Thursday, 10 July 2014
Strategic Banking Corporation Bill 2014: Committee and Remaining Stages
I move amendment No. 1:
In page 5, line 27, after "SMEs," to insert the following:"bodies seeking to provide social housing on a not for profit basis and households in mortgage distress unable to secure sustainable resolution arrangements with their mortgage providers,".Whatever about disagreements and criticisms in terms of the timing of this Bill, the principle behind it enjoys general support in the sense that we need a strategic bank which fills the gap left by the pillar banks and commercial and private banks and so on who appear to be averse in investing in areas which are of benefit to the wider economy and our strategic objectives to develop it on a sustainable basis into the future. That is positive.
The focus on SMEs which is the declared priority of the Bill and is explicitly set out therein is right and proper for the reasons, as mentioned by the Minister and other speakers, that the SME sector is the lifeblood of the economy; 70% of people working are employed in the SME sector and if there is going to be meaningful economic recovery we need to help SMEs, which the banks have failed to do. To my mind, there is an unwillingness on the part of Government to tell the banks what to do despite that we own some of them and have bailed out all of them. Given they are clearly not doing what they need to it is right this bank should fill that gap.
There are other priorities, which I believe should be explicitly set out in the Bill. The amendments in my name seek the inclusion of two other absolute strategic priorities, including address of the issue of mortgage distress. The committee of finance, of which I am a member, was informed this week of the multiple failings of the pillar banks and mainstream banking system to properly engage with distressed mortgage holders and the MARPs process. At a briefing yesterday with Grant Thornton and the Irish Mortgage Holders Organisation we were told of the pathetic number of cases dealt with under the insolvency legislation.
When it was first put through, the then Minister, Deputy Alan Shatter, stated that 18,000 cases would be dealt with in the first year. In fact, only a few hundred cases have been dealt with. The Irish Mortgage Holders' Organisation told me yesterday that 10% of those on AIB's mortgage book had to engage with it because the bank would not engage with them. It is not capable of doing so. The banks, therefore, are not doing what we need them to do, nor are they doing what we hoped the insolvency legislation would force them to do. We have got to do something about this, not just because we care and should care about the 136,000 householders and families in arrears but also because it has to be a strategic priority. The Government stated it was a strategic priority to get the people concerned participating in the economy again, but they cannot do so if lumbered with mortgage debts. We will paralyse a very significant portion of the economy's capacity to recover unless we deal with this problem with much more urgency and speed than the banks have proved willing or able to demonstrate. That is why the series of amendments is proposing that a priority should be to offer a way forward for those in mortgage distress where they have been unable to get a decent, proper deal, or any deal, from the banks. It is proposed that their mortgages be transferred to the proposed bank.
I talked to Mr. David Hall and representatives of Grant Thornton yesterday after they had given a briefing in the audiovisual room on the whole matter. I asked them what they thought of my amendment and Mr. Hall was certainly very positive about it. He stated it represented a very good idea that could really work. We obviously need to tease out the details, but there are many that need to be teased out in respect of what the Minister put in front of us. Will it really deliver for SMEs? We need to think about how the measure would work. What I believe should be a strategic priority for the new bank is a no-brainer. It is in line with the consensus on the need to make progress a hell of a lot faster and more decisively for those in mortgage distress than has been the case heretofore.
I hope the Minister will consider the amendments seriously. There is a clause that refers to providing finance for those seeking to provide social and affordable housing on a not-for-profit basis. The Government has stated it wants to see this happen, but we have not seen much in the way of concrete moves to make it happen. When in the light of the housing crisis we on this side of the House talk about the need for a significant social and affordable housing building programme and the Government states there is a big problem of supply in the market which is creating a property bubble or the threat thereof, it seems obvious that we need a vehicle to provide the necessary finance for bodies that are willing to address this issue, be they voluntary housing associations or otherwise.
We should seriously encourage co-operatives. I am always being asked by people in my area about housing co-operatives because they were a feature in the past. Building workers and people on the housing waiting list could band together, obtain some finance and use land not being used by the local authorities to provide social and affordable housing. The proposed bank should have as a priority the financing of such projects. Owing to all the bloody EU rules on financing local authorities, there may be difficulties, but we must find a way, perhaps through trusts set up by or sponsored by the local authorities, to direct money towards the building of social and affordable housing.
These are very reasonable suggestions which I hope will receive the support of other Deputies. Others have mentioned in their Second Stage contributions that the mandate needs to be wider. The wider mandate has been talked about a lot in terms of the international banking system. Reference was made to the contrast between the focus of banks in Europe and that of banks in the United States, where the banking system, starting with the Fed, has a mandate that is much wider than just dealing with issues such as inflation and the bottom line. A key part of the mandate concerns employment and housing. These are imperatives for the American banking system as dictated by the Fed. We should follow suit, not that I am saying everything about the American banking system is wonderful. We need a wider mandate, particularly for the strategic State-sponsored bank. I hope the Minister will consider these amendments.
I welcome the Minister to the Chamber. I was very disappointed that the Independent Deputies not belonging to the Technical Group did not get a chance to speak on Second Stage. I am disappointed also that the Bill has been presented hurriedly, although I realise it has been three years on the runway. I am not making criticisms but constructive observations.
I am speaking to the amendment because it refers to the fact that 136,000 households are in mortgage distress. In the presentation made yesterday by Mr. David Hall and the representatives of Grant Thornton, to which Deputy Richard Boyd Barrett referred, they said it was expected that there would be a bloodbath. In fact, there has been a bloodbath. There have been very many suicides, as well as considerable mental and physical distress in the households of the State. One should remember that 136,000 households amount to 500,000 people. One should add to this the 250,000 who have emigrated and the 300,000 in the 100,000 households on housing waiting lists. One should also add to it the number of people who have no homes and the number of SMEs in deep distress. Let us think about what happens.
Ms Fiona Muldoon left her job in the Central Bank early.
These are symptoms which demonstrate our current position. As when one is building, one must clear the site before one can start laying good foundations for a new structure. As Deputy Shane Ross implied in his two anecdotes, the banking system is in bits; it is still banjaxed. "Pillar banks" is a rubbish title to give the banks. Wilbur Ross made €500 million within two years and nine months and Archie Kane, chairman of the bank, thanked him for his support of it. He did not do anything for the bank; he wrote a cheque for his investment, which was a one-way bet. He could never lose on his €290 million investment on which he made €500 million. It was a certain one-way bet. The euro system would never have allowed him to lose money, yet we agonise over and debate cuts affecting the most vulnerable and wave goodbye to our young qualified people on the doorstep of new lives. Deputy Stephen S. Donnelly mentioned 39 year old people who should be the ones establishing new enterprises.
The Bill is aspirational; that is all it is. It is characterised by inexperience. It looks good because it is on green paper and written in legalese, but it is actually not connected with what needs to be done. The old debts - the 50% of SME legacy debts - need to be written off to collectable amounts, but the banks are not doing this. They do not have the experienced people to deal with their books. They cannot even answer the telephone. If I ring my bank, Bank of Ireland in Stillorgan, I will be directed to a call centre in Limerick, the staff of which do not know-----
I am sticking to them. All of my points refer to amendments Nos. 1, 11, 13 and 14 directly and indirectly.
I did not get a chance to speak on Second Stage. I have 21 years' experience of working in a bank that was funded by local and regional deposits in Ireland and which lent to SME businesses in Ireland. It had 70 years of uninterrupted, slow-growth profit and it educated people to be the bankers of the late 20th century and early 21st century. That was until Bank of Scotland (Ireland) under its Highland Bank of Scotland, HBOS, ownership trashed it by ballooning its funding and distributing that funding in mad lending. It was one of about ten banks that did it.
This is where the appraisal should start, because it is a practical situation. The Minister mentioned the insolvency legislation, but legislation solves nothing. It does not solve a physical problem, a medical problem or a financial problem. A financial problem is solved financially, by understanding the implications of the physics converted into finances. When the physics of an enterprise make sense, whether it is to manufacture shoes, import machinery, distribute it or whatever, the financials follow. Thirty years of working in financing physical production, marketing, distribution, importing, exporting and performance bond underwriting has taught me this. It is worth listening to the practitioners, but the practitioners' input into this Bill is not apparent.
One such practitioner was here last week to discuss SME lending in Germany through the Sparkhassen banks. Sparkhassen and the co-operative banks, together, provide 67% of all funding and lending to German households and SMEs. It is not done by Deutsche Bank, Commerzbank and other such banks; they have operations and assets created outside of Germany. The Sparkhassen banks are local banks which take local deposits and lend locally. They are staffed by people who are professionally trained to understand business. At present, our two pillar banks are bereft of people who know how to assess businesses. There are very few left and their heads have been done in. They are depressed and demoralised by the experience of the past six years, because they have been told to repair their balance sheets. We must get real.
