Damien English (Meath West, Fine Gael) | Oireachtas source

I thank the Deputies for their statements on the final report of the Joint Committee of Inquiry into the Banking Crisis. The report was published yesterday after tremendous effort on the part of the committee. There was much hard work over the last year and in the period before that. The significance of this undertaking should not be underestimated. The hard-working commitment of the Deputies and Senators involved is acknowledged and appreciated on all sides of the House. The findings and recommendations of the inquiry are welcomed by the Government. It will be a matter for the next Government to consider and act on the recommendations. Deputy Ó Fearghaíl asked for more time to go through them, and that can be facilitated by whoever is next in the Government.

It is important to note the key findings in the report. There was no single decision or event that led to the failure of the banks; rather, it was the result of a cumulative series of events and decisions over a number of years. There were two crises rather than one - a fiscal crisis and a banking crisis. I have maintained that for a long time. The equally big crisis we had was the public expenditure crisis. It was mentioned by some Members that Opposition parties had the same policies, but successive Governments over a couple of terms were obsessed with construction-based taxes and made long-term decisions based on them. That is what resulted in a fiscal crisis. There were too many eggs in the basket. That was not the case with other parties. When they were in the Opposition, Deputies Enda Kenny and Richard Bruton repeatedly said at every budget that there was flawed budgetary decision-making based on construction-based taxes.

One cannot put all one's eggs in one basket. When we left office in 1997, the rainbow coalition Government was creating 1,000 jobs a week across many sectors. Similarly, we are back there again after four or five years in government and Fine Gael and Labour are creating 1,000 jobs a week across many sectors. In its wisdom, Fianna Fáil believed for a long number of years in only having construction-based jobs which is what led us to the fiscal crisis which was just as detrimental as the banking crisis.

The lending practices of the banks made them vulnerable to a liquidity risk which was not recognised. By 2008, banks had moved away from prudent lending principles towards a riskier, asset value-based lending model in their dealings with the property development sector. The business model of key developers in the boom years led to them being overwhelmingly reliant on Irish financial institutions. The Central Bank and Financial Regulator had sufficient powers to do their jobs effectively and could have required banks to hold additional capital to absorb losses which would have arisen in the event of a financial crisis. While an independent review and assessment of the effectiveness of the Central Bank and the Irish Financial Services Regulatory Authority, an organisation created in 2003, should have been carried out by the Government, it was the execution of the Central Bank and the regulator of their mandates and the absence of interventions which directly contributed to the crisis. The systemic risk that was building up in the banking sector was not identified by the Financial Regulator. The financial stability reports of the Central Bank to monitor the key risks to the financial system and financial stability did not identify the key risks. The Department of Finance relied too heavily on the reports of the Central Bank and external agencies such as the IMF, the OECD, and the European Commission and the soft-landing theory accepted by the Department and external agencies was not substantiated by robust analysis or research. The Government at the time did not always follow the advice put forward by the Department of Finance or the Central Bank. The ECB threatened the then Minister, Brian Lenihan, that it would not continue to provide emergency liquidity assistance support to Irish banks if Ireland did not enter a bailout programme. Ireland's entry into a bailout in October 2010 was inevitable but the timing of the entry was determined by factors outside the Government's control. The ECB's position on imposing losses on senior bondholders in November 2010 and March 2011 contributed to the inappropriate placing of significant banking debts on Irish citizens.

It is important that we all learn from the mistakes of the past. Significant work has been undertaken by the Department of Finance in recent years to address the issues highlighted by the crisis. A comprehensive overhaul of the regulatory framework for the financial sector has been pursued at both domestic and EU level since the financial crisis. Through the introduction of various initiatives, the stability and resilience of the financial sector has been strengthened and restored to a point where it better serves the economies and peoples of Europe. A series of measures has been introduced at EU level to reduce the risks across the financial system and to minimise the adverse effects of future financial crises. These includes the capital requirements directive and the regulation and directive for banking recovery and resolution. The single supervisory mechanism, SSM, transfers key supervisory tasks for significant banks in the eurozone to the European Central Bank which means additional oversight beyond national central banks.

