Wednesday, 28 April 2010
Central Bank Reform Bill 2010: Second Stage (Resumed)
I welcome the opportunity to speak on the Bill. In the past 18 months to two years the spotlight has been directed in a serious way on the banking system, how it worked during the boom years and how the regulatory framework for the banking system operated. The principal aim of the Bill is the appointment of a new Central Bank structure and a new regulatory structure. Two appointments have been universally welcomed and applauded, namely, that of Professor Honohan as Governor of the Central Bank and Mr. Matthew Elderfield as Financial Regulator.
Before I speak about the direction in which they are going, we must look back at what was allowed to happen in the banking sector during the past ten years and especially during the past five or six years. In the Anglo-Saxon world in particular what was allowed to happen in banks and financial institutions worldwide is a significant issue. However, we must deal with the situation in this country and try to pick up the pieces in that regard. Reference has been made to light touch regulation. The reality is that there was no regulation at all. The incentivised lending of money by financial institutions was probably the root cause of much that has happened. The aim was to lend money out and those who approved the lending were paid according to the amount of money they lent. That was the fundamental mistake that was made in the banking system.
Long-serving Members of the House will recall the previous time money was given out so freely was after we joined the European Union and in the late 1970s up to 1979. There was a credit squeeze when the oil crisis occurred in the spring of 1979. The agricultural community in particular had borrowed heavily at that time to buy land at hugely inflated prices. Neighbouring farmers were loaned the same amounts of money to bid on the same parcel of land. It took many farmers who had borrowed heavily when money was freely available ten or 12 years to trade their way out of difficulty. Some farmers were not able to do so with significant consequences for them and their families' livelihood. One cannot say that the crash or the level of credit available was unprecedented. When one considers the system operating in the late 1920s prior to the Wall Street crash in October 1929, again, what is evident is the considerable availability of credit, driving up share prices, and the unsustainable herd instinct that sent everybody in the one direction. In Ireland, the herd instinct influenced the property market.
It is untrue to say what has occurred is unprecedented. The Central Bank Reform Bill 2010 and the associated measures being taken by the Government are to ensure the new regulatory framework that is to be given legislative effect will prevent a recurrence of what has happened. This involves a considerable change in the thinking on how financial institutions and systems work, a change in how financial services are being governed and a change in how we, as a nation, view these matters. Everybody has been screaming and roaring about what has been allowed in banks, particularly the major ones in serious trouble. Everybody speaks about what has happened in Irish Nationwide and Anglo Irish Bank.
I want to confine my remarks to the general issues but must state it would have been much easier, in Cork North-West or elsewhere, to sell the idea of winding down Anglo Irish Bank in an orderly fashion than the idea of adopting the current arrangement. Unfortunately, the advice received, not only from experts in Ireland but also from the European Central Bank and others, is that we must manage the debt Anglo Irish Bank has accumulated. It beggars belief that the management of the bank attempted to contact the Department of Finance, including the Minister, as late as August 2008 on further acquisitions in regard to the financial system or other financial houses. From perhaps the spring of 2008 onwards, it seems management believed it had enough people to back it or enough money to resolve the problem. What occurred beggars belief.
Unfortunately, the difficult political position is that we must manage Anglo Irish Bank in an orderly fashion in the best interest of the taxpayer. Unfortunately, huge sums of taxpayers' money are required but far more would be required if we were to go another route. Very serious concerns are expressed on this matter. It would be far easier to sell the concept of a wind-down to the public, who are quite rightly enraged over what has happened. We must consider those affected by this issue.
We should bear in mind the activities of sub-prime lenders, institutions that offered 30-year and 40-year mortgages and those that gave out credit without sufficient controls. Everybody has been seeking competition in the financial system and in every other sector in the best interest of the consumer but some of the financial institutions were offering credit more freely than others and on a more long-term basis. All the others followed suit and this led to the considerable problems we now face.
We must respect that this Bill provides a legislative framework for the new Central Bank and regulatory regimes. Credit will and should no longer be made available with the ease with which it had been made available. If we have learned anything in the past few years and months, it is that we must have draconian measures. Wherever there is an easy way to make money or a quick profit to be made, there will be imaginative systems designed to facilitate one's doing so. That is the nature of the capitalist system but we must ensure we never allow the bubble go so far as to explode in our faces.