As I have said, the aspirations are good. I am not being negative, just realistic. There was an unrealistic approach to assessing the provisions needed in the banks. One had to shout to be heard, and then be ignored. They are still short of capital. If they were not and if they had the right management and executives to do the job, they would get on with writing down the old loans from a bloated credit pyramid that was nothing other than a Ponzi scheme. The banking inquiry is going off in all sorts of peculiar directions and does not know where to start, but the banks' balance sheets will explain the story and provide the lessons, if they are properly explained. It is not rocket science. That will show where the accountability and responsibility lie, which is clearly on the desks of all the directors of all the banks between 2001 and 2008. The balance sheets show it. Furthermore, the culpability of the banks' boards for the creation of the asset price bubble is measurable from the balance sheets. On average, the banking sector was 92% culpable for creating the asset price bubble. Why is that? The weighted average of their loan-to-deposit ratios was 173%. That is 83% above the maximum 90% prudential level, and 83% as a proportion of 90% is 92%.
Deputy Boyd Barrett referred to the mortgages that might be included under this new arrangement. One could argue that a whopping proportion of the loan balances the banks say are owed by those customers are not owed by them, because the banks created the asset bubble that disappeared and left the customers with the loans. The same applies to the SMEs. That is really the starting point.
That cascades forward to the question of from where the funds came to bloat the Irish banking sector's balance sheets by such a huge amount. They came from people who invested in the bond offers by those banks, which was a crazy decision by boards that did not understand or if they did were just greedy, stupid and malfeasant in the years between 2001 and 2008. The funds were secured from issues and the subscriptions of the original investors, who might have been the pension funds. Members will recall when we were told we should be careful because we might damage our pension funds if the banks have to take losses. However, all of those original investors had sold into the secondary market, to the guys who take risks. That is why it was wrong that the losses were imposed on our people. It is not the vicious cycle of bank debt and national debt, but the vicious imposition of losses and its conversion into national debt.
Well done to Luke 'Ming' Flanagan, MEP, who, according to today's newspaper, told the new Commission President, Mr. Juncker, that we want our money back. Brian Hayes, MEP, was also credited for his participation in those remarks, but it was Luke 'Ming' Flanagan who made it easily understood.
We should consult Mr. Niclaus Bergmann, chief executive officer of the Sparkhassen, which has 250,000 employees and 29,000 trainee managers across Germany in local and regional areas of banking. The banks are not allowed to trespass on each other, so they understand the businesses to which they are lending. They are lending the deposits of the communities, which give them those deposits from their savings. It is all very sound and is probably the type of thing we should do.
The SBCI is more similar to a venture capital investment bank. It does not even have a licence to take deposits and the word "deposit" is not mentioned anywhere in the Bill. It is always a good test of a bank if its sources of funding and destinations for lending have some type of correlation. That is usually a good foundation. The analogy is a well balanced cardiovascular system in the human body. That is what we should have in mind. However, that means one must do site clearance of the canvas, relieve SMEs of the legacy debt that is an impossible burden and make the banks wake up, shape up and do the work they must do, with properly trained management and executives. Those people are available but they must be harnessed and motivated.
That is the task at hand. If one rushes off to do something that is a little too hasty, but has the appearance of being solid because it is in the presentation format of what we are familiar with, such as this Bill, one gets a false sense of security. Experienced pragmatism should underlie whatever we do to provide finance for SMEs and households. The households must be relieved too. We might as well put it out there to the creditors, which is the euro system, and tell Mr. Draghi that we got it all wrong but have woken up, that the promissory bonds are all wrong and we are tearing them up and that it will be something for him to organise in his housekeeping of the euro system across Europe. A sum of €25 billion is small beer in the context of the trillions of the eurozone, and it could do it.
I thank the Chair for her forbearance. I have blended part of a Second Stage speech, which was not available to the Independents, with some comments relating to amendment No. 1. I thank Members for their patience in listening to those observations.
Obviously, it would be a major structural change to the bank.
It is a different version of the point I was making. I believe Deputy Boyd Barrett is also going to the demand side, which we have spent a lot of time discussing in the finance committee in the past two years. While the Minister may or may not accept the amendment, does he accept the point that in order for demand for credit to surface, which it is not doing at present, something has to be done about the current state of the mortgage crisis? If he does, is there any complementary legislation he is thinking through or planning to introduce in the next few months that would incorporate some of the points Deputy Boyd Barrett's amendment is trying to address?
In regard to amendment No. 1, and we are also dealing with amendments Nos. 11, 13 and 14, I want to deal with the issue of social housing. While I know the amendments are brought forward in good faith, I am not sure how the mortgage distress side would work out and whether we would use this company to provide credit to those who have mortgages in distress so they could pay back all of the capital that is outstanding on their loans, and have a mortgage with this bank that offers lower interest rates. I am not sure if that is the suggestion here and perhaps Deputy Boyd Barrett can elaborate on that.
My concern is that we need to sort out the banks with the mortgages. This is a convoluted way of sorting that out but I accept it was brought forward with the right intention.
The housing aspect is crucial. An issue I raised on Second Stage is the definition of "other persons in the State", which the Minister said is anybody who is a legal entity. Therefore, can there be lending to housing associations such as Clúid and the different types of not-for-profit social housing providers through this vehicle? The commentary the Minister made earlier suggests it can. However, it is very clear in the legislation that this is directed particularly at SMEs. While there is a major problem with credit to SMEs, we know there is a social housing crisis and this is a vehicle that could be made available for cheaper credit to those bodies.
I would be interested to hear why social housing as a particular area is not identified within this new company structure, given that the Minister is modelling this on KfW. KfW has been successful and now lends a huge amount of credit into the German economy and economies throughout the world, with more than half going into the Germany economy but much going to companies that have links with German companies in other countries throughout the world as well as to other programmes. It has different structures, however. For example, one of the banks under KfW, Mittelstandsbank, is the one which deals with SMEs. If we examine the other structures within it, they deal with investment in housing, education and the environment. My fear is that the Government has decided to just look at one part of this and has left out the other parts.
Deputy Boyd Barrett's amendment identifies one of those areas, housing, but we could equally look at the others, such as education. However, given housing is a major crisis, access to cheap credit is needed and this is a vehicle that could be used. I believe the Government should consider supporting the housing aspect of this amendment. I would welcome it if Deputy Boyd Barrett would explain exactly how lending to those who cannot pay back their mortgages would work in regard to solving this problem.
There is a lot of food for thought in all of the contributions that have been made. I want to say, first, that I am not in a position to accept the proposed amendments because they are beyond the scope of the Long Title of the Bill and, as a consequence, I cannot incorporate them in the Bill.
Many of the contributions that have been made are very interesting but, effectively, they are a further analysis of the crisis that started six years ago, in particular the crisis brought about by personal debt and the indebtedness of the SME sector. This Bill is not intended as a vehicle for getting people out of debt. It is intended as an initiative for the future to ensure there is sufficient credit available to small and medium size enterprises to grow the economy, grow their own businesses and create additional jobs. It is in a different space to the space where many of the speeches were made.
I take the point made by Deputy Donnelly that it is possible to make the two ends meet. If there are supply-side initiatives such as this, we have to ensure there is sufficient demand, and if people are totally indebted, they do not provide the demand. However, we have the Central Bank's responsibility for running the programme on restructuring mortgages and getting people out of debt, and regular reports are brought before the House and before the finance committee in that respect. The Department responsible for planning and housing is responsible for social housing, under the Minister of State, Deputy Jan O'Sullivan, and the Housing Finance Agency is responsible for the financing of houses. While I agree with the Deputies' assertions that more could be done in those areas, there are organisations, agencies, institutions and personnel dealing with these problems already and we have had innumerable debates about them. Some people are critical and some are supportive, but I believe there would be a general view that progress has been made and will continue to be made.
This initiative is in a different space. This is to provide lending at lower interest rates and with different lending products to existing SMEs so they can expand, grow their businesses more rapidly, make a contribution to the general growth of the Irish economy and provide additional jobs. Some of what they will be doing is traditional and some will be innovative in the new economy. Any analysis of the availability to SMEs at present would indicate there are flaws in the type of products being provided, some of them to do with the interest rate charged, others to do with the length of the payback period and others to do with the fact it is very difficult for an SME to borrow in Ireland and have a payback holiday for, say, 20 or 24 months before the repayments pick up. As one moves from cash flow to profitability, it should be possible to design products, in the same way as KfW, that would fit the progress of a company from its loss-making early start-up years to years in the middle phase when it becomes profitable.
I am not challenging any of the views held by Deputies and expressed here today.
I am simply saying that they are not in this space. What we are doing here is looking to the future and seeing whether we can provide credit in new ways that would better suit the SME sector, which wants and intends to expand and whose expansion is being inhibited in many respects by the lack of credit or the fact that credit is not available in the way that best suits the needs of companies.
