and the transparency of the process. Specifically, the ECB cites the lack of time for interested parties to react. If the Minister has to take action and go to the courts to force a resolution process, the ECB is concerned that other interested parties may not have sufficient time to represent themselves in that process. The bank is also concerned that the independence of the Central Bank of Ireland is not explicitly set out in the Bill. I put those points to the Minister for his consideration as to whether they can be included in the Bill.
My concern is how the Bill has been developed and that in-depth parliamentary investigation is not included. The Bill seems to be the product of good practice as viewed by the IMF, the World Bank, the OECD, the Bank for International Settlements and by a collection of other central banks. I agree this is a good start and the Bill is a result of the agreement with the troika.
However, I suggest that the Bill lacks a local context. The US banking resolution regime legislation and the wider financial regulations, were drafted many decades ago and were the product of parliamentary scrutiny of the banking sector. The US Congressional hearings in the 1930s probed the bankers and sought to understand the local banking sector. These hearings examined the problems of the US banking sector and also the culture of the banking sector and then drafted legislation which resulted in the Glass Steagall Act. The importance of Congress was seen in the 1980s during the Savings and Loan crisis when William Black exposed corruption and a culture of deceit and manipulation in the US banking system. I think this would resonate with many Members and with many people in Ireland. This informed the Federal Deposit Insurance Corporation, the FDIC Improvement Act and the Dodd-Frank Act which are key pieces of legislation.
The Oireachtas has not had the ability to build up a sufficiently large base of analysis and to use its understanding of the particular idiosyncrasies of Ireland and of our political, regulatory and banking cultures. I suggest it might help to strengthen the Bill further if this process were put in place in order that the relevant committee would have real investigative power to ensure the Bill not only reflects international best practice but also particular Irish idiosyncrasies. The various reports such as the Honohan, Wright and Nyberg reports have thrown some light on the problems, but only certain aspects of the problems, and these reports were also time restricted. The Nyberg report, in my view, was a grey wash, in that it blamed everyone and therefore no one was to blame. I suggest it cannot be used to deal specifically with what should be changed or safeguarded in legislation.
The famous US Justice Louis Brandeis said that sunshine is the best disinfectant. The power of the FDIC in the United States is the power of the transparency of its actions and its structure. The FDIC website describes in detail the procedures it follows in the winding-up of banks and how depositors are protected. This form of transparency within our process would not only make for a better process, it would give the public and legislators some much needed faith in the process.
There are concerns about the independence of the Central Bank and the ECB commented that it would like to see a specific provision in the Bill. I regard this Bill as a good beginning and some of the comments from the ECB would add to the power of the Bill. Some deeper parliamentary investigation and input to tailor it specifically to Ireland would be very welcome.
Deputy Spring clearly spoke with first-hand experience of some of the problems in the culture of banking regulation. The culture of regulation needs to be improved in five areas which are the political culture, the regulatory culture, the culture of the Central Bank, the culture of the Department of Finance and the culture of the banks.
As regards the political culture, we all know the former Taoiseach played golf with the former chief executive of one of the biggest offenders, Anglo Irish Bank. The chair of the incumbent political party had become the head of the banking federation and there had been an extraordinary capture of the Government by the interested parties. I have no doubt this is something the Minister and his colleagues watched from this side of the House for many years. I hope this will all be put to bed.
As regards the regulatory culture, I refer to Deputy Ross's book, The Bankers, which gives an extraordinary account of a dinner which took place in November 2008. The dinner was hosted by the senior management of the banks for the recently retired regulator and attended by the new regulator. This is a small number of weeks after the banks convinced - I say hoodwinked - the Government into providing a guarantee bigger than our GDP. In a restaurant not far from this Chamber, the bankers were entertaining the regulators. I have worked in the United States and in the United Kingdom and in those countries the regulator would be fired immediately if he or she were to have dinner with senior bankers. This is an extraordinary situation and I hope we will not see this happen again.
The issues to do with the Central Bank include the tradition whereby the Secretary General of the Department of Finance subsequently became the Governor of the Central Bank. Being Secretary General of the Department of Finance does not equip someone to become Governor of the Central Bank and it was an extraordinary and ultimately damaging tradition. A second issue for the Central Bank is one of expertise. The Wright report stated that 39 of 542 staff of the bank were trained to masters degree or higher in economics, which is 7%. In Canada it is 60% and in the Netherlands it is 40%. While I do not know whether it is within the remit of the Minister, this issue needs to be addressed urgently. It would be great to see some serious up-skilling in order that we can at least get on par with places like Canada, which, of course, avoided the banking collapse in which we find ourselves.
Another issue is the culture of the Department of Finance itself. On this there is an issue of expertise. The late Dr. Garret FitzGerald cited that in 2009 the Department of Finance had only three members of staff with PhD qualifications and only one of these was working in macroeconomics. I have worked with public servants, as have most if not all Deputies in the House. My singular experience here and abroad is of people who want to do the very best and have a genuinely patriotic outlook. However, they also need the education and training. That may be a combination of providing programmes where people in the Department can be trained up and deployed accordingly, and hiring in more capability. Having one person with a PhD working on macroeconomics in 2009, if Dr. FitzGerald's assertion is correct, is extraordinary and deeply worrying. I hope something can be done about that.
Obviously the culture within the banks largely led to the situation in which we find ourselves. It has been spoken about and rehearsed many times. I am concerned that many of the senior teams are still in place. I know the Minister has told the House that it is his intention to rectify that. I reiterate my concern that much of the cultural legacy will remain until the senior teams are refreshed.