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Dáil Éireann debate -
Wednesday, 14 Mar 1990

Vol. 397 No. 1

Ceisteanna — Questions. Oral Answers. - Secondary Liquidity Ratios.

Michael Noonan

Question:

4 Mr. Noonan (Limerick East) asked the Minister for Finance if he will consider the reduction of the secondary liquidity ratio or the total elimination of the secondary liquidity ratio imposed on banks operating in Ireland; if he will commence talks with the Central Bank to discuss this possibility; and if he will make a statement on the matter.

The need for secondary liquidity ratios is kept under constant review in my Department. Following the most recent review, earlier this year, my Department concluded that the reduction or elimination of the secondary liquidity ratios would not be appropriate at present.

Given the current level of uncertainty in the financial markets it would not be prudent to reduce or eliminate the secondary liquidity ratios, which operate as a stabilising influence on the bond market. Therefore, there are no plans to initiate discussions with the Central Bank on this matter.

I would remind the House once again that we have come to deal with questions nominated for priority to which a strict time limit applies under the Standing Orders of this House.

(Limerick East): I would like to thank the Minister for his very definitive reply. Is the Minister aware of the imbalances between bank resources and bank credit which are now emerging and which need to be rectified? Is he aware that if these imbalances continue, a 1 per cent rise in interest rates caused by domestic factors is inevitable? Is he further aware that there is a reference to this problem in the statement on monetary policy issued by the Central Bank on 28 February 1990? One of the major options alluded to is a reduction in the secondary liquidity requirement of the banks.

I am aware of what the Deputy says. An argument has been made from time to time by the Central Bank and by others — one was made by the Central Bank as recently as last month — that the secondary ratios distort the market and that reducing or eliminating them would reduce the level of the Central Bank's support to the market and provide needed liquidity. Moreover, some commentators would argue that the stock sold by the banks would be available to foreign buyers, thus helping the reserves. At present the level of Government stock held by the banks is in excess of what they are required to hold. Therefore the argument made by the Deputy does not hold water at this time. I am sure he is well aware of all the uncertainty that exists in international financial markets at present and it would not be prudent to do anything of the kind at this time.

(Limerick East): I am always reluctant to take issue with the Minister because, as he reminded me one time in the past, he has better advice than I have.

I would so remind the Deputy again today.

(Limerick East): We will wait and see. The Central Bank in their statement on monetary policy on 28 February said the licensed banks now have limited scope to divest themselves of Irish Government securities, which is the exact opposite of what the Minister is now saying. There is also the fact that the financial institutions in Dublin, other than the banks, are now quite liquid, that they would be anxious to buy Government paper and that foreign investors, particularly German investors, would also buy Government paper. We are the only EC country that has a secondary liquidity requirement in these specific terms. It seems that if interest rates rise in the next two weeks it will be as a result of the Minister's inaction to put liquidity into the market and this is a method of doing so. It seems that the Central Bank in their monetary report——

I appeal for brevity, Deputy Noonan.

(Limerick East):——are putting an option into the Minister's mouth to act in this fashion.

The Deputy has been trying to put that option into my mouth, and into the mouth of everyone also for the last six weeks or two months.

(Limerick East): No, this is the first time I have raised the issue.

I would remind the Deputy of the number of times he has spoken, since the second week in January, about imminent increases of interest rates, increases of 2 per cent next week, tomorrow, the next day. They have done their very best to try to top up interest rates.

(Limerick East): Never. I have never said anything like that.

Look at your record in the media and we will see what it is all about.

Someone has to worry about interest rates when the Minister does not worry about them.

If you fellows had your way they would have been increased two months ago.

(Limerick East): I said that the German monetary union will lead to an increase.

I will give the Deputy a few facts that he is apparently not aware of. As I have said, given the uncertainties in the bond market at present and the large refinancing operation facing the Department in 1990 on the domestic market, involving £1,378 million, this is not the time to relax the secondary liquidity ratio requirements. Developments at EC level over a number of years may require that but I can tell the Deputy without fear of contradiction that his timing on this question is totally wrong and imprudent. As I have said, the matter is kept under review by the Department and we have no plans to change it at the moment. While recognising that the stockbrokers and the financial markets make money in times of instability rather than of stability, I know they would say in the paper every day that we should take away the secondary liquidity because they would make a fortune on it but I am in a different business here.

(Limerick East): I would like to ask a final supplementary.

Please be brief, Deputy. I want to make progress on the other priority questions also.

(Limerick East): Would the Minister not agree that the secondary liquidity ratio is kept at its present level by considerations of the Department of Finance financing their requirements and ensuring that the banks retain Government paper? The Minister is not particularly concerned if interest rates rise.

I am always concerned about interest rates but the Deputy is not.

(Limerick East): Would the Minister also agree that he has attempted to misquote me, and that a 1 per cent increase will come through for domestic reasons if the imbalances are not corrected. I have also said there will be further increases following German monetary union and if the Minister has had better advice I would like him to give it to the House. The Central Bank is saying what I am saying.

This is leading to argument and debate. I want to proceed to another question.

I want to remind the Deputy that at the end of January there was £240 million in excess of what was required by the Central Bank in Government stocks held by the various banks.

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