While the reform of our statutory code for the financial services sector has been and continues to be driven by the comprehensive set of reforms that have been brought forward at EU level, a number of significant domestic legislative reforms have been undertaken to build a strengthened domestic regulatory framework. The Central Bank Reform Act 2010 created a single, fully-integrated Central Bank of Ireland with a unitary board, the Central Bank Commission, which is chaired by the Governor of the Central Bank. In 2011, the new fitness and probity regime was rolled out by the Central Bank. The Central Bank (Supervision and Enforcement) Act 2013 enhances the Central Bank's regulatory powers. Drawing on the lessons of the recent past, it strengthens the ability of the Central Bank to impose and supervise compliance with regulatory requirements and to undertake timely assertive interventions. Legislation establishing a central credit register has been passed. The Credit Reporting Act provides that the Central Bank of Ireland shall establish, maintain and operate a central credit register as a means to enhance and promote more responsible lending in Ireland and to thereby contribute to overall financial stability. The bank has now entered into a contract with a partner to build and operate the register and it is planned that the system will be in place later this year. More importantly, all of these legislative reforms have been supplemented by real change in the culture of the Central Bank and a significant increase in regulatory activity with a corresponding increase in staff numbers and skills levels. The revised Central Bank Acts have produced peer review and independent oversight arrangements for the bank's operations. In combination with the single supervisory mechanism, these changes will be important in terms of preventing future instances whereby the Central Bank might fail to fulfil its responsibilities and mandate.

There have been a number of important responses in the context of applying the lessons learned from the crisis, both nationally and at EU level. Nationally, we have put in place the Fiscal Responsibility Act. The Irish Fiscal Advisory Council has been established on a statutory basis to provide independent assessments of the Government's fiscal stance. At EU level, there is now considerably greater scrutiny of the fiscal and economic policies of member states. The measures set out in the "six-pack" and "two-pack" of regulations and directives reformed and strengthened the Stability and Growth Pact and now provide for greater scrutiny and oversight of budgetary and economic policy. Economic and fiscal governance in the euro area has been reformed considerably since the crisis in response to deficiencies in the conduct of fiscal policy which became evident in many member states. The relevant measures are contained in two groups of EU legislation referred to as the six-pack and the two-pack. Under the two-pack, which came into force on 13 May 2013, draft budgets must now be based on forecasts which are either produced or endorsed by independent bodies at national level. The aim is to ensure that fiscal policy is framed in such a way as to guarantee that it is free from either an optimistic or pessimistic bias in the underlying macroeconomic forecasts. In Ireland, we have chosen the endorsement route and the task of providing endorsement has been assigned to the Irish Fiscal Advisory Council, which was established during our first year in government in 2011. This represents a significant change compared to the previous arrangement and should address the type of self-reinforcing loop between domestic and international forecasters about which the inquiry was so critical.

At EU level fiscal rules which now apply were adopted in response to the problems which the recent crisis revealed not just in Ireland but also elsewhere in Europe. The rules now in place in particular and the structural targets and expenditure benchmarks are aimed at breaking the link between cyclically unsustainable revenues under long-term expenditure commitments. The rules now provide for growth and expenditure in line with long-term economic growth trends. Anything above that will have to be funded through discretionary tax increases. Accordingly, the possibility of using windfall revenues to fund primers expenditure increases is much reduced if not altogether eliminated.

