Peter Mathews (Dublin South, Fine Gael)
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Today is an important day for this country, on which it is being represented by its Taoiseach in Brussels. He is one of the Heads of State or Government of 27 nations who convene in Brussels to address the European euro, banking and fiscal crises. The severe symptoms presented themselves in the five countries known as the PIIGS, namely, Portugal, Ireland, Italy, Greece and Spain. Ireland completed its quarterly review under the EU-IMF support programme only last week and received good marks across all the boxes. Ireland has reached the targets of fiscal correction and reform to the extent this now is under way. Earlier today, the Dáil completed the Second Stage debate on the Central Bank and Credit Institutions (Resolution) (No. 2) Bill, which will now proceed to Committee Stage. This shows that discipline is returning to Ireland's fiscal affairs following the change of government.

As part of the support programme, Ireland faces the imminent €19 billion recapitalisation of the banks. Because a critical point has been reached in respect of Europe's addressing European problems with a European solution, it may be timely to pause, reflect and consider the implications of the €19 billion recapitalisation as laid out in the EU-IMF-ECB agreement. When that agreement was signed in November 2010, there was an extremely poor understanding of the amount of losses that had occurred in the Irish banking system. It was only as recently as the end of March, following completion of the prudential capital assessment review, that the enormity and scale of the losses was determined at approximately €70 billion. Some people, including myself when I put on my accountancy and banking and finance hats, consider that figure possibly to be on the short side. The reason this is important in the context of the €19 billion recapitalisation concerns the funding of our banking system and our banks, which are being coalesced into two pillar banks, leaving aside the banks for resolution, namely, Irish Nationwide Building Society and Anglo Irish Bank. It is because the original six banks, now merging into two, owe obligations of approximately €150 billion to the ECB and the Central Bank of Ireland, which is proxy for the ECB. Included in the aforementioned €150 billion is approximately €70 billion that has its provenance from the redemption in full of senior bondholders up the end of last year, during the course of 12 months when there had not been an admission or a recognition of the scale of loan losses in the banking system. Consequently, by default or by a lack of proper understanding or perhaps by design but as a matter of fact, €70 billion within the €150 billion funding the banks through the ECB derived from redemption of senior bondholders.

Capitalisation of a banking system can happen by direct capital injection, of which, within the €19 billion, €10 billion will come from the National Pensions Reserve Fund. However, it may be timely to reconsider whether it might be better to present an insistent and persistent case to the ECB that a write-down of debt owed to the ECB could be negotiated.

This is in addition to what we have all heard about an interest rate reduction on the support funds being advanced by the eurofunds.

Since negotiations with Europe and the ECB are ongoing it would be very important to be able to achieve a change in the capitalisation strategy in order to preserve that €10 billion of cash in the National Pensions Reserve Fund, to be used as a cushion for the fiscal adjustments over the next four years under the relief programme of €50 billion. This would be very important because a creditor write-down of €50 billion from the ECB, €25 billion from the private creditors of bondholders and pro-note holders, could, in turn, be passed on to the customers of banks in the form of households and businesses, which would relieve customers, households and businesses, hugely. This would also create a stimulus to the economy which would get the real economy moving again.

Dinny McGinley (Donegal South West, Fine Gael)
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I thank the Deputy for raising this matter. We all recognise his expertise in these matters since he became a Member of the House and before.

In recent months the Department of Finance and the banking unit of the NTMA have been working hard to ensure that our commitments on recapitalising our banks are met by the appropriate deadline which is 31 July 2011. Given that the last day of this month is a Sunday, in practical terms this means having this work completed by Friday next, 29 July 2011.

The House will know that the stress tests announced last March by the Central Bank determined that our banks required another €24 billion of capital to meet their new regulatory requirements. The Government indicated at the time that a significant portion of this amount - at least €5 billion - would come from private sources as result of liability management exercises with junior bondholders.

