Dáil Éireann debate -
Tuesday, 16 Jun 2009

Vol. 684 No. 5

Financial Services (Deposit Guarantee Scheme) Bill 2009: Second Stage.

Minister for Finance (Deputy Brian Lenihan)

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

The Financial Services (Deposit Guarantee Scheme) Bill 2009 is one part of a two-stage legislative package — the other being a complementary statutory instrument which I will make as soon as the Bill has been enacted — to amend and update the Irish deposit guarantee scheme in line with the Government's announcement of 20 September 2008.

The main reforms announced then comprised increasing the statutory limit for the deposit guarantee scheme for banks and building societies from €20,000 to €100,000 per eligible depositor per institution with effect from 20 September 2008; the discontinuance of the co-insurance requirement whereby the depositor bore 10% of the loss up to the statutory ceiling on cover which had a maximum payout of €20,000; and extending the guarantee scheme to apply to credit union savers. These came into effect immediately and, as I indicated then, I would provide the appropriate legislative underpinning as soon as possible afterwards. The purpose of the Bill is therefore to provide the first step in this process.

Deposit protection in Ireland is a new intervention. The Central Bank Act 1989 put in place a deposit protection scheme which involved the Central Bank establishing a deposit protection account and transferring to that account 0.2% of deposits of the licensed banks held by the Central Bank. This was repealed in 1995 when the deposit guarantee scheme was established under the European Communities (Deposit Guarantee Schemes) Regulations 1995, S.I. 168 of 1995. This gave effect to an EU directive under which protection was provided at the minimum level of 15,000 ECU, the forerunner to the euro, and increased to €20,000 from 31 December 1999.

In simple terms, the Irish deposit protection scheme guarantees to compensate depositors, subject to certain limits, when a credit institution fails. It covers deposits held in current accounts, demand deposit accounts and term deposit accounts with credit institutions. The basic intention behind such a scheme is to reassure small and relatively unsophisticated depositors that there is a safety net that will enable them to recover all, or at least most, of their savings in the event of a failure of a credit institution. This reassurance, in turn, helps to reduce the likelihood of a run on an otherwise solvent bank and helps to contribute to the stability of the financial system.

A deposit protection scheme is not, of course, intended to cope with a systemic financial crisis. In such a scenario, government intervention to restore confidence might be necessary, as has been seen both in Ireland and in other countries over the past year. Thus, while deposit protection schemes can be seen as just one part of financial safety net, they can be helpful in protecting otherwise solvent institutions from failure. In the wake of the turmoil that has affected the global financial system in the past two years, there is a general acceptance that deposit protection needs to be enhanced and that information, funding and immediacy of payment are important factors in ensuring the effectiveness of a deposit protection framework by supporting confidence in the banking system.

All institutions authorised by the Financial Regulator to carry out banking activities here are required to become members of the deposit guarantee scheme and in this sense, it is wider than the scheme for the covered institutions. All these institutions must hold a balance in the deposit protection account, which is maintained by the Central Bank and Financial Services Authority of Ireland, CBFSAI. At present, there are approximately 50 such institutions which have been so authorised by the Financial Regulator and the extension of coverage to credit unions will bring in another 419 institutions. The balance in the deposit protection account in the CBFSAI at the end of 2008 was €617 million.

The Government decision last September to increase the guarantee limit from €20,000 to €100,000 was prompted by a number of factors. First, there was the significant uncertainty in international financial markets at that time, which had begun to play on some customers' fears regarding the security of their savings and financial institutions at home. Second, given the passage of time since the guarantee limit was last changed approximately ten years ago and the very substantial growth in the number and value of deposits, the case for raising the payout ceiling of €20,000 had been clear for some time. Finally, the case for an increase in the limit had been made by various Members on both sides of this House at that time.

The decision to remove the co-insurance requirement, whereby the depositor carried 10% of the loss on his or her deposit, was a necessary amendment because of the public's heightened sensitivity to the broader savings protection debate, particularly regarding people's fear of losing even a small portion of their savings because of a credit institution becoming insolvent. It was important to remove any incentive for people to withdraw their deposits from credit institutions and to reassure those with relatively small deposits in particular that all of their savings would be protected.

The extension of the scheme's coverage to credit union savers was based on the need to provide a level playing field for all depositors. In this connection, it should be noted that the Irish League of Credit Unions has, since 1989, operated on an all-island basis a savings protection scheme, SPS, for credit unions. To date, it has operated on the basis that it stood ready to provide financial support to any of its member credit unions that got into difficulty. Fortunately, it has never been necessary for the league to carry out that promise, as no credit union has become insolvent and no member of a credit union has experienced any loss of shares or deposits.

Nevertheless, last autumn I had a concern that any difference in the treatment of depositors, as between banks and credit unions, potentially could have been highly damaging for any class of credit institution that was considered by the public at large to have had inferior deposit protection terms. At the time, the Government decided the scheme should be applied to credit unions. It is important to stress that this legislation complements the more comprehensive guarantee made on 30 September 2008 under the credit institutions financial support scheme. That wider guarantee scheme provides a State guarantee for all deposits and certain liabilities of the guaranteed institutions to the extent that they are not covered by existing deposit protection schemes in the State or any other jurisdiction. In short, depositors must first claim from the deposit guarantee scheme and then move on to claim any balance from the credit institutions financial support scheme. Accordingly, notwithstanding the wider scheme to safeguard the banking system, this reform must be furthered in its own right, given the legal requirement for a compensation claim to be made first upon the deposit guarantee scheme. It is also important to emphasise that whereas the credit institutions financial support scheme applies to the seven covered credit institutions, the deposit guarantee scheme applies to all credit institutions authorised in this State and this now includes credit unions, which hitherto did not benefit from statutory deposit protection.

Before describing in detail the provisions of this Bill, I wish to explain the reason there has been some delay in bringing forward the legislation. As we began to draft legislation to give effect to our domestic reforms, the European Commission published a proposal to amend the deposit guarantee schemes directive of 1994. The main elements of the Commission's reforms were, as with our own proposed changes at that time, an increase in the ceiling of payouts and the abolition of the co-insurance requirement option. Other critical reforms announced by the EU in October related to the deadline within which compensation must be made. As our deposit protection arrangements were based on the original European Union directive of 1994, it made sense to cover our domestic changes and those of the EU within a single item of legislation. The Government was of the view that the decision of 20 September 2008 on our domestic changes to our deposit guarantee scheme provided a sufficient safeguard in the interim period. However, once the EU measure was finalised and published as a directive on 11 March 2009, steps were taken to finalise the drafting of the necessary legislative amendments and to have the Bill published as soon as possible.

One might also mention that the additional time has enabled the Department of Finance to reflect further on aspects of the existing statutory framework and as a result it is proposed to strengthen it by transferring a number of provisions from the statutory instrument of 1995, which is the basis for our deposit guarantee scheme, into primary legislation in the form of this Bill. These changes, on which I will elaborate in a few minutes, will provide greater legal certainty to our general scheme. I now wish to describe the main provisions of the Bill.

Section 2 empowers the Minister for Finance to make regulations prescribing the amount of compensation payable to a person maintaining deposits within a credit institution. Its purpose is to give effect both to our own protection ceiling increase and to the recent European Union amending directive on deposit guarantee schemes. However, it provides the power to prescribe a higher level of coverage up to 31 December 2010 than that set out in the directive. The directive requires member states to increase coverage to €50,000 immediately, with a further increase to €100,000 from 31 December 2010. As I mentioned earlier, our deposit guarantee scheme is set out in secondary legislation, which transposed the original European Union directive of 1994. Without this enabling provision, I would not be able to make legislative provision by statutory instrument for the €100,000 coverage rate announced last September as, at this point, it is outside the scope of the directive.

