JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS debate -
Wednesday, 8 Jul 2009

Reform of Financial Regulation: Discussion with Department of Finance.

Chairman

I welcome the delegates from the Department of Finance: Mr. William Beausang, assistant secretary general; Mr. Kevin Cardiff, second secretary general; and Mr. John Horgan, principal officer, for today's discussion on regulatory reform in the financial sector. I draw witnesses' attention to the fact that while members of the committee have absolute privilege, the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice that they should not comment on, criticise or make charges against any person outside the Oireachtas or an official either by name or in such a way as to make him or her identifiable. I ask members and witnesses to switch off their mobile telephones as, even in silent mode, they adversely affect the broadcasting transmission.

I propose that Mr. Beausang make a short presentation after which members may put questions to the witnesses. Is that agreed? Agreed.

Mr. William Beausang

I thank the joint committee for affording us the opportunity to appear before it today to discuss recent progress in regard to regulatory reform in the financial sector and, in particular, the establishment of the new institutional framework for financial regulation as announced by the Minister for Finance on 18 June 2009. The negative impact of the international financial crisis on the banking system in Ireland has emphasised the importance of the framework for financial regulation to the real economy and the critical links between financial regulation, financial supervision and the financial stability responsibilities of central banking. The range of reforms announced by the Minister are expected to underpin a much more effective and efficient financial regulatory regime.

The key change to the regulatory framework is the establishment of a single, fully integrated regulatory institution, the Central Bank of Ireland, which will be responsible for the supervision of individual firms and the stability of the financial system generally. This will replace the current two pillar structure currently operating within the Central Bank and Financial Services Authority of Ireland, comprising the Central Bank and Financial Regulator. The proposed new Central Bank of Ireland commission will be chaired by the Governor of the Central Bank. It should be noted that the Governor will retain sole responsibility for the performance of the functions imposed and the exercise of powers conferred on the Central Bank by or under the Rome treaty or the ESCB statute.

Consumer confidence is vital for the financial services industry. Within the new regulatory structures, the consumer information and education role, currently carried out within the consumer directorate of the Financial Regulator, will be reassigned to the National Consumer Agency, NCA, which is being amalgamated with the Competition Authority. The functions to be merged in the new body are highly complementary and share a common goal of enhancing consumer welfare. Regulation for consumer protection, including the development and enforcement of codes of practice, will remain within the Central Bank of Ireland as an integral part of conduct of business regulation. It should be noted that the proposed reforms will not impact on the current separate statutory role of the Financial Services Ombudsman.

Within the new Central Bank of Ireland structure, it is proposed that two top level posts will be established as ex officio members of the commission. The director of central banking will report to the commission on the performance of central banking functions by the Central Bank of Ireland other than those functions relating to the independent role of the Governor. The director of financial supervision will report to the commission on the regulatory and supervisory functions. The process of recruiting the director of financial supervision is already under way and the position was advertised nationally and internationally last week. A wide-ranging search is being undertaken to ensure the successful candidate has the necessary reputation, experience, abilities and expertise to lead the reform of the regulatory structure.

In addition to the recruitment of the director of financial supervision, reforms will also be supported by a significant expansion of regulatory capacity within the Central Bank of Ireland. Additional new staff with the necessary skills, expertise and experience to meet the objectives of the new regulatory structures will be appointed. Two assistant director positions were already advertised last week. Earlier in June, a range of specialist positions was advertised and the associated selection process is progressing. To expedite the implementation of these reforms, the Minister for Finance has established a high level group chaired by the Department and including representatives of the Central Bank and Financial Regulator. This group will also undertake appropriate consultations as part of the implementation process. Within the Central Bank and Financial Services Authority of Ireland, the current functions of the Central Bank board and the regulatory authority are currently being aligned as far as possible within the existing framework in advance of the full implementation of the regulatory reforms, which will require legislative changes to governing legislation.

The legislation to implement the reforms will ensure appropriate accountability of the new regulatory structures to the Oireachtas, while assuring regulatory independence, as well as strengthening the evaluation and quality assurance of regulatory performance. In addition to the changes to the domestic regulatory framework that I have outlined, significant work is under way at European Union and international level to improve the financial regulatory architecture. Developments domestically must be aligned with emerging international developments, ensuring our regulatory framework remains in line with best international practice. The reforms outlined are consistent with new arrangements proposed at European Union level and should ensure a cohesive approach between critical elements of effective financial regulation.

My colleagues and I will be pleased to answer any questions members may have on the new financial regulatory structures.

Deputy Fergus O’Dowd

I welcome the delegates from the Department of Finance. We have gone through a very difficult period nationally and internationally in recent months. Our finances have been abused by the banks, with loans to directors and so on, and there has been a lack of oversight.

When the regulator has been informed, there has not been effective action that the complainants would have expected. How much more robust do the Minister's proposals need to be? What extra strength is required for credibility? How will we know that the Department of Finance is doing its job? We assumed that the job was being done by the Financial Regulator and the Central Bank, but clearly it was not. What more transparency and accountability will there be?

Mr. Kevin Cardiff

It is certainly true to say there are shortcomings with the regulator. The regulatory authority has acknowledged that itself. The Central Bank itself has signed up to it and is anxious for reform. There are three important matters — first, the structure; second, the culture that operates within the structure; and third, the availability of the right skills within that overall organisation. The presentation we have just given is mostly about structure. As regards the past very difficult 18 months, we must look at the response of the regulatory system to what was an unprecedented crisis, and hopefully one we will not go through again. Looking at it under that much strain, there were some strengths. One of the strengths we found, especially earlier in the crisis period, and relative to what people were telling us in other jurisdictions, was the fact of the two entities — the Financial Regulator and the Central Bank — being part of the same overall structure. That meant that the people concerned were geographically close to each other, known to each other and were able to exchange information smoothly. The lesson that the Governor and others are trying to put forward is that even though that might have been a strength relative to where other countries were, it was not strong enough. They feel, and the evidence is in their favour, that what we needed was even better integration, especially at an earlier stage.

Deputy Fergus O’Dowd

The point I am getting at is that there was reckless lending going on in the banks, as well as completely and utterly inappropriate actions by different companies. There were 100% plus mortgages and the whole system was geared up to a collapse. What is new that will stop that from recurring? I appreciate Mr. Cardiff's point about the relationship between the different structures, but what has really changed? Will anything change?

Mr. Kevin Cardiff

The proposition is that the structure will be adjusted so that responsibility for regulation and financial stability, including examining all those issues from a macro-prudential viewpoint, bringing together the regulation of individual institutions and examining the overall system——

Deputy Fergus O’Dowd

The 100% mortgages came in at one stage. I am not being political about this in a party political sense, but that was very bad for the economy, yet nobody shouted stop. Will the Department shout stop? Will this new arrangement be more of the same? Is there a new dynamic here?

Mr. Kevin Cardiff

The point is that the proposed legislation will allow for a structure for that new dynamic. The structure in itself is very important but it is not the only thing. That was the only point I was trying to make. However the new structure will allow for the Governor and the board, which is the Central Bank commission, to have an oversight of the whole picture. So they are not just looking at whether 100% mortgages are prudent for any particular institution. Within the context of the whole system, they will be able to say that is not positive and therefore they should be taking action on it. The whole structure will be more integral and therefore better geared to taking a systemic overview and not just an institutional one.

