I thank the committee for providing me with the opportunity to make this opening statement.
Chapter 6 of the Comptroller and Auditor General's 2009 report sets out an overview of the main measures implemented by the Government as part of its banking stabilisation strategy during 2008 and 2009 and the first half of 2010. In fact, it is probably the best summary document of all that has gone on. Rather than go through all of those measures again it may be more useful if I were to draw out some of the major themes and then provide some update on the principal developments since the Comptroller and Auditor General's report was compiled.
Given the very difficult situation of our banking system since 2008, banking system intervention has taken a number of forms, and has dealt with several separate but related issues. Basically, these all revolve around three basic facts, which are that to be viable a bank must have capital as a buffer against losses; it must have liquidity to provide the cash flow for its operations; and it must be able to retain the confidence of the market to be able to sustain its capital and liquidity positions.
Liquidity, which is a bank's cash flow requirement, was the target of the banking guarantees. Three key interventions took place in this regard. The first, in September 2008, was the extension of the retail level deposit guarantee scheme to deposits of up to €100,000. The second was the broad guarantee given at the end of September 2008, and translated into law in the following days through the credit institutions financial support scheme, to which we refer as the CIFS guarantee scheme. The third was the more differentiated eligible liabilities guarantee, ELG, scheme, which provides in effect an extension of the broader CIFS blanket guarantee and has replaced it. It also allows for the possibility of guarantees for longer dated securities. It is framed to be more flexible and to allow for the eventual phasing out of the guarantees.
The second key theme of the interventions dealt with capital and loss buffers. Most of the domestic banking system has required capital support from the Government, and discussions on this started towards the end of 2008. Since then, capital has been provided in different forms by State agencies to Bank of Ireland and AIB, first in the form of preference shares and more recently by taking a direct equity stake, particularly in Bank of Ireland. State capital assistance has also been required by EBS, and in very large amounts by Anglo Irish Bank and Irish Nationwide.
Naturally, the process of judging the capital requirements of the banks has been difficult because over the period market values for loans and their underlying securities have been falling and difficult to estimate. However, a major step was taken earlier this year when the Financial Regulator's first prudential capital assessment review, PCAR, exercise was carried out, identifying in considerable detail the level of capital required by institutions having regard to various stress tests, as well as the estimates at the time of likely losses on transfer to NAMA, and again more recently with the statement of the Minister for Finance on 30 September 2010.
The NAMA process, which kicked off in April of last year and was the subject of very significant debate in the Oireachtas, has been another key element. This process has helped to reduce bank risk, by taking more difficult loan portfolios off their books. It also forces the early recognition of loan losses to ensure the level of losses in these more difficult portfolios is driven out into a more transparent form. At the same time, it provides institutions with assets in a form which can be used to access liquidity. This loan loss recognition is a challenge because it means the banks have to absorb losses on their balance sheets and on their profit and loss sooner rather than later. This, in turn, has capital implications. The detailed information provided to the markets in the Minister's September statement is designed to demonstrate that the Government's strategy for ensuring the resolution of our banking problems is transparent and sound. We are recognising these enormous banking sector costs in this year's deficit, which is projected to spike at 32% in general Government balance terms. While the projected Government deficit of 32% of GDP includes once-off capital support of almost 20% of GDP, it is important to recognise that were it not for this spike we would broadly meet our budget targets for this year.
A greater level of certainty regarding the final NAMA discounts for each of the participating institutions has provided the detailed basis for concluding our assessment of the capital needs of the banking sector. An assessment by NAMA of the loan-by-loan valuations carried out in respect of the transfer of approximately €27 billion of land and development and related loans into NAMA, together with the comprehensive and detailed information now available to it on the remaining loan books, has allowed the agency to refine its estimates of the discounts on the remaining loans to a high degree of accuracy. These final estimates have in turn allowed the Central Bank to update its assessments of the capital position of all of the institutions participating in NAMA following the prudential capital assessment review earlier in the year and the EU-wide Committee of European Banking Supervisors stress testing exercise carried out in July.
