Martin Mansergh (Tipperary South, Fianna Fail)

A point I heard made in Washington last week is that it is easy to put down all the difficulties to cynical, unscrupulous financial operators, or whatever words one wants to use. The aspect of social concern must also be recognised. People in different countries, including the United States and Ireland, were trying to make home ownership more accessible to as wide a number of people as possible. It is too simple to attribute the situation to weakness and wickedness in financial institutions. There was also a genuine social purpose there, even though, as we can see, there were excesses and things went wrong.

The question of dated subordinated debt was raised. There are two specific reasons for the recommendation that dated subordinated liabilities be included within the scope of the guarantee. First, the objective of the guarantee is to provide confidence among senior investors in the wholesale capital markets. In recent years, as a result of tightening credit spreads, traditional investors in senior unsecured debt have increased their exposure to non-deferrable dated subordinated debt — so-called lower tier 2 — in search of additional yield. Today the overlap in the investor base for both senior and lower tier 2 debt is extremely high. Therefore, it is crucial to the success of the guarantee that we include dated subordinated liabilities to preserve capital market access for Irish institutions into the future. Secondly, in an Irish context, lower tier 2 instruments are non-deferrable, and any non-payment of either principal or interest is defined as an event of default. This event of default would trigger claims across the Irish institutions of both senior and unsubordinated liabilities. The scheme does include specific provision requiring covered institutions to maintain their solvency ratio, which will prevent dated subordinated debt being raised to leverage lending unfairly.

The question of how to ensure we are not paying for non-Irish liabilities was raised. Paragraph 12 of the scheme provides:

The covered liabilities of a subsidiary of any parent credit institution which is not regulated by the Regulatory Authority (being a subsidiary which is a covered institution) shall include only such covered liabilities of that subsidiary: (i) which relate to its own business; and (ii) in respect of which there is no recourse to any other entity within or outside its group and shall not include liabilities which, in the absence of the guarantee, would normally be those of other members of the covered institution's group. The Minister shall monitor the use of this Scheme by such subsidiaries to ensure the purposes of the Act of 2008 and this Scheme are achieved and that the guarantee is not being abused, not being used in a manner irreconcilable with the purpose of the guarantee or not being used for the benefit of any entity other than the relevant covered institution. The Minister may ... impose specific obligations under this Scheme or the guarantee acceptance deed given by the covered institution ... to appropriately ring-fence the activities of a covered institution from its parent to minimise the covered institution's financial exposure to its parent credit institution.

It was suggested in the debate that the reporting provisions are weak. I do not agree. The reporting and information requirements of the scheme are powerful. They enable intensive scrutiny and the closest possible insight of the covered institutions' activities. The rights available to the Minister and the Financial Regulator under the scheme and the wide range of controls and requirements that can be imposed on the covered institutions under it have been put in place to protect the public interest in a manner consistent with helping to secure the future of the banking system in view of the critical role of finance in supporting the real economy, risk-taking and major household financial institutions. The chief executive and chairman of each covered institution will be required to certify on a quarterly basis compliance with the scheme.

The question of individual and corporate responsibility was raised. The scheme is a contract between the Minister and the banks and it requires banks to continue to comply with all existing regulatory rules. General rules under company law and financial services legislation apply. Listening to Senator Ross it sounded as if he wished to establish something like a virtual state by financial dictatorship in this country. There was the sound of the metaphorical tumbrels in some of the other contributions. We need to focus on our priority which is the stabilisation of the institutions not for the benefit of people who sit on the boards but for the benefit of the real economy, output and jobs, and secondarily the tens of thousands of employees of these institutions. While reference may be made to other countries such as the UK or the United States, we must all operate in the specific culture of the country in which we live. The leverage of governments in the countries with the biggest financial centres may be somewhat different from the leverage we have in this country.

The question was asked whether directors appointed from the panel have a conflict of interest. They can voice the public interest at board meetings and can vote accordingly, taking account of commercial reality, and they are independent. It is not the Government's purpose in this scheme for the State to interfere directly with the commercial decision-making role and responsibilities of the boards and executives of the banks. Rather we are putting in place a structure that ensures the assessment and commercial decision making of these institutions is at all times shaped by the broader public policy objectives underlying the scheme. In the scheme, a detailed overlay of strengthened corporate governance and reporting rules is being superimposed on what will be an intensified regulatory engagement.

The question about the costs of the scheme not being passed on in an unwarranted fashion was also raised. The cost of the charge to the institutions may not be passed on to ordinary customers under the scheme and that is the meaning and purpose to paragraph 44. The Minister for Finance has stated this unequivocally in the Dáil and Seanad in introducing the legislation and this remains the position. The Minister and the Financial Regulator will monitor increases in bank charges and in particular, under section 149 of the Consumer Credit Act 1995, the Financial Regulator must be notified of any charge imposed by a bank "in relation to the provision of any service to a customer or to a group of customers" and must also be notified of any proposal "to increase any charge which has been previously notified". The notification to the Financial Regulator must be accompanied by a statement of commercial justification, including a detailed statement of cost and details of the estimated amount of additional income accruing from the proposal. The Financial Regulator can waive or reduce a fee notified to it under section 49. I believe Senator Leyden referred to the State issuing a cheque. No cheques have been issued by the Government. I hope no situation will arise to necessitate that happening.

Obviously many questions were based on how the scheme would work in practice. One can answer to a certain degree as to what the intentions and rules are. However, beyond that the proof of the pudding will be in the eating. Senator Ormonde referred to the point I made about the minimisation of cost to the taxpayer. She felt it could be interpreted as suggesting there would be no recouping of cost. As has been stated there will be an increase in the cost of borrowing to the State. The purpose of the charge is to offset fully the increased cost of borrowing. The guarantee will embrace all covered liabilities, which at the time of announcement of the guarantee were estimated to be €440 billion based on the end 2007 published figures of the original six institutions. The relevant figures for covered liabilities are now being updated for end of September in the context of the guarantee-charging model included in the draft scheme.

Senator Leyden asked why worker directors are not appointed in the banks. At a personal level as a fellow socialist I——