Eoghan Murphy (Dublin Bay South, Fine Gael) | Oireachtas source

To reassure the Deputy, "discreate" may, in fact, be a word. At least, that is what Google tells me and I believe it. Therefore, we will go with it.

I thank Deputies for their kind words since we began this debate two weeks ago about my recent appointment as Minister of State. I also thank them for their constructive engagement in the debate on the Bill. I look forward to more detailed consideration of its provisions on Committee Stage. As the House will appreciate, the Bill is mainly technical in nature and has been designed principally to facilitate implementation of the EU banking union agenda, but it is important as it allows Ireland to fulfil its banking union obligations.

At this stage, progress in the creation of a European banking union is advanced. The European Central Bank, ECB, assumed its supervisory role in November 2014 and is working closely with national authorities in ensuring banks comply with EU banking regulations. This was an important first step on the road towards a banking union as centralised supervision should ensure a high level of independence and objectivity and will help to rebuild trust and confidence in the European banking sector. The next step in banking union is to ensure that if a bank gets into trouble, there will be appropriate tools and powers to manage the failure in an orderly manner. The Single Resolution Mechanism, SRM, was established for this purpose and should ensure an effective European response where a bank finds itself in serious difficulties. In order for the Single Resolution Mechanism to be credible, however, it was agreed by Ministers that a system of bridge financing though national credit lines needed to be put in place. This is to avoid a situation where the Single Resolution Board may find itself, particularly in the early years after the bail-in process has been completed, in a position where there are still losses to be absorbed. It is important to note that this agreement will only be in place during the transitional phase to 2024, while the Single Resolution Fund is built up. The consequence of not signing the loan agreement with the Single Resolution Board is that, should an Irish bank get into financial trouble, the funding available to the Single Resolution Fund will be limited to the small amount in the Irish national compartment and the mutualised elements of the other national compartments and any borrowing in which the Single Resolution Board can engage. However, if this should prove insufficient, there will be no fall-back source of financing from the Single Resolution Board as the national credit line will not be in place.

It is important to point out that the banks are in general good health. Therefore, the likelihood of this loan facility agreement ever being called upon is minimal. However, the provision of this national backstop to the Single Resolution Board is key from a confidence perspective as it provides another indication to the market that the banking union member states are serious about ensuring stability in the banking sector.

Before responding to specific issues raised by Deputies in the course of the Second Stage debate, I would like to say a few words about the recent UK referendum result on EU membership. Officials in the Department of Finance had been actively preparing for the outcome of the referendum over a considerable period by developing the Government's contingency framework. A summary of the key actions was published last Friday. As part of the planning process, the Department of Finance has been liaising closely with the Central Bank and the National Treasury Management Agency, both of which had been preparing for this outcome and closely monitoring developments. This close engagement will continue. The Minister, Deputy Michael Noonan, spoke to the Governor of the Central Bank on Friday morning and was advised that the Central Bank was confident that the appropriate contingency measures were in place to address any immediate issue of financial stability that might arise. As part of the euro system and the Single Supervisory Mechanism, the Central Bank is closely monitoring the market impact and the banking sector and will continue to liaise closely with the Department of Finance. The Minister also spoke on Friday morning to the chief executive of the National Treasury Management Agency who confirmed that the agency had prepared for this eventuality, that it was well funded for this year and that its debt dynamics were improving.

In response to the main issues raised in the debate, I would like to make the following comments. Deputies Michael McGrath, Seán Haughey, Frank O’Rourke, Pearse Doherty and Paul Murphy raised the issue of the retrospective use of the direct recapitalisation instrument. In current circumstances, it does not appear likely that there would be any benefit for the State in making an application for retrospective use of the ESM's direct recapitalisation instrument in regard to our bank shareholdings. The terms and conditions attaching to the use of the direct recapitalisation instrument are extremely onerous as the instrument is designed to be used almost as a last resort, after the creditor waterfall has been applied and other options are exhausted for the recapitalisation of a bank. Any application to use the direct recapitalisation instrument would need unanimous agreement from the other 18 ESM governors. Achieving such an outcome for a deal which valued our investments at a level above what we might achieve in the market in the current circumstances is unlikely, particularly given the strength of our economic recovery since 2012 and taking account of other concessions won by Ireland in recent years.

Deputies Michael McGrath, Pearse Doherty and Joan Burton mentioned the capital levels of the Irish banks. I would like to offer some clarity on the issue. The minimum capital level required by international standards is 8%, while the SSM has mandated a level of capital specific to each bank. This SSM capital requirement is a mandated CET1 ratio - a common equity tier 1 ratio - which is a measure of a bank's core equity capital compared with its total risk-weighted assets. While it is being introduced on a transitional basis, each of the Irish banks already holds a surplus to the final CET1 ratio required, as reported in or with their 2015 annual reports. The Irish banks have substantially increased their capital positions in the past few years, as have most of their European peers.

Deputy Paul Murphy remarked that the Single Resolution Fund might be insufficient, at €55 billion. At the time of negotiation of the SRM regulation, there was considerable discussion on this issue. However, the general view that emerged was that many of the losses of a bank should be covered by a bail-in of shareholders and creditors, in line with the general philosophy underpinning the Single Resolution Mechanism regulation and the bank recovery and resolution directive. In this regard, a contribution to loss absorption and recapitalisation equal to an amount of not less than 8% of the total liabilities, including own funds of the institution under resolution, measured at the time of the resolution action, must be used before the Single Resolution Fund can contribute. This is a significant contribution to loss absorption and should in many instances mean that the use of the fund will not be needed. In this context, the view of most member states was that a fund of €55 billion struck an appropriate balance between the need to establish a credible and effective fund while, at the same time, not overburdening the banking sector from a contribution perspective.

Deputy Joan Burton also raised the issue of new lending rules and referred to the change to the loan-to-value ratio, which may impact on small builders who can no longer roll equity from one development into a loan for another. It is important to note that the Minister for Finance has no role in the lending policies of Irish banks which are solely the responsibility of the board and management of each institution. While I am not aware of specific regulations in this regard, I understand that, based on this experience, certain banks have chosen to implement lending policies that do not permit unrealised profit or equity from one development to be introduced or rolled into a new development proposal in lieu of appropriate equity. In line with each bank’s lending policies and risk appetite, lending to developers is now largely based on cash flows, repayment capacity and appropriate loan-to-value ratios.

Deputies Pearse Doherty and Paul Murphy raised a number of technical issues around sections 2 and 3 of the Bill, as well as Article 24 of the loan facility agreement. These issues can be discussed in further detail with the Deputies on Committee Stage.

I hope there will be an opportunity to discuss the other matters raised by Deputies as the Bill continues its progress through the House. I thank Deputies for their contributions and assure them that the Minister for Finance will give careful consideration to all of the issues raised. I commend the Bill to the House.

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