I repeat my thanks to all involved in the inquiry for their dedication to seeing it through to a successful conclusion. Their efforts have resulted in a significant increase in the level of information in the public discourse. It is critical that we all learn from past experiences to ensure that those mistakes are not repeated. The report will help to improve on progress already made in that regard. Since 2011, €15 billion of burden-sharing has been imposed on subordinated bondholders. However, as the Minister has stated on numerous occasions, the ECB and EU Commission were opposed to its use in respect of senior debt. The Minister for Finance, Deputy Noonan, set out to the banking inquiry that the then ECB President, Jean-Claude Trichet, was clear and spoke in graphic terms of what he saw as the consequences of Ireland burden-sharing with senior bondholders. During the banking inquiry, the Minister made it clear to Deputy Higgins that he was never threatened. He stated:

I was never threatened that they'd withdraw ELA or assistance to the Irish sovereign but, and you'd well know from your experience here, in saying that Ireland would be treated as a country in default and a bank would be treated as a bank in default, the implications of that to me were clear. ELA could be suspended. ELA was always temporary.

The Minister for Finance has set out on numerous occasions that the Government considered burden-sharing in the winding down of IBRC - comprising Anglo Irish Bank and Irish Nationwide - but was prevented due to the ECB's unwillingness to provide the necessary support to allow such an action to take place, which is to say emergency liquidity assistance. However, it must also be remembered that as a Government, we were aware of the risks of burden-sharing with senior bondholders. Indeed, the Minister stated prior to the 2011 election that no action could be taken without ECB support. To be very clear, there has been no U-turn on the Minister's part. He was very clear on the matter. I worked with him in opposition in the context of the finance portfolio before the 2011 general election and he was very clear that this would not happen without ECB support. As such, I do not like the way people try to rewrite what he said. He stressed on numerous occasions and was very clear where he stood before we came into government and he did not change his view on taking office. People try to be selective in picking bits out of manifestoes or in recounting what was said. However, I know what was said. I was there beside him at the time and it is all on the record. To be clear, the Minister did not perform a U-turn in this regard.

The Government's banking strategy was announced to the Dáil on 31 March 2011. It set out that the Government was aware of the very real risks of imposing losses on senior bondholders in the banks that would have to finance economic recovery. Unfortunately, some Deputies are confusing threats of action with the consequences of action. It is important to remember that the Government's actions and negotiations from 2011 to 2013 led to vital successes which paved the way for our successful exit from the EU-IMF programme of assistance. More importantly, however, these successes included the promissory note arrangement, which reduced the deficit by over €1 billion annually. They have also reduced the State's cash borrowing requirements by €20 billion over the next ten years.

Such an arrangement would not have been possible without ECB support.

Some people have questioned whether the Minister for Finance, Deputy Noonan, and the Taoiseach made the right decisions or were tough enough in the negotiations with Europe. The record speaks for itself. While in charge of this country over the past five years, those two gentlemen made the right call on every decision on which card to play, when to negotiate and what deals to push for or accept. Their judgment has been proven correct by the way in which the economy has turned around. Ours has been the fastest growing economy in the past two years and will probably remain so in the year ahead. More important than the full economic recovery has been the jobs recovery. Unemployment, which was at 15% when we entered office and was predicted to reach 20%, is now below 9%. Indeed, it is probably closer to 8%. This proves that they made the right decisions. All of us accept that we have only gone part of the way towards ensuring that the recovery reaches everyone's house, given the fact that there is still some unemployment, but we want to deal with that. This is what we mean when we say that we want to use proven policies and plans to keep the recovery on its path.

Deputy Ó Fearghaíl stated that the Government was beginning to make the old mistakes. That was an unfair charge. The Ministers, Deputies Noonan and Howlin, who are in charge of the Departments of Finance and Public Expenditure and Reform, respectively, have been clear about their work, prudent in everything they have done and, unlike previous Governments that used to spend all of the money they could find when nearing an election, kept expenditure well under growth rates. The Ministers have been careful with resources.

There is a commitment to remove the USC as the growing economy allows. It is a Fianna Fáil-imposed emergency tax, but not a permanent one. We have started in the right way by gradually reducing the USC in the past two budgets. This will continue over the next five budgets. It is wrong to claim that this is a return to the old ways. Instead, an emergency tax is being removed gradually as the economy allows and when it can be replaced with growth. This is the key point.

The Government welcomes the committee's report and congratulates all of its members on their considerable efforts. I commend the report to the House.

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