Friday, 17 October 2008
Seanad Eireann Debate
Senator Frances Fitzgerald: On a point of information, yesterday the Leader of the House said he would try to make arrangements for the Minister for Finance to take a question and answer session on this motion in the Seanad today, which this side of the House considers to be very important. The Leader said he would report back to the House on that and it was on that basis we agreed to the Order of Business yesterday. Has he organised for a question and answer session with the Minister in this House? As the Cathaoirleach knows, it is not possible, unfortunately, to amend this legislation in the Dáil or in the Seanad and we are merely debating and giving our point of view on it here today. We consider a question and answer session on this matter to be very important and the Leader said yesterday he would report back to us on whether the Minister would be joining us for such a session today.
An Cathaoirleach: I had hoped that would have been sorted with the leaders of the groups. The Senator made that request yesterday and the Leader replied to it on the Order of Business. I would say the Minister will reply to Members’ points at the end of the debate. I now call the Minister of State, Deputy Mansergh, to speak on the motion.
Senator Donie Cassidy: On a point of information, the Order of Business was not agreed to yesterday; there was a vote on an amendment to it. I said I would endeavour to do whatever I could in this respect and I am still doing that. That is the up-to-date position this morning, as I informed Senator Fitzgerald prior to the commencement of business.
Senator Liam Twomey: This is too major an issue for us to be standing over Standing Orders and what we have agreed in this House. This is a massive issue for the people of Ireland. We cannot get tied down in Standing Orders and the like — that is ridiculous.
Senator Paul Coghlan: With respect, I wish to ask the Cathaoirleach a question. In light of what the Leader said, could we note that he is endeavouring to do something and agree that he can interrupt proceedings?
An Cathaoirleach: That is a matter for the Leader. If the Leader wishes to come back into the House and make a statement on that, I will accept that, but I now call the Minister and apologise to him for the delay.
Minister of State at the Department of Finance (Deputy Martin Mansergh): As Senators will know, the Government took swift and decisive action on 30 September to ensure that confidence in the financial system in Ireland remains strong. In the time since that decision was taken it has become clear that Ireland is far from alone in what has become a worldwide turmoil. I was present last weekend at the joint IMF-World Bank meeting and heard at first-hand from various finance ministers and central bank governors just how serious the problems are in many other countries. The subsequent events on the financial markets have, unfortunately, proven the Government was dealing with an issue of a freeze in international credit markets, which has given rise to the need for urgent actions across the world and not least the recent declaration following the unique euro area meeting where, for the first time, the Heads of State and Government of the euro countries gathered in Paris last Sunday.
From the outset, I want to stress to Senators that the purpose of the guarantee scheme is to ensure that the public authorities, in particular the Minister for Finance and the regulatory authority, have the tools to ensure that the risk that the State has taken on from providing the guarantee is mitigated and the interests of the taxpayer are protected. Under the strict terms and conditions of the guarantee, the institutions benefiting from it are subject to a range of detailed requirements intended to ensure that following the expiry of the guarantee period in two years’ time, the banking system in Ireland is well positioned to secure its long-term sustainability and viability.
In taking stock of developments in the past few weeks, notwithstanding the rapid pace of developments, one thing is clear. The Government’s guarantee has allowed our banking system to access the liquidity that it needs to support the critical function that finance serves in our economy. It is important to be very clear on this point; this measure is not a bail-out for the banks. Rather it was a strong and decisive action to ensure our financial infrastructure — a core element of the functioning of our economy — was safeguarded.
This is the context for the broader decision that was taken and the introduction of the Credit Institutions (Financial Support) Act 2008. The Government has underpinned the legislation with this proposed scheme which was approved earlier this week by the European Commission. This scheme aims to safeguard the stability of the financial system and, in doing so, ensure the financial needs of the wider economy can continue to be met from banks in Ireland, notwithstanding the serious liquidity situation that persists worldwide. As we know, the turmoil in global financial markets can be traced back to 2007. Problems that were emerging in capital markets due to losses on securities linked to US sub-prime mortgages led to central banks across the world taking action.
In a little over a year since then, the interbank and wholesale funding market has deteriorated very significantly, giving rise to the need for international central banks, including the European Central Bank, to supply significant liquidity in place of market sources. As we have all seen, there have been a number of serious problems in banks. Indeed, in the past months the five biggest investment banks in New York, Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley, have ceased to exist. The international situation worsened in mid-September with the developments in the US. The international markets, which previously had been working, albeit at a reduced capacity, effectively ceased to operate. Banks that had been reluctant to lend to each other for any period were now reluctant to lend on the interbank market at all. This meant very limited interbank or international wholesale term funding was available for either Irish or international banks. Put simply, banks could not continue to function without this type of liquidity.
The European Commission has already approved the scheme under EU treaty state aid rules and has found that it avoided unnecessary distortions of competition in the Single Market. We want to secure the positive resolution required here today to bring the scheme into effect as quickly as possible thereafter. This is being taken simultaneously in the Dáil, and of course the Minister of Finance is in the other House at the moment. A positive resolution is very important to ensure there is legal certainty in relation to the guarantee which will help support confidence in the banking sector in Ireland. The key objectives of the scheme are to minimise the potential cost to taxpayers, to remunerate the State for the financial cost of the guarantee and to ensure compliance with its terms. I will now set out the main provisions of the scheme.
The scheme sets out strict terms and conditions on covered institutions to ensure the public interest is paramount, including in particular that the interests of taxpayers are protected and that the long-term sustainability and stability of the banking system is secured. A covered institution may join the scheme by accepting its terms, agreeing to pay the charge for the guarantee and giving an indemnity in favour of the State to ensure, as far as possible, the cost of any claim made under the guarantee is ultimately recouped from the institution.
Different terms and conditions can apply in an objective manner for different credit institutions in accordance with the individual circumstances that may arise. Also, the terms will be reviewed at least every six months to ensure the scheme is achieving its objectives.
Specific obligations under the scheme may be put in place to ring-fence appropriately the activities of any subsidiary from its parent to ensure the Government’s objectives under the legislation are met. A key consideration in designing the scheme was to ensure the State was compensated for the cost of providing the guarantee. This is achieved through an aggregate charge to the covered institutions of at least €1 billion in total over the two years of the scheme. This level reflects the estimated cost over ten years of the assumed increase in debt servicing costs for the Exchequer. In current severely dislocated market conditions, it has been accepted by the European Commission that it is very difficult to determine an appropriate market-based benchmark for the guarantee. This charge will be allocated to the individual covered institutions participating in the scheme by reference to such factors as the risk profile of each institution. Provision is also made for a review mechanism for the charge.
The scheme provides that the Minister for Finance will report to the Joint Committee on Finance and the Public Service every six months on the level of charges received and the compliance with the terms and conditions of the scheme. There are extensive provisions in the scheme regarding information and monitoring. In the first instance, the Financial Regulator on behalf of the Minister will monitor compliance with its terms and objectives. In this regard, covered institutions are required to submit reports on such matters as liquidity and capital ratios at the request of the Financial Regulator on the Minister’s behalf. The Financial Regulator will in turn provide reports to the Minister.
In terms of adherence to consumer protection rules as highlighted by Deputies in the course of the debate on the Bill, the scheme provides that each institution must adhere to the Irish Banking Federation code of practice on mortgage arrears and the Financial Regulator’s consumer protection code.
There are detailed provisions in the scheme concerning compliance certificates, other reports from the institutions and provisions allowing for the disclosure of information between the regulatory authorities. Furthermore, the scheme allows the Minster to require covered institutions to develop a code of practice for effective risk management in furtherance of its objectives, in consultation with the Financial Regulator.
To protect further the public interest, the scheme provides that a covered institution may be required to appoint up to two non-executive directors to its board from an approved panel during the period of the guarantee. The Minister also has the right to appoint observers to the remuneration, audit, credit and risk committees of the covered institutions. The power is also available under the scheme to direct covered institutions to take certain steps to restructure their executive management responsibilities, strengthen their management capacity and improve their corporate governance. These powers are supplemented by important enforcement provisions.
A key element of the scheme is the right to regulate the commercial conduct and competitive behaviour of covered institutions to achieve its objectives. For instance, the scheme prohibits an institution from acquiring shares without prior approval in any other financial institution or any new business where such action would increase the Exchequer’s exposure under the guarantee. Also, the Central Bank and the Financial Regulator, after consulting the Minister, may require an institution to conduct its affairs in a manner that reduces the risk to the Exchequer under the guarantee. For instance, the institution may be required to manage its balance sheet appropriately in accordance with the purposes of the Act and improve capital ratios. Targets on assets and liabilities may also be set by the Financial Regulator. The regulator may also require an institution to limit exposure to any sector or customer in the interests of confidence in the banking system. Furthermore, the scheme allows the Minister to make rules regarding the payment of dividends to maintain capital ratios.
Under the scheme, the Irish Banking Federation, on behalf of all covered institutions, will submit a bi-annual report to the Minister on corporate social responsibility targets, including targets on the delivery of the promotion of financial inclusion. The scheme sets out specific controls and oversight mechanisms on executive remuneration. In future, bonuses will be linked to reductions in guarantee charges, reduction in excessive risk taking and encouraging the long term sustainability of the covered institution. Each institution is required under the scheme to prepare a plan to structure remuneration packages to take account of these objectives. The Minister will establish an independent committee to oversee all remuneration plans of the covered institutions and this committee will report to him.
The Minister can ask for such plans to be amended to ensure compliance if necessary. The operation of the scheme and the compliance of the institutions will be subject to close ongoing monitoring by the Governor of the Central Bank and the chief executive of the Financial Regulator who will report regularly to the Minister.
During the period of the guarantee, the Financial Regulator will continue to intensify its on-site and off-site supervision of credit institutions. This will build on revised capital and liquidity measures introduced by the Financial Regulator in the past two years. In addition, the Financial Regulator will apply any revised standards to emerge from the work being undertaken as part of the roadmap for regulatory reform at EU level.
The scheme strongly underpins the purpose of the legislation and the guarantee arrangements put in place since 30 September 2008 and subsequently extended. It aims to maintain financial stability and the long-term sustainability of the Irish banking system and hence the wider economy. The international financial situation remains uncertain and subject to swift and unpredictable changes in sentiment. However, all savings and deposits are fully safe and secure, due in no small part to the Government’s prompt actions.
With the putting in place of this guarantee scheme, the Minister has taken on the responsibility of protecting the taxpayers’ new interest in the financial institutions. I trust we will all continue to play our part fully in the public interest.
The scheme takes account of the debates which took place in both Houses on the legislation. In reply to criticisms that the scheme is insufficiently stringent, a balance has had to be struck between protecting the interests of the State and the taxpayer and securing the co-operation and confidence of the financial institutions even if on a sometimes reluctant basis. I commend the scheme to the House.
Senator Liam Twomey: We should have a more open debate on this issue and some form of question and answer session in the House. This issue has been discussed in both Houses as well as privately among ourselves. Many Members of this House are not experts on financial issues and even those who are experts are not quite sure where this is going. Even since this scheme was announced a couple of weeks ago, the situation has changed quite radically. Members of this House, who are more expert in regard to economic issues, have interesting and valid opinions, so we should have a two-way debate rather than statements whereby Members cannot contribute again once they have made their contribution, even though they may have a lot more to add. Perhaps we should consider returning to this issue every six weeks rather than every six months.
