I move: "That the Bill be now read a Second Time."
I thank the House for agreeing to discuss the Central Bank Bill 2014 today. I apologise on behalf of the Minister for Finance, Deputy Michael Noonan, who has a major commitment this afternoon.
The legislation has two purposes, the first of which is to extend the current Central Bank legislation which allows for the transfer of assets and liabilities between holders of banking licences so as to permit the transfer of assets and liabilities from a building society to the holder of a banking licence. ICS is the only building society in Ireland. This will facilitate both the State and Bank of Ireland in fulfilling their respective commitments to the European Commission as part of the bank's amended restructuring plan. The second purpose is to make provision for certain payments from the Central Fund to the account established by the European Stability Mechanism, ESM, as agent on behalf of the euro area member states, to receive payments for the purpose of providing financial assistance for the Hellenic Republic, namely, Greece.
The Bill has three sections and a Long Title. Section 1 provides for the amendment of the Central Bank Act 1971. Section 2 provides for certain payments from the Central Fund to be transferred for the ultimate benefit of Greece, subject to certain conditions. Section 3 contains the Short Title of the Bill.
In July 2013 Bank of Ireland agreed to an amendment to its restructuring plan which had previously been agreed with the European Commission in respect of state aid received by the bank. This allowed the bank to retain its life assurance subsidiary, New Ireland Assurance Company. As part of this amendment, the bank committed to certain substitution measures, including the sale of the ICS distribution platform, together with, at the option of a purchaser, up to €1 billion of mortgages and up to €1 billion of matching deposits. The purpose of the ICS substitution measure is to support new entities in entering the Irish market and thereby increase competition to ultimately benefit the consumer.
For the avoidance of doubt, Bank of Ireland is not required, under the substitution measures agreed to, to sell ICS, rather to offer for sale the distribution platform, together with, at the option of the purchaser, certain assets and liabilities of ICS. The ICS distribution platform includes the ICS brand, the IT system and the broker network. As matters stand, Part III of the Central Bank Act 1971 can be used by banks to transfer between each other their assets and liabilities under a scheme of transfer under Part III of the Act. The effect of the amendments contained in the Bill is to extend the scope of Part III of the 1971 Act to enable building societies to transfer assets and liabilities under that legislation, as well as banks. ICS is the sole remaining building society in Ireland. Part III transfer schemes have been used successfully many times and after these amendments, ICS will be enabled to transfer its assets and liabilities in accordance with that framework. Any transfer of assets and liabilities pursuant to the 1971 Act is subject to the approval of the Minister for Finance after consultation with the Central Bank. If the Bill is enacted, it is anticipated that ICS will apply, pursuant to Part III of the 1971 Act, to transfer the bulk of its assets and liabilities to Bank of Ireland. It is anticipated that an onward transfer of some of these assets and liabilities to a third party would subsequently be effected. This onward transfer could include up to €1 billion of the €6 billion mortgage book held by ICS. The restructuring plan which has been agreed to between Bank of Ireland and the Euorpean Commission requires the Commission to approve the purchaser of the ICS platform. The primary purpose of this condition in the restructuring plan is to encourage competition in the mortgage intermediaries market.
It is important to note that in respect of ICS, economic ownership of the building society has, by virtue of its membership rights in ICS, transferred to Bank of Ireland and that the members do not retain any right to any distribution of the assets of ICS. Bank of Ireland and ICS employ exactly the same procedures under the mortgage arrears resolution process, MARP, and both organisations comply with the Central Bank code of conduct on mortgage arrears, CCMA. Mortgage holders with ICS are not treated any differently from mortgage holders with Bank of Ireland. The ICS mortgage book value is approximately €6 billion, with approximately 40,000 account holders.
The purpose of the proposed legislative change is to allow for a new entrant into the market, thereby increasing competition to the benefit of the consumer. This can best be achieved by a sale to a regulated entity and the broad thrust of the text included in the restructuring plan is consistent with this. The Commission, however, has the final say in regard to the ultimate purchaser and that decision is outside our control.
There is also the broader issue of CCMA protection for residential mortgage borrowers who have had their loans sold by banks to an unregulated entity.
The House should note that the sale of loan books to unregulated third parties Bill, listed in the Government’s legislative programme, is intended to address concerns surrounding the continued applicability of the code after the sale of loan books to unregulated entities. The Government is committed to bringing forward legislation to protect mortgage holders and will work with other interested parties to achieve the best solution for consumers. Officials in the Department of Finance are actively examining this with the Central Bank and the Attorney General's office with a view to bringing forward legislation to address the issue. It is intended this legislation will apply to all loans which were issued by a regulated financial service provider and subsequently transferred to an unregulated purchaser.
Section 2 provides for certain payments from the Central Fund. Specifically, it is to provide a legislative basis for Ireland to make transfers to an intermediate account operated by the ESM, European Stability Mechanism, on behalf of the euro area member states. These transfers are to be in an amount equivalent to the income that accrues to the Central Bank of Ireland from the securities market programme, SMP, portfolio of Greek Government debt. The Bill provides that these transfers may take place up to 2026. However, as the amount in 2026 will be quite small, it is proposed that this will be paid in 2025.
