Martin Mansergh (Tipperary South, Fianna Fail)

As Senators will know, the Government took swift and decisive action on 30 September to ensure that confidence in the financial system in Ireland remains strong. In the time since that decision was taken it has become clear that Ireland is far from alone in what has become a worldwide turmoil. I was present last weekend at the joint IMF-World Bank meeting and heard at first-hand from various finance ministers and central bank governors just how serious the problems are in many other countries. The subsequent events on the financial markets have, unfortunately, proven the Government was dealing with an issue of a freeze in international credit markets, which has given rise to the need for urgent actions across the world and not least the recent declaration following the unique euro area meeting where, for the first time, the Heads of State and Government of the euro countries gathered in Paris last Sunday.

From the outset, I want to stress to Senators that the purpose of the guarantee scheme is to ensure that the public authorities, in particular the Minister for Finance and the regulatory authority, have the tools to ensure that the risk that the State has taken on from providing the guarantee is mitigated and the interests of the taxpayer are protected. Under the strict terms and conditions of the guarantee, the institutions benefiting from it are subject to a range of detailed requirements intended to ensure that following the expiry of the guarantee period in two years' time, the banking system in Ireland is well positioned to secure its long-term sustainability and viability.

In taking stock of developments in the past few weeks, notwithstanding the rapid pace of developments, one thing is clear. The Government's guarantee has allowed our banking system to access the liquidity that it needs to support the critical function that finance serves in our economy. It is important to be very clear on this point; this measure is not a bail-out for the banks. Rather it was a strong and decisive action to ensure our financial infrastructure — a core element of the functioning of our economy — was safeguarded.

This is the context for the broader decision that was taken and the introduction of the Credit Institutions (Financial Support) Act 2008. The Government has underpinned the legislation with this proposed scheme which was approved earlier this week by the European Commission. This scheme aims to safeguard the stability of the financial system and, in doing so, ensure the financial needs of the wider economy can continue to be met from banks in Ireland, notwithstanding the serious liquidity situation that persists worldwide. As we know, the turmoil in global financial markets can be traced back to 2007. Problems that were emerging in capital markets due to losses on securities linked to US sub-prime mortgages led to central banks across the world taking action.

In a little over a year since then, the interbank and wholesale funding market has deteriorated very significantly, giving rise to the need for international central banks, including the European Central Bank, to supply significant liquidity in place of market sources. As we have all seen, there have been a number of serious problems in banks. Indeed, in the past months the five biggest investment banks in New York, Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley, have ceased to exist. The international situation worsened in mid-September with the developments in the US. The international markets, which previously had been working, albeit at a reduced capacity, effectively ceased to operate. Banks that had been reluctant to lend to each other for any period were now reluctant to lend on the interbank market at all. This meant very limited interbank or international wholesale term funding was available for either Irish or international banks. Put simply, banks could not continue to function without this type of liquidity.

The European Commission has already approved the scheme under EU treaty state aid rules and has found that it avoided unnecessary distortions of competition in the Single Market. We want to secure the positive resolution required here today to bring the scheme into effect as quickly as possible thereafter. This is being taken simultaneously in the Dáil, and of course the Minister of Finance is in the other House at the moment. A positive resolution is very important to ensure there is legal certainty in relation to the guarantee which will help support confidence in the banking sector in Ireland. The key objectives of the scheme are to minimise the potential cost to taxpayers, to remunerate the State for the financial cost of the guarantee and to ensure compliance with its terms. I will now set out the main provisions of the scheme.

The scheme sets out strict terms and conditions on covered institutions to ensure the public interest is paramount, including in particular that the interests of taxpayers are protected and that the long-term sustainability and stability of the banking system is secured. A covered institution may join the scheme by accepting its terms, agreeing to pay the charge for the guarantee and giving an indemnity in favour of the State to ensure, as far as possible, the cost of any claim made under the guarantee is ultimately recouped from the institution.

Different terms and conditions can apply in an objective manner for different credit institutions in accordance with the individual circumstances that may arise. Also, the terms will be reviewed at least every six months to ensure the scheme is achieving its objectives.

Specific obligations under the scheme may be put in place to ring-fence appropriately the activities of any subsidiary from its parent to ensure the Government's objectives under the legislation are met. A key consideration in designing the scheme was to ensure the State was compensated for the cost of providing the guarantee. This is achieved through an aggregate charge to the covered institutions of at least €1 billion in total over the two years of the scheme. This level reflects the estimated cost over ten years of the assumed increase in debt servicing costs for the Exchequer. In current severely dislocated market conditions, it has been accepted by the European Commission that it is very difficult to determine an appropriate market-based benchmark for the guarantee. This charge will be allocated to the individual covered institutions participating in the scheme by reference to such factors as the risk profile of each institution. Provision is also made for a review mechanism for the charge.

