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Dáil Éireann debate -
Thursday, 22 Apr 2010

Vol. 707 No. 2

Central Bank Reform Bill 2010: Second Stage (Resumed).

The following motion was moved by the Minister for Finance, Deputy Brian Lenihan, on Tuesday, 20 April 2010:
That the Bill be now read a Second Time.
Debate resumed on amendment No. 1:
To delete all words after "That" and substitute the following:
"Dáil Éireann declines to give the Central Bank Reform Bill 2010 a second reading because:
I. It has not been rooted in any proper investigation of what has gone wrong, nor any serious attempt to make key players accountable for the errors committed, both of which are necessary to determine whether this Bill is an appropriate response.
II. It infers that the most urgent reform is to change the architecture of the existing regulatory bodies, when there is no verifiable evidence that such architecture was in any significant way responsible for the shortcomings of the regulatory system.
III. It preserves the system of appointment of Directors to the new Central Bank Commission exclusively to Government with no proper scrutiny by the Oireachtas or any other external body.
IV. It does not give the new Commission the necessary ‘bank resolution' powers needed to put failed banks safely into a managed administration when that is the most appropriate policy outcome.".
—(Deputy Richard Bruton.)

I listened yesterday to a number of speeches on this matter and I am a bit reluctant to break the pattern and address myself to the Bill. However, given the background against which this Bill is being introduced, it is inevitable that events happening outside of the House in the banking world, the impact those issues have on the real economy, their impact on real people and, indeed, their impact on industrial relations should hove large in the minds of contributors. It was nonetheless remarkable that such little attention was devoted to the Bill. To some extent, this is because very few Deputies on either side of the House are persuaded that the Bill is the solution, or even part of the solution, to the problems that have arisen. It is a case of the Minister shooting first and asking questions afterwards. After the bitter lessons of recent years, I acknowledge that everyone is in favour of effective bank regulation, and we all agree with the Minister for Finance when he put it in his opening speech that "the previous regulatory system failed spectacularly."

We do not know, however, why it failed. Did it fail because the regulator did not have sufficient powers or did it fail because he, for whatever reason, turned a blind eye? The Minister asserts that he knows the answers and that this Bill is a main part of his solution but he is putting the cart before the horse.

The purpose of the Private Members' Bill that I introduced on behalf of the Labour Party was to permit a public bank inquiry that would answer those and other questions. That public bank inquiry should have got under way as early as the start of 2009 but the Government blocked it. Now the Minister for Finance advocates a new regulatory architecture without establishing, in public at least, what precisely were the defects of the system that allowed the near collapse of the entire banking system. I support a number of measures in this Bill in terms of tidying up the hybrid system in place until now but I cannot do so with any confidence because we have never seen an evidence-based analysis of what went wrong. It is impossible, therefore, to avoid the conclusion that when things went so disastrously wrong, the natural instinct of those responsible is to distract from what ought to be the real focus. There is no better way of doing so than by redesigning the architecture and talking tough.

Is the Minister saying the previous regulator did not do his job because of defects in the architecture of regulation? That is the logic of introducing a Bill to change the architecture. Did regulation fail because of inadequate powers? If not, why did it fail? Why should the regulator have decided to turn a blind eye? Did he believe that in turning a blind eye he was in tune with the temper of the times? Did he believe that blind-eye regulation was exactly the way his political masters wanted it? If he had been operating within the framework of this new Bill, would it have made a blind bit of difference? Is there any evidence that the former regulator felt spancelled because he did not have the necessary statutory powers? If he had available to him, for example, the powers envisaged in Part 3 for "a fitness and probity" regime, would he have used them?

The truth is we are flying blind; we are enacting new law now and afterwards we will have the inquiry. It is a peculiarly Irish solution to an Irish problem. The Minister asserts that this Bill is the solution so we must go with it and later we can work out the precise nature of the problem. To put it mildly, up to now the Minister's assertions about the unfolding banking collapse have not proved very reliable. The result is that every week the mountain to climb gets higher.

In the past 18 months, Parliament should have been doing what Parliament is expected to be doing by the people: we should have been teasing through all of this in a structured way, establishing what went wrong and why and then coming up with solutions, but the Government would not permit it. Instead we rush to change around the deckchairs and hope that nobody will notice we are avoiding the elephant in the room.

All of this is reminiscent of what happened when the existing architecture was put in place. Members will recall that the public anger and the fall-out from different scandals led to a hybrid architecture of regulation being put in place. There was the report of the DIRT inquiry into tax evasion and inadequate provision for consumer protection. Then there was the McCracken report, which highlighted that the Central Bank was responsible for the prudential suspension of Guinness Mahon. Exchange controls were still in place at the time yet huge deposits had fled to the Cayman Islands. There were also the irregularities at National Irish Bank.

