Seanad debates
Thursday, 22 February 2018
Commencement Matters
Financial Services Regulation
10:30 am
Brian Ó Domhnaill (Fianna Fail)
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I welcome the Minister of State, Deputy D'Arcy. This Commencement debate relates to a call to consider separating the investment and retail, or customer-driven, arms of our banking model. Only full separation will constitute the safety valve required for the ordinary consumer and ordinary taxpayer in Ireland. As long as retail and investment banking continue in the same groups, the Government will never let the banks go bust and they will always rely on the too-big-to-fail mentality. That is exactly what happened here during the crisis in September 2008, when the Government bailed out the banks. The analogy given by the then Minister for Finance was that there would be no money in the ATMs if we did not do what he did. This goes back to the philosophy of the bank being too big to fail.
The bank lobby is desperate to suggest that the investment banking industry has, for all intents and purposes, disappeared. That is not the case. It is said large-scale investment banks do not exist now and will not exist in the future. This is coming from the new CEO of Morgan Stanley. The clear implication is one I do not buy for a second and that is why I am raising this matter today. As long as retail and investment banking are contained within the same groups, governments across the world, including in Ireland, will not let the banks go.
The universal banking model we have will always take on an increasing amount of debt and make ever more risky bets in the knowledge that the bailout will always come at the point of disaster. The only way to make our banks safe, or as safe as they can be, is to draw a full line in the sand separating investment banking and commercial banking. There should be different institutions with different owners and business models. This is the Glass–Steagall divide implemented in the United States after the Wall Street crash of 1929. It kept the American banking model safe for over 70 years until the Clinton Administration decided to deregulate extensively.That later led to the crash of 2008-09. Since deregulation occurred in the United States in the late 1990s, the world has lurched from one banking crisis to another. Obviously, the banking lobby will say otherwise. It is infiltrating every Department of Finance equivalent across the world. It is a very strong lobby and can only be tackled with serious political resolve. A recent report by the International Monetary Fund, IMF, showed that the world's largest banks still benefit from direct public subsidies to the tune of $590 billion because of their too-big-to-fail status. That is also occurring in Ireland. Ireland was the first European country to go where none had gone before under the European Central Bank, ECB, rules.
The lack of reform and the continued behaviour of our banks, which we will be discussing later in the House today, are unacceptable. Three recent reports - the Volcker report in the US, the Vickers report in the UK and the Liikanen report in Europe - referred to the need to segregate or separate retail and commercial banking from investment banking to protect ordinary consumers and savers. The ordinary pensioner or saver in Ireland puts his or her money into the bank in the hope that it will be safe. The Government regulates the banks. However, the investment arms of the banks are speculating on world markets and investing money in various jurisdictions and companies across security exchanges around the world. It is risky business. That is how they make their money. When one arm fails, the Government says that it is bailing out the pensioner on the high street, but that is not the case. It is bailing out the costs of the bank across its portfolio.
This is something bold which Ireland should embrace. The UK has done so and is moving towards it. We should do this and stand up to the banking lobby.
Michael D'Arcy (Wexford, Fine Gael)
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I thank the Senator for raising this issue. A secure and well-regulated financial sector is essential to the functioning of the economy and ensuring that consumers have confidence in the safety of the system and its ability to meet their needs. At the outset, it should be noted that Irish retail banks do not generally engage in significant volumes of high risk commercial activity, so providing for a separation between their commercial and retail activities would not significantly enhance the protections afforded to retail consumers.
In January 2014, the European Commission released its proposal on structural measures to improve the resilience of EU credit institutions, the so-called banking structural reform, which would have imposed new constraints on the structure of European banks and would have led to the reform advocated by Senator Ó Domhnaill. The proposal aimed at harmonising the different initiatives that had grown in Europe in the previous years. However, the Commission withdrew the proposal in October 2017 due to the lack of progress in the negotiation of the file after the Council agreed its position in 2015. The Commission also noted that the objectives pursued by the proposed rule have already been achieved by other regulations.
In the aftermath of the 2008 financial crisis, a significantly strengthened regulatory framework was put in place for the banking system. This EU-wide framework, known as banking union, was designed to protect consumers, in this case depositors, ensure banks are robust and able to withstand any future financial crises, prevent situations where taxpayers’ money is used to save failing banks, reduce market fragmentation by harmonising the financial sector rules, and strengthen financial stability in the euro area and in the EU as a whole. There are two key elements to banking union: enhanced capital requirements for banks and mechanisms for the resolution of insolvent banks that will protect retail customers against the effects of future bank failures.