Commentators recognise that the Anglo-Saxon model, which was developed from 1980 under Ms Thatcher and Mr. Reagan and replicated in various countries, was the model that was worst hit. There is a very significant lesson to be learned from this. We must tailor our policies to ensure we will never again have an economic bubble of the kind we experienced.
With regard to regulation, we must consider the mis-selling of products to individuals, companies and some financial institutions by people aligned to the stock exchange. We have all seen the headlines about a 74 or 75 year old being sold a 30-year product by a major stockbroking firm. The extent of such practices must be examined. In the past ten to 15 years, there has been major emphasis on tribunals on foot of certain financial transactions and planning issues.
Consider the money being spent on tribunals. They are now being challenged regarding issues and decisions they take. Money was completely wasted on very eloquent members of the law fraternity, who have been very well able to spin stories and carry on investigations for years. When engaging in investigations, future Governments must never go down the route of the tribunals because of their cost.
We have heard media debates on certain payments, politicians' earnings and pensions but we must acknowledge the amount of money earned by some people associated with the tribunals has been obscene. I question the position on the tribunals. What good can come of prolonging this saga, which should had been limited by a timeframe of nine or 12 months at the very beginning? Irrespective of the crises or issues in the public domain that need to be examined, we must learn a lesson from the tribunals.
Individuals in SMEs and agriculture are constantly talking about over-regulation. Through various Departments and organisations, such as the National Employment Rights Authority and the Health and Safety Authority, we seem to have become very adept at regulating the activities of people running small businesses with three to four staff. I refer to those in the food industry in particular and to SMEs. A massive number of regulatory measures from the European Union have been adopted to monitor these firms and ensure conformity. Subsequent to our adoption of the euro, we forgot about regulation in regard to money available on the wholesale money markets. We forgot to ensure proper regulatory arrangements were put in place.
The Bill should be clear and direct and should ensure people in financial houses in Ireland and the world over will never again be allowed to gamble the country's future with a view to making a quick buck, thus requiring the taxpayer to bail them out. People sometimes query why all this should not be left to the banks to sort out but for the sake of the economy we have to do this.
We are also dealing with the regulation of the credit unions, as Deputy Sherlock knows, as a member of the Joint Committee on Economic and Regulatory Affairs, and all the stakeholders are involved. The credit union movement has been a fantastic initiative the length and breadth of the country. Its benefits have been seen in both urban and rural Ireland. We have seen a very innovative idea being put forward in terms of one of the Dublin credit unions and development boards are to be put in place as well to help small to medium-sized businesses, which is to be welcomed.
The future regulation of credit unions is provided for in this Bill. Section 35 looks at ways of allowing people to restructure loans. That is a difficulty within the credit union movement at the moment. I am aware that as we speak new regulations are being discussed between the partners within the credit union movement, the Department of Finance and the Financial Regulator. It is important we ensure that while credit unions have to be regulated, as with all other financial institutions, there has to be confidence in the quality of all such regulation, not just in Ireland, but internationally.
Credit unions, however, have been very good about keeping credit lines open in their local communities and can, perhaps, be looked at separately from the major banks. We have seen the new Financial Regulator and the new Governor of the Central Bank being very surefooted in their approach to the business we have to deal with. We need them to be very clear about what they are looking for and will accept. They also have to be very thorough about even the smallest of issues. We have seen documentation on loans being added onto existing deeds and so forth just to ensure that people got money. I have even seen signed documents which did not contain the signatures of the purported signatories, that cost the latter money down the line. We have to be very clear about investigating such cases to ensure that the individuals involved get the answers they need from the Financial Regulator and the Central Bank on such matters. The ordinary individual who is out of pocket can face a regulatory framework within the State being set up by this Bill with confidence knowing that the issues he or she raises will be dealt with for his or her benefit and indeed, that of the wider community. I welcome the Bill and commend the Minister, Deputy Brian Lenihan on it. There is a need for the public to believe passionately in the regulation that we are putting in place, and to have confidence in the legislation. I commend the Bill to the House.