That being said, the first priority of the Bill is to take existing SMEs with a plan to expand that requires the investment of capital and make capital available in a user-friendly way. People will then set up new companies, many of which will be in the new economy, and credit should be available for them as well. In respect of housing, the test is whether it is an enterprise that will be run by an SME and has an identifiable commercial return, rather than being based on the particular activity people are engaged in. The German model is different. There is not the same level of home ownership in Germany. Much of the German housing supply is provided on the rental market, so obviously there are many SMEs and large housing companies that effectively provide the housing stock that people rent, and there is an identifiable income stream and commercial return. Germany has many SMEs and larger companies in the business. We do not have as many like that in Ireland. We have a buy-to-let sector which is quite strong but we do not really have a construct-to-let sector, although there are signs it may be starting. This is an area into which this credit institution could move in due course, but its primary purpose is to do what it says on the tin, namely, provide credit to existing SMEs and move on from there to new SMEs. To that extent, I think and hope it will be successful.
The other types of response the Deputies are talking about, whether it is through the insolvency legislation, bankruptcy, the work of the Central Bank in restructuring mortgages or the work of the individual banks in restructuring SME debt, all run in parallel. This is not a vehicle that is intended to support that activity. There are other agencies and people who have responsibility for that. Bank of Ireland says it has restructured over 90% of its SME loans that are indebted, and AIB says it is at 65%, so the percentage of SME debt being dealt with is higher than the percentage of domestic debt that is being dealt with, which we get in the quarterly reports from the institutions.
Another thing that is worth saying, but with which many Deputies will not agree, is that many of the problems we have had over the past four or five years are legacy problems that arose from the greatest and most disastrous recession the country has experienced and probably the greatest economic downturn since the Second World War. There are always problems in politics. The idea that there will be some kind of problem-free zone in a brave new world where politicians will have nothing to do is fantasy. It is just that the nature of the problems switches. We are in that switch year in 2014 where the problems of the future are coming strongly on board. It is a problem of the future economy. How do we deal with all the people who are unemployed? How do we create jobs for them? How do we provide the credit across the economy that is necessary in all the sectors? How do we deal with people whose confidence is beginning to build, who feel they are entitled to some reward and whose representatives in the trade union movement will be putting in pay claims? How do we deal with people have not received a pay increase or tax break for quite a while and who have expectations around budget time that they will receive one? As one works out the kind of models that might be effective, one can use as a rule of thumb the idea that a share of the legacy problems are going off the agenda and being replaced by the problems of the future.
This is addressing the future. It is not addressing the past. It is not addressing legacy debt issues either in the SME space or in the mortgage space. This is addressing a foreseeable lack of investment capital in the future to grow SMEs and the economy and, as Deputy Donnelly said, to complement what is happening with regard to foreign direct investment. I am not saying we should replace foreign direct investment with this, but if one looks at the model of economy we have, increasingly, foreign direct investment is going into the main cities and larger towns. The future of smaller towns is in doing what we were always very good at - agriculture, agrifood, food production and processing and tourism. One can name the tourist hot spots all around the country. While Dublin is very strong, there are others such as Dingle, Galway, Westport, Kilkenny and Kinsale. One can build the industry around them. We need a new tapestry where we modernise our traditional industry, invest in it, put people back to work and develop the agrifood and tourism industries in particular. To service that, one needs a strong construction sector and a strong retail sector. Of course, foreign direct investment runs in parallel but, increasingly, foreign direct investment tends to be in the larger urban areas to which quite a lot of people commute. Foreign direct investment is not the only game in town. Foreign direct investment is only part of how we rebuild the economy, and SMEs are absolutely vital. They have been vital all over Europe in growing successful economies. The availability of appropriate credit is crucial to the development of the SMEs. It is in that space that we should be resolving the problems that are quite clearly evident now but which take us into the future, rather than constantly analysing the ashes of the past.
It might surprise the Minister to hear that I agree with many of the sentiments he expressed at the end of his contribution. I do think we need to look to the future and chart a strategic road ahead. This is essentially what the Minister outlined with regard to prioritising investment and political energy in key areas that can form the foundations of a balanced and sustainable economic future and development for the country and its citizens. I agree completely with the Minister on that point.
Karl Marx said: "The tradition of all dead generations weighs like a nightmare on the brains of the living." Stephen Dedalus made a similar comment in James Joyce's A Portrait of the Artist as a Young Man. It is true and could not be more accurately applied to what is happening in our economy at the moment, where the past does weigh like a nightmare on the brains and lives of the living. It is preventing us from moving down the road of the future, and this needs to be addressed if we are going to get beyond the current paralysis.
"Paralysis" is a fairly accurate term for where we are. This is another favourite Joycean term. Dublinersis all about the paralysis of the city and Irish society and culture at the start of the 20th century. For the past ten years we have witnessed paralysis, more or less. The Minister might point to the odd incremental improvement and we may agree or disagree sometimes but things are stagnant and, as a result, there is a great deal of despair and demoralisation and many people are struggling. The reason for that is the Government and the previous Government hoped that if they put the banking system back on the rails and imposed a little more regulation and tried to influence its priorities, it would begin to inject life into the economy, but it has not done so.
It is not just about saying the Government was wrong and all the rest of it. We can argue that. I stress that my amendments fall far short of what I would propose. If I had a choice, we would send people marching into Bank of Ireland and AIB and boot the current boards out, take control of them and tell them what to do because we funded them. The Minister will not do that. I can say that but, having said it, we have to move on. I will campaign for that politically in other ways but in so far as there is a consensus regarding a strategic investment bank, which I welcome - it might be short of what I would like but at least it is pointing in the right direction - the question is what is its mandate. It is not only a question about the past, although my amendments partly try to address legacy issues, it is also about the future.
I do not know what is the Government's position but the view has been expressed by Fianna Fáil, Sinn Féin and Independents that the mandate of the banking industry in this country and in Europe is too narrow. I drew the contrast with the American banking system whose mandate predates the crash. Housing and employment are key priorities of that system. If we have rightly recognised the need for a strategic bank, surely the strategic priorities should not be only about SMEs. That is fine, although one might ask why it is not called the SME corporation bank if that is its only priority. I am not absolutely clear about the Minister's view on that. I accept SMEs are a priority but is the Minister saying housing finance should not be a key priority of a strategic bank? If so, I disagree with him not just because of the particular crisis we are facing but also, fundamentally, regarding what the mandate of such a bank should be.
I ask him to note the fact that KfW, the bank to which he is looking to co-invest in this bank, has housing finance as one of its key mandates and imperatives. The very bank the Minister has involved in this process, and which presumably at some level he is trying to copy or to take aspects of what it does and import into our strategic bank, has housing finance as part of its mandate, which is correct. Why would we not do the same? This should be a priority anyway, regardless of our legacy problems but it should be even more of a priority because of them. They are a dead weight on the economy and on hundreds of thousands of our citizens who are unable to participate and function in the economy properly and that is acting as a serious drag.
I raise a slight philosophical point. I do not know whether Minister has ever read the philosopher Jacques Derrida. I will go on a little tour.
It is. He is the famous deconstructionist philosopher. He pointed out that many of the dichotomies we take for granted are false and they do not exist in reality. That in a way is what Deputy Donnelly, myself and other are saying. Demand and supply are viewed as dichotomous when, in the real economy, they are not opposites or poles apart, as they are mutually interdependent.
The question of putting a roof over people's heads and not having them lumbered with mortgage debt and so on is intrinsically linked to their capacity to function economically and in every other way in our economy. It is reasonable that a strategic bank should have this as a priority. I do not deny the imperative relating to SMEs, but there are other imperatives and there is a significant overlap between them in respect of what the role, value and impact of a strategic bank should be. I urge the Minister to reconsider his view.
I have discussed the issue fully. While one could agree with the sentiments expressed by the Deputy, this legislation is not the appropriate vehicle for the amendments. They are beyond the scope of the Long Title. The Bill mandates the company in due course to expand into other areas and it does not exclude a social or environmental mandate. We will see how it progresses.
Yes, but normally, when we discuss legislation at the finance committee, the rule the Acting Chairman is seeking to enforce is not enforced. Is the Acting Chairman absolutely sure that is the rule on Committee Stage?
