asked the Taoiseach, in view of his comments regarding the banks which he made in Newbridge, County Kildare, on 12 May 1994, the steps, if any, he intends to take to convey these views directly to the banks; if he has received any response from the banks to the comments made; and if he will make a statement on the matter.
Ceisteanna—Questions. Oral Answers. - Views on Banking Sector.
The banks, and the financial system generally, have a critical influence on economic and social development, to an extent that is not the case elsewhere, in the business sector of our economy. This influence affects the funding of business development, especially of small and start-up firms, the position of mortgage holders and housing development, the property development area, a wide range of other personal borrowings and the return which those who hold their savings with financial institutions receive. All the areas I mentioned have a major impact on growth and emplyment in the economy.
I thought it correct then to highlight particular aspects of the banks' influence — dealing with business development, and small businesses and farmers in particular — in the speech on 12 May. The Minister for Enterprise and Employment followed up on the area of finance for indigenous industry and particularly for small and medium sized companies since then and will continue to do so.
I believe, as I said, there is a wider area of contact with the banking and financial sector that Government must pursue on a regular basis, so that we can be satisfied on both sides that the banking and financial sector are, in a partnership sense, making the most effective contribution to development and to employment, and that this is compatible with the business environment, including internationally, in which the banks and financial sector find themselves.
I am arranging that, with the Tánaiste and Minister for Foreign Affairs and the Ministers for Finance and Enterprise and Employment, I will meet the chairmen and chief executives of the banks and the other major financial companies to exchange views at the wider level I outlined. I am having the responses made by the banks, collectively and individually, to the issues I raised in the speech of 12 May examined as part of the preparation for the first of the meetings. I intend that such meetings will take place in future on a regular, say six monthly, basis. Individual Ministers will, of course, pursue specific issues, such as small business development, in the normal way.
Can I take it the Taoiseach agrees that small enterprise is being starved of badly needed seed and working capital because of the policies of banks? Can I also take it he agrees that inordinate profits are being levied on the consumer which contributes to the very healthy profits of the banks at their expense? If the Taoiseach believes that the consumer is being ripped off and small enterprise deprived of necessary capital, he should create genuine competition in the banking sector. He does not believe a word of that. It is a popular gimmick in the run-up to an election for the Taoiseach to——
Ceist, a Theachta.
Does the Taoiseach believe a word of the criticism he voiced, having regard to the fact that the proposals in the Programme for Government for a third force in banking is a dead duck?
A third force in banking is far from a dead duck. I appreciate that the Deputy must look for headlines every day between now and 9 June.
He gets them.
The Deputy likes to get help from me in advancing his case.
I do not manufacture my polls as the Taoiseach did for Olive Braiden.
I do not have to.
Let us hear the Taoiseach, without interruption.
I asked the banks to explain to customers, depositors and borrowers the reasons for the increase in rates between 1979 and today of 2.75 to 10.75 while recognising that they need adequate profit margins to run their businesses. I also voiced my concern at the late adjustment of the rates by the large banks when smaller banks moved in advance to force a drop in rates. My intervention had an effect and there was an immediate decrease in banking rates.
Did the Taoiseach know beforehand that this would happen?
No, I am not a clairvoyant.
Did they not tell him the day before?
No, I was not aware they were announcing their figures. All those serious issues will be discussed by the Minister for Finance, the Tánaiste and Minister for Foreign Affairs, the Minister for Enterprise and Employment and myself in regard to the future growth of the economy. It is difficult to explain to customers why they are getting a half of 1 per cent on their money on deposit, but that when their money is lent the rates charged are considerably higher and depend on whether one is A, AA or AAA rated. Those matters need to be addressed, the Government is entitled to satisfactory answers and we will proceed on that basis.
In regard to the third banking force, the Department of Finance is in the throes of completing its analysis of the position and will be putting options to the Government in that respect. As Deputy Rabbitte is well aware, the more competition in the market the better for everyone.