The Tánaiste of the day, Deputy Harney, wanted a regulator on a greenfield site separate from the Central Bank. The then Minister for Finance, Mr. McCreevy, favoured the Central Bank. Enter Michael McDowell, then, as now, in political exile, to make peace between the ideological soul-mates Harney and McCreevy. In his report, "The Establishment of a Single Authority for the Financial Services Sector", a minority group recommended a hybrid compromise where a financial regulator would be quasi-attached to the Central Bank and so the Central Bank and Financial Services Authority of Ireland was born. If a camel is a horse designed by a committee, the Central Bank and Financial Services Authority of Ireland was the product of the dispute in Cabinet.

For all of the confusion reposed in this clumsy architecture, it does not explain why it failed so comprehensively. The proposition that it failed because of defects in the structure is doubtful. I also disagree that the architecture now proposed is radically different. If Mr. Honohan and Mr. Elderfield had been in post between 2004 and 2008, this structure would not have impeded them from doing their jobs effectively. What else went wrong? Is anyone in the House saying that if Patrick Honohan had been Governor of the Central Bank and Matthew Elderfield had been Financial Regulator, the previous architecture would have stopped them from taking the steps that ought to have been taken to preserve our banking system? I do not believe so but to an extent we have embarked on creating an entirely new architecture without the Minister showing that was the problem that caused the collapse we have endured.

The new architecture is even more confusing when it comes to the consumer dimension. The Minister stated, "Consumer function will be integral to the bank itself," but the Bill transfers responsibility for consumer information and education to the National Consumer Agency, along with associated staff. This is a confusing distinction and, more fundamentally, it ignores the modern literature that consumer protection ought not be the responsibility of the body responsible for prudential supervision.

At the time that Bill was introduced in 2002 I said that development and regulation of the financial services sector ought to be distinct from the consumer protection dimension because inevitably there would be compromises if the developmental role were, in any way, confused with the consumer protection role. Deputy Bruton made similar points in his contribution. If I remember correctly, he quoted Professor Ray Kinsella, who explained in some detail why it is not a good idea to marry consumer protection with prudential supervision. Nonetheless the Minister, while hiving off a number of staff to education and information functions, maintains the consumer protection role under the bank.

When I brought in the Consumer Credit Act in 1995, I transferred responsibility for bank charges from the Central Bank to the Director of Consumer Affairs. I still think that approach has great merit. For the same reason I welcome the decision in the Bill to remove the bank's role in helping to promote the financial services sector. It is apparent why a role in promoting Ireland as a centre for the financial services sector might not be consistent with a role in the prudential supervision of that same sector.

I ask the Minister to help me because I am not sure I understand the new structure as proposed. I am not sure I understand the difference between financial regulation and prudential supervision. Who is the prudential supervisor? Is it the regulator? Is that not the task of the governor? If, for example, the banks are found to be putting too much money into property, is that a matter for the governor? If a particular bank is found to be putting too much money into property development, is that a matter for the regulator? I ask the question in the context of the provision of the twin heads of functions in the Bill — the head of financial regulation and the post of head of central banking. I ask the Minister to explain to me what exactly are the responsibilities of the head of central banking? Obviously, both persons will report to the governor but I note that unusual care has been taken in the legislation to guarantee the position of the head of central banking. I understand the opinion of the ECB, to which the Minister made reference — he said he would make this available before Committee Stage — draws attention to the unusual provision in this regard.

I do not know who is the head of central banking and I do not wish to reflect on any individual, but it must be asked whether he was there when the house of cards came down. If he was, is it not unusual that we should go to extraordinary steps to protect him in the legislation? The more one looks at the business of the clean up — or clean out — in the banks, as promised by the Minister for Finance, the more one must acknowledge that it did not actually happen. For example, on the last day the House sat before the Easter break I asked the Minister to let me know the position of the chairpersons of the internal audit and risk management committees in the banks. Are they still in situ? These were the critical people. Chairmen of internal audit and compliance and risk management committees are critical posts. If a person goes into Allied Irish Banks to look for a loan of up to €5 million, the request goes to the chairman of the risk management committee. If it is for more than that sum it might go to the board. I asked this of the Minister who undertook that day to let me know whether these same persons are still in their posts. I would be greatly obliged if he did so and I am glad to have the opportunity to remind the Minister that he promised to come back to me on this. I hope he will.

I welcome the proposals in respect of the credit unions. When I brought the Credit Union Act through the Dáil in 1997 I resisted credit unions being transferred from the Registrar of Friendly Societies. Given everything that has happened since, I agree that the Registrar now should be required to report through the Financial Regulator to the Central Bank commission. I also welcome the increase in lending limits for credit unions. It is some 13 years since that legislation was enacted and I hope the Minister is correct when he promised that changes in the area of rescheduling of loans will, as he put it, "facilitate credit unions in their wish to ease the position of their members". Above all, it is important that the changes being proposed by the Minister will protect members' financial stability and ensure the security of their savings.

