Dáil Éireann debate -
Thursday, 9 Jul 1992

Vol. 422 No. 5

ICC Bank Bill, 1992: Second Stage (Resumed).

Question again proposed: "That the Bill be now read a Second Time."

Mr. Quinn

I am conscious that we have agreed to conclude this Bill by 12 noon but I want to put a more formal request to the Minister for Finance in relation to the points I made before we adjourned on Tuesday last.

People in business have commented that the dominance of the two major banks which have 80 per cent of market share is squeezing any real sense of competition out of the domestic banking sector. The Minister for Finance has a unique opportunity to bring forward proposals to create a significant third force in the banking sector if we could harness the synergy created by the three banks ACC, ICC, Trustee Savings Bank and the retail section of the post office banking system operating together. I suggest the Minister should publish a Green Paper or a discussion document outlining the need for a third bank in the Irish economy and the need for the existing two main banks to strike up strategic alliances with other continental based banks within the framework of the European Monetary Union. I made these points before, and I will not repeat them as they are on the record of the House. However, I wish to stress that this should happen soon as I do not believe that this should be left exclusively to random market forces.

A combination of direct State intervention as well as allowing tenders from the different interested parties in either the domestic market or elsewhere is the best way to proceed. The Minister should prepare a prospectus of the possible options of a third banking force based on the analysis by me, and others outside the House, and put this to the financial institutions and the markets generally. The Minister could then stand back and see the bids that would come forward.

The credit controllers in the Department would like to pursue a treasury approach and dispose of the assets as quickly as possible. If the Government managed to dispose of all the assets, essentially the three banks, the Trustee Savings Bank, ACC and ICC, the amount realised would be in the region of £100 million to £150 million. Welcome though the £150 million would be, in terms of our overall economic needs, and the need to reduce the debt-GNP ratio it would not make a significant impact, whereas a strong third bank in the Irish economy would strengthen competition between the other two major banks and also encourage linkages with other continental banks in the European Monetary Union market. Our economy needs this and the Minister for Finance should vigorously pursue this option instead of bringing in a technical repackaging of the ACC and ICC banks.

Mr. Rabbitte

I can see no reason for opposing what has been described by Deputy Quinn as merely a technical measure to increase the borrowing limits, albeit in a curious way, of ICC by £300 million.

The two issues that have been raised during the course of the debate relate first, to the question of privatisation and, second, the potential use of ICC, either alone or in conjunction with other financial institutions that have been mentioned, as a vehicle for badly needed venture capital to the domestic economy. These two points have been raised in the debate and I want to comment on them.

On the question of privatisation, having examined the Bill and the Minister's speech, it is clear he is keeping his options open. However, he does not indicate any clear or alternative strategy on whether that will be the position. The Minister gave the impression during the course of the ICC Bill that he would deal with the type of points that have been raised again by Deputies Quinn, Noonan and myself in this debate. During the Order of Business I read the Minister's reply to the debate on the ICC Bill and it is my opinion he does not address the issues at all. He threatened to deal with it at a number of stages but backed off when precise questions were put to him. Whereas the legislation is preparatory to a possible privatisation situation, nonetheless is it the case now that the Minister is not finding it easy to get takers for the ICC and if so, why?

The Minister set out what he described as the ICC developing along satisfactory lines. He went on to indicate profitability and dividend payments in recent years. I wonder whether they are that satisfactory and if not, why? Would the Minister indicate the bad debts position in respect of the ICC? I feel that the ICC is in a particularly good position to attract deposits. Many small investors would be interested in that particular dimension but the loan book of the ICC is not so attractive. Traditionally, as I understand it, the ICC have had to function in a fairly rotten environment in that they had to deal with traditional indigenous industry and were sometimes left with the wrong end of the stick.

I want to refer specifically to an article by James Morrissey in The Sunday Business Post of 28 June. I mention James Morrissey because I suspect the Minister would appreciate a reference to a man who very nearly had the task of presenting the Government's decisions to the people and may have done so far more fairly from the Minister's point of view had he got the job. On the question of the privatisation of the ICC he had the following to say:

Two other State companies are, however, currently well positioned for privatisation. Last year, a detailed study of the Industrial Credit Corportion was carried out by accountants Stokes Kennedy Crowley and some 50 prospective purchasers were circulated with information about the bank but it is understood that no acceptable offers were received, despite a high level of interest.