I agree with the Taoiseach's final point. The Chair will not permit me to quote at Question Time.
That is correct.
I will draw the Taoiseach's attention to the pledge in the Programme for a Partnership Government that he would develop a vigorous third force in banking within the State sector by amalgamating the Trustee Savings Bank, the ICC, the ACC and perhaps some financial sections of An Post. What has happened to that proposal if the Taoiseach is serious about developing competition in the banking sector? Will he acknowledge that the large commercial banks are, effectively, operating a cartel in this economy which is stifling economic development and the potential for job creation?
Deputy Rabbitte should study the Programme for Government more closely. In that programme we recognised that we would try to amalgamate the Trustee Savings Bank — we recognise we do not own it——
It does not say anything about trying to amalgamate it.
The Deputy should read it out.
The Government will develop a vigorous third banking force from within the State sector——
Sorry Deputy, the Chair must be obeyed in this House.
The Taoiseach invited him to quote it.
I cannot condone quotations at this time.
I have a habit of obeying the Taoiseach.
I am sure the Taoiseach and the Deputy will agree that the Chair is in charge here.
I know the Chair is independent, but I tend to respect the office of the Taoiseach. The Government will develop a vigorous third banking force within the State sector——
Sorry, the Deputy may not quote——
——by merging the ICC bank, the ACC bank and the Trustee Savings Bank. The words "try" or "endeavour" are not mentioned.
The Deputy knows that the Government does not own the Trustee Savings Bank.
Did the Taoiseach know that was the position at that time?
I am a former Minister for Finance and I was fully aware of the position.
It was a promise in the heat of the election.
That had nothing to do with it. The Deputies, not I, said it was dead.
In the case of the British Trustee Savings Bank, was not the matter of ownership resolved by a decision of the House of Lords when it was decided that the State owned the Trustee Savings Bank? Is it not the purpose of the exercise to translate the Trustee Savings Bank into a plc so that the proceeds of the privatisation will pass to the Exchequer? The Taoiseach is hiding behind a fig leaf.
I will tell the Deputy about that fig leaf. The decision to opt for a plc will be, in law, a matter for the trustees. If it becomes a plc the Government will be the owners.
Some months ago I tabled a question to the Minister for Finance asking him to explain the disparity between the lending rates and interest rates operated by the commercial banks. The question was disqualified on the grounds that it was a matter for the commercial banks and the Central Bank. I understand why the commercial banks would wish to fix their interest rates. What role does the Central Bank play in fixing interest rates?
It is a separate question.
It is an extension of the question.
Nevertheless, I will try to accomodate Deputy Deasy. An agreed spread, which is not statutory or mandatory, is recognised. The spread ranges up to a certain level between the deposit rate and the lending rate. I am seeking a response from the banking sector as to why there is need for such a wide spread between the 1979 figure of 2.75 per cent and today's figure of 10.75 per cent, an 8 per cent difference. I appreciate there have been changes in banking instruments and lending instruments since that time, but bank charges have been introduced also. The whole area needs to be considered in terms of what return is required. An expanding economy, such as ours, needs the availability of capital at the best possible price.
Does the Central Bank exert any control over commercial banks?
We have had an extension of this question.
Applications for the altering of bank charges are submitted to the Central Bank for approval. A normal arrangement exists between them in respect of other rates.
Will the Taoiseach agree that what we need is vigorous competition, not an ideological view as to whether this should be provided within or without the State sector? Given that the State sector owns a fertiliser company which owes £180 million to the banks, will the Taoiseach agree it would be a mistake to believe that the State is in a good position to fund vigorous competition among bankers by taking a minority shareholding in a bank?
The Deputy should not bring in an extraneous matter of that kind.
Which is the extraneous matter? Is it NET? Before the banking sector ends up in the fertiliser business, will the Taoiseach indicate what advantage will flow from the State's having a minority shareholding, a suggested 40 per cent interest, in a third banking force?
I hope the Minister for Arts, Culture and the Gaeltacht will have some influence on the answers the Taoiseach gives.