Every Member of the House would agree it is very important we keep the banks working. If we wish to do that, we are very much forced into supporting this scheme, whether or not we are critical of it. Our hand is being forced to some degree. The Minister of State said the regulator may require an institution to limit exposure to any sector or individual in the interests of confidence in the banking system. The Minister for Finance and other Members of this House would not like to see any Irish banks go down but we have no idea of the level of bad debts in the banking system. Could we drag down good and solid banks, which are experiencing a bit of difficulty now, by taking a blanket approach and saving everybody? We have no idea how bad things are. This huge uncertainty and the lack of information are the reasons there is such a flight of capital from Irish bank stocks. If the Houses had an open debate, perhaps we could see whether we can save all the Irish banks, whether we can sort out the issue of liquidity and whether the issue of capitalisation needs to be considered seriously.
Until now the Minister has stated there is no problem with capitalisation. However, I believe every dog in the street knows there is a need to deal with the issue of capitalisation of the Irish banking system. If it becomes an issue after pretending it is not one, it will add to the uncertainly among the public. Members of the Houses are paying attention to what is happening but many members of the public are not and when they see that the scheme, which the Minister announced a couple of weeks ago and which was almost to the fore of what was happening internationally, is now almost lagging behind what is happening internationally and the Irish stock market almost crashed twice, they will become fearful. That will have a knock-on effect on the economy. There is scope to be a little more open-minded.
There is also a concern that people may feel there are shades of the beef tribunal in this. This scheme will bail out some very wealthy people. We must ensure we get the public on side in regard to this issue. The public has seen what happened with previous bail-outs where the taxpayer paid substantial amounts of money and the individuals who were bailed out became billionaires after their businesses were saved by the taxpayer. The taxpayer does not get the same benefit.
There is a sense that we are taking from the needy to give to the greedy and that the Government is somewhat compliant in what is happening. The Minister of State does not want to say too much but he knows the Government, the developers, the banks and being greedy have got us into this mess. He is also fully aware that the people who are supposed to get us out of this mess, namely, that same Government, the Financial Regulator and the governor of the Central Bank, were asleep on the job when this crisis was unfolding over recent months.
There is a need for better dialogue with Government and for an open debate in both Houses in order that we can discuss this very serious issue like grown-ups. We should address the issue of capitalisation. Perhaps we could set up a fund called “the Irish Government sovereign fund” if we need to capitalise the banks and that when this money is paid back by the banks, it could be given back to the people, whether by way of lower taxes or otherwise, to show appreciation of the role they played in getting us through this crisis.
Senator Liam Twomey: That is why we need a debate. I appreciate from where Senator Ross is coming. He has had some very good ideas in this regard and that is why there is a need for a two-way debate on this issue. To some degree, I believe we are being compelled to support this scheme to try to make it work for the Irish financial sector. However, I look forward to hearing other Senators’ views, as should the Minister of State. We should not all make a five or ten-minute contribution and then leave the House, because this issue is unfolding. The situation will change next week and the week after that. We may need to look at it differently week after week. The Government must be more open with Members of this House and the public which will pay for this fiasco, but that is not happening.
We cannot amend the scheme because if we try to make any changes to it, the Minister will have to go back to the EU and start again from scratch. I do not believe there is any inclination on the Government side to do that because they feel they have done its job so far. However, there is more to this crisis and the Minister should discuss that with us. We should also talk about how we ended up in this mess and what we are going to do about it.
The banks make excellent profits and they may well be down in the next couple of years, although not substantially. There is a need for the Minister to outline more clearly how he will ensure customers will not be fleeced with extra charges over the next few years to improve the profitability of the banks. The Minister must demonstrate that the banks will try and improve liquidity in the markets so that businesses can survive. It is very important that money gets into the marketplace. Risks must continue to be taken in this regard. If the banks stop supplying these moneys to the markets, we will be in an even greater crisis next year.
These are the matters that should form the basis of this discussion. I would prefer to see more of a debate in this House on this scheme rather than the type of statements we are having. I am looking forward to hearing the contributions of other Senators, particularly those of Senators with strong views that the scheme is a bad idea or who feel we should reject it. Their views should inform all our thinking. I do not think there is a person in the House or the country who has a full understanding of where the situation is headed.
We must acknowledge that we do not know where this will end or whether the crisis will worsen. We do not know whether one or perhaps two banks will fail or whether to expect mergers. We do not know what the impact of the situation will be on the international scene. We are playing by ear on this issue. We should look on it as the national crisis it has turned out to be and involve everybody in the decision making. The Minister should acknowledge others are playing a significant role in the situation and that the Government is not doing all the running. The Government got us into this and we are willing to try and get it out of it, but we need more discussion on it.
Senator John Hanafin: I welcome the Minister of State to the House. I am happy to support the credit institutions (financial support) scheme 2008 and propose its adoption. It was not the Government that got us into this difficulty. As a Member of the Opposition said yesterday, there is a global financial meltdown. This responsible and necessary motion is before us because there was a serious threat to the stability of the credit institutions in the State generally. The threat was so imminent that if the Minister did not provide the support, there would have been serious repercussions for one or more of our banks.
This motion is necessary to support the economy. It is easy to make a decision when there is no choice. The Minister made his decision quickly, took it on with gusto and made full provision for the Irish banking system. His action was copied quickly by Greece, Portugal, Denmark and Austria and applauded by the European Union. The action taken here strikes the right balance in terms of cost and State intervention. Whatever the cost to the State, it will be recouped. The decision also offers further facilities, as for example we had previously when we put a levy on the banks when the Insurance Corporation of Ireland was taken over. Therefore, if the €1 billion being proposed is insufficient, there is nothing to stop the State from saying it has not received sufficient recompense for its guarantee and it will impose a levy.
However, this is not the time to be looking for a pound of flesh but to ensure our banks are in a position to continue to trade and to trade correctly and deal with whatever difficulties exist within the financial sector and the debt bubble here. There are positive signs and it would be wrong not to mention these. Within the past few weeks, as inevitably with a recession, a number of events have occurred. One of these is the fall in the price of commodities. I am pleased the price of oil has fallen quite significantly as that will make a difference. The price of money has fallen too and that will make a difference. We will pay less for money next year. The 0.15% increase we will pay for giving this guarantee on the national debt will be offset and more by the 0.5% decrease in the ECB rate, allied to the fact we will get €1 billion back from the banks.
I suggest the Minister should consider using the €1 billion we intend to get back from the banks to purchase shares in the banks. This is a wonderful opportunity for that. It is as if having requested a blood transfusion, the person giving the transfusion is gaining from it. I have no doubt that in years to come the price Gordon Brown paid for RBS HBOS will be seen as very low and that vast profits will be made when the situation stabilises.
The credit institutions scheme follows the advice of the Central Bank and the Financial Regulator, who decided to guarantee the retail, wholesale, dated term debt, secured borrowings and interbank deposits of the six domestic credit institutions. The Government acted first and foremost in the interest of the stability of the economy and the long-term interest of the taxpayer. A secure and stable financial sector is essential for the economy and is in the best interest of the people. It is important to note that this guarantee is intended to secure the funding of these institutions. Equity investors will take first charge on the risk of any losses in them. As we speak, equity investors are down by up to 90% on their investment in the banks. This measure was taken as a response to the severe dislocation in the international credit markets which has impacted world wide. The banks are to pay €1 billion over a two-year period to get cover under the credit institutions scheme. This amount is approximately 10% of the annual profits of the Irish listed banks and less than 10% of the quoted value of those banks.
We did not arrive at the current situation overnight, but slowly. It began some years ago as a result of unregulated financial markets in the international marketplace. This has been the difficulty and is the reason the situation must be addressed. I am pleased to note the EU has endorsed calls for a financial overhaul. This has become an international imperative because so much money has been exposed to bad debt and there has been so much bad practice. We can go back to the days of Nick Leeson of Baring’s Bank when £800 million was lost in trading. The overseer of trading in that case was Nick Leeson himself. That case was followed by the case of John Rusnak in AllFirst, an AIB subsidiary in America. This was followed quite recently — the lesson was not learned — in Credit Generale in France, where £4.5 billion was lost as a result of unregulated trading in the commodity markets.
It is astonishing how financial institutions can watch over sums of money in transit with the help of the Garda and the Army but fail to watch over trades within the institutions themselves. On my way to Dublin I frequently see Securicor vans, with perhaps a few hundred thousand euro in them, escorted by Army guards in front and behind. At the same time, significant amounts in commodities can be traded in France without any checking of what is going on, thereby exposing all of us to enormous risk.
I am glad to note that in that most terrible of banking practices, sub-prime lending, the FBI is taking action to arrest and charge people for the mis-selling of those products. It is difficult to understand sub-prime lending. Basic reasoning would suggest that to offer people who have already defaulted on debt money at a higher interest rate is bad practice. If people did not pay their debts when rates were low, how can they be expected to repay debts at a higher rate? Sub-prime products were repackaged and resold. The equity received for the resold packages was, in a short space of time, pumped back into the marketplace, funding more less-secured mortgage lending. Without any responsibility for the package, it did not matter because one was selling it on to some other bank. Now the latest figures from the IMF are that sub-prime debt will reach €1 trillion. The sums are mind-boggling. What has this led to? The list of institutions that have failed or been bailed out as a result of this bad international banking practice includes Northern Rock, Bear Stearns, Merrill Lynch, AIG, Lehman Brothers, HBOS, Washington Mutual, Bradford and Bingley and Fortis and Wachovia. Institutions bought over include Royal Bank of Scotland, HBOS and Lloyds TSB. These are just the major institutions. Other failures include IndyMac, Lehman Brothers and Fannie Mae and Freddie Mac. It goes on and on. There are also the small institutions we do not hear about, which are continuing to fall daily. Yet not one Irish bank has fallen. That is a credit to the way in which Ireland and its economy are perceived. However, I have no doubt that if we still had the Irish punt, we would have been speculated against to such an extent that we would be like a cork in the ocean, bobbing around without support. It is by the grace of God that we are a member of the euro. Otherwise, like Iceland, we would have had no support. The value of Icelandic króna went from 120 to the euro to 360 to the euro over a short period of time. There was a run on food in the shops and one can only get goods and supplies into Iceland by paying cash. This was a leading first world country which is now in severe difficulty, with debts five times its GNP.
We now have the facility to put board members onto the boards of banks. I am pleased with that. I suggest that there are Members of this House — Members on the Independent benches who may not even support this amendment — who would be good sound people to sit on those boards. They have a strong, ethical view on how money should be managed. This would represent a direct link between the Oireachtas and the banks. I restate the call to use the €1 billion to recapitalise the banks and buy shares in them, which can only be worth more in the future.
I am pleased this motion is before us today because it represents some security for the future. However, in case we thought the worst was over, not only is there €1 trillion of debt in the sub-prime area, which could have knock-on effects as yet unimagined, but there is also credit insurance — insurance taken out against the loss of these mortgages, which may cause more institutions to go under. We are talking about significant amounts of money.
