Martin Mansergh (Tipperary South, Fianna Fail)

): It is interesting to note that the procedure for this discussion is still being batted backwards and forwards.

I am pleased to address the Seanad on recent developments in banking. Every Member of the House is aware that the banking sector is crucial to ensuring the economy can benefit from the global economic recovery under way. The banking measures announced by the Minister for Finance prior to the Easter recess constitute the latest decisive measures to be taken to stabilise the banks and protect the interests of the taxpayer and depositors.

The decisive measures taken by the Government in the past two years, including budgetary adjustments of more than €15 billion, have put us in a position in which our fiscal position is credible and recognised as such by the markets and our colleagues in Europe. It is expected the economy will start growing again in the second half of this year. This growth will be on a more sustainable and realistic basis and the banking system must play an important role in this return to growth in order that confidence is restored, not only in our fiscal position but also in the banking sector.

On the issue of growth in the economy, I recommend to the House an excellent article by the former Taoiseach Dr. Garret FitzGerald on the importance of competitiveness and the gains being made in competitiveness. The article appeared in last Saturday's edition of The Irish Times.

There is no doubt that some of the decisive and bold steps that the Government has taken are not popular, and the honest and full disclosure by the Government and its agencies of the appalling mess within our banks has shocked the nation. The measures taken by the Government are necessary and are key to putting our financial institutions back on a sound footing in order that they can return to the business of serving the best interests of our economy.

The new Financial Regulator announced on 30 March that he will require our banks to have an 8% core tier one capital ratio, of which 7% must be equity. This is a prudent capital provision consistent with emerging international best practice. The regulator has specified that the capital to meet these new requirements must be in place in each of the institutions by year end. It is essential that banks in Ireland are prudently capitalised in order that they can absorb potential future losses that may arise on their loan books. Since the regulator's announcement, Bank of Ireland has announced its intention to raise €3.4 billion equity capital. A total of €1.7 billion of this amount will be raised from the private sector. This will ensure the bank meets the stringent capital requirements set out by the Financial Regulator. The strongly recapitalised bank will now be in a position to provide credit to Irish businesses and households. This will help the economy to return to sustainable growth. The level of private interest in investing is clear evidence of growing international and domestic confidence in both Bank of Ireland and our economy. The Bank of Ireland capital raising is consistent with the long-stated Government preference that private market solutions to capital raising are found and implemented. We remember views expressed both in the media and by some political parties that all our banks should be nationalised. Recent developments have shown that the Government has called that one correctly, even though some financial institutions have had to be nationalised.

As part of the transaction, the State has agreed to convert some €1.7 billion of its preference shares into ordinary shares at face value or par. The State has also agreed to sell its warrants back to the bank for €491 million in cash. This represents the profit generated on the investment over the past year. The coupon on the remaining preference shares is also increasing from 8% to 10.25%. This is a significant return for the State's investment in Bank of Ireland. The Bank of Ireland transaction agreement with the Minister for Finance provides a legal basis for the proposed Bank of Ireland credit package. Bank of Ireland's plan, which sets out how it proposes to meet the lending targets, will be submitted to the Department of Finance by mid-May.

AIB has announced its intention to dispose of various assets and to undertake equity capital raising prior to the end of 2010 with a view to meeting the Financial Regulator's capital requirement. It has also agreed to submit a lending plan to the Department of Finance by mid-May.

The overriding objective of the Government's banking policy is to ensure a healthy, functioning banking system that can meet all the needs of the economy. These actions are a crucial step in realising this objective.

The first tranche of loans have now been transferred from the participating institutions to NAMA with the exception of Anglo Irish Bank which is expected to be completed shortly. The estimated average discount to be paid by NAMA on the first tranche of loan assets is 47%. The agency expects to complete the transfer of the remaining loans from all five institutions by the end of the year or February 2011 at the latest. In total, the agency anticipates it will purchase €81 billion in loans. The valuation process is conducted loan by loan so it is not possible to calculate the final haircut at this stage, although the 47% average haircut on the first tranche of loans is much higher than the initial estimates of 30%. As NAMA is purchasing loan assets from banks at a significant discount, it is expected to make a profit over its lifetime.

