Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Last weekend, the Government announced that it is prepared to support, alongside existing shareholders and private investors, a recapitalisation programme of up to €10 billion for credit institutions in Ireland. I want to set out the reasons for this announcement. At the outset, I want to make clear that this is a measured response to the dynamics of international capital markets, where expectations with regard to capital levels have altered in recent weeks. This has taken place in the context of an international financial crisis, which led to numerous state interventions in national banking systems across the world.

International financial markets have yet to normalise and the international financial system remains in a very fragile position. It is generally accepted that the fallout from the financial market difficulties is proving to be more acute and prolonged than anyone calculated at the outset.

The difficulties that began in August 2007 deepened significantly through September of this year with a succession of threatened collapses and rescues of financial institutions across the developed world. A pervasive uncertainty about credit risk emerged such that the market for interbank lending became extremely challenging. Matters worsened considerably when the big US investment banks came under stress, and across Europe the failure of the 158-year-old Lehman Brothers was a tipping point for the recent unprecedented turn of events.

Following this, the wholesale markets began to avoid all but the most minimal risks and this led to a drying-up of short-term lending. Despite liquidity injections to lower borrowing costs, the fear of further bank failures continued to deter interbank lending and led corporations, funds and banks to hoard cash.

Against this background and on the advice of the Central Bank, the Government acted with purpose and determination to guarantee the liabilities of credit institutions so that they could access funding in interbank lending markets. The prompt and decisive action on the part of the Government to guarantee all the deposits and certain debts was taken to allow the banks the support they needed to maintain their normal liquidity position in interbank lending and debt markets. The unequivocal advice to the Government from the Governor of the Central Bank was that this move was essential to allow banks to continue their normal ordinary business of providing credit in this country — what I have described as the lifeblood of the economy.

Following the initial announcement on 30 September, the Government brought the necessary legislation before the Houses of the Oireachtas to approve, first, the Banks (Financial Support) Act 2008 and, subsequently, the scheme to implement the Act. The Government's guarantee has been very successful. Irish banks have continued to do their business and all of our people and businesses have been able to deposit with financial institutions in confidence.

As with every country in Europe, Ireland has moved to ensure the security and stability of its banking system. For banks everywhere, liquidity — that is, the cash that comes in the form of deposits and interbank moneys — provides the funds that they then lend on. The guarantee has ensured that the banks can obtain that liquidity.

Since the guarantee scheme was introduced, my Department, the Financial Regulator and the Central Bank have been in ongoing discussions with the institutions concerned surrounding their obligations under the scheme. In addition, I have personally met with the chairpersons and CEOs of the institutions on a number of occasions. During these discussions I have asked the banks to examine options to attract or raise private capital to underpin their long-term sustainability and support their lending to the economy. These discussions have been productive and informative. This process of consultation, involving as it did close contact with the relevant institutions, provided a context for the Government's announcement of 14 December of support for a recapitalisation programme for Irish banks.

As I have said, banks need deposits and wholesale borrowings in order to have money to lend to the economy. The guarantee has enabled them to maintain this liquidity in very adverse circumstances. Capital is what allows the banks to take on the risk associated with lending into the economy, because capital provides a buffer against losses if they occur; less capital means less ability to lend. Even where a bank has plenty of liquidity, if it does not have capital it cannot afford to lend, and it will not be able to persuade others to lend to it. So recapitalisation will help to boost the ability of banks to lend and will place them on a more secure footing to contribute to our economy over the longer term. Moreover, it should also protect their ability to borrow money for their operations in the future, since higher capital levels reassure interbank lenders about the overall security of the banks they are lending to.

Recently, international capital market expectations in regard to capital levels in the banking sector have altered. Although Irish banks are capitalised above minimum European regulatory requirements, high loan impairments, whether already acknowledged or anticipated in the next few years, mean that the markets now expect that banks should have a higher level of quality capital. This expectation was reinforced when the United Kingdom carried out the recapitalisation scheme targeting this higher level. Other European countries have followed suit.

Significant falls in the share prices of Irish banks in recent times point to the capital market's belief that the Irish banks are undercapitalised. The Government's plan to recapitalise is intended to stabilise the Irish financial system and secure its funding base. Moreover, the Government's plan will enable banks to increase lending into the economy. Currently, the incentive is for banks to hoard capital to meet market expectations on capital levels. Reducing this incentive by injecting capital will facilitate lending to the real economy. Since the announcement of the guarantee scheme, many other countries have introduced state guarantees and recapitalisation programmes.

In Ireland, we have been able to monitor the actions taken by others and develop our own recapitalisation programme. Through this recapitalisation programme, the Government, working with the banks, intends to address the capital levels of the Irish institutions which have been the focus of capital markets in recent weeks.

As the House will be aware, the programme that the Government has announced envisages recapitalisation for banks in Ireland of up to €10 billion. This programme will include appropriate terms and conditions, and capital will be provided through the National Pensions Reserve Fund or otherwise. Accordingly, legislation to amend the National Pensions Reserve Fund Act 2000 will be brought before the Houses early in the next session.

The Government's detailed statement of 14 December sets out the main principles that would guide its approach to the recapitalisation of the banking system in Ireland. Important issues, such as the mechanisms through which the State could invest, the options available to the State for investment in the banking system and the maximum size of the fund, were all dealt with in the statement. It made explicit that the detailed guidance set out in the European Commission communication on recapitalisation on key issues, such as pricing, would be a central element of the Government's approach.