What do we need to do? We need to stop mortgage lending becoming a casino. Certainly that did not happen here, and it should not happen internationally ever again. Unfortunately, financial memories are short. It was Roosevelt who wanted to dispose of investment banks altogether for the damage they had done in 1929 by creating the speculative debt bubble. Bond ratings should be internationally overseen. There should be no sub-prime lending. It is not sub-prime but sub-prudent. Excess leverage, whereby banks are leveraged for up to 30 times their deposits, should be stopped. Conflicts of interest should be policed. Funds such as those we mentioned earlier with regard to Barings, Allfirst and Société Générale should be re-regulated. In fact, having regulated the Irish market and ensured the security of the Irish banks, we should now play a role in international security. We live in a global market and moneys can be transferred at the flick of a button. Somebody in America should not have control over how our economy fares without our having some say in the matter. We must have control over how we manage our economic affairs into the future.
Senator Shane Ross: I am sure Senator Norris will be pleased with the reference to Independent Members’ sitting on the boards of the banks, even though he is not here to hear it. No doubt someone will convey it to him in due course.
The speech made by the Minister of State confirmed some of the difficulties many of us have with this scheme. It is as difficult, as the Fine Gael Party has found, to oppose a scheme of this sort, as it is to oppose a rescue bid for the banks, because one may be easily portrayed as irresponsible when one does so. What the Minister of State said in the first part of his speech perpetuates the myth that has been part of the propaganda about this scheme, which is that Ireland is a victim of global turmoil in the international financial markets. That is absolutely true — every financial centre and sophisticated economy in the world is a victim of the financial turmoil — but let us not pretend that what is happening here has nothing to do with ourselves, our domestic policies, our own banks, our regulators and our Government, because it has. It is impossible to determine the proportions in which blame should be allocated but, undoubtedly, one of the main reasons we are in such a big mess today is reckless lending by the Irish banks to property developers with the connivance of the Government. The dogs in the street are barking about this, but it was not mentioned in the Minister of State’s speech. There are three parties to this. The global problem is one aspect; that is fine. However, the Government, the developers and the banks here were up to their necks in irresponsibility as well.
Senator Shane Ross: Lots and lots of tax breaks for property. That is where the connivance of the Government lies. These have been extended time and time again, giving developers a field day. Let us not pretend that is not the truth. Let us allocate the blame a bit here and a bit there, but let us not take the line that we are the victim of a global problem.
It is my contention that whatever the merits of the initial Bill, this scheme shows all the evidence of the Government’s rolling over in front of the banks and the Financial Regulator. I do not say that lightly. It was expected that the scheme would be radical and that it would change not only the way in which the banks operate but also their personnel. It was expected that the Government would have, on behalf of the taxpayer, a significant say in appointments to the banks. Speakers from the Government side of the House have pointed out, very weakly, that there will be up to two representatives on the boards of the covered institutions, by which I mean the ones that will buy into the guarantee. Two is the maximum number of representatives. It probably will be one, if the truth be known, because that is the way in which these things work, but it may be two. I do not know how big the boards of Bank of Ireland and AIB are, but there are about 15 members. Thus, the Government representatives, even if there are two, will be outnumbered by seven to one. They will not have an enormous say in what goes on. What is more, the Government will not nominate people to the boards of these banks. This is a comfortable little arrangement which shows all the signs of the bank lobby being victorious. What will happen? There will be a panel, which is the oldest political trick in the world. Anybody who reads the details of the scheme will recognise that the panel is not appointed by the Minister but approved by him. I do not know what that means. The scheme does not say from where it comes. When the panel is selected, who will choose the people in this kind of beauty parade for appointment to the boards? The individual banks will choose the people from that panel. I do not know how big the panel will be because conspicuously the Government does not give us that information.
We know, however, the same banks that have been selecting the members of their boards for years will now be able to omit people who the Government believes are suitable but whom they do not like. The people who are chosen to be put on the boards of these banks should not be people sympathetic to the banks but people who are truly independent and critical of them. That is not what we will get. No bank will select someone it knows will be critical of it. These people will be already approved by the Minister and they will sail on. This is a bit of a ready up and is not satisfactory. If the Minister were genuinely acting on behalf of the taxpayer he would have said he would appoint a specific person to each board. While that also has dangers, at least the banks would have board members they did not choose themselves.
Considerable fuss was made when the Minister for Finance said he would install people deep into the banks. Is the Minister putting members on the key committees, the remuneration committee, the credit committee and the audit committee? If Senators read the details of the scheme they will realise he is not. The Government is giving the impression it is doing so. The Minister is putting observers on these committees. They will sit there like stuffed dummies. We do not know whether they will be able to contribute or just watch what is happening. This is cosmetic.
In the United Kingdom where the British Government has taken equity — our Government will be forced to take equity sooner or later, irrespective of whether it likes it — it has put people directly on the boards and there have been resignations. How many resignations have there been here? Everybody in this House and outside knows the answer to that. It is quite staggering. The leaders of the two biggest banks in the country went cap in hand to the Minister on Monday 29 September, advising that they were all in desperate trouble and that Irish banking was a shambles. Instead of the Minister saying that those responsible would need to go, nothing of the sort has happened. He said the Government would guarantee their deposits and that there would be a bit of a payback. However, the bit of a payback is feeble. It is insufficient and it is not radical enough.
What about the costs which were mentioned on the other side of the House. There is a €1 billion cost over two years here of which we know. I will not argue the toss with the Minister of State over that, as I know it is only an estimate. It was picked out of the air, but is based on quite a complicated formula related to the extra borrowing. It may be wrong or it may be right, which would not be anybody’s fault. However, a principle is involved here. Who will pay the costs? The banks will. Everybody is asking whether they will pass on those costs to their customers, who are also taxpayers. The answer is that they will pass them on ruthlessly and with gay abandon. A clause, which is typical of this scheme, is being bandied about as if it is some defence. It states, “A covered institution shall not pass on the costs of the guarantee to its customers in an unwarranted manner.” That is their get out of jail card. An “unwarranted manner” means they can claim it is warranted and, therefore, will be passed on. Let us not believe it will not be passed on. It will.
I cannot understand the Fine Gael position on this scheme. I can understand its position in supporting the guarantee in the first place because of the emergency nature of it. I can understand why it wants to be portrayed as being responsible. However, all the vibes and words from Fine Gael on this are rightly critical. However, it agrees to the scheme. This scheme is a sell out. It is a victory for the banks and the Financial Regulator. It is not the type of scheme anybody in this House anticipated, talked about or demanded.
Who is to monitor the scheme? It will be monitored by the Governor of the Central Bank and the Financial Regulator. The Financial Regulator is the officeholder who has for so long presided over this shambles and has been so silent in the face of the dangers into which the property developers have put our economy. The proposed monitoring of this scheme is not adequate because of the historical record of those who have monitored matters in the past.
Senator Fiona O’Malley: I noted a wry smile on the face of the Minister of State when Senator Hanafin suggested that somebody from the Independent benches might take up a job on the bank’s boards. I find myself in considerable agreement with much of what Senator Ross has just said. We need to note there is a requirement on Government to help the financial institutions of the country for fundamental reasons. However, we need to be assured that this will change the practice in banks. The reservations Senator Ross has highlighted would make one think that perhaps we should be more vigorous.
Having listened to the speech of the Minister of State today and having read the resolution yesterday, I am concerned about some issues, one of which is that the Minister shall appoint observers to the various committees. Like Senator Ross I wonder about the status of these observers. We are interested in supporting the economy and are using the public’s money to do so. The quid pro quo is the appointment of people to the boards of the various banks to work, observe and look after the public interest. I would have concerns if the people on these committees are just observers. Is the Minister of State in a position to reassure us that whatever reservations the publicly appointed — if I may call them that — observers might have will be taken into consideration in reaching decisions?
Having listened to the Minister, Deputy Brian Lenihan, speak on the issue I realise there is a danger of a conflict arising when someone is appointed to a board. That person is no longer necessarily allowed to look after the interests of the public money — the purpose for which he or she was appointed — but must look after the shareholders’ interests. We are concerned about the public interest but, as soon as somebody is appointed to the board, they will no longer take account of it, which presents us with a dilemma. We must, therefore, move gingerly on this.
I also share the concern of Senator Ross about the banks being allowed to choose the appointees and I echo his call for two appointees to each board rather than one. Public money is being looked after and we must have a say in that. We have afforded banks an enormous security blanket and we must be recompensed for that. Perhaps the proposed panels should not be established because they do not offer the opportunity for people to pick and choose and to ensure it is not a banking insider. Scrutiny is needed. Will the appointees to these panels change banking practice? It must be accepted banking practice has put us in the position we are today. Whatever about international banking practice, Irish bankers were no different and that must be addressed.
We need to be conscious about how terrifying this scenario would be if Ireland was on its own and did not have the comfort of the European Union. We should remember that as we go through this difficult time economically. If Ireland was isolated and using its own currency, it would have gone down. Iceland is an example of what could have happened and, therefore, the comfort the EU provides to us must be recognised, particularly as we face the challenges associated with the Lisbon treaty.
I refer to the experience of the AIB bail-out in 1985. I share many other people’s thinking that the public interest was very badly served. It was always said banks would make money but that is not necessarily true nowadays. However, given the assistance provided by the State during this rocky period, it will not be long before they are profitable again. Rather than applying a charge for the State’s involvement in the banking sector, which will assist the banks and the wider economy, why does the Government not opt to take a percentage of their profits? Financial institutions will be restored to profitability. Would Ireland’s interests not be served by taking a percentage of profits rather than applying a charge? I expect the Government to always look after the national interest. Was this considered? If so, why was it rejected?
Like many people, I have experienced a steep learning curve regarding the financial world. I am beginning to wonder whether I know as much about credit default swops and so on as the people who oversaw them previously because there was not a great understanding of what they were about. We will all be more vigilant about these issues. It is difficult to know how to proceed but, despite the reservations and concerns of Members, we must work on this together and the national interest should always be served.
Senator Dominic Hannigan: I am glad the Minister of State is present because we have awaited this scheme for a while. However, the scheme and its clauses are disappointing. Like the previous speakers, I would like the board representation increased to a minimum of two people. The Labour Party believes they should be representative of the people who are bailing out the banks. We would like a taxpayer’s representative such as a member of the consumer’s association and a representative of the small business association to be appointed in order that their interests are well guarded and protected.
Insufficient reporting is being provided for in the scheme. We tabled an amendment to the legislation in this regard a few short weeks ago. The Houses of the Oireachtas should receive a monthly report and I ask the Minister of State to consider amending the frequency of reporting to a quarterly, if not monthly basis, because oversight of this regime is important.
With regard to commercial rates, the Minister for Finance stated the banks would pay for the guarantee provided but this is clearly not the case. He calculated the cost involved at 0.3% of the cost of servicing the national debt. What happens if an emergency budget is introduced in six months and increases the national debt? That would lead to an additional charge on the taxpayer. Will the banks be asked cover that? It does not appear so under this scheme. There is a danger the costs of the additional borrowing are not covered by the levy being applied to the banks and they should pay more. I am interested in Senator O’Malley’s call for a percentage of profits to be paid, which is almost the equivalent of taking equity or nationalisation. Perhaps taking shares in banks is an option but it is clear if they are to pay for a guarantee of this size, they should pay five or ten times the amount being sought. The Government parties are allowing their banking buddies to get away with it in the same week they levied charges on the poor and worried the elderly. Will the Minister of State consider this again?
