Wednesday, 18 February 2009
Banking Sector Regulation.
Question 38: To ask the Minister for Finance if he is satisfied that adequate arrangements are in place here to achieve the necessary turnaround in the banking system in a manner that does not expose the taxpayer to excessive risk. [6591/09]
In recent months, international markets have experienced turmoil and this has resulted in significant pressure on sources of funding for all banks globally. The Government has adopted a measured approach to this, pursuing a comprehensive strategy to ensure that funds are available for sound businesses and entrepreneurs to enable them to provide the employment and the output which will be the basis of our economic recovery.
The Government moved quickly last September to introduce the guarantee of Irish bank liabilities, which has provided certainty to depositors and investors alike in the Irish banks. The recapitalisation programme announced in December addresses both the expectations of international markets on the capital levels and the needs of our major financial institutions to cover potential loan losses in the years ahead.
In January, against a background of concerns about governance issues and market confidence in Anglo Irish Bank, the Government, following consultation with the Central Bank, the NTMA and the Financial Regulator, decided to take Anglo Irish Bank into public ownership. This decisive step was taken to safeguard the interest of the depositors of Anglo Irish Bank and the stability of the economy. I want to assure the House that this decisive step was taken to ensure the new nationalised bank will collect all debts due from persons who owe moneys to the institution.
Following the announcement of the recapitalisation programme the Government initiated further intensive discussions with Allied Irish Banks and Bank of Ireland with a view to securing the position of these, our two largest banks. As a result of these discussions, the Government decided on a comprehensive recapitalisation package which will reinforce the stability of these two banks as core elements in our financial system, increase confidence in the banking system here and facilitate the banks involved in lending to the economy.
I will continue to examine various proposals, including risk insurance, for the management and reduction of risks within financial institutions, having regard to international developments and to the best interest of taxpayers. Ongoing work at the level of the European Central Bank and in the European Union will inform the process.
In the context of the six month review of the guarantee scheme to be completed by the middle of April, the Government will examine how the scheme could be revised consistent with European Commission approval and EU State aid requirements in ways which include supporting longer-term bond issues by the covered institutions. This would be in line with international and EU trends where the average term of State cover for bond issues now extends well beyond 2010. Overall, the Government's approach is structured and incremental and designed to ensure the interests of the banks, their customers and the State are protected.
The Minister will understand that, on this side of the House, there is a great deal of scepticism over how the Anglo Irish Bank issue has been handled over a long period. People did not bother to ask the questions that ought to have been asked.
Is it not difficult to believe that confidence in our regulatory system will be restored when it is the regulator itself that is accused of being ineffective, at best, or, according to some accusations, complicit in some of the things that have gone wrong? Is it not hard to believe an investigation carried out primarily by the regulator will be sufficient to restore confidence?
What success can the Minister report from his announcement of recapitalisation last week? Are recovery and liquidity evident in the banks? Are there other indicators that the approach is accepted as sufficient to deal with the issue?
Will the Minister confirm whether payment by the banks in respect of the coupon on the preferential shares is to be optional or compulsory? A view now seems to be emerging that it is optional. Does the Minister believe there should be an entirely clean sweep of the regulatory authority and all banks' top executives and boards that receive State capital so we can start afresh?
I thank the Deputy for his questions. With regard to confidence in the regulatory system and his concern that it will be left to the system itself to address this matter, I can assure him it will not be left thereto. From the time of the departure of the chief executive of the regulatory authority, I made clear that I intended to bring proposals to the Government on the reform of the regulatory system. I will take responsibility for those proposals on the advice of my officials. I do not propose to subcontract responsibility to any consultancy or other group. I will hear the views of the regulatory authority and the Central Bank. Yesterday I received a detailed joint submission from those two bodies and it is now under consideration on the part of my officials. I intend to introduce definitive proposals on the reform of the regulatory system.
While I do not believe there should be any subcontracting of responsibility to a consultancy, I believe it would be in the interest of the country, in view of the damage caused to its international reputation by the activities at Anglo Irish Bank, to have some external validation of what we are proposing and of the interview process that must take place for the recruitment of a replacement regulator.
