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

I congratulate the Minister of State with responsibility for financial services and e-government, Deputy Eoghan Murphy, on his appointment. I congratulated him personally but I also wish to do so across the floor of the House. I got to know the Minister of State quite well when he was a member of the banking inquiry, and I am sure we will have a good working relationship across the floor of the House. I wish him all the best in his new role, which is a very exciting opportunity for him.

Fianna Fáil will be supporting the Single Resolution Board (Loan Facility Agreement) Bill 2016 in the Oireachtas. We do so as it is primarily technical legislation to facilitate the process of banking union, which is already well in train. The concept of a Single Resolution Mechanism and the associated Single Resolution Fund brings about a sea change in how banks will be supervised and regulated in Europe. Never again should a situation arise in which the authorities in an individual state are forced by the European Central Bank to use taxpayers’ money to prop up the banking sector in that country without assistance from fellow member states. An entirely new process is now in place which would mean that, in the event of a banking collapse, there will be a clear cascade of interventions. Equity holders would be first to lose out, followed by subordinated bondholders, various categories of senior bondholder, corporate depositors and, finally, uninsured deposits. In theory, the resolution fund only kicks in after all stages have been gone through.

The consequence of the new resolution arrangements is that investors and depositors are considerably more at risk than they were previously. Indeed, the outline structure was tested during the Cypriot banking crisis of 2013 when uninsured depositors lost out to the tune of 48% in the case of one bank, the Bank of Cyprus. This is something that needs to be considered carefully by individuals and institutions when deciding where to put their money. It is imperative that the system of regulation be sufficiently robust to identify weak banks and require them to take remedial action when potential warning signs are identified. This is particularly the case in respect of banks that operate across national borders.

Later this evening we will be debating the subject of motor insurance. One startling event in recent years was the sudden collapse of Setanta Insurance. It was operating in the Irish market but was regulated out of Malta for prudential purposes. Clearly this regulatory model failed as, over two years later, customers of the bank are still left waiting for claims to be settled. The question must be asked: is the system of banking regulation sufficiently strong in each country in the EU to prevent another Setanta-like situation arising? While the largest banks across the EU are subject to centralised supervision by the ECB, this function is essentially subcontracted to national central banks in the case of smaller financial institutions. It is highly likely that some depositors with amounts greater than €100,000 are not aware that some of their savings may be at risk in the event of a future banking collapse. It is important that people be aware of that risk and that they also be aware of the steps that are being taken and are in place to prevent such an occurrence.

The European banking system has not been cleaned up. There are plenty of weak lenders across the Continent. The biggest difference now is that, in contrast to 2010, inflation is at negligible levels. The European Central Bank has missed its inflation target for four years and is very likely to miss it for some years to come. This means that the banking system cannot rely on inflating away its problems. While a sticking plaster has been applied by the ECB to the banking sector in the form of wave after wave of cheap money, a number of European banks remain in a fundamentally weak position. The best mechanism to improve the health of the banks in the medium term is to improve the health of the economy in which they operate. In Ireland’s case, renewed economic growth has underpinned the position of the banks. A number of banks have released reserves as previous provisions in respect of bad debts now appear to have been overly pessimistic. However, the same cannot be said for other European states. Italy, Belgium and Spain all continue to have issues in their banking sector. This is inextricably linked to the weakness of the overall European economy.

While Mario Draghi has been creative in terms of the monetary policy actions he has taken, the response of the European Commission in relation to fiscal policy has been woefully lacking. Despite what the populists and anti-Europeans say, Europe itself is not the core problem. However, the European Commission is not playing anywhere near the role it should in providing solutions. The EU budget is limited because of the demands of anti-EU parties, so its ability to transfer money to hard-hit regions is contracting rather than expanding with need. It is also failing to push countries that have the opportunity to spend more to stimulate the economy. Should our neighbours in the UK vote later this month to leave the EU, there will be an immediate economic crisis and Ireland will be in the eye of the storm. There are few, if any, monetary policy levers left to stave off a Europe-wide slump. A sustained fiscal response is needed to stimulate the European economy. In simple terms, this would mean Germany spending a bit more and paying themselves a bit more, which would have a positive spillover effect on all countries in the EU and would certainly stabilise the volatile political situation across the Union.

This month marks the fourth anniversary of the so-called game-changer deal on bank debt. It might be worth recalling a few things that were said at the time. The Taoiseach told us:

To those the naysayers who say you should be beating the Lambeg drum up and down the streets of Europe, there is another way of getting results and that's what interests me. I'm a hard grafter and, as some of them found out, they shouldn't tangle with me too often.

Indeed, the Minister for Finance told the Financial Times:

Our negotiating position up to now was to put arrangements in place to lessen the burden of bank debts, but it would still remain on the sovereign balance sheet. This agreement takes this further in terms of policy and the intention now is to separate certain bank debt completely from the sovereign balance sheet.

It is not acceptable that the Government has all but given up on securing the implementation of the June 2012 EU summit agreement.

That summit agreement was interpreted by the Government as a game-changer which would deliver a bank-debt deal for Ireland. No such deal has been secured in the intervening period.

The early repayment of the IMF loans and changes to the terms of the EFSF and EFSM loans was fully supported by Fianna Fáil but it is entirely separate to, and certainly not a substitute for, a deal on legacy bank debt. Having failed to deliver a deal on bank debt, the Government switched to suggesting the sale of AIB shares as a better alternative. This is completely contrary to what the Government has been saying all along, when a bank debt deal was the main objective.

As I have said before, if the European Heads of State are to be true to their word, they would facilitate a retrospective recapitalisation of the banks. It would be an acknowledgement that Ireland has not just a practical case for relief on the bank debt, but also a moral case, as the Taoiseach has acknowledged, that the European position was imposed on Ireland.

A final point I would make relates to the long-term bonds associated with the IBRC debt now held by the Central Bank. At present, the interest payments on these bonds end up coming back to the Exchequer so the arrangement is effectively costless. The Central Bank dividend of €1.7 billion to the State is now hugely significant to the public finances and is largely driven by that transaction. The pace at which the bonds being held by the Central Bank as a result of the promissory note deal are being sold is far greater than was originally agreed. This means that instead of the annual interest payment on these bonds coming back to the State via the Central Bank surplus, they are being paid to a third party. I believe a political case must be put to the ECB for considerably slowing the rate of sale, with the aim of the bonds being held to maturity. This has the potential for improving the State finances in the years ahead.

We look forward to the remainder of the debate on this Bill and to Committee Stage, and I reiterate Fianna Fáil's support for the passage of this legislation through the Oireachtas as quickly as possible.

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