Paschal Donohoe (Fine Gael)

I welcome the Minister of State. This is important legislation. The last time I had an opportunity to debate matters of this nature with him, I raised the issue of the accountability of banks. Given the fundamental change in the relationship between taxpayers and banks, what are we going to do to ensure banks are held accountable for the guarantees and support that will now be afforded to them by the taxpayer? I also asked whether our banking system had reached a point where no bank was ever too big to fail. The Minister poured scorn on my comment and said that was an unfeasible or utopian situation.

I note with interest what Mervyn King, the Governor of the Bank of England, said earlier this week. He made some points that are very relevant to this discussion. In his speech at the Mansion House - with Alastair Darling, Chancellor of the Exchequer beside him - he said:

If some banks are thought to be too big to fail, then in the words of a distinguished American economist, "they are too big". It is not sensible to allow high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure.

He went on to say that those guarantees to retail depositors should be limited to banks that make a narrower range of investments and that banks which pose greater risk to taxpayers and the economy in the event of failure should face higher capital requirements. He concluded with a comment about the role of the Bank of England and said:

To achieve financial stability, the powers of the bank are limited to those of voice and the new resolution powers. The Bank finds itself in a position rather like that of a church whose congregations attend weddings and burials, but ignore the sermons in between.

If the Governor of the Bank of England made such points about how banks will be regulated in the future and we are having a discussion today about the deposit guarantee scheme we will extend to the banks, this raises questions to which I would like to hear a response. An OECD report published in 2008 on deposit guarantee schemes acknowledged that such schemes play a vital role in ensuring the banking system functions properly and serves the broader economy. It also noted, however, that guarantee schemes do not address the root cause of the crisis in the banking system. Of even greater concern than the lack of consumer confidence in the system is the lack of confidence banks have in each other. It was this loss of confidence that caused the liquidity crisis at the end of last year, the consequences and cost of which have become clear to us all.

While the Fine Gael Party supports the legislation in principle, it raises a number of questions which I propose to ask the Minister of State. The Bill will have important consequences for taxpayers and the country, providing as it does for a guarantee of deposits of up to €100,000. Will the deposit guarantee scheme encourage banks to engage in further irresponsible behaviour which is not in the interests of the broader economy? While this question may appear absurd in the current circumstances, if we have learned anything from the banking crisis, it is that the unthinkable is plausible and banks engaged in behaviour we hoped would not occur. What will the Government do if a bank uses its deposit base, which the State has guaranteed, to indulge in the type of behaviour that got us into the current unholy mess?

The legislation states that responsibility for the deposit guarantee scheme will reside with the Central Bank. This gives us an early glimpse into the type of new regulatory system the Government proposes to establish. Making the Central Bank as opposed to the other institutions involved in financial regulation responsible for the operation of the scheme is a noticeable departure from the current position. Will the Minister of State outline Government thinking on what type of regulatory system will emerge from the ashes? Who will have responsibility for ensuring there is no repeat of the systemic crisis in which we find ourselves?

It has become clear from recent events that the design of the institutions involved in financial regulation, in other words, the responsibilities devolved to them, the overlap in such responsibilities and the lack of co-ordination among these institutions, created a gap or hole which allowed risky behaviour to emerge. We are now dealing with the consequences of the problem. How will our banks be regulated in future and which institutions will be responsible for their regulation?

To take the nightmare scenario, if, despite this legislation, a future Government is forced to respond to a run on a bank by implementing the terms of the scheme and raising money to support depositors in danger of losing their deposits, where would the money be found? Would more responsible banks participating in the scheme be asked to stump up money to cover the cost of risky behaviour by another bank? Alternatively, would the European Central Bank provide this money, as it does at present, by injecting liquidity into the economy in exchange for Irish Government bonds? While it may appear slightly pointless to ask such a question given how unlikely this scenario appears, we must, as I stated, assume the unthinkable is possible. The position in which we find ourselves was considered unthinkable in the past. If the questions I ask were raised several years ago when earlier legislation was being introduced, we may not have found ourselves facing our current problems.

This has been a busy week for banking regulation. It has also been a disappointing week in that the major players, the United States, the European Union and the United Kingdom, have chosen to focus their efforts on different areas. The US has focused on banking regulation and consumer protection while the EU has focused on hedge funds. The UK, on the other hand, has started to fight a strong rearguard action against the EU proposals, arguing that they are too heavy-handed. The Chancellor of the Exchequer, Mr. Darling, has chosen instead to focus on corporate governance as a solution to the current problems. His approach is in marked contrast to some of the solutions proposed by the Governor of the Bank of England.

Only months ago, politicians all over the world argued they would never allow the problems in the financial sector to be repeated. In seeking to prevent such a scenario they have, however, produced different plans. This is important because it could result in what is known as regulatory arbitrage where different banks move to countries or areas where the regulatory environment suits their particular needs. It would be a great pity if we do not have a global response to the global crisis that has engulfed us. While this matter is clearly not addressed in the Bill, it is vital nonetheless that action is taken to address the consequences of the recent crisis.