Dáil Éireann debate -
Tuesday, 3 Mar 2009

Vol. 676 No. 4

Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Bill 2009: Second Stage.

Minister for Finance (Deputy Brian Lenihan)

I move: "That the Bill be now read a Second Time."

I thank the House for agreeing to discuss this Bill at short notice. The Bill is needed to allow the State through the National Pensions Reserve Fund, NPRF, to invest in Allied Irish Bank and Bank of Ireland under the terms of the recapitalisation programme announced by the Government on 11 February and debated in the House the next day.

The House will be aware of the international context in which this action is being taken. The past 18 months have been unprecedented in terms of the pressure states and financial institutions, banks in particular, have been under throughout the world. Market expectations with regard to the capital that banks should hold have altered significantly. As a result, banks have needed to compete vigorously for deposits and other forms of funding in a weakening economic environment. They have been forced to seek capital in a difficult market resulting in an array of state interventions, including recapitalisation programmes across the developed world.

The extended financial crisis has brought home to all of us the pivotal role that the financial system plays in supporting the economy. In turn, it has become clear to all that it is essential for the Government to take appropriate action to maintain the stability of the financial system. Like many other European countries, Ireland has moved to ensure the security and stability of its banking system. Throughout this process, our approach has been based on two basic principles. First, the State will not let any systemically relevant financial institution fail and, second, any State involvement in financial institutions will protect the interests of the taxpayer and have regard to legal implications and European requirements.

The Government's approach has been a considered response to a financial crisis that has resulted in state interventions across Europe and the world. Through the bank guarantee scheme, we created a space to assess the further measures needed to best protect our financial system in a strategic manner. In view of the continuing turmoil in global financial markets, the Government initiated intensive discussions with Allied Irish Bank and Bank of Ireland with a view to securing their positions. This resulted in the announcement of the recapitalisation package on 11 February.

As Deputies will recall, under the recapitalisation programme, the Government will provide €3.5 billion in core tier one capital for each bank. Of the total €7 billion, €4 billion is to be funded from the National Pensions Reserve Fund's current resources while €3 billion will be provided by means of a front loading of the Exchequer contributions to the fund for 2009 and 2010. These investments will remain part of the fund and the return earned on them will accrue to it. Funding the bank recapitalisation programme in this way strikes a prudent balance between, on the one hand, addressing an urgent economic priority and, on the other, continuing to take account of long-term budgetary stability and the sustainability of our pension system.

The total amount to be invested, €7 billion or €3.5 billion for each bank, was determined following detailed consultations with financial and property experts involving consideration of likely trends in asset values and various stress scenarios related to those. The State's investment will significantly strengthen the core tier one capital of the two banks, bringing it well in excess of regulatory limits. The State will obtain a direct return for its investment on specified terms and the banks have agreed to a customers' package containing a number of measures to improve lending in the economy, including statutory codes on business lending and mortgage arrears and a €100 million fund to support environmentally friendly investment and innovations in clean energy.

In return for the overall investment, the Minister obtains preference shares with a fixed dividend of 8%, payable in cash or ordinary shares in lieu. These preference shares can be repurchased at par up to the fifth anniversary of the issue and at 125% of face value thereafter. The Minister can appoint in total 25% of the directors to both banks and he obtains 25% of total ordinary voting rights in respect of change of control and board appointments. Warrants attached to the preference shares give an option to purchase up to 25% of the ordinary share capital of each bank existing on the date of issue of the new preference shares.

The recapitalisation will ensure the two main banks in Ireland are in a position to provide necessary commercial credit facilities to their customers and the economy generally. In line with this, the banks have committed themselves to increasing lending capacity to small and medium-sized enterprises by 10% and to provide an additional 30% capacity for lending to first-time buyers this year. If the mortgage lending is not taken up, the extra capacity will be available to SMEs. To ensure that credit is extended in an appropriate manner, statutory codes of practice on business lending and mortgage arrears have also been finalised.

Our recapitalisation programme will strengthen Allied Irish Bank and Bank of Ireland as financial institutions central to the economic future of the country. The Government is also in discussion with other relevant institutions about their respective capital positions and will take whatever measures are judged necessary in that regard at the appropriate time.

As Deputies will be aware, the NPRF was established in 2001 for the purpose of meeting as much as possible of the cost to the Exchequer of social welfare pensions and public service pensions to be paid from 2025 until 2055. As the Minister for Finance, I am required under the relevant legislation to pay 1% of GNP into the fund every year.

The principal purpose of the Bill under discussion is to amend the 2000 Act to facilitate the recapitalisation of financial institutions. The Bill amends that Act so that, in respect of credit institutions listed on a stock exchange, the Minister for Finance may, in the public interest and in particular circumstances, give directions to the National Pensions Reserve Fund Commission to make investments in such institutions and to underwrite their share issues. It may also give directions on the holding, management and disposal of such directed investments. An investment in a listed credit institution made by the commission on foot of a direction from the Minister is referred to in the Bill as a "directed investment".

The Bill will enable the Minister to make additional payments into the fund for the purpose of a directed investment in a listed financial institution and to transfer into the fund a shareholding or other interest held by him or her. If the total payments or transfers in any one year are greater than 1% of GNP, the excess will count towards the requirement to make annual contributions to the fund in future years.

For example, this year, the annual contribution from the Exchequer to the fund will amount to approximately €1.6 billion. This amount was provided for in the 2009 budget last October. The €3 billion contribution from the Exchequer to the cost of the recapitalisation of AIB and Bank of Ireland will be composed of the €1.6 billion and an additional amount of some €1.4 billion that will count towards the Exchequer contribution to the fund in 2010.

The Bill has a number of other provisions. Perhaps the most notable is the proposal to amend the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 to provide for greater transparency in terms of trading in financial instruments. This provision will enable the Minister for Finance to make regulations requiring certain information relating to transactions in financial instruments to be disclosed to the Financial Regulator, the market or both. The intention is that this will allow the introduction of regulations requiring disclosure of contracts for difference.

Let me turn now to the provisions of the Bill in more detail. Sections 1 and 2 contain the usual standard provisions necessary to explain certain terms used in the Bill. Section 1 links the Bill to the 2000 parent Act while section 2 amends the Act by inserting definitions of a number of technical terms used in the Bill, such as a "Commission investment vehicle", "directed investment", "listed credit institution" and "regulated market". Section 3 extends the functions of the commission so as to enable it to manage directed investments. It amends the commission's functions to take account of the investments to be made by the commission in accordance with a direction by the Minister for Finance. It enables the commission to have regard to such directed investments when determining the investment strategy for the fund.

Under the 2000 Act, the commission is precluded from investing in Irish Government securities. Section 3 contains a technical provision to clarify that the reference in the principal Act to those securities means debt instruments issued by the Exchequer.

Currently, the commission can only accept contributions from the Central Fund. This section will enable the commission to accept funds or assets for the benefit of the fund from sources other than the Central Fund if so directed by the Minister. This technical provision is the counterpart of the provision in section 6, which will allow the Minister for Finance to transfer shareholdings and other assets to the fund.

This section of the Bill also enables the commission to advise the Minister at his or her request on a proposed directed investment. This will, for example, enable the commission to carry out the necessary due diligence on Allied Irish Bank and Bank of Ireland before the actual recapitalisation. The Bill will also enable the NPRF Commission to underwrite issues of securities.

