Michael McGrath (Cork South Central, Fianna Fail)
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8. To ask the Minister for Finance the implications for banks’ capital levels and their capacity to increase lending of the bank Asset Quality Review; and if he will make a statement on the matter. [1628/14]

Michael McGrath (Cork South Central, Fianna Fail)
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This question relates to the recent Asset Quality Review of the main Irish banks which is a precursor to the European-wide stress tests next year. My concern is the element of uncertainty created following the announcements by the banks of the affect of the outcome of that review on their balance sheets. All of the banks have stated that they are still above the minimum regulatory capital levels, which is accepted. However, there appears to be a variation between the Central Bank's interpretation of Bank of Ireland's balance sheet in terms of its provisioning for loan losses and the bank's own interpretation in this regard. Bank of Ireland has also stated that engagement on that issue is ongoing.

Having the minimum level of capital does not mean that a bank is properly capitalised to meet the lending needs of the economy. It is important that in advance of the full stress tests later this year we have absolute clarity as to the state and health of the balance sheets of the main Irish banks, on which we rely to provide the oil for the engine of the Irish economy.

Michael Noonan (Limerick City, Fine Gael)
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I thank the Deputy for his question. As he will be aware, in 2013 the Central Bank of Ireland conducted a Balance Sheet Assessment, BSA, of the PCAR banks, namely, the banks that were subject to the Prudential Capital Assessment Review, being AIB, Bank of Ireland and Permanent TSB, which assessment incorporated an Asset Quality Review, AQR. The results of the review were shared with the external partners at end-November 2013 as agreed under the programme and with the participating banks to inform their ongoing capital and financial plans. The Central Bank has not commented on the participant banks in relation to their results of the BSA.

I have seen the results of the BSA as this was a commitment under our funding programme. As with all other such commitments, my Department communicated them to the troika by the appointed deadline. The results are very technical in nature and I am under a legal obligation to keep the details confidential. As the AQR is seen as part of the European Central Bank’s comprehensive assessment, the findings of the BSA are not being published separately. The interpretation of the results is a matter for the Central Bank. However, I am pleased that the Governor has informed me that there will not be an additional regulatory capital requirement in the banks as a result of this process.

Publication of individual BSA results is a matter for the banks to decide. I refer the Deputy to the statements made by the individual banks. As he will be aware Bank of Ireland has issued a detailed public statement on the outcome of the BSA. I am advised by AIB and Permanent TSB that they will consider the findings of the BSA in the preparation of their year-end December 2013 financial statements.

In relation to the banks' capacity for new lending being impacted by the BSA, I draw the Deputy’s attention to the statements made by the President of the European Central Bank, Mario Draghi, at the ECB press conference on 9 January 2014, wherein he specifically addressed this point. Mr. Draghi was asked whether the need to undertake the AQR, being part of the assessment, has delayed the recovery in lending. Mr. Draghi gave a detailed response to this question with reference to eurozone banks. I suggest that the Deputy read Mr. Draghi’s response, which for his convenience, I would summarise as follows: There might have been some short-term deleveraging by the banking system in order to prepare for the assessment but this needs to be counterbalanced by two points: the long-term greater health of the banking system on completion of the AQR and the reopening of the capital markets for banks.

Additional information not given on the floor of the House.

As the Deputy will be aware the PCAR banks have returned to the capital markets. I welcome that fact and note that the demand has been very strong for each of the capital market transactions recently undertaken by the PCAR banks. As the Deputy will be aware the level of new lending, in particular new mortgage lending, in the Irish economy was depressed during the financial crisis. Clearly the level of new lending that takes place is influenced by the level of supply of and demand for such lending. It has been evident that there has been an increase in the level of new lending in the Irish market in the second half of 2013 and I expect that the flow of credit into the economy is likely to continue to increase in 2014. My officials critically review the level of new lending - mortgages and SME - regularly and I am not aware of lending being negatively impacted by the BSA.

