Friday, 17 October 2008
Approval of Credit Institutions (Financial Support) Scheme 2008: Motion
On a point of order, I refer to documents laid before the House on the Order Paper for today. They concern three members of the Green Party, particularly its former general secretary, who is being paid a salary of €173,217 as a special adviser to the Minister for the Environment, Heritage and Local Government, Deputy John Gormley.
That Dáil Éireann approves the terms of the draft scheme entitled Credit Institutions (Financial Support) Scheme 2008, a copy of which draft scheme was laid before Dáil Éireann on 15 October 2008.
This draft scheme is being presented to the House under Section 6(5) of the Credit Institutions (Financial Support) Act 2008. The legislation was enacted on 2 October 2008 following debate in this House and the Seanad between 30 September 2008 and 2 October 2008. On the basis of the amendment made in the Bill during its passage through the Oireachtas, the draft scheme does not come into effect until it has been approved by both Houses.
I appreciate the co-operation and support Deputies extended to me and the Government during that week in respect of the urgent debate on the Bill, which provides a legislative basis for the provision of the guarantee issued by the Government on the morning of 30 September. As the House will be aware this guarantee, eligibility for which was subsequently extended by the Government on 9 October to subsidiaries with a significant retail customer "main street" presence in Ireland's banking market, has played a crucial role in maintaining financial stability in Ireland and confidence in our financial institutions over recent weeks during a period of unprecedented turbulence and uncertainty in the international financial system.
It is important for me to be clear to the House on what legal obligations are imposed on the State by virtue of the scheme. The State is unconditionally and irrevocably guaranteeing the covered liabilities of the participating institutions until 29 September 2010. The Minister will pay forthwith any valid claim on the guarantee. Should an institution be removed from the scheme, all of its fixed-term covered liabilities outstanding at that time will continue to have the full benefit of the guarantee. For all other covered liabilities, such as deposits, there will be notice of at least 90 days before the removal of an institution from the scheme.
This support, granted in the strongest and most explicit legal terms, is being provided in the public interest to maintain the stability of our financial system and hence to protect the real economy from the consequences of the severe financial disruption that would otherwise arise. In accordance with the principles of the legislation, the scheme is designed to safeguard the interest of taxpayers. In specific terms the guarantee to covered institutions is being made available at a significant charge to the institutions that avail of it. It is subject to terms and conditions under a legal contract that will engender behaviour that will progressively reduce the risk of the guarantee ever being called upon while supporting these institutions in undertaking the change required to adjust to the new commercial and regulatory realities of international finance. The terms allow the State to reclaim from a covered institution any payments under a covered institution's guarantee
It is currently estimated that the State will be remunerated by the covered institutions for the guarantee by an amount of at least €500 million per year for each of the two years of the guarantee. The scheme being considered by the House is an integral element to the Government's approach to the guarantee. It serves two primary functions: to mitigate the risk to the Exchequer from having provided the guarantee by placing significant contractual responsibilities and obligations on the covered institutions; and to steer the Irish banking system through the current period of turmoil to make certain that when it emerges from the guarantee regime in two years, the system will have both the purpose and capacity to successfully meet the needs of the real economy and the community at large.
The guarantee of the designated liabilities to depositors and creditors of and lenders to the relevant covered institutions has as its central objective the removal of any uncertainty on the part of counterparties and customers of the covered institutions. In particular it is crucial to give absolute comfort to the investors in debt securities of Irish banks that their debts are guaranteed in full by the State during the period of the scheme and that depositors know that they have the full protection of the State.
The stringent and demanding conditions the covered institutions will in turn be subject to under the scheme are sharply focused on ensuring that there is no abuse of the guarantee, that balance sheet growth is measured and in accordance with prudent banking practice and that risk is properly measured and managed. This approach will strongly complement the heightened and intensive scrutiny of the covered institutions that will be undertaken by the Financial Regulator using its statutory regulatory powers.
The Financial Regulator has advised the Minister that, in light of the severe difficulties faced by credit institutions arising from the crisis of confidence in the global credit market, it will continue to intensify its on-site and off-site supervision of credit institutions. The Financial Regulator will focus on liquidity requirements, capital adequacy, risk management, balance sheet structure and corporate governance. This may involve setting additional regulatory ratios as appropriate to reduce the risk in the balance sheet, reflecting the current domestic and global conditions.
In recent times, confidence can be said to be more precious than gold on international markets and on occasion just as difficult to find. This scheme will build over the next two years from the current circumstances that gave rise to the need for this safety net provided by the State to the entire domestic banking system. The goal at the end of the two-year guarantee period laid down in the legislation is a banking system that is fit for purpose in the transformed financial environment in which it will find itself operating in the coming decades.
As I have stressed repeatedly over recent weeks, the financial sector is undoubtedly a key element of our national economic infrastructure. Finance is the lifeblood of business, economic and household activity on a day to day basis. It was for this reason the Government took prompt and decisive action in providing the guarantee at the end of last month.
The essential step taken by the Government on 30 September in announcing that the State stood behind all deposits and extensive other liabilities of the institutions concerned has transformed the nature of the relationship between the banking sector and the citizens and taxpayers. This scheme is intended to provide a detailed framework for the positive and constructive changes that must flow from this to restore and uphold for the future the traditional banking values of prudence, responsibility, and controlled and managed risk-taking leading to long-term sustainability.
Subsequent events, particularly those close to home and that have recently occurred right across the European Union, have demonstrated that the significant challenges we currently face to secure the long-term viability of the banking sector are as common to the EU as they are to the developed world as a whole. This is evident, for example, from the declaration issued following the unique euro area meeting last week where, for the first time, the Heads of State and Government of the euro countries gathered. Yesterday, the European Council affirmed that it is determined to take co-ordinated and thorough action to restore the smooth running of the financial system, thus ensuring the normal and effective financing of the economy and a return to the path towards growth and employment.
Work must now begin on forging a new model to govern the conduct and behaviour of the financial sector. Ireland will play its part internationally and particularly at EU level in seeking to ensure that the re-design of the financial system and in particular of financial regulation is consistent with the objectives highlighted in the scheme.
As I have emphasised on several occasions, the over-arching objective of the original Government announcement, the legislation that followed it and the scheme that now arises from it is to remedy the serious disturbance that might have otherwise unfolded for the economy. It is about taking whatever steps are necessary to ensure we have a banking system that as a whole works effectively, efficiently and competitively in facilitating all the day to day ordinary economic transactions of commercial, business, family and social life.
The Government's guarantee has already helped ensure that credit institutions in Ireland have access to the normal liquidity and funding they require to fund their operations. The Government, on behalf of the community at large, has therefore performed a major service for the banking community. The onus is now on the boards and senior executives of the banks to meet the legitimate expectation that now exists that they will see as their first priority the goal of ensuring the flow of finance is channelled appropriately to support and underpin sustainable economic activities on the necessary prudent, responsible basis that is clearly in the interest of both the bank, the borrower and the wider economy.
The reporting and information requirements of the scheme are powerful. They enable intensive scrutiny and the closest possible oversight of the covered institutions' activities. The rights available to the Minister and the Financial Regulator under the scheme and the wide range of controls and requirements that can be imposed on the covered institutions under it have been put in place to protect the public interest in a manner consistent with helping to secure the future of the banking system in view of the critical role of finance in supporting the real economy and risk-taking and major household financial decisions. The chief executive and chairman of each covered institution will be required on a quarterly basis, to certify compliance with the scheme.
It is not the Government's purpose in this scheme for the State to directly interfere with or step into the commercial decision making role and responsibilities of the boards and senior executives of the banks. Rather, we are putting in place a structure that ensures the assessment and commercial decision making of these institutions is at all times shaped by the broader public policy objectives underlying the scheme. In the scheme an overlay of detailed rules, strengthened corporate governance and reporting rules is being superimposed on what will be an intensified regulatory engagement.
Our financial services legislation provides the regulator with extensive regulatory powers to supervise the conduct of credit institutions' affairs. Our company law provides a strict legal framework governing the performance of the fiduciary responsibilities of boards and executives. Clearly, this scheme had to be drawn up in the context of that fiduciary obligation, which is a duty of trust which a director has in regard to his or her company. The Government, therefore, is fully satisfied that, alongside the powers provided directly under the scheme, the relevant public bodies and in particular the Financial Regulator have the authority and legal power to take whatever steps are necessary to continue to look after the interests of all depositors and customers of these institutions as well as that of the State and the taxpayer which now arises on account of the guarantee.
The House will recall that during the passage of the Bill through the Dáil, several Deputies made the case that the Oireachtas should be given the opportunity to consider through a positive resolution the detailed provisions of the scheme applying to those institutions benefiting from the guarantee. I listened carefully to those views and, as I signalled in the Dáil, the Bill was amended in the Seanad so that section 6(5) requires a draft scheme to be approved by both Houses of the Oireachtas.
I hope Deputies will acknowledge that the scheme has been formulated to reflect many of the issues that were highlighted during the debate and in the amendments put down on the legislation in both Houses. In light of the significance of this issue to all Deputies, it has been a priority for me in developing the scheme to seek to reflect as far as possible in its design the many positive and constructive suggestions made by Deputies during the course of the debate on the Bill. I trust that the House will accept my assurance that I have sought at all times to strike an appropriate balance between the various and sometimes competing objectives of the scheme to seek to deliver the best possible outcome for the country at large both now and for the longer term.
I am pleased to say that the scheme fully conforms to our European Union responsibilities in regard to State aid and competition law and has been formally approved by the European Commission on that basis. As a small country which has benefited so significantly from the European Union Single Market, it is essential that any steps we take conform fully to our obligations in this respect. It will be an important task for us — working with our EU partners — to ensure that the integrity of the Single Market, particularly in the area of financial services, continues to be supported and maintained notwithstanding the diversity of national responses within the framework of the common principles that recently has been agreed.
Since the original announcement by the Government on 30 September, many other European Governments have taken initiatives in this area. These initiatives have reflected a variety of approaches and technique, referred to by the Taoiseach as a toolbox of techniques, which have been agreed upon at Heads of State level in the European Union. Deputies will appreciate that many other states are now on a learning curve that we have already travelled. I am very pleased the Commission was in a position to approve our scheme, and I thank it for the speed and expedition with which it did so. Naturally, our discussions at European Central Bank level continue and we will ensure we have an appropriate dialogue with the bank to secure our interests in that regard in the future.
I want to describe the main provisions of the scheme to the House, first with regard to the guarantee. For an individual credit institution to avail of the guarantee, I must make an order under section 6(1) of the 2008 Act specifying the credit institutions in the scheme. Following the making of this order, the credit institution must execute a guarantee acceptance deed, after which it will have the benefit of the guarantee of the Minister of Finance. By entering into a guarantee acceptance deed, the institution agrees to pay a quarterly charge and indemnify the Minister for Finance for any payments the Minister makes under the scheme. In addition, there are to be specific restrictions on subordinated debt issuance by a covered institution. There will be a quarterly publication of covered liabilities in aggregate under the scheme in Iris Oifigiúil. In the case of subsidiaries participating in the scheme, the Minister may impose specific obligations under the scheme to appropriately ring-fence the activities of a covered institution to minimise the covered institution's financial exposure to its parent credit institution.
The covered institution must pay a charge for its guarantee, which will be calculated and paid quarterly. The charge is risk-adjusted and is to be set at a level based on the long-term cost to the Exchequer of providing the guarantee. The risk to the Exchequer is reflected by the collection of this amount over the two-year time frame. Moreover, the scheme is designed to be self-financing, that is, any financial support under the relevant legislation is intended to be recouped from the institution concerned.
In specific terms, the charge is to be based on Government funding costs and will be set at an appropriate level, given the current financial environment. Current estimates indicate that over the two years of the scheme approximately €1 billion will be yielded from the charge to banks for the guarantee. If the cost to the Exchequer were to exceed €1 billion the charge to the covered institutions will be adjusted accordingly. I am satisfied that the Central Bank, the Financial Regulator and the covered institutions, acting in conjunction with the Government, will ensure that no claims on the State will arise.
There will be full scrutiny and careful observation of the operation of the scheme. This will be carried out by the Financial Regulator in the first instance on my behalf. This will be done by way of quarterly compliance reports received via the Financial Regulator, a biannual review of the scheme and the guarantee charge methodology, monitoring of the banking institutions who use the scheme and reporting on the covered institutions' compliance with certain codes, including those relating to consumer protection and corporate social responsibility. There will be consultation between covered institutions and the Financial Regulator on the development of a code of practice for risk management for the covered institutions.
The balance of executive and non-executive board members of a covered institution will be examined and the covered institution will be required to appoint one or two non-executive directors from a panel nominated by me. Under the scheme I also can direct the attendance of observers chosen by me at key board-level committees such as the credit, remuneration, audit and risk committees. This will help ensure effective oversight and supervision of the objectives of the scheme.
In addition, the scheme provides for the establishment of a covered institutions remuneration oversight committee. This three-person committee will oversee all remuneration plans for senior executives of the covered institutions and will report to me on same within three months of an institution availing of the guarantee. As I have made clear, where remuneration proposals are not in keeping with objectives of the scheme, they will be changed.
Senior executives' salary, bonuses, termination payments, pension contributions and other benefits will be controlled and linked to adjustments in guarantee charges and measurable actions to address excessive risk taking and to improve the long-term sustainability of the covered institution.
The Financial Regulator, in consultation with the Minister, will impose conditions regulating the commercial conduct of a covered institution's business to minimise any potential competitive distortion that may arise and to avoid any abuse of the guarantee or any use in a manner irreconcilable with the purpose of the guarantee. This will require covered institutions to appropriately manage their balance sheet in a manner consistent with the purposes of the Act and put in place improved structures to ensure long-term stability of funding. Covered institutions can also be required to restructure their executive management responsibilities and strengthen management capacity and corporate governance, as well as improving liquidity, solvency and capital ratios in circumstances where this is necessary. There also is an onus on the covered institutions to take such measures to minimise any risk of recourse to the guarantee and, if necessary, the introduction and application of a restructuring plan.
There will be close and intensive engagement by the regulator with the covered institutions, whereby conditions are imposed by the regulator on a covered institution's capital, liquidity and solvency ratios, its balance sheet items and its permitted growth. Dividend policy will be part and parcel of this. I expect the institutions to ensure that the costs of the guarantee are not passed on to the customers of covered institutions in an unwarranted manner.
The provision of the guarantee in the first instance and the access to liquidity that it has provided for our banks and building societies is an important benefit in ensuring that finance is available and affordable in the economy.
As Minister for Finance, I will be entitled under the scheme to recoup such amounts from the covered institution and may direct the covered institution concerning its business and corporate structure. The covered institution must, in such an event, draw up a restructuring plan within six months of such a payment being made.
In addressing issues or questions that have been raised in respect of the scheme since it was published, current estimates indicate that approximately €1 billion will be yielded from the charge to banks for the guarantee over the two-year period.
As I emphasised, while we must cover the taxpayer costs, we do not wish to impose a charge at a prohibitive level that will undermine the long-term sustainability and commercial viability of our financial institutions. A difficult and delicate balance must be struck in this instance between ensuring that the Exchequer is reimbursed for the cost of the scheme up-front and the financial sector is safeguarded at a time of extraordinary financial upheaval. We must support investor and debtor confidence in the overall Irish banking system.
We have put in place a wide guarantee for the banking system in Ireland. The guarantee has to date been successful in stabilising the position of the banking system in Ireland during an unprecedented period in international financial markets. It also has been approved as being in compliance with the European Commission's requirements on State aid. Other EU member states and other countries around the world have adopted similar guarantees and schemes. Most other countries have incurred far greater expenditure on behalf of the taxpayer in such schemes.
Last Sunday's euro group plan sets out a toolbox of measures of which individual member states may avail, according to their national circumstances, to buttress their financial sectors. This position was endorsed by the European Council, which noted the existence of national measures approved by the Commission.
Ireland already had taken effective and decisive action with the announcement of the guarantee scheme. The Irish legislation and this scheme are aligned firmly with the main themes of the euro group plan.
In return for the guarantee, I expect each covered institution to undertake a fundamental review of its corporate governance and to take appropriate steps to strengthen their boards and management, where necessary. I also expect them to adopt a positive attitude to customer needs and to exercise appropriate restraint with regard to customers, as well as in respect of rates paid on deposits. In addition, I expect them to take all necessary steps to ensure their capital base meets regulatory and Central Bank requirements.
As far as the issue of parliamentary oversight is required, the scheme provides for reporting by the Minister on its operation to the Oireachtas Joint Committee on Finance and the Public Service every six months.
As clearly demonstrated in recent weeks, the pace of these events is rapid and new developments often are almost entirely unexpected or unpredictable. It is important to make clear to this House that the Government will continue to act swiftly and decisively and will take whatever steps it believes on the expert advice of the Governor and Financial Regulator to safeguard the maintenance of financial stability in the wider public interest. The Government believes this scheme can play a central role in the next two years in achieving the demanding objectives that have been set for it and I commend it to the House on that basis.
Fine Gael has supported the mechanism of a guarantee on deposits. However, as we stated from the outset, we also seek maximum protection of the taxpayer in the implementation of this scheme. In the development of the scheme, the Minister has met many of Fine Gael's concerns in respect of bringing in restrictions on dividends, remuneration and having public directors on boards. I welcome much that is contained in this scheme. However, the Minister must recognise that he is asking the House to make an act of faith in his capacity as Minister, as well as that of the regulators, to implement these schemes effectively. In the course of today's discussions and question and answer session, Members will seek further details in respect of how the Minister intends to use the power he is being given to set standards, as well as on the standards he expects to see delivered. While it is all very well to have the enabling powers, the House will want assurances as to how he will use them. Although Members are providing the Minister with a big arsenal, they wish to see the rules of engagement. These matters are important in protecting the taxpayer.
Ireland was an early mover in bringing forward this guarantee scheme and undoubtedly set a standard of approach to dealing with the liquidity problem. However, Members also must be aware that matters have moved on considerably since that was done. Other countries are setting higher reserve standards. They have increased the capital reserve ratios that are expected of banks to 9% or 10%, which are much higher ratios than the Irish banks have at present. Members also must be aware that other countries have moved to examine the mechanisms through which banks in such countries will meet these higher capital requirements and how they will approach the issue of recapitalising their banks. The danger for Ireland is whether we still are up to the pace as the game moves on.
I recognise the assurances that have been given by the Minister and the regulator that our banks are adequately capitalised. Those assurances have been repeated time and again. Many in the House will want to ask questions about the basis on which those assurances have been given, the manner in which the value of certain elements of the loan books have been assessed and the auditing done by the regulator and the Minister on behalf of the taxpayer as to the quality of the loan book. Members will wish to ask questions in this respect today and I seek assurances regarding the adequacy of the capitalisation of Irish banks, particularly given the new regime that is becoming a reality across Europe, whereby higher capital requirements are needed.
I note the regulator has stated the banks are adequately capitalised in respect of the current requirements. However, the Minister has not dealt with the issue as to whether the current requirements have changed or whether Irish institutions are up with that pace. Undoubtedly, when one examines the markets, there still appears to be a view among investors that Irish banks have difficulties. The Minister must be alert to the fact that while this Act and this scheme may deal adequately with the first phase of this crisis, many people are sceptical about the assurances coming from the regulator and consider that the game is moving forward and that Ireland may not be moving with it.