I am including this measure in the Bill on an enabling basis, lest the need arises to have the National Pensions Reserve Fund Commission underwrite a capital raising issuance by a financial institution. I must emphasise this is not something I propose to do; I am merely taking the opportunity to include the provision on a contingency basis now that the NPRF legislation is being amended.

The Bill also allows the commission to form a company or other body corporate. This will allow the commission to set up special purpose investment vehicles where it is more efficient for the commission to invest through such a structure. At present, the commission is precluded from controlling a company. Section 15 of the National Pensions Reserve Fund Act 2000 prohibits the commission from controlling a company or acquiring a shareholding of such size that the commission would be required to seek to take control of the company. This is appropriate given the purpose of the fund as the commission's role is to invest for the optimum return and not to get involved in managing companies. However, it is necessary to lift this restriction in two instances, the first being when the commission sets up a special purpose investment vehicle as I have just described. The second is where the commission is required to invest in a credit institution on foot of a direction from the Minister or, in other words, when the commission is facilitating the State recapitalisation by investing in the banks.

I should emphasise at this point that the State does not intend to take control of the recapitalised financial institutions. The recapitalisation of AIB and Bank of Ireland is to be based on the State taking preference shares in those institutions, rather than ordinary shares. However, if the fund was to underwrite a future share issuance by these institutions, it is possible that the fund's overall holding could constitute a controlling interest. Once again, I must emphasise this is not something I propose to do; I am merely providing for it in the Bill on a contingency basis.

I am proposing that certain statutory provisions in company and takeover law should not apply where the commission is required to invest on foot of a direction in the public interest in a financial institution as part of the recapitalisation programme. The proposed amendments would ensure that investments by the NPRF in the financial institutions on the scale now envisaged would not be impeded by procedural delays.

Accordingly, section 5 of the Bill provides that certain provisions of competition and takeover law and section 7 of the Credit Institutions (Financial Support) Act 2008 do not apply in respect of an acquisition or proposed acquisition by the commission of an interest in a traded credit institution or a transfer into the fund of the Minister's interest in a listed credit institution, if the acquisition or transfer results from a directed investment. Section 7 of the Credit Institutions (Financial Support) Act 2008 essentially provides that the Minister for Finance is to take over the role of the Competition Authority in respect of the merger or acquisition of a credit institution in the current banking crisis. I am providing that this section will not apply where I am directing the NPRF Commission to recapitalise the credit institutions on the basis that it is not necessary.

The section also provides that nothing done by the Minister, the commission or a commission investment vehicle for the purposes of a directed investment in a traded credit institution will constitute a reorganisation measure for the purposes of certain European Communities regulations. The Bill seeks to ensure that contracts previously entered into between recapitalised banks and third parties are uninterrupted so as to permit the orderly continuation of the banks' operations, notwithstanding that the shares in, and control of, the bank have transferred to the commission.

Section 6 of the Bill amends section 18 of the principal Act in a number of respects. First, it amends section 18(2) of the principal Act by allowing the Minister to make the annual contribution of 1% of GNP in a lump sum or in instalments at any time during the year, rather than in equal quarterly instalments. The Act of 2000 provides for a contribution from the Exchequer to the fund each year of an amount equal to 1% of GNP, to be paid in equal quarterly instalments. To allow more flexibility, I now propose a technical amendment in order that the annual contribution need no longer be paid in equal quarterly instalments. This change would, for example, allow the Minister to pay the contribution in a single instalment early in the year, if funds were required in the context of bank recapitalisation.

Second, section 6 amends section 18(5) of the principal Act to enable the Minister to transfer into the fund a shareholding or other interest held by the Minister or his or her nominee, for example, the National Treasury Management Agency, and to contribute to the fund by paying a sum into the fund. Third, section 6 provides that such transfers or contributions may be taken as satisfaction or part satisfaction, as the case may be, of the Minister's obligation under section 18(2) of the principal Act to make annual payments into the fund. If the total contribution exceeds the amount required to be paid into the fund in any one year, the excess shall be taken in satisfaction or part satisfaction of the amount required to be paid in any subsequent year. Fourth, section 6 provides that stamp duty shall not be chargeable on any instrument giving effect to a transfer by the Minister into the fund. As ownership of the fund is vested in the Minister, there is no basis for stamp duty being payable when the Minister is transferring a shareholding in his name to the commission for it to manage and invest on his behalf. Section 6 also provides that any commission investment vehicle which may be established is owned by the Minister.

The National Pensions Reserve Fund Act 2000 provides that the National Pensions Reserve Fund Commission controls and is responsible for the investment of the national pensions reserve fund, subject to the level of risk involved being acceptable to the Commission. This effectively is a commercial investment mandate. The concentration of significant investment in a particular sector or small number of institutions could be construed as contrary to this strictly commercial mandate. Accordingly, section 7 amends section 19(1) of the principal Act so as to provide that the commission's strictly commercial investment mandate will not apply in the case of directed investments.

The preparation of this draft legislation provided an opportunity to consider once again the position regarding ethical investment. As Members will be aware, when the fund was being established, the scope for introducing an ethical investment policy was considered at length. In the event, it was decided that it would not be practical or appropriate to constrain the fund in this way and, consequently, the NPRF legislation provides for a commercial investment mandate without an explicit ethical component. In the intervening years, there has been significant debate on the issue within institutional and sovereign investors as to how they should be expected to invest the funds they manage on behalf of the ultimate owners of those funds. There have been considerable developments in thinking in this area and the National Pensions Reserve Fund Commission has itself taken a number of initiatives to integrate environmental, social and governance considerations into its management of the fund. In the light of this ongoing debate and having regard to the experience of other countries with sovereign investment funds, it is my view that this matter requires further consideration.

Given the sensitive and urgent nature of the legislation now required to facilitate the recapitalisation of the financial institutions and the complexity in drawing up a responsible investment policy that will work in practice, it would not be appropriate at this time to include such a provision in this Bill. However, given the importance of the subject and to advance matters, I will establish an interdepartmental committee to examine the issues further. The group will report to me within three months of its establishment and will be open to receiving the views of interested parties.

Section 8 is the key section in the Bill as far as recapitalising the credit institutions is concerned. I have indicated previously that I intend that the National Pensions Reserve Fund Commission should be the agent of the State in providing the additional investment needed to capitalise the financial institutions. This will require the National Pensions Reserve Fund Act 2000 to be amended to give the Minister for Finance the power to direct the commission to make, hold and dispose of investments in the financial institutions as necessary.

Accordingly, section 8 amends the principal Act to provide that the Minister, in the public interest, having consulted the Governor of the Central Bank and the regulatory authority, may, in specified circumstances, direct the commission to invest on specified terms and conditions in certain listed credit institutions and to underwrite or otherwise support the issue of securities in such listed credit institutions. The section also enables the Minister to give a direction to the commission on the holding, management and disposal of, and any voting rights attaching to, a directed investment on such terms and conditions as are specified in the direction. The exercise of these powers will be subject to the normal EU state aid approval process.

This section also provides that the Minister, the commission, a commissioner, the manager of the fund and staff of the manager shall not be taken to be shadow directors within the meaning of section 27(1) of the Companies Act 1990 of a company or its subsidiary in which the commission has made a directed investment.