No guarantees are provided regarding salaries. The Minister for Finance suggested earlier this week that he might examine a salary cap but that is not provided for in the scheme. I am surprised share options have not been ruled out, although that has happened elsewhere. During the debate on the legislation, reference was made to the dilemma that exists if bankers are allowed to retain share options. They have a one way bet because they know if the value of the shares in their banks increase, they can exercise their options and make a great deal of money and they do not care if the value decreases because we are guaranteeing their losses. I am worried, therefore, about the moral hazard that still exists because the Minister has not ruled out share options.
Earlier this week, the UK Government nationalised a number of banks. When the Swedish banks were in trouble in the 1980s, bankers were called in and senior management was cleared out. The Royal Bank of Scotland and HBOS were nationalised earlier this week and their chief executive officers and chairmen were called into Downing Street. They walked in with jobs and they walked out without them. It is a different story for our bankers. They walked into the Taoiseach’s office where they were given tea and sympathy and he might even have sung them a song but they walked out with their jobs intact. There was no accountability or responsibility. They have owned up to nothing and this must change. The scheme should make it clear the current way of managing banks is wrong. A number of the banks may have addressed this internally but heads should roll in a number of others and the Government’s scheme does not provide for this to happen.
Ireland is the only European country guaranteeing dated subordinated debt. I would like to know why this is being done because I am not satisfied this needs to happen. What is the Government’s motivation to include such debt in the guarantee? In general, a bank has two sources of funding — equity from shareholders and debts such as bonds or loans. The theory is that equity is slightly more risky and, therefore, a higher return is generated. Bonds provide banks with first call on a company. If a company runs out of money, bond holders get their money back whereas equity holders suffer. If a company makes money, the bond holders get the same amount as they would have otherwise, but equity holders stand to gain more. Subordinated debt is like a form of quasi-equity. It has a high rate of return, but low risks. If someone looking for a high return knows the Government is guaranteeing subordinated debt, he or she will be motivated to move money from, for example, equity or loans to it. Other countries are not guaranteeing subordinated debt.
I have three questions for the Minister of State. First, is he aware of whether there has been a flight of money into subordinated debt in the Dublin-Irish markets in recent weeks? Second, who is buying subordinated debt in the Dublin markets? Third, has the Government held discussions with individuals or institutions on the inclusion of dated subordinated debt in our guarantee? The reason the Government is including this measure is unclear. Why are we including this provision and are we serving the taxpayer?
Senator Jim Walsh: In July, I attended a gathering where a former senior bank executive painted a bleak picture of the overall banking situation. It set off alarm bells when he referred to the fact that the global climate had all of the ingredients present in 1929-33 during the Great Depression. Given what has unfolded, it was an insightful analysis. If this were known to someone formerly with the banks, the regulatory authorities and the Department of Finance must answer questions. It is a global rather than an Irish phenomenon. The former executive put it all down to leverage, which has afflicted Ireland in the same way as many countries.
The Chinese have a saying, “May you live in interesting times”. Anyone remotely connected with business, the economy or the Government would ask not to live in such interesting times in future. In late September, the Minister was justifiably complimented for taking a hands on role in a sure-footed way to meet the turmoil afflicting our and other financial institutions. His sensible approach in proposing the guarantee scheme restored confidence to the market during a time of serious challenges to the system. The situation has moved considerably since and other governments have pooled their expertise and resources to try to restore confidence. The EU and the US have been to the fore in this regard.
When we debated this issue some weeks ago, I mentioned a concern. While it is one thing to give a guarantee to domestic banking institutions, which are fundamental to the economy’s lifeblood, it is an entirely different thing to extend the guarantee to foreign-owned banks, which the EU has prompted us to do. We must recognise that it adds a risk of exposure. Murphy’s Law of what can go wrong, will go wrong applies to the global turmoil. One hopes that an element of confidence and improvement can be built into marketplaces, but we must recognise that the guarantee carries a risk. The scale has serious financial implications. If Murphy’s Law acts here as it did in Iceland, we could be retarded financially and economically for many decades. I am not a banking expert, but I believe this is a common sense business approach to the issue. We must rely on the Government’s expertise to ensure that the risks are managed in a way that will not lead to an unmanageable situation.
Other countries have tackled the problem by capitalising their banks, an issue that may need to be addressed in Ireland, probably sooner rather than later. Various advice has been given on how to see it done, but we need not look further than what Berkshire Hathaway Incorporated did through Warren Buffett. He came to the rescue of Goldman Sachs by placing $5 billion in preference shares and receiving a recoupment of 10% annually. He also struck a deal whereby he could inject a further $3 billion in shares by way of warrants during the next three or four years at a level set on current values. In the future, he will be able to buy ordinary shares at today’s prices instead of buying them now. If share prices have increased, he will make a handsome profit. If we or the State agencies must tackle the issue, this model should be recommended.
Regarding covered liability, we have agreed on retail and corporate deposits. My question on dated subordinated loans is the same as Senator Hannigan’s. Interbank deposits are of concern in that we may ultimately underwrite some of the foreign banks’ deposits. They have branches all over the world, only some of which will be guaranteed by the states in which they can be found. This situation must be policed to ensure there is no transference of problems into the banks’ Irish group companies. We are relying on the Central Bank and regulatory authorities. While this is not the time for recrimination, serious questions must be asked of them and international regulatory authorities. It might be prudent to conduct an independent analysis of the authorities’ strengths and weaknesses. We rely on them to ensure that structural defects are set right. If they fail to monitor the scheme properly, difficulties may arise.
Unless appointed directors have statutory executive input into operational matters, I am unsure as to how effective they will be regardless of their calibre. They must be present day to day to monitor and control so that, if there is a drift to our disadvantage, it can be detected early instead of relying on information provided at board meetings, by which point they may not be able to rectify the problem.
Senator Jim Walsh: I will conclude on the covered institution remuneration oversight committee. It is important the reporting to the Minister would be done more quickly than the three months mentioned here. We are giving the banks six months to come back to the body.
Where foreign banks are involved, does the scheme only cover the executives employed by the local group company in this country or does it go up the ranks to parent companies, which will often dictate policies for subsidiaries in this country? There is an issue if they are unaffected.
I have not noticed anything in the regulations for sanctions or penalties for both corporate non-compliance with the regulations or individual executive non-compliance, which could lead to cases where the guarantee is called and the indemnity from the bank is not sufficient to meet the guarantee. The State would be left suffering the consequences. Perhaps I have not picked it up but there should be some individual and corporate accountability and responsibility in this regard in the system. This could be pursued through the courts in the event of gross negligence or if the parties do not perform in the way they are obliged to under these regulations.
Senator Frances Fitzgerald: We have had a cosy cartel consisting of the Government, property developers and the banks in recent years which has led to a completely overheated property market. Many young couples and families are paying the price for this in negative equity. I have a concern with today’s motion that the public interest is not protected strongly enough in the detail of the legislation. I would like the Minister to address that and I will outline later my concerns on the matter.
As the debate has developed, what is most striking is that with every initiative taken — whether at government level in the United States, President Bush announcing an initiative, the world banks or the EU making statements — it seems it is never really the full solution and the problem continues. As we meet today, it is very clear the Minister will be back, this is not the end of the story and this is another part of an ongoing process.
Our world banking system has been seen to have feet of clay. Senator Fiona O’Malley made the point that we all assumed the people in it knew what they were doing but many serious mistakes have been made which have had a significant impact on individuals, small firms and families.
I say this as an observer of the stock exchanges only from watching television. I was in one exchange once watching the behaviour on the floor when economic times were easier and the crisis was not a concern. Even at that time, the behaviour on the floor of the stock exchange was frenzied and aggressive, and one must really ask the question whether this is the best we can do and the best way to regulate our world economies and stock markets. Are they really being run in the best possible way and is this kind of behaviour likely to lead to high quality financial decisions or world markets that will deliver the best for all our people and with all the needs we have in the world today? That is just an observation on how the business is done.
What we have learned during the course of this debate is that there are a range of questions we needed to ask about how the business was done and a range of mistakes were made. There was also a range of behaviour not in the interest of world economies, banks or individual consumers. That is the big problem which has emerged.
The Minister is coming to the House today with the scheme, which is extraordinary. The first few lines state that the Minister is making this scheme in the public interest because he is of the opinion that, “there is a serious threat to the stability of credit institutions in the State generally, or there would be such a threat if he did not provide the financial support”. We are in an extraordinarily difficult and demanding time and our economy, as well as the well-being of our people, is under serious threat because of the problem which the Government is trying to deal with.
There should be no mistake that Fine Gael will do what is best for the national interest. We have serious reservations about the motion today, and there is a democratic deficit in the way it is being dealt with. I understand the pressures of going to Europe to achieve the agreement to remove the uncertainty. Why could the motion not go before the Dáil and Seanad with the possibility of amendment? Why can the Ministers not listen to the points made in the Dáil and Seanad and incorporate them into a scheme before going to Europe? There must have been a window of opportunity to do this and I regret that is not being done.
Fine Gael will do the right thing to keep our economy moving. We must ensure credit is available for every man, woman and child. People may think the problem is very far away from them but every family and small and large business is affected. We must see that our banking system works effectively.
With regard to the democratic deficit, I regret we cannot put amendments to this legislation. It is a key point. There are a number of areas I would like the Minister of State to come back on. We are giving the Minister great power in this legislation and in many ways the legislation is asking us for an act of faith in how he will behave in affecting the banks’ behaviour. There are powers but very little detail on how they will be used and what precisely the Minister will expect from the various mechanisms within the Bill. Will the Minister of State outline the detail of that issue?
When he presented the legislation, the Minister indicated this is for this stage, which implied he may return with a more detailed scheme. I fully expect the Minister will have to return to both Houses in this respect. It looks in some ways as if he sees this as an initial scheme.
Questions have not been answered. I note that before an Oireachtas finance committee the other day, the Financial Regulator spoke about doing an audit when asked about the value of the loan book. Will the Minister provide some information on the audit and when he expects the result? It raises a question about the banks and the value of their loans. We know large loans were given assuming certain values and we know this has changed utterly. A question exists about that.
I will speak about the public interest, how it is protected in the legislation and the role of the independent directors. I refer to what the Minister of State indicated in his speech. This is the quandary I have in understanding how the public interest will be protected by these directors. Under company law, the director’s primary obligation is to shareholders. New legislation is necessary if the two directors to be appointed are to protect the public interest. I do not see how under present company law the directors can protect the public interest. I would like more information on that.
There is also an information and monitoring function indicated in the scheme. The Minister has today indicated that in the first instance, the Financial Regulator, on behalf of the Minister, will monitor compliance with the terms and objectives in the scheme. The Financial Regulator will in turn provide reports to the Minister, which sounds very weak. Given the lack of confidence many have had in the Financial Regulator and the lack of information over recent months and years, that seems a very weak provision for the information and monitoring aspect of the scheme.