Deputy Fergus O’Dowd

A few weeks ago we had a witness here, Mr. Eugene McErlean. I appreciate that Mr. Cardiff is not the Financial Regulator, but Mr. McErlean made complaints which were never followed up. It seems there were incredible abuses going on in part of the system that he knew about and the regulator knew about, but nothing happened. I respect Mr. Cardiff's professionalism but I cannot say that I am riveted by what he is saying. I am not trying to be rude but I do not see anything different happening, other than the two organisations — the Financial Regulator and the Central Bank — merging. Until the legislation comes in that is the way it will be. They are in the same room now instead of being in separate rooms. Is that unfair comment?

Mr. Kevin Cardiff

No, it is not unfair. It is a very valid point and that is what I was trying to hint at. Legislation tends to deal with structural issues, although it can deal with other things, but that is not all that is going on. At the same time as the legislation is dealing with structural issues, there is a process to recruit a new chief executive. There is also a process to recruit new senior managers. I think the advertisements were in the newspapers for that last week or the week before. Some 20 new banking specialists have been appointed who were brought in from the private sector earlier in the year. There is a process for another 20 at the moment. There is a soul-searching process within the regulator's office. I would not come to this committee and say that all that is changing is the legislative regulatory structure. That is changing but it is not all that is changing. If that was all that was to happen, it would obviously not be enough, but there is an extensive process of change going on. I have to say, though, that it is going on at a very difficult time when there are significant day-to-day distractions from the longer term for very obvious reasons. Only a fool would say that the process will be entirely smooth.

As regards the specific case the Deputy mentioned, I know that the regulator was probably before the committee and had some answers to those questions. I did not see the transcript so I do not know whether the Deputy is satisfied with those or not.

Deputy Fergus O’Dowd

I am certainly not satisfied but that is not because of your good self.

Chairman

A point has been made by Deputy O'Dowd concerning the economy. There are an awful lot of people hurting from what went on over the last number of years. We really need to see draconian regulation and legislation to ensure that what has occurred here will never be allowed to happen again. That is the point.

Deputy Fergus O’Dowd

That is the point, yes.

Senator Paul Coghlan

I welcome the departmental representatives to the committee. I wish to ask two brief questions. To what extent have the non-guaranteed and foreign banks pulled up their drawbridge, so to speak, in terms of lending to Irish customers? Does Mr. Cardiff agree they are merely concentrating on preserving capital, rather than lending in order to assist in getting the economy going again? There is a national interest in ensuring that unsustainable debt levels are not created, while at the same time freeing up lending for purchases. Is Mr. Cardiff sure that Irish financial institutions are providing adequate data on credit details to the credit bureau?

Mr. Kevin Cardiff

What does the Senator mean by non-Irish banks?

Senator Paul Coghlan

I mean those not covered by the scheme and the foreign-owned ones.

Mr. Kevin Cardiff

The retail ones, Ulster Bank and HBOS?

Senator Paul Coghlan

Yes, all of those.

Mr. Kevin Cardiff

Obviously, we do not define their commercial decisions. One must think in terms of what a bank needs these days to lend, especially a subsidiary. The first thing it needs is availability of capital, which is being destroyed somewhat at the moment because of heightened impairments, so capital is an issue. Just as important an issue, however, is availability of liquidity. The Irish system was running short of liquidity, thus prompting the guarantee. UK banks also have a guarantee, so they clearly have liquidity issues, and French and Danish banks, and others throughout Europe, are short of both risk-absorbing capital and also cash to make loans.

The third thing a subsidiary needs is the mandate from head office. I have no evidence to say the mandate from head office is lacking, but it is probably the case in almost any financial institution that loan decisions are being made much more carefully. It is also the case that for mortgages, for example, some of the other institutions are charging a good deal more than the guaranteed institutions. This implies they may be trying to set their competitive position such that they are not particularly anxious to make loans, but it may also be as much to do with the strategic position of the parent. We might consider what the parent is doing in its home jurisdiction and find that what it is doing in Ireland is not so different. There are a variety of constraints that apply to lending at the moment and we are anxious that the Irish banking system is returned to a position in which it has adequate liquidity and capital to maintain the loans it has into the future.

We have just received a report, which I have not yet read in detail, commissioned on foot of the recapitalisation of AIB and Bank of Ireland and dealing with credit availability for the SME sector. We have extended it beyond AIB and Bank of Ireland so it will deal with some of the other institutions as well. That will probably be published shortly.

Mr. William Beausang

Senator Coghlan asked a question about the Irish Credit Bureau. The Irish Banking Federation has a process under way at present which is examining how best to ensure the credit bureau is supporting the banks in making prudent and responsible lending decisions and that the appropriate information is provided to it by the banks to support that objective. We are aware there are important issues to be considered in the context of that review, such as the provision of information and the depth of this information, the external validation of its processes and the credit evaluation tools it uses. It is a piece of work the Department is interested in and we will be reviewing the results of that work closely to make sure the credit bureau is playing an effective role in supporting good lending practices. Obviously, consumers should not be loaned to if they are over-extended; however, they should not be denied credit if they are a reasonable risk. From a regulatory perspective, sound prudential regulation is supported by a system that ensures banks have the information available to them to make good decisions. It is an area in which we have an interest and we will be monitoring it carefully.

Senator Paul Coghlan

Mr. Cardiff referred to AIB, Bank of Ireland and the banks covered by the guarantee scheme. Is he satisfied, although all the anecdotal evidence is to the contrary, that the main banks are providing what was agreed to with regard to mortgages and SMEs? That was something about which we and the Government are concerned. Even though the agreement has been in place for a considerable period, the anecdotal evidence is that these banks are effectively not assisting the economy.

Mr. Kevin Cardiff

Getting to the basics, what we need for the economy is that it has a banking system that is stable and capable of maintaining itself. Various efforts have been made by the Government to achieve this, including the guarantee, the recapitalisation and what we will be doing in terms of NAMA. Thus, much work is being done to ensure this is happening. In terms of the recapitalisation of the two larger banks, various commitments were made about making available pools of credit, and we have no evidence that those pools of credit are not available. The question is whether, with the pools of credit available, appropriate loan decisions are being made so that where a good prospect comes to a branch manager he gets the hearing he deserves.

The Senator asked whether the statistics were good enough. No, they are not, which is why this study has been commissioned. The study, which will be interesting, is likely to say there is a difference between what the bank's own statistics show and what a large survey of 1,000 businesses found in terms of availability of credit. We have only just received the report and I have not read it in detail. It does not seem to be a major disparity but there is a disparity and this is presumably to do with the difference between the formal credit application and whether that was agreed, and what happens when the customer goes to the branch looking for money. Does the person in the branch say there is no point even in applying or does he say the customer can apply? In other words, there is probably an informal process in almost all business negotiations before the formal process begins, and there may be a disparity between the informal and the formal. As I said, however, we will be examining the report in detail and it will be published shortly, which will give us a better handle on the situation. It is always difficult to reconcile anecdotal and statistical evidence, which do not always show the same answers.

In addition, the Government has established a clearing group so that industry groups aware of patterns or significant individual instances of cases in which credit that should reasonably be granted is not granted can sit in the same room as the bankers and work the issues out together. The group was established about four weeks ago and is being chaired by the Department of Enterprise, Trade and Employment.

Senator Paul Coghlan

That is vital, because even though recapitalisation of both banks has taken place, whether one goes on the data or on anecdotal evidence, businesses are not getting the assistance they need for a productive economy. Until NAMA is in place and the banks receive further assistance on the capital side, we will not have the progress we need. We have no hope of seeing green shoots before NAMA is in place. As we know, the market abhors a vacuum, and until this is done there will be one. We seem to be engaging in delay. How would the witnesses comment on the progress made with regard to the setting up of NAMA?