The nature of the State's investment may be by way of preference or ordinary shares and the State may, where appropriate, participate on an underwriting basis. I will now engage further with the banks themselves — indeed, I have engaged with them already since the announcement — with a view to specific proposals being brought forward by them in early January. Any capital investment will then need to be approved by shareholders and the Financial Regulator as appropriate.

I have met in recent weeks with a number of banks and investment businesses regarding their proposals for investment in Irish banks. Any serious propositions were referred to the institutions themselves.

Some existing shareholders have expressed an interest in subscribing for new capital. The Government has indicated that it intends to support the recapitalisation of banks alongside private investors and that, in principle, existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government. Any role for private investors will reduce the need for State investment.

State investment will not be forthcoming without conditions. A key principle in the operation of such a fund will be to secure the interests of the taxpayers through an appropriate return on and appropriate terms for the investment. The relevant financial institutions have been asked to submit detailed proposals on how they might avail of the recapitalisation programme announced by the Government.

The Government guarantee scheme sets out strict terms and conditions for covered institutions in terms of commercial conduct, control and oversight on remuneration and bonuses, requirements to establish appropriate funding structures, compliance with the regulator's targets on assets and liabilities if necessary and drawing up the restructuring of management plans. Any capital support will build on the measures contained in the guarantee scheme, including those to secure an adequate return and to safeguard the interest of taxpayers. In addition, the Government may require compliance with such further transparency and commercial conduct requirements as it sees fit.

In the period after the guarantee, the State commissioned an extensive report, conducted by PricewaterhouseCoopers, into the asset quality of the covered institutions. On receipt of that report in November, I immediately arranged meetings with the relevant credit institutions to raise issues in the report and matters that also arose in the context of the business plans submitted to me by the covered institutions. That dialogue process has been ongoing and intensive. Deputies will appreciate that, as I am in a negotiating position with the banking sector on these issues, I am not in a position to give further detail to the House. However, I am most anxious to ensure that the negotiations are brought to a conclusion as swiftly as possible.

Concerning the availability of capital for small and medium-sized enterprises, SMEs, the Government is committed to ensuring that funds are available to sound businesses to support their commercial activity. I have asked the institutions covered by the bank guarantee scheme to consider the contribution that they should make to the economy through appropriate credit initiatives for SMEs and otherwise. On foot of this request, several institutions have announced comprehensive SME support packages.

I have also met Mr. Plutarchos Sakellaris, vice-president of the European Investment Bank which announced that it was providing additional funding through its lending facility for SMEs in the European Union. Mr. Sakellaris confirmed that the bank has been in discussion with a number of Irish financial institutions about participating in this facility and that the investment bank hopes that agreements to provide such loan facilities can be finalised as soon as possible. I have urged Irish banks to utilise the facility to the maximum extent possible with a view to making the additional funding available to SMEs as soon as possible. I note that a number of banks have announced their intention to do so.

I wish to refer to the action taken at a European level and to outline how our proposals accord with European Commission guidance and action taken in other member states. Any investment of capital by the State in any bank will be undertaken in line with best practice in the EU and elsewhere and consistent with EU state-aid rules, in particular the recent Commission communication on recapitalisation. These guidelines address how member states can recapitalise banks in the current financial crisis to facilitate adequate levels of lending to the rest of the economy and to stabilise markets without unduly distorting competition.

Ireland has been participating in this work at EU level in the past year to enhance financial stability arrangements and the ability of authorities to respond to serious disturbances in financial markets. The programme of actions involves reviewing, along with the EU's international partners, how to improve the transparency of complex financial instruments, valuation standards, the prudential framework, risk management and supervision and market functioning, including the role of rating agencies. Ireland will continue to help to progress this agenda so that the EU, working closely with its international partners, can bring about a far-reaching reform of the international financial system, underpinned by principles of transparency and integrity.

Deputies would profit from examining an interesting interview conducted in today's Financial Times with the deputy governor of the Bank of England. He pointed out that monetary policy must be directed towards getting credit flowing to every component of the economic chain. He made the point that an obsession with capital ratios would not necessarily be the most successful way to do so and expressed doubts about whether the degree of capitalisation decided upon by the United Kingdom's Government some weeks ago is adequate to ensure that type of credit flow in the real economy.

I mention this because I have noticed in public commentary some impatience that capitalisation has not proceeded at a faster pace. We should be careful about how we get involved. For this reason, I have insisted that the onus was on the banks in the first instance to capitalise themselves, as they are private institutions. In an earlier debate, Deputy Rabbitte may have mentioned the possible use of the National Pensions Reserve Fund. I agree that it can be applied where there is a prospect of an upswing for the taxpayers in an investment in a particular financial institution, which was made clear in the Government's statement last weekend.

We have done a great deal of work since the guarantee was given. The detailed examination of the asset quality within the banking sector and the submission of the detailed business plans have enabled my officials and I to have a far more informed view of the state of the Irish banking sector. Together with the structured dialogue, this was the context that led to the Government's announcement last Sunday, which will be implemented in a short timeframe.

Richard Bruton (Dublin North Central, Fine Gael)
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With the permission of the House I propose to share time with Deputy O'Donnell.

John O'Donoghue (Kerry South, Ceann Comhairle)
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Is that agreed? Agreed.