One of the stumbling blocks to a successful sale is likely to be the additional requirement for an equity injection so that the institution's capital adequacy ratios can be maintained at appropriate levels. Michael Quinn, ICC's chief executive, has stated that ICC is worth around £75 million.

Deputy Quinn had a different valuation and I am sure he had some sound basis for his remarks. Perhaps the Minister might comment on this.

Mr. Quinn

Absolutely.

Mr. Rabbitte

James Morrissey, in his article, continued:

ICC achieved pretax profits of £7.4 million for the year to the end of last October.

At one stage a merger between ICC and ACCBANK, formerly the Agricultural Credit Corporation, was rumoured. ACCBANK has embarked on an expensive marketing programme as part of its strategy to increase market share. Over the past year the bank further developed its banking services for small to medium-sized businesses, launched new products for personal customers and updated its range of products for the farming sector. In 1991 pretax profits increased by 25 per cent to £6.5 million.

I ask the Minister when concluding to comment on this failure to find takers in the marketplace. It is a fact that 50 prospective purchasers were circulated but that no acceptable offers were received. I want the Minister to deal with that as I believe it is folly to go down that road if that is the case, because as Deputy Quinn said, the yield will be buttons from the point of view of the domestic economy. For short term gain and whatever boost it will give to the Minister when announcing his end of year figures, I see no merit in it. There is particularly no merit in it when there is manifestly a need in this economy for what Deputy Quinn described as a third force in the banking sector.

The sub-committee of which I am a member, the Job Creation Strategies Sub-Committee of the Joint Committee on Employment, identified this question as a major issue that requires to be addressed if we are to review and revamp industrial policy and arrive at recommendations that are likely to have any short term, palpable effect on the problem of unemployment. It is acknowledged by both the experts who have given evidence, and by members of the committee, that there is great dissatisfaction in the Irish economy with the availability of venture capital to allow for the kind of risks that will facilitate industrial expansion. I do not believe the Minister challenges that view. Commercial venture capital companies are, to put it mildly, extremely cautious and conservative about the options they are prepared to support. The business sector frequently complain that necessary venture capital for what are deemed to be good ideas is not available, that banking institutions are more conservative than ever and that recent experiences in the Irish economy have made that situation more difficult.

I understand that some of the banks are now arguing that because of the enactment of the Companies Bill in terms of some of the impositions of that Bill, including the examinership process, they are less interested than they previously were. I am sure the Minister is under no illusion about to whom the banks see their primary responsibility. As far as the banks are concerned, their priority is to make a profit, to pay a dividend to their shareholders and, if that coincides with a contribution to job creation in the domestic environment, so be it. If it does not, tough luck. They are not going to make philanthropic decisions to facilitate Government policy.

If privatisation in any event will represent a short term minimum gain, the Minister should look to this alternative strategy. One thing that worries me about this debate on industrial policy — which has finally started after three years of this Dáil — is that we have continued to take a series of as hoc measures which seem to constrain the possibility of our agreeing on a comprehensive redirection, refocusing and retargeting of resources in any revamp of industrial policy that might get a mandate from this House. The major advantage of the jobs committee is that there is the possibility of getting a radical mandate from this House — to which all parties would be committed— to go forward in a certain direction. We no longer have NADCORP. In any event, I do not believe NADCORP were ever allowed function in the manner in which the legislation envisaged.

Mr. Quinn

They were strangled at birth if not at Cabinet.

Mr. Rabbitte

The IDA, in terms of the manner in which they have absorbed that function, are not adequate for the needs and purposes of this economy. Finally, I should like to refer to the schizophrenic approach to lending in the Bill. Perhaps the Minister would explain it in more detail because I have some difficulty in understanding the provision in the Bill to increase the borrowing limit by £300 million when the guarantee limit remains unchanged at £1 billion. I am not sure how this dual approach will segregate the £1 billion from the £300 million which is being provided for now and which will not be underwritten by the State. What is the thinking behind that? If £1 billion is at "risk" what is the point in not having £1,300 million at "risk"? What is it indicative of? Are we trying to get out of the business altogether? I cannot see any overall strategy in it. It is difficult to understand how it will work in practice.