Mr. Kevin Cardiff

We are certainly not engaging in——

Senator Paul Coghlan

Or should I say lack of progress?

Mr. Kevin Cardiff

No, I do not think the Senator should say that. There is a large volume of work going on in this area. Legislation is at an advanced stage of preparation and will, it is hoped, be published this month. In addition, a detailed practical exercise is taking place. It is not visible because it is preparatory work, but much work is going on. It is far from the case that nothing is happening; it is one of the most concentrated exercises I have seen in the public service. However, it will not bear fruit yet; the first fruit will be the legislation to be published shortly. I agree that the market, like everything else, abhors a vacuum, and therefore fast progress is an absolute priority. It is being treated that way.

It would be nice to believe that one could double the resources and do it twice as fast. However, the process does not quite operate in that way. We are working hard on it. The Department and the NTMA are addressing the issue of resources as the need to do so arises. The NTMA has appointed advisers in respect of various issues. I attended a meeting last night at which a valuation expert from the HSBC who was recently employed by the NTMA spoke. We are working through the process of how to value individual loans, what approaches should be taken in respect of such loans and how matters will be negotiated with the European Union, which will be obliged to approve everything we do in this regard.

At the meeting in question, a discussion took place in respect of the legislation and the problems that might arise which would have to be dealt with. Some legal experts who were present to deal with company law issues referred to how the latter might interact with the NAMA legislation. Additional resources have been applied in respect of these matters when necessary. I would like to say that the Senator will be pleased with the outcome. However, he will certainly be surprised by the sophistication of the outcome when the legislation and other practical measures come into place in the early autumn.

Senator Shane Ross

Our guests work in the taxation and financial services division of the Department. What does that division do?

Mr. Kevin Cardiff

We do a huge amount, including everything from dealing with legislation relating to financial regulatory structures——

Senator Shane Ross

Does the division advise on or draft such legislation?

Mr. Kevin Cardiff

We advise on and draft it. In addition, we advise the Minister, we send teams to Brussels to negotiate in respect of the detailed matters which are dealt with there, we draft legislation to accommodate the transposition of EU directives and we carry out contingency work in respect of legislation we hope will never have to be used but which must be prepared in any event. We also provide advice to the Minister in respect of crisis management exercises such as those which took place recently. In that context, we draw on resources in-house and from the NTMA, its advisers, etc.

We carry out quite an amount of work, some of which is mundane in nature and some of which relates to the current crisis.

Senator Shane Ross

Does the division have a responsibility for what happened prior to 30 September?

Mr. Kevin Cardiff

Yes, absolutely. Just as the Department, the Minister, the Government and the Oireachtas have responsibilities, there is no doubt that we, as advisers to the Minister, had a responsibility in respect of certain matters. We were all part of what was occurred both prior to and since 30 September.

Senator Shane Ross

Did our guests provide advice to the effect that the economy and the property market were getting out of hand?

Mr. Kevin Cardiff

As a Department, we would have taken a view on what was happening to the economy.

Senator Shane Ross

Did the Department advise that the position with regard to the banks and the property market was getting out of hand, that things were very bad in 2007 and 2008 and that urgent action was required?

Mr. Kevin Cardiff

In 2007, Northern Rock became a feature. In that year and 2008, there were increasing liquidity pressures within the banking system and we were tracking, monitoring, advising on and carrying out contingency work in respect of those pressures.

Senator Shane Ross

The Financial Regulator has taken a great deal of flak for what has happened. The politicians, the banks and everybody else have also taken a fair share of such flak. Is there not a reason for believing that the Department — which possesses the relevant information and which is monitoring events — should have blown the whistle? Should it not have indicated that the economy was getting out of control and that the banks were lending far too much money in respect of property? Did it ever take action in this regard?

Mr. Kevin Cardiff

That is the role of the Central Bank and Financial Services Authority of Ireland and the Financial Regulator. However, as a Department we have an overview role in respect of the economy.

Senator Shane Ross

However, Mr. Cardiff's division advises on regulation.

Mr. Kevin Cardiff

No.

Senator Shane Ross

Does it have any responsibility in respect of regulatory affairs?

Mr. Kevin Cardiff

We advise on regulatory structures and how they might operate in the Irish economy. We are not responsible for regulation; that duty lies with the Financial Regulator and the Central Bank and Financial Services Authority of Ireland. As matters change, obviously that could change. However, that was the position at the time. Is Senator Ross stating that it might have been nice if we could look back and say that we saw with clarity what was likely to happen and that we stopped it?

Senator Shane Ross

Yes.

Mr. Kevin Cardiff

Obviously, it would be nice to be in such a position.

Senator Shane Ross

The Financial Regulator obviously gave extraordinarily bad advice with regard to what was happening and believed in this amazing principles-based system of regulation. The latter obviously did not work and the position v is-à-vis the economy and the property market got out of hand. The Financial Regulator and the banks have, to some extent, been rightly upbraided in respect of the matter. What I am trying to establish is the nature of the relationship between the Department of Finance and the Financial Regulator. As Mr. Cardiff stated, the Department monitors everything and possesses all the relevant information. In fact, it possesses more information than anyone else. In such circumstances, I am trying to establish whether the Department should have raised a red flag and stated that the economy was going downhill very fast. It appears that the Department did not do so. Did anyone approach the Minister to indicate that the banks and the developers had got out of hand?

Mr. Kevin Cardiff

As the Senator is aware, we do not inform Oireachtas committees with regard to the advice we did or did not provide to individual Ministers.

Senator Shane Ross

Why not?

Mr. Kevin Cardiff

It is not the convention.

Senator Shane Ross

It may not be the convention. However, we are entitled to be provided with answers. We do not give a hoot about convention, we want to know the truth.

Mr. Kevin Cardiff

It is not the convention.

Senator Shane Ross

I do not care about convention. I am asking a question and I want to know the truth.

Mr. Kevin Cardiff

Then the Senator should allow me to finish. It is not the convention to discuss toings and froings between Ministers and their Departments. However, I would imagine that if a Minister had received detailed advice from the Department of Finance to the effect that the banking system was out of hand and was about to cause great distress, said Minister would have acted on it. Perhaps the Senator can take from that what is the answer.

Senator Shane Ross

So the Department of Finance gave no warning.

Mr. Kevin Cardiff

That is not quite what I said.

Senator Shane Ross

I am not trying to personalise this but——

Mr. Kevin Cardiff

I accept that. This is an extremely important issue and I am not trying to sidestep it. The Senator stated that we possess more information than anyone else but that is not actually the case. The Oireachtas, on the basis of advice from the Government and, obviously, the relevant officials, established the regulatory system on an independent footing and gave it a remit. The Department of Finance respected that independence and did not try to do the job itself. In addition, and as far as I am aware, the Department did not at any stage seek to duplicate the role of Financial Regulator in being the whistleblower in respect of any of these matters. Other than having a remit in respect of general oversight in respect of the economy, there was no unit within the Department which was in possession of all this information and which was tracking the position. The regulatory system has an independent role in this regard. That system was established such that there could be a sharing of advice between the Financial Regulator and the Central Bank and Financial Services Authority of Ireland.

