The Irish Banking Federation is a trade body and represents all of the banks, both retail and international of which there are more than 70. We do not regulate the banking sector as that is vested in the appropriate regulatory authorities. Our purpose is to foster the development of a dynamic and stable banking and financial services industry and in so doing to contribute to the economic and social well-being of the country. As part of that mandate, we promote and encourage high standards of compliance across the industry and we undertake a range of complementary initiatives on a voluntary basis, which seeks to enhance and strengthen the formal regime. I will elaborate on some of those initiatives later.
We fully recognise the need for a robust regulatory regime. If we do not have a robust regime it will not command the respect and confidence that we so badly need locally and internationally. We have a large financial services industry by global standards and that can only continue to develop and grow in an environment of world class regulation.
The Irish Banking Federation is not a regulator per se or responsible for regulating the sector, but I appreciate the opportunity on behalf of the IBF, to address the committee on the subject of compliance with financial regulation in the Irish banking sector.
In the coming period, we have to make major calls on the future direction of the industry and its regulatory regime. It is clear that we must do things differently but it is equally clear that we need to get it right and what we commit to now should be informed by reason and logic and above all it should be evidence based. I want to be as candid and frank as possible in speaking on the regulatory system and how it might evolve because far too often we tend to pull our punches as part of the compromise for living on a small island. The topic under discussion is too important for that and it behoves me to be equally candid in my remarks about the banking sector.
I can fully understand the depth of public anger at the banking system for having let them down and in the process lost their trust. We fully acknowledge that some significant elements of the banking industry failed to measure and manage risk effectively. We built complexity and opacity into the investment banking sector globally, which defied understanding even for some industry leaders.
The problems we have experienced in Ireland were not so much associated with the latter but nonetheless we brewed our own home grown crises with a property asset price bubble of unprecedented proportions. For these omissions and failures, I unreservedly apologise and regret that we let down our customers, in many respects shareholders, employees and the wider community. I know it will take a long time to regain trust and confidence. The word credit is derived from credere, the Latin verb “to believe” and also “to trust”. If one thinks about that, it forcibly reminds us that market capitalism requires regulation but equally relies on each and every one to have the strength of character and moral compass to do the right thing. All of these events were a disappointment for me personally. Over the years, my colleagues and I have worked professionally with dedication to effectively represent the sector and above all to build relationships with all of our key stakeholders. We have tried to do that based on mutual respect and understanding. We have done so to try to build the reputation of the sector as a valued economic and social actor. I would like to think that over those years we made some progress but right now it feels as though all that has been set to nought and we must start the work afresh. We must start it again even if it is to be brick by brick because the rebuilding of trust, reputation and confidence in our sector is foundational to rebuilding our economy, regaining our self confidence and restoring our international reputation. We know there are very hard lessons to be learned and readily acknowledge there is a need for change in the way we do business. We are engaging intensely on an ongoing basis with all our stakeholders to try to begin the task of rebuilding our reputation and trust. We know it will be a long and hard road to travel.
The global regulatory authorities have signalled the need for objectives such as higher capital and liquidity requirements, now and into the future. Measures are planned to reduce procyclicality and these are on the table as we speak. We also recognise there is a need for closer alignment of risk and rewards in support of a more sustainable banking system. That is a given. It seems inevitable that regulation will become more intensive and demanding but we also must remember there will be trade-offs. The pace of economic growth will be slower but, one hopes, less prone to shocks. If some of the figures speculated upon at the moment concerning the levels of capital liquidity that will be required to be held were to eventuate, they would come at a cost to the real economy. That is a decision we will make as a society, as we make our choices, but it is important to bear that in mind.
We should remind ourselves of the sector's role in the economy, which is lost sight of at times. We have had our failings and shortcomings but in going forward we need to renew our focus on the sector's potential and positives and ensure that pragmatic, sensible and practical measures underpin the regulatory response. We must ensure that banks can continue to make managed risks. One cannot manage all risks out of the system and if we try to do that we will be left with a banking system that would not be fit for purpose in serving the day-to-day needs of the economy or wider society.
Ultimately, it was not all about property. We facilitated the development of a dynamic Irish economy while other areas of infrastructure lagged behind. In just over 20 years we built an international financial services centre from a brownfield site in the deprived and decaying inner city docklands area which now employs over 30,000 people. We have provided and continue to provide a range of day-to-day banking services across more than 1,000 branches, 3,500 ATMs and we efficiently process millions of transactions on a daily basis. We are and will continue to be a serious contributor to wealth generation and employment. In its own right the sector is a key driver of economic growth. The International Financial Services Centre accounts for 35% of service exports. The sector provides €18.2 billion, or about 10%, of the gross value added in GDP terms to the Irish economy. More than 90,000 people are employed in the sector, the lion's share being in banking, namely, more than 45,000 people. We account for 7% of all private sector employees, spend €6.2 billion on employee remuneration per year and account for 12% of PAYE and a sizable chunk of corporation tax receipts. In the next slide, for page 6, members will see our sector's contribution in terms of corporation tax and PAYE placed against other sectors. While I readily acknowledge the contribution in corporation tax will be well down on previous figures because of the present situation in the sector, over time that is something which will return to be a major contributor to the Exchequer.