Members wish to hear the Minister's views on the development, in the coming weeks and months, of his approach to using the great powers they have given to him. While he has dealt solely with the scheme today, all Members are sufficiently realistic to be aware the environment is changing rapidly and seek the Minister's views on how we will continue to cope in such an environment. We have not heard such a view from the Minister and there is an expectation that at some stage we will. The House will be forgiven for some scepticism about assurances delivered by central banks and regulators who have been caught breathless and late in respect of keeping up with the credit environment. Few hold the view expressed by the Financial Regulator that poor lending in the property sector is not a problem for our banking system and this view created a doubt. There needs to be some hard, blunt discussion about our capability to manage these powers and how we will utilise them effectively. These are powerful tools and we must ensure that they are properly directed. The House wishes to hear more from the Minister for Finance on how he intends to ensure we have the capacity and capability to use these powers effectively in an entirely transformed regime.
I recognise that the markets create an expectation and that where events occur in other countries the market can take a view that there is something slightly amiss in even very strong banks which are adequately capitalised. I recognise these are difficult waters the Minister for Finance is treading. However, we must hear more from him today on how he intends to build the capability to deal with these new powers and also how he plans to deal with the developing situation that we see in other countries.
There are many positive elements in the scheme. I welcome the decision to have an observer on the risk assessment committees and other important committees within the banks. I welcome the powers on dividends, as suppressing dividends is one very practical measure open to the banks to rebuild their capital base, which is important. I also welcome the provision for controls on bonuses, remuneration packages and some of the toxic approach to risk-taking that was endemic in the banking system. I welcome the provision for a public interest director and the associated new powers in that respect. However, the whole issue is how the Minister for Finance uses these powers and what the guiding principles will be for dividend policy, remuneration packages, applying these powers and what he expects from the observers on the risk assessment committees and other boards and how they report back to the Minister for Finance or the Financial Regulator. We have not heard from the Minister on these matters. We need to hear more about how the observers will play a part in these committees and protect the taxpayers' interest.
I presume the Minister for Finance is taking powers to ban certain practices relating to trading in derivatives and so on. We need to hear if the Minister has explicit plans. Are there guidelines for activities that will simply not be permitted? We have not heard from the Minister on these issues. The Minister needs to furnish the room as well as providing the raw architecture for the building and what it will look like.
I raise specifically the role of the public interest director. We hope this position will have an important role in protecting the taxpayer. However I am sceptical, because if there is no mandate for this position, and I see no such mandate in the scheme, and if we are told the post will still have primary responsibility to the shareholder, how then can we have confidence that this person will represent the taxpayers' interest and not just the interest of the shareholder? There is clearly a conflict here that the Minister has not reconciled in law. Will company law need to be changed so that the concept and the independent role of a public interest director is recognised in law? The Minister's approach does not provide for this and it undermines the confidence we can have in the role of the public interest director. We need to know how the public interest director will be accountable to the public. Will he or she appear before the Financial Regulator, the Minister for Finance or the Oireachtas to report on his or her role in protecting the public interest?
While the scheme, rightly, has much emphasis on getting a correct prudential control of lending, provision to ensure the flow of credit to ordinary business and families is missing. Other countries have set about issuing guidelines to the banks on how to guarantee that the credit flow necessary to businesses and families will continue. Clearly, many business are not getting the credit flow they need. The Minister for Finance needs to be more forthcoming about how he will use the powers in the scheme, if he intends to use them at all, to ensure that ordinary families and businesses get access to credit. This is the reason for the scheme. It is to ensure ordinary families and business are not adversely affected by the banking crisis. We must ensure that in responding to the crisis the Minister for Finance has some categorical assurances that ordinary families and business will be catered for. We must see such assurances. What is to prevent a bank deciding to invest in property in Poland when we require something else? We must know what principles the Minister for Finance will apply. Will there be explicit bans on certain types of lending and so on?
The Minister and the Taoiseach have repeatedly said the banks will pay for the guarantee with charges. We were told at the outset that the banks would be subject to a commercial charge for the credit guarantee which is a form of insurance policy provided by the State. I do not believe the method of calculation used by the Minister for Finance fulfils the expectation. The Minister says he will charge the banks the extra cost to the taxpayer of public debt as a result of the guarantee. This is not what an arms length provider of insurance would charge to a bank for such a service. This is simply a cost-based calculation. There is scepticism about how the cost was calculated.
I understand the Minister has taken a premium of 15 to 30 basis points, applied this to the public debt, calculated an amount over ten years, and stated that it must be recovered in two years. If this is the mechanism, it seems there will be considerable room for argument afterwards, perhaps even legal argument in the courts. For example, does all Government debt turn over in a ten-year period? Is the cost on top of public debt, which is the method of calculation according to the Minister, correct at €500 million? The sum of €500 million has no standing in the Bill. Most people expected that the method of calculation would take account of the liabilities guaranteed, the cost of protecting them, the cost of insurance to those liabilities, and calculate the charge on that basis. This would be robust basis for calculation and would not be open to legal challenge. However, the route down which the Minister is going may be open to challenge and legal argument about whether €500 million is the actual cost in applying these principles. I am surprised about the basis on which the charge has been calculated——
——at present, but this is all we can see. This is the only calculation that will have the authority of the House, apart from another scheme. I am sure the Minister will answer the query later. There is a question mark over this matter and we must hear if this is only to be a temporary approach, and if there is to be another approach we need to hear what that will be. As a temporary measure perhaps it satisfies the Minister for Finance, but as a permanent measure it does not satisfy me. We need to hear more on this matter.
I apologise. I did not realise I was coming to the end of my slot.
I understand each bank will have its own scheme. Will a different approach be taken in each case? Will a tiered scheme be introduced to differentiate between banks that have strong capitalisation and banks that do not? We do not want the entire banking system to be frozen. If some banks are strongly capitalised, they will be prevented from developing. I would like to know what approach will be taken.
The scheme seems to give the Minister the power to deal with banks that are not based in Ireland. I refer to banks other than the six that were originally mentioned. In his opening statement, the Minister did not explain how he intends to ring-fence assets. He has said previously, on many occasions, that localised assets will be identified. He said he would reassure taxpayers, in giving guarantees in respect of certain liabilities, that the localised assets which were available would be matched in some way. In other words, we were told there would be a buffer between those assets and the guarantee. That has not been explained to my satisfaction.
It does not seem possible for banks to move out of the scheme within the two-year time frame. I am surprised that we are not providing for banks to be able to move out of the scheme if they can prove they are adequately capitalised and have adequate access to liquidity. It would be appropriate to enable the State to wind down its role, in exposing the taxpayer to these liabilities, in an orderly manner. Such an approach does not seem to be envisaged in the scheme. It seems that all the banks will have to participate in the scheme for two years, regardless of whether they overcome their difficulties, do all the worthy things that are set out in the scheme, strengthen their balance sheets, strengthen their lending powers and move on. It would have been prudent for the State, in offering this guarantee, to provide that banks which no longer need to avail of it — I will not refer to it as a life support system — are not still participating in it in August 2010, a month before it is due to come to a conclusion. We should allow banks to withdraw from it in an orderly manner when they no longer need it.
The Minister needs to elaborate on his plans for the long-term recovery of the banking system, whether by means of a bank levy or some other approach. No such plans are outlined in the scheme. It seems that only those banks participating in the scheme will be subject to the levy. In the longer term, the banks within the scheme that have always been relatively strong may be at a disadvantage. They will be subject to the bank levy, whereas financial institutions that remain outside the scheme will not have to carry the levy. We need to hear the Minister's thinking in that regard.
Why are subordinated debt holders covered by the guarantee scheme? I refer to people who, with their eyes open, took on high degrees of risk. The Minister needs to give an assurance about the capability of the new regulatory structure that is to be put in place. He needs to explain the role of the Oireachtas in riding shotgun in that regard. While I am glad the Minister will have to report to an Oireachtas committee, it is important to bear in mind that the committee structure is not generally equipped to deal with the level of oversight that may be envisaged or required. The Oireachtas needs to be confident that this structure will allow it to oversee the new regime in an adequate manner.
I concur with everything Deputy Bruton said. Today is a landmark day for Ireland and the Dáil, as we try to put in place a scheme that will work. We need to protect the taxpayer, bring liquidity back into the economy, ensure that the recession is not prolonged and introduce proper controls to the operation of the banking sector. The scheme being introduced will give wide-ranging powers to the Minister, the Government, the Financial Regulator and the Governor of the Central Bank. How will those powers be used? Will they be used to good effect? Is this phase 1 or phase 2 of the scheme? Quite simply, there is a cancer at the heart of the banking system. The guarantee scheme is, in effect, a form of surgery on that cancer. Further treatment will be needed, however, in the form of recapitalisation. It is important to cleanse the banking sector of its inherent flaws, such as a lack of regulation. How does the Minister propose to deal with the recapitalisation of the banks?
Two issues arise in respect of the charge mentioned by Deputy Bruton. The charge appears to be based on the cost to the State rather than the cost to the banks. We propose that a charge of €1.5 billion be imposed on the banks in return for the guarantee. The charge we suggest, which is based on market rules, will be 0.5% on wholesale deposits and 0.25% on retail deposits. It is driven by the market. It will provide a return. The approach proposed by the Minister would do no better than break even.
The scheme provides that the levies imposed on the banks will comprise a fund. If there is any balance left in the fund after the moneys are spent, it is proposed to transfer it to the Exchequer. The fund should be at its full limit by the time this scheme comes to an end. The entire fund should not be used to help the banks. That would cost the taxpayer. The taxpayer should not suffer a financial liability in respect of this scheme. That is absolutely critical.
Section 36 of the scheme sets a maximum requirement for the amount of money the banks put into the economy. It does not set a minimum requirement. The scheme that has been established in England requires the banks to match their 2007 lending levels. No such comfort is being offered to business people in Ireland. The banks are not being required to provide liquidity to their business customers. The Minister, Deputy Brian Lenihan, needs to give some reassurance in that regard. Will he provide for a minimum requirement?
Section 32 of the scheme does not provide for an absolute compulsion on the banks to appoint a director. It states that they must take "all reasonable steps" to appoint a director. It does not say they "must" appoint a director. The Minister needs to use his power under the legislation we passed two weeks ago to ensure that the scheme requires directors to be appointed. It seems that no such requirement is provided for. The legislation may have to be changed. In the case of Aer Lingus, the Government's nominees to the board of directors were useless, in effect, as they answered to the shareholders rather than to the Government. It is critical that we ensure the directors are answerable in this instance. They need to operate on behalf of taxpayers as a watchdog. The scheme that has been set out has a weakness in this respect.
Section 23 of the scheme provides that the Minister shall come before an Oireachtas committee within six months of the scheme coming into operation. I suggest that it is critical that the Minister appears before the Joint Committee on Finance and the Public Service within a few weeks of the scheme getting up and running. We are talking about the future of the banking system, the future of business and the future of Ireland, Inc. We need to get this right. The Minister needs to explain how he proposes to proceed during phases 1 and 2 of the scheme.
Fine Gael has taken a leap of faith in this House by supporting the Government's decision to establish a guarantee scheme. The wide-ranging powers the Government has given itself must be used judiciously to protect taxpayers' money. The taxpayer cannot pay for this scheme. The banks must pay. The Government must consider the entire issue of recapitalisation. This is phase 1 of the scheme. We must move on to phase 2. The Financial Services Authority in the UK has made it clear that the banks need to come clean on their bad debts. When the Financial Regulator appeared before the Joint Committee on Economic Regulatory Affairs last week, he said that loans worth €39 billion have been given to developers. He said that €24 billion worth of those loans was underpinned by other assets, including property, while €15 billion was underpinned by the underlying assets. There is a problem in that. We need to take up the floorboards and investigate.
I welcome the fact that extra supervisors are being appointed by the Financial Regulator. They must be of a top calibre and must know their terms of reference. They must come back to us and this must work.
I am sure the Minister, as a student, had an opportunity to read the greatest novel about the American depression in the 1930s, namely, The Grapes of Wrath by John Steinbeck. I see that he is nodding, so maybe he remembers what John Steinbeck had to say in the novel about the poverty that came from the depression, and the failure of the bankers in the 1930s to stem their own greed, and of governments to cap their greed. "The bank is something more than men, I tell you. It's the monster. Men made it, but they can't control it." In Ireland, we passed on controlling the banks in any tough sense. Instead, under the direction of the former Minister for Finance, Charlie McCreevy, we slavishly copied the British Financial Services Authority line for line. Even though the Minister's former colleague, Michael McDowell, suggested that the regulation ought to be primarily from a consumer, depositor and an ordinary business point of view, and therefore should be in the Department of Enterprise, Trade and Employment, the Central Bank and the then Minister for Finance fought a successful Government battle to give all the powers to the Central Bank and the new office of Financial Regulator. They won that battle, and we are paying a terrible cost for slavishly following the British model of light regulation.
Right across the globe, the British model of regulation, which had its origin in the era of Thatcher, Reagan and the Washington consensus, is at the heart of most of the banking failures. Yet the Minister is asking us to write a blank cheque today, just as he did two weeks ago. The Labour Party wants a functioning banking system. Every business in the country needs a banking and credit system, but the Minister asked us to write a blank cheque for the banks and we said "No". We want to help. We want to sustain, reform and transform the system, but we do not want to write a blank cheque. The Minister's speech today asks us to take more on trust and to give him extraordinarily extensive powers, but we are not to ask him to tell us in detail what he is going to do. We continue to have a terrible difficulty with this because we feel we represent the ordinary small, medium or large businesses across the country for whom banking is the lifeblood of their cash flow, yet the Minister has not answered our questions.
Due to Government failures, the pensioners will suffer to the tune of €100 million. The Minister told us that his guarantee is calculated at €1 billion over ten years, which is €100 million per annum. That is the same figure. The pensioners will suffer due to Government mismanagement, but can the Minister be specific? We know the bank shareholders are suffering. We know that people who hold pension funds through bank investments are suffering. It is stunning to see how low their shares have fallen. What are the bankers suffering? Can the Minister tell us? How many of them will resign, retire, and go off on their yacht to the Cayman Islands? Will they go to the Great Blasket Island, sit out there and think about the state in which they have left the banks? What is the downside of this for the bankers? The Minister is not even talking tough and walking with a big stick. He seems to have rolled over.
The regulation carried out by the Financial Regulator is not regulation by a pitbull in lipstick, rather it is regulation by your friendly Labrador who wants to roll over and have his tummy patted. That seems to be the model. The Office of the Financial Regulator cost €57 million and I have no doubt that the individual who controls it is a person of the highest integrity, as is the individual who controls the Central Bank. However, do they deserve the vote of confidence that has just been given to them again? The Minister has not had a hard word to say about them. He is the Minister for Finance, so where is the big stick? The big stick was taken out on the poor pensioners, who got a belt from which they will be reeling for years. Where is the big stick with the bankers?
Has the scheme that was brought in two weeks ago worked? We know that it has helped the banks to get liquidity, but I raised the question of solvency. I asked the Minister for Finance about repairing the balance sheets of banks where there were impaired assets. We know from the financial media — thank goodness for them — that two of the six initial financial institutions to be covered by the scheme appear to have heavily impaired balance sheets, because they lent the most speculatively to the building industry. One of these was a bank, and one was a building society.
The Minister announced last night that the Financial Regulator would advertise in the newspapers today for more expert staff. I hope he is asking for pitbulls rather than Labradors. I do not know if that is the description in the advertisement, but that is what the Financial Regulator needs to do.
He said that they ought to come from as far away as possible from the cosy world of the golf clubs and yacht clubs on the east coast of Dublin and Leinster. They are all members of the same ten social institutions. They all meet each other, they go to each other's parties, they went to school together and they went to college together. I went to college with many of them, so I know them.
I went to college with some of them, but I came via a different route and I never lost the sense that as a politician I had a duty to do more than just be a cheerleader for them. We can welcome the fact that they do well, but by goodness we must watch the public interest in what they do.
One of the bankers has become everybody's favourite uncle by giving friendly quotes. Having been rescued by the Minister, Mr. Fitzpatrick suggested that we take the medical card off the old age pensioner, and the Government followed his suggestion.
On 6 July 2007, The Sunday Business Post carried an article which stated:
Anglo-Irish Bank chairman Seán FitzPatrick raised eyebrows with his diatribe against the "corporate McCarthyism" of what he saw as over-zealous regulation of businesses. . . . Having run the boardrooms of some of Ireland's most prominent public companies, Seán FitzPatrick knows the value of picking his battles.
It was the old age pensioners last week and he won that battle.
So when the chairman of Anglo-Irish Bank and Smurfit Kappa launched into a tirade against what he called, "corporate McCarthyism", he knew the sort of reaction he was likely to elicit. . . . FitzPatrick said that the tide of regulation had gone too far. He said the increasing burden of regulation and compliance was threatening the entrepreneurial zeal that made the Irish economy the envy of the world.
He sounds like John McCain before he became candidate to be President of the United States. What does the Minister's little package this morning say to him or will the Minister just pick up the phone and speak privately to him and tell him to turn off the motormouth?
I have a number of specific questions to put to the Minister. The heart of the protection for the Irish taxpayer in this scheme is the Financial Regulator. When the Financial Regulator came to the Joint Committee on Finance and the Public Service on several occasions, Deputy Bruton, Deputy O'Donnell and I were there. I asked him specifically about the treatment of issues like the rolled up interest and the valuation of lending, the valuation of property-based land lending in the banks' books, and he told me the same old story, that the fundamentals are sound.
I called down to the Central Bank offices to meet him and the Governor of the Central Bank. It is a lovely office with a lovely art collection on the top floor of the Central Bank building. I spent a lovely afternoon with them. I asked them about the equivalent of door-to-door sub prime-type lending in Ireland. We all looked out the window and they told me that the fundamentals are fine. I looked out at the lovely view from the window and I was given a nice sandwich——
I refer to the Minister's regulations allowing for any pain they might suffer. What is the actuarial basis for the calculation of the risk? There is no evidence that the Minister carried out such a calculation. The Minister's officials indicated it may have been done, but the scheme indicates that all those details are confidential.
Paragraph 44 of the scheme states: "A covered institution shall not pass on the costs of the guarantee to its customers in an unwarranted manner." That is a prohibition that is meaningless as phrased and fantastic as an ambition. If the Minister wants to take something from the banks, where is the equity interest that, when hopefully we have come through all this and we have gone over to the other side, we get a return when these banks return to strength and profitability? That is an aim we share with the Minister. Where is the beef for the taxpayer? Where is the actuarial valuation?
The payments are going into a designated account in the Central Bank. On the expiry of the scheme, this account is to be paid into the Exchequer, just in time for the next general election, although I would not think the Minister had considered this.
Although the scheme provides that any call on the State to honour the guarantee will be met by a payment out of this designated account, Department of Finance officials in their briefing to me made it clear that such an event would amount to an act of bankruptcy by one of the covered banks. In that event we would be in a very different situation. The account, which the Minister says will have a maximum amount of approximately €1 billion, would not meet the liabilities that would arise if the guarantee was ever needed. The Minister stated repeatedly in the debate that it would never cost the taxpayer a penny but there is a hole in his scheme. If some of the banks go under, the €1 billion will not be enough so we will be back to the taxpayer. There is nothing in this scheme to suggest that the Minister will absolutely clean out the balance sheets of the banks to ensure that their assets are appropriately valued.