The Deputy asked a number of other important questions. On the question of the coupon attaching to the preference shares, the rate stands at 8%. Under the terms of the arrangement, were a bank not to pay the 8%, the value of the coupon would be translated into ordinary shares in the relevant State-owned institution, be it Bank of Ireland or Allied Irish Bank.
In accordance with the terms defined in the warrant, which the Deputy will appreciate I do not have to hand, the loss to the State caused by non-payment will be compensated for by the allocation to the State of an appropriate amount of ordinary shares from the institution, above and beyond the allocation already envisaged in the share warrant arrangement. As Deputy Bruton knows, this arrangement assures the State of a 25% stake in the institutions, exercisable at the option of the State after five years.
On the capitalisation announcement, the question of liquidity and the provision of funds to the Irish banks is still very difficult. As I stated in my reply, it is difficult for all institutions worldwide, as is the case with many of the measures that had to be taken to stabilise our banking system, including the guarantee, the nationalisation of Anglo Irish Bank and capitalisation. These are not options available to us but essential steps necessary if we are to secure the stability of our financial institutions. The share prices of Allied Irish Bank and Bank of Ireland have remained low and have been such for some time. To sustain international confidence in these institutions, it was essential that capitalisation take place, such that markets would be assured there was adequate capital and that the institutions would be in a position to meet potential losses. I do not refer to an adequate position but to a full position. Capitalisation has generated this confidence and this has been commented on by reputable commentators on banking matters.
On the question on the boards and executives of the two capitalised institutions, as Deputy Bruton is aware, the chief executive of the Bank of Ireland has announced his intentions. I understand from the governor and the board that it is intended to replace the executive in a matter of three weeks.
With regard to the chairman and the chief executive of Allied Irish Bank, the State will obtain not only four directors, appointed directly by the preferential shareholder, the Minister, but also 25% of the voting rights at the annual meeting. At that stage, the Minister can exercise voting rights and influence in regard to the composition of the boards——
Question 39: To ask the Minister for Finance the steps he will take to restore Ireland's international reputation for sound banking; his views on whether the financial regulatory regime here is unfit for purpose, having failed to identify and deal with wrongdoing and irresponsible lending practices; and if he will make a statement on the matter. [6515/09]
The importance of having a regulatory system that provides financial stability and fosters probity has become all the more clear to us now in a time of severe financial dislocation, both nationally and internationally. A new and better co-ordinated approach to ensuring financial stability and regulation is now required, with greater focus on areas such as risk management, compliance, corporate governance and general control processes.
As the Deputy will appreciate, steps have been taken in that regard in the Credit Institutions (Financial Support) Scheme Act and, as a result, the oversight of the banks concerned has been intensified greatly. This new regime provides for heightened direct engagement with each of the covered institutions and new reporting arrangements, including the provision of scheme compliance certificates by the covered institutions themselves and by their external auditors.
The bank guarantee scheme requirements and conditions are the first step in a new system of financial regulation and supervision. The joint boards of the Central Bank and Irish Financial Services Regulatory Authority have written to me and have outlined their views on the reform of the system. This reply does not reflect that fact as I received their opinions only yesterday. They are under consideration in my Department.
Regulatory reviews, both domestic and international, are under way: The regulatory authority is reviewing its overall strategic regulatory approach; the Financial Regulator business process review is now close to finalisation; the Financial Regulator is processing a strategic plan for 2009; at EU level, new regulatory proposals, including improvements to the capital requirements directive, are due for adoption in early 2009; and, at ECOFIN, work is being done to incorporate, at wider international level, the role and mandates of national regulators.
I will take account of the various reviews under way on regulatory reform but I accept that, as Minister for Finance, I am responsible for the legislative framework within which the regulator operates. When I have considered the issues fully, I will bring my proposals for reform to Government.
I indicated I propose to have external international validation of any proposals I bring to the Government or of any process for the selection of a replacement regulator. At the time of the departure of the chief executive of the Financial Regulator, I made clear no replacement was to be appointed before the completion of the review. It is an urgent matter. I am not conducting a review — I am formulating proposals to bring to the Government.