The suggestion has been made — and it is time the Minster addressed it— that there are possibilities here for the development of a venture capital organisation, institution or whatever that would necessarily be underwritten to whatever extent by the State as an engine for the development of economic growth and industrial expansion. Institutions have been mentioned such as the merger to which I referred earlier. Deputy Quinn mentioned — either in this debate or in the previous debate — the Trustee Saving Banks, the ACC and the ICC. There is total confusion about the future of the Post Office.

Mr. Quinn

Absolutely.

Mr. Rabbitte

Anybody who thinks the recent dispute that caused so much disruption in the post office is the end of the road for problems in An Post is not living in the real world. There are major matters to be addressed there. It seems to me we could address them in this kind of overall restructure consistent with maintaining industrial peace and maintaining employment and at the same time giving a better service to industry and so on. Unless something like that is examined the prospects for people seeking venture capital are very slim.

Mr. Finucane

My contribution will be brief because on a previous occasion we discussed the ACC Bank Bill and I can see a similarity between that debate and this debate. That is understandable because the situation has not changed dramatically since we discussed that Bill.

In the ACC Bank Bill we were dealing with a core business in the agricultural community; in this case, we are dealing with a core business in relation to small to medium sized businesses — usually industrial as well as retail type businesses. We discovered in the recent Dun and Bradstreet report that the level of closures is increasing and our level of unemployment is gradually increasing. Therefore, there has to be something wrong with our banking services in general. Frequently closure of business is due to a lack of finance and in many cases, as previous speakers have said, it is due to a lack of venture capital.

The objective of the Industrial Credit Corporation is to enhance their profit margins each year. Therefore, in that particular segment of business they will concentrate on where they can identify good quality business propositions. It is in identifying good quality business propositions that many ventures fail and they do not get encouragement. The National Development Corporation was discontinued. I wonder whether in providing venture capital for many businesses we can do anything to eradicate our high level of unemployment. It is ironic that we have a committee meeting and considering — as Deputy Rabbitte said — all kind of strategies in relation to employment. A fundamental cause of unemployment is the lack of venture capital, and caution on the part of the banking institutions to lend to people. As long as that remains the situation I do not think we will resolve our unemployment crisis. Many people say that our domestic rates which remain stubbornly high are responsible, yet our economists say our interest rates will not improve until we see a reduction in the German interest rates. We all know what is happening in the German economy and the difficulties they have in merging East and West Germany and the constraints put on their budget. Therefore, we wonder whether we will see any easing off in relation to the interest burden and the unemployment burden as such.

Perhaps the Minister would explain the borrowing requirement from £1 billion to £1,300 million and the removal of State guarantees and how this impacts on the overall situation. I do not think there is anything further I can say on this Bill as it is simplified legislation and is similar to the ACC Bank Bill. In relation to employment and in an effort to create those magical jobs, which is everybody's objective, I wonder whether a new departure is required, whether there should be a new departure in relation to banking circles, whether there should be an element of gamble and whether we need something similar to the National Development Corporation. If the ICC and the ACC and the normal banking institutions cannot provide financial sustenance for these companies who will provide it? If not, will we ever do anything about the high unemployment situation?

Minister for Finance (Mr. B. Ahern)

I would like to thank the Deputies who have contributed to the debate. The ICC have contributed to the economic development of the State for over half a century and that must be acknowledged. The Deputies who have contributed recognised their contribution. The proposals in the Bill will add to their capacity to continue that good work. There is no doubt ICC have helped many small and medium sized businesses to expand and prosper over the years. As I said at the outset. ICC are close to their statutory borrowing limit. Without the increase proposed in this Bill, company development would come to an abrupt halt. ICC are constantly involving their services in the light of the changing needs of the economy.

ICC are a merchant bank of some standing, particularly in the small and medium-size business sector. Perhaps somebody listening to the debate would not understand that but that is where practically all of their base is. The inclusion of the word "bank" in the title and the measures for the supervision of ICC by the Central Bank and for the application to ICC of the technical measures are particularly appropriate, given their more commercial orientation and the possibility of a future sale of the Minister's shareholding, should a suitable purchaser emerge at some stage. ICC are already dealing with the Central Bank on many issues and welcome these provisions.