I wish to specifically address the issue of credit unions and their ability to reschedule loans and pay dividends at the same time.
Part 7 refers to section 15(7) of the Bill, which seeks to amend section 35 of the Credit Union Act will make it impossible for credit unions to undertake rescheduling and pay a dividend to members. This is because the cost to credit unions of additional reserves arising from the rescheduling would leave nothing to be paid out by way of a dividend. This could cause members to withdraw savings from credit unions, resulting in them having less money to loan out and forcing members into the hands of loan sharks or moneylenders.
The Minister for Finance undertook in April 2009 to review section 35 of the Credit Union Act 1997 to make it easier for credit unions to accommodate members desiring to reschedule their loans, due to the recession. The Acting Chairman, Deputy Noel O'Flynn, will be aware that the Joint Committee on Economic Regulatory Affairs has undertaken extensive consultations with all the representative bodies on this and other regulatory provisions. The economic and regulatory affairs committee's consultations, under the chairmanship of Deputy Moynihan, in my opinion, have surpassed those of the Department of Finance in that the latter's consultation process has been more limited and technical difficulties are now manifesting on the eve of this legislation being passed into law.
I understand that the expert committee established by the Minister's Department was limited originally in its membership and met infrequently. The proposed regulatory requirements underpinning this legislation will result, to my mind, in the opposite to what was intended by the Minister unless amendments are made on Committee Stage. If not amended, it will mean a more restrictive regime around credit unions, denying them the ability to meet the needs of some members impacted by unemployment, wage cuts and even public service levies. I am sure this is not what the Minister had intended when the legislation was first drafted.
It is impossible and unwise to look at the Central Bank Bill as it relates to an easing of restrictions on credit union loan duration limits, without looking at what the registrar proposes as the underlying requirements and operational guidelines. The Registrar of Credit Unions viewed the proposed legislative change as an opportunity to impose yet more stringent reserve and liquidity requirements upon credit unions, it could be argued. This has to be seen in the context that credit unions are the most reserve rich financial institutions in the State. The registrar introduced a regulatory or non-distributable minimum capital reserve requirement of 10% for credit unions in 2009 – a very stringent reserve requirement, given that the banks at present are baulking at their new standard of 8%. It should also be measured against the fact that the vast majority of credit unions benefit from an additional layer of protection in the form of a self-funded mutual stabilisation fund, the savings protection scheme, under the auspices of the Irish League of Credit Unions.
There is a very real danger of over-egging the cake in this particular instance. The registrar proposes to apply his section 35 requirements to all credit unions regardless of whether a credit union wishes to avail of the extension to the section 35 limits. This is something that must be addressed on Committee Stage. The registrar is proposing a liquidity requirement of 25% to 30% where the section 35 exemption is availed of. Even the current 20% liquidity requirement is very onerous when measured against the standards the regulator currently applies against banking.
There is every danger here that the combination of the registrar's and Minister's proposals will have the impact of rendering it impossible for credit unions to pay a dividend to their members. If all surplus funds must be ploughed into additional reserves, credit union dividends will suffer, driving funds out of responsible credit unions and into irresponsible banks.
It must be stated, and the Minister must accept, that no credit union has needed to be bailed out by the State. No taxpayers' money has been poured into a single credit union, to my knowledge, and the vast majority of credit unions are part of a voluntary mutual stabilisation fund which acts as a backstop to the State deposit guarantee scheme. There are ongoing calls for this stabilisation scheme to be regulated by the Registry of Credit Unions and extended to all credit unions in the State.
The registrar seems to be taking the view that every rescheduled loan is an at-risk loan. This is a false assumption. Many credit union members are taking the responsible route when confronted by a drop in income and approaching their credit unions immediately, before arrears occur, to renegotiate their payments. This must also be considered on Committee Stage. The proposals before the House today, if unaltered, will tie the hands of credit unions behind their backs. It is inconsistent of the regulator to encourage banks to reschedule loans for their borrowers while, at the same time, financially penalising credit unions that seek to accommodate their members. Practical amendments need to be agreed on Committee Stage. A balance must be struck between the needs of borrowers and savers and the requirement to supplement already strong reserves.