The Government agreed a number of steps to provide certainty about the impact of NAMA transfers, including that all remaining NAMA transfers should be completed in one single tranche for each of the participating institutions and that the accelerated transfer of eligible loans would be completed by mid-October in respect of Anglo Irish Bank. In addition, the Government decided that where the total exposure of a debtor is below a €20 million threshold in Allied Irish Banks and Bank of Ireland, that debtor's loans will not now be transferred to NAMA. This is largely because the sheer volume of small loans would make the process more difficult to administer. The previous threshold had been set at €5 million. These changes will allow NAMA to operate to the highest level of efficiency and effectiveness in the management of its loan portfolio.
The Central Bank has carried out a detailed analysis of potential losses in Anglo Irish Bank in the coming years. Its examination has drawn on comprehensive information and analysis of the bank's non-NAMA loan book carried out both by the bank and its advisers and independent consultants in preparing its restructuring plan for the European Commission. Information has also been made available by NAMA from a review of the assets securing the loans in the bank's remaining NAMA tranches. This review has enabled NAMA to advise the Central Bank of the expected discount of 67% on the remaining €19 billion of the bank's loans that are due to be transferred. The Central Bank has therefore established as definitively as possible the level of capital required by the new structure, that is, an additional €6.4 billion in total capital. This additional capital requirement brings the projected total gross cost of the restructuring of Anglo Irish Bank to €29.3 billion. The capital will be provided by increasing the promissory note issued by the State and by appropriate burden sharing exclusively by holders of Anglo Irish Bank subordinated debt instruments.
The severe stress testing carried out by the Central Bank, including a 70% discount on the remainder of the bank's NAMA loans, has concluded that the stress case level of losses could potentially be €5 billion higher than the expected €29.3 billion. However, as a stress case, this indicates the upper boundary of the level of losses and does not represent the Central Bank's expectation of the likely outcome. The Government will capitalise the new structure to the expected requirement of €29.3 billion through the promissory note structure which extends the cost and the funding burden over a period in excess of a decade. The authorities will also press ahead with restructuring with a view to achieving the split of the bank early in 2011.
The Minister's statement also clarified the position regarding the Government's policy for achieving burden-sharing by holders of subordinated debt and the very different situation of senior debt obligations. As these matters can easily be misunderstood or misrepresented internationally, the committee will understand if I do not say much on this topic.
The commission of investigation into the banking sector has commenced its examination of matters relating to corporate governance and risk management in each of the banks covered by the Government's guarantee up to the date of the decision to nationalise Anglo Irish Bank on 15 January 2009. It is led by Mr. Peter Nyberg, former director general for financial services at the Finnish Ministry of Finance. A review of macro-economic policy lessons set out in the Regling and Watson report will be carried out by the Joint Committee on Finance and the Public Service following motions in each of the Houses of the Oireachtas. The committee has been asked to report back to the Houses not later than 4 November 2010. Obviously, I cannot answer for its work. The Department is providing some facilities to the Nyberg commission but it has no involvement in its investigations.
A review of the Department of Finance is being conducted by an independent review group of experts from Canada, Ireland and the Netherlands. This review group is evaluating the systems structures and processes used by the Department over the past ten years. It is working diligently and is expected to report later this year.
I would like to refer briefly to some matters the committee wanted me to address arising from our discussions in July. Included among these was the question of records of communications between the Department and the Office of the Attorney General in regard to the bank guarantee. As I stated in my recent letter to the committee, I am advised it is well established that communications between the Office of the Attorney General and Departments are privileged from disclosure. My letter set out in some detail the grounds on which the Office of the Attorney General considers these documents to be subject to legal professional privilege but in seeking to be as helpful as I possibly can, I enclosed with my letter a table describing the Department's letters and e-mails in as much detail as I felt able to provide so that the committee can have an insight into the work carried out between the Department and the Office of the Attorney General.
I indicated previously that I have been in contact with professional advisers who performed work for Irish institutions or authorities in the run-up to the introduction of the bank guarantee to seek their consent for release of material produced by them. Having obtained the necessary consent, I have sent the committee a number of documents. I hope that my statement has contributed to a useful discussion.