Brian Hayes (Dublin South West, Fine Gael) | Oireachtas source

I thank the Acting Chairman for the opportunity to contribute to this debate. At the outset, I thank Senator Barrett for his publication and tabling of this Bill, as well as for the previous Private Members' Bills on which he has worked assiduously in this House. In the Department of Finance, we genuinely appreciate this because a parallel process is being worked on at present regarding many of the issues Senator Barrett has put forward in this Bill. I should also thank those who helped the Senator in working with this legislation. We are working on and are nearing completion of many of these issues. As other colleagues including Senator Quinn have noted, these are issues on which we must find agreement at a pan-European level, as is the case across ECOFIN and the G20. I reiterate that in the Department of Finance, we very much appreciate the work the Senator has put into this Bill. Moreover, the Department considers that there is nothing to prevent a teasing out of the issues he has raised by way of a parallel process with the Government as it works its way through these issues.

In preparation for the debate on this Bill, I counted seven or eight separate legislative items at a European level that are dealing with this issue of regulation. Senator Barrett is absolutely right that if one is to create confidence within the banking sector, one must ensure the regulatory environment, domestically, internationally and across the Eurosystem, is absolutely spot on. Second, the lessons that have been learned from this enormous crash must be learned by everyone. Moreover, this must lead, as I have noted previously in this Chamber, to an entire culture change within the banking sector in which it recognises prudential risk, the necessity for capital reserve ratios and what are the ingredients behind a good borrowing strategy, either commercially or within the broader society. Unfortunately, what happened throughout the past decade and a half was an appalling lack of risk assessment, whereby people put faith in this enormous bubble, which was created by a deficient policy-making arm of government - and the Oireachtas I hasten to add, I include everyone in that - but also by the failure to put in place a proper regulatory authority and environment. These are lessons from which we must learn and we must ensure the architecture is right in respect of the future of Irish and European-wide banking policy.

I wish to deal with the issue of Basel III, which really is at the heart of a new banking environment, because this has not happened in the past. The capital reserves banks are required to have are absolutely crucial. I know something about this as when we entered Government, as Senator Barrett would be aware, probably the first big decision we took as a Government pertained to bank capitalisation in March 2011. At that time, the issue really was how to make the banks look safe because the capital reserve ratios within them had been dramatically changed. I have regularly made the point that Irish banks now are better capitalised than are Swiss banks. There is no difficulty regarding the level of cash within the banks now and this point was made recently by the Irish Fiscal Advisory Council. I note also the council referred to this today before a committee of the House. What is required is a very strong capital reserve ratio within the banks, in order that they can then lend to the economy and get it working again through business lending, mortgage lending and everything else that is needed. All of this really is summed up by two initiatives that have been taken across Europe and which currently are live issues for the Irish Presidency. One is the capital requirements directive, CRD IV, and the second is the capital requirements regulation. This really is the European answer to the international problem of a lack of capital within the banks. This is a matter that currently is before the European Parliament and there is growing confidence that it will be over the line before the end of the Irish Presidency. Given the size of Ireland's diplomatic staff and the number of people who work within its Government when compared with larger Governments, it will be a very good achievement for the Irish Presidency if and when this issue is over the line.

This is an issue that has been raised by Senator Barrett in terms of capital ratios in sections 3 and 6. It is being dealt with and resolved. The way in which this will be transposed into Irish law as a result of the directive being in place will be significant in terms of how we address the issue.

Shadow banking arises, in effect, if one has a bank and products are being advanced through it using financial intermediaries. We must recognise that levels of risk attach to them which are not ordinarily attached to the banking sector. This is an issue Senator Barrett has raised in sections 4 and 21. It is essential that there is a co-ordinated approach to monitoring the activities of shadow banking entities. That was agreed by the G20 and at a European level. It is something that we are working on at a global level. Other speakers have outlined that the Irish banking sector will be greatly enhanced by having in place an EU-wide agreement on these matters because of the close connectivity within the banking sector. It is an international operation and therefore it is not just appropriate to have domestic law, one must have a pan-European approach. That is something that is currently being examined. Recent information from the European Commission leads us to believe that the legislative proposals on shadow banking will be published before the end of the Irish Presidency. We will have some role in terms of advancing the EU-wide legislative response to shadow banking, which is important as well.