Richard Bruton (Dublin North Central, Fine Gael)
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I agree with the Minister that we must be careful about this issue. Equally, it is a matter in which the Dáil must exercise careful scrutiny of what is occurring, but that position is inconsistent with the Government's decision to dismiss the Dáil for six weeks in the midst of this delicate and important business.

When the guarantee was offered on 30 September, I happily offered the support of the Fine Gael Party. The scheme was necessary and bought time for the Government to develop a strategy. In the intervening period, I have not seen the emergence of that strategy. Rather, I have seen 35,000 jobs lost, credit dry up, as evidenced by the Central Bank's statistics, and regard for Irish banks shrink more quickly after the guarantee than previously. Last Sunday was a positive move forward, in that the Government dropped its untenable position of viewing recapitalisation as a last resort. No other state regarded government involvement in recapitalisation in that way.

That said, I still cannot see a strategy emerging. We are expected to believe that the Government is working to some master plan, but the document produced was full of undecided options and demanded no new conditions, which would have given a sense that the Government was driving the process in a particular direction. The Government seems to be looking for someone else to come up with the answers and ideas as to how we can get out of this hole.

The Government's prevarication has become a part of the confidence problem, not its solution. It is not setting an agenda to which banks must respond. It is waiting for them. They were given ten days in which to revert with a plan, but we have heard nothing about how the Government rejected some parts of the plan and improved it. They were given another ten days to produce a remedy for small businesses. All that the Minister can do is tell the House that they announced things, most of which are regarded by the small business sector as PR operations. The sector informed Members that 54% of its members are being refused loans, but the Government is sitting back and telling us that those few announcements are somehow dealing with the issue.

The banks were given seven days to respond to the issue of mergers and consolidations, which the Government seemed to indicate would be necessary. Those seven days passed, but there were no mergers or consolidations and the issue disappeared from the agenda. I do not know where the proposal lies now. The Government is now giving them 20 days in which to revert with a proposal for recapitalisation.

We need a Government that sets the standards and tells every bank which new capital ratios are required of them, not just the banks seeking State support for recapitalisation. We want to know what requirements the Government will set on banks in terms of their behaviour, how they will manage their toxic loan books and the manner in which they will deal with the drying up of credit for small business. We need a Government that is clear and confident concerning the terms on which it will offer taxpayers' support. We have not been provided with information in that regard. We taxpayers are in this up to our necks. We have guaranteed liabilities of €400 billion and we need to know that the Minister, as our representative, is operating on the basis of a credible strategy that will extricate us from the position in which we find ourselves.

Time is not on our side. I accept that the Government must be careful but it has had two and a half months to examine the details of what is involved. The Minister must dictate what is going to happen and lay down the conditions under which private equity will be provided. How will the Minister protect the taxpayer when there is private equity involvement? What conditions will he impose with regard to the behaviour of banks after recapitalisation occurs?

At present, banks are reducing their loan to deposit ratios. They have indicated that they intend to solve their problems by raising further deposits. However, everyone knows that they cannot all do so. As a result, they are squeezing down credit. The banks pretend that this is not happening but the statistics prove otherwise. Due to the fact that they are not facing up to difficulties relating to properties on their loan books, they are using up the scarce money that is available in order to roll-over loans. Where credit is being issued, it is going to the property sector. Loans to that sector are non-performing in nature and are soaking up any ability to deal with this crisis.

The banks have axed overdraft limits. Last month's returns show that such limits were cut by 25%. I refer here to unused overdrafts that provide businesses that are under pressure with some wriggle room. The Minister did not indicate how businesses are supposed to access overdraft facilities. He is correct to state that capitalisation is not a magic bullet. Will he indicate, however, the ammunition he possesses to allow him to formulate a strategy to deal with this matter? We are all aware of the problems and we expect a response in respect of them.

People are looking on in horror at what is happening. The Minister stated that the banks are meeting the regulatory requirements relating to capital ratios. The truth is that the market values their capital ratios not at 5% or 6% but rather, in the best case scenario, at 1%. In the worst case scenario, the market valuation is probably less than 0.25%. That is where matters stand.

History tells us that allowing the banks to deal with this problem on their own will not result in the best outcome for either the country or the taxpayer. There are perverse incentives for banks to take a punt on and increase their exposure to bad loans in the hope that something positive might happen. When banks are short of capital, their behaviour changes.

One can already see that much of the discussion with regard to shunning new capital is designed to save the position of those within the existing management structures of the banks and avoid the possibility that shareholder interests might coalesce and demand change. That is what is occurring rather than a strong, authoritative response to the crisis in the banking sector. The banks are managing down their loan books rather than trying to protect credit lines for decent businesses. I am concerned that the banks will persist with the policies on bad loans and ration the credit available to good businesses, thereby forcing them to the wall. Those in charge of the banks are more interested in saving their own skins rather than trying to achieve that for which we put our money at risk.

I welcome the fact that the Minister has moved away from the position of last resort. However, he continues to state that the Government is awaiting the proposals which the banks are due to make.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The position is far more advanced than that.

Richard Bruton (Dublin North Central, Fine Gael)
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I would have preferred if the Minister could have provided more information on the advances that have been made——

Joan Burton (Dublin West, Labour)
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The Minister is just waiting for the Christmas recess.

Richard Bruton (Dublin North Central, Fine Gael)
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——and indicated what is envisaged and how taxpayers will be protected. At present, taxpayers are being run ragged as a result of what is happening with the banks.