We were aware of that as a potential failing. In 2007, as this matter began to become more important, we established the domestic standing group. In that context, the word "domestic" means within the jurisdiction. I understand that almost every European country took similar action. The domestic standing groups were intended to allow for a greater exchange of information between those with economic responsibilities in finance ministries throughout Europe, their regulators and their central banks. Within our domestic standing group, there was an awareness that an issue was beginning to develop. In particular, that was evidenced by things like liquidity flows and so forth in 2007 and into 2008. This turned out to be a very useful thing because it meant that by the time we hit the real crisis period, we had procedures in place that allowed for greater exchange of information and had a self-reinforcing series of actions that had allowed for greater preparation for crises and so forth. For example, there had even been simulations of what would happen and what would be the responses were a financial institution to get into difficulty. This would have entailed meeting and running through a scenario and so on. A good deal of preparatory work had been done.

However, I do not think that anyone, either in Ireland or in other jurisdictions, from what I can see, anticipated this. Whether they could have done is a different question, about which outside commentators may be better able to talk. However, as a matter of fact, I do not think that anyone, either in Ireland or in most of the other jurisdictions with which I am familiar, anticipated or predicted the scale of the dislocation in markets that occurred, partially in 2007 but especially into the middle and autumn of 2008.

Senator Shane Ross

Ireland had a special problem. In Ireland, it was up to us to give warnings regarding our individual problem, particularly in respect of property and banking.

Mr. Kevin Cardiff

Everyone had a slightly different problem. In the United States, it was a sub-prime problem, while in other jurisdictions it pertained to over-exposure to complex financial instruments. In Ireland, the problem concerned over-exposure to property. In retrospect, it certainly would be wonderful to have been the person who, or Department which, had stated this must stop. As a matter of actual fact, no one in any of the aforementioned jurisdictions had anticipated the scale of the turnaround. The Senator should also remember that the problem was greatly exacerbated by the occurrence of a property crash at the same time as an international liquidity crisis. The coming together of these two events, as well as several others, such as an economic slowdown in other jurisdictions and so forth, was not predicted. While the question of whether it was predictable is a different matter, the evidence is that it did not seem to have been. However, the coming together of those events greatly complicated the matter.

Senator Shane Ross

I take it from Mr. Cardiff's comments that no one in the Department of Finance raised his or her hand to state this was a dangerous situation. The Department simply allowed it to continue the way it was.

I wish to turn to another question. Members have read a lot about the concept of the green jersey in respect of the banks helping one another out. I refer in particular to the specific case of Irish Life & Permanent and Anglo Irish Bank. Apparently, such an agenda was current throughout the past year, whereby banks were under official pressure or certainly were subject to official requests to help one another when in difficulties. This concept certainly has been used as some sort of cover in the case of the transfer between Irish Life & Permanent and Anglo Irish Bank of €7.5 billion or perhaps €8 billion. Can Mr. Cardiff tell members something about the green jersey? Was the Department aware of the green jersey instructions or urgings that were taking place to help one another in this regard?

Mr. Kevin Cardiff

What was the green jersey? While I am unsure I like the phrase, there certainly was an amount of urging from the Central Bank and the Financial Regulator, of which the Department of Finance was aware, to institutions to allow the normal liquidity interactions that happened between banks to continue. Obviously, that therefore meant that we wished to avoid a replication in Ireland of what was happening in many other jurisdictions, namely, a case whereby bank A, which had surplus cash at a particular time, would not lend to bank B, which was short of cash at that time. That is how interbank markets normally operate. They normally operate on a more international basis than was becoming the case, because there appeared to be a re-nationalisation of the market. I refer to the anecdotal evidence about which the Senator was talking and which is hard to pin down. However, people were telling us that although they normally would have got X amount from France, the French no longer appeared to be lending internationally. I cited France as an example but it could have been any country. There certainly was an encouragement to the market to try to keep the normal mechanisms going and operating.

Senator Shane Ross

Did that extend to helping one another? Were they being encouraged to help one another? Mr. Cardiff knows what the green jersey is. It has been all over the newspapers and he knows what I mean.

Mr. Kevin Cardiff

I know what the Senator means. However, he really is asking whether this extended to suggesting to institution A that if institution B wanted a transaction that would be out of the normal course and slightly dodgy, it should do it anyway because it would be a help. I do not know. I have no evidence that the green jersey agenda, if one wishes to call it that, was being pressed in that direction.

Senator Shane Ross

I am not asking about anything dodgy. The Department would not encourage anyone to do anything dodgy and I do not suggest it would. While they might do something dodgy anyway, it certainly would not be with the Department's sanction.

Senator Paul Coghlan

They would not be asking would they?

Senator Shane Ross

Certainly not. However, the banks are on the record in this regard. Was there approval from the Department of Finance for the banks to help one another when they were in legitimate difficulties in respect of short-term funding?

Mr. Kevin Cardiff

To the best of my recollection, the Department of Finance was not in direct contact with the institutions on this issue. However, it wanted institutions that had cash to operate the market in such a way that would be of assistance to the entire market.

Senator Shane Ross

To help one another, in other words.

Mr. Kevin Cardiff

Of course——

Senator Shane Ross

Mutually helping one another in difficulties.

Mr. Kevin Cardiff

If one helps the market, one helps one another, as there are not many players in the domestic interbank market. Consequently, it would be entirely remiss of us to not wish to see the market continue to operate at a time when it was under stress. On an operational level, as the Department is not the liquidity authority, which is more the Central Bank's area of responsibility, we would not have been in direct day-to-day contact with the institutions at that time.

Obviously, since the guarantee and so forth, our day-to-day contact with institutions has increased considerably. Moreover, there have been instances in which we have been more directly involved in issues of liquidity. For example, I refer to the raising of moneys under the guarantee in respect of bond issues and so forth. There was a point at which the institutions were afraid that the first lot of bond issues under the guarantee would all happen at once and therefore would fail because there would be too much supply of paper all at once. Certainly, while the institutions co-ordinated that among themselves, they did so with the assistance of the Department and the Central Bank.

However, I am not aware of evidence of anything that would explain illegality, deliberate misleading of markets or whatever. I cannot think of anything like that off the top of my head. However, to be clear, it has been a most unusual and difficult time. Consequently, there have been moments when we have been obliged to question ourselves as to whether action X is the correct option in respect both of supporting Ireland as an economy and of transparency and ensuring that the world is aware of what we are doing. I do not claim that perfection exists in the Department of Finance or in any part of the financial system. However, I have a sense of what I believe the Senator is getting at and I do not believe there was anything in our actions that would have gone as far as I suspect the Senator is wondering about.

Senator Shane Ross

While I have no idea as to the answer to this question, what was the relationship like with the banks and the Financial Regulator? How often would the Department be in contact with them or be on the telephone to them? Was it hourly, daily or monthly? How often did Mr. Cardiff meet them? Was there a close relationship or was it distant?

Mr. Kevin Cardiff

What point in time is Senator Ross referring to? I could give a flavour of how it developed.

Senator Shane Ross

Let us say before the crisis was recognised, throughout 2007 and 2008.

Mr. Kevin Cardiff

In 2007 I had personal——

Senator Shane Ross

Mr. Cardiff should talk about the Department and not worry about himself.

Mr. Kevin Cardiff

The Department had contact with the banking system, through its representatives in the Irish Banking Federation, and with the larger banks on a weekly basis. It tended to be more often than weekly and concerned legislative matters, European law and tax matters. The Department tried to learn what was going on in markets so as to best shape the legislation or the European agenda. The banking system tried to help us and tried to influence decisions in that regard.

Senator Shane Ross

Were the banks lobbying all the time?

Mr. Kevin Cardiff

It depends on what Senator Ross calls lobbying.

Senator Shane Ross

Trying to influence decisions.