I welcome the notion that PWC will be undertaking a forensic examination but I suggest we wait and see what that brings up. However, a couple of days ago, the Financial Regulator came before the Joint Committee on Economic Regulatory Affairs. My colleague, Deputy Sherlock, was at that meeting. When asked this question by Deputy Sherlock and by other members of the committee, the Financial Regulator said again that the assets of the banks are sound, and that was only one week ago. The Financial Regulator seems to have a primary view that there is no fundamental impairment of bank assets in the long run. I regard that as an extraordinary viewpoint and I say that as an accountant — the Minister for Defence, Deputy Willie O'Dea, who is sitting beside the Minister for Finance is also an accountant. Despite this extraordinary viewpoint, the Financial Regulator as the manager of the scheme is the person on whom the Minister will rely. What confidence can we have?
I do not have a difficulty with the proposal to appoint directors to the boards of the banks. However, I presume they will be drawn from the same golden circle of friends of the banks, such as retired Secretaries General of Departments. We need people who do not belong to any golden circle and perhaps some of whom come from abroad, who are tough, independent-minded and who will not be beholden to the banks in the future and were not so in the past and who will give an honest opinion. Now more than ever we need a kind of "Mr. Deeds Goes to Town", "Mr. Smith Goes to Washington" — these were films about the Great Depression era in America, as the Minister will know. We need a Mr. Deeds who will without fear or favour sort out what is valuable in the banks and what has lost value, such as the assets which represent intense, reckless, stupid, greedy speculation in land. The Minister does not seem to have said that to the banks.
Under the scheme the Minister is taking powers to himself. I expect we can discuss this in greater detail in the question and answer session later. I ask the Minister to say whether he is satisfied that this is constitutionally possible within the framework of the scheme.
I thank the Ceann Comhairle.
The issue as to whether there should be low regulation, no regulation or heavy regulation has always been regarded as a political matter in every political assembly. We must be very clear. Some phrases in the Minister's speech in some sense give the game away. One phrase is very interesting in which he refers to the "real economy". The real economy is very important. It is that for which we need capital and it is that for which we need job creation; it is to assist the traded economy, to promote experts, to achieve a balance of trade and ultimately a favourable balance of payments. However, the Minister does not say anything about the alternative economy, the economy other than the real economy; the phrase is his. The truth of the matter is that like a cancer through the international financial system, products that were not related to anything real, products based on virtual future possible yields that would in turn be translated into dividends to shareholders who, made insane for returns, gave bonuses to people to speculate and gamble.
Thus it was yesterday at the conference organised by Concern on world hunger day that Jeffrey Sachs could say that the bonuses paid in a single year on Wall Street exceeded the total budget for aid on the planet. The Minister has straight away made a distinction between the real economy and the speculative virtual instruments that were there internationally. One might say this is the lay-by in which those responsible for the Irish financial system have put their wagon as they seek to avoid responsibility. The public is asking what this guarantee scheme guarantees. Does it guarantee a return to more of the same? Is there a whit of admission in any of the people who took the decisions to be part of the international greed that they wish to change? There is none. One after another, they parade through the newspapers offering comments about what they suggest is some kind of national crisis that involves the patriotic humiliation, regardless of whether they participated in this greed. Apart from being lazy, this is stupid and will bring us little closer to a regulatory framework.
There are serious issues such as solvency, security, liquidity and capitalisation. What we discussed today was just part of that and we all want to be positive about this. However, we also all want to see some evidence somewhere of an admission that the phrase used by the Minister has some meaning. From what I heard this morning, the Minister said the model has changed. Where is the evidence that the model has changed? We are dealing with the same people. The Minister is not crucially changing their decision-making practices. There is no evidence that he is changing their attitude to capitalisation. He has no evidence that they are removing themselves from their addiction to virtual, bogus, speculative financial products and turning to what the Minister idealistically describes, and I agree with him, as the "real economy". The Minister is responsible for the real economy. After yesterday's changes, he will be paying for the unemployment. He will have to deliver what he said he would, this medicine everybody has to take, as the media likes to help him to explain.
I find an extraordinary arrogance in the Irish banking sector. There is an inability on the part of the Financial Regulator to admit he was wrong. There is an inability in the Central Bank to suggest it ever drew attention to such statutory measures as were urgently necessary to try to insulate the economy from the international madness. It is interesting that the Minister gives the game away for them in the middle of his speech. Instead of using the word "crisis" he takes their word, "disturbance", which he uses more than once in his speech. This is just a disturbance. The Minister offers a guarantee, paid for by the taxpayer, which I would describe as solid and written in steel.
The Minister states, "The State is unconditionally and irrevocably guaranteeing the current liabilities of the participating institutions until 29 September 2010." However, when he comes to provide the guarantee for the public, who are asking where is the return to the real economy with such capitalisation as will take capital projects in the public realm that have high employment content and will assist ordinary people, he goes all soft. It is not there. When the Minister comes to the one or two directors whom he "may", not "must", appoint, he refuses to say whether they will be among 15 other directors. They will be non-executive directors, hurlers on the ditch. He does not say how they will influence the decision-making of any banking process, and yet he describes a change of culture.
On page 45, having looked over the water, the officials in the Department of Finance decided they must say something about corporate social responsibility. How will this be achieved? I would like to hear the Minister say the people who have brought us to this point, the Irish Banking Federation, must make some admission, not that there was a "disturbance", so that we can remember what they did. At times the Minister spoke about light regulation. He must remember what the model was. The model said regulation slows one down, is a burden and, as my colleague, Deputy Burton, has just said, stands in the way of the new, glittery, Irish rich becoming billionaires.
I am glad of all the assurances on solvency, security and liquidity, if they are real, and I hope they are. However, I have doubts on the source from which they come, the Financial Regulator. It is time the Minister admitted the model was wrong. The model brought the world to its knees at a time of hunger. The model was wrong in Ireland and brought disastrous effects throughout Irish society. The public has no interest in providing a guarantee for more of the same. It is over. They want to hear the Minister say it is over, and they want real representation in the banks, not puppets. They want those who brought us to this disaster and the poverty of all the cuts the Minister announced yesterday to come out and say they followed a model that brought us misery. There is no sign of any of that. We are not here to solve some disturbance in a racket. We are here as parliamentarians to give voice to the people's right to an accountable, fair and sustainable banking system.
The Chief Whip asked me to, and I did not want to upset the House.
I welcome the Minister's wide-ranging speech this morning. I admire the Minister as one of the most progressive Ministers for Finance we have seen in very difficult times. His knowledge of finance has been outstanding. I was taken aback this morning when I read an article in The Irish Times entitled: "Audit into delays by banks in collecting interest payments." The banks are in difficulty because of their auditing. I checked the Internet to find out who audited the banks. Anglo Irish Bank was audited by Ernst & Young. Bank of Ireland was audited by PricewaterhouseCoopers, the company getting the job of forensically investigating the banks' problems. It got €15.4 billion last year. AIB was audited by KPMG. I would have much more confidence in my Labour Party colleague, Deputy Rabbitte, doing this forensic audit than I have in PricewaterhouseCoopers. Auditors are a joke and a waste of time. They are lick-arses for the management of companies.
Corporate governance does not work in our society. We have audit committees and remuneration committees. To whom do they report? Who appoints them? They are appointed from the weakest people on the boards who will agree to everything and report back to the chief executive for fear of upsetting him or her in any way. There must be a complete change in the auditing system.
Some other matters I found shocked me. To solve the core of the problem would take a magician, not legislation in this House. The Irish external debt at 13 September 2008 was €61 trillion, an increase of €51 billion on the previous quarter. The Irish banks borrowed tens of billions of euro from other European banks. These loans are generally borrowed on a short-term basis and, in many cases, are repayable over 12 months. However, the money was loaned in the vast quantities for speculators for terms of up to 20 years. That is why we have a crisis. International banks will seek their money back but the speculators have squandered it.
I do not agree with everything Deputy Burton says. When I sat on the finance committee with her, she was more concerned about bank charges and competition than about liquidity and the difficulties facing the Irish banking sector. We were in a hurry to get foreign banks in here, such as Bank of Scotland and Royal Bank of Scotland, which I would class as two rogue banks. They are in the height of trouble in the UK. They over-loaned. Royal Bank of Scotland is synonymous with Ulster Bank in the Irish context and the Minister is supposed to guarantee Ulster Bank along with the initial six. We are in a crisis because they came in here.
I follow movements on the stock market and read Irish newspapers, as well as those from Britain. It was reported on 18 June that the Royal Bank of Scotland was warning of a fully-fledged global crisis. That bank was warning about a crash and then it crashed itself. There is no point in condemning British banks or Irish banks, because they are of the same family, with the same system. The only difference is that the British have sterling and we have the euro.
The auditors of the banks certainly have a case to answer because so many warning signs were evident. The red light was shining for years but nobody called "Stop". Other countries can afford to rescue their banks but Ireland is in such a difficult financial state, with only 4 million people, that no such choice exists. Of course, Ireland was in extreme financial difficulty even before the credit crisis. In a free market economy, where enterprise and progress were encouraged, who landed us in this mess and what is to follow?
Directors of banks are appointed on a——
New legislation should be drawn up for auditors. The auditors in this country are a joke. When they are conducting audits they engage consultants to look into tax problems and other difficulties in companies. That is the problem that arises. The auditors are not independent but are extremely well paid. I am blaming them here and have no apologies to make for that. I served as a director on the boards of companies and I saw what went on. I have seen situations where companies were in crisis and people were sacked or walked out. That was in my younger days, before I came in here. I am sorry I came in here now because I might have got one of those big jobs.
What will happen to the small investors, like dentists and doctors, who do not have pension funds but have been investing in the stock market since leaving college, with the intention that their dividends would provide them with a pension? This is a crisis. Such people will be paupers.
Conor Lenihan (Minister of State, Department of Community, Rural and Gaeltacht Affairs; Minister of State, Department of Justice, Equality and Law Reform; Minister of State, Department of Education and Science; Dublin South West, Fianna Fail)
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I apologise to the House in advance because I will not, on this occasion, rise to the passion and eloquence exhibited by Deputy Michael D. Higgins. Having listened carefully to the Deputy, I admit that he is substantially correct in what he says. The market has overheated and the globalisation of risk in capital has led to a situation where regulation has lagged behind the market and some of the more reprehensible market practices we have seen in recent times. The Deputy is absolutely correct in substance but I am not so sure that an apology from a bank executive or governor, or indeed from a plethora of bank governors, will achieve the result we all desire.
We are not out of the woods yet. There is a severe liquidity and capital problem at the heart of the world's financial system and that fact is very evident in this scheme put forward by the Minister for Finance. This is one in a number of very important steps that will have to be taken to restore confidence in our domestic banking system and confidence among the lenders themselves so that they can begin to encourage the lifeblood of trade again by engaging in more lending in a responsible and appropriate fashion.
While I do not wish to be seen to compliment the Minister for Finance because he is my brother——
Conor Lenihan (Minister of State, Department of Community, Rural and Gaeltacht Affairs; Minister of State, Department of Justice, Equality and Law Reform; Minister of State, Department of Education and Science; Dublin South West, Fianna Fail)
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The officials at the Department of Finance are to be complimented, as are those at the National Treasury Management Agency, the Central Bank and the Financial Regulator. I compliment those public officials who also played a sterling part in bringing this guarantee scheme into being. There is a stark contrast between the human capacity available to Ireland today and what was available in the past. It is quite clear that in the current situation the Minister has enormous resources available to him in terms of advice, both from the public and private sectors, which was not the case in 1984 when the then Government came to the rescue of ICI, a subsidiary of AIB in London. What has helped us to come through this particular liquidity crisis is the fact that there are many Irish people well practised in the financial markets who can give good advice, whether from a private or public perspective.
Issues of systemic integrity remain and some Opposition Deputies have referred to this in terms of the recapitalisation of Irish banks and banks outside Ireland. The restoration of day-to-day lending is also hugely important. I draw the Minister's attention to the fact that we need to see a return to what I would call "old-fashioned" lending principles. There have been serious breaches of the lending code of practice that had developed over many years. This needs to be addressed. We must get back to old-fashioned lending that has a strong link to security and the asset values that underpin loans of any kind.
The Financial Regulator has an enormous role to play in terms of how the commissions, bonuses and rewards systems work in individual banks. It is absolutely clear that some of the incentives currently in place for bank executives are constructed in such a way as to encourage recklessness and blind disobedience of the old-fashioned norms of banking. That must and will change as a result of this crisis.
In recent years we have seen an enormous strengthening of the internal audit function in banks and other businesses. We have also seen, due to problems associated with the globalisation of risk and global capital movement, new roles emerging in banks. Of particular importance in this context is the risk officer, who balances the risk that a bank is carrying between the lending and treasury sides of its operations. It is very important that the role of individual risk officers in banks be strengthened, in a regulatory or legal fashion. The role of a risk officer is enormously important but it is still open to senior management in banks to ignore the advice of internal auditors or risk officers. We must create a system whereby the risk officer's function and position is strengthened. Such officers must be given greater independence in coming to their decisions and enabled to give warnings to senior bank executives, board members and the regulatory authorities when they consider that a level of inappropriate risk is being entertained or carried by banks in their lending and treasury operations.
The issue of the independent advisers the Minister for Finance intends to appoint to the banks brings to mind an anecdote relating to Mr. Joe Kennedy, who became the first chairman of the Securities and Exchange Commission following the 1929 crash. An east coast economist was tipped to become the new chairman of the SEC, but Franklin D. Roosevelt chose to appoint Mr. Joe Kennedy instead of the highly respected economist. Mr. Roosevelt was subsequently asked why he had picked Mr. Kennedy, who had an unenviable reputation as one of the great experts of shorting the market prior to the 1929 collapse.
Conor Lenihan (Minister of State, Department of Community, Rural and Gaeltacht Affairs; Minister of State, Department of Justice, Equality and Law Reform; Minister of State, Department of Education and Science; Dublin South West, Fianna Fail)
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When asked why he picked Mr. Kennedy he said, "It takes a thief to know a thief." I hope the Minister will appoint people with the requisite capital markets expertise to patrol the bankers in future.
I wish to share my time with Deputy Perry. I am grateful for the opportunity to address the House on this important issue. As Members will be aware, Fine Gael supports the guarantee, which is a necessary response to the liquidity crisis. However, it appears that there is more than a liquidity crisis at issue here. There is also a capital crisis, an issue to which I will return later. I welcome the fact that there will be Government representatives or observers on the boards of the various financial institutions, although I share the concerns of Deputies O'Donnell and Bruton regarding the mandate of those observers and to whom they will be answerable.
I wish express my disappointment that the Government is allowing the banks to get off so easily in terms of the levy that is being charged. Essentially the guarantee is an insurance policy for the banks. At a commercial rate, one would expect to get approximately €1.5 billion per year from the banks for this guarantee based on 0.5% for wholesale and 0.25% for retail deposits. Initially, when the Minister came before the House he told us there would be a commercial price for the guarantee. However, this seems to have been reneged upon. The banks will get it for one third of what it is worth and this is wrong.
Essentially, €1 billion of the cuts or tax increases announced on budget day would not have been necessary had the Minister not put the interests of the banks ahead of the interests of middle-class taxpayers, the poor and the old. In many ways, this shows where the Government stands. The Minister for Finance does not work for us or the people; he works for the bankers and this is very sad. If the banks cannot pay the €1.5 billion, which may well be the case if they suffer significant losses during the year, the difference could have been made up by the State taking preference shares in the banks. However, this has not been done.
There is no provision in the scheme to require that credit is extended to small businesses and individuals which is unfortunate. I share the concerns of Deputy Higgins with regard to the lack of accountability. Deputy Conor Lenihan stated that an apology from the bankers would not be worth anything. It would be worth a great deal, as would humility. In the United Kingdom, the chairman and the CEO of the Royal Bank of Scotland both lost their heads, partially at the instigation of Gordon Brown. In the United States, the chairman of Lehman Brothers was brought before a committee and grilled and humiliated by the politicians there.
During the Japanese banking collapse, bankers offered some apology. I remember the famous scene of the banker bursting into tears because of the number of jobs lost in his bank and his personal failure. We have the opposite in Ireland. Seán Fitzpatrick, the chairman of Anglo Irish Bank, went on Marian Finucane's radio programme, offered no apology and suggested that we should tax child benefit.
We should have accountability from these people. With regard to Oireachtas oversight, I echo the comments of Deputy O'Donnell that the Minister of Finance should come before the Joint Committee on Finance and the Public Service sooner than in six months' time.
As other Deputies have stated, this is phase one. Phase two must be the recapitalisation of the banks and mergers where necessary. When the Minister for Finance, Deputy Brian Lenihan, came before the House and made the initial proposal for the guarantee, he told us the banks' assets exceeded their liabilities by €80 billion. Now we know this is based on the balance sheet at the end of last year. It remains unclear whether the assets of the banks exceed the liabilities by €80 billion. The markets do not believe so and think it is significantly lower.
The European Central Bank has lent €69 billion to banks operating in Ireland. Admittedly only a fraction of this has gone to the covered institutions but it is a large amount of money. I understand the loans from the ECB take preference over the taxpayers' guarantee and I would like to know more about this. Fine Gael will support the measure but we remain dissatisfied about a large number of aspects and about the words of the Minister on the assets and the commercial charge for the guarantee on which he seems to have reneged.
I compliment Deputies Bruton and O'Donnell on the way they have handled this debate. I am pleased to contribute to the debate which is of vital importance to the wellbeing and vitality of the State in the years ahead. The matters being discussed today have the potential to impact on the lives of all citizens and fundamentally shape the type of society in which we live.
As legislators, we have been given a heavy responsibility to find the right solution to this problem and there is a very real sense that we are in uncharted territory. We have not faced this scale and type of crisis previously so we have no rule book on which to rely. However, one thing is sure which is that we must grasp the responsibility placed upon us and strive to get this right which means it is all about control.
The stakes are high. Failure to respond to the crisis that has faced our financial institutions in recent months could fundamentally destabilise our economy and set back the enormous progress made in recent years. It is no understatement to record that recent events have fundamentally changed the nature of commercial and financial life globally and not only in Ireland.
The very fundamentals of the market economy have been challenged with clear recognition that we have near market failure in the operation of the financial services sector in Ireland. In the face of such threatened market failure and near collapse the State has had to step in to rescue the financial system. It is important that the changes introduced result in real change, not only in how financial institutions are regulated but in the way the bank deals with customers.
This issue is about banks and banks have lost sight of their customers in recent years. They have been driven by shareholder demands and customers have been only a number on the scale. We are taking the pressure off banks and it is important that banks take pressure off people with negative equity. There is negative equity in every shopping centre, hotel and private house in the economy. During the past ten years for every €100 million given out, €40 million came back to the Exchequer.
A fair deal for customers must be at the heart of the new banking environment. We must have recognition from the banking community that it exists to serve its customers and not to exploit, overcharge or fleece them, which is the case. If the Minister does not honestly believe that banks will pass on the insurance charge I assure him they will. I guarantee it. A person taking out a loan today will pay a negotiation fee. There must be a new culture that respects customers and puts them at the heart of banking. This is important in any event, but particularly when the customers as taxpayers are underwriting the very existence of the banks.
The regulatory regime should support and underpin the new relationship. I hope the changes brought about by this scheme will lead to a major cultural change in the way banks and the regulator treat customers. The backbone of the economy is made up of small companies. Companies that employ fewer than ten people must pay charges for taking out a loan, lodging fees, cheques and debits. Literally, there is a charge at the door of a bank.
In recent years, we have all heard the banks come out with profits of €2 billion or €1 billion. These profits have completely diminished when one considers the drop in shareholding. Customers have been the pawns. Few Members have stated that the success of the economy was driven by small companies. The way banks relate to small companies is abysmal. Of all representative bodies, that of small businesses should have a voice on the body which regulates the governance of banks. We have seen the debacle in the United States in recent years with regard to corporate governance.
