Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I welcome the opportunity to contribute to the Second Stage debate. This is the latest stage in the process of establishing what is described as banking union throughout the eurozone. The basic intention in the three-pronged approach to banking union, comprising the single supervisory mechanism, the single resolution authority and the deposit guarantee scheme, is to ensure that at no time in the future will there be another taxpayer-led round of bailouts of banks.

We have already had the bank resolution and recovery directive, BRRD, dealing with the hierarchy of creditors. It established the circumstances in which losses would be imposed on shareholders, unsecured creditors including junior and senior bondholders and, potentially, deposits of over €100,000. A single resolution fund to finance the restructuring of failing credit institutions is now planned to be established as an essential part of the single resolution mechanism. In previous debates I have questioned whether the size of the fund would be adequate to meet all the potential demands which could be put on it. While the general eurozone situation has stabilised since then, I believe this concern remains valid.

I would welcome some clarity from the Minister on when exactly the Single Resolution Fund will be operational. I understood the original intention was that drawdowns could be made from 2018 where necessary, but there have been some calls for this to be expedited. Given that the crisis first began to unfold in 2007, no one could accuse the European authorities of being in a rush to take action to ensure that it never happens again.

The Bill also makes amendments to the Financial Services (Deposit Guarantee Scheme) Act 2009 in order to put in place a transitional funding arrangement for the new deposit guarantee scheme. It is questionable to state that we are witnessing the creation of a genuine banking union, underpinned by common deposit insurance, when earlier this year the Greek people had capital controls imposed upon them. Greek citizens were subject to withdrawal limits of less than €100 per day from ATMs. We saw scenes of old people fainting in queues as they waited to get their hands on their pensions.

In earlier stages in the eurozone crisis it was not uncommon for people to move money out of local banks in Spain, Italy and Cyprus to safer destinations. This sits very uneasily alongside the notion of full banking union. In essence, a Greek euro was perceived to be less safe than a German euro in recent months. The long-term damage that this will do to the eurozone project remains to be seen.

I note that earlier this month German finance Minister, Wolfgang Schäuble, sought to pour cold water on the common deposit insurance initiative. A German paper submitted to a meeting of EU Finance Ministers last month stated: "To now start a discussion on further mutualisation of bank risks through a common deposit insurance or European deposit reinsurance scheme is unacceptable." It now appears that the best we can hope for is a reinsurance fund which would contribute under certain conditions when national deposit guarantee schemes are called upon. We are still a long way from a common deposit insurance scheme, and for the time being a German euro will continue to be regarded as being worth more than a Greek euro.

While I am on the subject of the deposit guarantee scheme, I would like to mention the credit union sector in Ireland. It has put forward a reasonable suggestion, namely, that it be charged a lower levy for participation in the scheme than the 0.2% rate that applies to other financial institutions. This is fair, given the lower risk it poses. I also repeat my belief that it is wrong to limit the deposits it can take from customers to the €100,000 level of the deposit guarantee scheme. I understand some 55% of credit unions will be affected by this, based on their current customer profiles. It sends the wrong signal and puts the credit union sector at a competitive disadvantage relative to banks. I do not see the justification for this change, and urge the Minister to reconsider this decision and rescind the proposed cap on credit union savings.

There is also provision in the Bill to allow for the continuation of insurance regulation for companies outside the scope of the Solvency II directive. I have said in the past in this House that the system of regulation of insurance in Ireland and across European jurisdictions is inadequate. This was most recently demonstrated in the case of Setanta Insurance, but was also evident in the collapse of Quinn Insurance and the difficulties at RSA. What was particularly noteworthy in the case of Setanta Insurance was the apparent regulation shopping that went on, whereby the firm sought out the most favourable location in which to establish itself. Given that an insurance company which is prudentially regulated in one country can passport its services into another member state in the eurozone, it is essential that each member state take its national responsibilities in respect of regulation of the insurance sector seriously. The overall system of regulation is only as strong as its weakest link, as we saw in the Setanta Insurance case, an issue that is still being played out.

There is no strong case for the development of a single supervisory system for the insurance sector across Europe which would mirror that being developed for the banking sector. I am talking about going beyond the new directive in place for insurance. There is far greater cross-border sale of insurance products than other financial services, and citizens in one state should not be put at risk due to the failures of regulation in another member country. There is a need to better inform consumers in this jurisdiction about the fact that many insurance companies are not fully regulated here; rather, they are regulated for prudential purposes in other countries and passport in services. They are only regulated here for conduct of business purposes. Ordinary people do not make that distinction, and there is a far greater need for the Central Bank to inform people of the distinction between the systems of regulation that apply.

The Bill also makes a technical change to the definition of an investment in the directed portfolio within the Ireland Strategic Investment Fund, formerly known as the National Pensions Reserve Fund. This gives me an opportunity to refer to the major decisions that lie ahead in respect of the directed portfolio. The open market value of AIB is now put at up to €13 billion. In the next 12 months there is a reasonable prospect of the bank redeeming the contingent convertible capital notes and a significant proportion of the preference shares. These events will lead to a significant inflow of cash to the Ireland Strategic Investment Fund, yet there is precious little discussion as to what will be done with the proceeds. Earlier this year some cash was taken out of the fund to assist with the early repayment of IMF loans, which made good financial sense for the State, given the relatively high interest rate which attached to those loans. It was something I had advocated for some time.

It is not immediately obvious what the Minister would do with any upcoming windfalls from the sale of bank assets. There remains the option of using them to pay down debt. This is certainly worth considering, given the high debt-to-GDP ratio that the State still has, even though it has fallen. On the other hand, we are able to borrow at record low rates of interest, and the benefit in terms of interest savings from paying down debts is now a lot less than it was before. A further option is to deploy some of the cash from the directed portfolio to the discretionary portfolio, which is currently investing some €7 billion in economically productive investments. The fund has gotten off to a reasonable start, but it will take some time before we know the true impact of the investment it has made. It is reasonable to ask the Minister to bring forward a paper setting out in detail the options for deployment of the cash that will be realised over time from the sale of the directed portfolio, and I hope he will give consideration to that.

A discussion on legislation dealing with banking union would not be complete without reference to the June 2012 euro area summit statement, which pledged to "examine the situation of the Irish financial sector with the view of further improving the sustainability of the well performing adjustment programme." This was famously described by the Government as a game changer. The truth is that while the EU agreement appeared significant on the surface, it was dramatically oversold in Ireland. No sooner was the ink dry on the summit communiqué than some of the more powerful eurozone countries were putting an entirely different spin on what was actually agreed. The reference to specifically examining the Irish financial sector has not resulted in one cent of the €30 billion injected by Ireland to save AIB, Bank of Ireland and Permanent TSB being refunded in any way by the EU. Government leaders here were in such a rush to go further than each other in welcoming the agreement that they did not secure anything in it that would deliver with certainty a tangible and measurable deal to make our debt more sustainable and help Irish citizens. Over three years on, a deal on retroactive bank recapitalisation for Ireland seems as far away as ever.

The formal application process for ESM funding opened last November. At this stage, there is hardly a serious commentator left who believes that the Government will actually get the deal it was in such a rush to claim it had achieved. It appears an open-market sale of the banks remains the only game in town. This may result in the recouping of significant sums, but it is most certainly not what was promised three years ago.

Overall, we welcome the Bill. It is broadly technical in nature and the Minister has signalled a number of amendments he intends to bring forward on Committee Stage. We will work co-operatively with him in dealing with them. We hope for the early passage of the Bill, which is warranted and is of merit to the country.

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