Vol. 548 No. 5
40 Mr. J. Mitchell asked the Minister for Finance if he has received a report from the Central Bank on the reported loss of $750 million in a subsidiary of AIB; if so, the findings of the report; and if he is undertaking an investigation of the Central Bank in order to establish its role in the matter. [5752/02]
As soon as the Central Bank became aware of what had happened, contact was made with the US Federal Reserve, the primary regulator of Allfirst's activities. As the consolidated regulator for the AIB Group, the Central Bank has supervisory oversight of Allfirst. However, primary regulatory responsibility lies with the Federal Reserve. Two officers of the Central Bank travelled to the headquarters of Allfirst and they have been working with officers of the Federal Reserve to confirm the scale of losses and to identify as far as they can how these losses were accumulated and why procedures failed to identify a serious problem in good time. These inquires are ongoing.
When their current investigation has been completed, the Central Bank will prepare a report for me on whether any changes to legislative provisions governing banking supervision may be required in the light of recent events. I should explain that the Central Bank is statutorily independent in the exercise of its regulatory functions. National legislation dealing with the prudential regulation of credit institutions, which is largely derived from EU directives, obliges the Central Bank to treat as confidential the information it holds on supervised entities.
The legislation is framed so as to preserve the confidentiality of a bank's commercial interests and customer relations. It provides a protection for privacy, balancing the very wide range of inquiry which the Central Bank must have to carry out its supervisory role. There are provisions which enable the Central Bank to share confidential information with other bodies with similar functions subject to stringent conditions of professional secrecy.
It follows from what I have just outlined that there is no specific legal right of a Minister for Finance to information held by the Central Bank on individual supervised entities. I may, however, under the Central Bank Act, 1998 consult with the bank, in general terms, on regulatory issues. In this case, I have asked the Central Bank to report to me on the legislative arrangements in place and on the lessons to be learnt in that regard. The bank has confirmed to me that it will produce such a report.
International banking supervision is very complex, and many subsidiary entities are regulated at different levels and in different countries from their parent companies. A very wide network of co-operative working arrangements exists between regulators. In this case, the Central Bank was not the principal regulator of the supervised entity, but did regulate the overall prudential position of the group concerned. Events have shown that the prudential and solvency position of the group is more than sufficient to weather the strain. I know the Central Bank is anxious to learn from these events.
Does the Minister agree that we have a massive failure yet again in AIB and the Central Bank? We have a failure of internal controls and management information systems, a failure of internal and external audit and particularly a failure of the supervisory authority, the Central Bank. Does the Minister accept that there is a worrying trend developing? The Central Bank knew nothing and did nothing about ICI, the evasion of DIRT or about the problem in Allfirst until it was informed by the AIB itself. Are alarm bells not ringing in the Department of Finance about the performance of the Central Bank?
As I pointed out in reply to priority questions, the primary regulator in this regard was the Federal Reserve of the United States. The same regulations apply in this country. The banks that operate here are regulated by the Central Bank of Ireland and it has the primary role in relation to their operations here. In the last 15 years there has been a large increase in the number of banks and financial institutions operating here. In the US the Federal Reserve is the banking supervisory authority for operations within its remit. There is a residuary role for the Central Bank of Ireland as it is the potential regulator of the AIB Group but primary responsibility for the issue lies with the Federal Reserve. It is not correct to try to link the three issues. The US has cause to be proud of the Federal Reserve yet I am sure one would find lapses in this area in its operation. People here seem anxious to pin blame at all costs on the Central Bank and that criticism is unfair.
I am not in that category but I was appalled by the evidence given by the Governor of the Central Bank and his predecessor. It showed me, as chairman of the DIRT inquiry, an enormous gap in the Central Bank and it has now manifested itself again. Does the Minister agree there is something amiss when only one bank group has such a series of events? Does he agree that now is the time to ask questions about the supervisory role of the Central Bank in relation to the AIB and to ask for heads in the AIB?
I am sure the Central Bank of Ireland and the Federal Reserve of the United States will be interested in the outcome of the report being prepared by the AIB's investigators, the investigations by the management of the AIB Group, those being carried out by the Federal Reserve, those of the FBI and whatever investigations are carried out by the Central Bank of Ireland. Everybody will learn something from that process, not least the management of AIB Group. AIB will have to answer to its shareholders and to the various regulatory authorities. The various bodies will take on board whatever lessons have to be learned.
Does the Minister agree that we have been extraordinarily lucky that the scale of the losses in this case, big as they are, can be comprehended from AIB assets? Does he agree that it could have been otherwise and the consequences for the stability of the Irish financial system could have been grave and could be again?
In the mid-1980s when the AIB Group had difficulties with the Insurance Corpor ation of Ireland the Government of the day deemed it of sufficient magnitude that it could be a danger to the banking business of the State. That is why that Government took the decision it did regarding that particular collapse. The situation is different today. Despite this substantial loss by AIB Group on its Allfirst operation in the US, the effect on the reserves of the AIB Group are not significant. The adequacy of its tier one and two capital ratios are way above the minimum requirement. If the group had suffered such a loss in the 1980s the situation would be different but such is the strength of the AIB Group that it is able to take the strain.