The Central Bank Reform Bill 2010 is a crucial step in the comprehensive programme to put in place a domestic regulatory framework for financial services which meets the Government's objective of maintaining the stability of the financial system, provides for the effective and efficient supervision of financial institutions and markets, and safeguards the interests of consumers and investors. This represents the first of a three-stage legislative process to create a fully integrated structure for financial regulation. It provides a statutory basis for the new structure to replace the existing Central Bank and Financial Services Authority of Ireland.

It is interesting to compare the debates on financial regulation eight years ago with those of today. There was a strong preference at that time to separate consumer interest regulation from prudential supervision. While one can say the results of what was chosen have been far from happy, the direction in which we are now moving is tightening rather than loosening the connection.

A second Bill to be brought before the Oireachtas this autumn will enhance the powers and functions of the restructured Central Bank. These powers deal with the prudential supervision of individual financial institutions, the conduct of business, including the protection of consumer interest, and the overall stability of the financial system. A third Bill will consolidate the existing statutory arrangements for the Central Bank and financial regulation in the State. This legislative programme is particularly demanding and complex but is also essential. A sound financial regulatory regime is fundamental to a sustainable and dynamic financial services industry.

Prior to the financial crisis, there was a view that the structures and systems responsible for financial regulation were effective and appropriate. As we now know, that confidence was misplaced. The previous regulatory system failed to prevent what we now know to have been grossly excessive and irresponsible lending to the property sector. As a result, our most systemically important banks have had to be recapitalised, with the State acquiring a significant stake in each institution.

The financial system overall has been severely shaken and customers and households are managing unprecedented levels of debt. Nevertheless, I believe public confidence in the system of regulation put in place by the Government is growing day by day. However, wide-ranging reform is urgently required. We need a system where the overarching objective of the stability of the financial system informs directly the supervision of individual firms while at the same time safeguarding the interests of consumers and investors. The Central Bank Reform Bill 2010 delivers on that clear and simple objective. It is important it is enacted as soon as possible.

The ethical considerations in respect of rewards for the performance of individuals in the banks has been far from satisfactory. Some of those rewards have been excessive. They have shown a complete insensitivity to people in the more exposed parts of the economy. I am glad to say there has been some recognition in the recent past that certain arrangements, while legal, were definitely not appropriate.

The banks must realign their business practices with the needs of the modern economy. The third Mazars report on lending to small and medium-sized enterprises, SMEs, between October and December 2009 was published last week. The report showed that credit applications in number and value terms rose slightly in the last quarter of 2009 over the previous quarter, which is encouraging. The level of applications for credit appears to be stabilising and Mazars also reported a small improvement in the overall credit approval rate. However, the reduction in the stock of credit, as repayments exceed new credit, and in credit quality reported by the banks remains a concern for the Government. To address this concern, the Minister has directed that AIB and Bank of Ireland are to make available a minimum of €3 billion each for new or increased credit facilities, including working capital targeted at SMEs, in the real economy in each of the next two years. To ensure the proper management of these funds the two banks will be required to submit SME lending plans, both by geography and sector, for 2010 and 2011.

Mr. John Trethowan, our new credit reviewer, will be reviewing bank lending policies as part of his remit. The Credit Review Office, which Mr. Trethowan heads, is available to review banks' decisions to refuse credit to small and medium enterprises. It will provide an independent opinion of the banks' decisions on whether the credit should have been granted. SMEs can also seek a review of a decision to reduce or withdraw credit. In addition to dealing with individual cases, the credit review system will examine the credit policies and practices of the banks in respect of SMEs. This will help the Minister to decide what further action might be necessary to secure the flow of credit. The Minister intends to publish the analysis from the review process so the performance of the banks participating in NAMA will be clear to all.