In opening, I dealt with the question of guaranteed and unguaranteed borrowings. I said that there should be a clear understanding that existing depositors and lenders with ICC are not affected by the change; their position remains fully guaranteed within the existing limit of £1,000 million. ICC are proposing, after the passage of this Bill, to establish a subsidiary company specifically to take deposits on an unguaranteed basis. I want to assure the House, and particularly Deputy Quinn, that this was the ICC proposal and they did extensive research in the market place to see what would be the right and proper way to do it. It is very much what ICC want to do. The Deputy will appreciate that the one thing the banking world cannot cope with is uncertainty and confusion as between guaranteed and unguaranteed money. Therefore they intend to have a subsidiary so that it will be clear what is guaranteed and what is not guaranteed, so that in a doomsday scenario people would know precisely where they stood.

Mr. Quinn

It still seems weird.

Mr. B. Ahern

Deputy Rabbitte wanted to know if it made any difference. In the maket place it does make a difference in the eyes of those people who invest money. It is easy for those of us who are not investing substantial amount of money to talk. In the eyes of those who are investing substantial sums of money, or even small sums of money, there is a distinction between what is guaranteed and what is not guaranteed by the State and people must know which category their money is in. ICC have researched this at some length.

Mr. Rabbitte

That is not the point I was making. The point I was making was if there was a difference to the State between guaranteeing £1,000 million and £1,300 million.

Mr. B. Ahern

There is, and Deputy Quinn would probably be more expert about that than I, because he was part of the Government that studied that issue and made policy decisions which we have now been following since the middle of 1985. I have to say I agree with the decisions made at that stage but there is a major distinction. Under this there is a clear distinction between deposits with ICC which are fully guaranteed and deposits with the subsidiary which would not be fully guaranteed by the State. The subsidiary company will, of course, be fully underpinned by the resources of the parent company. ICC will thus be able to continue their growth on a commercial basis and without recourse to the State for the backing of a guarantee.

Deputies Noonan and Quinn wanted to know if this structure was necessary. Deputy Rabbitte mentioned this just a few minutes ago. I accept the views of ICC. They are the ones who have to operate the arrangements on the ground. It is essential to adopt a structure that their research and considerations have shown to be the most suitable way to avoid confusion as between guaranteed and unguaranteed investments.

I would add that this arrangement is not part of the Bill itself but I thought it would be of interest to Deputies to know how ICC propose to adapt to the change in the guarantee arrangements. It is a credit to ICC staff, management and board that they are now confident of being in a sufficiently strong financial position to make a success of this change. It is not something they would do if they did not believe they were in a strong financial position to do so.

The Industrial Credit Act, 1933, establishing ICC, envisaged that the predominant function of the company would be the giving of credit while also investing in equity shares and debentures. There is no departure from the fundamental principles enshrined in that original Act of 60 years ago. ICC have been involved in equity financing since their inception. In fact they have operated through a specialist equity division since November 1986. Their basic strategy is to build up a solid portfolio of both quoted and unquoted shares with a view to ensuring a steady flow of profits each year, and this strategy has been successful through judicious management of the portfolio and an active policy of acquisitions and disposals. As far as unquoted shares are concerned, investments are generally confined to profitable established companies with good growth prospects. Apart from Government paper the value of investments at the last balance sheet on 31 October was about £16 million.

Questions were raised about the availability of capital, including working capital from the banks, particularly for small and medium sized firms. We had some discussion about this yesterday at Question Time. Deputy Noonan referred to the arguments made by the various sectors. Opposition spokespeople and I myself have the opportunity, almost on an hourly basis, of meeting people from the different sectors. The Central Bank, who investigated the matter at the Department's request, carried out a detailed investigation and have assured me again and again that there is no evidence that the banks are operating a credit squeeze. That is the official statement of the Central Bank. Because I had a long debate in the Seanad recently on banking——

Mr. Quinn

Are they saying there is no shortage of venture capital?

