The Deputy expressed a specific concern about the adequacy of the capitalisation which was proposed for each of the institutions. It is important to note that the impact of the Government's proposed investment has been assessed to increase AIB's core capital to €12 billion and Bank of Ireland's to €11 billion. In addition, Deputies should be aware that the existing reserves of the banks will be supplemented by ongoing profits with the result that the banks are well equipped to deal with the expected losses. It is important to highlight that in the House because the suggestion has been canvassed in some quarters that the sums identified by the State as part of the State investment are somehow inadequate because they do not correspond to the anticipated losses of the institutions. It is important to note that there are not alone existing reserves at these institutions but there are also ongoing profits out of which expected losses can be met.
To turn to the area of assets at risk in the institutions, there has been much debate both domestically and internationally in recent times on solutions to deal with the asset side of bank balance sheets, whether this is a "good" bank', a "bad" bank' or a "legacy" bank as Fine Gael chose to name its option, or a form of asset insurance. On 11 February, the Government committed to examining proposals to deal with the assets that were at risk on the balance sheets of the banks, specifically land and development loans, with a view to bringing greater certainty and transparency to the operations of systemically important financial institutions. In examining possible options in this area the Government will have particular regard to developments internationally, especially at EU level where the Commission and the ECB have already issued guidance. Discussions are also ongoing between the Finance Ministers at Ecofin on this subject.
Any arrangement on asset risk management would require detailed preparatory work to define the categories of assets covered, and the State's role in managing and reducing risk associated with these assets. I have appointed Mr. Peter Bacon to work with the National Treasury Management Agency and to report and advise me, with the agency, on the options available to Government in this area. I made the point to Deputy O'Donnell, who opened the debate for the Fine Gael Party, that it is important that we appreciate there is a cost associated with the management of risk. There is a sizeable up front cost for the taxpayer in the capitalisation or funding of a "bad" bank institution, for example. Clearly the loans must be purchased by the "bad" bank and there is a cost annexed to this. I have noticed in public debate that the "bad" bank is often compared to a skip or a local authority vehicle into which one can dump these loans, harmlessly. That is far from being the case. Were we to establish a "bad" bank there would be a definite up front funding cost for such an institution, which initially would have to be borne by or borrowed from the taxpayer.
That is the reality of the bad bank option and those who glibly canvass this option must cost their proposal with great care. I do not say it is a bad option or that necessarily it is not the option that should be pursued here but it requires a great amount of analysis and necessitates an up front cost in funding. I do not believe this has been recognised in public debate on the subject to date. The other options that have been canvassed relate to some form of insurance whereby the financial institutions pay the State up front for the cost of insuring the loans and the State undertakes to indemnify the banks in respect of future losses. Analysis of that proposition immediately reveals that, in certain circumstances, it could amount to a time bomb for the Exchequer and the taxpayer.
With regard to pay levels in the banks I have previously stated, and it is accepted internationally, that the pay regime within banks needs to change to ensure that any rewards in the sector are structured to meet the long-term objectives of the banking institutions and the overall health of the financial system. The Government recognised from the outset the need to limit pay levels in banks benefiting from State support. Under the guarantee scheme the remuneration packages of directors and executives, including total salary, bonuses, pension payments and any other benefits are subject to review by the Covered Institution Remuneration Oversight Committee, CIROC. I have just received the report and am considering it. Caps are proposed for the remuneration of the various senior executive positions within each institution. I will take into account points made today in respect of the report.
The Bill strikes a prudent balance between the need to recapitalise the financial institutions in the current difficult market conditions and, in the context of maintaining long-term budgetary stability, the need to preserve the National Pensions Reserve Fund as a means of providing for as much as possible of the cost of welfare and public sector pensions when the full impact on pension costs of an aging population begins to kick in about twenty years from now.
Deputy O'Donnell asked me to clarify what is intended by the provision that the Minister for Finance may transfer a shareholding or other interest to the National Pensions Reserve Fund Commission. Deputy Rabbitte referred to the credit institutions not listed on the stock exchange, namely the mutuals, the EBS and Irish Nationwide. The Government announced its proposals in respect of the recapitalisation of the two main banks. It also announced it is in discussions with the other covered institutions, Irish Life & Permanent, EBS and INBS, concerning their respective capital positions and about the review of the guarantee scheme.
Deputy O'Donnell also asked what would happen if further funds were needed to recapitalise the banks. There are several options. It would be possible to invest Exchequer moneys directly under the Credit Institutions (Financial Support) Act 2008; to provide moneys from the Exchequer to the NPRF Commission for investment in a listed credit institution under this Bill; and it would be possible under this Bill for the Minister for Finance to direct the commission to invest in a listed credit institution from its own funds. I make it clear that none of these options is under examination at present. I clarify this matter for Deputy O'Donnell because he asked about the legal reach of the Bill rather than about any concrete proposals the Government might have in that regard.
Questions were raised about the transparency of the provisions that enable the Minister to make additional directed investments in the future. Deputy Rabbitte also touched on this issue. First, the annual 1% of annual GNP contribution to the fund is being maintained and will be provided for in the Budget each year as heretofore. Second, when the Minister makes an additional contribution from the Exchequer for the purposes of a directed investment Dáil Éireann will be aware of this. However, directions of this nature by the Minister can only be made in circumstances where the Minister is of the opinion, having consulted the Governor of the Central Bank and the Financial Regulator, that the direction is needed to remedy a serious disturbance in the economy or prevent serious damage to the financial system. In this type of circumstance, there may be a balance to be struck between transparency and the need to withhold — at least for a time — market sensitive information about investments which the NPRF is being directed to make in the public interest.
Deputy Olivia Mitchell said we were raiding the NPRF and purloining the next two years' contribution. In fact, the investments made by the NPRF in the banks will be part of the fund and the returns earned on them will accrue to it. Through the dividends from the banks which are part of the recapitalisation scheme, the fund will earn in the short term a very attractive rate of return in present market conditions, namely 8%.
I take issue with Deputy Mitchell's depiction of what this Bill will bring about. The National Pensions Reserve Fund was an important initiative to set aside moneys for investment to help meet the rising cost in the future of social welfare and public service pensions. The framework within which the fund operates was carefully structured in that the Commission was given discretion as to how fund moneys are invested and managed. Times have changed and we must consider how best to provide the funds needed by our financial institutions to re-establish their capital adequacy. It is reasonable to look to the moneys that have been put away for investment in the National Pensions Reserve Fund. In particular, I draw the attention of the House to the terms of the agreement under which the banks are to be recapitalised and the dividends and warrants the State has obtained.
Recapitalisation will work and it is the correct decision on the part of the Government in the face of the extraordinary turmoil in the financial system. We are not asking the NPRF to provide more than €4 billion at this time and therefore it will not have to liquidate any of its equity holdings for the present. As Deputy Mitchell noted, we propose to pay more than two years' contribution to the fund this year, for investment in the two main banks. I am confident that will be a profitable investment.
Deputy Burton proposed that there should be an annual report on the investments which the NPRF will be required to make in listed credit institutions. There is already a provision for the NPRF Commission to present an annual report on its activities and that report will contain information on its directed investments as much as on what I might call its traditional portfolio.
Deputy Burton also referred to section 5 of this Bill which disapplies section 7 of the Credit Institutions (Financial Support) Act 2008. Section 5 provides, inter alia, 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 listed 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.