Tracker mortgages are not being offered by any bank at present. This facility has been withdrawn. As we speak, up to 100,000 people will have problems with the repayment of their mortgages. They are being shifted away from favourable rates and being charged higher rates. We are taking pressure off the banks. Will the Minister for Finance speak directly to people being removed from tracker mortgage facilities and being charged penalties and excess charges? We must hear a clear message. People want to know what is being offered to them.
This deal is about saving the banks. What is the Government saying to people under pressure? Hotels, supermarkets, restaurants and small companies are under major pressure. Facilities are being withdrawn from them and they are being charged extra fees. Nobody is speaking for them. In his statement, will the Minister give a direction to the banks that they take the pressure and facilitate people who have been under pressure?
I welcome the opportunity to speak on the introduction of this extremely important guarantee scheme. Why is this scheme needed? Members on all sides of the House will agree that two and a half weeks ago the banking and whole economic system was on the brink of an abyss. Decisive, clear and swift action had to be taken. The Government must be congratulated on its decisive action in bringing forward the budget and introducing the bank guarantee scheme. Across the world, other countries have taken a lead from Ireland, which has a relatively small open economy in the context of global economics.
The primary purpose of the scheme is to restore and maintain stability in our banking system. We must protect against what has been referred to by all commentators as a serious disturbance in the economy. Ultimately, the scheme will ensure banks are open for the business of lending mortgages to young people and first-time buyers, loans and support to small businesses which create employment and day-to-day services for bank customers.
I agree with Deputy John Perry that, for the past 15 years, there has been a trend whereby banks have done everything to keep the customer out of the branch and having direct access to the people behind the counter. Initially, the trend to keep the customer at arm's length started with wages and salaries paid directly into the banks which was followed by the move to telephone and Internet banking. The guarantee will be a sea change as to how banks do their business.
The conditions and requirements that banks will now find themselves under are very stringent. The Minister stated that if a guarantee is activated, expenditure will ultimately be recouped from the institution covered by the scheme. That again is in the interest of the customer and the taxpayer.
The scheme looks to promote sustainable lending practices that support the appropriate availability of credit and favour enterprise in the economy, especially trading activities that contribute to the export of goods and services. This is crucial because Ireland must maintain job creation and be in a position to attract inward investment. As a small country, Ireland has always punched above its weight in attracting foreign direct investment. This legislation will ensure that this continues to happen. This is important for Ireland, particularly in the current international economic climate.
The strict terms and conditions that have been imposed on the operation of the scheme are crucial. The Minister has repeatedly pointed out that the public interest is paramount. This has come across in the details we have been given. The controls will ensure that no institution or shareholder will be unfairly advantaged. There has been much talk about the unfair advantage that some banks and building societies have had access to over the past number of years. This scheme will tackle that and ensure that, in the public interest — the day-to-day customers of banks — no unfair advantage will be gained by any institution or shareholder.
The appointment of public interest representatives is an indication of how this scheme will protect the public. The Financial Regulator and the Department of Finance, despite the negative comments about them over the past few weeks, are hugely experienced in the whole area of domestic and international finance. They have significant expertise regarding the banking industry as a whole in Ireland and abroad. The confidence the scheme puts in the regulator and the Department of Finance is well earned. Their regulation and scrutiny of the various institutions over the years will be strengthened by this legislation.
The Minister has assured us there will be a constant review of the scheme at least every six months. The flexibility built into the scheme will allow the Minister, the Financial Regulator and the Department to adjust the scheme and its conditions to whatever market conditions prevail at the time. This is crucial because over the past several months there have been fluctuations in banks' share prices almost hourly. Constant vigilance must be maintained, which is what the legislation proposes.
I particularly welcome the fact that the scheme will promote the highest standards of corporate social responsibility in the banking system. We are immune to banks and building societies having a responsibility to their local communities. The International Financial Services Centre is based in the Dublin Central constituency. It is made up of banks from all over the world doing billions of euro of business every day. There is a certain sense of corporate social responsibility in that area. However, that does not extend to the wider banking system. The scheme ensures and forces all banks and financial institutions to take their corporate social responsibilities seriously through constant monitoring of how they do business, lend and borrow money and pay remuneration. I particularly welcome the section dealing with remuneration and how instances where individuals are retiring or moving on are handled. This area will be subject to scrutiny.
We have heard claims that the scheme is a bonus, a helping hand, to the banks. Members can be sure the banks will not welcome outside scrutiny. They will not welcome the public interest representatives having access to their books and the power and ability to ask questions at board and senior management level. They do realise, however, that although the global events are outside their control, they will have to change. This is a sea change in terms of how Irish banks and financial institutions will do their business.
The flexibility built into the scheme to deal with issues as they arise is very important. The power to appoint people to a position to report directly back to the Financial Regulator, the Department, the Minister and, ultimately, this House will ensure the scheme's purpose — to protect customers who use banks and financial institutions on a daily basis — will be achieved.
The bank guarantee stabilises liquidity. The scheme outlines in part what the guarantee is and places certain requirements on the financial institutions that participate in it. Fine Gael supported the guarantee and by extension will probably support this scheme because the country needs a banking system. Without the guarantee, we may not have had one today. However, we are taking a leap of faith. We do not have documentary evidence of what exactly the situation is in the banks, but the Government should have. We know that currently the markets do not have great confidence in our banks. Today, share prices in the financial institutions remain almost as low as ever. People must have access to credit, which is necessary for the economy to operate and survive. The steps taken to date, including today's scheme, will not address the problem, which is that our financial institutions are not in a position to lend to people who wish to operate in our economy. They will need capitalisation and, however unpalatable that may be politically, it must and will happen. The Minister should address this matter in his response. The Government is avoiding the issue. This is just the second step we have taken but more steps are necessary. The Minister should outline to the House his views on capitalisation. The kernel of this issue and the reason Fine Gael has supported it is that the country requires a sound banking system in order for the economy to operate. A banking system is good only if it releases credit to innovative entrepreneurs but to date that has not been possible. This scheme will not make it possible and the Minister must be honest about that.
How can institutions that operated at a loan ratio of almost 25:1 for over 20 years now revert to an 8:1 or 9:1 policy without receiving funding to assist them in doing so? This scheme is very vague and we have many criticisms of it. However, at a minimum it must end reckless lending. The day of the developer is over, but where a money bubble exists some product will always fill the vacuum, like the tulip in Holland and land in Ireland. When one has an over-supply of money, production will increase where there is a finite availability or where it is not subject to international pressure.
The Government is responsible for the economy and now stands indicted because it allowed a mind-boggling increase in money supply. It can point a finger at the Central Bank and the regulator, but the Government is ultimately responsible. For the past ten years, I have heard it said that the Government was responsible for the fantastic economy we had, but it allowed a money bubble to develop and did nothing about it. We are here today because the Government spent money blindly. The international financial situation is a separate issue and while the Government does not blame itself for the global crisis, it stood over the creation of a money bubble, allowing it to develop. The onus of responsibility for the public interest did not lie with the regulator, the Central Bank or the financial institutions; it lay with the Government, which did nothing about it. The bubble has now burst due to the contraction in bank credit. The failure to control money supply is the Government's fault. We must create a public interest requirement for financial institutions and services, similar to the Hippocratic oath for the medical profession. At present there is no public interest remit, just an emphasis on the institutions producing a profit for shareholders.
This scheme has many shortcomings. There is no definitive risk policy and it is in the hands of those who have failed to date. In addition, there is no requirement on the institutions to give credit and they will not do so under this scheme. I am concerned about non-Irish banks funnelling funds into their Irish operations. Both the explanatory memorandum and the Minister's speech refer to the fact that covered institutions can be required to improve, among other things, their solvency and liquidity. How can they do so under this scheme, however, even if such a requirement is placed on them? I also want to know why the reference to EU policy has been changed from "will" to "may".
This scheme represents one small step, but it is not the solution and we should not pretend otherwise. The Minister should tell us what he is going to do about the banks. Will he say that the financial institutions will give credit once this scheme is passed? He will not do so, but let us hear why. The ultimate responsibility for this crisis, stemming from the over-supply of money, rests with the Government side of the House. While not having access to all the information, we are properly supporting this measure on the basis of good faith and in the national interest. We realise that the economy cannot survive without access to credit.
Like the last speaker, I think the Opposition must proceed to a great extent on trust. We trust that the required information is being made available to the Minister and that he has demanded the right degree of information and undertakings from the banks and other financial institutions. I am not so sure, however, and I remain sceptical. I am one of the three remaining Members of the House who sat on the DIRT inquiry some years ago, which investigated the activities of the banking institutions. During the course of that inquiry we were given firm undertaking that there would never again be deviation from good banking practices. Firm undertakings were given that due diligence reports would be made regularly and that no procedure would be entered into without approval from the Central Bank, the Department of Finance, the Financial Regulator and any other body that was required to give such assurances.
Each member of the inquiry team was, in turn, subjected overtly and covertly to various pressures during the course of those hearings, which went on for about three months. Up to this day, that pressure still existed for anybody who wants to admit it. Unless I see it written in tablets of stone, therefore, I do not accept any undertaking given by those institutions at this time. The onus is on the Minister, as the current holder of that office, to demand in stone, and written in blood, if necessary, an undertaking to the effect that the good procedures he is now requesting will be followed.
We began discussing this matter last night, but I do not know if the Minister can answer the point. Why were the Financial Regulator and the Governor of the Central Bank not fired in the past couple of weeks? After all, the carry-on that has occurred over the past six or seven years has been appalling. The Minister may open his eyes in amazement, but I know why they were not fired and so do other Members of this House. It is because they were acting on the instructions of the Government. They were embedded with the Government. There is no doubt in the world about it. What has gone on was purely and simply as a result of Government policy, which was working hand in glove with those institutions. The Government has compromised the institutions of the regulator and the Governor of the Central Bank. The Minister may look appalled.
He should not be appalled, however, because it is a fact. If what I am saying is untrue, the obvious question we must pose is why the regulator and the governor were not fired for not doing their jobs. This country is in a woeful mess. The Minister for Health and Children told the House yesterday that the country is in a serious financial crisis. She is not in opposition, she is a member of the Government. She was working hand in glove for the past ten years with all the culpable institutions. For God's sake, when are we going to cop on to ourselves? Now the Government wants the Opposition to take them on trust and to follow the same road, but what guarantees do we get? The onus is on the Minister to explain that. The fellows sitting behind the Minister will not stand behind him for too long if things go down the river.
The Deputy need not bother opening his mouth on this subject because he was in that Department and is culpable also. As a former Minister of State at the Department of Finance, he was part and parcel of it so he should not go there.
In the last debate on this matter, the Minister was asked to give undertakings, but he was vague about it. My conclusion is that he could not get those undertakings, for example, regarding the degree of exposure of the lending institutions, their solvency and liquidity. All these matters keep recurring. I do not know if the Minister received any such guarantees, but he should not be coy about them. There is more hanging on the decisions that will be made here today than just covering the Minister's political coat-tails. This business is more serious than any the country has had to face before.
Notwithstanding the global crisis that everything is now being blamed on, 90% of this crisis was created by institutions in this country. It was created by them alone and nobody else. There can be no escape from all the responsibilities — political, economic and social. The Minister should stand up, face down the people he is dealing with and get those guarantees or else we will all go down together.
I welcome the opportunity to contribute to the debate on the Credit Institutions (Financial Support) Scheme 2008. The approach taken by the Government has been absolutely ingenious. They have provided a safety net for the banking and financial system without, thus far, having to write a cheque for a single euro. This is something that has not been achieved in other countries, where taxpayers have seen their hard earned money invested in banks by way of capitalisation. We have achieved a level of stability without having to do so. The guarantee provided under this scheme has been enough to ensure the continued functioning of Irish-owned financial institutions and others operating in the State.
There is a misconception that the banks have already received this guarantee. However, until this scheme is sanctioned by the House and the financial institutions apply to avail of it, all that has been provided is the Government's announcement that the safety net will be operable for those who need to avail of it in due course. That Government statement in itself has taken much of the pressure off the banks. The Government was correct to allow two weeks to work on the details.
There is a worldwide dimension to the difficulties we face. Ireland is a small, open economy in a global trading situation. The regulatory system in this State is no better or worse than those in place elsewhere. Regulators worldwide, starting with those in the United States, have failed in their roles. The debate in the United States is between those who argue that there has been insufficient regulation and those who claim there has been too much. The same argument applies in Ireland and both sides are correct. We have had excessive regulation in regard to micro items which affect individuals, such as overcharging on credit card and overdraft interest, the introduction of new charges, late payment of direct debits and so on.
However, there has been no effective regulation of the prudential and financial stability of financial institutions. In common with other jurisdictions worldwide, we have suffered as a result of a failure of regulation which missed the big picture and focused instead on the micro issues and tabloid calls for the banks to be hauled in about overcharging. Those types of issues are being dealt with. The focus has been too much on that level of activity and not on the principal job at hand.
I welcome the provision in the scheme that the regulatory authority will focus on liquidity requirements, capital adequacy, risk management, balance sheet structure and corporate governance. This will involve additional regulatory provisions, as appropriate, to reduce the risk in the balance sheet, reflecting current domestic and global conditions. That is the principal job of a regulator but it has not been done worldwide. Instead, regulators have focused on the small issues because they were afraid to look at the major issues. The best action the Governor of the Central Bank and the Financial Regulator can take is to ensure the financial stability of the institutions. There is no point in talking about overcharging on a current account if the institution in question is going down the swanny. We must return to basics.
The proposal on the charges to be levied on the institutions is well balanced. While there have been calls to penalise banks, this would merely increase existing difficulties by reducing their cash flow. The purpose of the scheme is to ensure they have adequate capital resources. Penalising banks is counterproductive and the advocates of such an approach do not understand the nature of the current difficulties. There must be a balance. The cost of State borrowing has increased marginally as a result of the announcement of the guarantee. There have been claims that the charge to the Government should include an additional risk. That risk is factored in——
The situation is unprecedented. The only effective acid test is the increase in the cost of Government borrowing. It is the one definitive figure we have to work with. That figure must be recouped so that the banks do not derive a profit from this. All this is done on a growing concern basis. In other words, the scheme is predicated on the understanding that the financial institutions will trade out of this situation. That is the fundamental issue.
There has been much debate on the prospect of the State investing in, capitalising, part-nationalising or nationalising banks. It has been done in other jurisdictions, including our closest neighbour. It is my personal view that we should avoid such an approach. We have provided a guarantee. It is to be hoped that the market will settle next year. The taxpayer cannot be asked to cough up €20 billion to provide capital to financial institutions. I would prefer to see those funds coming from other sources, even if that required a change of ownership of one or more institutions, rather than raising them from the hard-pressed taxpayer.
I welcome the changes in regard to the remuneration of directors and other members of management. Increased transparency in this regard is welcome. I look forward to the publication of the reports on a six-monthly basis for examination by the relevant Oireachtas committee.
I welcome the opportunity to speak on the proposal before the House. I commend the Minister and his Cabinet colleagues on the decision they took in facing the current difficulties. I also commend the Oireachtas on passing the Credit Institutions (Financial Support) Act. It would have been easy to dither, as other governments did before being forced into action. A certain momentum has developed across Europe in the wake of the action taken by the Government to protect our financial institutions and, consequently, to protect the fabric of the economy by allowing ordinary people to continue to conduct their business.
Action was taken promptly to address the serious threat to the economy and that action succeeded in removing the immediate danger. There will be difficult times ahead but this guarantee gives scope to the financial institutions to continue to operate. I refer to the conduct of their normal business and not any attempt to attract business on the basis of this guarantee. The Financial Regulator has made clear that such actions are unacceptable. The purpose of the scheme is to allow financial institutions to operate as normal in the national and international markets and, in turn, to allow the economy to continue to function.
I welcome the interesting provisions regarding executive remuneration. It would be easy to specify a figure denoting a ceiling for executive pay. The United States model includes an interesting provision for a tax levy on amounts above a specified figure. However, I welcome the approach the Government has taken. The ability to award bonuses is necessary if banks want to attract the best staff. Under the scheme, those bonuses will be linked to efforts to reduce credit risk and encourage long-term stability. This is a positive and thoughtful proposal. There would have been a temptation for banks to try to work around a more simplistic provision.
The Minister has taken a reasonable view on the charge to the banks. Imposing an excessive levy would simply have prevented the banks from availing of the scheme, thus negating its value. As other speakers observed, there must be greater regulation and a tighter grip on the lending activities of the banks. However, individuals must also take responsibility. It was difficult for customers to resist when the banks were writing to them with offers of "free" loans and credit cards. However, individuals must take some responsibility for the borrowings they made. Some took out loans which they could not and cannot afford to repay. The banks have a major responsibility in discouraging such irresponsible borrowing by customers.
This scheme will facilitate the banks in entering into the guarantee provided by the Minister. This, together with the work being done throughout the European Union, will allow normal business to continue. We have not had to take the type of action taken in the United Kingdom, for example, in nationalising Northern Rock and Bradford & Bingley. The budgetary decisions to be taken by the Government would have been even more difficult if it was obliged to allow for the cost of such an approach. I commend the Government on the action it has taken.
I wish to share time with Deputy Morgan. The past conduct of the banks, the cost of this unprecedented insurance policy and the greed of some of the people at the top in the banks have naturally attracted much attention in this debate. Reckless lending policies, valuation of bank assets, capital adequacy ratios and the efficacy of the regulatory system are important issues, but in the brief time available this morning I wish to raise some other issues.
Will approval of this extraordinary scheme restore a functioning, prudential, accountable banking system that will serve the needs of our economy and of our consumers? If there is a call on this unprecedented guarantee, underwritten by the taxpayer, will the country be plunged into deeper financial crisis? The truth is that we do not know. The Government decided on this gamble on that fateful Monday night because of black Monday on the Stock Exchange. According to the Tánaiste, there would have been "a total collapse" of the banking system if the Government had not acted as it did.
We might never know what transpired that night but if falling share prices on the Stock Exchange was the trigger for this unprecedented guarantee, look at what has happened on the ISEQ since then. If one compares the share prices of the financial institutions on 30 September with the prices on 15 October, in all cases, with the exception of Irish Life & Permanent, they are seriously worse than on 30 September. We now have a statutory instrument that, like the enabling Act, is vague and aspirational on key issues. I hope it works. However, what reality is attached to some of the critical paragraphs? The scheme nominally provides that if there is a call on the guarantee, the bank in trouble will be rescued in the first instance by the other five covered institutions, or whatever number signs up to the guarantee acceptance deed.
Perhaps the Minister can reassure me. If a bank, and we will not name the bank, defaults and the court of the Bank of Ireland is convened to make its contribution to the rescue, why should they do it? Will they do it? Will they be able to do it? What happens if they resile from the deed entered into? Will the Government sue and towards what end? Will a bank headquartered outside the State, such as a bank in which the British Government is a stakeholder, pony up to rescue an Irish financial institution that might be deemed to have taken unacceptable risks?
In paragraph 37, a covered institution shall be required, for example, "to improve liquidity, solvency and capital ratios" in circumstances where this is required. However, if the covered institution is in trouble, how is it proposed that it will do these things? What reality is behind this injunction? Again, in paragraph 28 the Minister has power to direct a distressed institution "to draw up a restructuring plan" and the Minister may direct the institution "to make changes" in it and so forth, and the "covered institution shall comply with any such direction". What if the institution cannot make the changes sought? Who pays; the taxpayer, the bank customer or both?
