Rónán Mullen (Independent)

This Bill offers the necessary framework to the regulatory authority to address and resolve the problems of financial institutions that find themselves in distress. As we reform and rebuild our supervisory structure it is important that the Central Bank, as the resolution authority, can avail of such resolution powers as will be regarded internationally as a prerequisite in the post financial crisis supervisory infrastructure.

The ad hoc approach to this crisis as it develops must be replaced by a more permanent and transparent mechanism for bank resolutions if it is to have an effect on the banking system and retain public confidence in the future. We are not the only country caught in the bind of having to bail out our financial sector to avoid wider economic collapse. Our nearest neighbour, the UK, was one of the first countries to experience the difficulties of distressed banks in the current crisis. However, it must be remembered that its banking fiasco cost 5.5% of GDP in recapitalisation and other measures while ours is costing significantly more.

It may be useful to remind ourselves why banks are such a crucial element in the health of a modern economy. Commercial banks play an important role in the financial system in the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialised financial services which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services have to make the overall economy more efficient. That their function is so important would, on its own, necessitate tight regulation but we know that banks are inclined to play fast and loose with investor cash in a drive to generate fast and massive profits.

In his book Open Dissent , Mike Soden looked at the culture of silent dissent in Irish corporate life and a situation where there is an unwillingness to speak openly about the effects of cronyism between developers, banks executives and the regulators. We now know that banks took huge risks by lending to a relatively small circle of developers with the effect that our banks grew rapidly on a lending spree, funded by foreign bondholder cash. In other to prevent such a cataclysm from engulfing us in the future we must resolve to drive through the necessary effective measures. I am impressed at the Minister of State's inclusion in the Bill of powerful tools to intervene where there is a problem. The tools to achieve the objectives are bridge banks, the ability to transfer assets and liabilities from failing banks, special management orders, modified liquidation process specific to credit institutions, the formulation of recovery and resolution plans and the establishment of new credit institutions resolution fund.

In addition to the power to intervene, we also need the will and the courage to intervene. It emerged recently that senior officials at the Department of Finance had decided to discard the counsel of more junior colleagues when they raised questions about 100% mortgages and other initiatives that put the property market into potential peril. The Irish Times obtained some papers, from speeches and Dáil Question Time, that show initial concerns expressed over certain mortgage practices. However, later versions of the papers show that the angle was changed by senior officials to give a more positive spin on the property market and to downplay a prediction that inflation would rise in 2006.

The Department of Finance also made public other papers under the Freedom of Information Act that shed light on the thorny subject of 100% mortgages. A September 2005 examination of this type of mortgage resulted in a prediction that they might have an inflationary effect but senior finance personnel overruled advice from the Department of the Environment, Community and Local Government about intervening in the situation. Can we be sure that in the future our regulatory and oversight authorities will not be in any way dissuaded or pressurised to avoid action against a rogue element in a large bank?

Section 8 sets out the conditions that must be fulfilled before the Central Bank can make an intervention in respect of a credit institution. It is the Central Bank, in the first instance, that will be required to form the opinion that intervention is required. This is an important change of focus from the existing Credit Institutions (Stabilisation) Act 2010. Under the latter the power of initiation rests largely with the Minister. That is justifiable in dealing with the current emergency and in the context of the large amount of financial support from the State to the Irish banking system.

In the permanent resolution regime that is provided for in the Bill, it is important to place the power of initiation to address a failing credit institution with the appropriate banking authority. However, the Bill provides that the Governor of the Central Bank will be obliged to consult the Minister in appropriate circumstances. This raises a key question regarding the fitness for purpose of the regulatory authorities. After all that has happened, it is worth remembering that the current crisis was born of a failure of the same regulator in whom the Minister now proposes to vest his power. The unhappy memory of the assurances by the former Financial Regulator, Mr. Neary, in late 2008 that the Irish banks were well capitalised and stable still looms large in the public mind. It is the failure of regulation that has been consistently the most troubling aspect of this crisis.

The Financial Regulator and Central Bank should have been more proactive at a much earlier stage in cooling the ardour of the property market. Even without the interest rate instrument, there were several things which could have been done, ranging from moral persuasion to insisting on prudent loan to income and loan to property price ratios, from raising risk ratings from property to insisting on more diversified loan books within the banks. Close relationships between regulator and banks - difficult to avoid in a small country - will have to be ended. Significant progress has been made on this front to date with the appointment and work of Mr. Elderfield, the new regulator.

The warnings were there before the start of the crisis. The Comptroller and Auditor General's report from 2008 was very critical of the Financial Regulator, stating that the regulator was 30% off target for its own stated inspection target of banks. According to the tables in the report in the same year, there were no unscheduled visits to the banks; in other words, spot-checks did not happen. This begs the question as to what might have been the case had we had the legislation in 2008 when the banking system was on the brink of collapse. The Nyberg report stated that the existence of a resolution regime in itself would not necessarily have been a panacea to avoid high fiscal cost to the State in the absence of burden sharing with creditors. We have not seen the anticipated progress on that front from Europe either.

I welcome the Bill and the fact that the regulator has increased staffing levels up to 520 this year, an increase of 160 on last year and a further 200 staff are expected during the next two years. I hope we are on our way to better times. Mr. Elderfield has stated that the problem at the heart of the crisis was the focus on principles based regulation which has become a code word for light touch regulation. The Central Bank Reform Act 2010 introduced much needed reforms in areas such as fitness and probity of senior staff in key positions in the bank.

I hope we can achieve a culture change both in the financial services industry and in the regulatory authorities. Without that culture change, geared towards serving customer needs and compliance with regulations, all the rules in the world will not prevent another crisis in our banks.