This Bill is a case of putting the cart before the horse. We should have had a public, forensic bank inquiry. We should have examined whether the architecture was to blame before bringing a Bill to the House to create a new architecture. In the one minute that remains to me, I raise a matter to which I believe the House should return. There are very many people in addition to the Minister or, more particularly, his predecessor as Minister for Finance, who bear responsibility for the tragedy that has befallen us which has wounded so many people, hurt so many families, caused homes to be repossessed, jobs to be lost, and so on. This Bill smacks of saying, "Let's sweep it all under the carpet and get on with creating a new architecture". We need to examine what happened, and have it examined in public, making these people amenable and accountable for the decisions and omissions during that period, especially in the period from 2004 to 2008.

Any person who took time out to read the two articles in The Irish Times recently by the management consultant, Eddie Molloy, about the performance of the Department of Finance, would have very grave cause to be concerned. The juxtaposition of the conflict, in the manner in which the Department viewed itself on its website, and its actual performance during those critical years before the economic collapse, is a matter about which Members of this House ought to be concerned and which they ought to examine. When the Minister comes into the House again to ask us to accept his assertions that this is the prescription for the future, when we have not even analysed the entrails of the reason the previous system was such a failure——

The Deputy's time has expired.

I thank the Acting Chairman for his indulgence. I am sure everybody notices the impact this banking fiasco is having on the industrial relations arena. It is very easy to understand why that is the case. All this adds to the reasons there should have been a proper public forensic bank inquiry that would at least explain to people why and how what happened came about.

Tá me buíoch as an deis seo a bheith agam labhairt ar an mBille tábhachtach agus ba mhaith liom comhghairdeas a dhéanamh leis an Aire Stáit nua, an Teachta Mary White. I thank the Acting Chairman for the opportunity to speak to the Bill. I congratulate the Minister of State, Deputy Mary White, as it is my first opportunity to do so and I wish her well in her new post.

I welcome this Bill and our thanks are due to the Minister for Finance, Deputy Brian Lenihan, for the diligence he has shown with regard to banking activities and the sure hand he has kept on the tiller over the past number of years. The public recognises that the Minister knows his job and is taking action in the best interest of the Irish taxpayer.

The enhancement of regulatory issues is badly needed. A banking inquiry is necessary and will come about as promised by the Government. We do not want a repeat of the activities that caused these grave difficulties. I speak for all colleagues on this side of the House in saying that the actions of rogue bankers in Anglo Irish Bank, Irish Nationwide and other institutions were reprehensible. I welcome the fact that Garda investigations are progressing and I am sure I speak for everybody in the House in saying we look forward to court cases where guilt can be apportioned or otherwise.

Mr. Michael Fingleton's fee should be paid back and the Government has given a commitment to do all in its power so that the money is recovered. The new chief executive of Irish Nationwide has confirmed that he is pursuing the issue on behalf of his board. The public will be happy to see that money repaid.

There is no doubt that a lack of proper regulation and competence in certain regulatory staff has contributed to the issues. The public wants the Government to take action to ensure we never see a repeat of what has happened. There is no doubt it has been painful and everybody in public life knows what the reaction of constituents has been. Our actions have been difficult but they are necessary in the national interest. People have seen the circumstances surrounding Mr. Boucher's pension top-up in the past couple of days and find it difficult to accept that he should have a significant pension, which is one and a half times the Taoiseach's salary, paid to him at the age of 55 years.

I was on the public record on radio last Tuesday night calling for Mr. Boucher to forgo that pension top-up and looking for the board to ensure that it would not be paid over. I acknowledge the actions and opinions of everybody in this House, trade union leaders and people like Mr. Kieran Mulvey. It all contributed to ensuring that Mr. Boucher would do the honourable thing, which I welcome.

We have had many discussions on whether to bail out the banks, no matter what Bill has been brought forward. I do not have any personal doubt that there is no other option; it may be the least worst option and unfortunately, it is one we must take in the national interest. I have a business background with over 30 years experience in the insurance business. I have worked in the credit insurance departments and any client who ever had a default saw that stay as a blot on the copybook forever. I have personal experience of dealing with clients endeavouring to obtain credit insurance.

Equally, in the ordinary course of simple insurance policies, where companies would allow a deferred payment system over 12 months on the premium, any default would remain on record. If a party seeks the same facility in subsequent years, it may find that the insurance company, on the instructions of the financial institution, would not be prepared to give such a deferred payment system. We do not have an option except to deal with these bail-outs in the best possible fashion. As I have indicated, it is the least worst option.

President Obama will deliver a speech later today on US Government reforms. It is worth noting the comments from President Obama as one can see a parallel with what the Irish Government — and other governments in the EU — are doing. In the speech, he will talk about holding Wall Street to account, saying that the financial crisis was the result of a fundamental failure from Wall Street to Washington. That embraces politicians as well as bankers.