On the application of capital ratios to the insurance sector, in section 5 Senator Barrett makes proposals in respect of non-bank financial entities. The Bill proposes to apply bank capital requirements to insurance firms engaged in high-risk activities. However, the regulation of insurance firms is already being discussed at European level under the Solvency II legislation which seeks to establish a risk-sensitive solvency regime that is more appropriate for the true risks of insurers. That is another element in the armoury of legislation that is currently being prepared.

On the prohibition of affiliate transactions proposed in section 7, an additional proposal in the Bill covers transactions such as the extension of loans to affiliates, including branches or subsidiaries, investments in securities, derivatives transactions and repurchase agreements. The intention is to prohibit credit institutions from engaging in these transactions with affiliates and subsidiaries. Transactions of this nature are interbank transactions typically completed on a cross-border level and regulated as such. Basel III, and now CRD 1V/CRR, provide for the regulation of these transactions. For that reason a domestic legislative initiative is unnecessary because it is already contained in the European-wide proposals. I fully appreciate the point made by Senator Barrett. However, it is already contained within the proposed armoury of legislation.

On the prohibition on Exchequer assistance in sections 8 and 9, Senator Barrett also sought to restrict the opportunities for the State to become involved in a crisis in a bank or in the banking system. Sections 8 and 9 in particular attempt to make provisions restricting this potential for banking crises to cost the State money. I do not need to tell Senator Barrett or other Senators that the way we recapitalise banks that have become bankrupt is a live issue in the context of the Heads of Government agreement across the European Union. Senator O'Brien made a point in that regard. We are examining how we separate out the clear intention of the sovereign debt from the banking debt. The policy instrument was not available to the Government at the time, and legacy issues prevail in respect of the issue and how it was handled.

Colleagues will be aware that by the middle of next year it is the intention of European authorities that the European Stability Mechanism, ESM, will be in place. That will be a crucially important part of the architecture in terms of standing behind the European banking system. Mr. Rehn describes this as the “big bazooka”. The “big bazooka” was not there for poor old Ireland in 2007 and 2008 but we very much hope that it will be able to help us deal with a number of issues that remain in terms of the banking sector. Again, there is a firm intention on the part of the European authorities to put in place the architecture which will help limit the amounts the sovereign will have to put into banks that get into difficulties in that regard.

Senator Barrett has referred throughout his proposals to the role the Central Bank would play in implementing and supervising the rules and regulations laid out in the provisions of the Bill. However, in that context it is important to consider the steps that have alreadybeen taken to ensure that the Central Bank can deal with the requirements. Colleagues will be aware that in 2010 the Central Bank Reform Act created a new single unitary body, which was not the case prior to that. It is accepted that the initiative has helped to provide an overarching supervisory role within the financial system. We have learned from that. There are more people employed in the Central Bank now. One of the old chestnuts to which Senator Barrett regularly refers is the quality and quantum of qualified people within the Central Bank who have the expertise in dealing with these matters. The situation now is entirely different to the one that pertained even five years ago. That is largely due to the legislation that was passed at the time and the significant supports that exist to make sure that the fitness and probity regime is currently being rolled out across the system.

The Central Bank (Supervision and Enforcement) Bill is currently going through the Houses. The Minister for Finance, Deputy Noonan, is taking Committee Stage today and I will take it tomorrow. Many of the objectives Senator Barrett has set out in the Bill in the area of Central Bank reform are either in place or will soon be in place when existing legislation is amended. The role of the Central Bank in assisting in the resolution of the financial crisis in Ireland as well as fulfilling its other statutory obligations led to significant change in the organisation. That has been reflected in recent years in terms of the change in culture, attitude and the significant bumping up of the regulatory and supervisory controls the Central Bank had to put in place to ensure that people were clearly aware of the new environment.

We welcome the publication of the Bill. It has set out a number of key issues on which the Government is currently working with other colleagues across Europe. Those issues must be resolved in a pan-European way to ensure that we have confidence in the new architecture behind the banking system. I very much hope that this might be a parallel process and that we would keep in contact with Senator Barrett and work with him on the legislative initiatives we propose or that will be transposed in Irish law as a result of the directives that will shortly be agreed at EU-wide level.

I am a long-standing believer in the principle that the Government is not the only fount of wisdom. I have learned that over many years in opposition.