Martin Mansergh (Tipperary South, Fianna Fail)

I welcome the opportunity to speak to the Seanad on the Government decision last week to establish a framework for a comprehensive investigation into the causes of the systemic failures in the banking sector which culminated in the need for the State intervention. The Government has taken this decision in recognition of the public expectation that there be a full examination of what went wrong in our banking system.

The mistakes that were made have required the Government to introduce the bank guarantee scheme in September 2008 and to make some very significant interventions since then to ensure financial stability. These measures include the recapitalisation of our two biggest banks, AIB Bank and Bank of Ireland, the nationalisation and recapitalisation of Anglo Irish Bank, the establishment of the National Asset Management Agency and the recent introduction of the eligible liabilities guarantee scheme.

The proper functioning of the banking system is critical to the economy and therefore must be protected by the Government. In all the steps we have taken as a Government, our overriding objective has been to maintain a functioning banking system that will ensure a flow of credit to viable businesses and households in this economy.

We are all aware that the global international crisis has created extreme stress for the financial system worldwide. The drying up of funding in international credit markets and the huge write-downs of securitised assets has generated a financial shock which has resulted in the most negative economic conditions since the Second World War.

Ireland's exposure to the sharp deterioration in international financial conditions has been significantly exacerbated by practices which failed to address unrestricted credit growth in the Irish banking system. We know that this credit growth was facilitated by access to wholesale financial markets with no exchange rate risk and low interest rates and was both driven by and facilitated an unprecedented property boom and an unsustainable increase in property development lending.

The international context provides only a partial explanation. The State has been required to pour very significant, scarce resources into our banks arising from decisions that were made specifically by Irish banks over a number of years. Therefore, it is essential that we learn the lessons of our recent experiences as we set about the task of re-fashioning our banking system to restore trust in that system and to enable it to perform its proper role in meeting the needs of the economy.

The Government's framework for inquiry will have two stages. The Government will first commission two separate reports, one from the Governor of the Central Bank on the performance of the functions of the Central Bank and the Financial Regulator, and the second from an independent wise man or woman with relevant expertise to conduct a preliminary investigation into the recent crisis in our banking system and to inform the future management and regulation of the sector. These reports will also consider the international, social and macroeconomic policy environment which provided the context for the recent crisis. Both reports are to be completed by the end of May this year and laid before the Houses shortly thereafter.

The second stage of the inquiry will be the establishment of a statutory commission of investigation which will be chaired by a recognised expert or experts of high standing and reputation. The terms of reference for this commission will be informed by the conclusions of the two preliminary reports. The aim will be for the commission to complete its work by the end of this year. Its report will then be laid before the Oireachtas for further consideration and action by an appropriate Oireachtas committee.

These reviews will build on important work being done at international level. Over recent months substantial analysis of the failures of the banking sector has been undertaken elsewhere. The analysis to be commissioned by the Government will complement and build upon, for example, the European Commission's High Level Group on Cross-Border Financial Supervision, the de Larosière report, and the British Financial Services Authority's Turner report. These reports have recommended an extensive programme of reform of financial regulation at EU and international level which is now being put in place. These reforms will make a major contribution to underpinning the stability of the financial system both in Ireland and the EU in the future.

The commission of investigation will examine and report on the causes of the systemic failures such as corporate strategy, governance and risk management in the Irish banking sector. The terms of reference for the statutory inquiry will be shaped by the conclusions of the two preliminary investigations and in consultation with the Oireachtas. There are clearly a number of broad themes that ought to be examined thoroughly and these include the performance of individual banks and bank directors where wrongdoing and lax practices have contributed considerably to the crisis; the performance and structure of the banking system generally; the performance of the regulatory and Central Bank systems; and the response of the relevant Departments and agencies, including the linkage between the banking crisis and overall economic management. The two preliminary reviews will prepare the ground for the formal inquiry and ensure it is effective and efficient.

There was extensive debate in the Dáil last week on the appropriate role for the Oireachtas. For reasons that the Government has already set out, a committee of the Oireachtas is not best equipped to conduct an inquiry or investigation of this nature. Unlike the Committee of Public Accounts DIRT inquiry, the issues in the banking situation are significantly more complex and will require a greater range of expertise. Indeed the PAC itself was able to draw upon a comprehensive investigation into the DIRT issue by the Comptroller and Auditor General. In addition, the issues involved continue to be current issues rather than issues simply of the recent and more medium-term past and Members of these Houses continue to be engaged in debate on these issues. There could be some mitigation of these effects by confining the remit of the inquiry, but this clearly would not satisfy the need for a comprehensive investigation of all the relevant issues. The advice the Government has received from the Attorney General is that such an investigation would also require legislation following the Supreme Court judgment relating to the Abbeylara inquiry.

