I was speaking here yesterday evening on this Bill, before we went on to Private Members' business. The Bill is designed to have a legislative system in place to deal with banks in difficulty in any future banking crisis. We hope that we will not have to rely on this legislation, because we have had enough banking crises in the past, but we must pass this Bill because it could be necessary in dealing with some of the existing banks at the moment.
Many of the points I made yesterday were in connection with the role of the European Central Bank. I finished up by questioning the continued existence of the Irish Central Bank and the other 26 central banks in the EU. Most banks in those jurisdictions are too big for the local central bank to regulate and oversee. If we have learned anything in the last two years, we now know that this banking problem is a European issue that needs European resolution, and not just piecemeal resolution in each state.
It is unusual for someone in here to call for more powers for Europe, but everybody in Ireland lost confidence in the Irish Central Bank, the financial regulatory system and the banking system. Some of that confidence has been restored by the appointment of new people in those key positions, but those people will not always be there, and there is a strategic weakness in terms of the size of the Irish banks relative to the size of the Irish Central Bank.
The banking crisis has been examined to the nth degree. We have had several reports, including the Honohan report, the Regling-Watson report and the recent Nyberg report. We have also had a number of stress tests of the assets and liabilities of the various banks. The most recent test was carried out by an American organisation known as BlackRock, which took a very pessimistic view, put perhaps it is right to get to the end of it.
This is a heavy duty Bill, and I think there is general fatigue among the public when they hear about bank resolutions, financial crises, Greeks, bailouts, subordinated bonds, unsecured creditors and so on. Be that as it may, we have a responsibility to deal with these issues. In the Irish banking system and the worldwide banking system, there was no liquidity problem until the events of mid-September 2008, when Lehman Brothers collapsed. Access for banks around the world to short-term borrowing became very constrained due to the failure in confidence in the banking system and in the ability of banks to repay.
One can speak of a bank being solvent, in the sense that in time when its assets mature it will provide more than enough money to repay those who have lent money to it, while at the same time a bank can be illiquid in the sense that the bank is unable to pay its borrowings immediately and cannot find other lenders who will tide it over. We have a situation where banks can be solvent in the long term but cannot access funds in the immediate or short term to pay their liabilities that are falling due in the short term. That is what we would call illiquid.
Putting such a solvent bank, even though it might have a liquidity problem, into bankruptcy is unnecessary and will involve an unnecessary cost on the taxpayer. Emergency measures like that should only be taken as a last resort because if given time, the banks could work their way through the system.
There are major costs involved in having a reconstruction system in place. The costs are of two types. The first involves the funds that are required from the taxpayer to fund or eliminate the losses of depositors and creditors while the second, which is far more important for the public, involves the costs that will have been incurred by the taxpayer and which will ensure there are fewer resources as a result of putting the money into an insolvent bank for the economy's medium and long-term growth potential.
The money that goes into a bank is not just the cost of the money but the many purposes that the money could be used for, which is very important. It is, however, necessary to have this new resolution scheme in place. The main reforms, including those in this legislation, will involve the strengthening of regulation, adopting internationally accepted accounting auditing and financial reporting standards and practices and toughening compliance and regulation.
One may ask if this could not be done under existing company law. Company law deals with most situations but normally corporate insolvency procedures are inadequate for banks and other financial institutions and we must explain the reasons for that. The time to act to avoid a run on the bank is after a bank has lost market confidence but before it becomes insolvent. That can be a very narrow window. Insolvency practitioners do not take into account public policy objectives, so banking and banks have a major public policy objective in terms of the availability of credit and a payments system in the economy. A normal insolvency-liquidator process would not take that into account and that is why we need extra provisions to deal with a bank that needs reconstruction, as opposed to ordinary companies that do not have a wider impact on the economy. Also when a bank fails it has greater knock-on effects on the economy than a local business that fails.
I am pleased that the legislation is beginning to recognise the issue of bank liquidation. For a long time I have opposed the view that a bank is too big to fail. A bank is a business like any other business and the consequences of a bank failing are far more serious, grave and important, but that does not mean that banks are what may be termed "sacred cows" and should not be allowed to fail. The circumstances in which it can happen have to be specific and an absolute last resort from the taxpayers' point of view but that option must always be there. The resolution regime in terms of liquidation of banks means there must be specific reasons for placing the bank in liquidation and terminating its banking activities.
It is also essential that under this legislation it is made very clear that this can only happen if in the opinion of the Central Bank, the winding up of the bank is in the public interest. People who owe money or are owed money by a bank cannot put a bank into liquidation as happens in cases of other normal commercial debts. A bank is different and it can only be put into liquidation with the say of the Central Bank. It is also possible that if credit unions are unstable or, in the opinion of the Central Bank, may be unable to meet their obligations to creditors and have failed to comply with a direction of the Cental Bank, there are then reasons that they should be put into liquidation. It is important that we discuss that issue as we have shied away from doing so on several occasions.
In the legislation before us, section 6 refers to the independence of the Governor of the Central Bank. I have a major problem with that. I cannot see how it can work in practice. The Governor of the Central Bank, Professor Patrick Honohan, has said on various occasions when he is in Dublin he is Governor of the Central Bank in Dublin but when he attends a meeting in Frankfurt he is not the Governor of the Central Bank in Dublin but a member of the board of the European Central Bank. These are two different roles with two different objectives but one cannot divide oneself into two halves. This is a flaw with all the legislation across the EU.
l suspect that in years to come we will have legislation across the EU countries, and especially those in the eurozone, for one strengthened Central Bank to deal with these banking issues. We are tinkering at the seams of the problem at the moment. What we have to do is necessary in the short-term crises in which we find ourselves but in the calm light of day, when the banking crisis is behind us — it might be in five or ten years — we will have a stronger central bank at European level to deal with all the banks in Europe.
We all know that if the Irish Central Bank wants to close a bank it will have to get permission from the European Central Bank on any major action in which it wishes to engage. By definition that proves that the Irish Central Bank does not have autonomy. Anyone who believes that the Irish Central Bank has autonomy in regard to currency, exchange rates or any major function one would normally associate with a central bank is mistaken because such functions have long been obsolete since we joined the euro. We have not yet managed in our national psyche to accept this reality. It is a nationalistic wish to hold as much authority as we can in these areas but I see the time coming when we will have a strengthened European Central Bank and these decisions would be made on a broader European basis for the good of all our citizens.