Martin Mansergh (Tipperary South, Fianna Fail)

I begin by declaring an interest in that I have a daughter who is a middle ranking official in AIB, although she is on maternity leave at the moment.

I thank Senators for their contributions and for what has been a good debate. I assure them that I listen carefully to what the Opposition and everyone has to say.

I will give a short response to the last contribution. Senator Paul Bradford was correct in the last debate I attended when he said nearly all of us were, to a degree, to blame and nearly all of us had to help find a solution. That was a very accurate statement.

There was a reference to infrastructure bonus. The national motorway network, which was started in the late 1990s, will be completed next year and is a quite a large infrastructure bonus. As far as preference shares are concerned, that is the route the Government has gone down. I agree with Senator O'Reilly on that point.

While commentators here are naturally very much focused on our own internal problems, it is important to put the banking crisis in an international context and Senator Boyle, in particular, did so. Governments all across the world are grappling with collapsing confidence in the global financial system, and all are making a variety of interventions to try to achieve the best possible outcomes for their country. It is important, therefore, to understand what the Minister for Finance, Deputy Brian Lenihan, sees as the Irish strategy.

The Minister is keen to ensure there is an independent banking sector in Ireland. This requires us to protect systemically important banks and avoid nationalisation of these institutions, if at all possible. His aim is to ensure there continues to be competition in the Irish market for consumers. To that end, we are seeking to ensure that Bank of Ireland and Allied Irish Banks plc continue as a strong and competitive banking presence in the marketplace.

Given the uncertain position of the UK and foreign owned banks, we would ideally like to see a third significant Irish player in the banking sector. This situation reminds me of debates in the early 1990s on a third banking force which was part of the Fianna Fáil and Labour Party programme for Government, but it did not come to fruition at that time.

The prerequisites for the success of this strategy are sufficient liquidity in the system and adequate capitalisation of our banks. The introduction of the Government guarantee scheme in 2008 was designed to ensure the banks would have sufficient liquidity to operate on a day-to-day basis. This move has since been followed by many other countries.

Market expectations regarding the capital banks hold have altered significantly. As a result, banks have had to compete vigorously for deposits and other forms of funding in a weakening economic environment. They have also been forced to seek capital in an unwilling and unfriendly market, resulting in an array of State recapitalisation programmes across the developed world. It is in this context we have announced our plans to capitalise the two main banks. In due course, we will look at the remaining institutions.

In this extremely challenging period for the banking sector, and where investors dealing with banks are even more risk-conscious, the good standing of a bank, its reputation and a strong ethos of corporate governance through its board and senior management become even more important. There have been important issues for the Government to address in taking on this role, at a time when we have also to redress a large fiscal imbalance and take difficult decisions to restore our competitiveness internationally.

The Government is providing €3.5 billion in core tier 1 capital for each of the two main banks. The capital to be provided to each was determined following detailed engagement with the banks themselves and with the benefit of survey information of the bank's loan books, which was conducted for the Financial Regulator by PricewaterhouseCoopers. A careful assessment was made of the potential losses that the banks face on their loan books in the coming years, taking into account the impact of likely trends in property values and various stress scenarios for the economy.

The Minister was criticised in some quarters for being slow to proceed with a recapitalisation of our major financial institutions, but he strongly believes the time spent on assessing as accurately as possible the capital requirements of each bank was worthwhile in terms of the assurance that can now be offered to the markets on the levels of capital in the two largest banks.

The level of capital being provided by the State will boost the core tier 1 capital ratio of AIB to 8.5% and of Bank of Ireland to 9%. It is important to note that these are high capital ratios by international standards. The banks will therefore be in a strong position, able to raise the funding they require on international markets and withstand loan losses arising.

The continued flow of credit is vital to our economy. To establish the exact position regarding the availability of credit, the recapitalised banks have agreed to fund and co-operate with an independent review of credit availability which will be managed jointly by the banks, Government and business representatives. The recapitalised banks have also agreed to work closely with the IDA, Enterprise Ireland and State agencies to ensure the supply of appropriate finance to contractors engaged on major projects sponsored by them. They have also agreed to engage in a clearing group to identify specific patterns of events or cases where the flow of credit to viable projects appears to be blocked and to seek to identify credit supply solutions. The two banks have also agreed to provide €15 million each to a new seed capital fund.