A statement on the White House website indicates:

Wall Street took irresponsible risks that they did not fully understand and Washington did not have the authority to properly monitor or constrain risk-taking at the largest firms. When the crisis hit, they did not have the tools to break apart or wind down a failing financial firm without putting the American taxpayer and the entire financial system at risk.

That is a very strong statement and reflects exactly the difficulties we have found in Ireland. It is also indicated in the statement that Wall Street must be held accountable and pay taxpayers back for costs. A levy is proposed for the banking system, which we should consider. The public would like to think that when banks return to profitability, they will endeavour to pay back the substantial moneys given by the Government.

The statement argues:

The only way to end bail-outs is serious reform. No firm should be "too big to fail". We must constrain the growth of the largest financial firms; restrict the riskiest financial activities; and create a mechanism for the Government to shut down failing financial companies without precipitating a financial panic that leaves taxpayers and small businesses on the hook.

That is exactly the position in which the Irish Government has found itself. President Obama has also referred to the protection of consumers. That statement continues:

We must establish an independent consumer financial protection agency to set and enforce clear, consistent rules for the financial marketplace. A single consumer agency will set clear rules for the road and will ensure that financial firms are held to high standards.

I believe this also is the road on which the Minister for Finance, Deputy Brian Lenihan, and the Government are proceeding. The website also states:

Today, there are seven different regulators with authority over the consumer financial services marketplace. Accountability is lacking because responsibility is diffuse and fragmented. In addition, many mortgage lenders and mortgage brokers were almost completely unregulated.

Does this not ring bells with Members with regard to recent events? The President also proposes to close the gaps in their financial system and the website states, "We must address the gaps that led to regulatory failure — at its peak, the shadow banking system financed almost $8 trillion in assets". This certainly is a horrendous sum, as while we talk in billions, the Americans talk in trillions. The White House website also makes reference to the fact that market discipline is not enough and notes that "relying on market discipline to compensate for weak regulation and then leaving it for the Government to clean up the mess is not a good strategy for economic growth nor financial security". It also states:

Our financial systems need clearer accountability. There is no substitute for vigorous, consistent enforcement of the laws governing the financial system. But each regulator should have a clear mission and the authority to execute that mission.

This is exactly what the Irish Government is doing at present by putting in place new regulations, having appointed a new regulator. I congratulate Mr. Elderfield on his actions to date. He has shown clearly what he is made of and that he has the taxpayers' interests at heart and I certainly wish him well and continued success in his job.

Referring back to the subject of President Obama's speech later today, reform is critical to market certainty and stable growth. Reform is central to providing a foundation for stable growth. The website states, "Our financial system is most competitive when our system is stable, resilient and transparent". It continues by stating, "reforms will make the financial industry and the markets they operate in stronger, safer and more competitive". It also refers to clearer accountability in the supervision and regulation in which financial firms may operate, whereby there will be a coherent set of rules and expectations within the regulatory arbitrage. It also states:

Comprehensive reform is important to generate innovation and economic growth. A key test of a strong financial system is whether or not it effectively channels savings to finance future innovation. Today's system produced waves of credit bubbles and real estate booms followed by severe financial shocks and damage. We need a financial system that is not only interested in short-term profits, but in long-term growth, entrepreneurship, and in savings.

Finally, it comments on leading the way on international financial reform and states:

We are working in parallel with our international partners to make sure that as we move to reform and strengthen our financial systems at home, the G20 is moving to implement reforms to achieve a level playing field.

In that context, we in Ireland are working with our European partners and all the actions of the Government over the years have been taken with the knowledge and acquiescence of the European Union, the European Central Bank, the International Monetary Fund, etc. Consequently, these actions, which the Government proposes to take in a clear, concise and coherent manner, are backed up by our European partners.

While I have made this point previously, it is worth reiterating the point that in the United Kingdom, the authorities have paid out £850 billion in a bailout of its banks. In the United States, the bailout thus far has cost $12.4 trillion. Consequently, when one discusses whether Ireland's bill may be €30 billion or €40 billion, while that is a massive sum of money in our context, ours is not the only Government that is obliged to do this. The £850 billion being paid by our neighbours across the water also constitutes an enormous amount and it is worth pointing out which institutions actually received that money, and how much. A total of £76 billion has been paid to purchase shares by the Government in the RBS and Lloyds banking groups. The indemnity the Bank of England has given against losses incurred in backing up liquidity support cost £200 billion. The guarantee for wholesale borrowings by the banks to strengthen their liquidity cost £250 billion, while £40 billion has been provided to Bradford & Bingley and the financial services compensation scheme. Moreover, £280 billion is needed to provide insurance for bank assets. These costs add up to £850 billion. In the United States, there is a litany of organisations, many of which would be unfamiliar to Members were I to name them, but the overall total is $12.4 trillion.