Regarding consumer protection, it is stated that the scheme must provide that each institution shall adhere to the Irish Banking Federation code of practice. Is this the same code of practice on which we relied for the past number of years? Where did that get us? Or will the code of practice be updated and changed? I certainly hope so.
What power will the observers to the remuneration audit credit and risk committees of the covered institutions have? What power to implement change will the Minister have concerning their recommendations? It seems that we have gone for a weaker scheme than other countries and there are still significant issues about the solvency of the banks and their ability to commence giving credit again. Does the Minister of State believe this will happen as a result of the measures?
The Minister for Finance will return to the House. I would have preferred to have had a situation where Fine Gael and other parties might have put down amendments to the scheme. We would have come out with a stronger guarantee that would have been in the interests of the consumer and the taxpayer. I regret that we are not in a position to do that today.
Senator Dan Boyle: The uncertainty that has accompanied the global economy since we sat all night in this Chamber two weeks ago has not abated to any great extent. It could be argued that the uncertainty has moved away from the financial sector and into the global economy. That we have taken time to put together the scheme and that it is being discussed in both Houses of the Oireachtas should be of benefit as we try to tackle this problem, in the Irish economy at least.
Since we passed this legislation, the central principle of a guarantee has been adopted by the European Central Bank and the eurozone countries. Measures taken in other countries, such as that taken by the United States in passing legislation to purchase toxic debt, and the British Government’s approach to intervene directly in its national banks, do not appear to have had the necessary effect in terms of the strength of the financial institutions and stock exchanges. The British example, whereby one bank, the Royal Bank of Scotland, was recapitalised to the extent of £21 billion, gives the lie to the notion that our response should be immediate. Our response must be measured and taken on an institution by institution basis. This scheme is structured in such a way that we have not yet been called on to use the guarantee it affords. As and when we might be called upon to use it, the structures are in place to protect the interests of the Irish taxpayer.
Arguments have been made in respect of the actual cost of the scheme. Only €0.5 billion will accrue in each year to the State and people ask whether that is enough to meet the interests of the taxpayer. The Government and the Minister for Finance had to be conscious that our banks are dealing with a combination of factors concerning liquidity and, it must be admitted, solvency. The charge imposed must be measured in such a way that it does not affect either of those areas in the short term. I believe the balance is about right.
That said, I do not believe we should be talking merely about the two-year period of the legislation detailed in the scheme. As an Oireachtas, we should send out a clear signal that we expect those institutions to pay for a long time to come for the mess which they have got themselves into by fairly suspect practices. In the past I have called for a bank levy——
Senator Dan Boyle: ——which I believe should be restored. It is not something we can do in combination with the operation of this scheme because the scheme already contains a charge. We must look into the medium and long term so that the State can be recognised for the role it is playing in this instance.
The role of the two directors who will account for the public interest has also excited some comment. It is necessary that we have people involved and my preference would be that those people be directly appointed. A mechanism in this scheme allows for the financial institutions to choose from a panel. I have no doubt the panel as compiled will include people of the highest integrity and ability. It is an unfortunate arrangement, however, and perhaps it can be re-thought as the scheme evolves over the course of the two years. We may have genuflected too much in respect of the hurt feelings of the financial institutions concerned. As an Oireachtas we should be prepared to say that they must take or leave the proposals of the scheme.
I hope those who will be on that panel and appointed to the institutions concerned will be given every support from the Oireachtas in their important role. There is an expectation that their role has something to do with demanding heads inside the financial institutions and controlling pay. That is not the role of the State. Why have we not seen this attitude among those directly responsible, the shareholders? The actual value of many of the financial institutions has crumbled in a phenomenal way over the past year or so and yet we do not hear calls for emergency general meetings or for resignations from the people who own the companies. It is not our role to do that but, in the nature and content of this debate, we are sending out a clear message that we, as public representatives, do not have confidence in way many of those people have performed. I hope the passage of this scheme will send out a further message.
Ultimately, we should be aware that in availing of this scheme, the strongest protection measure for the Irish taxpayer is the reverse guarantee that the financial institutions must give. In availing of the guarantee to the extent that they do so, the banks must recoup the cost of that guarantee. That is qualitatively different from the approach followed in the United States and in the United Kingdom, where money has been, in the short term, poured down a black hole.
We may see further evolution of the scheme in the next two years and we might even adopt the approach that seems to have been so successful in Sweden. There the State intervened in the case of a number of banks and subsequently privatised them and made a huge profit on behalf of the Swedish taxpayers. We are not anywhere near that now because our public finances are in the state they are and to get into a recapitalisation situation we would have to borrow. In borrowing we would add to our current budget deficit and national debt and compromise our ability to borrow for other areas such as infrastructure and, unfortunately, meeting our current expenditure.
I believe, therefore, the approach which has been followed and largely accepted and adopted by many of our European Union fellow member states is essentially the correct one. I accept that reservations exist in terms of strengthening this scheme and I believe these are being heard and will be part of the evolution of the scheme on an ongoing basis. I also have a sense that it remains the concerted feeling of Members of both Houses that this scheme is necessary and that it is good. A message must go out that it is supported by the political system in order that we may face these extraordinary times in our financial services and in the economy.
The Government took a correct decision on 30 September when it solved the liquidity problem. It avoided the danger of running short of money during that week, a move that was well done, as was the speed at which this move took place, overnight and in the following few days. Within days, however, that action was no longer enough. Once the United Kingdom and other countries took their steps liquidity and cash were no longer the problem. Capital became and remains the problem and of course we have not solved it with this scheme.
Senator Fitzgerald said the Minister for Finance would return to the House and that this was only an initial scheme. Of course it is, because the marketplace will not accept merely a solution to the liquidity problem but requires the capital problem to be solved. During the past two weeks matters changed after the British Government put not only a guarantee but investment into its banks. This scheme is another guarantee that covers the liquidity problem, but capital is required. The Government must ultimately take equity in the banks. However, liquidity is no longer the problem. Capital is needed, which means the Government will be eventually forced to acquire equity in the banks. Should the scheme have provided for such a step? Given that the State will have to do so at some point, it should have intervened in the past two and a half weeks .
The question of where the State will get the money to buy equity in the banks is a matter for debate. A number of options are available, although none is attractive. Investors in the marketplace will answer the question because when they decide they are no longer satisfied, the issue will no longer be in our hands. Trust and confidence are needed in our banking institutions because without them we will all lose.
On the question of what went wrong in the banks, I understand the Financial Regulator was castigated at a recent meeting of the Joint Committee on Economic and Regulatory Affairs. To what extent was the regulator constrained by a lack of resources and management support or hostile lobbying on the part of the banks? An even more important question arises regarding an earlier checkpoint, as it were, namely, the non-executive directors of the banks. Where were they when they were needed in recent years? Their function is to oversee management strategy and policies and examine issues such as excessive leverage, disproportionate reliance on property related lending and the advancing of dangerous percentages of value. These practices do not appear to have been stopped. Some non-executive directors are long-serving and had ample access to comparisons with earlier years. They should have been alarmed by the changes taking place and risks being taken by the banks. We must ensure this failure is not repeated.
This morning, the values of Allied Irish Banks and Bank of Ireland are approximately 90% lower than 12 months ago and it is unlikely, given the current outlook, that a dividend will be paid to shareholders in the next two years. Those who argue the State should invest in the banks on the basis that they will make substantial profits are being optimistic. One should not be too confident in this regard.
The reason the State should take equity in banks is to protect our financial institutions and create public confidence. The large falls in the values of the banks will have major implications for future pensioners and pension funds because bank stocks are the largest holdings of many pension funds. Practically everyone who has a pension that is not guaranteed by the State will be affected. Even those with State guaranteed pensions must be asking questions.
Moreover, for many Irish citizens, mainly older people, the dividends paid out by Irish banks are an important part of income. Politically, this will be the next shoe to drop. We have not gone far enough to address the challenge we face. We must go much further to create confidence and trust in the banks, which will require changes in bank capital as well as liquidity.
On the night of 1-2 October I criticised the absence of adequate protection for taxpayers in the Credit Institutions (Financial Support) Bill 2008 and, as an Independent Senator, I believed it was my duty that night to vote against the Bill.
I am glad to have an opportunity to speak on the credit institutions (financial support) scheme 2008. This is an important scheme but, as with the legislation, it does not provide adequate safeguards for taxpayers. I remain concerned about the absence of these safeguards. During the debate on the Bill, the Minister, with great eloquence, assured Senators that the detail of the protections would be included in the scheme and that these protections would be adequate.
The terms of the scheme are inadequate for four reasons. First, as other Senators noted, the scheme does not provide a guarantee regarding State oversight and board representation. While the scheme provides that the State will have at least one and perhaps two directors on bank boards, the absence of a guarantee that two directors will be appointed makes it improbable that more than one director will be appointed.
It is also a matter of concern that persons appointed by the State to remuneration committees will have only observer status. The fine print of paragraph 32 on board representation states that the institution shall, at the direction of the Minister, take all reasonable steps to appoint at least one but no more than two non-executive directors from the Minister’s panel, about which others have expressed concern. I am concerned that the words “take all reasonable steps” ensure the banks are not obliged to appoint any non-executive directors from the panel. The wording leaves too much scope and leeway for banks to wriggle out of the terms of the scheme.
Second, we need a stronger guarantee that banks will not pay dividends. An update issued by NCB Stockbrokers on 8 October describes dividends as a thing of the past and states the company considers it “inconceivable that listed banks will pay cash dividends for the foreseeable future.” The scheme does not provide a sufficient guarantee that dividends will not be paid by banks availing of the terms of the scheme.
Third, I am concerned about the wording in paragraph 8 which states the Minister “may review” the scheme every six months. The wording should be prescriptive rather than facilitative by providing that the Minister “shall review” the scheme. Given that the scheme will run for only two years, at a minimum one would expect a review to be carried out every six months.
Fourth, directors’ pay was debated at length in the House on the night of 1 and 2 October and amendments were tabled on the issue. I am sorry a cap has not been imposed on directors’ pay, although I welcome the provision to establish an independent committee to review pay and all types of remuneration for directors. This rather open-ended approach to controlling directors’ pay should be replaced by a more prescriptive provision.
The scheme sets out criteria governing how the charge will be levied. I am glad to hear spokespersons on the Government side suggest a bank levy would be appropriate. The charge is not in the nature of a bank levy. In addition, the scheme does not provide a sufficient guarantee that banks will be charged at a sufficiently high rate to compensate taxpayers. I am concerned by the statement in the annex that funding costs of Government debt will soon increase as a result of the guarantee. Even those of us who do not have financial expertise will recognise that this is an inevitable consequence of the scheme. Alarm bells must ring because we do not know exactly how much the banks will have to pay, whereas we know the cost of servicing Government debt will increase.
As many speakers noted, the State will have to take equity in financial institutions because neither the legislation nor the scheme will resolve the capitalisation problem facing banks. We still do not know the true extent of banks’ liabilities. The banks claim the value of their assets exceeds the value of their liabilities by €80 billion and this, we are told, will act as a cushion or safety net. As I stated previously, however, we do not know on what this figure is based or if it has any reality given the current state of the property market.