Mr. B. Ahern

Yes. I checked that. That Seanad debate was only a few weeks ago and I did considerable research at the time. I can only tell the House what the Central Bank advised me. They have assured me that there is no evidence that the banks are operating a credit squeeze. Bank lending is not constrained by capital requirements or liquidity conditions. However, both borrowers and lenders have become more cautious. There is no doubt about that and that is what everybody here has said today. I have repeatedly exhorted the banks to act in a positive way to assist Irish business. I have been keen to monitor the banks' ongoing response in this area. It is my belief that there are ample funds available for sound, viable projects.

Mr. Finucane

It is not the situation on the ground. What is viable?

Mr. B. Ahern

I have spoken to a number of developers. It is very much a matter of whom one is talking to. I have gone to great lengths, with the help of my departmental colleagues, to talk to individuals and have even checked with some projects around town. I have seen projects that had no difficulty whatsoever with the banks and I have seen other projects which are not so lucky. I had the pleasure of visiting a project here in the city which involves a substantial number of millions of pounds. It was not, maybe, in the top ten but a project does not have to be in the top ten. The bank's statement to the developer of that project was that if he built the first two phases of a five phase development with his own capital, funded them and let them, the banks would talk to him about doing phases, three, four and five. My retort to him was that I would consider funding phases three, four and five myself if he could manage to let the other two. A smaller developer on a site almost adjacent to him told me the banks could not have treated him better.

Mr. Quinn

Is that not the problem? The banks are not shy about property. It is jobs that are the difficulty.

Mr. B. Ahern

This is the difficulty. The Central Bank's position has to be taken into account. The Central Bank have assured me that they are not operating a credit squeeze and that lending is not constrained by capital requirements or liquidity conditions. I ask Deputies to carefully note what I am saying.

I want to assure the House that I will continue to exhort the banks to act in a positive way so as to assist Irish businesses — I know this is something the House and the Government wish me to do — and I will monitor the response of the banks in this area. I will have an opportunity during the summer recess to meet the banking institutions. While ample funds are available it may be difficult to obtain finance for high risk type ventures. The definition of "high risk ventures" is always a matter of much debate.

The provision of working capital and equity finance for small and medium sized enterprises is a commercial matter for the individual banks concerned. I am glad to note the recent initiative by the Small Firms Association in securing a scheme for their members with one of the main banking groups. This is an excellent scheme and one which I would certainly recommend. Deputies will recall that the banks have made available a sum of £25 million under the scheme for young entrepreneurs and other schemes which offer loans at a reduced rate of interest and do not require personal security from suitable applicants. I welcome these schemes as many good projects were stifled because people did not have adequate security. To date over 200 projects have been assisted under these schemes.

As I indicated to the House my officials have been engaged in discussions with the life assurance and unit fund industries regarding the impact of the changes in the DIRT on their products and the importance of equity investment for small and medium sized Irish industry. This is one of the major factors which has to be taken into account in this regard. Deputy Quinn has been following this issue very closely. I met the financial services people recently and agreement was reached that progress could be made in this area.

Deputy Quinn raised some very broad questions in relation to the availability of capital by Irish banks, the development of the Irish banking industry, their competitiveness, the implications for the industry of full economic and monetary union and the place of the State banks in the industry. I have already referred to the availability of capital. The reason I did not refer to these issues in my Second Stage speech is that they are not relevant to this Bill. I wish to assure Deputy Quinn that I have not forgotten about these matters; I have devoted a good deal of time to these issues over the past few months and my Department have been following up the undertakings I gave on 1 April.

Mr. Quinn

Can we expect a Green Paper?

Mr. B. Ahern

I am not sure if I will follow this with the publication of a Green Paper. Discussions are continuing in the matter.

The second EC banking directive will open up the Irish market to further EC competition. Deputy Quinn asked about this issue previously and I know he is following developments in this area. Even if we were not doing so, this directive will require us to look at the issues involved. Some steps have already been taken in this area, for example, the lowering of the primary and secondary liquidity requirements, the adjustments to the DIRT tax and the new arrangements for the bank levy. My Department and the banking industry have been working on these issues for over a year. There has been no shortage of joint meetings between my Department and the banking industry in this respect. All these measures are aimed at improving the competitiveness of the Irish banking industry in the new environment.