- Richard Boyd Barrett
- Tommy Broughan
- Joan Collins
- Ruth Coppinger
- Stephen Donnelly
- Tom Fleming
- John Halligan
- Séamus Healy
- Joe Higgins
- Finian McGrath
- Mattie McGrath
- Peter Mathews
- Catherine Murphy
- Shane Ross
- Róisín Shortall
- James Bannon
- Ray Butler
- Jerry Buttimer
- Catherine Byrne
- Eric Byrne
- Dara Calleary
- Ciarán Cannon
- Joe Carey
- Paudie Coffey
- Áine Collins
- Michael Colreavy
- Michael Conaghan
- Paul Connaughton
- Ciara Conway
- Marcella Corcoran Kennedy
- Simon Coveney
- Barry Cowen
- John Deasy
- Jimmy Deenihan
- Pat Deering
- Pearse Doherty
- Paschal Donohoe
- Robert Dowds
- Andrew Doyle
- Bernard Durkan
- Damien English
- Alan Farrell
- Frank Feighan
- Anne Ferris
- Peter Fitzpatrick
- Charles Flanagan
- Terence Flanagan
- Seán Fleming
- Brendan Griffin
- Dominic Hannigan
- Noel Harrington
- Simon Harris
- Tom Hayes
- Martin Heydon
- Phil Hogan
- Brendan Howlin
- Heather Humphreys
- Derek Keating
- Paul Kehoe
- Alan Kelly
- Seán Kenny
- Séamus Kirk
- Seán Kyne
- Anthony Lawlor
- John Lyons
- Michael McCarthy
- Helen McEntee
- Gabrielle McFadden
- Dinny McGinley
- Michael McGrath
- John McGuinness
- Sandra McLellan
- Pádraig MacLochlainn
- Eamonn Maloney
- Olivia Mitchell
- Mary Mitchell O'Connor
- Michelle Mulherin
- Dara Murphy
- Eoghan Murphy
- Gerald Nash
- Dan Neville
- Derek Nolan
- Caoimhghín Ó Caoláin
- Seán Ó Fearghaíl
- Aodhán Ó Ríordáin
- Jonathan O'Brien
- Kieran O'Donnell
- Patrick O'Donovan
- Fergus O'Dowd
- John O'Mahony
- Joe O'Reilly
- Jan O'Sullivan
- John Perry
- Ann Phelan
- John Paul Phelan
- Pat Rabbitte
- James Reilly
- Michael Ring
- Brendan Ryan
- Alan Shatter
- Seán Sherlock
- Brendan Smith
- Arthur Spring
- Emmet Stagg
- Brian Stanley
- David Stanton
- Peadar Tóibín
- Robert Troy
- Joanna Tuffy
- Liam Twomey
- Leo Varadkar
- Jack Wall
- Brian Walsh
I move amendment No. 2:
In page 5, line 29, to delete "the private company referred to in section 5" and substitute "a public company".The Minister should not be able to privatise this State bank at any point. One of the features of the bank bailout that drives me around the twist is that we bail out the private banks and, in some cases, nationalise them when they have wrecked the economy, put them back on their feet and, as soon as they start to look as if they can function again, sell them off so that future profits or benefits do not come to us. We do not benefit, notwithstanding that we bailed them out when they were on their knees and at risk of collapse.
We take all of the hit, provide all of the protection and get none of the future benefit. I would hate to see that pattern repeated with a strategic bank. This strategic bank should not be open to being flogged off in part or in whole by the Minister at any stage. For that reason, I have tabled a series of amendments which underline that the bank is a public entity with a different focus, mandate and set of priorities and imperatives from the so-called "pillar banks" which have one motive only and seem far less concerned with the strategic priorities and needs of our economy and citizens. The logic behind the amendments is fairly self evident although I doubt the Minister will accept it. I make the point nonetheless.
I have discussed the amendments with Deputy Boyd Barrett. I note that the Minister has stated explicitly that he does not intend ever to sell the company. Nevertheless, my reading of the legislation suggests the Minister or a future Minister for Finance could sell it. If there is no legal impediment to what Deputy Boyd Barrett suggests, it would be welcome if the Minister would make the amendments even as a symbol and statement of intent that it will not be sold.
While I welcome the amendment moved by Deputy Boyd Barrett, the matter has been considered at length by the team involved in the establishment of the SPCI. As initiated, the Bill expresses the optimal structure for the SPCI, which will be established as a company incorporated under the Companies Acts rather than as a statutory or public company. A Companies Acts company is more transparent than one set up by statute as it must follow the corporate governance regulations and laws of the State unless exempted under the Acts. Incorporation also provides the Minister with more flexibility in managing the shares on behalf of the State. Importantly, it will allow the SPCI to act on an independent basis in the carrying out of its functions.
It is necessary for the SBCI to act in a strategic manager, taking into account its enabling legislation, but its day-to-day operations should be independent of the Minister and the Government. Therefore, I cannot accept the amendment proposed by Deputy Richard Boyd Barrett.
I refer to section 12, which is relevant in this case. In circumstances where a Minister holds shares in a company enabled or established by statute, it is usual to specify that the Minister in question may sell or otherwise dispose of the shareholding or part of the shareholding. It is not anticipated that the Minister's shareholding in the SBCI will be sold or otherwise disposed of at any time. Section 11(5) specifies that the Minister for Finance is to be the sole shareholder. However, given that it is usual to include a section on the alienation of shares, it was agreed with the Office of the Attorney General that it was best to provide this section in its current form but also to specify the intention that the Minister is the sole shareholder. This is to allow the Minister freedom of action where the proposal is appropriate and to account to the Oireachtas afterwards for his or her actions. This is in accordance with practice whereby the Executive - or the Government - acts and is then accountable to the Oireachtas for such actions. That is the further clarification on the point.
The title, the Strategic Banking Corporation of Ireland Bill 2014, suggests it is the arrival of an institution that will endure. Ownership and control of the institution will lie with the Minister on behalf of the State, which is the people of Ireland. That is the impression given by the framing of the legislation. The funding for the institution will come significantly from KfW and it could happen that, in the course of business and after a few years, as a serious creditor to the institution KfW could exert leverage to take over or convert the funds it has lent to the institution for controlling shares. An institution that will have a broad spectrum mandate and be predominantly focused on SME financing in the short-term, medium-term or long-term, for fixed assets, working capital or whatever and taking on housing finance, if deemed appropriate, or other objectives and if difficulties arise in the conduct of the business, the creditors may end up having a significant influence to control, to take over, to liquidate or partially own the institution. I do not know whether that discussion has been held in the Department with advisers but it is important.
I am glad to hear that the Minister assure us that this will be retained as a public entity. The Minister seems to be arguing that it is for practical purposes and for purposes of transparency that we must set up a private company with the Minister as the sole shareholder. Concerns about potential privatisation of Irish Water led to the Government explicitly including in the Irish Water legislation an insistence that it be retained in public ownership. Some of us remain sceptical about whether that will be adhered to, partly for the reasons referred to by Deputy Peter Mathews. There can be a hollowing out of public ownership from the inside when it is financed from elsewhere. If it is his intention that it stays public and that this is a practical way of organising it, can the Minister include, as suggested by Deputy Stephen Donnelly, something more explicit about it being retained fully in public ownership? This sets it solidly in legislation, lest future Ministers decide on, or are forced in, a different direction.
There seems to be a contradiction and I accept that the Minister is saying in good faith that he has no intention of selling into private ownership the company. I take the Minister at his word that the setting up of the company as a private rather than a public entity is better for tax or transparency reasons. However, the Minister refers to section 11 in the Bill. Section 11(5) states: "Subject to section 12, the Minister shall be the sole shareholder." Section 12 states: "The Minister may, at such time or times as appear to him or her appropriate, sell, transfer, exchange, surrender, redeem or dispose of all or any of the shares in the SBCI on such terms and conditions as appear to the Minister to be appropriate." The next section states that "Any funds received [...]shall be paid into or disposed of for the benefit of the Exchequer and the Minister may not dispose of any shares in the SBCI without the general principles of the disposal being laid before each House of the Oireachtas." The legislation seems to allow a future Minister for Finance to sell this into private ownership. Deputy Peter Matthews made a legitimate point that foreign companies will have equity, loan calls or the various legal calls on the entity and they may be interested in taking it over. The legislation sets out how it can be sold into private ownership. There seems to be a contradiction between the stated aim of the Minister, and I take him at his word, and what the Bill lays out as the sales mechanism for a future Minister for Finance. Is that interpretation of the Bill correct? Does the Bill preclude it? If it is his intention that no future Minister is capable of selling this into private ownership can we introduce a subclause that states that? Otherwise, can we get rid of section 12(2), section 12(3) and section 12(4), which are the legal mechanisms by which the sale can happen?
The Minister has taken the discussion into sections 11 and 12. These are the key areas and we do not question the intention of the Minister to keep this in public ownership. The provision of the Bill provides for it to go into private ownership. That may be a precautionary measure or on the advice of the Attorney General. No one knows what the future holds and we may all want to get rid of this company because a better company may exist and we may want to sell it.
The problem I have with this is that the Minister can do this alone. The Minister mentioned there would be accountability by the Houses after the event and that is the real issue here. Deputy Boyd Barrett spoke about Uisce Éireann. If that company was to go into private ownership, it would require a resolution in the House. It would require legislative change. What we are saying is that if the Minister does not want to change the law, he should at least require a resolution in the House that gives him the democratic mandate to transfer what is a private company, whose shares are solely held by the Minister for Finance, into a variant of that, whether completely private or semi-private. This is the key issue for me.