Section 9 of the Bill amends the Taxes Consolidation Act 1997 to provide that the same exemptions from taxation that apply to the National Pensions Reserve Fund Commission shall apply to any "commission investment vehicle", as defined in section 2 of the Bill. Section 10 amends the European Communities (Markets in Financial Instruments) Regulations 2007 to clarify that the National Pensions Reserve Fund Commission and any commission investment vehicle which may be established are not subject to the regulations. This is a technical provision. For the avoidance of doubt, it provides that the commission and any commission investment vehicle are not investment intermediaries in their role of investing the fund on behalf of the Minister.

I propose to amend the Securitisation (Proceeds of Certain Mortgages) Act 1995 to facilitate the winding-up of Ulysses Securitisation plc. This is a securitisation vehicle which was established in 1995 to borrow for the Exchequer using the cash flow from local authority mortgages to guarantee repayment of the bonds issued by Ulysses Securitisation plc. The bonds issued by the company have been repaid and it is now proposed to wind up the company. The provision proposed in section 11 of the Bill is a technical change to the legislation to facilitate the winding-up of the company and provide that any remaining assets of the company on its winding-up will be transferred to the Minister for Finance or to such other body as he may direct.

Deputy Pat Rabbitte

Has this anything to do with the Bill or does it merely constitute using the Bill to deal with this issue conveniently?

Deputy Brian Lenihan

No, the Bill is being used as a convenience to address the issue. Regrettably, this will not represent a major windfall for the Exchequer. Ulysses Securitisation plc holds some €127 million in cash but it is already borrowed by the Exchequer as ways and means borrowing. Therefore, this amendment will not represent an improvement in the fiscal arithmetic. Rather, it is a legal tidying up arrangement.

Deputy Olivia Mitchell

Are there any other pots into which the Minister could dip?

Deputy Brian Lenihan

I am still searching.

The Bill includes a provision amending the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 to enable the Minister for Finance to make regulations requiring that certain information relating to transactions in financial instruments must be disclosed to the Financial Regulator, the market or both. Certain financial instruments can be used to acquire an economic interest in the shares of publicly listed companies without acquiring direct control over, or ownership of, such shares. Such financial instruments are increasingly used by investors to avoid disclosure of their economic interest in a particular company.

There has been particular controversy regarding the use of contracts for difference, CfDs, which, unlike share transactions, do not need to be reported to the market, unless the contracts explicitly provide a right to acquire or give access to voting rights. The provisions in section 12 enable the Minister for Finance to make regulations to require all those who have entered into transactions in financial instruments to disclose certain information relating to those transactions to the Financial Regulator, the market, or both. The provision covers all financial instruments in order to cater for possible future market developments, but the intention is to make regulations covering CfDs in the first instance.

The decision to recapitalise Allied Irish Banks and Bank of Ireland is a clear indication that the Government is fully prepared to stand behind the banking system. We have embarked on a comprehensive recapitalisation programme for our financial institutions which will reinforce the stability of our financial system, increase confidence in our banking system and facilitate the banks involved lending to the wider economy. Our actions send a clear message to customers, investors, credit rating agencies and the markets generally that Ireland is a safe and secure place in which to do banking business.

In preparing this legislation, I was anxious to convey another important message. The existence of the National Pensions Reserve Fund is taken into account by those who lend to Ireland. The amendments to the legislation that have been brought forward in the House have been brought forward on the basis of minimal change to the existing legislation. The argument has been canvassed in the House as to whether we should take a holiday from making a contribution into the fund when we are operating from a position of Exchequer borrowing rather than surplus. It should be borne in mind that the front loading of the contribution means the essential investment which must take place in the banking system will allow us further space to consider this issue in the next two years. Therefore, it is not necessary to decide on this issue at this stage.

It is worth noting that the fund has substantially depleted in value as a consequence of the global decline in stock values. The sums that are available to finance the recapitalisation from the fund are liquid assets which can be realised easily. It has been canvassed in other quarters that the fund could be applied to some greater national purpose. However, the realisation of the remainder of the fund would come at a considerable cost because it is denominated in equities and other stocks which have depreciated in value and which would, in effect, have to be sold on a fire sale basis.

Deputy Kieran O’Donnell

I move amendment No. 1:

To delete all words after "That" and substitute the following:

"Dáil Éireann declines to give this Bill a Second Reading because:

I. the Government's recapitalisation strategy for AIB and Bank of Ireland has already been dismissed by the financial markets as lacking in credibility,

II. the Government has refused to provide an assessment of the superior ‘Good Bank' recapitalisation model put forward by Fine Gael Finance Spokesman Richard Bruton TD, and

III. the Government has not imposed an income cap on Bank Executives and Dáil Éireann insists on new Boards, new Executives, new Auditors in those banks that are to receive recapitalisation from the State.".

I propose to share time with Deputy Mitchell.

An Ceann Comhairle

Is that agreed? Agreed.

Deputy Kieran O’Donnell

Ultimately, the purpose of the scheme to recapitalise Bank of Ireland and AIB through the National Pensions Reserve Fund must be to enable those banks to restore credit lines for small businesses, first-time buyers and others. Fine Gael is of the view that, for various reasons, this legislation will not succeed in that objective.

Deputy Brian Lenihan

Keep telling that to the markets.

Deputy Kieran O’Donnell

We support recapitalisation but in a different form. This House is charged with ensuring value for taxpayers' money. The Bill facilitates the allocation of €3.5 billion to both AIB and Bank of Ireland. To compare, the pension levy will yield €1.4 billion in a year, according to the Minister's figure, and the income levy will provide €2 billion. The Taoiseach indicated in the House earlier that some €2 billion to €3 billion will have to be raised by way of additional taxes or reductions in expenditure. Taken together, these measures will produce almost €7 billion for the Exchequer. This helps to illustrate the scale of the allocation of taxpayers' money from the National Pensions Reserve Fund to the banks.

We all agree that the banks must be recapitalised. We all agree there are problems in terms of liquidity and solvency. However, we must ensure value for money and we must ensure the scheme is effective. The results announced yesterday by AIB show that with the €3.5 billion recapitalisation from the State, its tier one capital ratio would be in the order of 8.5%. Without the recapitalisation, however, it is below the minimum level of 4%. Looking forward to 2009, the bank foresees a bad debt write-off of between €2.9 billion and €4 billion and an operating loss for this year of some €121 million. In addition, each bank will have to pay €280 million in terms of the preference coupon. We are looking at a situation where, unless international markets change significantly, the banks may well be obliged to turn again to the State in search of additional funding. This is the reality.

Fine Gael has argued for a "good bank" model. The Minister has acknowledged the issue of toxic debts and so on and has indicated a willingness to look at this type of model in the future. Our proposal is very straightforward. Under our model, AIB and Bank of Ireland would each retain their toxic debt, but two new banks, New AIB and New Bank of Ireland, would be established, each of which would take all its parent bank's deposit liabilities and good assets in terms of commercial and residential loans. The newly created good banks would help to inspire confidence in the international markets. The problem is that the banks are retaining——

Deputy Brian Lenihan

How would this type of bad bank be funded?

Deputy Kieran O’Donnell

The bad bank would function as a debt collection agency rather than a functioning bank.

Deputy Brian Lenihan

It would still have to be funded.

Deputy Kieran O’Donnell

It would be funded in terms of what is required to wind the parent bank down. It would engage in no new commercial lending.

Deputy Brian Lenihan

I ask again how it would be funded.