Most of us assume the figures supplied by banks are open to question. We have been asked to take a great deal on trust but our trust has been severely undermined by what has occurred in recent weeks. Unfortunately, under this scheme we are being asked again to take a great deal on trust in terms of the overall solvency of the institutions taxpayers are being asked to guarantee and may yet be asked to bail out by investing substantial sums in them. More adequate safeguards are required.
Senator Larry Butler: I welcome the Minister of State to the House. As speakers noted, this is an important scheme which takes the first step. It is important to strike a balance to ensure the legislation is flexible and will allow the banking system to function. This is what the scheme achieves. As I indicated, however, it is only a first step.
Other countries, both in Europe and globally, adopted different approaches to addressing problems in their banking systems. The Irish approach is more cautious than those taken elsewhere. The Government examined the global position, which has not improved in recent weeks. Pumping money into the system does not necessarily solve problems in financial institutions. The marketplace is precarious because investors are involved and bank stocks are virtually on the floor.
Senator Larry Butler: Before we see the bottom the banks will have to come clean on their loan books and write down what is necessary for the markets to kick back into place again. That is the second stage of this process. This is what the Minister has done, and he has given himself leeway.
We need strong financial packages for small businesses, export businesses and industries that keep our employment and economy going. We have a foot in the door, and that will be an important part for us to play. We, in this House, must bear in mind that we have a responsibility to the ordinary taxpayer, but we also have a responsibility to ensure our banking system is solid and that we will deliver that, through our intervention.
It is also important to note additional resources are required for scrutiny in the banking system. If extra people need to be employed to scrutinise what is happening in the banks, the banks are the people who should pay for it. We must ensure that. Section 22, which contains the right to review the scheme and change the model every six months if necessary, is vitally important as it allows leeway within the scheme due to current and changing global climates within the global situation. The Bill also provides that each institution covered shall provide the regulatory authority on behalf of the Minister with a compliance certificate. The acquisition of a certificate to back up the system, and that we know about it on a regular basis, is key to the scheme.
The action that has been taken has improved liquidity in the system and it is no longer a problem. The main issue now is re-capitalisation of the banks. We must take steps to restructure their executive management and responsibilities and strengthen the management capacity of corporate governance. That is key. We must ensure the people who take the decision to grant loans in precarious circumstances are not allowed to do so in the future. We must be clear on that; to protect the taxpayer we must have solid investments. If one has good, solid investments, they will show a return. One can look at any of the main stocks today; the more precarious stocks are falling, but those such as CRH are still in a healthy situation. Good investment is essential.
I commend this package of measures to the House. The Minister and his staff have been working tirelessly on it and I congratulate them. We also have an opportunity in view of the situation in global and European markets. We are not totally alone in this situation. It will be very important over the next number of months to have a close working relationship with Europe regarding the banking system.
Senator Paschal Donohoe: I welcome the Minister of State to the House. I wish to comment on many of the earlier contributions from both sides of the House. There has been much discussion on capitalisation and re-capitalisation of the banks. I noticed a distressing and worrying trend. The idea is being created that re-capitalisation of Irish banks by the taxpayer is inevitable. Let us pause and consider what re-capitalisation actually means. It means the taxpayer’s money, which should be used for building hospitals, schools and roads, and putting gardaí on our streets, will be put into the equity of banks to prop up the financial system.
We may reach that point in the future, but Senators on both sides of the House, including — I am saddened to say — some Independent Senators and all on the Government side, say that re-capitalisation of Irish banks by the taxpayer is inevitable. Let us forget about the language of capitalisation and face the consequences of what it means. It means the money we need to look after our society and to invest in the productive capacity in our economy will be used to pay for the mistakes of an elite. I do not believe this should be inevitable and that we should rush into doing this. If events happen beyond our control, and we need to do it, I do not want a member of a board of a bank or a hedge fund manager to think that the Irish taxpayer and Government will rush to re-capitalise and bail out other people. As Members of the Oireachtas, we must pause and think about the consequences of the language we are using. I am saddened to hear many Senators think there is an inevitability about spending taxpayers money, not on hospitals and schools, but on looking after bankers.
I wish to focus on the failures and weaknesses that have that have resulted in this situation, and why Fine Gael will support this legislation. The Government claims the global financial crisis was responsible for the current situation. There is a global financial crisis that we are all part of but over the past ten years the Government has taken specific and conscious policy actions that have encouraged reckless behaviour by the banks.
There has also been a failure of leadership in the banks themselves. The non-executive directors and the directors of the banks have been silent about the mess they have created. Senator Boyle asked why the shareholders are not calling for resignations. Why are the executive or non-executive directors not calling for them? The reason is because all of these banks have invested in each other, and a cosy consensus has built up among them regarding how they should operate and what are acceptable standards of behaviour. My other colleagues have commented on the failure of regulation and the failure that has taken place on behalf of non-executive members who should be participating in these banks.
In the debate on the Bill earlier this month we were given a different explanation as to how banks would be charged for participation in this scheme. The consequence is that banks will be charged less to participate in this scheme than we were originally told.
One of the objectives of the Bill concerns the issue of liquidity. We should not continue to mix up liquidity with capitalisation; they are very different. An objective of the legislation should be to ensure that once banks return to the state to which we require they will lend again. We need to also know the quality and the quantity of their lending. There is no such provision in the legislation. It does provide for a clearly laid out reporting mechanism ensuring that we would know regularly, say, every week or every month, the level of credit within the Irish banks.
Senator Hannigan pointed to the fact that subordinate debt holders are now being included in the legislation. That is a major change to the legislation and its principles as we debated it when the Bill was before the House. Other people have commented on the fact that the banks will decide who will be appointed to their boards. At some future time I will attend a meeting in a community hall or school in my constituency and will have explain to people the reason they cannot get approval for a school building project. I will have to outline why State money may have to be invested at some point to deal with the issues under discussion, which I sincerely hope does not happen. However, as there will be no mandate to decide who should be appointed to the boards of the banks we may well look back on this debate and realise it was a grievous mistake that we did not take the opportunity presented by this legislation to address that.
I have a final observation to make on the general economic system and how we have got ourselves to this point. Up to now we believed that the way to run a national economy or a bank was to spread risk across as many people as possible. However, risk has been spread so widely and lightly that nobody understands the nature of it. The derivative market globally is worth $55 trillion, twice the value of the national income of the leading industrial nations. Therefore, we should not be merely talking about the regulation of these financial instruments but about how, in some cases, we can abolish them because their creation has brought us to the point that we have had to engage in this debate and put time, effort and taxpayer’s money into resolving it.
Senator Ann Ormonde: I welcome the Minister of State to the House. I also listened to earlier speakers. I will refer to the recapitalisation of the banks but will speak generally about the scheme and the current position. I acknowledge the swift response of the Government to intervene to protect our economy and the stability of our financial institutions. I also acknowledge we are the victims of the global financial problems.
However, I do not hold a torch for the banks under any circumstances. They have become arrogant and have lost my trust and that of the people of Ireland. I am concerned about how they can regain our trust. They lost our trust because they forgot the old fashioned ethos of looking after the small person, the ordinary depositor. They wanted to line the pockets of big investors. They forgot that Ireland is small and made up of mainly ordinary people and not the small percentage of big investors. The banks lost their way and until such time as they change their practice and quality of lending and think small again I will find it difficult to place my trust in them.
I wish to refer to the charge that will apply to the banks. It will be calculated each quarter and it will be €1 billion for the institutions covered by the scheme. I am concerned about a reference to the scheme by the Minister of State, namely, that the aim of it will be minimise the cost to the taxpayer. I do not like what that might imply. I would like the Minister of State to indicate what he means by minimising the cost. It suggests that some charge may be borne by the taxpayer. I want reassurance from him that the charge will not be passed on to the taxpayer. That is an important aspect of scheme.
Reference has been made to the regulatory authority and that the regulator did not do his work and was not regulating in the proper way. The role of the regulator has received a bad press. Hopefully the regulator’s role will change from hereon and that he will be able to monitor the functions of the banks in a more stringent way.
On the issue of representation on the boards of the banks, what is the composition of these boards? What will be the role of the non-executive directors who will be appointed through the panel referred to by the Minister of State? I hope they will not have a passive role. How will they report to the Minister? It is important to find out that information.
On the question of reviewing the charge, Senator Bacik referred to the phrase “may review the charge”. I do not like the word “may” because it leaves the issue wide open. The provision should be stricter than that. Provision should be made for constant reviews, monitoring and restructuring of ways of assessing the banks’ quality of lending, risk experience, funding costs and liquidity. Provision in these areas was not spelt out by the Minister of State. I would like him to respond on the points regarding the charge, the regulator, the representation on the banks’ boards and the role of their members, and to reassure us that the taxpayer will not have to carry any of that charge.
Senator David Norris: Like Senator Donohoe, I listened with great interest to what my colleagues said and in particular I was entertained when Senator Ross, who is a noted gadfly in this House, suggested that the recommendations from the Government side, that somebody should be placed on the board as a Government nominee, referred to me. It would be far more appropriate if it were Senator Ross, who has served on a large number of financial institutions and funds of various kinds. He has the experience and one hopes that he has guarded their moneys extremely well. Since he is the father of the House and has been here about three times as long as anybody else, I was a little surprised that he did not know that we do not refer to the fact that people are not physically in the Chamber in his pointed remark about my absence. I was doing my work in my office and I heard every word he said, much of which made sense.
That is the problem. There is no leadership, certainly no moral leadership. There was not any leadership here either because we did not take on the Americans. We were afraid of the impact. Nobody in the financial world and nobody with a foot in both camps was prepared to stand out against the appalling moral collapse in values in the United States when it embarked on kidnap, torture, the blitzkrieg of Iraq and all the rest of it. The bill for that is precisely the size of the hole in the banks, and that is a point well worth making.
There is no question of business ethics. All this talk about patriotism is nonsense. Banks and stock exchanges do not operate on the basis of ethics, rather on the grounds of profit. They do not even observe their own rules. I was a director of several companies. I did not get paid but the institutions were established as companies. On two occasions I stopped the operations of those companies for fear of reckless trading. Did the directors of these banks ever hear of the phrase “reckless trading”? Why are they not prosecuted? They obviously traded recklessly with their depositors’ and investors’ money and the future of this country. It is shameful that they are being allowed to continue in their positions. Seán Ó Faoláin, writing in the aftermath of the Civil War, said that when the dust had settled, nothing had changed and the old arses were back in the saddles. Nothing had changed, and that is exactly what has happened here. They are still there even though they traded recklessly which is, in fact, a criminal offence.
This affects not just Ireland, of course, but the whole financial world. We hear people such as the head of the IMF talking about a global financial meltdown. This is apocalyptic language and the situation is very serious. Bank shares are tumbling all the time. How many more mornings we can listen to announcements about 9% off one bank and 9% off another? They are going to be left with virtually nothing. These were the people who made obscene profits and now they are repossessing people’s homes. I hope the Minister of State will bear in mind what I said the other day, namely, that people who are being squeezed for their mortgages should be looked after. If we are rescuing the banks, the small people also should be rescued.