Section 3 confirms the establishment of the deposit protection account at the CBFSAI and was already catered for by regulation No. 4 of the existing regulations. However, this is an example of a provision that has been incorporated into the Bill to ensure that it has greater clarity and is more safe from legal challenges.

Section 4 empowers the Minister for Finance to prescribe by regulations the amount of the deposit which a credit institution shall lodge to the deposit protection account in respect of its participation in the scheme. It also enables the variation by order of the amount payable by a credit institution or credit institutions or class or classes of credit institution. The current level of contribution is set at 0.2% of a prescribed deposit base. It is not proposed to change that figure at present, having regard to the significant charges already being levied on credit institutions participating in the separate bank guarantee scheme.

Sections 5 and 6 deal with annual recalculation of the amount of deposit and charges on the deposit protection account. They are being transferred from the existing regulations. Section 7 permits the payment of aggregate contributions on behalf of a group or groups of credit unions and is being incorporated to facilitate the existing structure of the movement, as well as the administration of the scheme by the Central Bank, as it will facilitate a bulk payment in lieu of a plethora of small payments by individual credit unions.

Section 8 is being introduced to cater for a position in which, in the event of the insolvency of a credit institution and the funds available in the deposit protection account that funds the deposit guarantee scheme not being sufficient to meet the required payout, the Central Bank might cover the shortfall with its own resources on a temporary basis. However, as European Central Bank rules prohibit such monetary financing other than on a short term and urgent basis, this section provides that the Exchequer will recoup the Central Bank for any outlay within three months. As the deposit protection account was replenished, the remaining credit institutions would repay the Exchequer over time. I intend to introduce an minor amendment to section 8 on Committee Stage. This amendment will make it more clear than was evident in the initial draft of this section as published that the Central Bank is not obliged or required to fund any shortfall that may arise in the deposit protection scheme in respect of any payments arising. It may, of course, decide to so do at its own discretion, if a view is taken that it is in the interests of financial stability.

Section 9 deals with offences and penalties and, again, this provision is being placed in primary legislation. Section 10 is the standard provision relating to the laying of regulations before the Houses of the Oireachtas. Section 11 amends the Central Bank Act 1942 in respect of certain technical matters. In addition to setting out the Short Title, section 12 provides that section 4 of the Bill, namely, the amount to be maintained in the deposit protection account in so far as it applies to credit unions, shall come into operation on such day as the Minister may appoint by order. After the passage of this legislation and the necessary statutory instrument, it will be necessary to have further discussions with the credit union movement for their admission into the scheme from an administrative perspective. Credit union savers are, and will continue to be, covered up to the €100,000 compensation limit the Government announced last September.

I wish to emphasise the importance of having this Bill enacted in sufficient time to enable the necessary statutory instruments under the provisions of the legislation to be made. These regulations must be commenced into law by 30 June to meet the European Union's deadline for the transposition of the amending directive. I appreciate the co-operation of Members across the floor in meeting this deadline and I commend the Bill to the House.

Deputy Richard Bruton

I wish to share time with Deputy O'Donnell.

An Ceann Comhairle

Is that agreed? Agreed.

Deputy Richard Bruton

I welcome the introduction of this legislation which has been awaited since the Minister originally indicated his intention to take action in this area. The role of taxpayers in the banking system is being extended gradually. They will have a permanent role in the system as a result of this Bill, as their role will not end when the Government guarantee comes to an end in September 2010.

I am sure the Minister will acknowledge that the need for these measures does not primarily result from the crisis that hit banking systems throughout the world last year. The international banking crisis hit the Irish banking system at a time when its house was far from being in order. People are genuinely appalled by what has occurred. I refer to the failure of the regulatory and banking systems to protect us, for example. It is clear that responsibility for systemic risks to our system had been assigned to the Central Bank. It was plainly marked absent when the time came to contain the property bubble, the single sector banking model that was so prevalent in Ireland and the extension of credit far beyond the deposit base. Our ratio of indebtedness to GNP is 270%. I think the nearest to us is approximately half that figure. We are way out in a league of our own. The Central Bank which should be protecting us in a professional manner has been found wanting. The Financial Regulator, to which the Central Bank was joined at the hip, has also been found wanting in meeting its responsibilities in respect of individual institutions. The practices uncovered in the most notable case, that of Anglo Irish Bank, were plainly wrong, by any standard. It appears that the Financial Regulator was fobbed off with legal advice in the case of some of the wrongdoing at that bank. The regulator did not probe the validity of that advice and failed to escalate some of the evidence of wrongdoing that came to its attention. It was not elevated up the scale. The system failed.

The catastrophic failures in the banks and regulatory authorities are having appalling consequences for ordinary people. The Bill represents a further permanent shift in the relationship between the taxpayer and the banking system. It is all bad news for the taxpayer who is having to take on an extra burden. Everyone wants to know what is on the other side. Where is the quid pro quo? People are appalled that such questions have not been answered, more than nine months into the crisis. Ordinary people have not yet seen evidence of new standards, levels of accountability and powers of enforcement. They are frustrated that the Office of the Director of Corporate Enforcement has yet to come to a conclusion on offences that may have occurred. One wonders whether the legislation under which that office operates is up to scratch. As we vote on whether to put another round of responsibilities on the shoulders of taxpayers, we have to ask whether the regulatory system is fit for purpose at this time. Are we able to pursue the wrongdoing that has occurred with sufficient effectiveness? Is our legislation inadequate and in need of change?

The Government's conclusion on regulation, the sum total of which appears to be that the Central Bank needs to move more centrally into control of regulation, strikes me as totally inadequate. It has come up with institutional change to save everyone's blushes. It was clear that the Central Bank had responsibility for systemic threats. It is now clear to everyone that this was a systemic threat. Everybody knows that the Central Bank did not square up to the threat adequately. We have been told it is to be given a more central role in policing the system, but nothing has happened. It is inadequate that the public has not been honestly told what went wrong. It should be made clear that policies and people failed. We have to be plainer about the fact that these failures were caused by a kind of cosiness. I am sure the Minister will say he has made significant progress in changing the top management and leadership in the banks, but where is the significant change in the Office of the Financial Regulator? I do not think it is sufficient to change the deckchairs on the boat by giving the Central Bank a more central role. As far as I am concerned, the Central Bank was already centrally in charge of these matters. It had a board which was almost common, although it was not entirely so. This response is not adequate. I appreciate that the Minister is mired in the day-to-day management of the issue.

There needs to be a permanent shift in the relationship between the taxpayer and the banking sector. That change should relate not only to the downside, where taxpayers are shouldering the cost, but also to the upside, where taxpayers are shouldering the consequences of the new legal arrangements in place. The public has been appalled by the golden handshakes given to those who have failed. It is frustrated because all it has seen to date is evidence of a cosy system that looks after its own people when they are seen to fail. There is a sense of anger and frustration about the Government's failure to make the sort of changes that are needed. The sort of protection on which we are voting today, like that we agreed last September, was always implicit. The State was always going to come to the rescue of the banking system because it is of such importance to us. However, these commitments go far beyond the protection of limited liability, an enormous and special privilege enjoyed by people in business. We decided that in addition to protecting the people concerned, the taxpayer would, in effect, underpin any bad decisions made by them. The trust implicit in that enormous privilege was plainly abused. Our regulators did not follow the advice of the great Adam Smith who is sometimes credited with being the first economist. I cannot reproduce the exact quote, but he said, in effect, that when business people came together, it was always to conspire against the good of the consumer or the ordinary person. The Financial Regulator did not cotton onto this. It thought the people to whom I have referred were part of a nice cosy club. It did not consider the appalling vista that some elements of the banking system might be rotten. We have been failed in that area.