There are many other paragraphs which tend to suggest that the focus will be to try and ensure that the guarantee is never invoked. I can understand that objective but can the Minister explain what will happen if there is a call on the guarantee and what would be the economic and financial implications? I am especially interested in the Minister's explanation given that the Taoiseach is believed to have set his face against injecting capital in any circumstances into the banks. What is the Minister's explanation for the tumbling financial shares on the stock market? Can he explain why the valuation put on the banks by the market is so wildly different from that of the banks themselves and the Financial Regulator?
For 48 hours after 30 September, second-tier Ministers were rolled out to extol the virtue of the two Brians' splendidly innovative blanket guarantee. However, a couple of weeks later Ireland is the odd man out, aside from Greece, and the markets are still falling. When the Bill was introduced I asked several times if the reason for the falling share prices was that several of our banks might in reality have a capitalisation requirement. The Minister said that was not the case and that it was a liquidity crisis. What does he think now? Why is the Government opposed to taking an equity stake that would be likely to reward the taxpayer in the future? In today's global conditions would it not be justified for the National Pensions Reserve Fund, for example, to invest in our lead banks for an equity stake or other beneficial arrangement?
I hope the scheme works. It confers many powers, but in a vague and general way like the enabling legislation. The Minister is not bound by the scheme to deal with any specific issue in any specific way. The scheme is binding on an institution as a matter of contract, not of statute. The remedies for non-compliance are an increase in the charge, the imposition of an additional condition or revocation of the guarantee. The scheme does not provide the capitalisation many commentators believe the banks need but it subjects them to a great deal of oversight. If the view is taken that the banks are at risk of being restricted in their ability to trade their way out of their current difficulties due to excessive and over-cautious second-guessing of normal commercial decisions, while still suffering from the core problem of inadequate capital, there is a danger that a scheme such as this could leave us with the worst of both worlds.
I thank Deputy Rabbitte for sharing time with me. When the Minister for Finance introduced the Credit Institutions (Financial Support) Bill before the House two weeks ago the Sinn Féin Party supported it. We did so because we believed it was necessary to stabilise the State's banking system. Our judgment has been proved correct. Since its implementation Ireland has not lost a bank or been forced to bail out a bank with cash. However, the issue was about significantly more than banking.
We stated at the time that we had reservations about the ambiguity of the guarantee's terms and conditions. Deputy Ó Caoláin and I met the Minister for Finance to express our concerns and we received reassurances that the taxpayer would receive adequate remuneration for the insurance scheme for the banking sector. When we received the document outlining the terms of the scheme last Wednesday evening we examined it on its merits, leaving aside our reservations about supporting anything produced by this Government in the wake of Tuesday's savage budget.
This is an extremely important point. If we had given consideration to the Government's presentation of the budget in the context of dealing with this issue, we would not support it. In fact, a general election should be called immediately due to the Government's total lack of leadership in the budget. It represents a complete change of direction by the Government, for which it has no mandate. The budget lacked sophistication and only succeeded in terrorising 70 year old people throughout the State. It was a scandal. Nevertheless, we put that aside when we examined this scheme.
During my contribution to the debate on the budget, I set out the terms and conditions Sinn Féin would seek in the scheme. They included a windfall payment to the State, the introduction of a banking levy and the imposition of an onus on banks to negotiate as much as possible with home owners facing repossession. I strongly advocate the establishment of a State bank as well. However, there is no return for the taxpayer from this scheme. The financial remuneration only accounts for the estimated increase in debt funding costs that arise as a result of the guarantee. If the Minister bought a car for €30,000, the average insurance broker would charge him approximately €600 per annum, or approximately 2% of its value, to insure it. This is the very least in terms of commercial interest rates that should have been applied to the banks for the guarantee, regardless of whether money is drawn down under the scheme. There is no reason that such repayments could not be paid over a longer period than the two year period of the scheme.
Furthermore, the only sanctions that appear to have been put in place for banks that abuse the guarantee is expulsion from the scheme, and even then it is only after at least 90 days notice. The scheme does not mention fines for banks that gamble with taxpayers' money, let alone provision for the State to take legal action against such an institution. Within days of the announcement of the guarantee we witnessed unbecoming conduct in one of the banks to be covered. Are we to accept that if such an event were to recur, the worst punishment the bank would receive would be its removal from the scheme?
I am hugely disappointed that the only provision that applies to hard-pressed home owners is a reference to the banks complying with the IBF's voluntary code of practice on mortgage arrears. This code represents what the lender will endeavour to do in normal circumstances, but these are not normal circumstances. There were almost 50 repossession cases before the courts last week. A panel is being established to monitor banks' practice but an arbitration committee could have been set up immediately to ensure the banks do everything possible to refrain from repossessing, even if they offer interest-only repayments in the current climate. I recognise the legal necessities associated with mortgage contracts and that not every homeowner can be given licence to withhold mortgage payments, but it does not sit well with me that, while we are throwing away the rule book on guaranteeing banks, we are doing nothing for businesses and mortgage holders who are very hard-pressed for cash at present.
On a point of order, Deputy Olivia Mitchell and I are scheduled to speak for five minutes each after the Fianna Fáil contributions but we are running out of time. Will the House agree to allowing us ten minutes from the question period?
I welcome the opportunity to speak on the motion. I commend the Government on the action it took at the end of September when it was effectively compelled to do something to prevent our financial infrastructure from falling apart.
It is important to state we need a strong and healthy banking system. Our economy will not function without a financial system in which the public has confidence. A good system is a key element of our national economic infrastructure.
This debate is important in that shortcomings have been exposed in the work and practices of our banking industry. It is important to consider the role of the Central Bank and the Financial Regulator in this regard. If a lesson is to be learned from recent occurrences, it is that the Government, particularly the Minister for Finance, will have to adopt a more proactive and hands-on role in examining the operations of the banking system.
Banking stability is very important. It is important not only that customers and shareholders have confidence in our banks, but that our international partners do so also. In this regard, it was interesting to see the reaction of our European colleagues following the Government's actions at the end of the September. If there was any finger-wagging done, it had to be rescinded six days later in that the states concerned effectively took the same action themselves.
It is important to consider what occurred in the United Kingdom, where the Government had to invest in banks, and what occurred in Iceland, where banks actually failed. If any lesson is to be learned, it is that our Minister and Financial Regulator must adopt a more active role in the industry. I am pleased there will be a role for the Joint Committee on Finance and the Public Service and that the Minister will report to it on a six-monthly basis so Members of the Oireachtas can have an input.
I compliment the Minister for Finance on his handling of this matter. The important issue for the Government and the country is to consider how the banks can return to lending to the real economy. The guarantee is critical in this regard. Without it, we would have an almost impossible situation. While there will be reduced leverage, which is not a bad aspiration, it is equally important that banks be allowed to lend to the productive economy.
The question of investing capital in banks will become a live issue for the Government. At present, Irish banks are at a disadvantage in comparison to the British and continental European banks, which have had capital put into them by their respective Governments. I advocate that our Government should consider these issues. There is no risk involved in that the money will be repaid. Had the State taken a stake in AIB when it had problems many years ago, at which time Labour and Fine Gael rightly intervened, there would have been a considerable payback to the economy.
I have no difficulty in respect of Irish banks. Deputy Rabbitte asked how the other banks will respond if one defaults. They will respond positively and have agreed to do so. With due respect to Deputy Rabbitte, it is very unlikely that any Irish bank will default in that we have a strong banking system. An issue certainly arises regarding lending to the property sector but the amount of lending and the risks involved are overstated in the public commentary that has been heard on this issue.
There will be casualties and bad debts — the bad debt provisions are being provided by the banks — but the vast majority of people in the property sector at present are in good stead. It is important to recognise that those who are not in this position will go into liquidation, which is normal business practice.
The guarantee has been critical. We have shown leadership throughout Europe and farther afield in that many Governments have now followed our example. If it is necessary to inject capital into the banks, the Minister should not be afraid to do so.
It is hard to believe the banks of the world, which have hundreds of years of experience and which are subjected to so much regulation, are collectively on the brink of failure. There are so many guidelines, rules, regulations, laws and oversight procedures that it is almost impossible to fully convey their pervasiveness and extent in modern banking.
What has happened in recent weeks is a result of many problems coming to a head at the same time, the most important of which is the need for liquidity. The Government's guarantee scheme, aimed at solving the liquidity problem, does not come free. Aside from the €1 billion charge to the industry, specific controls on banking activity have been sought and are outlined in the Act. They range from guidelines on executive pay and bonuses, to the monitoring and reporting of over-exposure to one customer or sector, to new risk-management measures. The Government is correct to ensure a strong presence in return for such a significant guarantee from the taxpayer.
That these kinds of controls are necessary at all reflects the failure of the existing system of checks and balances. If the banks' chief executives have made mistakes, there is a wider failure on the part of the banks' boards of directors in allowing them to happen. The task proposed by the Government of keeping an eye on the banks should have been done by their boards, particularly the non-executive chairmen and directors, and their regulators.
It would be interesting, from a corporate governance viewpoint, to know about the performance of the non-executive directors of the banks during the years of frantic lending to parties in the property sector. What questions did they ask? What answers and assurances did they receive to allay their concerns? What have they been saying and doing within the confines of the boardrooms in recent weeks and what changes will they introduce following their examination of the lessons learned? Have they sufficient reason and voice to demand that certain persons be held accountable and that systems procedures and practices need to be changed? The measures now sought by the Government should have been covered by the corporate governance and regulatory framework that already existed.
Banks do not operate in isolation from the other sectors of society, nor do countries or economic blocks operate independently of each other. Banks are so big and important that every Western economy seems to have decided it is cheaper to support them rather than allow them to fail, and then try to rebuild them and their economies from the wreckage. The decision taken by the Government will ensure that Irish banks will operate as competitive, profitable private-sector entities, thereby ensuring the continued growth and development of our economy.
Two weeks ago, I said we were only dealing with the symptoms of the problem and that the underlying problem would remain. The truth of these remarks was proven within 24 hours, with the markets very clearly telling us that even the comprehensive guarantee we gave did not restore confidence in our banks. What the guarantee has done — I realise it was and is absolutely essential — is to buy us time, but it has done no more than that. We must look now to a future strategy. The one thing the Minister does not want to wait for is the next call from the Governor of the Central Bank to tell us we have a disaster on our hands.
The Government must at this stage have some idea of a scenario in which it would make the next move. For example, has it set a benchmark fall in property prices which would inevitably trigger one of the banks to call in the guarantee or is it to be judged by the fall in growth rates in the economy? My belief is that we cannot wait for those kinds of indicators or for one of the banks to directly call in the guarantee before taking the next step or at least preparing for the next step. When it happens, it will happen rapidly and probably as part of an extreme market event whereby one bank goes, not necessarily in this country, and it will spread from bank to bank and gradually through each country.
This is why countries such as the US, the UK, France and Germany are recapitalising their banks. Undoubtedly, as the Minister said, each country has to do what it feels right in its own circumstances. However, just as in giving the guarantee we pushed other countries into doing the same thing, so too will their recapitalisation of their banks put pressure on us, as it has already done. The British banks are being recapitalised to the point where their tier 1 capital ratio is 9%, which in itself is reducing confidence in Irish banks by making them much less secure than the British banks. We have had guarantees of adequacy of our reserves from the Governor of the Central Bank and the Financial Regulator but while those guarantees may have been adequate last week, if we can believe it, they may not be adequate this week.
We must look at the real implications for us, our children and our children's children. I do not know if the Minister is aware that when Lehman Brothers was allowed to go to the wall and when all the money was counted and all assets sold, the recovery of liabilities was a mere 9%, which meant creditors got just $9 in every $100. If the same thing were to happen here and even one of the major banks went, taking one fifth of the guarantee, we might have to stump up €100 million. If the level of recovery was the same, the banks would produce €9 billion whereas the Government and we, the taxpayers, would have to produce €91 billion, which would be a total catastrophe. In the interests of every person in the country, there is a real imperative to avoid allowing that to happen.
Recapitalisation must happen now, hand in hand with the guarantee. Increasingly, it seems the only way to avoid having to pay out on the guarantee is to recapitalise. I realise the Government's position is that the banks should look first to private investors but the truth is that this is completely unrealistic. There are no private investors who will invest in Irish banks, not just because of the lack of confidence in Irish banks or because of possible restrictions that will be placed on the banks' ability to make a profit as a result of the guarantee we are giving, but simply because virtually every bank in the world is looking to recapitalise at present. Irish banks will be very far down the list from an investor's point of view.
If and when the call comes, it will be up to the Government to stump up the money. The Government at the least must at this stage prepare for the eventuality of needing to recapitalise by establishing, for example, precisely the level of capital required to bring each of the banks up to the tier 1 capital ratio which is comparable to the other banks we are competing with in Britain and elsewhere. Then the Government must prepare to have the funding ready and available as soon as the decision is made. We of course have the National Pensions Reserve Fund but even it needs notice to have liquidity available at short notice. If the Government has to go to the market during an extreme market event, it would be competing with other countries and it would be very difficult and expensive for us to access money in such circumstances.
Since the financial crisis began, Governments everywhere have lagged behind events and have always been caught on the back foot, unprepared for the crisis. We have to learn this lesson and act now.
The Minister took until page 19 of his speech to mention the elephant in the room, to which Deputy Olivia Mitchell referred, namely, the issue of capitalisation of the banks. The Minister's speech contained a paragraph which stated that in return for the guarantees being given, the banks will be expected to do certain things. At the end of the paragraph, the Minister states: "In addition, I expect them to take all necessary steps to ensure their capital base meets regulatory and Central Bank requirements." If there was never a guarantee, they are required to do that under the law, but this is also to miss the point.
As the Financial Regulator told a committee of this House last Tuesday, the banks are adequately capitalised under existing rules. While I believe this, the problem is that existing rules in Ireland no longer correspond to best practice internationally. As Deputy Olivia Mitchell pointed out, tier 1 ratios in the UK have increased to 9% while in Europe they are increasing to 10% in certain countries. In Ireland the practice is 8% but the regulation is less. Therefore, quite a gap is emerging. It is not an issue of the banks not complying with the regulator or the Central Bank. The issue is that the Irish system of regulation no longer accords with best international practice. This is one of the reasons we see the value of shares and Irish banks continuing to fall in the market.
Second, and connected to this, is the issue of bad debts in Irish banks. We frankly do not know what is the level of bad debt. The regulator states there is €15 billion of loans to the building and construction industries which are only underpinned by the assets on which the loan was raised. These assets, whether commercial property or land banks, would have reduced in value by 30% to 40%. There is a huge lag between the nominal value of the collateral and the real value.
With regard to the other €24 billion to which the regulator referred when under pressure at the committee, he was not quite sure what the level was but stated there was a collateral other than the asset on which the loan was raised. When questioned, he could not say whether some of it was underpinned, for example, by portfolios of shares, which would have been collateral at the nominal value 12 months ago but which would not be anywhere near the real value now. He promised the committee he would carry out an audit to examine the level of collateral underpinning the loans.
This is the issue connected with the tier 1 ratios of capitalisation which is keeping the market down and which the Minister will have to address. We are only into phase 1. We were ahead of the international curve a fortnight ago when the Minister brought the emergency legislation into the House but things have moved on very rapidly since. The UK Government has moved to capitalise British banks and this has led to a trend of recapitalisation all over Europe.
There are different models. The United States Government decided to buy out bad debts and put €750 billion of taxpayers' money on the table. Rather than recapitalising the banks, it took, or is taking, out the bad debts, which has the same effect. In the UK, equity stakes are being taken. In some other countries, straightforward equity is being taken and in others preference shares are being taken with the intention of trading out of difficulty and selling the shares back again and getting out of the banking system when order is restored.
There is a suggestion here that the National Pensions Reserve Fund could be involved. The Minister would have to consider this very carefully before opting for it. First, he would be forcing it to go liquid on certain assets when the market is at the bottom. In addition, the purpose of the National Pensions Reserve Fund is to underpin certain pensions which the State will have to pay in the future. By taking equity in the banks, one will reduce and dilute the shareholding of the banks — if one took 50% one would effectively halve it. It is the shareholding in the banks that is underpinning private sector pensions so the Minister would be using a public sector pension fund to diminish the value of private sector pensions. That is a tricky line of country and that would want to be taken into account before anything is done along those lines.
There are other models. I am sure much advice is available to the Minister from the European Central Bank. As the Taoiseach said, thank God we are in the euro and we have the European Central Bank behind us and a very strong currency. However, this is an unprecedented and serious situation. Fine Gael is supporting the motion on the basis of trust because we know that unless there are proper credit lines in this country, we will be in a very bad state. Credit is the lifeblood of the economy and we cannot work without it.
As for the detail, however, it is over to the Minister. Fine Gael is taking him on trust and I make clear that it is his responsibility if it does not work out. Moreover, the other issue regarding capitalisation is outstanding. The Minister does not wish to discuss it and there are reasons not to so do. However, reasons to talk about it also approach. A point will come at which the Government will be obliged to show its full hand, because such secrecy is not impressing the market. The introduction of the Government's guarantees gave rise to an expectation that restoring liquidity would lift the banks' share prices. I will conclude by citing one of the hairiest statistics I have come across. Yesterday, the Irish banks being guaranteed by the Minister were worth €7 billion. Before Christmas 2007, AIB alone was valued at €21 billion, which provides an indication of the deterioration. If one matches a total value of €7 billion against a loan book, which may or may not be hairy, of between €15 billion and €40 billion, one can see the difficulties.
As the time has expired, I thank the Ceann Comhairle for the opportunity to speak and will be brief. I am glad to have the opportunity to speak on this issue and compliment the Government on the actions taken. Everyone agrees it had to be done and, I hope, for everyone's sake, it will work out.
I wish to raise one or two issues. I have many friends who work at the coalface in banking. They are being frustrated in their efforts to help their customers, many of whom are friends they have known for many years. I refer in particular to people in small businesses who are trying to survive in what is an extremely difficult market. The bank officials are being instructed by faceless bureaucrats who are making rules for them. In turn, they are obliged to pass on such regulations to their small business customers. I recently received a text from a small businessman who employs seven people. He deals with a mainstream bank and has an overdraft facility of €10,000, which he now wishes to renew. He has complied with the regulations regarding overdrafts, which stipulate that one must be in credit for ten days of the year. However, to renew the overdraft facility of €10,000, the bank now insists on 90 days in credit per annum. There is no chance that this man can comply with such a regulation.
It is crucial that the Minister does not forget small businesses and those men and women who employ many others. Together with other Members, I am aware of the pressures such people are under. The Minister is understanding and will do whatever he can to keep control over individuals who make difficult rules and regulations for small businesses that employ many people. The Minister should give them whatever help he can to ensure they survive. The Government has been good to the banks by providing them with this guarantee and the banks in turn should return the favour to those who employ many thousands of people.
We will move to the questions section. I propose to use the usual format, whereby I will call the spokespersons, namely, Deputies Bruton, Burton and Morgan. Thereafter, I intend to move around the House.