In the few minutes that remain to me, I wish to refer to the year 1985. I note Deputy Noonan is in the Chamber and he would have been a member of the Fine Gael-Labour coalition Government at the time. Allied Irish Banks owned an insurance company called Insurance Corporation of Ireland, which got itself into financial difficulties. That coalition Government introduced emergency legislation similar to that which the present Fianna Fáil-Green Party Government has been obliged to do in recent years. The position in which the Government of 1985 found itself was exactly similar, in that it could not countenance the idea of a bank collapse because of the effect it would have on the entire economy. I am sure Deputy Noonan remembers this well. Some of the media comment from that time is interesting because it parallels exactly what is happening today. For example, the late Dick Walsh, who was a reporter from The Irish Times referred to the Opposition Fianna Fáil Deputies, who were led by the late Charles Haughey, making quite a fuss about it at the time. Equally, however, backbenchers from Fine Gael and the Labour Party were greatly concerned. Ultimately, they all voted for the legislation on the basis that it was necessary in the national interest.

It is no different in 2010 from it was 1985, in that banking failures for small countries like Ireland are not an option. Our credit rating is at risk, as is our ability to borrow. As I noted, I come from a financial services background in which I know what a credit rating and worse, its loss, means. Moreover, in 1985 certain actions were taken by bank directors. For example, a director of AIB at the time, a Mr. Gerry Scanlon, bought 50,000 shares on the day before the Government bailout. The bank shares rose by 25% on the following day and he made a substantial profit. Consequently, in respect of a Government being obliged to bail out banks and being obliged to accept that certain bankers take inappropriate actions and abuse their powers, it was no different from under the aforementioned Fine Gael-Labour Party Government. While both Fine Gael and Labour Members are castigating the Government's actions today, they should look at the mirror and reflect on what they did when in power and should reflect on the reasons they took that action.

I do not think being obliged to bail out banks is nice. Like every other Member, this involves my taxes, as well as those of my family and all my constituents. However, in the national interest, the Government must take this action. Last year, we borrowed €24 billion at reasonably competitive rates. This year, the figure will be in the order of €20 billion. If we reneged on bank debt, we would not get that amount of money and we would pay much more for what we got. Greece is a prime example, in that its Government decided some weeks ago that it would allow failures. It was told in no uncertain terms by the German Chancellor, Angela Merkel, that Europe would not assist it. The Greek Government has come around to the belief that one must work with Europe and endeavour to deal with situations in a realistic manner.

This is not the first time financial regulation has been debated in the House or its committees. Any Government worth its salt would be introducing a Bill to change the regulatory system, since the manner in which we regulate our financial institutions has proven a failure. There is universal agreement in this regard.

The Bill is complex and I compliment those who put it together. They were working against tight deadlines and I am sure there will be much room for amendments on Committee Stage. In terms of a piece of legislative work, this is more of a Committee Stage Bill than a Second Stage Bill. I look forward to Committee Stage. I hope the Government will be open to amendments. Everyone should note that financial rescues have worked best in the past 12 months where governments have shared full information with opposition parties and where there has been a united approach in the national interest to remediate the situation. This was particularly true in the United States of America and we should adopt the same model.

When the Central Bank was first founded, it was not even the Government bank. That role was carried out by the Bank of Ireland. Until the 1990s, regulation was fragmented. For example, the Department of Industry and Commerce regulated the insurance industry, the Central Bank looked after the prudential side of regulation of banking institutions, no one really looked after the consumer's interests at that stage and the credit unions had a life of their own until Deputy Rabbitte amended the primary legislation controlling them.

The debate started as matters began to change internationally during the 1990s. I served on a committee chaired by Deputy Michael Ahern, the recommendation of which was that we should move to a single regulatory authority. That was in 1998. Our recommendation to go in that direction was quite strong. Subsequently, the Government set up an expert committee under the chairmanship of Michael McDowell when he was not a Member of the House. He brought forward a report that gave rise to much conflict in the public service. This was the first big problem with financial regulation. In effect, a turf war was fought among certain officials and institutions and there was no clear run until a compromise was brokered between the then Deputy McCreevy and Deputy Harney. The compromise was to shelve the majority report of the McDowell committee and to use the minority report as the basis for the financial regulatory Act of 2003. It was never an adequate provision. At the time, the battle was more about personalities, careers and who would get which job than it was about the effectiveness of the regulatory system. Many of our problems go back to that date.

The architecture of regulation is not as important as the type of regulation. The debate over regulation based on principles and regulation based on rules has been well rehearsed. In the principles approach, the Central Bank sets down the principles. Since we knew that all bankers were honourable people and, like the other high professions, were led by the highest ethical standards, they would implement regulations in detail as soon as one told them the principles. Of course, we found this was not right. The principled approach failed.