Deputy Rabbitte could inform Deputy McDowell that it was recognised in the proposal for a third banking force that an outside partner, probably a European one, would be required.
That is not in the text.
I would ask him to read it.
I am always at the Taoiseach's disposal, but it does not mention that.
We are aware that we need an outside partner. We recognise that if our small banks were amalgamated they would not be strong enough to meet the competition. Deputy McDowell recognised that reality. However, if Deputy McDowell were to say to the depositor and borrower that there is sufficient competition in the market and that we are obtaining the best deal possible, I would have to disagree with him.
I did not say that. I asked the Taoiseach why he wants the State to take a 40 per cent interest in it and he will not answer the question.
The Taoiseach in response to Deputy Deasy's question spoke of an agreed spread between the deposit rate and the lending rate. I understood that was the matter about which the Taoiseach publicly complained. If there is an agreed spread will he explain who are the parties to such an agreement, how long it is in place, what is new about it and what he did about it when he was Minister for Finance and had direct responsibility? Why is he complaining publicly about it now when he has agreed or acquiesced to it during the years?
The Deputy was not listening to my replies to earlier questions. Deputy O'Keeffe should know that the Central Bank approves bank charges and there is an agreed spread between them. We need to consider the overall demands of the economy and if we are being properly served in terms of the availability of capital at the best possible price to people who wish to invest money in our economy any create jobs. In the budget we provided a facility of up to £1 million at subsidised rates to help small businesses set up to meet the demand for their services. Many changes are taking place in the banking sector. Larger firms are bypassing banks and approaching different financial institutions such as life assurance companies and building societies. We want to talk to the banks to see how this economy can be best served, which at the end of the day is in the interests of the banks. The more businesses that operate successfully the better it is for the banking sector. There is a vested interest on both sides in getting matters right.
The Taoiseach accused Deputy O'Keeffe of not listening to him, but the Taoiseach did not listen to me. I suggested that competition was necessary to drive down interest rates. Will he indicate what public interest will be served by the State retaining a minority interest in a vigorous competitor in the banking sector? I would be interested in his reply because I can think of none.
If the Deputy can think of none, I can think of a few. It is better to be at the table to make an input into policy decisions rather than not to be present. That is the simply logic of the matter and the Deputy might apply his simple mind to it.
So the Taoiseach gets representations.
Does the Taoiseach agree that the commitment in the Programme for Government makes reference to the fact that State-controlled banks which discharge a commercial as well as a development function are commonplace in the European Union? That is the actual statement. Does he agree that he ought to confirm that the emergence of a third banking force within the State sector cannot now happen? What is his response to the reply from the bankers who said that the Taoiseach's criticisms were "simplistic"? If the Taoiseach is serious, which I do not believe he is, will he indicate his response to those bankers?
That should be adequate.
The areas I intend to discuss with the banks are some of those I mentioned in my criticism, which I stand over. The large banks have been too slow to respond to the change in interest rates and it fell to small banks to lead the way. I made that statement. I stand over it and believe it is valid.
I agree with the Taoiseach on that.
I have received plenty of complaints from people trying to start up a business who say it is extremely difficult because of the treatment they get from banks. I have also received complaints from customers whose lending rate has been changed from AAA to AA to A and who have had additional conditions imposed. Those people disagree with the view held by their bank managers. The fundamental problem with our banking sector is that our banks go over the top in terms of security instead of considering the project, the people backing it and its possible success. Look at the role the banks played in the development of the economies in Germany, Japan and elsewhere; they took part of the equity and drove the development. We here will have to return to that at some stage. We cannot continue to hang everything on security. What good is security if the business fails?
We never had that here.
We always had it here. The banks look for the kitchen sink by way of personal guarantees, with which I disagree.
We have never had equity participation.
I am talking about security. We have too much security and not enough equity participation. That is one of the fundamental problems of the development of this economy. It is those areas that we want to discuss with the banks.