The Minister for Finance confirms that well in excess of €4 billion of such burden-sharing has been achieved with holders of subordinated bonds and we are well on track to reach the aforementioned target of €5 billion. This leaves a sum of up to €19 billion which must be largely met by the taxpayer. I will update the House on where we stand with regard to this investment.

Allied Irish Banks merged with the EBS on Friday, 1 July 2011 and the recapitalisation plan for the combined entity was announced the same day. The combined capital requirements of the two institutions are €14.8 billion. Under the plan, the National Pensions Reserve Fund Commission will inject €5 billion in equity capital at a price of 1 cent per share, bringing its shareholding to 99.8%. The State will also inject €1.6 billion in contingent capital. Following the imminent completion of burden-sharing with subordinated debt-holders, which is expected to generate a total capital gain in the region of €2 billion, the remaining capital requirements will be met by way of a capital contribution. An extraordinary general meeting to approve the capital raising is scheduled for 26 July and the funds are expected to be injected shortly afterwards.

The recapitalisation plan for Irish Life & Permanent was put forward by the board to shareholders of the institution yesterday and was rejected. Under the plan, the Minister for Finance was to subscribe for €2.3 billion of equity at a price of 6.3 cent which was a 10% discount to the market price on 23 June. This would have given the State a shareholding of 99.2%. The Minister was also to contribute contingent capital of €0.4 billion. The balance of the bank's PCAR requirement was to be made up of €200 million from internal resources, and an estimated €1.1 billion from the combined benefits of the bank's liability management exercises and the disposal of Irish Life. Following the rejection of these proposals by shareholders, the Minister for Finance intends to review the options open to him in light of our imminent obligations both to the Central Bank and the external partners.

In the case of Bank of Ireland, of its €4.2 billion capital requirement, just under €2 billion has to date been achieved through a liability management exercise. A rights issue is currently under way to raise circa €1.9 billion and this is fully underwritten by the NPRFC at a price of 10 cent per share. The balance of the PCAR requirement will be made up of contingent capital of €l billion, for which the Minister for Finance will subscribe and further burden-sharing measures linked to the remaining junior debt outstanding. Depending on how the take-up goes in the rights issue and assuming no other third party takes up the shares in the bank, the State's shareholding will end up anywhere between 29.2% and 69.7% in the bank compared to 36% today.

The House will be aware that the state of bank balance sheets is not just a topical subject in this jurisdiction. The issue has been debated extensively across Europe and indeed beyond. The recently announced European stress tests were specifically designed to address concerns that European banks were under-capitalised in light of current economic conditions and market circumstances. In the end, only eight banks were found to have a capital need under the test with the combined shortfall identified as being €2.5 billion. However, it is acknowledged that had it not been for the €50 billion in equity capital that was raised by European banks earlier this year, the tests would have identified a far bigger requirement. Our banks passed the EBA stress test as we had moved early to analyse the banks' books in great detail, using a level of granularity far beyond what was involved in the European tests.

The EBA methodology included a number of differences relative to that applied in the recent PCAR exercise. The PCAR was tailored specifically to the Irish banks' need to reduce their reliance on external funding over the coming three years, while the EU-wide test looks at the resilience of the largest European banks against a set of more widely applicable adverse circumstances.

The EBA stress test set a 5% core tier 1 capital requirement in the stress scenario, while a level of 6% was applied in PCAR. The PCAR was applied on a three year horizon from 2011-2013 compared to the two year 2011-2012 timeline applied by the EBA. There were also significant differences in the application of future changes in the balance sheet; application of funding constraints and treatment of sovereign and bank credit losses. Loan losses independently forecast by BlackRock Solutions as part of the PCAR were also applied to Irish banks participating in the EU-wide stress test.

In summary once our recapitalisation and indeed restructuring commitments are met by amounts which are clearly within the envelope of the external authorities funding programme, Irish banks will be among the best capitalised banks in Europe and in a far stronger position to return to the markets for funding and to meet the needs of the Irish economy.