Members will manage this as best they can. I will open up the session by dealing with the capitalisation issue, which has been raised by many Members, about which I have a specific question. Will the Minister produce a strategy on the re-capitalisation of Irish banks within a period of two weeks and then return to the House so that Members can discuss it? If the Minister agrees to this proposal, he should include within such a debate a discussion of the rules he plans to apply in respect of dividends being paid by banks covered by the guarantee, his report on the scrutiny of the loan books and their strength, as well as the rules that are being applied by the regulator in dealing with that matter. Such a debate also should include a report on the Irish banks' ability to achieve the higher reserve tier one capitalisation ratios of 9% and 10% that now are becoming common across Europe. In addition, the Minister should give his view of the different options available for re-capitalising banks, either from within their own resources or elsewhere. Will the Minister return to the House within a finite time of two to three weeks to address this issue? Deputy Noonan described it as the elephant in the room and many other Members feel the same way.
In the current international climate, it is highly dangerous to set a deadline for a full public discussion on the floor of the House about such a matter. First, one must recall that the Government put in place this wide guarantee and its effect was to restore confidence in the banking system in the context of liquidity provision. That has been a real success of the guarantee operation. It is interesting to note that although, as Deputy Rabbitte pointed out, the shares have remained under some pressure and have seen some decline in value in the light of international developments, the fact remains that the banks retain confidence and liquidity, notwithstanding such falls in share prices because the liabilities now are guaranteed. Clearly, this constitutes an important first step in restoring confidence to the banking system. Therefore, the legislative scheme setting out the terms and conditions for the guarantee is important to the viability of the banking system. The guarantee has worked by stabilising the position of the banking system and has been approved by the European Commission.
The key question, which was raised by many speakers, pertains to the capitalisation of the banks. Deputy Noonan mentioned the passage in my speech in which I referred to capital ratios. Under this legislation, the State will have far more power to intervene and to move in on the banking system and to ascertain a great deal more about it, which is very important. Many of the essential inquiries are under way and will be completed within a matter of weeks. As for capitalisation, however, it is important to bear in mind that the preferred policy of the State regarding the banking sector in the first instance is that the banks should raise the necessary capital. The preferred position of the Government in respect of capitalisation is that the banks should access capital from local and international markets to ensure that their capital base is sound. I use the word "sound" in the commercial, rather than the strictly legal or regulatory sense.
Deputies have canvassed various other options in respect of capitalisation and have mentioned the option of public participation. The option of public participation is contained in the legislation. Section 6(9) of the primary Act provides that the Minister can take shares in an institution to which financial support is provided. In the context of the guarantee I took the view that since it essentially was an interim measure, what we wanted was cash, which is the best form of payment available, rather than a promise of a share of the enterprise in the future. The question of capitalisation could be dealt with under that section at a future date as such an option is contained in the legislation. I cannot speculate on stock exchange movements.
Members referred to the capital position now being guaranteed by the United Kingdom Government, which has invested substantial sums by way of equity in the financial institutions there. It is worth noting that the United Kingdom guarantee is related to the capitalisation and in that country's scheme, some financial institutions are capitalising from private sources of funds. There is a variance in the degree of public participation in the different institutions and I understand that all of them are being exhorted to correspond to a higher capital ratio. However, some United Kingdom authorities have indicated to me that it is not what it seems and there has not been an actual increase in the capital requirements. Investors see that very substantial state investment is taking place in the jurisdiction nearest to us in its banking system. Many harsh words have been said about the banks in the parliamentary debates on the subject and some of them were well deserved. I say this to Deputy Michael D. Higgins specifically as he questioned me on this matter during his address. From a commercial point of view, the Irish banks have been very resilient to date in facing this crisis compared to banks throughout the world.
Many Deputies referred to toxicity, sub-prime assets and derivative assets. Deputy Higgins, in particular, referred to the toxicity of the paper dealings which took place in the banking system——
——and I agree with him on this matter. However, it is a fact established by the Financial Regulator to his complete satisfaction that the Irish banks do not have a substantial exposure to such instruments. Members referred to the possible exposure of the banks in connection with the property sector in Ireland. It is undeniable and all of the analysts have pointed out the exposure. However, this is not toxic in the same sense as the exposure of derivative instruments. The whole point of derivative instruments is that they are now worthless. They were paper to which a value was attached and the paper subsequently became worthless. The promise to pay embodied in the instrument became illusory in the hands of the holder. That is the position on derivative instruments and this is what has caused so much of the difficulty in the United States of America.
The danger for the Irish banking system is that, because some of these instruments were described as sub-prime mortgage instruments, they are somehow connected with the difficulties in the property sector in Ireland and they are not. Many derivative instruments derived from the purchasing and trafficking of mortgages. Eventually these instruments lost their value dramatically as we saw in the United States of America. However, the position is not the same for the Irish banks, which hold underlying securities to land. The land may have fallen in value and there may be exposures that the banks need to work through, but there is still a security of value underlying the loan they have advanced.
Yes, indeed. It is important to make that point because it is a distinction between the Irish banking system and the banking systems in other countries which have entered hazardous waters because of their exposure to sub-prime lending. Sub-prime lending was, in turn, discounted on the market and eventually the discounted instruments became useless and valueless.
Can I revert to the original question by way of a supplementary question? The Minister said he will not come to the House to offer a strategy for recapitalisation. I challenge this and I question the Minister on this matter.
If the Minister agrees to come to the House, I might be satisfied. Let me ask the question. The Minister did not answer it first time around and I am sure the Ceann Comhairle will not tolerate another intervention from me. The Minister intends to establish rules for dividends which we will not see as they have not yet been established or presented. We ought to see them as they are intimately tied up with recapitalising the banks.
I understand the Minister is taking up the floorboards with the loan books of the banks and will examine the banks' capitalisation. I presume the Minister will examine the higher capitalisation ratios now required in other countries. We must have a Government strategy for this. The alternative is that the taxpayer is landed into putting real money on the table without the House knowing the Government strategy, or having the confidence that the Government is designing a strategy to deal with the situation. There is an onus on the Minister to come to the House within a short period to show the Government has a strategy, that its homework is done and that there is a strategy bearing in mind the changed circumstances.
Deputy Bruton referred to dividends. The scheme allows the Minister to make rules regarding the payment of dividends to maintain capital ratios. No dividends will be paid by covered institutions before such rules are made. The extent of the discussion on dividends is something to which shareholders have regard when examining these institutions. Of course I will return to the House if there are any decisions made by me in this area, as these are matters of fundamental national importance.
These are very sensitive commercial matters and must be treated in this way. I am conscious of my responsibility to the House and I will always discharge it. However, I do not believe I should be tied down to a definite date in unveiling a plan for the recapitalisation of the banking system.
That is not what I asked. I want to see a strategy. The Minister says the ideal is that the banks recapitalise themselves, that curbing dividends is a way of re-establishing matters, that the banks are adequately capitalised, even bearing in mind the new ratios. If that is the case, the Minister needs to return with a report showing his confidence is well-placed and that we can be confident the banks are adequately capitalised.
I share Deputy Bruton's frustration. We have faithfully attended the Oireachtas Joint Committee on Finance and the Public Service and put many of these questions to the Financial Regulator and the Governor of the Central Bank in great detail. In reply we have received polite, meaningless words. All they ever say is that the fundamentals are okay. Why should we take the Minister at his word? He is standing on the word of the Financial Regulator and the Governor of the Central Bank. However, it has been proven that their response has been inadequate and the Minister for Finance is, basically, relying on them. The Minister is sitting on top of a house of cards.
The Minister remarked that the banks should issue capital. I presume he is referring to a rights issue. Given the current position of the shares, which shareholders does he expect to take up a rights issue? Is the Minister suggesting that he envisages, and is he positioning himself for, the takeover of several Irish banks by foreign banks or, perhaps, by very wealthy Irish individuals? Are there people among the group of wealthy Irish individuals who are sitting and waiting to pounce on some of our banks as the share price tanks? Should the Minister not be more forthcoming to the House on the scenario he envisages? What will the basis be for the valuation requested, involving expert accountants, of the loan books of the banks?
At the weekend IIB bank raised its bad debt provision very significantly. This was presumably on instructions from its parent company. If any of the other Irish banks mirror that action, bearing in mind some of them are much more exposed, surely the level of bad debt provision required for impaired assets, not so much for property as for land, will be very significant? This will create a sizeable further hole in the banks' balance sheets and drive their share prices even lower, if that is possible. What is the Government strategy to address this issue? Is the Government considering the first Paulson plan, namely, to create some kind of asset management vehicle and take the bad debts? The Minister for Finance and the Taoiseach have indicated they do not favour taking an equity stake in the relevant banks.
If the assets are as badly impaired as appears to have been suggested, will the Minister consider a Paulson 1 formula? I refer to a formula whereby a kind of asset management company is established to take toxic assets off the balance sheets of the banks and perhaps park them. Is the Minister thinking about using the National Treasury Management Agency and the National Pensions Reserve Fund, in some respect or another, as the parking lots in this scheme? There are two ways of approaching this matter. The Minister can approach it from the assets side by taking the assets out, or he can approach it from the capital side by recapitalising the banks. There does not seem to be any other way of doing it. The Minister has suggested that the banks could recapitalise themselves. In the current market, does the Minister think it is realistic to believe the banks are likely to be able to do that in the short term? Can the Minister give the House an indication of the revaluation basis?
It did not escape my attention — it may be historically significant — that the date on which the Government announced the rescue package was the date on which Anglo-Irish Bank's financial year ends. The other banks have different financial year end dates. In time, history will tell us whether that is of significance in the context of this scheme.
The date in question was the end of the financial year of the bank I mentioned. As far as I know, none of the Irish banks has the same financial year end date. Is that a significant factor? It seems to me that it may be. Auditors have to undertake valuations at the end of the financial year. The Minister's guarantee may have created a scenario which had obvious implications for the bank.
Paragraph 7.3 of the scheme states that each institution shall "indemnify the Minister in respect of any .... losses" under the guarantee. Under the agreement, losses incurred on a guarantee across the sector will not have to be shared. If a bank fails and cannot pay its debt, is there anything in the agreement that will force the sector to indemnify the State? In such an event, will some vehicle like the National Pensions Reserve Fund have to take responsibility?
Paragraph 8 seems to be unlawful. It purports to permit the Minister to vary the scheme. This cuts across the power of the Oireachtas to approve or disapprove the scheme. In any event, the power to vary the scheme could not be provided for in the scheme itself. It would have to be provided for in the original legislation. As we have already said, there is very little detail of the charging model in the scheme. It is left entirely up to the Minister of the day. I would like the Minister to respond to the points I have made.
One of the elements of the scheme that was mentioned earlier by my party leader, Deputy Gilmore, was the provision that "the Minister shall impose specific restrictions....in respect of dated subordinated debt....to prevent the unwarranted expansion of capital and lending activity". Can the Minister explain the motivation behind that provision? I was surprised the Minister included tier 2 debt in his initial blanket guarantee. He is aware that such debt is, in effect, near-equity debt which is valuable to those who hold it. The people in question tend to be large investors with large amounts of funds at their disposal. I refer to wealthy conglomerates and individuals. He guaranteed such debt the first time. Did he have second thoughts on the matter? Did he decide he had been foolish to guarantee near-equity debt, in respect of which large interest returns are guaranteed, in the first instance? On the night the Bill came into the House, the Labour Party said it might be reasonable to give a 100% guarantee to depositors, ordinary lending institutions and businesses. Has the Minister changed his position on subordinated debt?
No. The Deputy has asked a number of interesting questions. The Government took its initial decision on this issue on the night of 29-30 September last. I was not aware, until Deputy Burton mentioned it in the House this afternoon, that the date in question represented the end of the year, for auditing purposes, for a particular financial institution. Therefore, the fact mentioned by the Deputy was not a significant factor when the decision was being made. However, Deputy Burton is right to suggest that it was significant that the end of the month was approaching. Liquidity is often renewed in financial institutions at the end of the month. That was a significant factor on the night in question.
Deputy Burton concluded by asking a question about subordinated debt. The freezing up of international credit markets in September caused serious liquidity issues for banks in Ireland. It caused a significant mismatch between the institutions' asset and liability profiles. As a result, they relied significantly on short-term funding, such as commercial paper, inter-bank deposits and corporate deposits, to fund their long-term assets. The objective of the guarantee of dated subordinated debt in the lower tier 2 category was to give the covered institutions the ability to access at least two-year term funding to reduce their reliance on short-term funding and attenuate the liquidity squeeze. Investors in such securities have an expectation that their bonds will be repaid at their call date. If covered institutions are not able to re-finance dated subordinated debt, it will have a serious impact on their reputation and, therefore, their ability to access all wholesale finding markets.
As Ireland is a small economy, it is very exposed to global trends. Our banking system needs to be able to access funding of the type I have mentioned. The position of the Irish banking system is not comparable to the position of the systems in the UK or Germany. No necessity was found to introduce a guarantee element in such countries. The banks in those jurisdictions operate in a far vaster pool of liquidity in the first instance. I assure Deputy Bruton that the Government decision on the letter was arrived at after consultation with the Governor of the Central Bank and the Financial Regulator. I considered the matter carefully with the Taoiseach. I was concerned about the issue of subordinated debt. I assure the House that I did not make my decision lightly. At that point it needed to be made in the national interest. When we had an opportunity to prepare the scheme, we discussed these issues with the EU Commission. The Commission is naturally and rightly concerned to ensure there is not an improper flow of capital between member states. Therefore, certain restrictions on the possibility of re-financing subordinated debt in the future are imposed in the scheme. That is appropriate,
To be honest, I felt it was appropriate that it should be in the scheme in any event. I had raised the matter with my officials before the Commission expressed its view on the matter. A fine balance has to be struck on this issue. As Ireland is a small exposed economy, with a banking system that is crucially and critically dependent on international finance, it is important that the Government guarantee aims to attract funding into the banking system to the maximum possible extent. On the other hand, we have an obligation as part of the EU not to promote excessive dependence on such forms of lending. I have tried to strike that balance in the guarantee scheme that is under discussion. I should point out, in practical terms, that there is a significant overlap across any bank's wholesale funding base. The same investor can often buy a bank's commercial paper debt, senior debt or dated subordinated debt. If the bank did not call these bonds, this large source of funding could be cut off, irrespective of a guarantee on the senior debt. I took those considerations into account when drawing up the part of the scheme relating to this issue.
Deputy Burton was also concerned about my power to vary the scheme. I assure her that the power in question cannot be used to materially rewrite the scheme. It relates to the operation of the scheme only. I am constrained by case law in the extent to which I can rely on that clause. Perhaps the Deputy will remind me of the other questions she asked.
I indicated in my Budget Statement this week that I am conducting a review of the operation of the National Pensions Reserve Fund. I intend to bring forward my views on that. If legislation is required as a result of the review, it will be introduced before the end of the year. I presume the reference to the Paulson formula is the idea of a company to manage toxic assets. I have not considered that option, but if the Deputy wants me to examine it, I will do so. However, it has not been to the forefront of my mind.
I apologise to Deputy Morgan for interrupting, but I should have said to Deputy Burton that I certainly do not envisage that as a statutory function of the National Treasury Management Agency.
There are some strong paragraphs in this document, some of which relate to transparency and accountability, but unfortunately some do not. Paragraph 6 states that "A covered institution and any group company party to a guarantee acceptance deed shall be required to comply with all the terms and conditions of this Scheme". It appears to me that the only way to sanction a bank is to remove it either partly or entirely from the scheme. Paragraphs 13 and 14 are related, as the issue of sanctioning is dealt with again. Paragraph 14 states that 90 days' notice must be given before a covered institution can be removed from the scheme. Should there not be something stronger in paragraph 6 than the word "shall"? Many other Bills provide for fines to be imposed, and/or a term of imprisonment not exceeding a certain amount of time, which should be ten years in this case given the carry-on that the characters involved in these banks have been up to. Will the Minister consider introducing the shadow of Mountjoy to some of these people? Should that not be applicable in this case, so that it is just not the assets of the institution that are on the line, but the liberty of the individuals involved?
Paragraph 8 states that the Minister will provide the results of any review of the scheme to the European Commission. Would he consider providing it to this House as well? I appreciate that he will go before the committee every six months, but it would be useful if the report was placed before this House as well. Paragraph 12 states that the Minister shall monitor the use of the scheme. Will he elaborate on that monitoring? Is it similar to paragraph 32, where he will be sending in monitors?
Paragraph 16.7 refers to the provision of an adequate return for taxpayers. Can the Minister confirm that he has made up his mind about the quantity of that return to the taxpayers? Media reports suggest that it is €1 billion. Is that the case? Would he consider that €8 billion might be more appropriate, albeit extended over the two-year period of the scheme? Under these terms, it appears that taxpayers will not get a single cent. Any money coming back will only cover the loss to the State at the moment.
It is clear from paragraph 20 that the covered institutions will work out the charge payable. In other words, the banks will monitor the banks. Why does the Minister not send in somebody from the Department of Finance to do that work, rather than trusting the banks to do it? I certainly would not trust them with that work.
Under paragraph 26, the banks involved in the scheme will be required to comply with the Irish Banking Federation code of practice on mortgage arrears. Can the Minister tighten up that paragraph further? Could he appoint a panel of individuals who could negotiate interest only repayments for a period? That would be considerably stronger. Paragraph 27 states that "Every quarter each covered institution shall provide the Regulatory Authority on behalf of the Minister with compliance certificates". Does the Minister trust the Financial Regulator to carry out such an important task? It is clear to me that this person has been asleep at his desk for at least ten years. I would not trust him to go up the road. Paragraphs 28 and 29 are very strong and very good——
Paragraph 32 refers to the covered institutions taking "all reasonable steps". That is not covered in the definition at the beginning. Can the Minister elaborate on what he would regard as "all reasonable steps"? There is no indication of it here, and the Minister's notion of this and mine may not be the same. When we go to the banks, their notion might be substantially different than ours. Perhaps he could elaborate on that. Paragraph 32 also refers to the period of the guarantee. Given the activities of these bankers, is it not appropriate that this type of monitoring should be in place beyond the terms of the scheme?
Paragraph 34 refers to steps to restructure the executive management responsibilities of the covered institutions and to strengthen its management capacity. Unfortunately, there is no capacity in the scheme for heads to roll. We are talking about strengthening the management responsibilities, and not the management team in these institutions. Would the Minister consider looking at that? It is clear to me that some of these people should be put out the door.
Paragraph 44 states that "A covered institution shall not pass on the costs of the guarantee to its customers in an unwarranted manner."
Paragraph 45 mentions corporate social responsibility. I have never heard of a bank that had corporate social responsibility. The second line of the annexe guaranteeing the charge on page 14 refers to the State being remunerated appropriately. Would the Minister consider that the State should be remunerated proportionately? The proportional reward to the taxpayer and the State would bring the figure closer to the €8 billion that I mentioned earlier, rather than the €1 billion sum that has been mentioned in the media.
There are a fair few questions there and it is difficult to work on a Committee Stage basis when I am asked a question on every paragraph. I will assist the Deputy as best I can. I wonder whether we should have had a proper Committee Stage so that we could go through the scheme paragraph by paragraph.
Deputy Morgan started talking about enforcement and paragraph 35 deals with that. The basis of enforcement is that a legal obligation of a civil character is being entered into by the relevant institution with the Minister. Hence the Minister has the power, by notice in writing, to increase the charge, to impose additional conditions or ultimately, to revoke the guarantee. Were an institution to engage in persistent misconduct in raising of funds on foot of the guarantee, the Minister would have power to revoke the guarantee and bring it to an end.