Mr. Kevin Cardiff

Of course they were, very regularly. The bulk of it is not about influencing decisions of principle but technical decisions. If something must happen, what is the best from the point of view of the banks? Very often, but not always, this works best from the citizens' point of view.

Senator Shane Ross

Was Mr. Cardiff aware of the regulator's thinking?

Mr. Kevin Cardiff

On the issues for which we have a clear remit, we talk to the regulator more frequently than weekly. The regulator was on almost any committee that considered a legislative matter governing the financial system. The Central Bank and the regulator were closely consulted.

Senator Shane Ross

Did Mr. Cardiff express concern? Did anyone express concern that the regulator was getting the exposure to the property market wrong?

Mr. Kevin Cardiff

I cannot think of an instance off the top of my head where there was a formal evidenced approach that presented a significant weakness in part of the process in 2006 or 2007. I cannot think of an informal approach either. Later on, as the international system became more fraught, in conjunction with the domestic downturn and the property market, these became evident to most people at the same time.

In recent times, in contrast with what happened in 2007, the extent of contact between the Department and individual financial institutions is much greater. It affects different issues. It raises questions for us about what is a Department of Finance issue and what is a regulatory issue. We try to be careful. We are in a different kind of contact, at a more senior level on more domestically important issues than was the case two years ago. That is expected, if one is in a crisis there is more communication than in a non-crisis period.

Interaction with the regulator is different and roles have changed. This has taken place under legislation and is an important feature. The guarantee is the Government's guarantee. The regulatory issues and the control of risk are handled by the regulator but under delegation. More issues are brought to our attention. We are investors in financial institutions and potential investors in other financial institutions. In making their strategic plans, financial institutions are much more conscious of Government plans. The process of NAMA is coming along and there is more interest in Government intent on that. There is a more fluid judgment of responsibilities between official bodies concerned, which I hope is appropriate. It has been a year where there have been problems daily. If there is a problem now, the official will not spend too much time worrying about whose responsibility it is to talk to X or Y. The impetus is to get the job done. There has been a more organic interaction between the institutions, it is less institutionalised. It is still important to have enough institutional separation to ensure people know their responsibilities and try to get them done. It is a different scene.

Chairman

There is a vote in the Chamber. We will suspend for a few moments.

Sitting suspended at 4.10 p.m. and resumed at 4.20 p.m.

Senator Shane Ross

I think we can establish that the Department did not issue a warning or put its hands up to state that we were in mortal danger, that the banks were behaving recklessly and that the property market was on fire. That is a pity but I do not know whether the Department is meant to be monitoring the regulator. I do not know what is the Department's relationship with the regulator. Is the Department of Finance meant to be regulating the regulator or does it just inform the Minister on what is going on? Regulatory structure was mentioned and I presume the Department has fair knowledge and responsibility for what is happening in the regulator.

Mr. Kevin Cardiff

We do not have responsibility for what is happening in the regulator.

Senator Shane Ross

Does the Department monitor what it does?

Mr. Kevin Cardiff

It is difficult to describe the relationship. We have a fairly detailed relationship with it mostly to do with structural, technical and legal issues, at least that was the case back in the 2007 period.

Senator Shane Ross

What about solvency and liquidity issues?

Mr. Kevin Cardiff

Solvency and liquidity issues are and have been a matter for the regulator but obviously as they reach critical pitch as has been the case over the past year or so, they become Government issues, I suppose because the regulator does not have a purse. The advent of the domestic standing group from approximately the middle of 2007 would have brought us more and more into an ongoing dialogue on those issues.

Senator Shane Ross

May I ask Mr. Cardiff about principles-based regulation? When did that happen? Were we always principles based?

Mr. Kevin Cardiff

I would rather be in private session at this stage. Personally, there is nothing in the legislation on the Financial Regulator that uses the phrase "principles-based regulation". The legislation established a structure and an authority, and naturally the authority had to make decisions on how it would regulate. It shows the model, motto or cultural phrase of "principles-based regulation" as the general tenor of its regulation.

Frankly, there is nothing wrong with principles-based regulation. It is supposed to mean that the actions of the regulator and of the regulated would not be judged entirely on the basis of box-ticking exercises and whether one has complied exactly with a technical instruction, but that one would also be judged against the principles of sound management and sound regulation. In that sense, principles-based regulation should be a stronger system. It should be more than a technical exercise; it should be a governance exercise and almost a cultural exercise.

What has come out in the wash, particularly during the recent strains, is that there are shortcomings with the regulatory approach, which have been acknowledged by the regulator and the Minister, and that changes must be made. One hesitates to give a purely personal view, but as a purely personal view I am not sure that it matters what one calls it so much as what one does and the behaviour that underpins it. The choice of the Minister and the Government is to try to underpin a more rigorous, closely monitored expert system with a structure that brings the macro-prudential views of the Central Bank into closer integration with the views and understandings of the people regulating individual institutions. My view is that it is not just about legislation, it is also about expertise and cultural change. It does not matter whether one calls it "rules based" or "principles based", it is what happens that matters.

Senator Shane Ross

To Mr. Cardiff's knowledge at what stage did people in the Department know about the €7.5 billion transfer between Anglo Irish Bank and Irish Life & Permanent and what did they do when they knew about it?

Mr. Kevin Cardiff

To the best of my knowledge, and do not quote me on the exact date, it was the "twenty-somethingth" of October. The official concerned picked up the phone——

Senator Shane Ross

Pardon?

Mr. Kevin Cardiff

The official concerned picked up the phone and told the Office of the Financial Regulator that we had been reading through a report that we, that office and the NTMA had received the previous day; that presumably staff in the Financial Regulator's office had seen such and such a transaction but that the official was bringing it to their attention in case they had not reached it.

Senator Shane Ross

What happened then?

Mr. Kevin Cardiff

The regulator has published a detailed report on what it did with that information. It carried out various actions including speaking with the institutions concerned. In case I get the sequence of events wrong, Senator Ross can refer to the regulator's report. My recollection is that was at the end of October, and that there was further follow-up on that later.

Senator Shane Ross

Did the regulator know about it when telephoned about it?

Mr. Kevin Cardiff

It is difficult to say, to be honest, because several people would have been reading the same reports at the same time. This would have been the first draft of a significant PricewaterhouseCoopers report.It was being read in the National Treasury Management Agency, the Department of Finance and in the regulator’s office more or less at the same time.

Senator Shane Ross

I was just trying to establish if the regulator knew about it before the report was read.

Mr. Kevin Cardiff

I certainly have no indication of that.

Senator Shane Ross

Okay.

Mr. Kevin Cardiff

If I were the Senator I would refer to the regulator's own report because there may have been some interactions between the people on the desk, so to speak, and the financial institution concerned before that. I just cannot recall the exact sequence.

Deputy Kieran O’Donnell

Did the regulator read the report before the Department of Finance and the NTMA? That is the key question.

Mr. Kevin Cardiff

It was more or less simultaneous but the report was commissioned by the regulator and I presume, from recollection, that the regulator would have got a copy and shared it with the appropriate people.

Deputy Kieran O’Donnell

What was the Department's view on the fact that the Financial Regulator, the people who had commissioned the report, had not picked up on the issue prior to it being brought to their notice by the Department?

Mr. Kevin Cardiff

I did not say that. I said I do not know whether they had or not because people would have been reading this around the same time. For all I know there were 20 people in the Financial Regulator's office who had picked up on it. There would have been 20 people reading it but I do not know whether they had or had not picked up on that particular paragraph of the PWC report either just before or just after the Department of Finance made a telephone call. I know the NTMA picked up on it just before we did because it talked to me about it directly.