The scheme provides that the Minister for Finance will report to the Joint Committee on Finance and the Public Service every six months on the level of charges received and the compliance with the terms and conditions of the scheme. There are extensive provisions in the scheme regarding information and monitoring. In the first instance, the Financial Regulator on behalf of the Minister will monitor compliance with its terms and objectives. In this regard, covered institutions are required to submit reports on such matters as liquidity and capital ratios at the request of the Financial Regulator on the Minister's behalf. The Financial Regulator will in turn provide reports to the Minister.

In terms of adherence to consumer protection rules as highlighted by Deputies in the course of the debate on the Bill, the scheme provides that each institution must adhere to the Irish Banking Federation code of practice on mortgage arrears and the Financial Regulator's consumer protection code.

There are detailed provisions in the scheme concerning compliance certificates, other reports from the institutions and provisions allowing for the disclosure of information between the regulatory authorities. Furthermore, the scheme allows the Minster to require covered institutions to develop a code of practice for effective risk management in furtherance of its objectives, in consultation with the Financial Regulator.

To protect further the public interest, the scheme provides that a covered institution may be required to appoint up to two non-executive directors to its board from an approved panel during the period of the guarantee. The Minister also has the right to appoint observers to the remuneration, audit, credit and risk committees of the covered institutions. The power is also available under the scheme to direct covered institutions to take certain steps to restructure their executive management responsibilities, strengthen their management capacity and improve their corporate governance. These powers are supplemented by important enforcement provisions.

A key element of the scheme is the right to regulate the commercial conduct and competitive behaviour of covered institutions to achieve its objectives. For instance, the scheme prohibits an institution from acquiring shares without prior approval in any other financial institution or any new business where such action would increase the Exchequer's exposure under the guarantee. Also, the Central Bank and the Financial Regulator, after consulting the Minister, may require an institution to conduct its affairs in a manner that reduces the risk to the Exchequer under the guarantee. For instance, the institution may be required to manage its balance sheet appropriately in accordance with the purposes of the Act and improve capital ratios. Targets on assets and liabilities may also be set by the Financial Regulator. The regulator may also require an institution to limit exposure to any sector or customer in the interests of confidence in the banking system. Furthermore, the scheme allows the Minister to make rules regarding the payment of dividends to maintain capital ratios.

Under the scheme, the Irish Banking Federation, on behalf of all covered institutions, will submit a bi-annual report to the Minister on corporate social responsibility targets, including targets on the delivery of the promotion of financial inclusion. The scheme sets out specific controls and oversight mechanisms on executive remuneration. In future, bonuses will be linked to reductions in guarantee charges, reduction in excessive risk taking and encouraging the long term sustainability of the covered institution. Each institution is required under the scheme to prepare a plan to structure remuneration packages to take account of these objectives. The Minister will establish an independent committee to oversee all remuneration plans of the covered institutions and this committee will report to him.

The Minister can ask for such plans to be amended to ensure compliance if necessary. The operation of the scheme and the compliance of the institutions will be subject to close ongoing monitoring by the Governor of the Central Bank and the chief executive of the Financial Regulator who will report regularly to the Minister.

During the period of the guarantee, the Financial Regulator will continue to intensify its on-site and off-site supervision of credit institutions. This will build on revised capital and liquidity measures introduced by the Financial Regulator in the past two years. In addition, the Financial Regulator will apply any revised standards to emerge from the work being undertaken as part of the roadmap for regulatory reform at EU level.

The scheme strongly underpins the purpose of the legislation and the guarantee arrangements put in place since 30 September 2008 and subsequently extended. It aims to maintain financial stability and the long-term sustainability of the Irish banking system and hence the wider economy. The international financial situation remains uncertain and subject to swift and unpredictable changes in sentiment. However, all savings and deposits are fully safe and secure, due in no small part to the Government's prompt actions.

With the putting in place of this guarantee scheme, the Minister has taken on the responsibility of protecting the taxpayers' new interest in the financial institutions. I trust we will all continue to play our part fully in the public interest.

The scheme takes account of the debates which took place in both Houses on the legislation. In reply to criticisms that the scheme is insufficiently stringent, a balance has had to be struck between protecting the interests of the State and the taxpayer and securing the co-operation and confidence of the financial institutions even if on a sometimes reluctant basis. I commend the scheme to the House.