Did it not cross the Minister's mind to sack the board of the Financial Regulator given its absolutely abject failure to deal properly with the regulation of Irish banks in that there has been a series of disastrous failures in Anglo Irish Bank, which in turn has impacted on the rest of the banking system? Does the Minister believe the board of the Financial Regulator and former regulator should apologise to the people over what the latter will have to pay for the regulatory failure? Will anybody on the regulatory board be brought to account for what has happened there?
The Minister is aware that the reputational damage caused by the affairs of Anglo Irish Bank to Ireland is immense. What inquiries are being made in the counterparty banks to the activities in Anglo Irish Bank, namely, Irish Life & Permanent and Irish Nationwide Building Society, given that on his announcement of recapitalisation before Christmas the Minister indicated that approximately €3 billion of taxpayers' money would be made available to those institutions?
What is the Minister's response to the bond markets given that Irish Nationwide Building Society has bonds coming due between May and July of more than €2 billion? That information is freely available. If we do not restore our reputation who, other than the Irish taxpayer, will replace those €2 billion of bonds? Does the Minister have any strategy to deal with that?
First, in regard to the position of the board of the Financial Regulator, one of the options under consideration by the Government is the fusion of that board with the board of the Central Bank. I am not saying the Government has decided to adopt that conclusion but it is a matter under consideration. In the circumstances the best course is to await the bringing of proposals to Government before addressing the question of the board of the Financial Regulator.
In regard to the reputational damage done to the good name of Ireland in banking circles, I am pleased Deputy Burton has acknowledged that that is the core issue in regard to what happened in Anglo Irish Bank. The various practices that have come to light, that are coming to light and that will come to light in the regulatory reports, have done serious damage to our reputation abroad. In the case of a small country financial institutions are not readily distinguished by overseas markets and investors.
Specifically in regard to the question on Irish Life & Permanent, the regulator is continuing to make inquiries in regard to the full circumstances of the back-to-back arrangement. Incidentally, I have checked the records in my Department and while there was a reference to the back-to-back arrangement in an early draft of the PricewaterhouseCoopers report, the formal summary submitted to me did not contain any reference to that back-to-back arrangement.
The regulator is making intensive inquiries about the circumstances of transactions in the Irish Nationwide Building Society. Deputy Burton also raised the status and position of the Irish Nationwide Building Society. I am arranging to meet the chairman who resigned and I will discuss those matters with him. I assure Deputy Burton that a close surveillance of this institution is being maintained by my officials and by the regulator and the Central Bank, as is the case with all six covered guaranteed institutions.
Does the Minister have an estimate of how much the taxpayer will have to put in to the two counterparty institutions, namely, Irish Life & Permanent and the Irish Nationwide Building Society, in order to prop them up?
Did it never cross the Minister's mind to sack the board of the regulator, given that those people who are industry insiders — I do not know if there are any outsiders — all worked in this, that and the other bank and financial institution? The Minister could then appoint people with a fresh vision who perhaps did not lunch in the same clubs, play golf in the same spot or go to the same yacht club.
First, these are not industry insiders. For example, they include a former Revenue Commissioner and a number of individuals who have no connection with the world of finance. Deputy Burton should not throw around references to yacht clubs in this House if it does not apply to the individuals concerned.
Or golf clubs. I am neither a yachtsman nor a golfer but Deputy Burton seems to have an unwonted interest in them.
One matter I am pleased the Deputy asked me about is the question of an alleged promise of €3 billion to put money into the Irish Nationwide Building Society and Irish Life & Permanent. No such undertaking or statement was made by the Government. We said we would consider capitalisation of those institutions but we never indicated a precise figure.
Irish Life & Permanent is a well capitalised institution and any capital requirements it might have are marginal at best. As Deputy Burton is aware, the institution has a valuable life company as well as a banking business and all of the market information available about the company suggests that it is a well capitalised bank. There is no suggestion either that there is any exposure to excessive commercial lending at Irish Life & Permanent. That is far from the case as it is an institution that did not engage in such. I wish to make that clear on the record of the House.
I am now turning to the Irish Nationwide Building Society. I am about to deal with it. The position is that there have been no discussions about capitalisation between my Department and that society. I indicated that the retiring chairman will discuss his views with me later this week. To date there has been no investment of capital by the State in Anglo Irish Bank either.