The cost of the State's borrowing has already risen by 1.5%, which will add almost €1 billion to our total debt next year. Taxpayers are, therefore, being screwed in respect of the cost of this borrowing. It is obvious that we, as taxpayers, will be obliged to offer commitments in respect of liabilities created by the banks beyond 2010. The Minister's announcement last week did not instil the confidence he hoped it would. I accept that this pre-emptive move bought time at a point at which the markets were extremely concerned.

The Minister must begin to answer some of the difficult questions. How does he intend to manage joint funding involving private investors? There is a real concern that the Government, the Financial Regulator and the Central Bank and Financial Services Authority of Ireland lack both the skill and ideas necessary to deal with this matter effectively. Ideas such as those to which I refer have not been articulated and people are dubious as to whether the Government has a clear strategy that will allow it to negotiate with the wolves and emerge with a credible package that will protect taxpayers. The Minister has not outlined the framework within which he proposes to manage the difficult negotiations to which I refer and emerge with a deal.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I would be devoured by the wolves to whom the Deputy refers if I announced my strategy in the House.

Richard Bruton (Dublin North Central, Fine Gael)
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There are different views on that matter. One of the most respected commentators in this area, Patrick Honohan, has made it clear that the Government ought to articulate the conditions on which a deal of this sort should be done. He also stated that, rather than what the Minister is doing, we would be better protected if public pronouncements were made in order that everyone might know the rules of the game.

The Minister must outline his vision with regard to what form the repaired banking system will take. He must also indicate how the State is going to repair that system. It appears the Government is being dragged along reluctantly, requesting people to react to particular proposals and then resting on its oars while awaiting further developments. Such an approach is not good enough in the current climate.

Kieran O'Donnell (Limerick East, Fine Gael)
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I concur with everything Deputy Bruton said. Everyone accepts that a recapitalisation of the banks must take place. However, such a recapitalisation must occur in the context of the facts as they exist. We understand that PricewaterhouseCoopers is due to present its report to Government by 20 December. However, we have not been provided with any details in respect of this report. The purpose of the PwC report is to investigate the position regarding bad debts within the banking sector, which forms the nub of the problem in respect of the loan books of the financial institutions.

It is not merely a case of recapitalising the banks. We must be informed as to how much money will be required in this regard and the Minister must indicate whether this will be the first, the first of many or the only round of recapitalisation. Members of the public are of the view that the banks are dictating the pace in respect of recapitalisation. Representatives of the two main banks, AIB and Bank of Ireland, came before the Joint Committee on Finance and the Public Service earlier in the week. If the share prices of client companies of these and other financial institutions had fallen by 95%, those institutions would seek that CEOs and boards of directors of such companies be removed and EGMs would be held. However, this has not happened in the banking sector.

Members of the public have a great distrust of the banks. They want the Government to show leadership but are of the view that it has not done so. We have been informed that tier 1 capital ratio levels are not sufficient to meet market requirements. However, AIB has publicly stated that it will not be seeking any recapitalisation funds from the Government. There is a contradiction in this regard. As a result, the Government must take a leadership role. The Minister indicated that the banks have put forward plans in respect of providing funds to the business sector. That may well be the case. AIB has agreed to guarantee an aggregate of €3 billion in overdraft facilities to its customers, but it is withdrawing such facilities on a daily basis.

Bank charges and interest rates in this country are significantly higher than the EU average. However, the banks will not answer questions in respect of this matter. The Government must insist the banks provide details on how they will guarantee the flow of funds when recapitalisation takes place. There is every likelihood the banks will take the funds and use them to soak up bad debts. Will funds flow to the small business sector and will the Minister obtain a guarantee in respect of house repossessions? The Government must take care of Ireland Inc. and its citizens. That is its role and is what it should be but is not doing. The banks are acting as though there have been no changes.

I am concerned, in terms of private investors coming in, that the Minister will sell out our financial sovereignty. The concern is that the Government will have no input into this and that investors will strip the cupboards bare and make a killing. Side by side, Ireland Inc. will literally fail in terms of the flow of funds. The Government should take up the suggestion made by the Small Firms Association at a meeting of the Joint Oireachtas Committee on Finance and the Public Service. It is important that round-table discussions on this measure, involving the banks, the small business sector and Government take place and that this measure is adopted by Government and made a precondition in terms of recapitalisation.

The Government is acting in a form epitomised by procrastination. This does not instil confidence and shows a lack of leadership. The Government needs to take the lead with the banks. As of now, the banks are leading the Government.

Joan Burton (Dublin West, Labour)
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I wish to share time with Deputy Pat Rabbitte.

Brendan Howlin (Wexford, Labour)
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Is that agreed? Agreed.

Joan Burton (Dublin West, Labour)
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This debate takes place just as the Central Statistics Office has announced that GNP for the third quarter has fallen by 4.9%. This is, unfortunately, not recession but depression territory for the tens of thousands of people whose jobs are at stake and for the hundreds and thousands of businesses which may be forced to close next year.

The Minister in his short comments, most of which have been published before, evaded the issue. The purpose of this debate is to allow the Minister to set out and give to the House a sense of how he is approaching this problem. The Labour Party is asking that the Minister protect the national interest over and beyond the many invested interests that are lurking in respect of all of these issues.