With regard to the objectives of the Bill, there has been some talk about liquidity, capitalisation and all this type of stuff. This is supposed to create confidence. It is supposed to be a guarantee. I am not a financial wizard and I know it depends on confidence but sometimes confidence can turn into a confidence trick. The exposure of the banks is rumoured to be €485 billion. The real gross national product of this country in the last figures issued by the Department of Finance was €158.86 billion. In other words we have issued a cheque for three times our GNP, and it could well bounce if called into play. That is the type of guarantee that cannot be sustained.
The Minister of State is laughing and I am glad he has something to laugh about. Perhaps it is delusional. One never quite knows because it is certain Ministers and the heads of financial institutions have been delusional before and we do not know the precise exposure of the banks. When I read the Bill last night, I thought that as I do not have the financial expertise of some of my colleagues, perhaps I was missing something. I could find very little in the way of specific detail. We were told, when we were looking at this situation earlier at the time of the crisis a week ago when Members were in the House overnight, that this was a facilitating Bill and the detail would come in this motion, but it has not. The explanatory memorandum is full of those exhortatory phrases such as “to the extent possible” and so on, but it does not give any specifics as far as I can see. One senior banker is quoted today in the newspapers as saying it is like going into a restaurant without knowing the prices.
With regard to the mechanism for rescuing the banks, the seven criteria listed in the Bill are very interesting. The Minister of State knows them, so I do not have to read them out. They include long-term credit rating, ability to reduce risk and to self-finance charges, etc. However, the weaker the banks, the higher the charges will be. That is rather strange. Joining this scheme is optional. If any of our big banks were properly capitalised and not in any danger, why would they join this scheme to bail out institutions that had been stupider and more profligate than they were? It will be interesting to see whether banks join the scheme because I can see disincentives in it.
One way or another, there is no doubt capitalism is in trouble. The Minister of State smiled there a while ago. I smile somewhat at the situation I mentioned and believe it should be questioned. However, I do not smile for the unfortunate citizens of this country who have been caught in this situation and for the weakest and most vulnerable who are the target of this Government. That may be seen very clearly not just in the removal of the medical card for the over 70s but in a most sinister fashion in the attempt to collapse into one controllable unit the five principal agencies that look after the weakest. Just today the Departments of Finance and Justice, Equality and Law reform have refused freedom of information requests about the exchanges between their two Departments on this issue.
I congratulate the Minister for Finance and the Government for taking bold and decisive action on 30 September. This move, while initially greeted with some concern, has since been emulated by countries around the world in one form or another. We gave the lead. While it would have been preferable to act in concert with our European Union counterparts, given the lack of a structure for so doing and in the face of serious concerns, we took the initiative and benefited from this foresight. The initial commitment has now been followed up with a scheme which incorporates many of the constructive suggestions made by Members of this and the other House in the past two weeks.
I will outline the clear necessity for the scheme before making a few reasonable suggestions for improving the transparency and accountability of it. The Government acted to protect the entire Irish economy. The collapse of a major bank would be catastrophic for our economy and would never have been allowed to happen by this Government. The early and decisive action by the Minister meant that the economy benefited from the stability and certainty provided by a clear guarantee that the Government would act, if necessary, to prevent the collapse of a major Irish bank. Had an Irish bank collapsed, the Government would have had to have intervened in any case and it benefited the entire economy to give such a commitment in clear terms in advance and before any potential problems materialised.
An estimated 60,000 people are employed by the financial institutions in Ireland. The two major retail banks, AIB and Bank of Ireland, employ approximately 30,000 staff between them. The collapse of one of these banks would not only have been catastrophic for the economy but would have resulted in devastating job losses. Putting the best face on it, there would have been a situation where some parts of the collapsed bank would have been taken over by another institution and perhaps some staff along with it. On the other hand, some collapses could result in further collateral damage in the form of job losses at the contracted suppliers of goods and services to the collapsing institution. The fact that this number of jobs are potentially at risk is, in itself, a compelling reason to act to secure the financial institutions.
As a nominee of the Irish Bank Officials Association in the Seanad, I am acutely aware of the contribution made by bank employees to the success of this sector which, despite the fall in share prices, still attracts huge foreign investment. AIB shares are €2.99 today from a high of €17.41, Bank of Ireland shares are €1.76 from a high of €12.81 in the good times and Anglo Irish Bank shares are €2.12 from a high of €13.02. That shows the difficulties that have arisen but they still attract huge foreign investment. It would be grossly unfair if ordinary bank employees, who have warned about the dangers inherent in departing from traditional banking practices by senior executives in recent times, were now to pay the price for these executives’ recklessness.
Addressing the detail of the scheme, I welcome that it requires participating institutions to appoint a nominee of the Minister to the board of management. As Senator Ross pointed out, more information is required about the candidates the Minister proposes to appoint to this panel of supervisors. I have a reasonable proposal that steps are taken, either by amending the scheme or in general banking legislation, to require banks to appoint representatives of ordinary bank employees to the boards of the major institutions. There should be worker participation on the boards of all these organisations. I am very surprised that is not the case. We need to introduce legislation and I would appreciate if the Minister provided for this.
Worker directors should be appointed to the boards of banks. That is a reasonable point of view. It would be worthwhile and would give staff security. As well as the other nominees provided for in the scheme, this would be an additional appointment, or appointments, to these institutions. ESB, CIE, Iarnród Éireann and RTE all have worker directors on their boards. Why do the banks not have them? One of the reasons the banks got into trouble was that they did not listen to the ordinary, hardworking and decent bank officials who have diligently worked on their behalf but who have not been empowered by being on the board of these banks.
I very much welcome that the scheme empowers the Minister to appoint persons to observe the remuneration, audit, credit and risk committees of the institutions involved. I would like the Minister to give further details on this clause as the supervision of risk management is crucial to securing value for money for the taxpayer.
On the selection of the candidates, I suggest the Minister advertises in next Sunday’s newspapers for suitable persons to apply. Let there be an open and transparent approach. I do not want to see another golden circle of people being appointed. Many people could be appointed by the Government and I suggest an open and transparent approach whereby applicants could apply within the next seven days to be considered as suitable appointees.
Very few people are neutral in this regard and the Minister will have difficulty getting people who are qualified but who do not have shares in banks or who are not involved in banks in some way or another. This would be a way to identify very fine people who are prepared to give their time and services to the Minister, the Government and the banks. This is a useful suggestion and I ask the Minister to consider this approach. If he does not advertise it, he could put it on his website that he is open to considering all names.
Senator Jerry Buttimer: Cuirim fáilte roimh an Aire Stáit. The past month has been an extraordinary culmination of bad practices and a political ideology and philosophy which has funnelled and promoted greed and which, in many ways, opens a new debate about the morality of Irish life.
I am not a millionaire, nor am I rich or poor. Like many of us here, I need a bank. The protection of the taxpayer must be of paramount importance, along with ensuring a properly functioning credit system to keep our economy going. Unlike any other party in the State, Fine Gael has always put people first and will continue to do so. The public interest must be served by the banks, although they have not done that in the past. They have not been accountable and have not treated people fairly but rather with contempt. As Senator Leyden said, it is not the ordinary members of staff in the banks, for whom I have much time, but the people who direct them from on high. They have promulgated activities which brought us to this point of financial instability.
We talk about the need for transparency and responsibility. Will we see an end to the reckless practices and irresponsible behaviour of the banks where people were pushing packages and measures in order to receive dividends and remuneration?
I support the call by Senator Fitzgerald and other Senators for a question and answer session. We have questions which have not been answered in the explanatory memorandum to the legislation or in the scheme itself. This morning Deputy Bruton spoke in the Dáil about enabling powers. How will the Minister for Finance use his powers? As many Senators said, this is the first step but what happens next?
I agree with Senator Butler that the banks have an obligation to come clean about their loan books and the level of bad debts and toxicity. They have breached trust. We are using taxpayers’ money here. As politicians we keep forgetting that taxpayers and citizens are people. They are not mythical but are real people who are being forced to pay out more as a consequence of the budget and 11 years of mismanagement.
We are bailing out the banks yet again. The Irish citizen is coming to the aid of the banks. I will put it more simply than Senator Paschal Donohoe. The few are the well-paid corporate Turks and the many are all of us who are not rich and who are just about surviving. We are being called in to make a leap of faith. We are making a leap of faith, as is the Minister of State, because we need the State to continue running. I know the ideology of the Minister of State is similar to that of many on this side of the House and that this is foreign to his way of thinking.
Corporate responsibility and morality must be brought back into society. It is against this background we have this motion before us. There have been no resignations from the banks, no apologies and no signs of contriteness. There has been nothing. They have not even accepted responsibility. A couple of weeks ago when the story first broke an e-mail was sent out on behalf of a certain bank as if it was business as normal. It is not and cannot ever be. We need to prevent the abuse that has taken place and safeguard taxpayers.
I wish to put some questions to the Minister of State. Who are the people who will be appointed to the proposed panel and from what sector will they come? Why have we not been given more information on this? How do we arrive at the cost to us, which seems low to me and others? I hope we will not have an old pals’ Act and a cosy cartel where the banks can appoint A, B and C and they will look after themselves. I agree with Senator Leyden. Perhaps we should consider having worker directors in banks, who will serve our interests.
We on this side of the House will always do what we believe is right for the people. It is the banks, however, who have got us into this chaos and who have put us at risk. We can blame outside forces and other events, but we have had 11 years of boom and bloom with a Government that has failed to put checks and balances in place. As a result, banks are now squeezing small enterprises and businesses, sole traders, small farmers and ordinary citizens with mortgage and business costs. We must never allow the banks hold the gun to the people’s heads again.
Minister of State at the Department of Finance (Deputy Martin Mansergh): I thank Senators for their thoughtful contributions. I thank the Fine Gael Party for its support for the scheme, even if expressed with some reservations.
Senator Frances Fitzgerald: On a point of order, may I interrupt the Minister of State? We asked that the Seanad be adjourned while the questioning is going on in the Dáil. The Leader is considering this.
Deputy Martin Mansergh: When I was a Member of the Seanad, I always considered it was an independent House. This motion is being taken in both Houses and we are permitted to complete the process here in parallel with that in the Dáil.
Senator Fitzgerald mentioned a democratic deficit. I wish to make two points in that regard. The contributions made by Members of both Houses on the Bill with regard to what the scheme should or should not contain have all been considered in the formulation of the scheme. The question was put in the Dáil as to whether the scheme would be open to amendment and a clear answer was given. The Fine Gael Party supported the legislation on that basis, perhaps reluctantly.
The scheme protects the public interest as a whole. We all know how vital confidence is in the banking system. By putting this scheme in place, we help to restore confidence in the banking sector here. Senator Leyden was right to point out that the banks do not simply comprise a few well remunerated directors. I do not have the exact figure, but there are at least 50,000 people working in the banks, among them a daughter of mine.
I support what Senator Buttimer said with regard to strengthening corporate responsibility and morality. I remember, going back to the 1980s, two interventions by the Government in the case of failing financial institutions. One concerned the collapse of the PMPA. This was, effectively, put into a form of administration which was funded by the insurance industry, not the public. My recollection is that this worked well. There was another rescue in 1985 of AIB in the case of the Insurance Corporation of Ireland. AIB was put back on its feet in double quick time, but there was a feeling that the terms were much too light. The scheme we have before us today is much more stringent.
