Dáil debates

Thursday, 10 November 2016

Other Questions

European Banking Sector

5:05 pm

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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11. To ask the Minister for Finance if he has made provisions for instability in the European banking sector in view of reported difficulties in German and Italian banks in particular; and the discussions he has had with his counterparts on this matter. [34038/16]

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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What are the Minister's views on the possibility of a significant second wave of a European banking crisis with an epicentre perhaps in Germany with Deutsche Bank or in Italy and the suffering banking system there? Has the Minister made any preparations for the impact of such a crisis in Ireland in terms of the banking system and the economy?

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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As I have said previously, it would not be appropriate for me to comment on media speculation about foreign-owned banks. However, what I can say is that both I and my European counterparts have been working steadfastly since the financial crisis to bring about strengthened oversight and resolution regimes to address any emerging vulnerabilities or instabilities in the European banking sector.

The entire landscape has changed utterly, characterised by the presence of new European institutions, strengthened regulations, a more intrusive supervisory approach and a new focus on macroprudential requirements.

New European regulations have strengthened controls over the banking system and have resulted in an overhaul of regulation, supervision and resolution regimes. The capital requirements regulation and directive, which came into force in 2014, brought about significant enhancements in the quality and quantity of capital that banks are required to hold and the setting of minimum liquidity requirements.

The banking recovery and resolution directive and the single resolution mechanism have transformed the framework for dealing with failed banks and are designed to provide a financial safety net and a means of recovery and resolution with minimum disruption to the sovereign.

The single supervisory mechanism, SSM, is now responsible for the prudential supervision framework for euro area banks. The central piece of the SSM supervisory process is the supervisory review and evaluation process, under which the ECB-led joint supervisory teams inspect business models, internal governance, profitability and banking risks.

All these new regulations and institutional arrangements have been designed to address the challenges of banking oversight and resolution at a European level and provide for a proactive approach towards systemic and emergent risks at European level.

Besides the introduction of new European and national regulations, the Central Bank too has increased its resources and has become more proactive in addressing systemic risk. Of course cross-border bank linkages warrant ongoing attention by the new EU supervisory structures and by the Central Bank. I assure the Deputy that the Department and the Central Bank are continually monitoring international developments in collaboration with our European colleagues.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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The fundamental thing is that it is eight years since the outbreak of the major financial and banking crisis, which had a particular European dimension, and the policies implemented in response to it did not deal with the fundamentals and did not fundamentally deal with the unsustainable debts which exist. The bailout funds which have been set up are not substantial enough to deal with the debts that can be exposed here. To take the example of Italy, which is clearly unstable, it is reported the Italian banking sector as a whole has €360 billion of problematic loans, equivalent to one fifth of GDP. It has a particular name for them in Italy, which is la sofferenza, the suffering. When we look at political events around the world, there is a constitutional referendum coming up in Italy, and one would have to place relatively good money on Renzi's Government losing the referendum and therefore a political crisis in Italy, which could detonate the banking crisis there, or similarly the points regarding Deutsche Bank.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I find it hard enough to assess risk in Ireland without assessing risk in Italy also. Certainly from newspaper reports on its banking system, it would be helpful to everyone in Europe if it were stronger. Since banking union has been put in place, there is a separation of the banking industry from the sovereign, so we get away from the too big to fail mandate that was there eight years ago. It is a matter for the European Central Bank in Frankfurt and the banking regulatory regime to deal with any inadequacies there are in the European banking system. They are doing so and moving towards full banking union with the establishment of a resolution fund which will be fully neutralised.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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The problem will be when the money runs out in the common European banking funds and the resolution funds, because the money can run out when we speak about amounts of €360 billion. Who will pay for it then? Take the example of Deutsche Bank, which was being described as a potential Lehman Brothers 2.0. Obviously, it subsequently returned profits and things have calmed down slightly, but it is a systematic bank in terms of the entire European banking system and it is acting like the Irish banks pre-crisis, just selling off whatever it can in Las Vegas, China and Britain to try to get a cash for itself. The point comes back to here. A renewed European banking crisis would have a major impact on the Irish banks. In the most recent stress test by the ECB, the Irish banks emerged among the weakest. How would the Irish banks and the Irish economy react to such a significant banking crisis?

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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The Irish banks emerged as weak principally because the data on which the assessment was made was historic. The Irish banks had moved on significantly to a much stronger position by the day the stress test was published from the day the data on which the stress test was based was collected. There are still difficulties with the Irish banks. The Deputy will notice that while Bank of Ireland pays a dividend AIB has not done so yet. Of course, it would require supervisory permission to pay a dividend. It is a work in progress. There is no immediate threat to any bank in this jurisdiction, and there is no crossover from any of the banking problems the Deputy mentioned in continental Europe, which are the responsibility of the European Central Bank and the European supervisory authority.

Question No. 12 replied to with Written Answers.