I am not as concerned with regard to whether it is public or private. I am familiar with what the Minister has said in terms of the different rules that would apply under the Companies Act to a private company. The key concern is that section 12 facilitates - whether that is the Minister's intention or not - the sale of the shares into private hands, and it does this without requiring the approval of the Dáil. We could have a situation where the Minister wants to sell some shares one day and more on another. Obviously, he does not want to be required to change legislation all the time to do that. However, he should at least seek approval of the Dáil. That is the reason I believe the amendments I and Deputy Donnelly propose later would, if accepted, deal with this issue and with our legitimate concerns regarding section 12 - a section not in other Bills - being written into this Bill.
It is always worth remembering that anything enacted by the House can be changed by a future Dáil. Therefore, no matter how a provision is couched or included in legislation, it can change. If, for example, we include a provision that the Minister for Finance will never dispose of the company, in a year's time the Minister for Finance could come in with amending legislation that would remove that particular section. Anything that can be enacted in law can be changed in law. It is not like the Constitution. We set out clearly in the Bill that it is not the intention to sell, so that on the record of the House all subsequent Ministers for Finance and all subsequent Members will know the policy position at the time of institution was that there was no intention to sell.
I am advised by the Attorney General that for legal reasons it is best to have the power to alienate shareholding in legislation, so that if there was to be a change, this is specified in law now rather than carte blanchebeing given to our successors to bring in amending legislation far wider than the provisions we are enacting. Also, her advice is that having the Minister as the sole shareholder is an important defence, because then the company cannot be sold to other shareholders. It either all goes or the Minister is no longer the sole shareholder. I am following the legal advice from the Attorney General that this is the most prudent way to proceed and that rather than incorporating it by separate statute, if we do it under normal company law, all the protections and transparencies that go with Irish company law will apply.
In a different world, one could make the absolute case. However, we should remember that in any Dáil at any time a Minister can bring forward legislation to amend anything enacted by a predecessor. Knowing that, we cannot give the kind of belt and braces security one might want. The policy position is clear that there is no intention to sell.
I move amendment No. 3:
In page 6, line 1, after “on-lending” to insert “and directly”.We are going to run out of time as a result of the guillotine the Minister has placed on us, so I will not take up much time on these amendments. Amendment No. 3 is a simple amendment. The purpose of the Bill is to allow for on-lending. I believe this should be accompanied by the possibility of direct lending. The Minister mentioned earlier that this will morph and grow into other things. While on-lending may be the way these companies or banks provide credit to SMEs and other sectors of society, it is not the only way. Direct lending also takes place and I believe this should be available as an option, if not for immediate purposes at least as it grows. For example, we should provide that we can lend directly to a certain sector or project, where the loan is not required to be on-lent through another financial institution.
In dealing with the issues of on-lending and direct lending, I am interested to hear the Minister's views in regard to the likes of Microfinance Ireland and where it sits within this Bill. This Bill is about small and medium enterprises, which includes microenterprises. We already have a company or agency set up to provide credit for microenterprises, at a lending rate of 9.5%. Is it envisaged that the SBCI would on-lend to that company, which would then lend it out at a cheaper rate or are the functions of that company going to be subsumed into this new company, which could therefore lend directly to the small and medium enterprises which have been refused credit from banks? Or, are we just going to get rid of Microfinance Ireland altogether. How is this going to pan out and is this going to change the structure there?
The legislation and the Minister's speech make clear that the corporation is being established as a wholesale lender. I agree with Deputy Doherty that it would be preferable if the corporation had the capacity to lend directly to the end consumer, in this case primarily SMEs. One of the main selling points of the Bill as presented is that the corporation will be able to increase the availability of loans of greater duration with enhanced terms and potentially at a lower cost to the SME sector. Will the Minister elaborate on how the strategic banking corporation can ensure this happens? In other words, if the SBCI is providing funding to the financial institutions at a relatively low cost, how can we be sure the banks are not just going to use that as a means of increasing their net interest margin? How can we be certain an SME will be able to get a loan at a competitive interest rate, because that is the purpose of the Bill. Will the Minister elaborate on what assurances we have the terms offered to an SME by way of loan offer will be attractive?
One of the main reasons I would like to see the corporation being in a position to lend directly to SMEs is that under the system we now propose, the banks will still make the final call on any lending decision. If a bank is risk-averse - as banks are currently - there is no guarantee that even with this funding being available from the SBCI, it will be more willing to lend to the SME sector.
The fact that the corporation will not have the capacity to lend on directly is a key flaw in terms of what is proposed.
Perhaps the Minister might outline the position with regard to the mechanics of how this is going to work in practice. If a bank wishes to avail of some of the funding available, will a formal contractual agreement have to be entered into with the SBCI? Will such a bank draw down a tranche of funding from the corporation and then make it available, at its discretion, to SMEs? If the Minister could elaborate on these matters, that would be very helpful. The Minister clearly indicated earlier that the funding to be made available to SMEs by the SBCI via on-lenders would be for investment purposes. The critical issue SMEs face at present in the context of funding revolves around the availability of working capital. Businesses are trying to keep their doors open and, as we know, many of them are hanging on by their fingertips. In the short term at least, funding from the SBCI will be of no benefit in terms of the availability of working capital. Will the Minister outline his vision as to how long the corporation will be restricted to providing funding for investment purposes and on how quickly it might provide funding, particularly in the form of working capital, for the day-to-day needs of businesses?
From reading the Bill and the one-page diagrammatic aid circulated to Members at the beginning of Second Stage, I am of the view that the intentions here are very clear. Whether they are adequate in terms of what is needed and answer the question as to where the economy stands in the context of SMEs is another matter entirely. The strategic banking corporation of Ireland will essentially be a wholesale bank that will lend to existing banking institutions and any new entrants to the market. The risk relating to the moneys that will be on-lent to SMEs will be carried by the direct-lending entities, namely, those existing institutions and any new entrants. Deputy Michael McGrath's point to the effect that the security the banks hold at present in respect of existing loans, legacy loans and the banjaxed loans that are weighing down on SMEs is compromised is well made. The appetite on the part of the banks to lend to SMEs is going to be dulled by that compromised security. They will not want to ascribe to the new funds better security than that which applies in the context of legacy debt. This will cause a problem and it brings me back to the point that the blackboard must be cleaned before any new sums are written on it. In other words, the position with regard to mortgages and SME legacy loans must be addressed expeditiously.
As I have already stated, my comments are constructive in nature. I am all in favour of the sort of bank being established under the legislation. ICC bank, for which I worked, was that kind of institution, but it lent directly. ICC obtained its funds mostly from its customers but also from the EIB in the case of ten-year funds with fixed interest rates. That was how it was designed. The trouble with what is proposed in the Bill is that the Minister is trying to straddle two moving platforms. On one hand are the banks, which have poor operational experience with their customers and which are trying to deal with the new requirements of those customers, and on the other is the new funding coming from new wholesale funders through those banks. It is a very wobbly arrangement. I am only being realistic. The Minister must be of the view that my comments are very negatively charged. That is not the case. They are realistic and they need to be taken on board.
As a number of Deputies have pointed out, we are dealing here with a wholesale model. The SBCI's business model is based primarily on the on-lending model which has been operated successfully by Germany's promotional bank, KfW, and Spain's state investment bank, Instituto de Crédito Oficial, ICO. The SBCI is being set up initially as a wholesale funder which will work with various on-lenders in order to minimise the overhead expenses of operations. This is designed to get the SBCI up and running as soon as possible so as to leverage the existing networks and capabilities of on-lenders for the benefit of SMEs. That will ensure that SMEs obtain the best value possible. The money will be forwarded to on-lenders in tranches. Of course, those lenders will be subject to rules and regulations laid down by the wholesale entity. There will be contractual agreements and these will specify the nature of the product which will be on offer to SMEs and also the terms and margins involved. As the money involved will be obtained very cheaply, the risk carried by on-lenders will be covered by the margin charged. The wholesale entity, namely, the SBCI, will put in place a protocol that will cover that margin. This should work reasonably well in practice.
On Deputy Pearse Doherty's question about microfinance, the SBCI team will be working with the Department of Jobs, Enterprise and Innovation and Microfinance Ireland in order to identify how further demand-side solutions can be facilitated as soon as possible after the company has been established. In other words, we will establish the company and get it working as an on-loan wholesale bank. Money will then be lent to on-lenders such as the existing banks, which will lend in the normal way but subject to protocols set down by the SBCI. At that point, the Department of Jobs, Enterprise and Innovation and Microfinance Ireland will become involved in order that they can be used to deliver microfinance to small industries. The model is fairly well worked out and it will be flexible enough to deal with any day-to-day problems which might arise.
The facility will not be confined to existing lenders; new entrants to the market will also have access to it. All funding drawn down by the SBCI must be used or returned to it. The Directorate General for Competition and the SBCI will require proof that the moneys involved have been passed on to SMEs. As a result, there will be no question of investment funds going anywhere other than to SMEs, which, of course, are the intended target of such funds. In addition, the SBCI will supply credit products that are innovative, that are in no way designed with the lender in mind and that are tailored to the needs of SMEs.