Deputy Kieran O’Donnell

Did Mr. Cardiff have any communication with the Financial Regulator on that particular issue prior to the Department of Finance making that call?

Mr. Kevin Cardiff

We would not have had to because the report was only in a day or two and this was——

Deputy Kieran O’Donnell

The NTMA had made a telephone call to the Department——

Mr. Kevin Cardiff

In terms of what was happening, it has turned out to be an exceptionally helpful situation. With the National Treasury Management Agency, the Minister has a source of advice which is more specialist than the regulatory legislative advice he gets from the Department of Finance, which is hopefully well-informed but we do not have the same direct market expertise as the NTMA. The NTMA has been providing advice to the Minister throughout this period. There is a Part in the NTMA Act that provides for the Minister to seek its advice. It has been integrally involved in the various processes that have been taking place since last year and, frankly, it has been hugely helpful. The quality of our response would have been hampered had we not had that. As part of that it was involved in that process of reading through the reports. In terms of the phraseology used, it was stated as a bald fact that such and such a transaction took place. The exact significance of the transaction, apart from the fact that it was large, probably would have jumped to the forefront of the NTMA's mind quicker than it would to mine but in any event, we saw the issue and brought it to the attention of the appropriate authority in this regard.

Deputy Kieran O’Donnell

I thank Mr. Cardiff for appearing before the committee and apologise for being a little late. I may go over some old ground but I have two questions. First, the new system the Department is bringing in is very similar to the pre-2004 system. There are some variations but it is bringing it back again under one umbrella. On that watch there were scandals such as Ansbacher and the DIRT inquiry arising out of the financial regulation system at the time. What does Mr. Cardiff believe the new system will bring about to ensure that does not happen?

Second, we have just had questions to the Minister for Finance. On the issue of the fixed rate mortgages, the Department had received a report from the financial services authority on whether banks had matched fixed rate mortgages with their own borrowings at high rates, which would justify the application of the high breakage charges. When the Minister came back he stated that the Financial Regulator had been in touch with the banks and that the banks had come back and provided their own actuarial advice but it would not appear that any verification work had been done by the Financial Regulator at that time even though the Minister qualified his response by stating that it would be looking at sample verification in the future, although it did not give a date for that.

I would have thought that in terms of any report on this issue by the financial regulatory authority, it should have adequate expertise to carry out an independent verification process. Is Mr. Cardiff confident that the financial regulatory authority has the necessary expertise currently and into the future because in terms of many of the recent scandals, certainly those involving Anglo Irish Bank, one of them in particular involved independent advice being provided by Anglo Irish Bank to the Financial Regulator, which it accepted?

I find it difficult to understand the reason the Financial Regulator had not done the verification work on the fixed rate mortgages from day one. It is a simple exercise involving the Financial Regulator bringing in its own actuaries to examine, over a range of samples, the rate and whether the banks had been borrowing short to lend long in terms of fixed rate mortgages. Instead we are getting reports sent back by the banks, with no independent verification work being done by the Financial Regulator. The old term in accounting was a balance sheet rather than a systems approach. If proper verification work had been done by the Financial Regulator on the various bank transactions, we would not be in the banking mess we are in today. I ask Mr. Cardiff to comment on those points. What will the new system do that the old system did not do? The system in 2004 was to ensure a more rigorous, accountable and regulatory system for the banking and financial sector, which clearly did not work. We are now going back to a form of the old system. Is Mr. Cardiff satisfied the Financial Regulator has enough expertise to properly monitor and do independent tests and verification of the banking system?

Mr. Kevin Cardiff

If the Deputy does not mind I will take the second question first because the answers come together somewhat. The answer is "No". I am not satisfied that there is sufficient expertise in the financial regulatory system as a whole but nor is the Financial Regulator. It is actively trying to beef up its expertise to ensure that——

Deputy Kieran O’Donnell

That is a clear example. Regarding the fixed rate mortgages, which is one of the biggest difficulties facing ordinary people currently, the Financial Regulator relied on the financial institutions themselves.

Mr. Kevin Cardiff

I saw the draft of the answer but I did not hear what the Minister said. I hope he did not depart too far from——

Deputy Kieran O’Donnell

No. He stuck to the script.

Mr. Kevin Cardiff

One likes to think one is helpful. I am not defending its position but my recollection of what was said was that the regulator had produced this report and was going back to do the verification. The question of whether it should produce the report first or——

Deputy Kieran O’Donnell

When a report like that goes out the Financial Regulator should be able to do independent verification as a matter of course.

Mr. Kevin Cardiff

The Deputy also referred to independent verification of what comes in, more generally. With regard to the other example he mentioned, the regulator is very unhappy that he did not do that kind of independent verification at the time, in that particular instance. Since the flaw has been identified, I hope the regulator will address it.

Deputy Kieran O’Donnell

We are looking at a current report and the same modus operandi is being repeated. Will the Department of Finance be looking for a change?

Mr. Kevin Cardiff

I cannot answer for the regulator. We would, obviously, like to see a Financial Regulator who is highly expert and highly competent. We do not believe that merely requires a change of legislation. It also requires a broadening of expertise. The committee would be delighted with the level of expertise in the Financial Regulator's office. There are some very impressive people down there. One also needs a breadth of expertise, perhaps including market rather than regulatory experience. One needs a broader mix. That is what the office has been trying to achieve and what the Government has been encouraging them to do over the past year or so. Much work is going on. Even in current times, it is not easy to get that kind of expertise and keep it. The office brought in some superbly expert people and they are already beginning to lose one or two of them.

Deputy Kieran O’Donnell

To whom?

Mr. Kevin Cardiff

To financial institutions. We might be happy that the financial institutions also needed that expertise. It might be a positive sign. Even allowing that the Financial Regulator's office will go out and get some expertise, one can expect some churning of staff. That is just how the world works. It is not just about the structure and, therefore, it is about the expertise and building it up. I hope we will see the benefits of these efforts. However, that is for the Office of the Financial Regulator to answer to the committee, not for me.

With regard to what will be different, what changed in 2004 was structure but also breadth of responsibilities and so forth. The new feature of that breadth of responsibilities was a consumer focus and the integration of consumer issues and attention to detail which dealing with consumers requires. Some people — I hope not in our Department — are dismissive of the consumer interest as secondary. The treatment of consumers is often a reflection of how well an institution is generally managed. The best protection for consumers is stable and liquid institutions. It is also important that individual consumers are treated fairly on the doorstep. That will not go away. It will be the significant difference in breadth between now and the situation before 2003.

The cultural shift will not go away either. People are not trying to reintegrate into a Central Bank structure so that we can go back to how things were done in simpler times in the 1980s and 1990s. Much of the legislation dealing with responsibilities has changed. A suite of legislation enacted between 1989 and 2003 has gradually broadened the role of the regulator. Those responsibilities will remain in the new Central Bank-Financial Regulator although they were not in the traditional Central Bank-Financial Regulator structure of the early 1990s. They include responsibility for securities, funds, insurance, interactions with consumers and listings, which is currently with the Stock Exchange but is gradually moving towards the regulator. All those will be new. It will be a much broader institution than in the times the Deputy is talking about, when the Central Bank was the regulator of banks and not much else.