Deputy Kieran O’Donnell

It would be funded so as to enable it to meet its requirements in terms of being solvent. It would no longer be operating as a commercial bank in the markets. The bad bank would effectively function as a debt collection agency, while allowing the new, good, bank to function.

The problem is that the international markets do no accept that €7 billion is sufficient funding for AIB and Bank of Ireland. For example, Citigroup has predicted the two banks will require an additional €3 billion between them. This cannot be ignored.

Deputy Brian Lenihan

Fine Gael's proposal would require €15 billion.

Deputy Kieran O’Donnell

No, our solution requires the setting up of good banks. Is the Minister saying he regards the level of bad debt in the banks to be in the region of €15 billion? What exactly is the Minister saying? This is about finding something the markets will believe in, in respect of the banks, their solvency and dealing with bad debts. The Minister may disagree with the model Fine Gael proposed but we believe it will work. What is proposed here is extremely worrying.

With regard to positive aspects of this legislation, I welcome the fact that the Minister is dealing with contracts for difference. The Quinn group was not legally required to disclose its dealings with Anglo Irish Bank to the Financial Regulator and this caused major difficulties for the bank. I hope the legislation will have substance and we will examine the matter on Committee Stage in order that contracts for difference are required to be disclosed and what happened with the Quinn group and Anglo Irish Bank will not happen again. I welcome the fact that the Minister will establish an interdepartmental committee to establish how bodies make investments.

Fine Gael takes issue with a number of aspects of the scheme. I refer to the announcement by the Minister for Finance on 11 February that the shares would be perpetual non-cumulative growth preference shares for €3.5 billion core tier 1 funding. The Minister should have considered these shares being cumulative preference shares and that the Government would have discretion in any year to decide whether the bank could afford to pay the dividend. There are two worrying elements to this. The banks will pay €280 million per year as a dividend for preference shares. If the banks redeem €1.5 billion of this State investment, the new preference shares, before 31 December 2009 the markets would worry that the banks would not be able to afford to do that. This puts unsustainable pressure on the banks and the Government should have opted for cumulative preference shares with discretion on the matter of whether the banks are in a position to pay dividends. The option of redemption by 31 December 2009 should not be included because it puts undue stress on the banks. The Minister referred to the banks redeeming up to €1.5 billion of the State investment in new preference shares from privately sourced capital prior to 31 December 2009. The worry we have is that it will put pressure on the banks. It is unlikely that they will be able to source tier 1 capital from private sources.

AIB is capitalised to the value of €406 million and Bank of Ireland has €201 million. We are putting €3.5 billion into the two banks for a 25% potential stake if the coupon dividend is not paid. This values the banks at €14 billion but that is not the case. With regard to the money being invested in the banks, we are worried that we will end up with zombie banks because the main concern of the banks will be the shareholders and funds will not flow to small businesses and first-time buyers. Overall that is the essence of the recapitalisation scheme and that is why we proposed the good bank model. This would allow a bank to function as a fresh bank and to go to the market in terms of liquidity and raising private funds. The State could consider putting ordinary shares into a good bank because it would be viable and the State could receive a return in future years. The problem is that we have a bank with assets that comprise a combination of toxic debts and good debts. We still do not know what is the position.

Fine Gael has concerns that the State is putting €1.6 billion from the Exchequer and borrowings into the National Pension Reserve Fund on a yearly basis. That is creating pressure and the Minister should consider a holiday until we reach 3% of Government deficit to GNP. There does not seem to be criteria on how the NTMA will account separately for the performance of normal investments along with directed investments. There must be transparency and accountability because this concerns €7 billion being invested in the banks under the direction of the Minister for Finance rather than a decision by the National Pension Reserve Fund. Fine Gael will refer to this matter on Committee Stage.

The Bill gives the Minister the power to bring forward payment to the fund from future years. This allows immediate recapitalisation of AIB and Bank of Ireland. This power should be curtailed for this reason only. The Minister has referred to the Government's contribution to the National Pension Reserve Fund being in the form of cash from the Exchequer or investments in lieu. The Minister must clarify what he means by these investments and whether he refers to shares in companies such as the ESB. This measure is clearly specified in the legislation and we require clarification on it.

The good bank model is critical for the international markets. Deputy Richard Bruton has espoused this point of view. In the context of the international markets, State capitalisation should require a clean-out of existing management teams and the appointment of new boards. There should be a cap in the order of €250,000 on executive pay. The CEO of AIB is still receiving approximately €670,000. In giving confidence to the public about the recapitalisation scheme, there should be a new broom.

We need a full overhaul of financial regulation in Ireland. I note the Taoiseach's comments at the weekend about effectively merging the Central Bank with the Financial Regulator. We await specifics on that but what is required is that the board of the Financial Regulator be removed and that a new financial regulator — preferably someone with international experience — be appointed. We are all singing from the same hymn sheet in that we want the banks to work. We want recapitalisation to work; we do not want the two main banks seeking further State investment in a few months' time. The worry is that the measures provided for here could bring about that. I refer to the announcements by AIB and Bank of Ireland about their bad debt provision for 2009 and 2010 and the situation they will face in terms of paying the coupon, which they can roll into ordinary shares. They will certainly try to repay the preference shares by the end of 2009. The buy-out of preference shares by the end of December will create pressure. We must get this right. A model should be put in place that will work and give confidence to the international markets, that will not bring about zombie banks but a situation where funds will flow to small business and mortgage holders.

In the terms of the recapitalisation scheme the Minister speaks about an increase of 10% in capacity for small business and 30% for first-time buyers. The worry I have is that proposals from small business will be looked at up to a particular sum and that funds will not be given beyond a certain capacity. It is critical that the Minister looks to have published the number of small business loans approved by banks versus the number turned down and the level of funding provided. The terms should also be made public. I have people coming to me who are involved in small business. They may require restructuring facilities but the banks are increasing the interest rates charged to the customer. Every other loan is being restructured at much higher rates. The problem is that the people concerned cannot go to other banks, as competition is effectively dead and banks are concerned more with protecting themselves than providing funds for small business.

The Minister should take our concerns on board. We have argued that we want a good bank and a cap on salaries for top officials in banks. We are not getting value for taxpayers' money but must get some guarantees from banks with regard to the flow of funds to small business and first-time buyers. We may find ourselves in a position where we will have to come back here in a number of months because funds will not have flowed to small business. What view will the Minister take if the banks come back in three, four or six months and indicate they require more funds? That is the decision we are taking today with the model proposed. The worry is that the banks will look for extra funds and that the required statement will not be sent to international markets. We will deal with this issue in much more detail on Committee Stage.

Deputy Olivia Mitchell

Despite the evident lack of interest in this legislation, in many respects it is little short of cataclysmic. We would regard it as such in other times, although at this stage we may consider we have seen it all and cannot be shocked further. This is another sacred cow, self-evident truth and core principle being turned on its head and perhaps jettisoned altogether. I refer to the pensions reserve fund which, despite some recent losses, represents the last tangible evidence that there was a Celtic tiger and that we were capable, as a country, of providing for our future and pensions. It was a small cushion that we could salvage from the years of the raging Celtic tiger. We are being asked to raid that fund in order to save the banks. More than that, we are being asked to purloin the contributions for the next two years, amounting to €3 billion. The way it is referred to suggests the sum of €3 billion in the next two years will be given at no cost but in reality the money must be borrowed at far from favourable rates, if the Government is capable of borrowing that much. That is one sacred cow but another is the absolute independence of the National Treasury Management Agency which is also being breached. The agency is being directed, at the whim of the Minister, to make investments in financial institutions. I use the word "investments" advisedly because I do not believe they are investments.