I understand the credit union representative associations, including the Credit Union Development Association, the Credit Union Managers' Association, the Irish League of Credit Unions, the National Supervisors' Forum and the credit unions themselves, have been in negotiation with the regulator and the Department of Finance on these issues. I look forward to the introduction of positive amendments that will add strength to the credit union movement, which is one of the few bright lights on the financial horizon.
The Minister for Finance set out, in April 2009, to make it easier for credit unions to respond to the needs of members experiencing unemployment and reduced incomes by affording greater flexibility to credit unions to extend loan terms, where necessary, beyond five years. His Department entered into limited consultation on this matter and it was the registrar of credit unions and not the Department that became the driver in this reform. The result is legislation that makes it more difficult - that is, more expensive - for credit unions to respond to member requests for rescheduled loans.
I am not saying credit unions should not have strong reserves. Nobody is arguing that. I fully support the registrar's introduction of the regulatory reserve requirement in 2009 and commend credit unions for building up their capital reserves to 10% as a result of this requirement. This compares favourably with the equivalent figure for banks, which is 8%. However, this House should pause for thought when we see yet another reserve-driven initiative from the registrar that has not been the subject of a regulatory impact analysis. Credit union representative associations are responsible bodies and are warning against the financial impact of this latest - dare I say it - hurried imposition by the registrar. It is unwise for this House to consider such an imposition when the registrar and the Department have clearly not undertaken an impact analysis. Impact models produced by credit union bodies show many credit unions facing nil dividend returns to members as a result of the Minister's proposals.
The proposed change will not address the needs of unemployed credit union members but will make it impossibly expensive for credit unions to respond to the needs of their members. In addition, and equally importantly, the measure will jeopardise the ability of many credit unions to pay dividends to their members, which will drive money out of credit unions over time and ultimately damage this great not-for-profit resource. Ultimately, the only bodies that will gain from the weakening of the credit union movement will be banks and moneylenders.
It could be argued that this is a hurried and ill-conceived measure. It merits careful scrutiny before damage is inflicted on the credit union sector. This sector has not demanded any bailout at taxpayers' expense and it has acted with probity at all times, although there are some notable exceptions. Looking at the credit union movement, one must be convinced that it has acted for the common good at all times. It is a responsible sector with its own stabilisation fund. When we hear warnings from the credit union representative associations of the damage that this so-called reform will bring, we must take cognisance of this and act cautiously.
The registrar of credit unions has extensive powers of regulation and is currently overseeing a review of the credit union sector on behalf of the Department of Finance. Radical proposals to heap additional reserve requirements on an already reserve-rich credit union sector need careful consideration. I urge that this take place and that there be plenty of dialogue with the representative associations. I hope their concerns will be reflected in the Minister's response and in amendments introduced to the Bill on Committee Stage.
I ask the Acting Chairman how much time I have left.
I thank Deputy Sherlock for giving me some additional time. I welcome the opportunity to speak on this Bill. Over the last 18 months we have been in the middle of an economic nightmare. We have not since the 1930s seen anything similar to the collapse of the banking system, which was caused, as everyone acknowledges, by reckless lending and inadequate regulation. The consequences for the country and for every citizen have been enormous. There has been much comment from all sides of the House about the measures contained in this Bill. There have been calls for greater regulation and for people of substance, with adequate training and experience in the area of regulation, to be brought in to deal with this problem.
We are dealing today with the Central Bank Reform Bill, which has been introduced to address past inadequacies in regulation and restore confidence to our economy. It is particularly important that we go about rebuilding confidence among ordinary citizens because, if we are to rebuild our economy, it is important that people believe we are coming to the end of the recession and that the comments over the last number of weeks by the ESRI about the return of growth in the second part of this year are correct. We are seeing positive signs, as indicated by the Minister for Finance this week when he stated that exports are rising and car sales are increasing, that there is an improvement in the economy, which is to be welcomed.