None of this changes the fact that I have been trying to stress with Deputies O'Donnell and O'Dowd that it is not just about the structure, it is also about the culture within the structure. The proposed change of chief executive and strengthening of senior and middle management will help to change the culture and to make it more attentive, flexible and expert. Another thing will change the culture. The shock to the system we have experienced in the past two years will demand a different approach to the world. We must watch this. Any organisation that has been through a crisis — it will be the same with the Financial Regulator's office and, no doubt, with the Department of Finance — there is the shell-shock factor and the buck-up factor. The buck-up factor occurs when people respond to crises by upping their game. They become culturally different because they learn from their new experiences. There can also be a shell-shock factor. The regulator will have to be attentive, not only to the people brought in but also to broadening the skills base and ensuring the productivity of the people who are already there, who have been through two years of hell and who must struggle through that and put their public interest business above worrying about it.

There is a management job for the leadership team in the Financial Regulator's office and I hope it is doing it — I am sure it is. It must ensure its people are fully focused. They have taken a beating, as has the economy and people working in banks and the construction sector. Many people have been through a very difficult time. We need to avoid the shell-shock factor, make sure the business of the day is attended to and that people continue to work hard. The management task involves more than simply getting the new people in. It also involves keeping the existing people on track. That is equally important. We cannot aim for a perfect situation in a year's time while not paying attention to detail in the meantime.

Deputy Kieran O’Donnell

It is critical that the expertise required for verification work must be within the Office of the Financial Regulator, unlike what happened in the case of the review of fixed rate mortgages. We cannot rely on internal reviews carried out by banks. Banks will talk about independent consultants, but those consultants are appointed by the banks. To restore trust in the system, the expertise must be found within the Financial Regulator's office to do proper verification on this issue.

Today, I asked the Minister for Finance to do a broad review, not merely a sample review, in terms of verification of the fixed rate mortgages issue. I ask Mr. Cardiff to take on board this observation.

Mr. Kevin Cardiff

I will take it on board and I will send a copy of the transcript to the Financial Regulator's office so that they will see the Deputy's comments. It cannot be the case that the Financial Regulator would run the institutions. We must be careful not to try to remove responsibility for the proper running of an institution from its directors and managers. They represent to the regulator much of what they do and that on which they rely. Unless the regulator is to have a duplicate management team managing the institution, a situation will never get to the point where everything represented to the regulator will be checked.

Deputy Kieran O’Donnell

It should be considered for a period of time until confidence has been restored in the operation of the banks and financial systems.

Mr. Kevin Cardiff

The regulator has a heightened involvement, even to the point of its staff attending board and committee meetings on a sample basis. Given the times in which we are in, there is closer contact between the regulator and the institutions. I imagine that this will continue and, perhaps, extend into other institutions.

Deputy Fergus O’Dowd

Mr. Cardiff referred to the shellshock factor of what was occurring, but there was also a denial factor in the whole of the system. That people did not realise what was occurring is more telling. My two questions are joined together. The political system was in denial and the administrative system within the Financial Regulator did not pick up on the issues adequately. When Mr. Cardiff replied to Senator Ross, he stated that no one in the Department shouted "Stop" or intervened with the Minister on the basis that the situation was out of control and that the economy was in serious difficulty.

Mr. Cardiff stated that a part of the Department's role is to plan in advance and to consider what new legislation might be required, given certain scenarios. Will he expand on this point? Is he referring to a doomsday scenario in terms of financial regulation? Notwithstanding the changes occurring inside the Central Bank and the regulator, what changes are occurring within the Civil Service in the Department? I accept Mr. Cardiff's point in that the Department cannot regulate the regulator and that the latter must be allowed to get on with the job. However, Mr. David McWilliams and others commented on the overheating of the economy and the trauma that lay ahead of us all. What changes is the Department making to ensure that it has a broader and deeper understanding of the issues and that it would be able to respond more quickly? I am speaking collectively rather than personally.

Mr. Kevin Cardiff

I appreciate that. To be clear, that is not quite what I stated. I gave the Deputy a strong hint without breaching the usual convention that we do not comment on what exact advice was given to Ministers at what point. As I told the Senator, it would be nice to be able to look back and be able to say that there was a point in time at which the Department had greater foresight than the rest of the world. Maybe it should have had greater foresight.

Deputy Fergus O’Dowd

Mr. McWilliams said it. I am trying to look forwards, not backwards.

Mr. Kevin Cardiff

We and the Deputy are quite right to do that.

Deputy Fergus O’Dowd

The country is angry at the political system for what occurred. There is a structural deficit for which the Administration is responsible. Ignoring the external issues, what is the Department doing to ensure that it is on red alert for these issues so that they can be picked up earlier?

Mr. Kevin Cardiff

The Deputy should not get me wrong. This is the greatest economic crisis that we have been through.

Deputy Fergus O’Dowd

I know that.

Mr. Kevin Cardiff

It would be wrong of us all not to look back and try to work out how we got it wrong so that we can try to do better. I have no quibble with the Deputy's question, as it is appropriate.

In terms of the difference and so forth, the Deputy mentioned legislation and other contingencies. To give an example, on 30 September when the guarantee was announced, we were confident that we could produce the legislation to back it up within one or two days because, while the Bill had not been drafted, much drafting work had been done in and around it. Therefore, we could produce a Bill based on the work already undertaken in the Department of Finance and the Attorney General's office. With the significant assistance of the Oireachtas, the Bill was quickly passed. Its quick passage gave the guarantee a considerable boost in credibility in terms of its legal robustness, particularly during the first couple of months. The market, people and depositors believed in the guarantee because they only needed to wait one or two days, not three months, before it was passed into law.

I was referring to this type of matter. The Department had been preparing legislation at various times. When Anglo Irish Bank was nationalised, the legislation was produced quickly primarily because much of it had been pre-drafted on a contingency basis, although it did not have the words "Anglo Irish Bank" in it at the time. This is what I meant and I was not trying to suggest that there was a doomsday plan.

The Deputy mentioned the denial factor. If we suffered from it, I hope that we are not suffering from it now.

Deputy Fergus O’Dowd

The political system was in denial.

Mr. Kevin Cardiff

The administrative system, as much——

Deputy Fergus O’Dowd

The Government disappeared for three months.

Mr. Kevin Cardiff

Everyone must consider how to ensure that this situation does not recur. The immediate changes in the Department are to address immediate issues. I run what used to be the tax and financial services division and what is now the financial services division. It comprises an extra 18 or 20 people. Those general service civil servants were picked to try to give us a boost in expertise.

Deputy Kieran O’Donnell

What is the total number of staff in the Department?

Mr. Kevin Cardiff

Approximately 600. The division's figure——

Deputy Kieran O’Donnell

In the financial services division.

Mr. Kevin Cardiff

Approximately 40.

Deputy Kieran O’Donnell

It has doubled in size.

Deputy Fergus O’Dowd

Regarding commentators outside the normal commentariat, is anyone in the division reading their articles? Some independent commentators made significant contributions. Had they been picked up collectively, the Department's early warning systems might have been more efficient. What I am trying to say is——

Mr. Kevin Cardiff

Whether there is a system, many of the 40 people are doing what used to be the day-to-day work of servicing our European and legislative obligations and so forth, but we have tendered for and acquired additional legal resources. We have additional attention from our friends in the NTMA, which has been a crucial determinant. It is not that the NTMA has many people. Rather, those people are good. We are considering ways to acquire expertise that has not been in-house to date.

Deputy Fergus O’Dowd

I appreciate Mr. Cardiff's——

Mr. Kevin Cardiff

As to the Deputy's point, we need a better macro perspective. We are all reading commentators' articles. We are also relying on our advisers, including the NTMA.