The international credit crunch is severely limiting the availability of credit to sound businesses and thereby doing severe damage to our economy. The bank customer package announced as part of the recapitalisation program addresses this problem in a number of ways. The banks have agreed to make additional funds available for lending. A statutory code of conduct for SME lending has been devised to help create a better climate for SME lending and to give potential borrowers greater confidence. This covers all banks and not just those which have been recapitalised. An independent review of credit availability will give a definite picture of the current supply, demand and conditions for business lending.

In addition, statutory codes of practice on business lending and mortgage arrears were published by the Financial Regulator on 13 February 2009 and apply to all banks. The business lending code includes a requirement for banks to offer their business customers annual review meetings, to inform them of the basis for decisions regarding their accounts and to have written procedures for the proper handling of complaints.

Decisions to grant, refuse or alter credit must be taken on a case by case basis. Where a customer gets into difficulty, the banks will allow reasonable time to seek to agree an approach to resolve problems and to provide appropriate advice. The Minister wants to stress this is a statutory code and banks will be required to demonstrate compliance with it.

The code of practice on mortgage arrears applies to all mortgage lending on a customer's principal private residence. A lender may not seek repossession until every reasonable effort has been made to agree an alternative repayment schedule with the borrower. The code will ensure that mortgage lenders can only commence legal action for repossession six months from the time arrears first arise. A number of days ago the Financial Times quoted a figure of, I understand, 70,000 repossessions in the UK. Proportionately what is happening here is, properly, far below that figure.

In January, against a background of concerns about governance issues and market confidence in Anglo Irish Bank, the Government, following consultation with the Central Bank, the National Treasury Management Agency and the Financial Regulator, decided to take it into public ownership. This decisive step was taken to safeguard the interest of its depositors and the stability of the economy.

The Government, along with the entire country, has been shocked by the revelations of the practices in Anglo Irish Bank, and as the Minister for Finance has said time and again, we are fully committed to getting to the bottom of the situation and ensuring the full rigours of the law are applied to anyone found to have abused the system. The Government will fully investigate the loans to Mr. Sean FitzPatrick, the loans to purchase shares transaction and the Irish Life & Permanent deposit arrangement. Any further issues that may emerge will also be dealt with by appropriate action, but the Government must remain fully cognisant of, and committed to, upholding the principle of natural justice.

It is vitally important that the country now regains confidence in its banking system. There are many thousands of loyal and hard-working banking staff out there who are shocked at recent revelations. It is important they and the public can be reassured about the long-term future of the financial sector in Ireland. It is also important that we collectively give confidence to the international markets about Ireland's financial sector and its long-term future. Continued revelations of alleged malfeasance damage all of us individually and collectively. However, it is incumbent upon all of us, the media included, to ensure there is a balance struck between the exposition of past alleged wrongdoings and the solidity and proper functioning of a significant and vitally important part of the country's infrastructure.

There is no doubt that there are inherited problems in the banking sector and there has been much comment about how these might be resolved. As the Minister for Finance indicated in his recapitalisation statement, the Government is prepared to look at and examine proposals such as an insurance scheme, the creation of a bad bank, or other, more innovative Irish solutions to deal with this problem. The Minister has appointed Dr. Peter Bacon to work in conjunction with NTMA to report and advise me on suitable options in this area.

At the recent ECOFIN meeting, there was considerable debate and discussion on this topic and desire was expressed for an EU-wide response.

The British Government has examined many possible options in this area and may well announce a scheme in the coming weeks. The Minister is firmly of the belief that there is no huge benefit to being first with a solution on this issue and that the best approach is to learn from other experiences and to move as quickly as possible when we have devised a scheme that uniquely suits the Irish circumstances.