The banks' senior executives and boards have strong vested interests in terms of the protection of their reputations, jobs and wealth given most of them are major investors. The Minister has not identified or addressed the strategic national interest. An issue arises also in respect of whether there needs to be an Irish banking industry which is significantly dominated by Irish interests, although it may include foreign investment, as is currently the case. The fact that the Minister is unwilling to take questions indicates that he has not yet made up his mind as to what he will do. However, I know the Minister has made up his mind and that he is choosing not to tell us what he proposes to do. He informed us of three options in terms of how the State might express its interest in this regard.

I know the banks are playing hard ball. I know also that when the Minister came up with the Farmleigh formula of inviting in people such as the Mallabraca consortium, J.C. Flowers & Co. and Carlisle Investments——

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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They were not at Farmleigh.

Joan Burton (Dublin West, Labour)
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These foreign venture capitalists who lie behind some of the recapitalisation proposals, if allowed to take control of significant sectors of the Irish banking industry, pose an extreme danger. I can understand that the Minister is in some difficulty but this is a Parliament and he should not have refused to answer questions on this matter if, as he suggests, he has a plan.

Perhaps the most striking aspect of the banking crisis has been the complete lack of accountability at the highest levels. It beggars belief that the same CEOs and board chairmen are in place almost three months after the Government threw them a safety blanket guarantee. We were then first movers, for which the Minister claimed advantage and acclaim. However, the Government's first-mover status and advantage has long been eroded by its pussy-footing around and entertainment of any and all-comers. It has sent out the wrong signals. It has sent out signals that it is dithering rather than acting with due consideration, diligence and speed.

We are now considering injecting billions of euro into these banks. The Minister referred earlier to the Labour Party request at the time of the debate on banking that the Government deal with the adequacy of the banks' capital. He poopooed that proposal on that occasion because he said it was liquidity and not recapitalisation of the banks that was at issue. The reason the Labour Party focused on recapitalisation is that the banks' core problem is the unknown levels of bad debts on their balance sheets. This unknown level of bad and potential bad debts is what is poisoning the banking system in this country. It is when these bad debts come to be written-off that the level of capital impairment will go way below that to which the Deputy Governor of the Bank of England referred. The Bank of England recognised way back that bad debt impairment in the UK banking system needed to be addressed. It is what caused the complete destruction of the Icelandic system.

Let us be clear on what it is the Labour Party is talking about in terms of recapitalisation. Recapitalisation arises because banks here have built up unsustainable levels of bad debts largely related to the property construction boom. There is no evidence, as yet, that they have addressed this issue in a manner that is convincing to the capital markets or bankers in other banks not affected by this issue.

There has been a gross failure of oversight. I am baffled that the Financial Regulator continues to insist all is well in Irish banking and that all capital adequacy ratios have been met. It appears all regulations have been complied with and all the boxes have been ticked. This comes from the cat's milk school of auditing, namely, checking if the €100 one spent on the cat's milk is accounted for while all enterprises are in peril of sinking. As I said before, this is akin to saying that the State rooms in the Titanic are in perfect order, clean and refurbished while the ship is going down.

The regulator, from what the Minister said, is insisting that Irish banks are adequately capitalised. However, as I stated earlier, the arbiters in the markets, who do not get everything right but nonetheless play an extremely important role in this, are saying that is not the case. The Minister showed through budget 2009 that he can be tough on pensioners and school children. When does he propose to get tough on bankers and people in the regulatory system who failed to do their job properly?

I wish now to raise an important issue which I raised privately with the Minister. We have had no explanation or discussion in this House in respect of what happened with the Financial Regulator and the Quinn Insurance Group and company. We know that the largest fine in the history of Irish regulation was levied and that the regulator acknowledged that the moneys of an insurance company to the tune of more than €200 million were used to assist in some way unidentified people in purchasing positions, via contracts, or shares in one of the banks most related to the construction industry.

We are told by the regulator that the insurance company is fine subject to the chairman standing down despite it being levied with the largest fine in the history of Irish regulation. On the other hand we are told the bank in which the share positions or the options through which CFDs were taken is fine also. That is a gravely worrying series of events in related financial institutions, which are regulated by the same regulator. No explanation has been forthcoming, except to say that the disciplinary approach that was taken is a private agreement. That is not good enough.

We, in the Labour Party, favour the Swedish model where the State seeks to have an equity investment in the banks, and that investment is available for sale when the bank shares recover and taxpayers can recover their money. We are afraid the Minister is opting still for the Japanese model, where bad banks were nursed along and allowed to limp along by the state by not recognising the level of loan write-offs they had to have.

I understand that the PwC report may have suggested levels of loan write-offs of approximately 2% a year for up to three years or five years. The Minister did not publish that report either, so we do not know what we are talking about, but we can guess it must be at least 2% a year for three years. That is a total of 6%. The banks are doing nothing like that. They are basically picking approximately half of that figure because they can deal with that by not paying dividends and through a variety of other devices. In the meantime they will starve the economy and businesses, large and small, of credit in order to assist that.

There is a law in economics called Gresham's law where the bad money drives out the good. Are we having an Irish version of Gresham's law where a number of bad banks that are hopelessly compromised by their level of bad debt, especially in respect of the construction industry, are going to drive out the good banks, which with reorganisation are capable of constituting a strong, competitive banking force with State equity? If the Minister is compromising his approach in order to hold up bad banks then he is not serving the national interest.