I would like to speak about some elements of the Bill. I am sure we will return to this topic when the NAMA legislation and the legislation to extend the guarantee are brought before the House. Will the Minister indicate what the cost of the guarantee he provided last September has been? We were told that the calculation of the cost was to be based on the premium imposed on our borrowing. Have the sums been done? Do we now know what the premium is on our borrowing? What proportion will be charged? How, in turn, will this impact on the sort of charge that will permanently be imposed under this legislation? I understand there is provision for a deposit requirement to be made. Will this have an ongoing premium charge? What is the aggregate amount we are guaranteeing in all the institutions covered? What is the aggregate value of the deposits for which we are taking responsibility? This is important legislation and the Government had not envisaged this for a long time. While I do not oppose it, we need to enact it with our eyes open and be aware of its long-term cost. To what extent will it still be a feature of added borrowing costs for the State, even in five years time or whatever and how is it proposed we will recoup that or is it proposed that we will recoup it?

I note from the explanatory memorandum that the relationship between the Central Bank and the Central Fund has been introduced to get around an ECB requirement that this sort of protection can only be provided on a short-term and urgent basis. How does the shifting of that liability to the Central Fund overcome that problem? If the liability lies with the State, whether it is in the Central Bank or the Central Fund, it is still a form of financing that, on the face of it, appears to be in breach of what the ECB allows other than on a temporary basis.

While I welcome this legislation, I must express our continuing concern on this side of the House about the Government's broader approach to purchase, on behalf of the taxpayer, all the impaired loans into which the banks entered at a cost of €90 billion. The scale of that commitment, the nature of that black hole and the costs that are involved are a source of great concern to people. Despite the Government's argument that the setting up of National Asset Management Agency is about getting credit flowing, there is a lingering concern on my side of the House that it will be about the banks getting rid of some of their most toxic loans but they will still be in the business of shrinking their balance sheets to preserve their independence from the State for a long time to come not in the business of extending loans. That is the last thing that will be on their minds. They will try to preserve their independence of operation.

That is reason we have favoured an alternative approach, where the State would intervene first and foremost to get credit flowing. The banks should be forced to face up to their bad borrowing. Irish taxpayers should be given time to consider the terms under which they will become involved in this. I would prefer to use the remaining period of the guarantee to tell the banks that they and their professional investors must face up to their responsibilities. There will be a role for the taxpayer to play in time, but it will not be the role of a patsy, taking on his or her shoulders all the lousy stuff and allowing people simply to walk on. There will have to be a fair sharing of the pain. The approach of rushing to set up NAMA, or in the case of Anglo Irish Bank pretending it is a going concern, gives the impression that the shoulders of the taxpayers are broad enough to save everyone but they are not. Taxpayers are in the mire. With our spending €20 billion or €24 billion more than we are raising in tax, taxpayers face an appalling vista just dealing with our own financial problems, let alone being anything but the most careful and prudent in the way we approach problems generated elsewhere in the banking system.

Admittedly, the taxpayer has to stand ready to make sure the banking system does not fail, but he or she is not in a position of saying to professional investors who took risks that they can walk away from those risks unscathed. I worry about what the Government is doing in this respect. I am sure we will have a much more robust debate on this and perhaps much more information from Government on it. It is frustrating to be so far into this debate, for an interim executive to be established and heaps of information to be flowing between the banks and that body and undoubtedly implicit commitments being made on the part of the taxpayer in that process, and yet have only a flimsy eight or ten pages offering any explanation or justification as to why this is the right course of action. That is not good enough for a decision of such enormous potential importance to the Irish taxpayer.

I genuinely worry that this is being made up as we go along. The Dáil must become involved sooner rather than later to ensure there is a public debate based on the Government's best judgment as to why it is doing this and allow us to tease that out before final commitments are made. I worry that over the summer this process will gain increased momentum and that more and more implicit, if not explicit, commitments will be made while we have not had an opportunity to express views or build in the protections the people would expect us, as representing the taxpayers, to seek to insert.

Deputy Kieran O’Donnell

This Bill is being introduced against the backdrop of the increase in the deposit protection levels last September in the wake of a failure in bank regulation worldwide and more particularly in Ireland. I welcome this deposit protection scheme because only seven covered institutions are provided for in terms of the overall deposit guarantee as well as certain loans for banks. I welcome that this legislation extends the scheme to credit union savers.

This legislation is being introduced because regulation has failed. People expected to be able to trust the Central Bank, the Financial Regulator and the Government on how the banking system was being regulated. However, that did not come to pass. The Central Bank's role was to examine, as Deputy Bruton said, any systemic threats to the State, our finances, to the way the economy functions and to our monetary stability. If one reads the Central Bank reports dating back many years, certainly in terms of the housing market, it mentioned a problem with the property bubble, but it never said stop and someone needed to say that. It was within the powers of the Governor of the Central Bank to bring in higher capital ratio weighting requirements for loans, particularly developer and housing loans, to ensure that money was loaned prudently. Money was loaned in a fashion such that with any variation in the way the economy was performing the banks would be in trouble. Effectively, banks were getting short-term lending for long-term lending to customers. Once the well dried up on short-term lending, they could not function. The tsunami came with what happened to some of the banks in America but of all the economies in Europe our economy was completely exposed in terms of the way our banking system worked.

When our banking system failed last September the Government put across the key point that it was seeking to increase the flow of credit for small businesses and mortgage holders, but that has not happened. Matters have worsened. Credit has dried up for small businesses and people cannot get mortgages. The Government is now saying that the panacea for all the ills of the banking system is NAMA, which will provide that the Government will take over all the toxic debts of the banks, the related development loans. I have quoted the relevant figures previously. The Minister of State with responsible for housing, Deputy Finneran is present, but it is a disgrace that the Minister for Finance is not. Our banking system is in crisis and the Minister is not here to deliberate.

Deputy Michael Finneran

He is gone for a couple of minutes.

Deputy Kieran O’Donnell

We are debating this only until 7 p.m. The Minister should have been here.

Deputy Michael Finneran

He has just left the House for a few minutes.

Deputy Kieran O’Donnell

I am glad to hear that.

As the Minister of State will be aware, it is estimated that there is currently enough land zoned for residential purposes to accommodate just short of 1 million housing units. At 50,000 units per year, that is the equivalent of 20 years' supply. Much of that land will end up in NAMA. It will be nothing more than agricultural land. How can NAMA be justified on pure financial and economic grounds? NAMA will have to pay the cost of Government bonds, probably of the order of 5%, and we are looking at a rate of return on the assets that could, according to projections, be as low as 4%. This is a loss-making situation and will not bring about a flow of credit to small businesses or to mortgage holders. As Deputy Bruton said, the banks would continue to shrink their balance sheets even if their toxic and related assets were taken over by NAMA.

We all know businesses are dying on their feet from lack of credit. There is an old saying in business — cash is king. If a business does not have cash it cannot function. Small businesses are the backbone of our economy and employ around 700,000 people throughout the country in cities, towns, villages and rural areas. They provide employment and spending and a flow of funds to other businesses. One of the critical issues at the moment is that businesses are unable to pay each other, which is a knock-on effect of the lack of credit.

Judged objectively, NAMA does not pass the test on two accounts. It does not pass the economic and financial test based on the returns — the cost of buying the asset will outweigh the return — and it does not pass the crucial test of providing a flow of funds to small businesses. We have put forward an alternative model which is different from that of the Government. The bondholders must take a share of the risk because the taxpayer is taking an exorbitant share of the risk at the moment. We suggest the establishment of a national recovery bank which would provide funds to the banks for the specific purpose of ensuring a flow of credit. NAMA is not specific to that purpose; it is about taking non-performing toxic assets from the seven covered institutions and hoping that the performing assets it takes on provide sufficient return to counterbalance the losses on the toxic assets. It is a massive gamble at the taxpayers' expense. The risks are too high and outweigh any of the advantages of NAMA.