The former regulator, a man who is much maligned and who I will not attack today, Mr. Neary, discussed the principled approach in 2007. He stated, "It means leaving it up to firms to attune their business strategies with regulatory expectations and places the responsibility for the proper management and control of a financial service provider, on the board of directors and its senior management." This is as good a definition of light touch regulation as one will get. Since people are ethical and of high standards, one can set out the principles and trust them to implement the regulation in accordance with those principles. This never occurred; it was a fiction, but that was the principle.

The alternative is the rules-based approach, in which the details are set down. A rules-based regime prescribes in minute detail how service providers should behave in conceivable scenarios. In 2007, the Comptroller and Auditor General stated, "This kind of regime may provide financial services providers with a high degree of certainty about what their regulators expect, but it may also result in high compliance costs".

The debate is not about the architecture of the regulatory regime, but the type of regulation. The choices are between the principled approach, which has come to be known as light touch regulation, and the rules-based approach, which is being implemented via the Bill. These rules are of the most precise and rigid kind with provision for the Minister to add to them by statutory regulation.

The debate goes on. It should be also noted that it is not as primary coloured a debate as has been presented. There always have been rules and regulations under law that were supposed to be implemented by bankers. According to the Comptroller and Auditor General, since the Financial Regulator's establishment, it has "inherited a varied and sizeable body of rules, regulations and guidelines from its predecessors." The chairman of the Financial Regulator, Mr. Jim Farrell, stated before an Oireachtas committee in January 2009:

I stress that the principles-led supervision system that was applied to the 48 banks we regulate is not a rules-free environment where regulated firms can do as they wish. In addition to the principles set out by the Financial Regulator, there is a vast number of rules that apply to the banking industry. These range from rules and requirements put in place by the Financial Regulator, including capital requirements and weekly liquidity reporting, and the consumer protection code, to rules applied under EU directives and the rules that apply under the law of the land. For example, under Basel II, the EU capital requirements directive, there are hundreds of detailed rules with which banks must comply.

It is incorrect to pose the matter as a free choice between setting out principles and relying on people to comply with them and having a series of rules with which people must comply. Under principles-based light touch regulation, there were hundreds of rules, most of them statutory, with which bankers were supposed to comply in accordance with law, but they did not do so. It was the job of the regulator and the Central Bank to ensure they did. At one remove, it was the job of the Department of Finance to ensure they did. However, no one made sure and our regulatory system failed.

We are moving to a new architecture and a new set of rules-based regulation again, but there is a strong chance that they will fail. In the final analysis, whether the banks are properly regulated depends on the people running them. I am of the opinion that there should have been a clean sweep of the people who run the banks. Everyone who served on the boards of the banks, everyone who was part of the banking culture and who has now been promoted into a senior position and everyone who served on the audit or risk assessment committees of the banks should have been removed. The introduction in Dáil Éireann of new architecture for regulation, which will be implemented by the people who shared in the culture that existed and who made many of the key decisions when things went wrong, does not represent a sufficient response. I am, therefore, seeking a clean sweep in respect of everyone who was involved.

I have no particular animosity against those who are now in charge of the banks. However, there comes a point when — regardless of whether one is culpable — if one held a particular position and if something happened on one's watch, one is responsible and one must go. That is the rule that applies throughout Europe and across the United States. However, it does not apply in Ireland.

There is a second problem with those who are in situ. Let us reflect on what has happened during the past 18 months. Senior banks have lied to Government Ministers, to Members of the House, to their shareholders, to the public, the regulator and the personnel of the Central Bank. However, those who were one step below these individuals in their organisations and who briefed them are now in charge of those organisations. We cannot have a system that will be effective and that will work in accordance with a new set of regulations unless new people who will implement the rules and a new culture are put in place.

It is worth noting that this country has experienced a series of problems relating to banking. While the institutions have, at corporate level, been penalised and fined, the personnel have remained untouched. Many of us believe that the DIRT inquiry was effective and a great success for parliamentary democracy. We are of the view that it was good that, when the inquiry reported, sanctions were imposed at corporate level and that the banks were obliged to pay back some of the tax they previously evaded. However, none of those who organised and ordered that evasion of tax through the network of bank branches throughout the country was touched. While sanctions were imposed at corporate level, no one was held personally responsible. In addition, the culture that had previously held sway remained in place.

How many instances of overcharging occurred in institutions from NIB to AIB in the late 1990s and early 2000s? What happened in the case of such overcharging? The answer is that the regulator and the Central Bank intervened and instructed the banks to repay those who were overcharged. On some occasions, minor amounts were paid in compensation. However, those who organised the overcharging and managed it on a day-to-day basis remained unscathed. Many of these individuals retained their jobs, obtained promotions and worked they way up to the top of the banking system.

Regardless of what might be the architecture of regulation or the content of the new rules regime, there is a great chance that the legislation before us will fail if the culture to which I refer and those who shared in it continue to hold sway within the banking system. The system must change in a dramatic way and this can only be achieved by means of a clean sweep.