Pat Rabbitte (Dublin South West, Labour)
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Listening to Deputy Bruton and Deputy Burton I am bound to say I have some sympathy for the Minister for Finance. Of all the Ministers in the former Taoiseach, Deputy Bertie Ahern's second Government he is least responsible for getting us into the terrible mess we are in now. He has taken the worst hospital pass in modern politics from his predecessor. Whereas he was a good Minister for Justice, Equality and Law Reform, I am bound to say that when it comes to economics he has proved to be a slow learner. However, the middle of a crisis is no place for on-the-job training.

The Minister misjudged the downturn. He got it wrong on the pay deal. He got it wrong on the budget. He bet the country on the banks and that has not solved anything. The Minister is back where he was on 29 September except that this time the banks have him over a barrel because of the guarantee. He did what he did on 29 September because the Government argued then that if one bank went down it could cause difficulty for other banks. That same bank is again in danger, despite the guarantee. We have not heard from the Minister whether it is his intention to nationalise Anglo Irish Bank. If he does, what are the implications for where that bank interacts with the Bank of Ireland? Does the Minister intend to use Anglo Irish Bank as a vehicle to strip out some of the toxic loans in some of the other banks or does he intend to reorganise along the lines Deputy Burton, I and the Labour Party favour, which is the way the Swedish Government did it?

The problem is that in the meanwhile the real economy is suffering. Small companies are hurting, people are losing their jobs and, in some cases, their homes. The banks are stalling, share prices are sliding and credit is tightening. There can be no economic stability, not to mention economic recovery without a functioning banking system. The Minister is correct to say that on day one I referred to the likelihood of capitalisation being necessary from the National Pensions Reserve Fund, but I said that would be the case because the core problem, as Deputy Burton indicated, is the quality of some of the big loans on the loan books of the banks.

Whereas we may not have a full-blown credit freeze, small companies are fearful of what the first quarter of 2009 will bring. All the while the Minister is locked in a never-ending embrace with the banks reminiscent of that scene in "They Shoot Horses, Don't They?" where each is afraid to let go of the other.

The two Brians boasted of how speedily, decisively and instantaneously they reacted on 29 September when they got a telephone call at close of business from the two big banks and that a guarantee was in place by midnight. Meanwhile, Mr. Seán Fitzpatrick slept soundly, disturbed only by the closing scenes of the play he had attended that evening. I did not believe a word of that then and I do not believe a word of it now, but if the Minister could react so speedily then what has he been doing for the past 11 weeks? It is this drift, uncertainty and prevarication that is doing so much damage to the morale of our people and to the confidence of the business sector.

There have been press releases to the effect that we do not need an economic plan because we have one, called the national development plan. Then we are told we will get an economic plan. Another press release indicated the banks did not require capitalisation but then we heard we are going to set up a recapitalisation fund. The Minister for Finance told the Dáil he would raise the issue of pay with the unions but the Taoiseach said no, he is not. Sunday night's announcement from the war room in the Cabinet office, on examination, amounted to no more than an invitation to the banks to "Come up and see me some time". The banks will write to the Minister over Christmas and we will work out something.

Following the debate, we still do not know what is the shape of the fund, what it will comprise, which bank will get what, we do not know what will be the terms and conditions. We need to know whether the Minister is going the route of Irish fund managers' investment with the National Pensions Reserve Fund or whether he will go outside the State to some of the private equity consortia. We have not had any indication.

I accept the Minister is constrained by what he can say but he is not constrained in terms of what he can do. It is 11 weeks since 29 September. Business is hurting. Jobs are being lost. Credit is beginning to freeze up and we still do not have the shape of a solution.

Arthur Morgan (Louth, Sinn Fein)
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It is now 80 days since the Minister for Finance announced his bank guarantee scheme in the House. Even though he then promised he was not "protecting the interests of the banks" but was instead "safeguarding the economy and everyone who lived and worked in this country" there has been an air of inevitability about recapitalising Irish banks. Over the past two months we have seen one state after another launch a recapitalisation scheme to save their deteriorating economic circumstances, while the Government dithered. Worse still, there is no good news for struggling mortgage holders today as home repossession rates soar, and neither for SMEs, the backbone of our economy, which are shedding workers daily.

The warning signs were there long before September and yet again the Government did nothing. Earlier this year Permanent TSB became the first of a series of banks to withdraw 100% mortgages and cut the maximum percentage of the cost of a house they were willing to lend for to 80% of the property value.

The reason for withdrawing the 100% mortgage was that the bank wanted to have "a more prudent lending policy" — somewhat late, I suggest.

In July Bank of Ireland, BoI, and Irish Life and Permanent, ILP, began to cut back on commercial lending and in the case of Irish Life and Permanent, an early July slump in share prices saw it lose a quarter of its value in a week. Newspaper reports at the time said ILP had driven its lending business not through growing deposits but by borrowing from other banks and lending that money to home buyers in the buy to let market. The Daily Telegraph reported in the first week of July that Bank of Ireland told British customers it would take on no new commercial lending for three months. In the same week BoI disclosed that it was unable to predict future profits because of the slowdown and the problems being faced in loan repayments by some of its business customers.