The legislation to establish NAMA has yet to come before the House. I ask the Minister to consider the model Fine Gael is proposing. It is a straightforward model based on sound economic principles. We recommend that a national recovery bank be set up to provide funds to the existing banks for good commercial and housing transactions, particularly by homeowners and small businesses. Second, we must ensure that the banks, over the period of the guarantee, up to September 2010, try to deal with their toxic assets. They have the knowledge and are dealing with the people who have the loans. They should find ways of obtaining value for money on these assets. After September 2010, funds should be flowing to small businesses through the national recovery bank and any toxic debts in the existing banks will be left there. Effectively, they are asset recovery agencies. We would set up good banks from within the existing banks using the good assets that are performing. This would give confidence to the markets in providing funds to the banks, and the national recovery bank will continue to perform its role.

We have a financial crisis such as has never before been seen in Ireland. We must find ways of ensuring that jobs are maintained. A first critical step in this is to ensure banks are providing credit to small businesses. There is no disagreement on that among Government or Opposition; the problem is with the methodology. NAMA is a theoretical model based around freeing the banks of any responsibility in terms of the toxic assets they have created. To use an analogy, we are taking all the toxic assets and burying them in a hole for a period of three or four years — out of sight, out of mind. The danger is that in three or four years the grass will suddenly start to turn brown because of the toxic assets underneath. Certainly, NAMA will provide a window of time in which the toxic assets are unseen, but will it provide funds for small businesses? It will not. It is a short-term solution for the banks but it will result in major headaches in terms of getting the economy moving again and allowing small businesses to recover. I hope the Government will accept this advice in the spirit in which it is given.

The Minister of State gave me to understand that the Minister would be in the House in a couple of minutes. Regrettably, he is not here. I hope he is hearing these deliberations.

Deputy Michael Finneran

The Minister will be here when NAMA is being debated, but today we are discussing the deposit guarantee scheme, not NAMA.

Deputy Kieran O’Donnell

These are all interlinked and have come about because of the financial crisis and because of a banking crisis caused by a lack of regulation. The Financial Regulator is gone and the heads of all the main banks are gone. Dire mistakes have been made and we need to discuss this in depth.

I will return to the Bill. Section 4, which is important, provides that the Minister will have the power to prescribe the level of deposit to be maintained by the banks in the deposit protection account. The current level of contribution is set at 0.2% of the prescribed deposit base. I ask the Minister to clarify whether this was the level that pertained before 30 September last and the banking crisis. The Minister stated in his speech: "It is not proposed to change that figure at present, having regard to the significant charges already being levied on credit institutions participating in the separate bank guarantee scheme." I must point out that no higher levies have been placed on the taxpayer in terms of the cost of borrowing to the State because of the guarantees we are providing under the various schemes. I ask the Minister to elaborate on this and to tell the House whether he believes that at 0.2% he is getting value for the taxpayer.

I am a great admirer and supporter of the credit union movement in terms of what it has done for small borrowers and savers throughout the country. I am delighted that the deposit protection scheme applies to savers. The Minister stated: "After the passage of this legislation and the necessary statutory instrument, it will be necessary to have further discussions with the credit union movement for their admission into the scheme from an administrative perspective." I hope this will be concluded in a speedy fashion in order that we can have complete certainty.

I hope the Minister will take the Fine Gael proposals in the spirit they were offered and that funds will flow to small businesses. The National Asset Management Agency is a time-bomb. It will not facilitate the flow of funds to small businesses. Instead, it will merely buy time in that the loans in question will be out of sight and, therefore, out of mind. I hope we will have time to debate the NAMA legislation properly, without a guillotine, when it comes before the House.

Deputy Joan Burton

I propose to share time with Deputies Sherlock and Morgan.

Acting Chairman (Deputy Seán Ardagh)

Is that agreed? Agreed.

Deputy Joan Burton

This Bill must be judged as part of an overall banking package which the Minister has proposed on several occasions to introduce. It seems he has now decided, perhaps for tactical and strategic reasons, to split the package into several separate legislative proposals.

The Bill before us was published at the end of May. Last Friday the Financial Measures (Miscellaneous Provisions) Bill 2009 was published. I understand it will be taken in the House next week. The latter will afford the Minister for Finance the right, by ministerial order, to extend indefinitely the infamous bank guarantee of 30 September 2008. There is broad agreement in the House on the provisions in the Bill before us today to guarantee the deposits of ordinary depositors. However, under the scheme introduced in September, the Government undertook to guarantee bondholders and various classes of bond debt in a way which the Labour Party pointed out at the time was deeply reckless and unfair to ordinary taxpayers, yet the Minister will propose next week, in parallel with this Bill, to have a ministerial order power conferred on him and his successor in order to facilitate the extension of the guarantee to bondholders.

Another of the Minister's promises, apparently taken from a proposal made by my party some months ago, was to establish an expert banking commission to reform the Irish banking and central regulatory systems so as to regain the international esteem in which Ireland was once held in financial matters. This esteem was lost during the tenure of the Taoiseach at the Department of Finance and, most especially, during that of Mr. Charlie McCreevy. They acted recklessly in stoking the property market, leading to the current collapse which is causing great suffering for individuals and businesses throughout the State.

Why is the Minister, Deputy Brian Lenihan, bringing forward legislative proposals in a piecemeal fashion when what is required is an overreaching and thorough discussion of the implications of the policy the Government is pursuing to address the problems in the banking system? We were told last week by the chairman of Anglo Irish Bank and the two public interest directors, as well as by the Minister and officials from the National Treasury Management Agency and the shadow NAMA body, that up to €4 billion of taxpayers' money would be required by the bank. The delegates who appeared before the Joint Committee on Finance and the Public Service last week did not deny this. Nor did they deny that the €4 billion would effectively go down the tubes because it was more than likely, given the losses to which the chairman, Mr. Donal O'Connor, confessed at the meeting of the committee, that we were looking at a distressed loan book of almost €29 billion, comprising various loans in difficulty, deterioration and various stages of distress. A recent paper by Professor Patrick Honohan, the foremost authority on this subject, and an article by Cliff Taylor in the Sunday Business Post both predicted that the €4 billion being invested in Anglo Irish Bank would almost inevitably be lost.

The willingness to sink money into a bottomless hole at Anglo Irish Bank must be set against the failure to prevent the loss of 1,200 jobs at SR Technics in my constituency which is also the constituency of the Minister for Finance. Every Deputy in the House can point to large-scale job losses in their areas. It is incredible that the Minister and the Taoiseach have brought us to this pass. They came into the House at the end of September to announce that their bank guarantee scheme was the cleverest thing in the western world and would safeguard the fundamentals of the banking system. We have been living with the consequences of that decision ever since. Our children and grandchildren will have to live with the debt accruing to the State as a consequence. It was clear from the expert testimony given to the Joint Committee on Finance and the Public Service that the NAMA situation is unlikely to work itself out for between ten and 15 years. This and the next generation of taxpayers will pay for the errors made.

From the beginning of 2008 I tabled a series of questions to the Taoiseach, then Minister for Finance, asking the reason the existing bank guarantee scheme was not being revised, updated, enlarged and renewed. On 16 September 2008 I called for the limit applicable under the bank and credit union depositors scheme to be increased to €75,000. The Minister for Finance, Deputy Brian Lenihan, dismissed the idea, even though people were continuously calling radio programmes such as "Liveline" to ask whether their money was safe. This was in the wake of the queues outside branches of Northern Rock. Earlier in the year I asked the Minister's predecessor about reviewing the deposit guarantee scheme.

Deputy Brian Lenihan

For the record, the queues outside Northern Rock were in late 2007. I was not Minister for Finance at the time.

Deputy Joan Burton

I had asked about the deposit guarantee scheme in April 2008. The Taoiseach, then Minister for Finance, replied:

I would remind the Deputy that, as I have mentioned in response to previous similar questions, the first and most robust line of defence for depositors must be a well-managed system of prudential regulation and supervision so as to try to minimise the risk that a DGS needs to be activated. Recent assessments by bodies such as the IMF have confirmed that the Irish regime for financial regulation complies with best international practice.