The sum of €7 billion is not mentioned in the legislation but we are enabling the Minister to direct that this amount be invested. We are being asked to vote to allow him to direct the National Treasury Management Agency to invest in any bank up to any value; we do not know the figure the Minister will direct the body to invest. It is an absolute reversal of the terms of the original legislation under absolute independence was given to the agency to make financial investments only in the public interest. It was completely independent of the Minister of the day. Under this legislation, the Minister, without further recourse to the Dáil, will have full authority to order the purchase of any amount of shares in AIB or Bank of Ireland, which amounts de facto to nationalisation of the banks. We may be moving in that direction but I hope not, as the implications will be enormous for the country. If the dust ever settles, we must have a viable financial services sector. If we want to have anything more sophisticated than a sub-post office, we must be very careful before we go down that road. Whether we eventually go down it, we cannot bury the matter in this legislation. That step is too big and must be clearly flagged and discussed, and only taken after every other option is fully explored.

The Government persists in calling this an investment of €7 billion but nothing could be further from the truth. An investment would be entered into freely with the expectation of some reward. Even the Government in its most optimistic mood would not genuinely expect a reward, not in our lifetime or within a reasonable timescale. If it does, it is not dealing in reality. The process is not being entered into freely. The players are being brought, kicking and screaming, at a time of the banks' choosing, for an amount of their choosing and probably on their terms. That has been the nub of the problem. I am sorry the Minister is not present to listen to what I have to say, as the Government has not taken control of the financial crisis, any more than it has taken control of the fiscal crisis. At every stage, by the time it eventually took action, the nature of the crisis had changed so much that the solution was already inappropriate, too little, too late and always extremely costly.

As my colleague has noted, Fine Gael is opposing this measure. It is akin to pouring money into a pot with a hole in the bottom. Perhaps it will give us a brief respite from market disbelief regarding the state of the banks' assets but it will not last long. There is a reprieve while the markets turn to eastern European banks but the pressure will return, unless we take the action that sends messages of confidence. Even if such messages were sent, they would do absolutely nothing to achieve our goal of increasing the level of credit provided for small business.

Reading today's newspapers, by AIB's own admission its liquidity ratios will be adequate when the bank is recapitalised. In other words, the recapitalisation is required to reach the liquidity figures required by law. If the banks need this capital, they will hoard it rather than lend it to business or those seeking mortgages, etc. It is a fallacy that that goal will be achieved.

My colleagues, including the party leader, as well as Deputies Bruton and O'Donnell, have made suggestions in good faith about the direction we should take. I ask the Minister to listen to these suggestions, as something must be done about extending the guarantee which is as damaging as anything else in terms of confidence in the banks. There is also the model of a good bank to consider in recapitalisation.

The approach and measures we must take should be dictated by what the end game is and what we want to achieve in the long run, not by the minimum measures necessary to get us through next week or the week after and certainly not by dancing to the tune of the banks and the level of interference they find acceptable, but that is what has been dictating the Government's approach. It has been listening to the banks on each occasion in terms of what they need rather than what the country needs and where we need to get to. The attrition rate of this approach in terms of confidence in the banks, the economy and the Government is enormous. It is sapping the Government's ability to solve any of the problems facing us. Its drip, drip approach, as I mentioned, is always too little, too late and is sapping the lifeblood of the country, financially and psychologically. It is utterly debilitating, enervating and destructive and has to end with some decisive comprehensive action, not only for the banks, important as that is, but also to address the country's finances.

The Government has been in denial about the country's finances in recent months and the gaping hole in our finances has increased in size from €5 billion to €10 billion to €15 billion to €18 billion. Today we find it is €20 billion. Does anybody honestly believe it will end there? It will not stop increasing, unless the Government takes decisive action. It can dress it up any way it likes, but we are facing a third budget within one year. How can we expect ordinary people to plan their lives and finances and have realistic spending plans if they do not know what will happen with the Government's finances and what it will spend. How can businesses plan in a climate of such uncertainty? This incremental piecemeal approach is destroying and killing the country and must stop.

Deputy Joan Burton

I wish to share my time with Deputy Rabbitte.

Acting Chairman (Deputy Kathleen Lynch)

That is agreed.

Deputy Joan Burton

I mean no slight on the Minister of State, Deputy Devins, in saying it is disappointing that there is no economics Minister present in the Chamber when we are discussing a measure of such fundamental importance for our future. I understand the Minister for Finance may be doing media work in the context of the announcement of a mini budget, but this measure involves a sum of €7 billion for the banks. Several Ministers and Ministers of State have direct economic responsibilities. While I have no objection to the Minister of State, Deputy Devins, being present, as he is just doing what he was asked to do, I find it insulting and an appalling comment by the Government, particularly given the repeated suggestions made by members of the Government that the Opposition has not been co-operative enough. This is the forum in which we can speak and make comments on what the Government is proposing to do and if it is so arrogant in not even wishing to bother hearing what we have to say, it makes co-operation very difficult.

I have before me a useful timeline published in the Irish Independent some weeks ago. On 23 October Mr. Eugene Sheehy, the chief executive of Allied Irish Banks, declared that the bank would not be looking for cash from the Government or shareholders and said they would rather die than raise equity. How is that for a capitalist warrior going into the breach and saying they would rather die than raise equity? On 5 November Allied Irish Banks slashed its profits forecast and indicated that it expected to write off €2.35 billion in loans, mainly to property developers in the past few years. Fast forward to yesterday when the same Mr. Sheehy was rather more subdued when he admitted a worse case scenario for the bank in the next few years of €8.5 billion in bad debts. This followed on the heels of its sister bank, Bank of Ireland, which made an announcement that it expected to have a broad bad debt provision in the next few years of approximately €6 billion.

The Government is putting €7 billion into the two banks — €3.5 billion per bank. I asked when the recapitalisation announcement was made if what was being done was adequate. Some €8 billion and €6 billion make €14 billion. The first question for the Minister is what are the economics of what he is doing? We should bear in mind that is not about saving the vanity of the various senior executives involved but about getting credit flowing to businesses. I am sure the Minister of State will have seen today in the February Exchequer returns that excise duties and VAT returns are down considerably. If one is in business, a fall in excise duties and VAT returns means that business activity is way down because importers have reduced their imports. As a consequence, there is paralysis in the country such that people are nearly afraid to paint their front room, they wonder if they can afford to do so, if it is sensible for them to do so, if they will have a job, or if they would they be better off putting their money under the mattress or saving it in a bank.

This is the last in a series of measures the Government has put before us and none of them has done the trick. We need to recognise that the Government has failed miserably in all its attempts, namely, the bank guarantee scheme, cited as the cleverest measure in the world when introduced at the end of September, bringing forward the budget in October, the announcement of the recapitalisation scheme and of a variation of it, the announcement of the nationalisation of Anglo Irish Bank and the announcement that the banks would not be able to raise more capital but that the State would up its capital investment to €7 billion. In counting these measures on my fingers, they number seven. Today another measure was announced — a mini budget. The pension levy legislation was passed last week. After counting all these measures on my fingers, I have only one finger remaining. All these measures were meant to fix the problems facing us — the lack of fiscal stability in the public finances and the recapitalisation of the banks. I will not even begin to talk about the disaster of unemployment stalking the land with people losing their jobs or income due to having their hours of employment reduced.