I commend the Minister for Finance on the actions he has already taken. He has instilled confidence in the people, who believe he has a strong command of his brief and is taking the issues seriously. I welcome the appointment of the new Governor of the Central Bank, Professor Patrick Honohan, and the new Financial Regulator, Mr. Matthew Elderfield. In the short time since they were appointed, they have already begun to build a new regulatory regime and people have confidence that something is being done about this problem. My constituents certainly believe the correct steps are being taken. Now that we have gone to the trouble of putting these experts in charge of a new regime, there is no point in criticising them at the outset. We must let them get on with their jobs because creating a decent regulatory regime will probably require the introduction of tough measures. In regard to Deputy Sherlock's comments on credit unions, we must let the regulator get on with his job. Public confidence is growing in Ireland and it has been recognised internationally that the decisions we have taken were the correct ones.
The Bill before us proposes to reform the structures of the Central Bank and establish a single, fully integrated structure with a unitary board called the Central Bank commission. This body will be responsible for the stability of financial systems, prudential regulation of financial institutions and the protection of consumer interests.
The regulatory regime clearly did not work well in the past. The former Governor of the Central Bank, who reported to the Minister for Finance, was not paid sufficient heed when he issued warnings about the direction we ultimately took. Even though the issue was raised before the Committee of Public Accounts, it did not receive the attention it deserved. For this reason, I welcome the Bill's provisions on enhanced accountability and oversight mechanisms. The annual statement on regulatory performance, which is to be presented to the Minister and the Houses of the Oireachtas, will provide an early warning mechanism for Members. I welcome that the Central Bank will have to produce a strategy statement every three years. Regulation and accountability will be further strengthened by the international peer review of regulatory performance which will be conducted every two years. The combination of these measures will create a system that ensures true accountability to the Minister and this House through Oireachtas committees. The Governor of the Central Bank will have to come before committees to be questioned on these mechanisms. This Bill strengthens our hand as a country and puts in place a system of which we can be proud.
Ordinary hard-pressed taxpayers who are already funding the recapitalisation of the banks and whose pay-packets have suffered severe losses do not want to be saddled with the cost of regulating our financial institutions. Regulation, which cost €60 million in 2009 alone, is extremely expensive. The enhanced regime we will be putting in place will cost in the region of €78 million. I welcome, therefore, the Minister's plan to make the financial services industry bear the full cost of regulation. At present, the industry covers only half of this cost but this Bill provides for the power to claw it back through levies on financial institutions. This will be a task for the new Central Bank commission and I suggest it should make it a priority because people need to see that financial institutions are paying for the regulation that has been made necessary by their failure to self-regulate in the past. I can identify several areas which would benefit from the €78 million being spent on regulating the financial sector and I ask the Minister to raise this matter as a priority with the new commission.
It is important that we recognise the positive developments. Too often, the only comments we hear in the media or this House are negative. We tend to talk ourselves down in this country but we must acknowledge that we are heading in the right direction both in terms of regulation and as an economy. The ESRI forecasts a return to export-led growth in the second half of this year which will lead to the creation of 20,000 jobs next year and 45,000 in 2012. Ordinary citizens need to be convinced that we are coming to the end of the recession rather than be told that doom and gloom will prevail into the future.
The Minister's actions have been endorsed by the European Central Bank. Deputies opposite have offered their own solutions to our current mess but the favourable reaction we have received from the financial markets reflects a recognition that the approach being taken by the Government is the correct one. I dread to think where we would be economically had the policies of Opposition Members been followed. They are in the fortunate position of being able to propose policies which they know will never come to fruition. Without having to face their policies' drastic consequences, they can offer different viewpoints every day of the week. When one is in Government, however, one has to implement a policy that one hopes will be successful. We must ensure that the decisions we take are successful when they are implemented.
We are already seeing evidence that the Central Bank Reform Bill 2009 is a step in the right direction in the proactive stance taken by the Financial Regulator on certain very public cases. I support the entrepreneurial spirit of those who have done so much to create employment in this country. If we are to return to growth, such people will be needed in the insurance industry, the construction sector and export businesses. However, the financial services industry, about which I know quite a lot, requires strict regulation and once we put in place the necessary measures we must let the regulators get on with their jobs. I commend the Bill to the House as a step in the right direction and I congratulate the Minister on introducing it.