In November 2012, as part of the package of measures designed to help Greece, it was agreed by the euro area member states that the securities market programme related income of member states would be transferred to Greece under certain conditions. Euro member states agreed in January 2013 that the ESM would be the agent for making such payments. It has, accordingly, established an intermediate account into which the euro area member states can place an amount equivalent to the income on the SMP portfolios accruing to their national central banks as and from budget year 2013. Member states under a full financial assistance programme are not required to participate in the scheme while in a programme. As Ireland exited its EU-IMF programme of financial assistance in December 2013, the measure now applies to it. The next transfer date for this measure is 1 July 2014, the earliest date by which Ireland could be required to make its payment of €31 million for 2014 and the necessary legislation will need to be in place by that time.
As is widely known, Greece is benefiting from its second programme of financial assistance, arising from the serious budgetary and economic problems it has experienced and its resulting inability to secure international funding at sustainable rates. On 27 November 2012, the most recent in a series of packages to assist Greece was agreed to by euro area Finance Ministers. It is designed to provide further assistance for Greece in putting its economy on a path to sustainable growth and its domestic finances on a sound footing. It was agreed in the context of the statement by euro area Heads of State and Government on 21 July 2011, reiterated in October 2011, that the Greek situation was different from that of other countries, therefore requiring an exceptional response.
One of the measures agreed to in November 2012 was the SMP measure, the subject of section 2. As Ireland has successfully exited its programme, we are now liable to make payments under this process, beginning in 2014. Legislative provision needs to be made to permit these payments to be made. The full package of measures agreed to in November 2012 includes a debt buy-back of bonds held by private investors; a reduction of 100 basis points in the interest rate margin on the Greek loan facility, bringing it to 50 basis points; the cancellation of the guarantee commitment fee on EFSF, European Financial Stability Facility, loans; the extension of maximum maturities of the loan to Greece by 15 years to 30; deferral of the interest payments on Greece's EFSF loans for ten years; and that member states will pass on to Greece's segregated account an amount equivalent to the income on the SMP portfolio accruing to their national central banks as and from budget year 2013. Again, member states, under a full financial assistance programme, are not required to participate in this scheme for the period in which they receive financial assistance.
The Euro Area Loan Facility (Amendment) Act 2013 provided for the interest rate reduction and the maximum maturity extension. The debt buy-back, successfully completed in December 2012, and the cancellation of the guarantee commitment fee did not require either the amendment of existing legislation or the introduction of new legislation here. It is also important to note that, as before, these concessions to Greece are to accrue in a phased manner and conditional on a strong implementation of the agreed reform measures in the programme period, as well as in the post-programme surveillance period. The current SMP measure, with the deferral of interest rates previously agreed to, provides an additional level of financial conditionality both during the existing programme and also in the period of post-programme surveillance which will apply when Greece emerges from its programme.
In Ireland, on the other hand, we have exited our programme. We are, therefore, subject to both the normal fiscal and economic policy co-ordination and oversight which applies to all EU and euro member states. We are also subject to post-programme surveillance but without the added potential financial sanctions which can apply to Greece as part of these measures. Both Greece and the other euro area member states agree that it is only through the full and strict implementation of the fiscal consolidation and structural reform measures included in their programme that Greece will regain competitiveness and be able to fund itself through the international markets.
Some ask why Ireland is not seeking or being offered the Greek package or one similar to it. It is important to differentiate between Ireland and Greece in this case. Ireland's situation differs in fundamental aspects of fiscal and economic performance from that of Greece. The approach to these issues is, accordingly, fundamentally different. Greece's public debt prospects are of a different order of magnitude to Ireland's. Notwithstanding significant private sector involvement in March 2012 in its autumn forecast later that year, the European Commission forecast that the Greek debt-to-GDP ratio would worsen, reaching over 188% in 2013. This outlook, with a worse than expected economic and fiscal performance up to that point, was what prompted a reconsideration of Greece's debt sustainability in November 2012. Even after the series of measures agreed to and taking account of the impact of structural reforms in raising both growth and revenue in the coming years, Greek public sector debt could amount to around 124% of GDP by 2020. The corresponding Department of Finance assessment of Ireland's public debt, published in the budget last October, is that the debt-to-GDP ratio peaked at 124% in 2013 and will decline thereafter.
The Greek economy has suffered a recession that was more severe than anticipated, with GDP declining by 23.5% from 2008 to 2013. Notwithstanding its difficult path, some welcome signs of recovery are emerging. On the fiscal side, Greece will record a primary surplus for 2013 which it expects to be larger than originally envisaged. Recent data support expectations that Greece should return to growth in 2014. Confidence indicators continue to improve, while hard data releases suggest the first signs of recovery. Structural reforms undertaken in labour and product markets have underpinned improved competitiveness leading to expectations for strengthened exports and investment. In addition, Greece's bond yields have also dropped sharply recently.
There is, nevertheless, some distance to go towards recovery. A critical difference between the two economies in this regard relates to the importance of international trade. In Greece exports amount to the equivalent of about 25% of GDP, resulting in export growth not being in a position to provide much by way of offset to the contractional effect of fiscal austerity. In Ireland, by contrast, exports amount to the equivalent of over 100% of GDP, meaning that the growth in exports can provide a powerful offset to the impact of fiscal consolidation on economic activity.