I am sure we will discuss this matter on many future occasions. However, what I have outlined is the general shape and scope of and intention behind what is involved. We will deal with any practical difficulties that arise as we proceed. I stress that the SBCI will operate independently of the Minister for Finance and the Government and in accordance with its own mandate.
The provision of credit directly from the SBCI is not precluded under the legislation. Section 8(1)(a) will ensure that direct and indirect lending can be made possible. The intention is, of course, to facilitate indirect lending in the first instance. Under section 8(1)(a), the corporation will be legally empowered to become involved in direct lending subsequently.
I thank the Minister for his reply, which was helpful. I wish to ask a number of follow-up questions. Will information relating to the funding to be made available through the SBCI be highlighted, front of house, in bank branches? Will SME customers be able to inquire about such loans in their local banks and will marketing information be available in the respect of SBCI loans and the terms and conditions attaching to them?
I asked about the purpose for which funding would be made available. Initially it is for investment purposes for small and medium-sized enterprises. For how long does the Minister envisage this will remain the case? Is it his intention that the purpose of the funding can be broadened in scope to include meeting the day-to-day cash or working capital requirements of businesses?
Contracts will be entered into between the SBCI and financial institutions. Will they go into detail about the lending criteria to be applied? Ultimately, will it still be very much a decision of the bank on whether to lend? Will the normal lending criteria apply in the assessment of risk by the banks or will these transactions be specified as being different by way of the contract entered into between the SBCI and the bank?
I am unclear on how the corporation will interact with Microfinance Ireland. The Minister said there would be engagement, but let us consider Microfinance Ireland. It is a stop-gap option for companies that have been refused by commercial banks. They go to this State-funded entity where the rate is 9.5%. Now we are setting up a vehicle that will provide funding at cheaper credit rates over a longer period and offer different products that it will design over time. The real question is whether it can fund Microfinance Ireland. Will we see Microfinance Ireland's interest rate drop substantially from 9.5% to a reasonable rate? Given the way it is structured as a company, will it be allowed to access the funds available from this corporation through on-lending arrangements?
Forgive me if I have missed it, but I have not heard an argument against the possibility of direct lending. The Minister has indicated that this has been modelled on the on-lending concept or practice used by successful operations in Spain and Germany. He has said KfW will fund the company. KfW also allows for direct lending and has several associated proposals. It has been heavily engaged in direct lending to the wind farm industry. A direct lending option could and should be available. I am not suggesting it should be for wind farm energy projects but in any given area in which direct lending could be of help. It would be of benefit to allow this to take place from the start.
On Second Stage I mentioned that one of the major problems with the Bill was the lack of clarity on how it would work. We are putting infrastructure in place without real knowledge of how it will work from the consumer's point of view. Deputy Michael McGrath raised this point also. If a person from an SME goes to the bank, how does he or she access SBCI loans instead of those of Bank of Ireland, AIB and so on? What are the sureties required? The Minister has indicated that the banks will have to assure the SBCI that the money will be lent to small and medium-sized enterprises. We have been there and done it. The Minister has laid down targets for lending into the economy from the pillar banks. We have had representatives from the banks before the committee and they have told us they reached the targets set. However, they did it by removing overdraft facilities from small and medium-sized enterprises and turning them into loans. Let us consider the targets laid down by the Minister in mortgage resolutions. The banks abused the system of allowing legal letters to be issued and then counted them in meeting the targets.
There is not enough in the Bill to ensure lending into the economy and to SMEs. Will what is envisaged enhance the credit facilities available to SMEs? I simply do not understand why the concept of direct lending should be ruled out completely at this point. How will Microfinance Ireland interact with the organisation? Will the corporation be able to lend at low rates to Microfinance Ireland, a company owned by the State?
Like the discussion we had earlier, I simply do not understand why we seem to be taking aspects of the KfW model but not all of it. I forgot to thank the officials for the briefing which was very illuminating. If I understand the position of KfW properly, it provides products directly, but these products are also made available through other banks. It is possible for an SME to obtain a KfW product from other financial institutions. However, if an SME goes directly to KfW, there will be a different product from what it might obtain from the banks, given their narrower commercial focus or orientation. KfW has a different mandate and, therefore, different products. If we are modelling the corporation on KfW, why are we not doing what it is doing also? Perhaps the Minister might explain why we are doing a little of what KfW does but not all of it.
One of the major differences between the on-lending model through a wholesale provider of funds and what we are used to with high street banks is that the network is not in place. We will move to set it up immediately, but the first set-up will be some type of central office, probably in Dublin. It will not have a network of offices in every town in the country. The obvious way to deliver money to SMEs throughout the country is to have an on-lending arrangement with the institutions that already have networks. We will start with the established banks; then new entrants will come in, to be followed by companies such as Microfinance Ireland. I am a little vague about the model for Microfinance Ireland because it is in transition. It has a new chief executive. There are major changes in the agencies assisting industry - for example, the local enterprise offices are now playing a stronger part. The intention is that after the discussions between the new institutions and the Department of Jobs, Enterprise and Innovation, Microfinance Ireland will be an on-lender and provide credit on much the same terms as on-lenders in the banking sector. That would imply a reduction in interest rates from their current level. The details have to be worked out because Microfinance Ireland is under review and the new chief executive has been put in place.
Why not do it all on the one day? We are starting something new which, as Deputy Peter Mathews pointed out, is going to be a permanent feature of the Irish financial landscape. We hope it will be a significant investment lender in the economy for many years to come. We hope what we are putting in place will be something like what our predecessors did when they established the IDA or one of the institutions which were very successful.
I hope it will be successful in that way. In building any organisation from start-up, it is reasonable to phase its development. While we want to empower it to lend directly, the first phase incorporates an on-lending basis. A bank without a network must consider the logistics of direct lending. A bank could lend directly from a head office for big projects.
For smaller projects, the on-lending model works best. One of the earliest steps will be taken this summer, in that there will be marketing and promotion of the strategic banking corporation of Ireland, SBCI. SMEs will know from where they can get SBCI loans. Like everything else in private business, the incentive for the on-lending banks will be their profit margins. This will largely depend on what margin is negotiated. Due to the reduced risk for and availability of money to on-lenders, they should not charge much more than a handling charge plus a small risk premium. We know there is a willingness among the banks to participate and the details will be worked out in the coming months. I am anxious to get this model up and running this autumn so that actual lending to the SME sector will have taken place in 2014.
Although the previous measures we have tried might not have worked 100% and all of the money earmarked for SMEs in 2011 was not be drawn down, the situation improved in 2012 and 2013. In co-operation with us, the Central Bank asked RedC, the polling agency, to examine the funding of SMEs. The latest returns show that more than 80% of applications for investment funds from SMEs are being sanctioned by banks. A residue is not being sanctioned, but the situation has improved substantially. We are not claiming 100% success for any of our initiatives.
Regarding the Deputy's original proposition, there is also a demand-side problem with people who are indebted not wanting to borrow further. For those who were burned badly playing in the property market, the last place they will go is near the fire again. In general terms, Irish entrepreneurs and SMEs have become risk averse. Many try to limit their borrowing and are working with cash only. While this is prudent, we need SMEs to borrow, to invest, to grow their businesses and to provide jobs if the expansion we require is to happen. This is an objective we all share.
I thank the Minister and agree it would be good to see the SBCI up and going but, at the risk of being repetitive, I will underscore my comment by asking him to whip into shape the banks' boards and managements. They have not been behaving properly. They need to be whipped into shape, write off what is irrecoverable and be realistic with their accounts instead of dancing around the edges. It is time to take out the scalpel and perform the necessary surgery on the gangrenous financial remnants and carcasses of the past. Otherwise, the SBCI will not work.
That request makes it sound as if nothing has changed. On the infamous night of the guarantee, there were 75 or 76 directors of Irish financial institutions. Only one of those is left, and that at the request of private investors. Every other director has been moved on.
"Whip them into shape and obedience" implies that they are still in situ and I, as Minister for Finance, have the whipping control. If they are gone into the sunset, I have no control-----
I move amendment No. 4:
In page 6, between lines 11 and 12, to insert the following:"(f) to create employment in the State,".My intention is to broaden this strategic bank's mandate so that we can move away from banks' overly narrow focus and instead focus on the strategic priorities for the economy and our citizens. Creating employment is a self-evident imperative for society. It seems reasonable to insert this imperative into the Bill's list, which currently includes the general and correct imperatives of protecting the interests of taxpayers and contributing to the economic development of the State as well as enhancing the competitiveness of the State. I am not so crazy about competition, but that is the Minister's bias. The list refers to these imperatives and broader strategic objectives, but it does not explicitly state the need to create jobs. The Minister might claim such is implicit in the bank's objectives, but I do not know why it would not be explicit.