It is widely accepted that bank regulation on a global scale has been too lax, and Ireland is no exception in this regard. A new structure is clearly required and the Minister is committed to its implementation. The Minister has already indicated in the Dáil that this may involve the merger of the Financial Regulator and the Central Bank and he is close to securing international expertise, which will help advise him on this matter. Several Senators pointed out, properly, during the debate the extreme importance of this, given the size of the financial services sector in Ireland and, in particular, the International Financial Services Centre.

The oversight of the banks concerned has been greatly intensified since the introduction of the credit institutions — financial support — scheme. This new regime provides for a heightened direct engagement with each of the covered institutions and new reporting arrangements, including the provision of scheme compliance certificates by the covered institutions themselves and by their external auditors. The bank guarantee scheme requirements and conditions are the first step in a new system of financial regulation and supervision. The joint boards of the Central Bank and Irish Financial Services Regulatory Authority are considering further reform measures and the Minister has received a report in that regard which he will examine closely.

In addition, other regulatory considerations, both domestically and at international level, are under way, including the following: the regulatory authority is reviewing its overall strategic regulatory approach with a view to ensuring that the authority meets its statutory mandate and responds to EU developments in financial regulation; the Financial Regulator business process review, designed to improve its effectiveness and value for money, is now close to finalisation; the Financial Regulator is also processing a strategic plan for 2009, which will address the particular EU and guarantee scheme requirements for 2009; at EU level, new regulatory proposals, including improvements to the capital requirements directive, are due for adoption in early 2009 and more generally; and at ECOFIN, which will incorporate the work being carried out at a wider international level, the role and mandates of national regulators are now the subject of in-depth consideration and, arising from this, it can be expected that proposals will be forthcoming on matters such as prudential soundness, the orderly functioning of markets and stronger European co-operation on financial stability oversight. The Minister proposes to progress those issues and to bring proposals to Government as a matter of urgency.

There is absolutely no doubt that there needs to be accountability in the financial sector for what has happened. We have seen a number of senior people stand down for various reasons and the Minister is clear that more will follow when that is appropriate. What we have witnessed is a massive failure on a global scale of a banking culture that went beyond all bounds in pursuit of high short-term rewards, with appalling global economic and financial consequences on a scale that few countries, including our own, ever expected to be faced with.

At all stages, the EU has been consulted regarding any involvement in the banking sector. In the coming days an EU high level group is due to unveil its blueprint for reforming the financial system. This is one of several topics the Minister intends to discuss with the President of the European Central Bank, Jean Claude Trichet, when he visits Ireland tomorrow. It is essential that we work with our EU counterparts to ensure a consistent and decisive approach is adopted that will see us emerge from this very difficult time with a strong and well regulated banking system.

The Minister has already put on the record that there will be a new pay regime in the banking sector in Ireland. It is imperative that this regime is organised in such a way that any rewards in the sector are structured to meet the long-term objectives of both the banking institutions themselves and the overall health of the Irish financial system. The banks have accepted this in principle and we await CIROC findings to help us ultimately flesh out and implement these principles. The Minister has been advised that this committee, headed up by Mr. Eddie Sullivan, will report on 5 March 2009 and that the report may well include a recommendation regarding a cap on the salaries of senior executives.

I agree with Senator Twomey that we are perhaps involved in a redefinition of the scope and role of social partnership which has served this country well over the past 22 years but which must be reshaped to respond to present circumstances.

The Government recognises that the future prosperity of the country hinges on the actions we take now. It has a strategy to deal with the complex problems in the banking sector and actions have been undertaken firmly and fairly in accordance with the national interest. The Government's approach to the banking system has been structured and measured. All Government intervention in the banking sector has as its ultimate goal the benefit to the citizens and the taxpayer of ensuring stability and securing the position of the customers of the banks, account-holders, mortgage-holders, businesses and entrepreneurs, not ignoring the thousands of rank and file employees who work conscientiously in the banks for reasonable but essentially modest reward.

I call on the Seanad to support the amended motion and to contribute to the leadership needed to see us through this crisis.