The more stable economic and monetary conditions which will result from European Monetary Union will help Irish businesses, including the banks. The completion of the Internal Market and greater economic and monetary integration in the Community will create opportunities as well as challenges for every sector, including the banks. The more competitive Irish banks are in the domestic market the more competitive they are likely to be in the broader European market. Therein lies the challenge facing them. The financial institutions, not least the ICC, seem to be keenly aware of the need to increase their competitiveness in the light of the challenges ahead. I have had discussions with banking and other financial institutions. I want to assure the house that if all businesses were as geared up to the changes which the Single Market will bring as the financial institutions are we could be very confident; they have examined all the issues involved. The size of an institution is not necessarily a major impediment. Success in this area will depend on the segment of the market being sought by our financial institutions, including the ICC, the ACC and the Trustee Savings Bank. Despite their relatively small size some of our financial institutions have made good progress in the markets abroad. This point should be noted by the Deputies.

I do not have time to refer to all the issues involved, but I wish to point out that the changes, some technical and others not so technical, which have been introduced during my seven months in the Department of Finance have been of benefit to the ICC and the ACC. Changes have also been introduced in the Trustee Savings Bank. Consideration has also been given to what is known as the "third force". A considerable amount of work has been undertaken in this area. I am very keen to ensure that the concessions given in the Finance Act will give a return to our industries. I am not paranoid in thinking that all profits generated here tend to move abroad, but liquidity, openness and freedom in the market make it attractive for people to move profits and investment out of the State. This will have to be taken into account in the context of any concessions which are given.

I do not accept that there is a lack of strategic thinking in the banking industry. Much work is being carried out in this area.

Mr. Quinn

We would like to see some of it.

Mr. B. Ahern

The Central Bank and my Department are working to ensure that we have a competitive and healthy banking sector which will be capable of meeting the challenges ahead.

With regard to the "third force", this relates to amalgamations. I wish to point out to Deputy Quinn that, like him, I have spoken to a number of people about this issue. I have learned that no two people agree; even some of the arguments put forward in favour of the "third force" are very different. Some of them argue that (a) I should amalgamate all the banks, (b) do a joint venture with a European bank and (c) sell the lot. One needs to be very careful about the measures taken in this area. Some of the figures given as to the value of the ICC are very low. This is done for their own benefit.

Mr. Quinn

It is to be expected.

Mr. B. Ahern

If I was in the same business I would do the same. I am having discussions with people and very different arguments are being put forward — some of them are increasing the figures while others are reducing them.

Deputy Rabbitte referred to the transfer of the NADCORP portfolio to the IDA, who already have a substantial equity portfolio. The Culliton report recommended that the IDA should take more equity capital in Irish firms instead of grants. This is being done. With regard to the bad debts provision, the figure for last year was £6.9 million while the figure for the previous year was £3.4 million. The value of ICC has been put by some people at between £20 million to £30 million. This is much too low. The value of their net assets in 1991 was £54 million. This company could not be sold for less that the net asset value. I could speculate about how much more than that would be acceptable, but we are certainly talking about a figure substantially in excess of the net asset value. I have already outlined that the consultants recommended sale of the State shareholding. I have not been following that with vigour in recent months while I have been looking at the issues. The market was sounded and there was no great pull from any of the players.

Mr. Quinn

Was the perception of overstaffing a factor?

An Leas-Cheann Comhairle

The House will have an opportunity on Committee Stage to discuss that.

Mr. B. Ahern

There may be some concern about that. Deputy Quinn claimed that the staff level in ICC was 650, but they have cut back to just over 300. There are players in the market who, if they acquired ICC, ACC and Trustee Savings Bank, would solve the problem. It is a matter for consideration. I have listened very carefully to the different views of four or five players. In the meantime all these banks are making money and employing staff. All these issues have to be balanced.

The options are full or partial sale of the State shareholding, full or partial amalgamation or mergers, or the option of each developing on a stand alone basis. I am not ruling out any of the options in this debate. They will be considered on their merits. I thank Deputies for their contributions.

Question put and agreed to.