At the time of the announcement of the bank guarantee scheme the Government would not acknowledge that property developers and the golden circle had been central to the fall in our fortunes, but Allied Irish Banks stated yesterday that it had loaned €5.4 billion to 30 developers. Mr. Sheehy said only four or five clients — I love the way bankers talk, they should write novels — owed the bank more than €500 million each. What a charming concept. They are photographed in today's edition of the Irish Independent, taken after these announcements and before their nice lunch — given all the humble pie they have had to eat, I am surprised they needed lunch also — against the background of a well known painting in a well known hotel across from Government Buildings. It is a beautiful painting by Jack B. Yeats. I am sure the Minister of State, Deputy Devins, will know it——

Deputy Pat Rabbitte

——given the Sligo provenance.

Deputy Joan Burton

It is entitled, "A Race on Hy Brazil". The Government is permanently sequestered on Hy Brazil. I do not even think "A Race on Hy-Brazil" by Yeats is providing them with inspiration because they just do not get it. The measures announced today indicate that the banks are laughing all the way to the bank because the Government has yielded to them on almost every point. The small measures that the Opposition sought which would make so much sense for business and employment and put manners on bankers are not included. The Government is in Hy-Brazil and we have not been answered. The Bill contains no measures to get credit flowing or apply conditionality to the injection of the sum of €7 billion, which is essential. It is good that the banks are coming forward with clear and honest statements of what has been happening. Inevitably, with the scale of losses they have incurred, how will they provide funds for existing and new businesses to sustain employment? It is incredible that this matter does not feature in the Minister's speech.

I repeat what I said on 30 September and in early October. The Labour Party has a very simple proposal, which is that bankers' salaries, compensation or whatever they call it should be capped at the same salary and compensation package of the Minister for Finance. That salary stands at approximately €250,000. Ministers receive expenses of €60,000 to €70,000 and have a chauffeur driven car. In my language, that means a Minister's total package is worth approximately €350,000 which is remarkably similar to the figure President Barack Obama has come up with for bankers in the United States. In order to incentivise the people concerned — if they only understand incentives — a review clause could be inserted stating that after two or three years when they have brought the banks back to health we could consider giving them a Christmas box or something like it. It would not be a bonus but something modest that would reflect our thanks for what they had done. We want a capping of bankers' remuneration to be provided for in the Bill.

The Minister has announced today that he will hit the people with a mini budget, probably by the end of March. The people need reassurance that these masters of the universe are to feel some pain. While I cannot feel it, I can understand the pain felt by Mr. Goggins when he announced that his earnings would be cut to below the €2 million mark. Yesterday standing under the painting "A Race on Hy-Brazil" Mr. Sheehy was devastated that his income was falling to €700,000. I can understand that if one's lifestyle is pitched around earnings of €2 million, €700,000 does not sound fantastic. The people, like most Members, believe is an extraordinary amount of money, that it is excessive and that it should be reduced. I do not care what the CIROC is doing. It just needs to do it and bring bankers' salaries down. They need to be capped in order that the little people who will be asked to cough up in a mini budget will see that the bankers will also pay. As they are wealthy, they should pay proportionately more than those on small modest incomes.

We have had no detailed figures from the Minister to indicate why he believes the €7 billion recapitalisation figure is adequate. I am concerned that more will be required and that the Bill does not require the Minister to come back to the Dáil. We want a clause inserted in it requiring him to come back to the Dáil for approval. The terms of the Bill describe them as directed investments. Once these investments are made in the banks we want an annual report to be laid before the Houses of the Oireachtas. In effect, after we have invested €7 billion in the banks, we will own them. They will be nationalised in all but name because the device used is one of preference shares.

We are also concerned that the recapitalised banks will be protected against acquisition until the State has recouped its money. It would be quite possible for a clever capitalist — a hedge fund or private equity operator — to decide to buy ordinary shares. While we know it would be subject to the credit institutions financial support scheme, what is to stop a high flyer in a private equity or hedge fund buying up stocks of the two banks at very cheap prices, then taking over the banks — because that is what is provided for in the Minister's scheme — and saying to the taxpayer, "Off to Hy-Brazil with you. You are getting nothing." Where is the upside for the taxpayer? From the details of the Bill, there is no evidence that we are protected.

During the two-year but renewable lifespan of the guarantee for the covered institutions, the Minister will have the power to revoke the guarantee if an institution is taken over. Article 13 of the scheme states the Minister may revoke the guarantee in whole or in part after consultation with the governor and the regulatory authority. However, section 5 of the Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Bill reverses section 7 of the Credit Institutions (Financial Support) Act. I am not sure whether this has become clear to the Minister. In other words, the special rules relating to the merger or takeover of guaranteed credit institutions do not apply to the investment by the pension fund on the Minister's behalf in the two banks. However, these special rules will continue to apply to a subsequent merger or takeover if it is only the State investment that is not covered by the rules under section 7.

Section 7 of the Credit Institutions (Financial Support) Act is a good example, which is worth highlighting in debate, of how rushed law makes for bad law. Its purpose is to modify competition law in its application to covered institutions. This was intended to facilitate mergers by providing for ministerial rather than Competition Authority scrutiny and approval. The mistake in the section is that it creates a special procedure to fast-track approval by the Minister of mergers and acquisitions to which the section applies in covered institutions. However, it defines mergers and acquisitions to which the section applies by reference to the Minister's certified opinion that:

(i) the proposed merger or acquisition is necessary to maintain the stability of the financial system in the State, and

(ii) there would be a serious threat to the stability of that system if the merger or acquisition did not proceed,

In other words, the Minister cannot consider a proposal for a merger or acquisition unless he is first notified of it, considers it, seeks additional information on it, if necessary, consults the Minister for Enterprise, Trade and Employment, the Central Bank and the Competition Authority, invites submissions, appoints a competition adviser and ultimately decides whether to approve or refuse the proposed merger or acquisition. This elaborate procedure only applies to mergers and acquisitions to which the section applies, being ones which the Minister has decided are necessary for the stability of the financial system of the State. The definition puts the cart before the horse. On the basis of our legal advice, if the provisions of the section were ever invoked, it would be absolutely unworkable. It is another example of rushed legislation being bad legislation.

I am also disappointed that the Bill only applies in regard to the investment in the banks in terms of the financial stability of and the financial crisis in the State. It makes no provision whatever for investment, for example, in necessary elements in the State such as required public infrastructure. In other words, what is left of the fund will continue to invest in equities throughout the world, from Hong Kong to Australia to the United States, in products as diverse as armaments, cigarettes and anything else one fancies, because it is all managed in diversified funds by fund managers who get handsome fees amounting to approximately €20 million a year. In the meantime, while there are very good projects in this country with an absolutely recognised and viable rate of return, there is no way of using anything from the pension funds to invest in those particular projects.