It was apparent that officials in the Department of Finance, under the leadership of the then Minister for Finance, had their heads firmly wedged deep in the sand. When I asked questions earlier, in January 2008, I was told by the then Minister for Finance that everything was rosy in the garden. It is extraordinary that the previous Minister for Finance, his immediate predecessor, Mr. McCreevy, and Fianna Fáil in government have led the country to this pass.

Not only has the system of regulation failed. I accept that the Governor and staff of the Central Bank and Financial Services Authority of Ireland have worked night and day on this crisis. However, over a two-year period prior to the crash questions were asked about this matter in the House. When they came before the relevant committee to answer such questions, the Governor of the Central Bank and Financial Services Authority of Ireland, representatives of the Financial Regulator and the Secretary General and senior officials from the Department of Finance continually stated the fundamentals were fine, that Ireland possessed the best regulated system in the world, etc.

When introducing the Bill today, the Minister indicated that we were now in the best of all possible recovery modes. These matters are being dealt with in a way that is completely delusional. The Minister has presented the Bill as if it is some magnificent achievement. For the average taxpayer, however, it represents confirmation of the fact that this generation and that which will succeed it will be responsible for repaying a national debt of extraordinary proportions.

The Minister has a number of serious questions to answer about NAMA and Anglo Irish Bank. We have been posing questions about Anglo Irish Bank and the regulation of the banking system in general. We were continually informed that all was well and it was indicated to us that asking such questions was somehow not in the national interest and represented a failure to wear the green jersey. What action is the Minister taking in respect of bond holders? The difficulty with Anglo Irish Bank is that because the guarantee given by the Minister was so wide, unilateral and uncontained, the people are up to their necks in hock with international bond holders.

Other parties chose not to question the extent of the guarantee given to the banks. I am not referring to the principle that ordinary deposits should be guaranteed because the Labour Party was the first to suggest the deposit guarantee scheme should be significantly increased. We have been obliged to repeatedly ask the Minister the same question, namely, what is his view of the bond holders? Will he follow the lead of Allied Irish Banks and Bank of Ireland by ordering Anglo Irish Bank to buy back the debt for as little as 60 cent or 40 cent in the euro?

Deputy Brian Lenihan

It will be less than that.

Deputy Joan Burton

Therefore, the debt will be bought back at approximately 30 cent in the euro.

Deputy Brian Lenihan

That will be a commercial decision.

Deputy Joan Burton

The Minister has not provided a detailed picture of what will be our liability in respect of Anglo Irish Bank. Nor has he indicated for how long that liability will hang like a millstone around the necks of every man, woman and child in this country.

In the meantime, ordinary businesses cannot obtain money to fund their day-to-day working capital and expansionary needs. Those who wish to start up new businesses or expand existing ones cannot obtain finance either. This is because the focus of the Minister, his Department, the regulatory agencies and the Central Bank and Financial Services Authority of Ireland does not rest on restoring the flow of credit to the ordinary businesses which are the mainstay of employment creation, rather it rests on bailing out those involved with Anglo Irish Bank and — due to the nature of the guarantee — international bond and debt holders. I would be interested in seeing a detailed list of these bondholders, Irish and international. I would also be interested in seeing a list of those who are deposit holders with Anglo Irish Bank. It would be good to discover whether these depositors have loans from the bank and whether recourse might be had to their deposits in order to offset their borrowings.

One Sunday newspaper indicated that an individual, a former managing director and chairman of Anglo Irish Bank, apparently had significant deposits with that institution. Will the Minister confirm the fact that the bank has no recourse to these deposits in offsetting borrowings incurred by the individual to whom I refer? In other words, this person's deposits which amount to several millions are guaranteed by the State and, therefore, cannot be used to cover his loans with the bank. It is clear the taxpayer is being taken for a ride on this matter.

The Minister referred on previous occasions to the architecture of bank reform and indicated an intention to return to the Central Bank and Financial Services Authority of Ireland on many of the direct regulatory functions in this regard. That appears to be borne out in the Bill because the guarantee scheme appears to come within the remit of the Central Bank and Financial Services Authority of Ireland. If that is the case, is the Minister suggesting he will do away entirely with the Financial Regulator? Is the Central Bank and Financial Services Authority of Ireland the best entity to hold responsibility for the guarantee?

The Labour Party suggested some months ago that a banking commission comprising people of national and international repute should be established in order to put in place a system in which we could have faith and which could restore our global reputation. What the Minister is doing is a typical Fianna Fáil trick. He is picking off a range of piecemeal reforms and placing the major one — the renewal of the bank guarantee scheme — under ministerial order and including it in another little Bill that will emerge next week. The Opposition is being presented with only bits of information in order that it will not have a clear idea of exactly what is planned.

What will happen to the savings protection scheme of the Irish League of Credit Unions? On the 0.2% contribution to the existing guarantee scheme — questions about this matter which was also dealt with in an OECD paper relating to moral hazard were asked on previous occasions — the same rate applies to all of the financial institutions covered by the scheme, including the credit unions, regardless of their level of risk. The OECD points out that deposit guarantee schemes are extremely useful in bank crises. As stated, the Labour Party called for the level of the guarantee to be increased long before the Minister even thought of addressing the issue.

Deputy Brian Lenihan

It made its call four days before I addressed it.

Deputy Joan Burton

The Minister was still maintaining at the time that everything in the garden was rosy. Will he indicate why there is no differentiation of risk among the covered institutions? At present, if I have money to deposit and choose to lodge it with the riskiest institution because it is offering the highest rate of interest, the said institution will only contribute the same amount to the guarantee as other institutions. The OECD has asked why that is the case. I am of the view that this is a reasonable question to put to the Minister and his officials.

Will the Minister indicate in detail what his proposals are in respect of the Irish League of Credit Unions? Does he propose that a single payment be made on behalf of the league or will the position be differentiated?

Deputy Seán Sherlock

It is vital that we view this legislation in the context of Directive 2009/14/EC. The changes incorporated within this directive form the basis of the Bill before us. The purpose of the legislation is to mitigate risk, the risk faced by small depositors or working people who rely heavily on the banking system to assist them in their daily lives. It is vital at this time that we insure depositors against a run on a bank or financial institution. Therefore, the provision within the Bill that increases the statutory limit from €20,000 to €100,000 is to be welcomed and necessary, given that a vast number of depositors within a certain age bracket who have contributed to the economy throughout their working lives would have deposits within this range.

The fact that the guarantee scheme is to be extended to include the credit unions is also to be welcomed. However, I too have questions about the credit union movement because the Minister states the current level of contribution is set at 0.2% of the prescribed deposit base. He went on to say there would be further discussions with the credit union movement as regards admission to the scheme from an administrative perspective. Will the Minister, please, tell the House what the nature of the discussions with the credit union movement has been so far? Will he inform us how this will pan out in practical terms for the credit union movement? Because of the disparate nature of credit unions, some practical difficulties will emerge and I am sure they have questions about the Bill which they will expect us, as legislators, to reflect. It is easy to forget, too, that a considerable amount of money is held within credit unions. It would not be equitable, therefore, to exclude them from the ambit of the Bill.

The current economic environment is uncertain. Thankfully, thus far we have not seen a stampede by ordinary depositors to extract their savings from financial institutions. We must guard against this possibility as the last thing the State needs is a run on the banking system. It is vital, therefore, that a measure of guarantee is provided by the State so as to ensure ordinary people who are normally casualties in any downturn do not stop putting money into the banks. By increasing the deposit protection limit from €20,000 to €100,000 we are at least ensuring individual savings will not be split disproportionately between a wider range of institutions. Liquidity must be preserved within the system. The only way to do this is to ensure there is sufficient money on deposit.