The Irish Wind Energy Association reported in late June that wind farm operators were finding it difficult to finance new projects as banks were only willing to fund 70% to 75% of the construction costs compared to over 80% before the credit crisis and the smaller wind farm operators were being hit hardest. Faced with all these realities of a growing crisis the Government did exactly in July what it is doing today — it went on holidays. Given the amount of time that has elapsed, one would have thought the Government would be in a position to provide details of a clear and comprehensive recapitalisation project that would boost confidence in our financial institutions and inject much needed credit into our economy. What we got in last Sunday's announcement, however, was a vague statement that inspired little confidence in the Government's ability to deal with one of the greatest economic challenges to face us in a lifetime.

Rather than a decisive plan of action, the latest Government announcement has been described as an "approach to recapitalisation", with broad parameters that have left us in the dark as to what exactly it all means. The Government has reiterated that the interests of the taxpayer are paramount. Based on certain signals it has made, however, I remain far from convinced that this is the case. Among my core concerns is the Government's reiteration that it will "supplement and encourage" private equity investment. The involvement of corporate raiders in the Irish banking——

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Excuse me. The Government never indicated it would support private equity investments. The Deputy should not say that.

Arthur Morgan (Louth, Sinn Fein)
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The Minister has said on many occasions that he would welcome and listen to them, talk and meet with them. He said that here. It is on the record of the House.

The involvement of those corporate raiders in the Irish banking sector has been described by even the most right wing economists as one of the worst things that the Government could do, yet even today we do not even have names of those private equity interests but it is pretty clear that the sharks smell easy prey and are circling ever closer. If the Government proceeds with inclusion of private equity investors, it will have used the guarantee, paid by Irish taxpayers, to subsidise a tiny number of investors making quick profits at the expense of our economy.

It is hard to see why we are not facing another Eircom debacle of five owners in seven years, with an ever increasing debt burden, large dividends for shareholders and a failure to invest adequately in the customer network. These vulture investors are only interested in high profits in very short periods and if they are successful in getting a controlling stake over any of our major banking institutions, we will be in a perilous situation.

Any involvement of private investors threatens the public interest as we will not be in a position to restructure the banking sector in a way that is necessary to secure our economic future. Again there is nothing in the Government's statement that suggests a radical overhaul of the banking business model which created the type of irresponsible and reckless lending behaviour that has brought our economy tumbling down. The culture of banking is going to have to change forever to ensure stability and if this is not addressed the banks may well go on acting irresponsibly and recklessly. Key to this is the replacement of those senior executives in certain banking institutions who have misled us as to the true nature of their debt problems and encouraged the type of behaviour which has contributed to the credit crunch.

The banks should not get a single penny from recapitalisation until there are wholesale changes in their senior management and those who are accountable for the mess that we are now in should be sacked, without any type of golden handshake, before they even commence their applications to be recapitalised. While this seems to be recognised as imperative by almost everyone, the Government's failure to achieve either of these demands at the time of the guarantee leads me to believe that very little will change with recapitalisation.

One of the most disappointing aspects to the Government's approach is its refusal to use the leverage of recapitalisation to protect the people who are paying for it. We have all heard this week that 13,391 mortgage accounts were three months or longer in arrears by June 2008. This was an increase of 11,252 from December 2006. The number of repossession orders being heard in the High Court is increasing at an alarming rate while there may a substantial number of voluntary repossessions that will never be heard about.

My party has been calling for a moratorium for the duration of the guarantee scheme for those who fall into financial difficulty. The Government missed the boat at the launch of the guarantee scheme to make this happen. However, there is another opportunity with recapitalisation to help the hundreds of thousands of families whose homes are now threatened. Another crucial measure which must be taken is to open up credit streams for the SME sector. When the banking officials visited the finance committee last Tuesday, I was disappointed, but not surprised, at their failure to appreciate how serious things have become for this sector. A couple of weeks ago an ISME survey showed that half of its members were being refused credit. These were not unknown companies, but well established businesses which have long established relationships with their banks. The result is that a large number of SMEs are now in serous financial difficulties, which has massive employment implications. Yesterday it was reported that almost half of all firms in the small and medium sector experienced a fall in employee numbers in the last three months. While all of this is happening the banks are continuing to sit back. The sector has moved at a snail-like pace in dealing with the credit crisis, negotiations are still ongoing with the EIB in relation to its small operational fund while the banks have done really nothing to capitalise themselves.

If we are really to place the public interest at the core of recapitalisation the issues of mortgage repayments and credit for our SMEs must be core conditions. There is no guarantee that the banks will lend out the funds as opposed to sitting on them. This was a problem that the US Roosevelt Administration faced when it stepped in to recapitalise the banks in 1933. For this reason, the Government will have to ensure that the State becomes a major shareholder in our banking institutions to get credit going again. This will have to be done through part or full nationalisation of our banking sector, with the Government retaining ownership of one of the major financial institutions to protect our national interest.

It is clear to even the most right wing of economists, who have suddenly decided that the State must intervene in our economy, that the public interest can only be prioritised if the State plays a leading role in our financial sector. There was a time when we had the solution to this problem in Ireland, known as the State banking sector. For business and industry we had the Industrial Credit Corporation, for farm business there was the Agricultural Credit Corporation and for insurance there was the State owned Irish Life. The Post Office had a savings bank, and building societies were only allowed to lend to prospective home owners, not into the buy-to-let market which now accounts for 36% of the housing market in Ireland. None of this was the glitzy banking sector of today. It was boring and solid, but it worked and it was trusted by the public, unlike the banks today. None of these banks ever made a loss, the profits were not enormous but business was done, money was lent, houses were built and some businesses grew. The model and scale was very limited but the principle was well-established. This cannot be done through any involvement of foreign private equity and my party will oppose any recapitalisation plans that support this.