I am delighted that Mr. Matthew Elderfield, who was brought in from abroad, has been appointed as head of financial supervision at the Central Bank. I am also delighted that Professor Patrick Honohan has been appointed Governor of the Central Bank, particularly as he worked abroad for the past 15 years. I knew Professor Honohan, but not very well, when he advised the former Taoiseach, Garrett FitzGerald, and the Cabinet of which I was a member. Since then, Professor Honohan has worked with the World Bank and has been involved in bank rescues across the globe. He is the kind of man we need, particularly as he speaks in an extremely forthright manner.

Prior to his appointment as Governor of the Central Bank, Professor Honohan made a number of very interesting statements. In 2009, he said that bank regulation in Ireland, although compliant with international standards was nonetheless "complacent and permissive" and that too much reliance was placed on the internal risk models deployed by the regulated entities. He also stated that it is possible to implement rules in banking by number. In other words, if lending exceeded a certain percentage, a mechanism would be triggered automatically and action would be taken. The current rule of thumb with regard to mortgages would be that they would be offered at a figure of 80%. Under the rules to which Professor Honohan refers, if a mortgage exceeded this or went over 100%, for example, a red flag would be raised and action would be taken as a matter of course. However, such rules were not imposed within the banking system here.

Professor Honohan also stated that in a rules-based approach, numerical controls act as trigger points for action by the regulator and highlighted the fact that balance sheet growth of 20% is often taken as such a numerical trigger. In such circumstances, if an institution's balance sheet showed growth of 20% in a given year, it would have to be monitored. If it increased by a further 20% the following year, that would be a strong signal. In the case of Anglo Irish Bank, Professor Honohan indicated that this level of growth occurred in eight out of nine years and that the average annual growth on that institution's balance sheet was 36%. However, no red lights flashed, no flags were raised and no triggers were activated.

On Committee Stage, we must ensure that the new portfolio of rules proposed by the Minister includes mechanisms that will trigger action. They must not be ignored in the same way the existing rules were ignored in the past by the people who were reared and educated in a particular culture and who still believe that bankers are autonomous in what they do, all this regulation is mere guff spouted in the Dáil and that they can carry on and deal with their customers in the same way they did in the past. It is astonishing that there was 36% growth on the balance sheet of Anglo Irish Bank in eight years out of nine and no one in the Central Bank, the Financial Regulator's office or the Department of Finance noticed.

Before his appointment as Governor of the Central Bank, Professor Honohan also pointed out that the loan books of the Irish banks assumed a modest 20% fall in house prices. Two years ago, no one would have believed anybody who said that the fall in house prices would have been pegged at 20%. However, that is what happened.

The Minister faces a major difficulty bringing this legislation in operation rather than into effect. He is fortunate to have a new regulator and a new Governor of the Central Bank. I do not know whether the third key position, namely, that of the person responsible for regulating the Central Bank on the Governor's behalf, has been filled. These individuals must operate within the banking system.

There is a theory which has become fashionable and which states that regulation failed because it was all based on principles. Under this argument, the premise is put forward that poor Mr. Neary said "They are the principles, lads, and I know you will follow them". That is only part of the story. The banks were obliged, under law and the old regulatory system, to comply with hundreds of rules but they did not do so.

Much of the material to which I am referring and from which I am quoting was supplied by the Oireachtas Library research unit. I wish to compliment the staff of the unit who do great work to assist legislators in the context of directing them towards sources, etc. The information the unit provided in respect of the Bill contains a table drawn up in 2006 by David T. Llewellyn, who knows a certain amount about matters of this nature. The table contains a list of the universal functions of financial regulation agencies. These are functions which one would expect to be carried out by regulators in all jurisdictions.

The first of these functions relates to the prudential regulation for the safety and soundness of financial regulation. I am obliged to ask whether our regulatory system passed or failed the test in respect of this function. The second one is the stability and integrity of the payments system. It failed that test because we had to bring in a universal guarantee in September 2008. The third one is the prudential supervision of financial institutions. Does anyone believe that happened when Anglo Irish Bank had to be nationalised and everything is breaking all around us? The fourth one is the conduct of business regulation, that is, the rules about how firms conduct business with their customers. Does anyone believe that happened with the loans being given to developers? The fifth is one is the conduct of business supervision, to which the same question applies. The sixth one is the safety net arrangement such as deposit insurance and the lender of last resort role performed by the Central Bank which I believe actually happened. The seventh one is liquidity assistance for systemic stability, which is happening now after the Government intervened in very difficult circumstances. The eighth one is the handling of insolvent institutions, on which there is no need to comment. The ninth one is crisis resolution which, again, speaks for itself. The tenth one is issues relating to market integrity.