On the matter of moral hazard, the movement of responsibility for this area from the Financial Regulator to the Central Bank has to be explained in greater detail. I have certain reservations about the role of the Central Bank in the last 12 months in overseeing the banking crisis. I remain to be convinced that its warnings, issued in quarterly reports, were adequately articulated. Perhaps it was the case that it was just not being listened to, or perhaps it was not shouting loudly enough about what was going on. Some, more cynically minded, might suggest there was an air of complicity in terms of what was happening throughout the economy for a number of years. The Central Bank, with the Financial Regulator, has been diminished in its role in overseeing the banking structure. However, I am hopeful the Minister will ensure their role in the future will involve vigorous policing of the scheme once it comes into being.

Deputy Arthur Morgan

I support much of what is included in the Bill which increases the allowance to a rate which more reflects modern times, removes co-insurance in order that total deposits will be protected, brings credit unions into the scheme and reduces the minimum time period in which depositors will receive their guaranteed deposits. However, I express concern about the sum at which deposit insurance is being set. While the EC directive increases the deposit interest provision to €100,000 from 1 January 2011, we have decided to go with the provision from September 2010, up to which point €50,000 will be the accepted figure in Europe. The reason I make this point is that for a deposit insurance scheme to work it must be credible. For it to be credible, the State has to meet its liabilities if a situation arises where banks begin to default. In this country we are in a constrained fiscal position which is likely to continue into late 2010. While I accept there is a capital asset requirement for lending and to meet this requirement we must have investors in Irish banks, we also have to be realistic as regards what the State can cover in terms of worst case scenarios where we must meet defaulting bank deposits, as well as in best case scenarios where our international borrowing capacity is affected by the State's liability. Increasing deposit insurance to the highest figure months before it is necessary is another example of the Government overshooting with regard to the banks and putting its risky policies ahead of the State's interests.

Financial institutions have to place 0.2% of their deposits in a deposit protection account, or a minimum of €25,400, which is excessive for credit unions, as 0.2% of their deposits would be less than this. Credit unions will end up paying over the odds for this insurance and this minimum figure, if possible within the constraints of EU law, may need to be addressed. However, 0.2% is not a sufficiently high insurance premium and the Government should be arguing for it to be increased in the case of banks. The argument that, in the event of a bank run, a bank's assets would be liquidated and paid to depositors first does not necessarily cut ice as we have seen in recent history. In keeping the insurance premium down, for this reason, one assumes banks will not dispose of their assets in advance of a bank run, or will not engage in any corrupt activity that would reduce their capital base and allow them to default without sufficient assets to liquidate.

This is, after all, an insurance premium from the State. It is protecting banks currently not in public ownership. They are private institutions, with a taxpayer deposit insurance scheme. Banks should pay more for the scheme. We will not get into the figures, but it should be borne in mind that at the end of 2007 there was only €526 million in deposit protection accounts, enough at the time to cover only 26,000 account holders for €20,000 each. Clearly, the figure 0.2% will have to be increased when the banks are functioning again.

Deputy Michael P. Kitt

I am sharing time with Deputy Chris Andrews.

I very much welcome what the Minister has done in this Bill and I am aware that it is part of a package of legislative measures to amend and update the Irish deposit guarantee scheme. While I welcome the increase in the deposit guarantee scheme for banks and building societies from €20,000 to €100,000 for eligible depositors and institutions, with effect from 20 September 2008, I also welcome the scheme as it applies to credit union savers. These measures are very important. While previous legislation applied to the seven covered credit institutions, the deposit guarantee scheme applies to all authorised credit institutions in the State, including credit unions which have not benefited heretofore from statutory deposit protection.

In many of my comments I will refer to the credit union movement. In fact, people involved in the credit union movement to whom I spoke did not raise the issues about which other Deputies have talked. One of their concerns was on making representations to the Financial Regulator to relax the requirements of section 35 of the Credit Union Act. Their query was on the loan book and particularly the question of the 20% limit on loans greater than five years. Many credit unions are making representations to the Minister and Financial Regulator on that issue and I hope we will get some progress on it. The credit union movement members say they have options of restructuring the debt, which would put them in breach of section 35, or accepting the reduced borrowing, which will allow arrears to escalate. It is important we see a change in that situation whether by legislation or guidelines from the Financial Regulator.

One of the reasons this has been raised is the importance of the credit union movement. Deputy Sherlock referred to this. One of the difficulties we have in many parts of the country, particularly in rural Ireland, is that for many years even when the economy was in very good shape, financial institutions were closing down throughout the country. Some branches in Dublin and other cities and large towns closed, but most of the closures were in rural areas. Very little publicity has been given to these closures. Local banking services are very customer friendly and have the market intelligence one needs.

It is disappointing to see these closures. Even a mobile bank in Connemara was closed down some years ago. The problem of banks giving out outrageously high mortgages in the past would not have happened if we had more banks available throughout the country. Three years ago I was part of a campaign to persuade the Bank of Ireland to stay in Glenamaddy, County Galway. It was not a successful campaign and Bank of Ireland customers were told to go to Castlerea in County Roscommon. A similar situation happened in another town near where I live in Mountbellew where Allied Irish Bank had a three-day service and then decided to withdraw from the area. These are the situations that put more pressure on credit unions.

I am glad these issues have been addressed in this Bill and that many Deputies have raised them in the House. This is about people having access to banking. If one is to talk about savers, one needs access to banking. The Minister probably knows that in recent times Permanent TSB proposed to close 48 agencies throughout the country, of which eight were in County Galway. When the final decision was made, three branches remained in Galway city and none was left open in the rural areas. An opportunity for savers was gone and the people who owned these premises and provided the agencies put money into providing and refurbishing offices but unfortunately their work was not recognised by these bodies. The outcome of many of these decisions is unemployment. They cannot blame the recession for some of these decisions. Financial institutions are making money. Unfortunately, they would probably say they are not making enough money and that is what it boils down to.

I hope the Minister, through the good people he has on the various institutions can, as well as examining the difficulties people have with loans and savings, also look at closures. ACC Bank's decision to close 16 of its offices nationwide was taken following very little discussion. We probably regret now that we did not have ACC Bank and ICC Bank coming together as State banks in the past when they were moving into other areas. In Tuam, seven jobs will go because ACC Bank is moving to Galway city. The places not affected by the closure of 16 branches around the country will be Galway, Cork, Dublin, Drogheda, Kilkenny, Limerick, Mullingar, Sligo and Waterford. These are fairly large centres and will not suffer but other parts of the country will.

I have written to many of these institutions, including Permanent TSB and ACC Bank, asking why they are carrying out these closures. Banks have made profits. Rabobank was in profit last year. I have received very little response to my representations on trying to keep agencies open. That is why I am raising it in the Dáil. The usual response has been that I should go to my local credit union. That brings us back to why we are putting emphasis on the credit union movement. We are dealing with credit union savers.

I appeal to the financial institutions to be customer friendly. It is very arrogant to say one is closing down an agency and that customers can go to Galway city or the nearest large town. Let us remember those who have no access to public transport who were very happy to deal with a local agent or bank regarding their savings and who, unfortunately, are finding some of these agencies are closing down.

I wish the Minister well with this Bill, which is one of two Bills he will introduce in this area. I hope we reach a situation where more branches are available and we hold the branches we have rather than seeing continual closures and withdrawal of services for those who are keen to have savings. Many of those savers are elderly people who would like to deal with agencies and banks in their own localities.

Deputy Chris Andrews

I welcome the opportunity to speak on this matter. Last September, the Government announced that it would increase the statutory limit for the deposit guarantee scheme for banks and building societies from €20,000 to €100,000 per depositor, per institution. Subsequent to the Minister's announcement, the European Commission issued a discussion document on updating the EU directive on deposit guarantee schemes. The European Council and European Parliament passed Directive 2009/14/EC. The changes made in this new directive are incorporated in the Financial Services (Deposit Guarantee Scheme) Bill 2009 and its associated regulations. This Bill will extend and modify cover to all credit institutions in the State and will cover depositors in banks not supported under the Credit Institutions (Financial Support) Act 2008.