Finally, I should mention an initiative I spoke about on last night's Private Members' business. The recapitalisation scheme may provide a golden opportunity to tackle the impending housing crisis. While speaking to an Oireachtas committee on 14 October last, Mr. Patrick Neary, CEO of the Irish Financial Service Regulatory Authority, told us that speculative lending to the construction and property sectors in the country amounted to €39.1 billion and that he anticipated "losses on property-related loans" and that "increased provisions and write-offs will be necessary". Mr. Neary also revealed that a PwC audit of the six largest Irish banks had found that €15 billion of property lending was secured on the properties alone. Can we learn anything from the Swedish experience in the early 1990s, where a similar case of ill-advised commercial lending in a property boom led to a collapse in its banking system?

As part of the Swedish bailout, the Swedish Government forced banks to write down losses and sell off the distressed assets. In the Irish case, some of the assets in question are the land banks amassed by speculators, the unfinished housing estates and commercial retail ventures that should be sold off as bad debts. The Swedish Government formed a new agency to supervise institutions that needed recapitalisation and another that sold off the assets, mainly property, that the banks held as collateral.

In Ireland, we have a unique opportunity to return control of the planning process and commercial development to local government, by breaking up the property cartels that have been holding Dublin and many other towns ransom to their own development strategy, wilfully thwarting local council development plans. As property prices fall and these assets are sold, local government could have a unique route to dealing with the growing housing crisis, and taxpayers can be given a better return for their investment in the banks, rather than allow cash-strapped developers sit on their assets now only to make more profits in decades to come.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Deputy Bruton made a fair point when he asked what was the vision for the banking sector. If we strip away the political charges made by the Opposition speakers and consider what they want for the banking sector, it is what we all want. It is what the people want, that the banks will serve borrowers and small and medium sized enterprises in an honest way and ensure that those in default on their home loans are treated in a reputable and respectable way. These are core objectives of both the Government and Opposition parties and are not an issue in this debate.

However, with regard to the political charges made and, in particular, to the suggestion there has been a delay in dealing with this matter by the Government, I wish to point out that I have spent night and day, since budget time, working on this issue. The issues involved are of fundamental importance, both to the economy and the taxpayer. I received the final report from PwC on 18 November. Therefore, Opposition speakers who contributed to this debate cannot say there has been some——

Joan Burton (Dublin West, Labour)
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That was the final report. The Minister had several drafts before that.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Will the Deputy allow me speak without interruption, for once? As soon as I received drafts, I worked on them. I assure the Deputy of that.

Joan Burton (Dublin West, Labour)
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Be honest.

Brendan Howlin (Wexford, Labour)
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Allow the Minister to conclude.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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As far as vested interests are concerned — Deputy Burton is very fond of insinuating vested interests in public debate — I act in the public and national interest, nothing else, in this matter and if there are questions of detailed negotiations to be conducted, they are referred to the National Treasury Management Agency.

The question of private equity, which is an important subject, was mentioned by a number of speakers in the debate. Banks are approached all the time by private equity investors and they draw their own conclusions about them. Were private equity to be involved in the recapitalisation now under way, it would have to act in terms in accordance with the public interest and the fundamental importance of retaining a viable, sustainable banking sector here in Ireland for the long term. There is no question about that. With regard to credit for small and medium sized businesses, I thank Deputies for their views. They are the same as that of Government and have been fully factored into the negotiations.

A number of Deputies referred approvingly to the Swedish model. Deputies should be aware of the facts relating to the Swedish model. It was a total nationalisation of the bank sector. A total nationalisation of our banks——

Joan Burton (Dublin West, Labour)
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It did not include all the banks. The biggest bank was not included. We have read about the Swedish model also.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am aware the biggest bank opted out. Let us be clear about this. Were we to nationalise our banks, we would be required to compensate the shareholders of the institutions at current market values under our current Constitution. That would not ——

Joan Burton (Dublin West, Labour)
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That would be about €3 billion.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Deputy Burton may think €3 billion can be loosely thrown around the street like that and turned into——

Joan Burton (Dublin West, Labour)
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I did not say it should be thrown around, but it is not that much.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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——dead money in the hands of shareholders all over the globe, but I do not think that is a sensible course for the State to pursue in this context.

Joan Burton (Dublin West, Labour)
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There is almost €11 billion in the national pension reserve fund in shares all over the globe that have tanked. That is the Minister's strategy.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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May I speak without interruption?

Brendan Howlin (Wexford, Labour)
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Allow the Minister speak, without interruption.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The strategy on the pension fund, which was signalled by Deputy Rabbitte in the original debate on the guarantee — for which I give him credit — is that Irish pensioners, from 2025 onwards, can participate in the upswing in the Irish banking sector which will, inevitably, happen when the reform and repair of the Irish banking system takes place. It is a good investment for the pension fund to invest in the banks that have prospects of an upswing.

Joan Burton (Dublin West, Labour)
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Is that in banks in Ireland or around the world?

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Currently, the pension fund has investments in banks all over the world. What I am doing is ensuring that funds at the disposal of the pension fund can be invested in the Irish banks to provide them with the essential capital buffer that will give further confidence to these institutions and ensure that they lend into the real economy.