Deputy Bruton raised the question of the voluntary departure of an institution from the scheme. That is envisaged in paragraph 13 of the scheme. Paragraph 13.4 provides for when the covered institution, with the consent of the Minister, withdraws from this scheme. An institution can leave before the expiry of the period with the consent of the Minister——
I remind the Deputy that the charge is there to secure a return to the taxpayer for the valuable benefit which sovereign Ireland has conferred upon the institution. That is a consideration which the Minister would be entitled to take into account in considering whether to permit an institution to leave the scheme. That is the reason for the insistence on ministerial consent in the scheme. However, there is the possibility of departure and it could be that institutions would wish to depart.
Deputy Morgan raised the question of the position on the charging model, which I outlined in my speech on Second Stage. On the calculation of the charge, one of the difficulties in this whole area in determining a market rate for a guarantee of this nature is the absence of comparable benchmarks and how one takes into account the potential difficulties in the current circumstances for beneficiaries to bear the amounts that might be estimated, as against those in normal financial circumstances. In normal economic and financial circumstances the need for a guarantee would not arise. However, we are in abnormal circumstances and the price that a private commercial institution would charge for such a guarantee in abnormal economic circumstances would be very high indeed. The charge for the provision of the guarantee is based on the Government funding costs, on the basis that it comes as close as possible to what could be considered an appropriate price in the current financial environment. There is currently no indication that funding costs for the covered institutions have declined on account of the provision of the guarantee.
Deputy Bruton in his Second Stage contribution also asked me about the revision of the charge. There is provision in the scheme that the charge can be revised by the Minister in light of prevailing economic conditions. Were the funding of Government debt to become——
I agree with the points made about the need for confidence. We can stay here all day going through the 53 paragraphs of the scheme. The legislation would be successful if the scheme were never used. This is a matter of confidence. It is our job to ensure that we have a stable banking system in which people have confidence and in which they are prepared to invest their money on deposit. I refer the Minister to the explanatory memorandum of the scheme and the provision for regulatory supervision. That is the most important aspect of the scheme.
I am going to ask a question. I want to know from the Minister whether the regulatory supervision will include the activities of banks. Banks want to be building societies and insurance companies, and building societies want to be banks. If I have a plumbing problem, I call a plumber, not a carpenter. The problem has arisen because banks got involved in business they were never supposed to be involved in. Will we restrict activities so that banking will be for bankers? A 1% insurance levy is still being levied on the taxpayer, in case people forget, because somebody set up an insurance business that was destined to go flop and we are still paying the price for it. Regulation in these areas is very important.
I was a member of a Government that had to bail out the AIB because it became involved in an insurance company. What was it doing?
I am asking a question. When we have the opportunity now, will this regulatory supervision extend to curtailing the activities of people dealing with other people's moneys so that they concentrate on the business on which they are supposed to concentrate, such as the AIB becoming involved in insurance and some fellow over in London taking risks on the back of a cigarette packet and we have to bail them out?
Regulatory supervision and the regulatory authorities are vitally important. I ask the Minister, in addition to reporting back on the operation of the scheme to the Joint Committee on Finance and the Public Service, of which I am a member, to give the House a guarantee that we will have a regular report from the Financial Regulator and the Central Bank on the activities of all the financial institutions and that we will not be forced to go, cap in hand, to ask these people to please come in and explain themselves. Now we have an opportunity to put in place structures for proper and adequate supervision. It is fair and reasonable to put restrictions on institutions because of their importance in the whole structure of society, to say they are not to become involved in other business and that they are to stick to their own business. If building societies had continued on the road on which they were established, they would be giving mortgages and banks would not have been involved in that market. We all want to do other people's business and it is time that we decided that a banker should stick to banking, an insurer should stick to insurance and a building society should stick to giving loans to people. I ask the Minister if he agrees or disagrees with my proposal.
I will answer the Deputy's question in two parts. First, with regard to the immediate steps, the Financial Regulator will recruit an additional 20 senior supervisory staff with banking experience to be placed on site in key banks to monitor developments. I referred in the course of the debate to the fact that it is quite easy to recruit good people at present. The Financial Regulator also requires the banks to set out new business plans focusing on the need to reduce their risk profile and to ensure their models of banking are sustainable in the new environment. The regulator will apply enhanced reporting obligations regarding capital, asset quality and individual large loans to supplement our daily liquidity reporting requirements. Other measures will be announced in due course.
Deputies Bruton and Burton raised the issue of the absence of detail. The scheme sets out a range of additional requirements that must be met by the banks. The board of the Financial Regulator has confirmed that to police the operation of the scheme and to reflect the new developments in financial markets, it has decided to introduce a more stringent regulatory regime to apply to all banks covered by the scheme. This regime represents an intensification of measures already introduced by the regulator as well as the imposition of significant new requirements. The measures will focus in particular on the management of credit and liquidity risks and the need to ensure adequate funding to meet the borrowing requirements of the economy.
The elements of the new regime include a requirement that each covered institution will demonstrably strengthen its overall risk assessment model for credit, liquidity market and operational risk to take account of the changed economic, investor, international market conditions. There will be a requirement for each covered institution to agree a risk mitigation plan with the Financial Regulator. This plan must include not only an evaluation of strategic options but also management and governance arrangements for its business activities. In addition, covered institutions must implement the terms of the agreed plan and must report any variance from it. It will be open to the regulator to require the plan to be reviewed at any time. A key component of the plan for the institutions covered by the scheme will be to review the cash flows and funding schemes in place to manage liquidity and each bank's approach in these matters will be subject to any requirements that the Financial Regulator may impose.
I have outlined to the House the steps already being taken by the Financial Regulator. This is one half of the issue raised by Deputy Barrett. A very interesting issue raised by him was that in the era of the past two decades considerable confusion has developed in the name of capital liberalisation with regard to the traditional identities of banking institutions, so that insurance, traditional retail banking, wholesale banking and building society operations have become merged and blended in different institutions. This is a second elephant in the room which will have to be examined but I do not think it is as urgent and requires examination as urgently as the first one.
I refer to the Minister's contribution this morning in which he stated that this is a draft scheme. We are now discussing that draft, but it is serving little purpose because we are in a take-it-or-leave-it situation. Why was there no opportunity for amendments to be dealt with? Even if we speak until 10 p.m. we cannot change anything in the regulations.
I am concerned with the weakness in some of the Minister's statements. It is provided that the Minister "may impose a specific obligation". On page 16 he states, "I expect the institutions to ensure the cost guarantees are not passed onto their customers." Could we get a little more assurance than that the Minister expects this to happen? He continues in this vein, saying, "I expect each covered institution to undertake a fundamental review of its corporate governance and take appropriate steps." We will be waiting a long time for the institutions to take those sorts of actions. I have no confidence in the Minister's expectations of the institutions to carry out those functions. Could the Minister be a little stronger than expecting the institutions do this, and instead make them do it?
The phrase "may" is commonplace in any statutory drafting and it gives the Minister power to deal with matters as the Minister thinks fit. The matter before us is a statutory instrument, not an Act of the Oireachtas, so it is considered in its whole terms.
They will be made do things as required. To be clear, "A covered institution shall comply with any direction from the Minister or the regulatory authority, or both, to take specified steps to restructure its executive management responsibilities, strengthen its management capacity and improve its corporate governance." Therefore if the Minister gives a directive it must be complied with.
Arising from the Minister's earlier reference to recapitalisation, does he accept the fact that there is some anticipation outside this House that any action on recapitalisation will be led by the Government? There is a clear duty and onus on the banks to engage in recapitalisation, with particular reference to their duty to investors, small business and their shareholders. The Minister speaks of action and execution. What action has he taken recently to influence the banks on their duty regarding recapitalisation to avoid a situation where people appear to be waiting for the Government and the Minister to lead that charge?
Deputy Bruton mentioned the role of the public service director. There may be a conflict that might require amending legislation to the Companies Act given the fiduciary duties of any director and the fact that it would appear that any public service mandate could conflict with the duties of directors as defined in companies legislation.
On the board of directors, Deputy Charles Flanagan is correct. The company law and fiduciary obligations of directors have coloured how we have drafted the paragraphs of the scheme. The Deputy will notice in the terms of the paragraph, "in order to promote the public interest", so the purpose of the appointment is to promote the public interest, but it is not in the public interest. The director still acts a director of the financial institution and must have regard to the overall well-being of the company, and the duty to the shareholder applies to this director as it does to any other. That is why the paragraph has been drafted in that way. The State is not taking equity participation in the financial system through this legislation and scheme. Because we are a step short of that, one cannot say the director who is acting to promote the public interest represents the public interest. It is a fine distinction in the scheme and, fine though it be, it is to respect the principle that this is still a private institution.
They will have a vote on the board and will belong to a panel of persons whom I will choose, not one selected by the banking system. Deputy Burton expressed a view earlier on the appropriate type of person that should be appointed and I would be interested in the views of Deputies, short of naming names in the House, on the type and calibre of person they would like to see occupying these positions.
Without getting to names, Opposition Deputies could recommend the type of person. Reference was made during the debate to public servants. There are public servants who have never had any private engagements on the termination of their period of service in the public service and are willing to act in the public interest. There are people in this House who could act in the public interest. There are people in the banking system who have sufficient detachment from their private concerns to act in the public interest. If Members have other ideas I will entertain them.
I have regular discussions with the chief executives of the two principal financial institutions and I have raised these matters in those discussions, but I do not want to elaborate on the contents of those.
I am reminded of "Joe the plumber". If he was looking at us and examining this scheme, would he and his family have confidence that the scheme being implemented would be suitable to his needs and requirements? He would not. When the Minister first announced the scheme——
I will put my question. The Minister promised he would go in deep. This scheme allows for the possibility of going in deep without going in deep to the banks. I see nothing in the scheme that changes the regulatory framework we have seen heretofore. My question is specifically on page 11 of the scheme, point 45, where the Minister refers to corporate social responsibility. He states, "The Irish Banking Federation, on behalf of all covered institutions, submits a bi-annual report to the Minister on goals and targets laid down by the Minister in relation to corporate social responsibility". I would like the Minister to elaborate on that statement because until we can force a recalibration of the modus of corporate social responsibility and how banks do their business, it will be more of the same and there will be no change to the banking culture. There must be a change to the banking culture. That question is on the minds of the people I represent and it is a legitimate question.
I would like a further teasing out of the appointment of non-executive directors. The Minister previously spoke about the problems that would arise about the legal personality if one were to appoint people directly to the board. Is there no provision that can be made that would serve the public interest by amending any legal provisions that would give the people the power as overseeing executives on boards of banks?
This State pays the Financial Regulator and his offices €57 million per annum. We have seen no bang for our buck. Nothing in this document——
A number of powers to patrol business practices are laid out in the scheme. I have the power to withhold approval from the covered institutions to acquire shares in other financial institutions and to prohibit them from establishing subsidiaries or entering into new businesses, if I believe that is appropriate. I also have the power to set rules governing the declaration and payment of dividends. All of these powers are vested in the Minister.
In addition, the Financial Regulator, after consulting with the Minister, can impose conditions regulating the commercial conduct of a covered institution's business to minimise any potential competitive distortion that might arise and to avoid any abuse of the guarantee. The Financial Regulator has the power to direct covered institutions to take risk reduction measures, which reduce the risk to the Exchequer under the guarantee is contained in the scheme. The regulator also has the power to limit the expansion of the activities of covered institutions in order to ensure that their aggregate growth and balance sheet volume is not excessive and does not exceed certain stated rates. The regulator can set targets on assets and liabilities, including loan deposit ratios, wholesale funding, total liabilities ratio, deposit growth and maximum loan to value on new loans, as well as direct covered institutions to set up appropriate funding structures and to comply with the liquidity, solvency and capital ratios that he or she considers appropriate. The regulator also has the power to withhold approval for share buy backs or redemptions from covered institutions. As well as these bare powers, I outlined earlier the steps already taken by the Financial Regulator to implement greater controls, which are on the record of the House.
Corporate social responsibility is dealt with in paragraph 45 of the scheme. The scheme requires the Irish Banking Federation, on behalf of the covered institutions, to submit a twice yearly report to the Minister on the goals and targets laid down on corporate social responsibility by the Minister. These include the delivery of the national payments strategy,the promotion of financial inclusion, the development of financial education and the implementation of the next phase of the Government's social finance initiative. These are ambitious goals in terms of the social responsibility of the banks.
The question of a national payments strategy goes back to a national e-payments strategy report published by the Information Society Commission in 2003. The report concluded that Ireland lags behind most of its fellow EU member states when it comes to modernising its payment systems. Following publication of the report, an implementation programme was established under the Department of the Taoiseach and the Irish payment services organisations to co-ordinate the actions of industry and stakeholders in moving towards electronic payments in Ireland. I moved that process forward in the budget announcement earlier this week. Deputy Sherlock may not be aware that I increased the stamp duty on cheques and lowered the duty on certain card transactions.
The Department of Finance commissioned research into financial exclusion in Ireland in 2005. The resulting report, entitled Financial Exclusion in Ireland: an exploratory study and policy review, estimated that approximately 11% of the Irish population was unbanked. Those who were over 65, retired or unemployed were most likely to be unbanked. Within this 11% it was estimated that 3% were unaccounted, that is, they did not have a bank, credit union or post office account.
What we have here are the rules of engagement and the entrance strategy. I ask the Minister to look forward and elaborate on the exit strategy from this arrangement for the State and the taxpayer. There is a sunset clause concerning 2010 but I envisage unintended consequences here because of the public interest that will be served by the appointment of observers to bank boards and the non-payment of dividends, which I presume is what the Minister intends. Does the Minister envisage that the latter provision will make it more difficult for banks to recapitalise from the market themselves? In that context, does he foresee difficulties for the State and the taxpayer in extricating themselves from the current arrangements in 2010?
I wish to raise the issue of toxic assets and the figure of €15 billion that has been mentioned. I understand that the figure of €15 billion refers to assets that are not backed by additional collateral but is based only on the value of the property to which it relates. I consider that to be extraordinarily toxic, to the extent that there is a very bad smell from it.
At what stage will the taxpayer be called in to pay for what is involved in that €15 billion figure? Let us take the example of a speculator who bought a property for €1 billion several years ago. One could now assume that the property would only be worth approximately €250 million, perhaps less, if the speculator could actually get someone to buy it. For how long will the misery and pressure rest on either the speculator or the bank before it transfers to the ordinary taxpayer? That is what the ordinary people of Ireland want to know. If one considers the misery the Minister has inflicted on the Irish people in his budget in order to save €2 billion——
Section 23 of the scheme refers to the Minister appearing before the Oireachtas Committee on Finance and the Public Service every six months. As I said earlier, initially the Minister should appear before that committee within one month to deal with the level of charges and to advise Members as to how the scheme is working. The Minister should also advise us of his views regarding the possible recapitalisation of the banks. I ask the Minister to give a commitment today that he will appear before the committee within a month. The scheme requires that he appear every six months but it is important that he do so within a month to set out the full methodology in terms of the charge and to deal with the issue of recapitalisation.
Following from Deputy Connaughton's point, does the Minister consider the banks to be solvent? The Financial Regulator appeared before the Oireachtas Joint Committee on Economic Regulatory Affairs last Tuesday and stated that there was €42 billion of a capital base within the banks. He also said that property development assets in Ireland amounted to €39 billion, of which €24 billion is supported by additional collateral, with only €15 billion based solely on the property itself. Does the Minister believe that the value of that property will hold up? I note that the Financial Regulator is planning to go into the banks to take a closer look.
In section 36 of the scheme, there is no commitment to a minimum level of funding being given by the banks to customers, mortgage holders and so forth. Will the Minister be seeking a minimum level of funding to be given by the banks to allow the economy to function? This is critical.
With regard to section 44, will the Minister guarantee the charge will not be passed on to the customer? The section states, "A covered institution shall not pass on the costs of the guarantee to its customers in an unwarranted manner." Will the Minister commit to come before the Joint Committee on Finance and the Public Service within a month to advise on how the application of the scheme is working and on the recapitalisation of the banks?
Recapitalisation is not in the scheme. If there were any question on recapitalisation I would immediately approach the Opposition spokespersons and brief them on it. I remind the House that last week the chief executives of a particular British financial institution were observed entering No. 10 Downing Street and it was suggested that the visit was about the capitalisation of the institution. The institution in question lost 42% of its share value on the stock exchange the following day. The idea that we can come here and have a great debate about capitalisation is misinformed.
Will the Minister come before the Joint Committee on Finance and the Public Service within a month to advise it on how the scheme is functioning, provide an update on the scheme and deal with other issues? The Minister is not giving a commitment.
The scheme will end in two years' time and it cannot be extended. Deputy Creed asked about a sunset clause and this is the sunset for the scheme. The Government gave a letter to the relevant institutions on 30 September and this letter was reflected in legislation and in this scheme. The terms of the scheme have been cleared with the European Commission. It arose from a danger which had developed and the measures are proportionate to that danger. This proportionality means the scheme will expire on the date specified in the scheme.
Deputies Connaughton and O'Donnell touched on the evidence on toxic assets which the Financial Regulator gave to the Oireachtas Joint Committee on Finance and the Public Service. The regulator made the point that our banks do not have excessive exposure to derivative contracts. He accepted these securities had a habit of cropping up in other sectors. While he was careful to state he did not wish to suggest we would not see them in areas such as reinsurance in the future, he did not regard them as a material matter in the context of banks' balance sheets.
The regulator also examined the focus on property. Deputy Connaughton quoted one of the figures he gave for property secured where the property was the only asset and the security and this figure was €15 billion. This property still has a value. As I pointed out earlier, it is not valueless. He also drew attention to the fact that the capital base of the banks is €42 billion.
Paragraph 32 of the scheme states that in order to promote the public interest, one or two non-executive directors can be appointed. In reply to Deputy Charles Flanagan, the Minister stated they are not to act in the public interest. Deputy Charles Flanagan had raised the fiduciary issue. Does the Minister agree if they are not to act in the public interest they have little purpose? Will the Minister explain what is supposed to be their role?
In what way is the public interest protected by such appointments? Will the Minister clarify what type of person he regards as qualified to be so appointed? How will he determine who should be put on the panel? Not to be blunt about it, how will the House be sure that crass party political appointments will not be made to the panel?
Will the Minister explain the reason behind his thinking when it comes to individual financial institutions covered under the scheme for presenting them with a panel from whom they can choose one or two individuals? Will the Minister agree it would be more appropriate in respect of a particular institution that he nominate the individual or individuals he deems appropriate? Did the Minister give any consideration, when it came to composing a panel of appropriate individuals, to the idea that those individuals to be appointed to the panel should be approved by the Joint Committee on Finance and the Public Service so there is some form of transparency?
To return to Deputy Charles Flanagan's question, will the Minister accept that the general public is under the belief that these appointees will act in the public interest? As this is not compatible with company law, next week this House should introduce an amendment to the Companies Acts as part of the emergency provisions necessary to ensure they can lawfully so act.
With regard to paragraph 45, the Minister has already made reference to what he sees as the issues relating to corporate social responsibility. Will the Minister explain why this does not apparently involve any corporate responsibility imposed on banks to give leeway to those who hold residential mortgages and are under pressure because of their loss of employment? Does the corporate social responsibility clause envisage ensuring the banks can give some leeway to individuals to roll over interest payments for a period of time in the same manner as allowed to major developers?
My next question has been raised already by colleagues but the Minister has not properly responded to it. The scheme has a provision which states the banks will not be allowed to make unwarranted charges on customers arising out of the guarantee. The obverse of this is that the banks can make warranted charges. Will the Minister explain his thinking behind this? To what extent will bank customers be protected from facing extra costs for banking activities as a consequence of the recklessness of banks in making unnecessary and unsustainable funding available to developers?