Sometimes, there can be a trade-off between imperatives if it is not fully understood that we want them all. In particular, some deem a competitive approach to be one that cuts jobs. I do not agree, but this is often how "competitiveness" is interpreted. In having a fully rounded set of objectives for this strategic bank, it is important to include as an informing principle an explicit commitment to create employment. Who knows? Maybe the Minister will accept this amendment.
This amendment makes a great deal of sense. To ensure that my memory was serving me well, I checked to see whether one of the US Federal Reserve's mandates was employment. It is - the exact wording is "maximum employment". The amendment seems to be a simple, useful, risk-free and costless change.
The focus on economic development and growth is welcome.
However, there are probably a bunch of SME investment opportunities that may have fairly small economic growth potential but quite large employment potential. When the new strategic investment bank is in an ongoing relationship with the on-lenders, they will discuss the criteria under which they will lend money and the types of investment for which they will lend money.
Deputy Boyd Barrett's amendment proposes including in the purposes of the Act the wording "to create employment in the State," and I might suggest the wording "to support employment in the State" or "to maximise employment in the State," because it is about both creating new employment and protecting existing employment. Obviously, it is easier to keep somebody at work than it is to create a new job. It seems it would be useful for the Government and the strategic investment bank to be able to say to lenders that they think there are a significant number of opportunities which would create or protect employment and even though they may not be a huge boon to GDP or GNP, they would create and protect a bunch of jobs, and they think they should be lending to those as well. This amendment is an excellent proposal and I hope the Minister either accepts the wording proposed by Deputy Boyd Barrett or brings forward some similar wording such as "support, protect and maximise employment." I think it is an excellent idea.
These amendments seek to add additional purposes to the Act such that a specific purpose of the Act would be the creation of employment. From a first reading of it, I was very sympathetic towards this but the legal advice we got is that as neither this legislation nor the SBCI is specifically designed to tackle employment issues directly, it was better not to refer to creating employment in the section. I agree with the Deputy that the creation of employment is a key goal here, but enabling growth through enhanced credit provision in the economy is the more accurate purpose of the Act and the more accurate function of the SBCI, and it is this economic growth which can enable the creation of employment directly. Consequently, I am unable to accept the amendments.
The Minister's best instincts initially gravitated towards the value of this amendment, and then it seems the lawyers and officials pulled him back from it. I do not know what exactly happened, but the Minister's response is a little disappointing. Furthermore, it is a slightly contradictory response to say that although this legislation is about creating employment, we cannot put in that category for legal reasons because it goes beyond the remit of the Bill. I do not understand that. It is quite contradictory. It raises the question of why we do not call it an enterprise Bill or an enterprise bank Bill, if the Government wants to focus it so narrowly. That would be a good objective.
I was chatting to a Fine Gael colleague of the Minister's outside the House who made the point that this legislation is very important in terms of the need to provide finance to the small and medium enterprise sector which is not currently available, and I replied that I totally agreed but that there are other strategic economic and social objectives which are as important for the economy and our society, and I would have thought that was what a strategic bank should be. If it is simply an enterprise bank, we should call it an enterprise bank or a bank similar to the former ICC, which was mentioned, but I thought this was a strategic bank and that it had a slightly broader remit. That is what the name implies, yet the Minister is narrowing its focus. To narrow it down to the extent that the imperative to create jobs cannot be explicitly stated in this section seems odd. To elaborate on the point I and Deputy Donnelly mentioned, the categories of growth, economic development and competitiveness in the economy are quite general and one could argue they go beyond the priority the Minister is putting on SMEs, because they are quite broad - namely, protecting taxpayers and contributing to economic development. Therefore, why would the category of employment not be set out explicitly as an imperative, as there are things that would significantly benefit from job creation which might not necessarily be ticked under the other categories or imperatives?
I am surprised that the Minister will not accept this amendment, particularly when he is saying that it is the intention of the Bill, but we just cannot say so. It is an odd position. Perhaps he could explain that. It would be sensible to accept this amendment and it is what would mark out a strategic bank as opposed to another type of bank whose focus is more narrow.
I respectfully suggest that the logic in the Minister's response is flawed. He stated that the purpose of the Bill is economic growth and that economic growth and economic development are what he is talking about. That is not stated in the Long Title of the Bill, which states that the Bill is for the purpose of "making credit available to enterprises and to other persons". Under the section setting out the purposes of the Act, the only other wording is about the "availability of credit ... to benefit the economy". The section goes on, and pretty much out of nowhere it states: "to contribute to the economic development" and "to enhance competitiveness." The Minister's response was that he liked the idea of the proposed amendment but the legal advice he got was that the category of employment should not be included in this section because it does not link back to the purpose of the Bill. The categories of competitiveness and economic development are included in the section, but neither of these, with which I agree, are included in the Long Title. Therefore, if the category of competitiveness can be pulled into this section under subsection (h) and is not mentioned anywhere else, surely the category of employment can be pulled in.
We all talk about economic growth, and it is a good thing, but what is the purpose of it other than to get on top of our debt ratio? It is about employment and jobs. It is all well and good having the strategic investment bank thinking that it needs to lend money to SMEs in order to have economic development, but what is economic development? It may interpret it as GNP or GDP, which basically means that as long as the company is investing, GDP and GNP will go up, because that is one of the five constituent parts, but if the Government is going to bring in competitiveness as an explicit objective, surely the most fundamental economic objective is not GNP growth or competitiveness but employment. The only reason we want competitiveness is for the sake of employment. Competitiveness in and of itself is not a thing; it is an enabler of employment. If the category of competitiveness is included in the section, I respectfully suggest that the legal advice the Minister has is flawed and that including the category of employment would not just be a nice thing to do in terms of the legislation but would actively allow whoever ends up running the investment bank to say to a bank such as Bank of Ireland that it has given the bank a tranche of €500 million and it expects to see some very smart investments which result in the creation of jobs. I ask the Minister to reconsider this amendment; perhaps he might consider introducing a similar amendment on Report Stage. It seems a very sensible thing to do.
One can challenge legal advice, but law always comes down to the precise meaning of words.
While the purpose of much of what we do is the creation of jobs, that is not the direct purpose of this legislation. The purpose of this legislation is to provide credit to SMEs in a manner not previously provided and by an institution that has not existed heretofore. A consequence of this is that the SME sector grows and jobs are created. Employment is a consequence of what is being provided for in this legislation.
Competitiveness is a direct purpose of this legislation because we are providing therein a direct alternative source of credit to the SME sector as distinct from the sources of credit already in place. Growth in the economy is the first macro consequence of the provision of the additional credit. Employment is a secondary consequence. It is in this space the legal argument is made.
I do not wish to labour this point too much but the more the Minister says the less convincing it is. This is slightly worrying. There are regular engagements with the troika and the Irish Fiscal Advisory Council during which we have sight of fascinating tables regarding GNP, competitiveness, investment levels and so on. What probably matters most to our citizens and to people in business is jobs. Leaving aside all of the statistical indicators and so on, the bottom line is returning more people to employment. Everything else flows from that. We appear to be doing things the wrong way round. We are not suggesting that everything should be turned upside down; we are just asking that what is sought in the amendment be included. I do not see how an objective for creating employment is in a different category legally or any other way from the other purposes set out in the Bill, including the economic development of the State. How is that objective legally different from or more important than employment in terms of the objectives set out in the legislation? This does not make any sense.
These issues we are discussing and the legal advice which leads the Minister to reject these amendments further supports the claim that we should have had more time on Committee Stage to thrash out this legislation. I would like to hear a serious explanation of the legal advice that has led to the Minister saying we cannot include the creation of employment as one of the objectives of the strategic bank. This does not make any sense. I believe the Minister should reconsider this and, perhaps, interrogate his legal advisers a little more about it.
Sorry, Chairman, but as this is Committee Stage there is no harm in a little interaction. If sufficient time had been allowed for Committee Stage, we would have been able to thrash out this issue more seriously.
I support Deputy Boyd Barrett. What he said makes perfect sense. Ultimately, the Bill is about jobs. While this is implicit in the objectives set out in terms of the purpose of the SBCI, it should be explicitly stated. I do not accept that there is any legal impediment to specifying the employment objective. The only issue I would take with amendment 4 is that I would substitute the word "support" for the word "create" because we want to also support existing employment. It is equally important we do this. One of the benefits of this new system, if it works, is that it will secure existing jobs and, hopefully, result in the creation of new jobs. Why the objective of the support of employment in the State cannot be included is beyond me.
I move amendment No. 5:
In page 6, between lines 16 and 17, to insert the following:"(2) The Minister for Finance will ensure the Central Bank has recourse to supervisory measures, including imposing capital requirements for borrowers from the SBCI who do not lend to the real economy as laid out in subsection 1(g) and (h).".We touched on this issue earlier. This amendment arises out of the concern expressed by myself and other members that the banks will suck up this cheap money and lend it to customers to whom they were going to lend anyway, resulting in this not having any big impact on the SME sector or that the banks will lend on the money as overdrafts turned into loans and so on and then dress that up as new lending to SMEs. What sticks are available to us with which to beat the banks if they do this?