Senator Fitzgerald spoke about collusion between banks and Government. It should be recalled that in the 1980s and into the 1990s there was collusion between banks and members of the public to defraud the rest of the public and the Revenue through particular schemes.
The principal feature of this scheme is the provision of a guarantee to covered institutions. This guarantee provides for a pricing mechanism to determine the economic charge for individual covered institutions by reference to their risk profile, the application of strict terms and conditions on covered institutions to ensure that the public interest is paramount and that neither the covered institutions concerned nor their shareholders will be unfairly advantaged from the receipt of financial support. That is important from the broader EU competition point of view.
The other main features of the scheme include a return to the Exchequer for the value of the financial support provided to the credit institutions consistent with the requirements of EU state aid and competition law; measures to ensure that any potential competitive distortion caused by financial support is minimised to the extent possible and that any advantage to an institution is offset by a cost to them; arrangements to advance the strategic change required in the Irish financial sector to secure long-term stability when financial support under the scheme is withdrawn on 29 September 2010; substantial additional oversight, scrutiny and control of the credit institutions while they are in receipt of financial support from the State, including the appointment of representatives to the boards of directors of those institutions in receipt of financial support; regular and detailed reporting to the Minister to ensure protection of the taxpayer and the realisation of the objectives of the scheme; strict controls on and oversight of the remuneration of executives and directors of the credit institutions in receipt of financial support; and a number of measures which promote higher standards of corporate social responsibility in the banking system overall. The implementation of the scheme will be subject to close ongoing monitoring by the regulatory authority on the Minister’s behalf. The scheme provides for the Minister to report to the Oireachtas on the scheme by way of quarterly reports to the Joint Committee on Finance and the Public Service.
I would like to deal with as many as possible of the issues raised by Senators. The issue of the quantification of bad debts was mentioned, and there was a question why there is no provision to ensure impaired assets are written down. The purpose of the scheme is to assist the covered institutions to access their required liquidity through the provision of a guarantee for certain covered liabilities of the covered institutions. In Europe there has been a move away from forcing immediate write-downs of assets in current distressed market conditions. On Wednesday it was agreed that across Europe accounting rules would be amended to allow financial institutions to reclassify certain instruments. This means they can move them from their trading books, where they must be marked at fair or current market values, to their banking books, where they can be reported at amortised cost. This means that any further falls in market prices would not have to be reported and any gains would be spread over the lifetimes of the assets.
A key obligation on covered institutions is that they actively manage their assets and liabilities to improve liquidity and solvency ratios over the period of the guarantee. This is a priority task imposed on all covered institutions and will be subject to direction by the regulatory authority and the governor. This will take time, and an important benefit of the guarantee is to ensure there is an opportunity for the institutions, their auditors and the Financial Regulator to assess the balance sheet as a whole while benefiting from the security of the guarantee and taking account of the change in economic and financial circumstances.
Many Senators raised the topic of recapitalisation of the banks, making different points on the subject. The guarantee has to date been successful in stabilising the position of the banking system in Ireland during an unprecedented period in international financial markets. The Irish scheme is firmly aligned with the main themes of the euro group plan, which contains an option to provide additional capital resources, where appropriate, to the banks. If it is the case that an assessment is made by a particular institution that higher capitalisation would be appropriate, the first step is for the institution itself to consider all possible options to meet this requirement. The purpose of this scheme is to provide for a guarantee to assist the covered institutions in accessing their required liquidity. Section 6(9) of the Act provides that the Minister can take shares in an institution to which financial support is provided, but it does not arise under the present scheme.
Senator Boyle, in moderate terms, and Senator Donohoe, in passionate terms, made a point which I think tends to be lost sight of in this debate, namely, that capitalisation by the State carries an opportunity cost. I do not think it is the business of the State, as was suggested in some contributions, to speculate on a rise in share value. That is not the purpose of the State’s intervention. The State’s purpose during this whole period has been to stabilise the banks so they can resume services to the public, including the small businesses, firms and people to which Senator Buttimer referred in his contribution. It is not about the State trying to make a buck out of the situation, although it is about its covering its costs. That point was well made.
An Cathaoirleach: I ask Members to refrain from talking in the House while the Minister of State is speaking. If there needs to be a meeting, it must be held outside. I apologise to the Minister of State.
Deputy Martin Mansergh: A point I heard made in Washington last week is that it is easy to put down all the difficulties to cynical, unscrupulous financial operators, or whatever words one wants to use. The aspect of social concern must also be recognised. People in different countries, including the United States and Ireland, were trying to make home ownership more accessible to as wide a number of people as possible. It is too simple to attribute the situation to weakness and wickedness in financial institutions. There was also a genuine social purpose there, even though, as we can see, there were excesses and things went wrong.
The question of dated subordinated debt was raised. There are two specific reasons for the recommendation that dated subordinated liabilities be included within the scope of the guarantee. First, the objective of the guarantee is to provide confidence among senior investors in the wholesale capital markets. In recent years, as a result of tightening credit spreads, traditional investors in senior unsecured debt have increased their exposure to non-deferrable dated subordinated debt — so-called lower tier 2 — in search of additional yield. Today the overlap in the investor base for both senior and lower tier 2 debt is extremely high. Therefore, it is crucial to the success of the guarantee that we include dated subordinated liabilities to preserve capital market access for Irish institutions into the future. Secondly, in an Irish context, lower tier 2 instruments are non-deferrable, and any non-payment of either principal or interest is defined as an event of default. This event of default would trigger claims across the Irish institutions of both senior and unsubordinated liabilities. The scheme does include specific provision requiring covered institutions to maintain their solvency ratio, which will prevent dated subordinated debt being raised to leverage lending unfairly.
It was suggested in the debate that the reporting provisions are weak. I do not agree. The reporting and information requirements of the scheme are powerful. They enable intensive scrutiny and the closest possible insight of the covered institutions’ activities. The rights available to the Minister and the Financial Regulator under the scheme and the wide range of controls and requirements that can be imposed on the covered institutions under it have been put in place to protect the public interest in a manner consistent with helping to secure the future of the banking system in view of the critical role of finance in supporting the real economy, risk-taking and major household financial institutions. The chief executive and chairman of each covered institution will be required to certify on a quarterly basis compliance with the scheme.
The question of individual and corporate responsibility was raised. The scheme is a contract between the Minister and the banks and it requires banks to continue to comply with all existing regulatory rules. General rules under company law and financial services legislation apply. Listening to Senator Ross it sounded as if he wished to establish something like a virtual state by financial dictatorship in this country. There was the sound of the metaphorical tumbrels in some of the other contributions. We need to focus on our priority which is the stabilisation of the institutions not for the benefit of people who sit on the boards but for the benefit of the real economy, output and jobs, and secondarily the tens of thousands of employees of these institutions. While reference may be made to other countries such as the UK or the United States, we must all operate in the specific culture of the country in which we live. The leverage of governments in the countries with the biggest financial centres may be somewhat different from the leverage we have in this country.
The question was asked whether directors appointed from the panel have a conflict of interest. They can voice the public interest at board meetings and can vote accordingly, taking account of commercial reality, and they are independent. It is not the Government’s purpose in this scheme for the State to interfere directly with the commercial decision-making role and responsibilities of the boards and executives of the banks. Rather we are putting in place a structure that ensures the assessment and commercial decision making of these institutions is at all times shaped by the broader public policy objectives underlying the scheme. In the scheme, a detailed overlay of strengthened corporate governance and reporting rules is being superimposed on what will be an intensified regulatory engagement.
The question about the costs of the scheme not being passed on in an unwarranted fashion was also raised. The cost of the charge to the institutions may not be passed on to ordinary customers under the scheme and that is the meaning and purpose to paragraph 44. The Minister for Finance has stated this unequivocally in the Dáil and Seanad in introducing the legislation and this remains the position. The Minister and the Financial Regulator will monitor increases in bank charges and in particular, under section 149 of the Consumer Credit Act 1995, the Financial Regulator must be notified of any charge imposed by a bank “in relation to the provision of any service to a customer or to a group of customers” and must also be notified of any proposal “to increase any charge which has been previously notified”. The notification to the Financial Regulator must be accompanied by a statement of commercial justification, including a detailed statement of cost and details of the estimated amount of additional income accruing from the proposal. The Financial Regulator can waive or reduce a fee notified to it under section 49. I believe Senator Leyden referred to the State issuing a cheque. No cheques have been issued by the Government. I hope no situation will arise to necessitate that happening.
Obviously many questions were based on how the scheme would work in practice. One can answer to a certain degree as to what the intentions and rules are. However, beyond that the proof of the pudding will be in the eating. Senator Ormonde referred to the point I made about the minimisation of cost to the taxpayer. She felt it could be interpreted as suggesting there would be no recouping of cost. As has been stated there will be an increase in the cost of borrowing to the State. The purpose of the charge is to offset fully the increased cost of borrowing. The guarantee will embrace all covered liabilities, which at the time of announcement of the guarantee were estimated to be €440 billion based on the end 2007 published figures of the original six institutions. The relevant figures for covered liabilities are now being updated for end of September in the context of the guarantee-charging model included in the draft scheme.
Deputy Martin Mansergh: As a fellow socialist I see considerable merit in the worker director model. However, the reality is that it has only been applied in the semi-State sector in this country. It is not being applied elsewhere in particular because it would deter inward investment. It is also the case that, should we say, the managerial classes in this country are of a somewhat conservative disposition and would not readily welcome it. A degree of pragmatism is required. I naturally look forward to Senator Ross either in this House or in his newspaper column telling us of his conversion to the system of worker directors.
Deputy Martin Mansergh: To introduce such changes a degree of consensus would be required among employers. If the Senator has any doubt about my view on this matter he is welcome to ask the employer organisations. They would be adamantly opposed to a system of worker directors. Inward investing companies and multinationals would also object. There is no culture of worker directors in the United States and they would be opposed to that.
The Minister has the right to appoint observers to observe the meetings of the remuneration, audit, credit and risk committees of the institutions covered by the scheme who may attend all meetings and have access to all relevant committee papers and information without prejudice to anything in the articles of association of the relevant institution. This will facilitate ensuring compliance with the remuneration, corporate governance and regulation of commercial conduct under the requirements of the scheme.
|Boyle, Dan.||Bradford, Paul.|
|Brady, Martin.||Burke, Paddy.|
|Butler, Larry.||Buttimer, Jerry.|
|Callely, Ivor.||Carty, John.|
|Cassidy, Donie.||Coghlan, Paul.|
|Corrigan, Maria.||Daly, Mark.|
|de Búrca, Déirdre.||Donohoe, Paschal.|
|Feeney, Geraldine.||Fitzgerald, Frances.|
|Hanafin, John.||Leyden, Terry.|
|Ó Domhnaill, Brian.||O’Brien, Francis.|
|O’Donovan, Denis.||O’Malley, Fiona.|
|O’Sullivan, Ned.||Ormonde, Ann.|
|Phelan, Kieran.||Regan, Eugene.|
|Twomey, Liam.||Walsh, Jim.|
|White, Mary M.||Wilson, Diarmuid.|
|Bacik, Ivana.||Hannigan, Dominic.|
|Norris, David.||Ross, Shane.|
|Last Updated: 06/09/2010 20:10:52||Page of 3|