Notwithstanding this, an Oireachtas committee will have a vital function in this process through assisting in the formulation of appropriate terms of reference with regard to where the inquiry goes at the conclusion of the scoping exercise and exercising its constitutional role of examining matters of public policy arising from the findings of the statutory inquiry. Specifically, the Oireachtas will be involved at each stage of the planned inquiry process. An appropriate Oireachtas committee will meet both the governor and the independent expert at the outset of their work to be briefed on the members' priorities for investigation. The two preliminary reports, when completed, will be laid before the Houses of the Oireachtas and the Oireachtas committee will be invited to consider the findings of the reports. The terms of reference and draft Government order to establish the statutory commission of investigation will be laid before the Oireachtas and the report of the commission of investigation will, when completed, be laid before the Oireachtas for further consideration by the committee. It is open to the committee to hold public hearings on the report.

It is important to underline a point which is relevant to the debate on the role of the Oireachtas in this inquiry. The Governor of the Central Bank, in his appearance before the Oireachtas Joint Committee on Economic Regulatory Affairs at the end of last year, said that the banking crisis was bigger and more complicated than one that could be accommodated by an Oireachtas inquiry. He went on to say the question would not be sufficiently answered by a judicial inquiry because it was not simply a matter of establishing the nature of what had happened and the sequence of events and that an inquiry should involve experts in economics and social science and politicians. He continued:

The crisis is not simply a question of discovering who did what and who knew what. Uncovering the deep roots of the crisis will require expertise and broad social scientific understanding more than merely forensic skills.

The Government's agreed approach will allow for the timely completion of expert, authoritative and structured examinations of the financial crisis. It will form a comprehensive framework of investigation into the recent crisis in the banking sector which will enable us to understand its origins and help us to learn lessons that will inform our future management of the banking sector. The framework will involve the Oireachtas at each stage. It will be efficient and cost effective. Most of all, it will restore trust and confidence in the banks in order that they can play their full and proper role in promoting economic recovery. This will allow the Government to assess how lessons can be learned to inform our future management of the sector, both in respect of institutions and their management and direction and regarding the management of risks and stability issues within the regulatory and governmental systems.

I would like to add one or two other observations. The causes of the domestic and international banking crisis and remedies to prevent or mitigate against recurrences are under serious investigation in every country affected by it and in international economic forums. This week's Davos meeting is preoccupied with precisely that subject. For example, today's Financial Times contains a heading on the meeting in Davos that reads: "The great reckoning". The global fiscal crisis demands a shift in philosophy. The issue is too important for crude polemicisation. What is to blame matters as much as who is to blame. When I first entered this House in mid-2002, one of the first Bills discussed was the Central Bank and Financial Services Authority of Ireland Bill 2002 on foot of the McDowell report. We did not go as far as recommended in separating completely the FSAI and the Central Bank. I wish to quote what I said during that debate:

As an observer in a previous capacity, without having been involved directly, I was always of the view that one could not separate the regulatory and consumer protection functions. Senator Higgins said the two were at opposite poles but I am not sure that is true. The worst prejudice to the consumer is if a financial institution collapses and he or she loses money.

I must admit that, like nearly everyone else, I was nonetheless too optimistic that the solution had been found, but it is worth recalling that the opposition to and criticism of the Bill came from the point of view that the two authorities should be completely separated instead of remaining under the umbrella of the Central Bank. In effect, the thrust of the legislation is now likely to be reserved.

I forget who, but a commentator stated today or yesterday that we could save ourselves an inquiry by reading approximately half a dozen recent books written by columnists of broadsheet newspapers. In my contribution in the Dáil last week I raised the issue of the extent to which the property supplements for which these columnists and authors wrote had played a part in fuelling the property bubble. My argument was that they excoriated poor decision making and regulation and cronyism, real and alleged, but rarely made any reference to the relentless hype in property supplements that had fuelled what has been described elsewhere as "irrational exuberance" - this phrase has been picked up by Mr. Jim Power - caused many of our current problems and, in the prevailing climate, would be difficult to contain or control. To be fair to Senator Ross, he often raised in the House the issue of what he considered the sharp practices of estate agencies in terms of guide prices, published prices and so on.

Interestingly, my point was also made by Deputy Upton on behalf of the Labour Party in the Dáil. She referred to the complicity of the media in stroking the property bubble, that they had been so great an earner for newspapers that property sections were often as large as the rest of the newspaper. They happily quoted pet economists in banks who told us that the property sector remained strong and its fundamentals were sound. She also stated the role of the media and others with a financial interest in encouraging or scaring people into purchasing houses at grossly inflated prices needed to be investigated. We are good at discovering the beam in other people's eyes but do not look sufficiently at the mote in our own. On this point at least, the Labour Party and I are in agreement.