I am extremely disappointed by the Bill the Minister has produced. In a democracy, there must be public and social consent for what happens. As I said, today's announcement is the ninth attempt in terms of banking and stabilising the public finances. We seem to be set on a course where the banks have got everything they wanted in this recapitalisation proposal whereas the modest proposals put forward by us to cap bankers' pay and insist on conditionality being put in place in regard to credit for small and medium businesses in particular, as well as larger businesses, and have this addressed either by way of designated funds or otherwise by direction of the Minister, have been left out. It is difficult for people not to be very cynical about how partisan the Government has been when it is continuously on the side of rich bankers, not on the side of families working hard to put their children through school and build a life for themselves.

Deputy Pat Rabbitte

The Minister in particular drew our attention to sections 6, 8 and 12 of the Bill. I will start at the back and make reference to section 12, which concerns the amending of the Markets in Financial Instruments and Miscellaneous Provisions Act 2007. In his script, the Minister drew our attention to the fact the purpose of this is to provide in particular for the situation that has risen with regard to contracts for difference, CFDs. It could theoretically apply to other instruments and derivatives already in existence, or perhaps yet to be created, but in particular it is intended to deal with this issue of CFDs.

I welcome that measure. It introduces a badly needed element of transparency and obligation on the person concerned to disclose certain information. While I do not know on whom is the obligation to disclose certain information relating to such transactions to the market, the Financial Regulator and the public — whether it is on the person accumulating the CFDs or on the company — I certainly welcome it as a step forward.

I do not have any wish to criticise Mr. Seán Quinn who is a major employer in this country. When I was Minister of State with responsibility for commerce, I had occasion to authorise his insurance company and I have had the opportunity to visit it and see the very large number of people employed there. He is a very important employer. However, what happened in the case of Anglo Irish Bank has done untold damage to our reputation outside of this country. Even Fianna Fáil has gone from describing it as "disappointing" on day one to describing it at the weekend as being akin to the damage wreaked by Cromwell, which is one hell of a distance to travel in a short time. However, it is a positive measure in the Bill.

I wish to come back to the point made by Deputy Burton in regard to the covered institutions. Will the Minister when replying deal with the issue of what now is the position with regard to the mutuals and the building societies? I was horrified to find that even a well-managed, conservative organisation like the Educational Building Society had decided to get in on the property business at the height of the market, just in sufficient time to make significant losses in the context of that company's overall loan book. If assistance is required for the EBS or Irish Nationwide, where one reads it will definitely be required, how will the Minister support that? Will it be by way of guarantee or by way of underwriting a bond? We would need to be told how he proposes to deal with it.

I also ask the Minister to address the issue touched on at page 5 of his script, where he draws our attention to the fact the commission can only accept contributions from the Central Fund and explains that this section will enable the commission to accept funds or assets for the benefit of the fund "from sources other than the Central Fund". What is envisaged in this regard? Is the Minister anticipating there that moneys may be forthcoming from sources other than the Central Fund? Does this envisage the disposal of State assets elsewhere? Does it envisage the disposal of State holdings in, say, a company like Aer Lingus or the privatisation of other State companies, for which there is occasionally a clamour outside and inside this House?

I would like to know what is the position because when one looks back at the Act we enacted before Christmas, one will find the Minister was laying the ground then for the possible recapitalisation of the covered institutions, notwithstanding that he vehemently argued at the time that he was not and that recapitalisation was not required. Now, when one looks back, that is the main Act and this Bill is really only invoking its terms.

In that regard, I draw the Minister's attention to the question raised by Deputy Burton on whether €7 billion will be adequate. She made a compelling case for the Minister to come to the House to give a considered reply to that question given the history of this entire saga since 29 September. Is the answer to Deputy Burton's question that the Minister intends to come back? It is very interesting to note that, under the original Act, if this is done by way of scheme, the Minister must come back to the House but if it is done by agreement with the individual institution, he is not required to come back to the House. If Deputy Burton is correct and the figure is inadequate, then the Minister, without reverting to the House, can enter into an agreement with a specified covered institution. Notwithstanding the enormity of the decisions we are now making, somewhat casually, the Minister is not obliged to revert to the House at all. We have grown accustomed during this crisis to making such decisions. I recall that we won a commitment from him for a scheme on the floor of the House, although I understand this was not originally envisaged by his minders. Nevertheless, he conceded given that he is an agreeable man. However, the position is that he can extend the €3.5 billion to a particular institution, or he can cause it to be extended to a new covered institution, provided it is not a mutual institution, without reverting to the House at all. We should hear from the Minister on that matter.

Acting Chairman

The Deputy has one minute remaining.

Deputy Pat Rabbitte

These debates are entirely inadequate to deal with the issues that are before us. I note that the Minister is required to talk to or consult the Central Bank and the Financial Regulator. Up to now, I have not made much comment about the regulator because, by and large, I believe public servants do the job they are allowed to do. However, the more one examines the matter, the more horrified one becomes at the role of the regulatory authority. I note the emergency decision made by the Taoiseach before the Ard-Fheis, which permitted us no opportunity to properly discuss the issues involved. There was some brief discussion at the time that the senior counsel, Mr. Michael McDowell, made his report on regulation. A hybrid was born which has failed, with tragic consequences for the country. The Taoiseach went ahead notwithstanding and announced a new configuration without any discussion and it is a matter that we must discuss.

I do not agree with the comments of my colleague, Deputy O'Donnell, to the effect that perhaps the 8% coupon was punitive on the individual banks.

Deputy Kieran O’Donnell

That is incorrect. The point is that they may not be able to repay it in terms of liquidity and solvency ratios. It is not punitive at all. In fact, they should pay more.

Deputy Pat Rabbitte

That is a different point. When Mr. Alastair Darling initially dealt with this issue the coupon was 12%. It turned out to be unsupportable with the objective of stabilising the banks and it was too punitive. Taxpayers find that having devoted a share of national wealth to the pensions of the future, that pension money is now going toward the banks. Many people have great difficulty in understanding that, although we must say that without a functioning banking system we cannot have a functioning recovering economy. In that sense it seems if the Minister is reassuring us about capital adequacy ratios, that a coupon of 8% ought to be capable of being borne.

I was greatly amused at the weekend by the huff into which Fianna Fáil fell about the preposterous notion that anyone should associate that party with developers and such people. Whoever was responsible, there is manifestly no basis for such a claim.

Deputy Chris Andrews

It is good to hear Deputy Rabbitte standing up for us.

Deputy Pat Rabbitte

I am standing up, and I hope the Minister, Deputy Noel Dempsey, has calmed down somewhat since.

Deputy Michael Noonan

Those tribunals are libellous.

Deputy Pat Rabbitte

They are absolutely shocking. Deputy Burton referred to the role of Hy-Brazil. I note that Ulysses was mentioned too. Will the Minister of State, Deputy Haughey, in the course of his reply clarify the position? It appears that on the one hand we will receive a windfall of €127 million, but on the other hand, that is an administrative fiction and no more than a legal tidying up. Will the Minister of State explain this matter, because it seems to be relevant to an area in respect of the local authorities and alternative proposals may yet be necessary?

Deputy Chris Andrews

I wish to share time with Deputy Michael McGrath. I thank the Acting Chairman for the opportunity to speak. Ulysses is always difficult to understand, however one reads it. The purpose of the Bill is to amend the National Pensions Reserve Fund Act 2000 to enable the National Pensions Reserve Fund Commission to make investments in the public interest in listed credit institutions and it amends the Taxes Consolidation Act 1997 in respect of the taxation of such investments. The National Pensions Reserve Fund was established with great foresight by the Government of the day and under the careful eye of the then Minister for Finance, Charlie McCreevy, in 2001. The original objective of the National Pensions Reserve Fund was to meet as much as possible the costs of social welfare and public service pensions from 2025 onwards. Demographic projections indicate that the age structure of the population is due to undergo a major transformation in the coming years. The proportion of persons of working age relative to those greater than 65 years of age is projected to fall from a current 5:1 ratio to less than 2:1 by 2050. This will inevitably put severe strains on the capacity of future Governments to continue to fund social welfare and public service pension liabilities on a pay-as-you-go basis.

