Martin Mansergh (Tipperary South, Fianna Fail)

I thank Senators for agreeing to sit late tonight. This Bill provides legislative underpinning to the financial support provisions announced by the Government on 30 September for depositors and lenders to Irish financial institutions. It is a significant measure so that they can continue to provide the financial services that are vital for the proper functioning of our economy and the well-being of society.

The financial services sector in Ireland has contributed enormously to growth in employment, export earnings and economic activity. Our banks entered the current period in a position of strength but, like financial institutions everywhere, they rely on international capital markets for liquidity. When that becomes harder to access, banks find it increasingly difficult to carry on normal business. It is the shortage of liquidity that is at the heart of much that is happening in financial institutions around the globe. Moreover, what funding is available is also at a significantly greater cost than official market rates and lending periods have continually shortened.

This is the context in which the Government determined to take action. The primary purpose of the Bill is to maintain the stability of our financial system which it does by providing a legislative framework for the guarantee arrangement for depositors and lenders to Irish financial institutions announced by the Government yesterday. The Bill responds to the difficulties caused for Irish credit institutions because of the turmoil in international financial markets that began in August 2007 and which have persisted and deepened since that time. That crisis originated in the credit markets of the United States and has now spread and broadened. Internationally, major financial institutions have gone into liquidation, been forced into partnership or been subject to state takeover. In both the US and Europe, public authorities have been called upon to provide unprecedented support. Where once financial institutions and markets were the concern of a few, there is now near universal awareness of and interest in their well-being.

Having received the advice of the Central Bank and the Financial Regulator, the Government decided the right and necessary step was to provide a guarantee to the six domestic financial institutions which were not in a position to rely on the support and assistance of a parent institution. I want to put it clearly on the record of this House that the Government's decision is intended, in the first instance, to underpin the financial standing of the Irish banks and building societies. It provides a framework for the future to address financial stability, which is of common concern with our EU partners and especially our closest neighbours in view of the strong degree of financial integration between the two jurisdictions and the several financial institutions which operate in both.

I have been at pains to stress that the provisions in this Bill should in no way be viewed as a free lunch for the banks. The guarantee provided by the State is not intended to insulate the shareholders of banks from the risks that they have taken on. I want to reiterate that this guarantee is not free and it is not a bail-out. The taxpayer who ultimately underwrites this support will be paid for the support provided. The terms and conditions on which the guarantee is provided will ensure the taxpayer gets value for money.

Our society and economy will benefit from a guarantee that helps to secure greater stability for our financial system. That system not only plays a crucial role in the Irish economy and our day-to-day lives but also, through the financial sector, has broader social responsibilities to society at large. More directly, the Minister has announced in the other House that he will draw on the advice of the Central Bank and the National Treasury Management Agency to put a fee mechanism in place to remunerate the guarantee at a commercial rate taking into account such factors as the possibility of increased funding costs for the Exchequer, the economic value for the institutions and the need to support investor confidence in the Irish financial system overall.

There has been comment that the Exchequer is potentially assuming very significant risks with the measure in this Bill. This simply is not the case. There are real and substantial factors that mitigate any potential financial exposure as a result of this decision. Crucially, there is a very substantial buffer comprising the equity and near-equity of these institutions. The Central Bank and Financial Services Authority of Ireland is preparing detailed analysis, but initial work by the NTMA indicates the assets of the Irish finance institutions supported by this measure exceed their liabilities by approximately €80 billion. This is not diminished by the access some of the banks have had to European Central Bank liquidity on the basis of asset swap.

It is important also to appreciate that the asset quality in our financial institutions is good with a strong concentration in residential mortgages with a relatively low loan-to-value ratio, LTV, on average. While Ireland, along with all developed economies, has experienced a sharp decline in its property market, there is very significant capacity within the institutions concerned to absorb any losses.

We have all learned much from the current period of turmoil and one important lesson is that we must maintain the increased level of scrutiny and oversight of financial institutions which was put in place by the Financial Regulator since the onset of the current turmoil. This will be maintained and strengthened further to ensure high regulatory standards are achieved in Ireland and the quality of corporate governance in these institutions is a protection against any risk of loss for the State. As for the issue of moral hazard, I stress it will be a priority of the Government to ensure the highest regulatory and corporate governance standards will apply in all of the institutions concerned, including in respect of lending practices, to safeguard the interests of taxpayers against any risk of financial loss.

An important feature of the Bill is that it provides that in certain circumstances, the Minister for Finance can step into the role of the Competition Authority. He has done this to ensure the maintenance of financial stability fully informs decisions on mergers and acquisitions in the financial services sector, while ensuring no diminution of competition.

I will now describe the main provisions of the Bill. Section 2 establishes that the functions of the Minister for Finance under the Bill are exercised in the public interest having regard to the importance of maintaining the stability of the financial system in the State. The functions in the Bill are granted, in the public interest, because the Minister, having consulted the Governor of the Central Bank and Financial Services Authority of Ireland, has formed the opinion that the exercise of these functions is necessary to protect the stability of credit institutions and to maintain the stability of the financial system of the State. The Minister may continue to consult the Governor and the Financial Regulator in the exercise of his functions after the passing of the Bill. Section 2 also confirms that the Bill will not interfere with the exercise by the Central Bank or Financial Regulator of their functions in respect of credit institutions authorised or regulated in the State.

In section 3, the term "relevant date" is defined as 30 September 2008, the day upon which the Minister announced the decision to guarantee deposits in credit institutions and subsidiaries and protect the interests of creditors of credit institutions on their subsidiaries. This is the date from which the Minister may provide financial support to credit institutions.

Section 5 provides that the Minister for Finance may make regulations to do anything that appears necessary or expedient for bringing the Act into operation. Section 6 provides that the Minister may give financial support in respect of the borrowings, liabilities and obligations to the Central Bank or any person, of any credit institution or subsidiary which the Minister may specify by order. Financial support will not be provided beyond 29 September 2010. Such support would be in such form and manner and on such commercial or other terms and conditions as the Minister sees fit.

Conditions attaching to financial support may include stipulations to require the institution or subsidiary to fulfil all requirements of the Financial Regulator or relevant authority, as well as conditions to regulate the competitive behaviour of the credit institution or subsidiary. The Minister may subscribe for shares and other securities in a credit institution on such terms as he sees fit. For the purposes of this section, the Minister may create and issue securities subject to such interest, consideration and terms and conditions as he sees fit. Money paid by the Minister as financial support under this section will be repayable with interest once funds to do so are available to the company. The section also provides for annual reports to the Houses of the Oireachtas by the Minister on the position regarding any financial support provided under this section, commencing with 2009.

Under section 6, the Minister can make arrangements for this support by means of a scheme. At present, the Bill provides for the scheme to be laid before each House of the Oireachtas and each House can annul it within 21 days. However, the Minister, who will be present later tonight, intends to bring forward an amendment in this House which will significantly enhance the role of the Houses of the Oireachtas in scrutinising regulations under this section. As amended, it will require a resolution approving the scheme before it is made.

Section 7 provides that if a merger or acquisition involves a credit institution and the Minister considers that the proposed merger or acquisition is necessary to maintain the stability of the financial system in the State, then the power to determine whether the merger or acquisition would be in breach of the prohibition on anti-competitive practices in that Act lies with the Minister rather than with the Competition Authority. It also provides for the circumstance in which the Minister may approve a merger or acquisition.

The State is underwriting very substantial liabilities in monetary terms but is, as I have outlined, at a far remove from loss arising from these liabilities. I commend the Bill to the House.