That is the list of the essential functions of regulator and I suggest the regulatory regime in Ireland failed. It is not about architecture; it is not even about new rules. It is about the combination of the architecture and the rules and the people who are there to impose them. While the Government has done its job in appointing a new Governor and a new regulator, the banks have not done their job. The Government has not done its job in respect of the banks because to get a fresh start, we need a clean sweep of everybody who was tainted by the culture. There are many people still in situ who were tainted by the culture and they will revert to type within a year or two years when things settle down. The next generation of Deputies in 15 or 20 years’ time will be back again. It is time for a clean out.

I am delighted to have the opportunity to speak on this matter because regardless of which side of the House one is on, we all agree the revelations in regard to our banking system and the lack supposed regulation, which was designed to protect customers and society, are truly shocking.

In common with many other countries, including the UK and the US, the Irish regulatory system failed abysmally to carry out its role which was to ensure the financial institutions behaved in a responsible manner. The true scale of the appalling state of our country's banks, as the Minister for Finance indicated, was beyond anyone's notion of the worst case scenario.

This week, we heard Irish Nationwide Building Society incurred losses of more than €2 billion. That is more than it ever made in profits, which is outrageous. I sometimes think the public believes Members of the House are somehow supportive of the banks. We are as outraged, angry and upset by the actions of the people in charge of the banks at that time. Likewise, the revelations in regard to Anglo Irish Bank and other financial institutions have shaken the public's faith in those at the top of the financial sector.

There are many different views about NAMA. My view is that it is the right course of action. It is bringing stability to the financial system. The Minister for Finance and the Department officials deserve great credit for the way they examined in detail every possible option available to them. NAMA has received the support of the IMF and the ECB which stated that measures in the legislation should restore confidence in the banking system, which is the case. The Minister highlighted the favourable reaction of the financial markets to the steps the Government is taking to address our economic difficulty, although I do not believe people in Ireland are as easily convinced. Greece has been forced to borrowed at 8% which shows the steps Ireland is taking are well regarded internationally.

The Financial Regulator failed to carry out his primary function. He did not regulate the banks which abused the trust shown in them. To say their behaviour was reckless is an understatement. The behaviour of some of those bankers was nothing short of criminal and the public is rightly outraged and shocked, as are Members of the House, as to how this was allowed to happen.

Internationally, there was a view that over-regulation and interference was, in many ways, anti-business or anti-growth but with hindsight, trusting the banks to behave in a responsible manner was the equivalent of allowing the lunatics to run the asylum.

Last week, UK Prime Minister Gordon Brown admitted he was not tough enough in regulating the banks. He agreed that an era of light touch regulation had grown in the UK. Likewise, we were not tough enough in regulating our banks. There is no question about this. However, I am optimistic that the new measures the Minister for Finance set out in the Bill will ensure that taxpayers will never again be held to ransom by the banks and that they will overhaul regulation in this country.

Mr. Elderfield, Mr. McDonagh and Professor Honohan appeared before committees recently. They gave everybody a shot of confidence. They have all performed exceptionally well. They are seen as independent and as being on top of their briefs. As I said, they have given confidence politically, economically and financially.

This Bill is the first of a three stage legislative programme — to create a new fully integrated structure for financial regulation, to enhance the powers and functions of the Central Bank and to consolidate existing legislation. This is a detailed Bill with many different parts but the main component of the Central Bank Reform Bill is the merging of the functions of the Central Bank of Ireland and the Financial Regulator. This merger will create a single regulatory body. A Central Bank commission will be created and will be responsible for proper regulation and supervision of the financial services market, including regulation of the service providers.

I welcome the fact an Oireachtas committee will receive an annual regulatory performance statement. This is a sensible move and will ensure greater Oireachtas oversight and accountability. As the Minister highlighted, this step is consistent with the recent recommendations of the Comptroller and Auditor General in a special report on the Financial Regulator. Likewise, the Bill requires the bank to arrange regulator peer reviews of its regulatory performance at least every four years and to report on such reviews. The bank will also be required to prepare a strategy statement every three years in addition to its annual reports and accounts. There are many components to this Bill that will radically reform financial regulation, which is badly needed. It will slowly restore confidence in the banking system.

However, I do not believe that even now the bankers who caused the crisis fully appreciate the implications of what they have done. Last night, Richie Boucher bowed to political pressure to forgo his pension top-up. However, I find it unbelievable that Bank of Ireland, given its current financial situation, would have agreed to go ahead with this payment. People talk about contracts and rules and about how nothing can be done if these payments have been agreed in advance. However, how is it that private companies can change terms, reduce salaries and alter pension contributions in order to achieve savings? Our banks and those in positions of power need to understand that it is only because of the Irish taxpayer that they are still in existence and attempts to make pension payments and bonuses agreed in a radically different economic environment are simply delusional. The trust of the public is eroded each time a story such as the Richie Boucher one appears.

Debate adjourned.