The National Pensions Reserve Fund represented a move towards a part pre-funded public pension system. It involves the statutory setting aside and investing of 1% of GNP annually. Currently the fund is valued in the region of €16.5 billion. Late in 2008, due to a number of factors, national and international, and coupled with the ongoing turmoil in global financial markets, the Government initiated intensive discussions with several banks with a view to securing their position.

The Government decided on a comprehensive recapitalisation package, which will reinforce the stability of our financial system, increase confidence in the banking system here, and facilitate the banks involved in lending to the economy. Every day we hear of the difficulties of viable small and medium enterprises in accessing credit and cash. Such small and medium sized enterprises are struggling and must be given support. This measure will go some way towards doing so. Further steps will be required in addition to the steps already taken. There is no magic wand and no one silver bullet that will solve everything. Everything cannot be neatly packaged into one small box and rolled out on one day. Given the current turmoil and the meltdown of the financial markets it is very difficult to predict what will come next. I note the comments of an economist who stated that what was needed was small steps not giant leaps. This measure is one small step that will assist the economy and small and medium enterprises.

The purpose of the Bill is to allow moneys from the National Pensions Reserve Fund to be used for this programme of recapitalisation and I support this proposal. The plan will see €3.5 billion invested in each bank, the Bank of Ireland and Allied Irish Banks, in return for preference shares with a guaranteed dividend of 8%. There is concern in some quarters that 8% may not be sufficient but it was the case in other countries that a higher dividend had to be reduced subsequently. This dividend is balanced and good and the Government will also have the right to appoint one quarter of the number of directors at each bank and obtain one quarter of ordinary voting rights at board meetings. In return for the funding, both banks have agreed that bonuses for staff will not be paid for activities in 2008 and 2009. While salaries for senior executives will be cut by at least 33%, the banks have also agreed to increase lending to small business by 10% and to first-time buyers by 30%. This will be welcomed by all those involved and those who appreciate the serious demands on small and medium enterprises.

An effective banking system is vital for business and consumers alike and is essential to Ireland's economic recovery. The recapitalisation of these banks will have a positive impact on the ability of businesses to acquire finance and maintain business activity. Recapitalisation will boost confidence and will send a strong message to the domestic and international business community that Ireland is a safe place in which to do business.

Businesses are really struggling. The reduction in gas and electricity prices is a very good step and must be a great relief to both the residential and the business consumer. Businesses are finding it difficult to pay rent and rates and local authority charges. In Grafton Street, not too far from here, there are proposals for bids for district improvement which is also adding on charges for additional services. While these services are very welcome and the bids concept is a good proposal, it imposes a heavy burden on many businesses which are already struggling. I heard of one landlord who was seeking to increase the rent. It is amazing that anyone would try to do that at this time——

Deputy Joan Burton

He must have been a Fianna Fáil landlord.

Deputy Michael Noonan

They do not do development.

Deputy Chris Andrews

It was probably an old Labour Party socialite. Is it socialist or socialite, I am not sure?

Deputy Joan Burton

We have no landlords.

Acting Chairman

We were doing so well. I ask Deputy Andrews to continue and not to rise to it.

Deputy Chris Andrews

Deputy Burton could not resist. I will not lower myself.

Deputy Joan Burton

It is the word picture being painted.

Deputy Chris Andrews

On a humorous note, I saw a cartoon recently which I thought was very Irish in its humour. It was in reaction to the banking crisis. It showed a picture of two rats sitting in suits chatting to each other and one said to the other, "I hear that we are never more than ten feet from a banker". I thought that was a very Irish view of the banking sector and it highlights the depth of anger against the bankers.

Deputy Pat Rabbitte

The Deputy is better than Deputy Charlie O'Connor.

Deputy Chris Andrews

I have not mentioned Tallaght although I still have a few minutes left.

Acting Chairman

The Deputy has just one minute and a half left.

Deputy Chris Andrews

Time flies when one is enjoying oneself.

I said I would not rise to Deputy Burton's remarks. She said this proposal should be brought back to the House for further approval. I find it amazing that she would imply that the Labour Party would approve of anything because they have opposed everything for as long as I have been a Member of the House.

The Government's recapitalisation scheme will provide the stimulus to kickstart the economy once more and I commend the Bill.

Deputy Michael McGrath

I welcome the opportunity to speak on this important Bill. We must recognise the integral importance to the economy of a properly functioning banking system. We cannot have economic recovery unless the banking system works for its customers and is in a position to lend credit to personal customers, to small and medium-sized enterprises and to large companies. The success or failure of this recapitalisation proposal will be measured by the extent to which it allows credit to move through the economy again. As part of the proposal, the lending capacity to small and medium-sized business is to be increased by 10% and an additional 30% capacity for lending to first-time buyers will be provided in 2009. It is one thing to provide capacity for extra lending but this does not necessarily equate with actual additional lending. I ask the Minister to ensure there is follow-through on the extension of credit to ensure the extra capacity translates into credit being extended into the market. Judging from the advertisements in the newspapers from institutions it is quite clear they are now more enthusiastic about taking in deposits than in providing credit and this has to change. It is to be hoped that this recapitalisation initiative will help to achieve that result.

I met a motor dealer recently who told me that a couple of years ago the refusal rate from car financing houses to personal loan applicants was in the region of 20% whereas now it is up to 65% to 70% refusal rate. Many of these applicants are legitimate with no bad credit history and would be in a position to meet the repayments but it is clear there has been a shift in thinking and in the practices among the institutions regarding the availability of credit. The recapitalisation of AIB and Bank of Ireland will have to result in credit being extended to our economy again so that we can work our way through the current recession.

There has been much comment as to whether €7 billion is sufficient and from reading the various articles which were provided by the research service of the Oireachtas Library it is clear there is a divergence of opinion as to whether €7 billion is sufficient and whether the entire principle will work. It is clear that the Minister has taken this decision very seriously and has consulted with the appropriate authorities such as the Central Bank and the Financial Services Regulatory Authority and has had extensive negotiations with the institutions over the past number of months resulting in the Government decision to proceed with this recapitalisation. I welcome the code of practice on business lending and mortgage arrears which is being finalised. I look forward to a more understanding attitude by the main banks towards personal customers who run into difficulties with repayment of mortgages which were secured at highly inflated values in recent years.

It is essential that confidence is restored in the banking system and this must be a national political priority. Since the outset of the global financial turbulence, the Minister and the Government have made it clear that the Government will stand behind the main financial institutions which are of systemic importance to our economy. The Minister has made it clear on many occasions, including in his speech on Second Stage, that the Government will not allow any institution of systemic importance to fail. This is an important statement from the Government and it will help to reassure investors and the markets that the Government is serious in its intentions.

Deputy Rabbitte referred to the hybrid regulation system where the Central Bank has certain functions and the regulatory authority has other functions.

Debate adjourned.