In the context of the security the banks hold, and we have heard two figures, namely, €15 billion and €29 billion, the Minister is correct to state that property regarded as security still has some value. Will the Minister acknowledge that in the current market situation it is almost impossible to know what is this value? Does he have any insight as to how the people appointed by the Financial Regulator to stress test the banks' security is attaching value to these matters?
Will the Minister confirm to the House whether the various financial institutions identified are expected to sign up to this scheme within the next 24 hours if and when it is approved by the House? What is the timeframe for this?
This morning the Minister stated:
In the case of subsidiaries participating in the scheme, the Minister may impose specific obligations under the scheme to appropriately ring-fence the activities of a covered institution in order to minimise the covered institution's financial exposure to its parent credit institution.
When the Credit Institutions (Financial Support) Act was going through the House, the Minister said he would consider favourably one bank of several mentioned in the House. He said he might consider another and he certainly would not consider the others. What changed his mind on that? Was it the intervention of the EU Commissioner? Now that he has given them the option to sign up to the deed, how does he propose to ring-fence them? What will the Minister be ring-fencing? If an unnamed bank with a subsidiary has loans out in the United Kingdom, Poland or elsewhere, will we be underpinning those liabilities?
Given the fiduciary duty of a director to an institution and its shareholders, is it not the case that when the public interest representatives become directors of a bank, their first duty is to the bank and its shareholders? Are we sending out a false comfort signal when putting the word abroad that everything will be all right with a couple of public interest directors on the banks' boards?
Regarding the commercial rate, the Minister's colleagues, including the Minister for Defence, Deputy Willie O'Dea, who is beside him, were all rolled out after 30 September to repeat the mantra that we will be charging the banks a commercial rate. They all had that off, but many of them did not even understand what it meant.
Then one morning The Irish Times had the headline that the banks were to be charged €2 billion. That did not arrive there because of some journalist. That figure was planted. Now the figure has changed. I understand the Minister's argument that if he were to impose a commercial rate, say 2%, it might be counterproductive.
Is it not the case that the €500 billion is an estimate and the model will not be published? The scheme provides that if there is a call on the State, it will be honoured out of the fund. We know the fund will not go within an ass's roar of meeting liabilities in those circumstances. There is a second elephant in the room and it may be connected to Deputy Michael Noonan's first elephant. What would happen if there were to be a bank default? Is it seriously suggested that because the gentlemen at the top of the other banks have signed up to the deed, they will come to the rescue of a bank, that I will not name, if it goes down? I do not believe that for one minute.
Paragraph 44 of the draft scheme states, "A covered institution shall not pass on the costs of the guarantee to its customers in an unwarranted manner." The term "unwarranted manner" is part of the vague, aspirational idea with which we would all agree. What does it mean? Accordingly, there must a warranted manner and in those circumstances the bank customer would end up paying the charge. Does the Minister envisage a similar levy to that imposed on all the other insurance companies during the PMPA failure? People will want to know about this, given the scope of this insurance policy of €500 billion from a State that is fast getting into serious difficulties with its public finances. If the guarantee were called in, how would it materialise?
Does the Minister have a rough idea of how the charge will be approportioned as between the banks? The Minister earlier said there will be a short time to sign up to the scheme for one of the banks not headquartered in Ireland. How much time will be given to it to sign up? Will it have to come to the tape by a certain date and after that it has lost its chance and takes its luck in the marketplace?
I indicated earlier I would be interested in the views of the House on the appropriate type of person to appoint to the public interest panel. Deputy Pat Rabbitte is correct that their duty will be to promote the public interest but their primary duty will be to the bank's shareholders. This is because this is not a nationalising measure; it is one step short of that. What we have arranged for is the establishment of a panel of persons appointed by the Minister for Finance who are available for appointment to the boards of the bank but they are there to promote the public interest. That is the formula we have arrived at for this scheme.
Deputy Alan Shatter suggested amending the Companies Act next week to oblige the appointed directors to act in the public interest. That is not an easy amendment to insert into the companies legislation. The duty of a director to a company is a fundamental one.
I will be judged on this matter by the quality of the people on the panel. That is the key point. Their contribution and record regarding their capacity to act in the public interest will be the judge of their ability.
Deputy Alan Shatter raised the issue of lending policies and the treatment by banks of those who get into repayment difficulties. This is covered in paragraph 26 which states:
Each covered institution shall, at such frequency as the Minister shall determine, confirm in writing to the Minister its compliance with the Irish Banking Federation Code of Practice on Mortgage Arrears and the Consumer Protection Code issued by the Regulatory Authority.
That is best practice and it is reinforced in the scheme.
Deputy Alan Shatter also raised the issue of warranted and unwarranted charges. The bank could charge a higher risk customer the higher rate because of the existence of the guarantee. Again, the degree of control that is exercised over the scheme means that improper deductions from customers cannot take place on foot of the provision of the guarantee and the liability of the banks to pay the State.
We envisage the negotiations to finalise the scheme will be completed within days rather than weeks.
Deputy Pat Rabbitte raised several interesting questions but I wish to clarify one matter he raised. The subsidiary banks to be covered in the scheme are headquartered, have a corporate existence and are regulated in Ireland. We are not covering banks which are established in Ireland but have headquarters overseas. Regarding the ring-fencing provision, none of these institutions is the same. It is important we have a more general power to ring-fence the assets in terms of their authorised securities and their assets in the jurisdiction.
We can apply elements to it but there has to be a careful ring-fencing of the operation to its presence in the Irish economy. That is the whole purpose of the ring-fencing element of the scheme. Paragraph 50 provides:
A covered institution shall manage the business of its group at all times with a view to furthering the purposes of this Scheme [and] the Minister may require certain obligations of this Scheme... to apply to the parent of a covered institution...
For the purpose of protecting us here in Ireland, the Minister is given the power to impose as a condition of the agreement an obligation on the parent company as well as the subsidiary. That is provided for in paragraph 50 of the scheme. Therefore, it is not just a matter of ring-fencing the assets of the subsidiary in this jurisdiction; the Minister can stipulate, as part of the contract with the relevant institution, that the parent company has to enter into certain obligations as well. That is essential to safeguard the State and the taxpayer in that regard.
Deputy Rabbitte wanted to explore the doomsday scenarios. The point is that, through the guarantee, we have restored solvency and confidence to the banking system. The question of a default by the banks is not envisaged at present. The Taoiseach made it clear that were there a default in the future it could only be dealt with by a levy over time. That is not in the legislation or the scheme, it is something the Oireachtas would have to consider afresh. He did state, however, that that was the policy of the Government in that regard.
That is a fair question but the whole point about the scheme, if one examines its contents and the statement already made by the regulator concerning the implementation of the scheme, is the intense degree of supervision that we are now exercising in the banking sector. The Deputy is right to say that is inseparable from the character of the guarantee we have given. We have to exercise that intensive level of supervision over these institutions to safeguard ourselves.
Does the Minister agree that, due to the extraordinary circumstances we find ourselves in, we must take special measures concerning all banks and other financial institutions availing of the guarantee system? The guarantee is effectively being underwritten by all the citizens of this country who are demanding special measures. We are talking about international finance and a remuneration oversight committee, which goes over most people's heads. The public is demanding openness and transparency. The banks should guarantee to include a note in their accounts on the breakdown of loans. Does the Minister agree that information on the construction sector should include the amounts outstanding?
The data should be provided on a geographical basis, including the Republic of Ireland, Northern Ireland, Britain and North America. Many accounting bodies may not be happy with this suggestion, but it would be appropriate in the current circumstances. Does the Minister agree?
Will banks be able to choose from the 20 board members? Will each bank have the right to choose or will the Minister nominate those two? Could two people resign voluntarily from the bank's board, or why will the Minister not remove them? The system as envisaged would make boards unwieldly. They have quite a few jackasses on those boards who may have to be removed.
Paragraph 32 states:
The covered institution shall remunerate those non-executive directors. The Minister will also have the right to appoint persons to observe all meetings of the remuneration, audit, credit and risk committees of a covered institution.
Will there be another panel to go into these risk, remuneration and audit committees? This is the nub of the problem in all boards which have sub-committees. They are set up because they are someone's friends who do not have any responsibility. They only look for arse-lickers. I am quite clear on that. That is the bottom line.
I apologise to you, a Cheann Comhairle.
Why did the Minister not give the Committee of Public Accounts' auditor, the Comptroller and Auditor General, the right to examine those banks and institutions to see what is there? He would be more independent than the banks' auditors who, I suspect, are appointed by the chief executive and the board under the Companies Act, which is different. They are there to protect shareholders but I am conscious that they do not protect customers.
When the audit has been completed, will those management letters be available to the Minister to see what the auditor's findings were on the failures of the past 12 months? Management letters are discussed at board level, if presented by the auditors.
How many of these banks will need capital? Is it the Minister's intention to force a merger of banks? Does the Minister have that right? We have been told of various names in this regard. What is the position of the six major Irish institutions? Is the Minister sure they will all sign up to this agreement? As we have seen in the last few days, arising from some issues, the share price has collapsed. I understand that Anglo-Irish Bank will publish its annual report in December. Has the Minister or the regulator had sight or knowledge of what is in that bank's annual report for last year, vis-À-vis what we are hearing now?
Last week, the Minister told the House that prior to establishing this scheme he would instruct his departmental officials to investigate the situation in the Central Bank and the Office of the Financial Regulator. What was the extent of the investigation and how many investigators were involved prior to the introduction of the scheme? What was the outcome of the investigation? What undertakings were given to the Minister on foot of any inquiries that might have been made? I am not sure if it was an investigation or an inquiry, but the Minister mentioned it in this House and in the Seanad during the debate last week. Did he or his officials find anything unusual that would worry him? What guarantees was the Minister given to address those issues henceforth?
Deputy Feighan asked about profile statements by financial institutions, breaking down their lending between different sectors in the economy. In fact, they have published such information in the past. Under the scheme it would be possible to require the publication of such information. It does not present any difficulty. One cannot assume that a particular sector is toxic in its entirety, of course. No matter how one classifies books or analyses the sectors, one must remember that much of the loan book can still be good. Quite an assumption has been made in the debates here and in the Upper House that lending in the construction sector is automatically in default, which is not necessarily the case.
Deputy Ned O'Keeffe raised a number of points. First, the relevant bank auditors do report to the regulator, whose staff have sight of the information referred to by the Deputy.
Regarding whether I can remove a board member who is a total fool, paragraph 34 states:
A covered institution shall comply with any direction from the Minister or the Regulatory Authority, or both, to take specified steps to restructure its executive management responsibilities, strengthen its management capacity and improve its corporate governance.
I suppose if a director was so impossible as to be an impediment to good corporate governance I might, on a construction of that provision, have power to do so.
The more important point raised by Deputy Ned O'Keeffe — and I agree with him — is the importance of the sub-committees that deal with risk assessment, auditing, remuneration, and credit and risk committees of the institutions. Under this scheme I have the power to appoint persons to observe all those meetings. That is a critical power in this scheme.
There are sub-committees, as the Deputy well described for us, and under this scheme we have powers to send persons to attend all their meetings.
Deputy Durkan asked a number of questions which, I must confess, I could not quite fathom. The regulator is recruiting 30 additional staff to assist him in the intensive supervision of the financial sector.
Will the detail of the quarterly oversight reports to be completed by the regulator be published and will they be subject to oversight by the Oireachtas Joint Committee on Finance and the Public Service? In regard to parliamentary oversight generally, it is a nonsense to suggest, taking account of how quickly developments have taken place in the financial situation, that we should have a debate only every six months. In the last three weeks alone, we have seen a dramatic change that nobody could have predicted. To talk about a six-month reporting period, when presumably the Minister will come before the Joint Committee on Finance and the Public Service, seems totally inadequate.
Many speakers have asked about the role of the non-executive directors and observers on risk assessment boards and credit committees within banks. Is it consistent that while the State does not propose to purchase an equity stake in the banks, the Minister will have the power to determine salaries and bonuses and to link them to adjustments in guarantee charges and measurable actions to address excessive risk? The Minister is rightly determining the salaries, bonuses and pension entitlements of senior executives within the relevant financial institutions, but at the same time he is saying he cannot appoint anybody to the board to look after the State's interest. Is that not inconsistent with company law? Even though the State is not taking an equity stake in the financial institutions in question, the Minister lays claim to an entitlement to determine the salaries and bonuses of executives. Will the Minister clarify that contradiction?
Is it time to replace the chief executive in the Office of the Financial Regulator and the Governor of the Central Bank? Following the point made by Deputy Coveney, will the Minister take equity in the banks in order to give teeth to the nominated directors? Will the Minister consult with the leaders of Fine Gael and the Labour Party before appointing the three wise persons and directors to any of the financial institutions in question?
Every quarter, each financial institution will have to provide the Minister with a compliance certificate issued by its auditors. Should this certificate not be issued by an independent auditor? Does the Minister agree that the auditors of the banks should be rotated every three years? There seems to be no sanction where auditors do not convey bad news. Surely that is the kernel of the problem.
Today's edition of The Irish Times includes an advertisement seeking the recruitment of 20 staff to the regulator's office. How many additional staff are required to "go deep" into the banks, as the Minister put it? Are we merely setting up another layer of bureaucracy?
Deputy Coveney asked about the oversight reports. These will be commercially sensitive documents and the information contained in them cannot be publicly disclosed for that reason.
The Deputy also asked about the balance struck in the scheme and whether the State has too many powers in the absence of an equity participation. It is true that the State does not have an equity participation under the scheme, but the State is acting as sovereign guarantor. Part of the price on which the State is entitled to insist in return for that are the various requirements set out in the scheme.
We could have considered requiring of the banks a participation in equity. However, as I said in the House when I put through the Bill, the best course of action at this stage is to seek cash from the banks in return for the sovereign guarantee they will receive.
I am not ruling out other ways forward in the future. I am saying, here and now, that the decision I took in regard to this guarantee was that we seek cash and the presence of directors on the board in securing the public interest. That is the balance struck in this scheme.
There is a provision in the scheme for establishing a committee to deal with that.
Deputy Quinn raised an important point in asking whether I will consult with the leaders of Fine Gael and the Labour Party prior to the selection of the appointees both to the panel and to the remuneration committee. The answer is that I will. I am happy to do so. The strength of the participation in the boards rests on the quality of the appointees.
Deputy Quinn also asked about the State taking equity in the banks. I explained that the judgment I took at this stage is that we seek cash——--
In the grave crisis which the banking system presented on 29 September and in the days leading up to that, the Governor of the Central Bank and the chief executive officer of the Financial Regulator were pillars of strength.
The Governor participates in meetings with his colleagues at the European Central Bank. His ongoing liaison with the president and members of the governing bodies is of great importance to the State. There is an issue of continuity in terms of the stability of the financial system. That is very important.
Deputy Deenihan asked about the audit process. The auditors are subject to professional supervision and standards of their own. We have provided in the scheme for the appointment of an observer on the audit committee of the relevant institutions.
Is it possible for the Minister to increase the tariff on the banks by €100 million per year? This would enable him to steer clear of the golden oldies who will otherwise be put through rigorous means testing for their medical cards.
The Financial Regulator is seeking to recruit an additional 20 staff. My understanding is that the cost of running the Office of the Financial Regulator, which is in the region of €50 million to €60 million per annum, is undertaken jointly by the taxpayer and the banks. Can we have a decision that the entire cost will be borne by the banks?
The Financial Regulator said that €15 billion has been loaned to developers whose collateral is Irish property. Can the Minister get the banks to come clean and list the bad debts relating to that property, given that they will never realise that money? That there is uncertainty about this has not helped the banks' share prices. Under paragraph 8 the Minister has the power to review the terms and conditions of the guarantee scheme. Will he charge the banks a more commercial rate when he reviews the scheme?
With regard to the failure of leadership on the part of the chairpersons and chief executives of the six institutions concerned, does the Minister have the power to ask them to step down now or will he wait until he brings the next scheme to the House to provide for equity? At least one of the institutions is a mutual society. Does it have different terms and conditions from those of the other institutions?
Deputy Costello asked about the cost of the increased number of staff for the Financial Regulator. There is a formula which apportions the cost between the State and the banking sector. The banking sector makes a contribution to the cost of the regulator under that formula, which is administered by the Central Bank.
I can examine that issue but we might be constrained by the current arrangement and the legislation that provides for it. In reply to Deputy Terence Flanagan, writing up the books in banks is primarily an issue for banks and their auditors. On Deputy Broughan's question, I have ample powers to take the steps he suggests.
The Dail Divided:
For the motion: 114 (Michael Ahern, Noel Ahern, Barry Andrews, Chris Andrews, Seán Ardagh, Bobby Aylward, James Bannon, Seán Barrett, Joe Behan, Niall Blaney, Áine Brady, Cyprian Brady, Johnny Brady, Pat Breen, John Browne, Richard Bruton, Ulick Burke, Catherine Byrne, Thomas Byrne, Joe Carey, Pat Carey, Deirdre Clune, Niall Collins, Margaret Conlon, Paul Connaughton, Seán Connick, Noel Coonan, Mary Coughlan, Simon Coveney, Seymour Crawford, John Cregan, Lucinda Creighton, Ciarán Cuffe, Martin Cullen, John Curran, Michael D'Arcy, John Deasy, Jimmy Deenihan, Noel Dempsey, Jimmy Devins, Timmy Dooley, Andrew Doyle, Bernard Durkan, Damien English, Olwyn Enright, Frank Fahey, Frank Feighan, Michael Fitzpatrick, Charles Flanagan, Terence Flanagan, Seán Fleming, Pat Gallagher, John Gormley, Noel Grealish, Seán Haughey, Brian Hayes, Tom Hayes, Paul Kehoe, Billy Kelleher, Peter Kelly, Brendan Kenneally, Michael Kennedy, Enda Kenny, Séamus Kirk, Michael Kitt, Tom Kitt, Brian Lenihan Jnr, Conor Lenihan, Michael Lowry, Pádraic McCormack, Jim McDaid, Tom McEllistrim, Shane McEntee, Finian McGrath, Mattie McGrath, Michael McGrath, John McGuinness, Joe McHugh, Martin Mansergh, Olivia Mitchell, John Moloney, Michael Moynihan, Michael Mulcahy, Dan Neville, M J Nolan, Michael Noonan, Seán Ó Fearghaíl, Darragh O'Brien, Charlie O'Connor, Willie O'Dea, Kieran O'Donnell, Fergus O'Dowd, Noel O'Flynn, Rory O'Hanlon, Ned O'Keeffe, John O'Mahony, Christy O'Sullivan, John Perry, Seán Power, James Reilly, Dick Roche, Eamon Ryan, Trevor Sargent, Eamon Scanlon, Alan Shatter, Tom Sheahan, P J Sheehan, David Stanton, Billy Timmins, Noel Treacy, Leo Varadkar, Mary Wallace, Mary White, Michael Woods)
Against the motion: 22 (Tommy Broughan, Joan Burton, Joe Costello, Martin Ferris, Eamon Gilmore, Tony Gregory, Michael D Higgins, Ciarán Lynch, Liz McManus, Arthur Morgan, Aengus Ó Snodaigh, Brian O'Shea, Jan O'Sullivan, Willie Penrose, Ruairi Quinn, Pat Rabbitte, Seán Sherlock, Róisín Shortall, Emmet Stagg, Joanna Tuffy, Mary Upton, Jack Wall)
Tellers: Tá, Deputies Pat Carey and John Cregan; Níl, Deputies Emmet Stagg and Thomas P. Broughan.
Question declared carried.