The enhanced capital requirements that banks must meet are set out in the capital requirements directive IV, CRD IV, and the capital requirements regulation. These requirements are to ensure that banks can withstand future economic shocks, manage their risks prudently and continue to carry on their business as normal during economic downturns. The bank recovery and resolution directive, BRRD, was adopted in spring 2014 to provide authorities with comprehensive and effective arrangements to deal with failing banks at national level and co-operation arrangements to tackle cross-border banking failures. The directive requires banks to prepare recovery plans to overcome financial distress. It also grants national authorities powers to ensure an orderly resolution of failing banks. The directive includes rules to set up a national resolution fund that must be established by each EU country. All financial institutions have to contribute to these funds. Contributions are calculated on the basis of the institution’s size and risk profile.
In addition to the work on capital requirements and resolution, a deposit guarantee scheme is in place to protect depositors in the event of a bank failure. The Central Bank of Ireland is responsible for the operation of the Irish deposit guarantee scheme, DGS, which covers licensed credit institutions, including credit unions, operating in the State. The DGS covers deposits up to €100,000 per eligible depositor per credit institution. In November 2015, the Commission proposed to set up a European deposit insurance scheme, EDIS, for bank deposits in the euro area. The EDIS proposal builds on the system of national deposit guarantee schemes, which should lead to the protection of bank deposits being fully financed by EDIS. Discussions on this issue are ongoing.
I remind the Senator that it was the retail and commercial side of the banks that crashed here, not the investment side. Often people lump everything into the same pot but that is not correct. It was purely the retail and commercial part of banking that collapsed in Ireland and brought down our system. The investment banks have received no money from this jurisdiction. In addition, in the case of non-domestic banks that are operating in the international financial services area, where I have authority, no non-Irish bank received any money in the Irish banking crash.
Brian Ó Domhnaill (Fianna Fail)
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I accept the Minister of State's response but I disagree that there is no significant risk in terms of investment banking in the Irish economy. All the banks are engaged in investment activity and they were all engaged in that activity during the crash. They were exposed internationally. The contagion that started with Lehman Brothers in the US indirectly affected all the pillar banks in Ireland as well. It caused a run on the world's financial system. That affected property prices and in turn caused the collapse in the retail side here. It was all interlinked, whether we like to admit it or not.
Ireland is a small player in this regard but there is a need to pursue the Commission's proposals at European level. I fully agreed with those proposals but the banking lobby succeeded in changing the Commission's mind. The banking lobby is one of the greatest lobbies in the world, and it is no different in Europe. It probably has more power in Brussels than the average small country. I am not sure what the Irish Government's thinking is when the finance Ministers meet at EU level, but I believe we must consider this separation. I agree it was retail banking in Ireland but the collapse here in 2008 was linked to what happened in North Dakota and North Carolina. The entire system was interlinked. That it happened was not the fault of the ordinary pensioner or the guy who borrowed to buy a buy-to-let property. They were not the problem. It was due to the philosophy of the bank on going after huge bonuses and huge returns on both the investment and retail sides.
That is my argument. Banks will be bailed out in the future unless this is addressed now. When they are bailed out, there is no way one can ring-fence the money from the taxpayer for just the retail side. The bank might pretend that it is only using it for retail but it is a single organisation with one chief executive officer, CEO, and one organisational structure.
Michael D'Arcy (Wexford, Fine Gael)
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In November 2016, the Commission proposed a new package of banking reforms.They aimed to update and amend the capital requirement files and the Bank Recovery and Resolution Directive. The package is known as risk reduction measures. Negotiations are under way at Council with officials from the Department of Finance, assisted by colleagues from the Central Bank of Ireland attending the relevant working parties. We broadly welcome the risk reduction measures text as currently proposed by the Bulgarian Presidency and have been constructively engaging on the package at the Council working party. We have secured a commitment for a number of amendments to address specific Irish priorities. We anticipate this package will be agreed at Council during the Bulgarian Presidency.
I understand where the Senator is coming from and his concerns. If there is to be a bailout of an institution in future, it will come from moneys currently being collected via the reforms put in place since 2008. The bailing out of banks would occur with banks' own money, which is being collected from each sector. It will not come from the exchequer of any jurisdiction, including this one.