The measures announced in the Bill will increase the deposit protection limit to €100,000 from €20,000; remove co-insurance in order that the total of deposits up to €100,000 are protected and not a fraction as in the previous scheme; reduce the minimum time period within which depositors must receive their guaranteed deposit from three months to 20 working days; move the responsibility of this area of financial regulation back to the Central Bank from the Financial Regulator; and extend the protection to depositors and shareholders of credit unions who were not covered in the previous scheme. That has been covered.

I commend the Minister for Finance, who acted very decisively last September on this matter, which was of great concern. Much speculation had been mounting among consumers that Irish bank deposits were not secure, with a number of people going so far as to withdraw their savings, with the consequent difficulties. People were discussing whether their money was safe in the banks. This would have undermined our entire economy. Allowing this to continue unaddressed would have had a serious effect on one or all of our banks, as without the liquidity of deposits banks simply could not function.

The steps taken by the Minister for Finance reassured the public and demonstrated the Government's commitment to ensuring a stable financial system. Measures taken since have shown that commitment. The Minister has acted assuredly and with great clarity. The guarantee offered by the State is among the highest in Europe — I understand only one other country offers a higher guarantee. As we are all aware, Ireland, with the rest of the world, has since found itself in the midst of the worst financial recession in more than 70 years. At national level the Government has taken necessary steps to stabilise the domestic banking system to ensure we have a healthy and sound banking system that meets the needs of the economy. The measures announced in the Bill represent just one of these steps. I note that previous speakers discussed NAMA. While the Opposition is working out the theory of how NAMA works, I have no doubt the Government will ensure NAMA works in practice.

Both at home and abroad changes are taking place in the financial sector in terms of regulatory approach, which is welcome. We need transparency and cannot be rigorous enough in ensuring we have such transparency. We also have improved international co-operation, risk management, etc. This will no doubt lead to a changed, but I hope far more stable and realistic financial sector. It is critical that the lessons of recent months are learned. The measures presented in the budget in April regarding the banking sector will, I am sure, rebuild confidence in our financial system, but it will not happen overnight. By steady management the measures announced in the Bill will assist in that process. I certainly support the Bill.

Deputy Seymour Crawford

I appreciate the opportunity to say a few words on the Bill. Obviously, we have been advised for some time that last September's agreement would be given effect in law. I welcomed it in principle and the Fine Gael Party supported the need to guarantee deposits at the time. However, one must ask questions about the role of the Central Bank and the Financial Regulator in the banking fiasco. We used to have good banks, but now the State is investing billions in them.

I wish to raise an issue which, while it may not be completely relevant to the Bill, affects small businesses, farmers and others — their inability to access the necessary finance to keep their businesses going. I have received many calls in recent weeks from people who are under pressure because of income pressures, etc. In the 1980s at least the banks would have given them the necessary funding to take account of weather conditions, business conditions, etc. However, that is not the case now. People are finding that small overdrafts are simply no longer available and they find themselves in desperation. Jobs are at stake in areas such as mine. We never attracted a major industry that cost the Government much money. We need something to help small businesspeople and those in the farming sector if we are to retain any employment in areas such as Cavan-Monaghan. I beg the Minister to ensure that whenever he hands over money to AIB, Bank of Ireland or Anglo Irish Bank, he secures a payback agreement that small businesses will be looked after.

Minister for Finance (Deputy Brian Lenihan)

I thank Deputies for their contributions to the debate. By and large, they supported the principle of the measure before the House. Plainly, deposit protection is an essential tool to have in place in order to reassure depositors that their savings are safe. The Government decision last September to increase the guarantee limit from €20,000 to €100,000 was a very important step in ensuring financial stability. There is no doubt that significant uncertainty had been introduced by the performance of the international financial markets at the time. I mentioned earlier that this had played on fears regarding the security of savings in financial institutions.

The deposit guarantee scheme embodied in the legislation before us applies to all credit institutions authorised in the State, including not only the seven covered institutions, but also other main street institutions such as Ulster Bank, Halifax, KBC Bank Ireland, First Active and ACC Bank. It now also includes credit unions which did not previously benefit from statutory deposit protection. Given the scale of the increase in the size of the basic deposit protection envisaged in last September's decision, it was essential to provide a level playing field for the credit unions and the other financial institutions and not put them at a disadvantage. Banks that passport into the State on a branch basis such as Danske Bank trading as National Irish Bank, Northern Rock, Nationwide Building Society Ireland — not to be confused with Irish Nationwide Building Society — and RaboDirect are covered by their home scheme. For example, National Irish Bank is covered under the Danish deposit guarantee scheme.

As I mentioned earlier, the European Commission has embarked on a consultation on possible further amendments to the Community's deposit protection arrangements, with a view to bringing forward further proposals before the end of the year. It is clear, therefore, that, notwithstanding the changes we are considering, this is an evolving story and that we will be revisiting this topic before too long. The purpose of the review is to try to ensure over the longer term the greater effectiveness of the deposit guarantee schemes directive and respond adequately to any deficiencies or risks that may have arisen as evidenced by the current financial crisis. The Commission is required to submit a report and, if appropriate, legislative proposals by the end of 2009. There may well be further changes in our deposit protection legislation in 2010.

I understand the Europeand Union is reviewing the following issues: the possible harmonisation across the Union of deposit funding mechanisms; the appropriateness and modalities of providing coverage for temporally increased deposits, for example, where a person temporarily deposits proceeds from the sale of a house, pushing his or her deposits above the limit; possible models for introducing risk-based contributions; the benefits and costs of introducing a Community-wide deposit guarantee scheme; the effect of offsetting loans against deposits in the event of a bank failure; the harmonisation of the scope of products covered; and the link between deposit guarantee schemes and alternative means of reimbursing depositors such as emergency payout mechanisms.

Academics will undoubtedly say the soundness of the financial system rests upon effective regulation and supervision by independent supervisors, together with adequately high levels of institutional development covering corporate governance, transparency, accountability and deterrence. Developments in the past few years have also highlighted the risks to financial stability if deposit holders are not assured of timely access to their funds in the event of their bank failing. This is the over-riding concern of depositors in regard to a deposit guarantee scheme. Deposit guarantee schemes originated in the United States in the wake of the great crash of the 1920s.

In terms of the EU-sourced reforms in the current package of reforms, the most significant factor is the reduction in the minimum payout period from three months to 20 working days. The achievement of this will require further investment by the banking sector and the credit unions in order that they can supply depositor data to the Central Bank in good time for it in turn to meet the deadline. All in all, there will be a big challenge for the credit union sector in becoming absorbed into the new regime, but my Department and the Financial Regulator will approach this in a positive and constructive way with the movement's representatives.

Several Deputies spoke about the credit union movement. I have engaged in detailed discussions with the credit unions on how we can implement the deposit protection scheme in their regard. The provisions of the Bill are of sufficient flexibility to allow a number of approaches to be taken. I am sure Members of the House are aware that the question of deposit protection has divided the credit union movement. Some of the larger credit unions disaffiliated from the league on the basis that they were unhappy with the system of internal protection provided by the league and wished to be in a position to deposit with the Central Bank in a direct manner. Clearly, I have the difficult task of reconciling the different views expressed by credit unions and ensuring that in all cases the public interest is protected. However, in my discussions with representatives of the credit unions involved I have endeavoured to devise a solution which will meet the concerns of all concerned and, above all, provide adequate safeguards for depositors. I would welcome further views from Deputies in that regard. Like Members, we frequently receive representations from credit unions and, as Minister, I am in constant discussions with them on the matter. It is important, however, that any system devised is workable, durable and commands the confidence of depositors. The decision to extend deposit protection to credit unions was the correct one because it puts them on an equal footing with banks in regard to the basic level of deposit protection provided. Having regard to the general responsibilities of credit unions, the limit of €100,000 is sufficient to put them on the same footing as other financial institutions for all purposes.

