Brian Hayes (Dublin South West, Fine Gael)

I thank all Senators who contributed to the debate. There were at least 15 speakers which means at least 25% of the Seanad contributed, a significantly higher percentage than in the Dáil when the Bill was discussed some time ago. I congratulate my colleagues for the range of issues put on the record today.

There is a broad range of support for the resolution mechanism outlined in the Bill, largely because it has been the work of two Governments and has been in gestation for quite some time. It is fair to say that one of the great inadequacies of this crisis over the course of the past number of years, not just in Ireland but across Europe and elsewhere, has been the complete failure to put in place a banking resolution mechanism which deals with insolvent and defunct banks. It is easy to say that after the pony has bolted but as long as these provisions are not in place the risk to the financial system and ours banks is even greater. That has been reflected across the House in the contributions made.

I was very taken by some of the remarks. Senator Barrett spoke about the importance of having better trained bankers. There is a lot of common sense in that. We need to get between the jargon and what has happened historically over the course of the past number of years. Our banking system became totally dysfunctional. It was based on a model which was completely unsustainable, a point made by Senator Mooney. Anyone who questioned that was seen as some kind of pariah and going against the trend.

The Minister for Finance used the phrase "retrofit" in the other House. We need to retrofit the current financial system with the legislative means to ensure this crisis can never happen again. That means upping the entire regulatory and legislative code in place which can make a difference. We need to return to a traditional banking methodology.

When the banking recapitalisation scheme was first mooted in March this year it was put to me at the time by officials in the Department of Finance that banks can only lend on the basis of how much they have. Therefore, the more they have the more they can lend. Typically the rate of deposits to borrowings should be about 120%. In the Irish banking model that figure grew to 180%. Anyone looking at the balance sheets of our banks could see the recipe for disaster that emerged from 2008-11. The real problem emerged many years before when the credit sequence was allowed to get out of kilter.

There are very logical questions that flow from that. How was the situation allowed to exist in what were substantially publicly owned companies within the regulatory framework, the Central Bank and the political system? These are questions we will answer for quite some time.

We should return to a traditional banking model based on common sense and bankers knowing their communities, like the credit unions who know who and who not to lend to. That type of Colonel Mannering banking is based on people knowing what is going on. That did not happen in this country over the past ten years as communities and individuals were given an opportunity to take out 100% mortgages and the like. Senior bankers should know what is going on, understand what is happening in their communities, take responsibility for it and demand that local banks are engaged in communities. If we follow that model it will be successful in getting credit flowing again.

We have already put in place, through the credit institutions scheme legislation, the means through which the subordinated debt write-down could be obtained for the State. Even when the legislation was challenged it proved to be robust.

Senator Reilly and others said there has been no burden sharing to date. That is not the case. Significant burden sharing has taken place in regard to subordinated debt to the tune of over €5 billion.

One of the reasons the Troika has spoken so highly of the bank recapitalisation is because it has proven not to be as expensive as first envisaged in March. We only own 15% of Bank of Ireland and funds have come into it through the private market, which has been a huge confidence boost for the country. The full ECB exposure in this country has reduced over the course of the past number of months.

For the first time in eight months deposits have come back into the country after the enormous sums taken from our banks. We are in a better position in terms of bank recapitalisation and our banks are now in a better position than Swiss banks because they have become over capitalised. Arguably, that is the model which other European banks will have to follow if credibility is to be restored to the European banking system. In the decisions the Government has made on recapitalisation since March - I believe there is an appreciation of this - that model has been proved to be successful in attempting to regain confidence in the international markets. We should not underestimate that. I make those points merely by way of introductory remarks.

A range of issues were raised and we may have an opportunity on Committee Stage to return to them. The point was made, I think by Senator MacSharry, as to why we did not have a regulatory impact analysis and why it was not published. He is right to raise this matter. In the programme for Government a commitment was given that for all legislation there would be a regulatory impact analysis and that it would be published. That was not possible in this case, given the talks that were taking place between the Troika and the Government and the exacting timelines that were required in getting the legislation through. Senators will be aware that this is a condition of the Memorandum of Understanding. Commitments were entered into and the Government thought it prudent to keep to those commitments in the enactment of this legislation.

Senator MacSharry is right in saying the regulatory impact analysis did not occur. It will occur for all future legislation. In the case of the Construction Contracts Bill, which I have sponsored and which I hope will be before both Houses soon, we published the regulatory impact analysis over the summer, allowing for consultation. That is not to say that consultation has not happened with stakeholders throughout the financial industry on this Bill. It has.

Senator Michael D'Arcy mentioned the special liquidation procedure. An important aspect of a successful special resolution regime for banks is the facility to allow an institution to be wound up while minimising the impact on depositors, particularly those covered by the deposit protection scheme. The Bill provides for a modified liquidation procedure which requires the liquidator to prioritise insured depositors' access to their deposits over the usual objective of ensuring the best return to all creditors. The insured depositors may be paid by the deposit protection scheme or their deposits may be transferred to another institution. A liquidation committee will be established to monitor the liquidation process in achieving this prioritised objective. Once this objective has been achieved the liquidation will proceed as normal. The Bill puts a committee in place to look into this issue and to set out a scheme which will be followed.

Senator Barrett raised the question of large capital inflows. It is the job of the Central Bank to monitor such flows, having regard to its responsibility for overall financial stability within the economy. The Central Bank is now operating the monitor risks at a microprudential as well as a macroprudential level. I hope that reassures Senator Barrett that, were it to happen, a massive inflow into the Irish banking system would be highlighted by the Central Bank. There was a complete lacuna here in the past when very significant sums were coming into our banks. That issue is now covered. Given what has happened in the last few years, the Central Bank is well appointed to deal with this issue and to highlight it, if it were to emerge.

Senator Gilroy spoke about the resolution fund, and this was also referred to by a number of other Senators. The introduction of a bank levy is one of the objectives set out in the programme for Government. The Bill will provide for the introduction of a levy through the establishment of a resolution fund based on contributions from authorised credit institutions. However, it is important that the timing of the imposition of this cost on the financial sector and its potential impact on the financial position of authorised credit institutions be considered carefully and not rushed into, particularly given the difficulties still facing the overall sector. It is the Government's intention to move on this fund. It was flagged in the programme for Government.

Putting the fund in place will require temporary funding from the central funds of the State. A resolution fund will be set up initially with funds provided by the State. Senator Gilroy asked why the Irish fund required the consent of the Minister. It is because the funds come from the Minister and from the State. It is my understanding that this is not the case in the United Kingdom. The fund will be in place initially on a temporary basis until the levy is introduced. The money will come from central funds. When the levy is introduced the State will get its money back and the fund will be established on a more permanent basis. Central funds will he made available on a temporary basis. That is why the consent of the Minister is required. Under EU law, those funds cannot be provided by the Central Bank. They can only be provided through central funds.