The Minister mentioned that the banks would be required to prove to SBCI that funding was being used for SME lending. What protections exist in this regard and what level of oversight does the Central Bank have in this regard? Also, what penalties can the Central Bank impose on banks if funding is not properly passed on? The amendment is structured to provide for a system similar to the mortgage arrears targets and the Central Bank's power to impose additional capital requirements and so on. However, the situation in the SME sector is different because of the way in which the banks are dealing with non-performing loans and so on. The amendment calls on the Minister to ensure that the Central Bank has recourse to supervisory measures, including imposing capital requirements for borrowers from the SBCI who do not lend to the real economy as laid out in subsection 1(g) and (h). What measures are in place to ensure this lending takes place in the manner intended?
The SBCI will impose a number of requirements on lenders to ensure they use SBCI funding for SME financing, which will fulfil the purposes of this Bill. However, the SBCI must balance these requirements with the on-lender's reporting burden to ensure that it is economical for that on-lender to lend SBCI products. The SBCI operating model will be to provide funding to on-lenders, which is linked to the provision of credit products designed to meet the needs of SMEs. Extensive reporting requirements will ensure that the SBCI can monitor the use to which all funding has been put by the on-lender. Loan contracts with on-lenders are likely to include provisions which ensure that any funds which are unused by the on-lender are returned to the SBCI. While the amendment is well intentioned, it is unnecessary. Consequently, I cannot accept it.
What the Minister referred to in his last contribution does not exist in legislation because the company has not yet been established and there is no requirement on the on-lenders to inform the SBCI how they are on-lending the money they are getting from it. We are speaking about a company that is being established to lend money to a bank which is regulated by the Central Bank and will lend vast amounts of money to customers throughout the country and in other jurisdictions. This money will be sizeable in amount but only a small fraction of the overall lending of the larger institutions.
The problem is that although the banks may be contractually bound to report to the company demonstrating the funds they accessed were lent to X, Y and Z in the SME sector, this arrangement may not work unless there is an institution with an overall picture of what is occurring. We have seen the unfortunate behaviour of some financial institutions that twist, bend and contort the rules to ensure the arrangement is in their own financial interest. Therefore, the appropriate agency to ensure oversight and ensure the spirit of this legislation is being adhered to is the Central Bank. It is only the latter that will have the potential to gain access to all the information. For example, it could ascertain that a product developed by the SBCI is not just supplementing lending already taking place within a bank. Perhaps the Minister's intention is that the company will just provide cheaper credit and not more credit to the SMEs such that those availing of credit today might be able to avail of different forms of credit, with different term loans and at cheaper rate. This would be a failure considering the aims of the legislation. Not only should different types of credit be available through different products - the Minister mentioned some of them, including holiday payments, longer durations and cheaper credit - but more credit should be available for SMEs. The company itself will not be able to adjudicate on that. Only the Central Bank of Ireland will be able to determine whether all of the funds made available by the company to a financial institution have been lent to SMEs. It would be able to determine, for example, that 50% of the funding replaced existing funds lent to SMEs and thus did not increase the flow of funding. A broader approach is needed involving the Central Bank in some way. I am not sure what the phraseology should be in the legislation, but the Central Bank should have a role. I do not trust the banks and I believe we have enough evidence to show that when rules are applied, it is the job of some of the very senior staff in banks to discover how to comply with them in a way that maximises profit or, at least, minimises the loss of profit to the bank. Therefore, the banks may comply with the letter of the law but not the spirit. That is why we need an adjudicator that can see around the corners that the company will not be able to see around.
The on-lenders will need to demonstrate that it is new lending in the first instance. The purpose of the Bill is to provide additional credit to SMEs. The word "additional" is important. It is not substitute credit to enable the banks to make more profit. It is not a scheme to assist the banks but a scheme to assist the SMEs.
Second, if a tranche of money is provided to an on-lender, the latter will have to account for how the money has been on-lent. Any moneys that have not been on-lent to an appropriate SME will have to be returned to the main lender. KfW does not have any particular problem with this because it operates the same model in Germany. The European Investment Bank also operates this model. It provides sizeable amounts of money to both AIB and Bank of Ireland, and there is a reporting system that ensures the money goes to SMEs and is not diverted to other borrowers at the banks' discretion. There are reporting systems in place that are satisfactory. We will continue to take advice from KfW. It has been very helpful in the negotiations thus far. It is committed to assisting us in the set-up stages of the new institution.
We are not going to see eye to eye on this issue. Perhaps the Minister is more hopeful that the reports that come from the banks will be acceptable. As I stated, a report can be made to appear as if it fulfils the requirements.
I take the Minister to task on his statement that "additional" is the key word. Nowhere in the legislation does it state that lending must be "additional"; it actually just refers to making credit available. That is probably a good example of how the Minister's intention in drafting this legislation is not reflected in the text. If one examines the stated purpose of the legislation, one will note it is to encourage the giving of credit in a prudential manner to enterprises, etc., and that it does not say anything about additional lending. It refers to "availing of credit and making credit available through on-lending to enterprises", "the making available of funding for the provision of credit to enterprises, particularly SMEs" and to availing of sources of funding. It does not state "additional credit". It is clearly the intention of the Government and this House to ensure that additional credit will be available, but rules are rules. If one lays down a rule for a bank, it may say additional credit is not required. I hope there may be provisions that will allow the SBCI to state that there must be additional credit, although it does not state that in the legislation.
It is for these reasons that I believe the Central Bank should have a role in stipulating that at least some of the funds lent be "additional". Perhaps there is an argument for stating that not all the funding needs to be additional and that some of the credit might simply be credit made available in a more flexible way. Some SMEs are availing of credit at this point in a way that is making them unsustainable, so access to credit in a new manner envisaged in the legislation might make them sustainable or increase their activity, thus leading to a spillover in terms of economic development and job creation. However, there needs to be additional credit. I am disappointed that there is no role at all for the Central Bank of Ireland.
I listened to what the Minister said about how the system operates in Germany. That may be the case, and I am not suggesting it is not, but I just believe that if we are to have a State-guaranteed institution that will on-lend to the banks, some of which will be private and others of which will be in our ownership, as at present, we should be including protections so that the legislation will do what it says on the tin, namely, allow for the provision of both credit and additional credit to the SME sector.
It is a pity that in a debate like this, during which time is constrained and there is not a long interval between Second Stage and Committee Stage, it is very easy to miss detail in certain sections. There is actually a reference to "additional credit". Section 8(1)(a) states that a function of the SBCI shall be “to provide, and promote the provision of, additional credit in a prudent manner to enterprises or other persons in the State, in particular SMEs”. I do not mention this to criticise the Deputies, because it is difficult to grasp all the details when one is moving rapidly through the legislation.
To return to the legalities of the matter, the wholesaler, which will be the SBCI, will be providing additional credit by definition because it will be a new lender on the market. What we need to do is to ensure that when credit goes to the on-lender, the on-lent credit will be in addition to what has already been lent to SMEs. We can provide for that in the protocols and contractual agreements that will govern the drawing down from the wholesaler to the on-lender.
I appreciate that, but I believe my point still holds in that while the requirement of the SBCI is to provide additional credit, which it will do by putting credit into the marketplace, it does not necessarily require the banks or on-lending institutions to provide additional credit.
That is my concern in that regard, which I think has been well flagged.
I move amendment No. 6:
In page 6, between lines 16 and 17, to insert the following:“(2) Following the passing of this Act the Minister shall direct the Central Bank to publish the SME debt restructuring targets for banks and the performance of the banks in reaching these targets on a quarterly basis.”.This provides for the inclusion of an additional subsection which provides that the Minister shall direct the Central Bank to publish the SME debt restructuring targets for banks and the performance of the banks in reaching these targets on a quarterly basis. There are two issues involved here. First, the targets must encompass all of the institutions, not just the State institutions or the pillar banks. Second, there must be transparency regarding what are the targets and how banks are meeting those targets. That is particularly important given that we will now have a State guaranteed fund that could be lending to institutions that might not be reaching the targets laid down by the Central Bank.
It is important that there is transparency about this. As was mentioned earlier by my colleagues, the finance committee looked at how the banks are dealing with people in mortgage arrears. In my view, the finance committee should also examine that issue in respect of small and medium enterprises. A very esteemed economist has suggested that this is a serious issue that the Department and the Central Bank must address, and I know there has been some engagement by the Central Bank with the professor in that regard. However, there must be transparency about the system. Given that we are dealing with on-lending to institutions that may have targets laid down for them by the Central Bank and that may or may not be meeting those targets, it is important that some transparency is brought to this, that the debt restructuring targets are disclosed and published and that performance in meeting those targets is published on a quarterly basis.