As regards the contributions made to the debate, Deputy Bruton raised the question of funding being shifted to the Central Fund. That is a necessary requirement of the directive which this measure implements. The thinking in the directive is that the State must insist on the industry being levied for any cost occasioned by the guarantee. Therefore, the directive imposes an initial cost on the Exchequer which will be reimbursed through a levy mechanism. That is what is envisaged in the legislation and the directive.

Deputy Bruton then turned to the wider question of the restructuring of the Central Bank and the Financial Services Authority of Ireland, likening it to moving the deckchairs on Titanic.

Deputy Richard Bruton

I did not say on Titanic.

Deputy Brian Lenihan

I am sorry. That is an official summarisation. I apologise; I was unable to be in the House for the Deputy's contribution.

Deputy Burton also touched on what was, in her view, the failure of the Central Bank and the regulatory authorities to anticipate the crisis which has engulfed us. There are two distinct issues in the reform of the Central Bank and the financial regulatory system. One concerns the personnel who staff the system, while the other concerns the legal framework. The far more important issue is that of the personnel who staff the entities because it is decidedly a question of men and women, rather than measures. We must ensure that whoever takes over the position of regulator is a person who can ensure the regulatory system will be robust and can command confidence in the future.

The legal changes which will be necessary are to make the system more streamlined, transparent and efficient. The Government has been considering these changes for some time. The Taoiseach made an announcement about them earlier this year and I will be making a further announcement later this week about what is envisaged. However, the crucial point is that while the position of regulator must be independent, it must be accountable to a commission which can hold it to account. In addition, any Central Bank commission which will be presided over by a governor, as is the practice in every country in Europe, will have to hold to account an independent regulator and a director of central banking functions. It is my view also that we must examine how the Oireachtas can hold such a commission to account in the performance of its duties. We must also examine what is evolving in Europe in terms of European supervision of our regulatory system. Whether additional national supervision is required is a question that will have to be examined by the Oireachtas in any amending legislation. There are grave questions that have to be analysed here; it comes back to the old maxim, "Who guards the guardians?" These are issues we will have to address in considering any such legislation.

Deputy Bruton asked about the percentage of depositors fully covered by the new limit. It is expected that the vast majority of private depositors will be fully covered. It is difficult to be more specific, given the lack of data on the amounts held by individuals in banks.

Deputy Richard Bruton

Does the Minister know what the value of the deposits is?

Deputy Brian Lenihan

I do not have precise information on the value of deposits and their combination in banks. Hwever, I do remember last September acquiring more specific data on this question before recommending to the Government the decision made at that stage. I will undertake to furnish the Deputy with such information as we can gather in that regard.

Deputy O'Donnell wandered into the land of NAMA and the Fine Gael magic bank, as I choose to call it. I do not want to wander down that laneway with him this evening because the matter does not arise on Second Stage of this legislation. There is a big difficulty with the Fine Gael recovery bank in that one does not get money from the European Central Bank unless one advances collateral for it. Fine Gael has not demonstrated any collateral available, whereby €2 billion can generate €50 billion.

Deputy Kieran O’Donnell

It is not about that. The Minister will find that in France and other European countries they are covered.

Deputy Brian Lenihan

That is why I call it a magic bank. It is not a realistic proposition. It has been dealt with by many commentators and is not a runner. The sooner the Deputy faces up to this the better.

Deputy Kieran O’Donnell

What about NAMA?

Deputy Brian Lenihan

We will have plenty of time to discuss NAMA which is the only show in town.

Deputy Richard Bruton

The Minister will not receive many bouquets for it.

Deputy Brian Lenihan

Deputy Burton often feels I pick on her and accuse her of being irresponsible. I find some of Fine Gael's comments about debt and defaulting on bonds far more irresponsible than anything the Labour Party has advocated in the House. In fact, the Labour Party has made a case for adopting an old-fashioned nationalisation approach which can claim some reputable academic support, whereas the Fine Gael proposal is just bizarre.

Deputy Richard Bruton

The Minister should listen to what is being said.

Deputy Brian Lenihan

It is a Lehman's bank type of proposal which involves a default. It is unsustainable as regards the development of the banking sector. It may provide a fig-leaf, whereby Fine Gael can freely criticise the Government on these matters.

Deputy Kieran O’Donnell

How will the Minister get a return on NAMA?

Deputy Brian Lenihan

I assure Deputy Bruton that the day he walks into the Department of Finance the fig-leaf will be removed.

Deputy Burton broadly welcomed the Bill. I was not aware of the fact that she had raised the issue with the previous Minister. She sees some sinister reason in the fact that the Bill has been separated from other legislation dealing with financial matters. The Bill implements the directive; it is normal practice to implement a directive in a Bill of this type. We have consolidated some of the statutory instruments involved in the legislation and I can assure the Deputy there is no sinister motive for it. I certainly never saw the guarantee given subsequently on 29 September as the cleverest move in the world. I simply saw it as an indispensable step towards maintaining confidence in the banking system. Most European countries have implicitly or explicitly guaranteed banks. The fundamental question that arises in connection with the guarantee concerns the fact that the Government decided it could not let a bank fail — at least, a bank of systemic importance could not be permitted to fail. That is the position of the European Central Bank and also the position of the Government. It is relevant to the current discussion about Anglo Irish Bank. One of the key lessons to which Galbraith and others drew attention regarding the 1929 financial crisis was that if a government permitted a bank to fail and insisted on bank failure as a remedy to solve difficulties in the banks, the shock wave in the economy would be far greater than the shock wave already being felt in the course of a recession. Anyone who studies the 1929 depression or world recessions where bank failure was accepted as an axiomatic solution to a banking crisis will see that the shock wave in those economies was far in excess of anything we have seen in the current economic crisis.

Deputy Joan Burton

Our unemployment figure is much worse. That has been the real shock in the economy.

Deputy Brian Lenihan

If the Deputy is advocating a 31% unemployment rate — the rate in the United States during the Great Depression after the failure of the banks — fair enough.

Deputy Joan Burton

I am not advocating anything.

Deputy Brian Lenihan

That was the rate of unemployment during the Great Depression in the United States.

Deputy Joan Burton

It is a consequence of the Minister's actions.

Deputy Brian Lenihan

I showed the Deputy the courtesy of not interrupting her while she made many tendentious comments. I am seeking to reply to them in general terms. In 1929 there was a 31% unemployment rate in the United States as a result of a government decision to let banks fail. Were we to decide, for example, that Anglo Irish Bank should be allowed to fail — as has been advocated implicitly by some — the effect would be an immediate liability on the State of €64 billion.

Deputy Kieran O’Donnell

That is a misinterpretation.

Deputy Joan Burton

What about the Government guarantee to bondholders?

Deputy Brian Lenihan

I will deal with bondholders in a moment. Were we to repeal——

Deputy Joan Burton

The Minister was reckless with the guarantee.

An Leas-Cheann Comhairle

Please allow the Minister to conclude.

Deputy Brian Lenihan

There would be an immediate liability on Ireland of €64 billion, with incalculable consequences for the funding of the national debt and the position of other banks.

When we speak about bondholders, let us distinguish between those about whom we are talking. There is a fundmental distinction between subordinated debt holders who have no particular advantage under the guarantee in the case of Anglo Irish Bank and senior debt holders in other financial institutions who fund the State and other banks and in respect of whom the matter of default cannot be raised.

Deputy Joan Burton

The Minister should give us the figures.

Question put and agreed to.

Committee Stage ordered for Wednesday, 17 June 2009.