As the Deputy will also be aware this Government has since it took office pursued a number of initiatives to increase the supply of credit to businesses and individuals. A key aspect of the Action Plan for Jobs 2013 was the facilitation of access to finance for SMEs. The Government has taken a number of significant initiatives aimed at providing equity support to SMEs. In this regard the National Pensions Reserve Fund, NPRF, has set up a number of funds, including the SME corporate fund, which is a €450 million fund, the SME equity fund, a €300 million to €350 million fund, and the SME turnaround fund, a €100 million fund. A number of other initiatives including the credit guarantee scheme and the microenterprise loan scheme have also been implemented by Government.

Michael McGrath (Cork South Central, Fianna Fail)
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I thank the Minister for his reply. Can the Minister confirm that the European Central Bank has accepted that the bank balance sheet review will form part of the stress tests that will take place later this year? In other words, does it accept that that box has been ticked and the balance sheets do not have to be reviewed again?

I am concerned that the Central Bank did not announce the results of the balance sheet review and that each of the banks made separate statements. As acknowledged by the Minister, varying levels of detail were provided by AIB, Permanent TSB and Bank of Ireland, which also took issue with the findings of the balance sheet review in terms of the amount of loan provisioning provided for on its balance sheet and stated there would be a need for further engagement with the Central Bank on this issue. This results in an element of uncertainty as we enter into a critical period in the context of the full stress tests this year by the European Central Bank. This uncertainty is regrettable and unnecessary. In my view, the Central Bank should have published the outcome of the balance sheet reviews.

The bottom line is that in the case of two of the banks, we own them fully and we have recapitalised them. In the case of Bank of Ireland, we are still a significant minority shareholder.

Michael Noonan (Limerick City, Fine Gael)
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First, one would need to distinguish between capital requirements and provisioning. Provisioning against bad debt was what arose from the asset quality review. It was clearly stated by the bank that arising from the asset quality review, no extra capital was required. Obviously, they are interrelated because to make the extra provisioning, a bank draws down on the store of core tier 1 capital. Therefore, the core tier 1 capital ratios have been reduced in the banks but they are still well above the minimum required.

Second, much of the material we are talking about is confidential and commercially sensitive. The Central Bank is independent and it has a relationship with the banks it regulates. The Central Bank deemed it to be appropriate not to publish the findings. Of course, it is up to the banks to publish what they are doing in respect of the additional provisioning required. The Bank of Ireland did so immediately because it had obligations, as a result of the preference share transaction we were conducting with it, to fully inform potential purchasers of the preference shares and of the new situation. It would comply with normal market guidelines to do so. That is why Bank of Ireland came out in greater detail. The other two were not involved in any similar transaction at the time and they are doing what would be normal. They will put the extra provisioning they may or will make into their annual return and annual report for the end of 2013. They will give a good deal of information as well, but they will do it in accordance with their timetables for announcing information about their balance sheets, that is, in the return for the year.

Deputy McGrath's first question was on the asset quality review and whether it will have to be repeated. I imagine it will have to be updated. The asset quality review was for 1 June 2013. Since the stress tests will be in October and November 2014, the asset quality review will be somewhat dated by then. I would prefer if there was an asset quality review, and it was the intention of the European Central bank to have this throughout Europe for 31 December 2013. They may update the June reviews to see what would happen. Obviously, there are downsides to that but there are certain advantages as well since loans supported by property related collateral would have enhanced in value between June and December.

Michael McGrath (Cork South Central, Fianna Fail)
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When Mario Draghi spoke in December, he was questioned about the outcome of the balance sheet reviews. He referred to decisive action being required in respect of the Irish banks. That was seen in the context of the balance sheet reviews which had just been published and interpreted by the banks. Will the Minister give us his interpretation of what Mr. Draghi was referring to when he spoke of decisive action being required by the Irish banks in advance of the stress tests? Does it relate to dealing with the mortgage arrears problem or was it respect of loan provisioning and the balance sheet review?

Michael Noonan (Limerick City, Fine Gael)
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It was Central Bank speak for "Get your provisioning done". It is self-evident, because of the asset quality review, that extra provisioning is required. The banks are doing that now and that is what they should do. I assume Mr. Draghi had the mortgage issue in mind as well because he has been speaking to that topic for some time. From my conversations with Deputy Doherty, I imagine we are all ad idem in the House that the banks need to keep the foot to the floor in solving this particular problem and not resile from the agreed targets.