Deputy Fergus O’Dowd

The key commentators stated that Government policy was wrong, the economy was overheated, the property market was going to collapse and there would be a negative equity situation. These points were made publicly. The former Taoiseach, Deputy Bertie Ahern, is reported as stating that one should commit suicide if one wanted to run down the economy. Why did people in the Department of Finance not insist on a change of policy, given the trends?

Mr. Kevin Cardiff

No official can insist the Minister adopts a position.

Senator Shane Ross

You said he "will" not insist, not "cannot".

Mr. Kevin Cardiff

I gave as honest an answer as I could without breaching any convention. It is not the role of a civil servant to tell Ministers how to set policy. He or she can advise and assist but he or she can never instruct, that would not be right.

Deputy Fergus O’Dowd

I know he or she cannot instruct but were there no confidential reports stating the country was going down the tubes?

Mr. Kevin Cardiff

We did not write such a view any more than the consensus that existed.

Senator Shane Ross

Did everyone in the Department think everything was all right and on course?

Mr Kevin Cardiff

One would almost have to set a timeframe.

Senator Shane Ross

In 2007.

Mr. Kevin Cardiff

Ministers responded in a policy way as they saw appropriate in light of the advice they got from us and from elsewhere. I cannot say we had any greater foresight.

Senator Shane Ross

There does not seem to have been any feeling of foreboding.

Mr. Kevin Cardiff

I did not say that.

Senator Shane Ross

It is the impression we are getting.

Mr. Kevin Cardiff

I cannot bring in every policy document or notes from every discussion we ever had with the Minister and set it out. Personally speaking, the Department staff and others would, in retrospect, like to have done a better job of seeing what was coming. Many other people got it wrong too but they are not the people with the responsibility for advising Ministers, we are and we try to do our best.

In terms of our forecasting the overall economy, which feeds into this issue, we have been trying to improve on an ongoing basis our processes. The coming together of so many negative aspects at once was not foreseen by us or by anyone else.

Senator Shane Ross

The Minister of Finance of the day, who is now Taoiseach, presumably reflecting the views of the Department, was still saying in 2006 and 2007 that the fundamentals were sound. He continuously used that expression. Was that the Department's view?

Mr. Kevin Cardiff

In truth, I do not think anyone else was saying different. In a speech by the Taoiseach, he stated that when he took up office as Taoiseach in May 2008, the experts in the IMF, the OECD and the ESRI were predicting economic growth of over 3% that year and in 2009. They are now predicting a contraction of between 8% and 10%. There was no general understanding that things would turn as quickly and as seriously as they did.

Senator Shane Ross

There had been warnings. There had been programmes such as Richard Curran's "Property Crash" as part of the "Future Shock" series and warnings from various economists.

Mr. Kevin Cardiff

There was a view that a significant shift in the property market was likely. That was built into much of what Ministers were talking about but the scale and the interaction with factors such as the global liquidity shock and the banking crisis worldwide that exacerbated our domestic issues were not fully understood or predicted anywhere. It would be great to be able to say that we predicted it and that any difficulties could have been overcome if the world had listened to us, but that is not the case. We were not far from the consensus view of a downturn that was not a catastrophe, a shift, not an inversion, and we held to that consensus in what we did. I cannot give a different policy outlook from the Government because it is in charge of policy. That is how our democratic system works and I will not take a policy stance.

Deputy Fergus O’Dowd

If someone felt strongly about it, the memo would have been sent, even if the Minister did not agree with that opinion. Did no one in the Department argue that?

Mr. Kevin Cardiff

There are many people working very hard in the Department.

Deputy Fergus O’Dowd

The economy is an absolute mess and partly for political reasons but was there never a view within the Civil Service that things were changing? Did no one feel strongly enough about it to tell the Minister?

Mr. Kevin Cardiff

The Government, particularly the Minister for Finance, at various times would have got advice and information from the Department that would suggest policy directions and would talk about the central forecast and the risks surrounding it. The budget at the end of 2007 outlined the expected position over the coming few years but it also listed risks. From recollection, six risk areas that had to be watched were listed in the budget and by the end of the year, all six had happened. Commentators would have been saying the same, that there were risks, and the Government was aware of them, but no one said to Government that all six would come to fruition at the same time.

We must all strive to do better. What has happened is on a scale that is disruptive to people's lives. We must ameliorate the effects of this on the people we serve and stabilise the situation. There is still a fair degree of crisis and we must try to stabilise it.

Deputy Kieran O’Donnell

The IMF was critical of the 2007 budget, calling it expansionary. Given that the IMF and the ESRI had said there was a property bubble as early as 2005, did officials promote such an expansionary budget for 2007 in the memo the Department officials sent to Cabinet in July 2007?

Mr. Kevin Cardiff

The IMF is pointing out in retrospect all that might have been wrong with the 2007 budget. That is appropriate because it is asking how we got here and how we get out? It is useful for us, for commentators and for Members of the Oireachtas to have that view. The IMF's figures for 2007-08 showed a structural surplus of 0.7% of GDP, presumably for 2007 and 0.5% for 2008. It did not say that at the time. The people there are very good but they are not capable of forecasting the future with precision.

Deputy Kieran O’Donnell

Did Mr. Cardiff feel it was appropriate at the time to have such an expansionary budget for 2007 considering that the winds of change were already in the air as people outside the Department were aware? The property market had been slowing down since July 2006. Did officials in the Department of Finance feel that the brakes should have been applied?

Mr. Kevin Cardiff

I will not answer that question. I cannot as an official comment on Ministers' policy choices. That is not how our system works. If I were to do that Ministers would have to watch their backs every time an official appeared before a committee.

Deputy Kieran O’Donnell

Did the Department's officials present different options to the then Minister, the current Taoiseach, Deputy Cowen, in advance of the 2007 budget? I presume that would be the norm.

Mr. Kevin Cardiff

In any budgetary cycle we present a range of scenarios to Ministers. A set of memoranda on tax and expenditure would be presented to the Minister. In a typical budget there would probably be 50 tax memoranda on different issues, two or three of which would be crucial, dealing with the main tax heads. At the same time the Minister would receive similar advices on expenditure items and the expenditure picture. There would be various meetings to bring those together and discuss the pros and cons of a range of options.

Deputy Kieran O’Donnell

The officials provided alternatives at the time.

Mr. Kevin Cardiff

That depends on what Deputy O'Donnell means. We provided advices on the range of issues that go into putting together a budget and expenditure package and we would have discussed the various issues and packages in detail with the Minister.

Deputy Kieran O’Donnell

Did the Department's officials have concerns at the time that there would be economic difficulties?

Mr. Kevin Cardiff

We would have had the same concerns as economic commentators generally had and those would have been reflected in our advice to Ministers. The Deputy is trying to put me in a situation where I am either defending or attacking the Minister. I will not do that.

Deputy Kieran O’Donnell

Mr. Cardiff could give us a broad overview of how the Department works.

Mr. Kevin Cardiff

There is no problem giving the Deputy that information but it is not part of my brief to do that in a situation where I am expected to comment on the Minister's policies. If the Deputy wants a view of how the Department works or how the budgetary picture comes together, by what processes and so forth, we will happily host the Deputy and any other members of the committee who wish to know and somebody will talk them through it.

Chairman

That concludes our meeting and I thank Mr. Beausang, Mr. Cardiff and Mr. Horgan for attending today and for the lengthy discussion we have had. We look forward to further discussions with them.

The joint committee adjourned at 5.15 p.m. until 1.30 p.m. Wednesday, 15 July 2009.