I should add a comment on the farm sector, which is an important part of our economy. Last week, the Irish Farmers' Journal had a three-page report on the credit situation as it applies to farmers. My reading of that report was that the situation, while not completely satisfactory - and recognising that many people, and the supply industries, are in financial difficulties - was not an entirely black or bleak picture. It is not a subject on which I am receiving a lot of representations from farmer constituents.

The Government is conscious of the high value Irish people place on owning a home and of the huge efforts they make to secure and retain their home. From both an economic and social policy point of view, the Government is determined to assist home owners who are in difficulty with mortgage arrears.

There have been a number of developments relating to the Government's commitments in the renewed programme for Government dealing with protecting the family home and helping those in debt. In February, the Minister for Finance informed the Government of his proposals regarding expanding the membership of the interdepartmental mortgage arrears group, under the chairmanship of Mr. Hugh Cooney. The revamped mortgage arrears and personal debt group's terms of reference, which the Minister has approved, reflect the commitments made by the Government both in the renewed programme for Government and in subsequent Government decisions concerning the issues of mortgage arrears and personal debt.

The group has met on a number of occasions and will focus initially on bringing forward recommendations in dealing with mortgage arrears problems and will later address the personal debt issue. The group will report and make recommendations to the Minister on a rolling basis and will submit a final report to the Minister on the mortgage arrears issue by the end of June 2010.

The terms of reference of the mortgage arrears and personal debt group include a commitment to take account of the ESRI report on negative equity in the Irish housing market. All estimates of the extent of negative equity appear to be based on very general economic assumptions, but it is difficult to assess realistic price levels when property market activity remains low. Being in negative equity does not change the level of mortgage payments and the Financial Regulator has estimated that only a small proportion of borrowers with the covered institutions who are in negative equity are in arrears on their payments.

Senators will be familiar with the other supports available to protect homeowners who are in difficulty. In addition to the Financial Regulator's code on mortgage arrears, a number of additional support measures are in place. These include the mortgage interest subsidy scheme.

It cannot be denied that over the last 18 months, Ireland has faced extraordinary challenges. We are, however, facing these challenges head on. We have acknowledged the scale of our problems and we have taken the necessary actions to solve them. The banks have been forced to recognise their losses and this Government, on behalf of the taxpayer has committed the capital that will ensure we have a banking system to serve the needs of this economy as it recovers. The positive reaction of investors to Bank of Ireland's capital raising plans is a clear indication that we are on the right path, and I look forward to further positive developments in the coming months.

There are undoubtedly issues and controversies relating to the international banking system. That crisis has impacted greatly on the domestic one. For example, in the current British general election campaign, there is intense debate about some of those issues, which may have exacerbated the sub-prime mortgage situation. I recently received a visit from the Greek ambassador. In addition, we also have the whole issue of the concealment of the true state of the Greek national finances, which has had knock-on effects for all members of the euro zone. There are Members of this House who have significant knowledge and expertise not just in the area of national banking but also in international banking. Naturally enough I do not wish to hold them responsible for things of which they may only have a branch association, but it would be useful to have contributions to the debate from those quarters. A complaint was made to the European Commission regarding the ethics of some of the things we have put in place, like NAMA. In addition, the conduct of office holders in the other House has been an issue here. I hope that in the course of this and other debates, some of those issues, which I think are very important to this country, including the ethics of international banking and the response to some of the issues that have been raised in international debate, will be dealt with.

There is a debate on the degree of regulation that is appropriate in light of the experience we have had. There is also a debate around the issue of moral hazard, whereby if one has to bail out financial institutions is that not an incentive for them to behave irresponsibly in the future, with that implicit safety net. There is also the issue of what the banks and financial institutions should themselves contribute to the potential future costs of forced State rescue operations. All these issues need to be carefully considered. Clearly, the answers cannot just be national - they have to be international, otherwise one is creating competitive advantage in some countries rather than others. On many of these issues the western world has to move in convoy. Whether on this or another occasion, some of those issues are well worth debating as well as our own national domestic situation.