Joe O'Toole (Independent)

I thank the Minister of State for coming to the House. It is important that we continue to have these discussions on developments in the banking sector.

We should begin by defining what a bank is, as that would help us in the future. Having banks which were too big fail in the system is what led to the huge problems in the American economy. It was not stated in quite these terms in the Irish economy, but it led to the same outcome.

In Ireland banks stopped being banks some years ago; they became financial institutions which bought building societies, stock brokering firms and insurance companies. They were on all sides of the argument. The consequence was that the local bank stopped being the local bank; it became a provincial office for a business director in Dublin. They lost expertise. I used to say there was no one in Ireland who could remember how to build a railway; therefore, it did not come as a surprise we were not building them anymore. In the same way we have lost banking skills. The local bank manager in a small town knew the businessman who came into his or her office to seek a loan. He or she made an assessment of the risk and the value of the loan to the business. He or she made other assessments, including based on previous experience. He or she also knew if the person concerned had been doing business in another bank in the town because bank managers knew each other and shared information. That stopped happening. Bank managers were under pressure to lend as much money as possible and lost the discretionary power to make decisions which were all made at the level above them. Consequently, they did not do this anymore. Effectively, they stopped being bankers. We speak regularly about the importance of money being available for small and medium enterprises. Some money is available, but the banks are afraid to lend; they can no longer make these assessments.

In the last 20 years the banks have changed. Had we been faced by this difficulty 25 years ago ACC Bank and ICC Bank had a particular focus to deal with small and medium enterprises, make funds available to them, manage the risk, manage loans and shepherd them. There is a strong argument being made by the Labour Party for a bank to deal with entrepreneurship and the development of business. The arguments in favour of having such a bank are strong, but I do not like the idea of a new, separate bank; I would like the banks currently operating to have stand-alone operations for this part of their business.

Why do I think this? I go back to the small town and the role of the credit unions. Irish credit unions have shown the value of assessing sub-prime risk. Many commentators use the phrase "sub-prime risk" as if it was the worst thing in the world. There is nothing wrong with it if the risk is managed. If the local credit union tenders a loan to someone who failed to get one from the banks in order that he or she can put up new shelving and extend his or her shop, if the members of the credit committee pass the shop as they go to their meetings and see that the work has not been done, someone will lift the telephone to find out what is happening with the money. There was hands on management of the sub-prime risk. On the sub-prime risk that brought the American company down, it involved people of straw with no assets or income being signed up to pay $5,000 a year for 20 years; that instrument was then sold on for a percentage of the value and it was then sold on to someone else. Eventually the person facing the risk had nothing to do with the original product. Banks should be required to face a degree of the risk involved in any loans they make. They are required to manage, shepherd and guide them. That is hugely important.

The other practice that should be ruled out is that of Goldman Sachs, which took both sides of a risk. In other words, that organisation encouraged people to make chancy investments which it had been advised would fail. It drew people to part with their money and as soon as the investments were set up and sorted, another part of the operation on another side of a Chinese wall put money into betting that those operations would fail, which they did. Ultimately, Goldman Sachs took money from the failure and the people who bought in so ill-advisedly will continue to pay into negative equity for the rest of their lives, or for whatever number of years can be imagined.

That is how Goldman Sachs worked. To make matters worse, it did something it does all the time, namely, using the differences between regulations in different jurisdictions. The instrument I described was European but Goldman Sachs channelled and routed it through the United Kingdom. As the Minister of State will be aware, UK and Irish law puts great stress on caveat emptor, or buyer beware. If one buys into a dicey operation in this country, as was proved in a major court case some six months ago involving one of the big developers, it is judged that one should have assessed the risk. The law here says buyer beware and the consumer pays whereas in Europe there is much stronger support for the consumer. Goldman Sachs knew that and therefore channelled this operation through the UK.

We also must look for global regulation rather than having, for example, one system in the United States under the Securities and Exchange Commission, SEC, and another in the UK, under its most recent name, the Financial Services Authority, FSA. That last came about because three years ago Britain decided its method of regulation was not working and set up the FSA as a new approach. There are also the European conventions which have made great progress.

I shall give the Minister of State an example concerning the quality assurance of auditors. There has been a significant debate in banking circles during the past week on how one firm of auditors got a big job in Irish Nationwide although it had not spotted the problems in Anglo Irish. I shall not go into that matter now because I am somewhat conflicted on it, being a member of the Irish Auditing and Accounting Supervisory Authority. However, Europe passed a statutory directive on auditing three years ago, seeking quality assurance. There are 28 countries in the EU and only one has not signed up to that directive, namely, Ireland. We were brought to the European Court of Justice and found to be guilty, at fault, or whatever the word may be. There was a report over two columns in the business pages of The Irish Times last Friday week but nobody took any notice of it. This will cost us money but apart from that it is a worry to me that Ireland is not leading on this.

I welcome the new consultation document brought out by the Financial Regulator in recent days. That is hugely important. We should remember that although the focus is currently on auditing governance is the real issue.