One area I wish to touch on, because I am sure it will be anticipated by members, is what we are doing at present. I shall elaborate on some of the voluntary initiatives we have undertaken to complement the regulatory regime in place, particularly in so far as it relates to borrowers. We have been doing a number of things. We have a code of conduct on mortgage arrears which has now been put on a statutory basis. This was introduced by the sector on a voluntary basis in 2000, well before the challenges we now face. It is now a statutory code. This morning we also announced a lender's pledge on repossessions which will give further reassurance to home owners. We have the protocol with the Money Advice and Budgetary Service, MABS, and the statutory consumer protection code. I will speak about the debt enforcement system on which we have long-standing views.
Regarding the code of conduct on mortgage arrears, we should remind ourselves it provides very strong safeguards for borrowers. It means that in the first place lenders must adopt flexible procedures when they are handling arrears cases. They must wait, at a minimum, six months before they start legal action. This is 12 months in the case of the recapitalised banks. The code covers all the mortgage lenders including the sub-prime lenders. We represent only the mainstream lenders but the code covers all lenders and builds on the code we developed in 2000.
To put the debate on repossessions in context, during 2008 we had 96 repossessions. That is 0.01% of all mortgages. In terms of forbearance our culture is entirely different from that in the United Kingdom, where there are 35 repossessions for every one in this country. Regarding mortgage arrears, while there are quite a number of people in that situation, we believe the safeguards and assurances that have been put in place mean we can manage that situation, give the required level of forbearance and work towards solutions with people so they stay in the security of their own home.
In the announcement we made this morning, we further strengthened our commitment. We will monitor this commitment and have the input of MABS in helping us to monitor it. Where a person is in genuine repayment difficulty in respect of his or her principal private residence, provided there is early open communication with the lender — this is critically important from both sides — a mutually acceptable repayment arrangement can be arrived at. A range of solutions is available which should be able to address the vast majority of issues that people in current difficulties with repayments may have. The institution pledges it will not go down the legal route. That arrangement will then be reviewed on an individual basis every six months and will be overseen by a committee of the Irish Banking Federation with input from the Money Advice and Budgetary Service.
Concerning the protocol on debt management, we are working with MABS and money advisors. With lenders who are members we are giving priority to solutions over legal proceedings. That is absolutely the default position. We are developing sustainable repayment plans for people who may find they have a loss of income or are between employments. All the solutions are designed to meet each of those different needs because every case is special in its own right and has its own set of circumstances. We have a formal agreement with MABS which was developed in discussions over a period and draws on the long-standing good relationship we have with MABS. All institutions that are members of the IBF have signed up to this protocol. It is open to other lenders in the sub-prime area or elsewhere to adopt if they so wish and some have done so.
The consumer protection code is a statutory code and, in a sense, is more forward looking. It requires lenders to act to protect consumer interests and strengthens safeguards already there. Effectively, it means that when one extends credit to a customer, one has to assess his or her suitability and ability to make repayments. There should be no pre-approved or unsolicited credit. We worked closely with the Financial Regulator when it was developing the code. It is fully effective since July 2007 and is monitored and reviewed on a regular basis by the regulator, which has probably reported on this to the committee. The regulator does a number of themed inspections across all financial institutions to measure compliance with the code. That code is due for review some time early in the new year.
Regarding debt enforcement, we support the overhaul of the current system. Members will be aware there was a recent publication by the Law Reform Commission on this area. We believe very much there should be workable alternatives to imprisonment for non payment of fines for civil debts. We have made submissions over the years to the Department of Justice, Equality and Law Reform and since 1997 have been consistent in making representation to different Ministers, setting out our position, namely, that we believe the current regime is anachronistic and should be repealed. Although IBF members have sought orders from time to time, no member has placed any debtor in prison for failure to pay his or her debts in 2008 or 2009. It is not a road down which we wish to travel.
Concerning regulation and getting the balance right, I ask members to look at the montage of an advertisement that is probably familiar, namely, "I don't know what a tracker mortgage is". It was humorous and excited a lot of interest at the time. There was, however, a serious message behind it, that consumer protection is an important subject. In the old regulatory regime, the balance was wrong in the way it was discharged between the consumer and the prudential mandate. That is in no way to be critical of the consumer mandate. In many ways, the consumer mandate and the way it was discharged was an example of best practice and benchmarked against our international peers, it performed very strongly.
My own view is that in the way in which those mandates were discharged, the consumer mandate was placed before the prudential mandate and ultimately prudential supervision is the guarantor of consumer rights. At the height of the crisis, when people were seriously concerned about their savings, the question they asked was if their money was safe, not if they knew what a tracker mortgage is.
In the future regulatory regime we must bear that in mind and ensure there is a strong focus on prudential supervision. I am not saying there should not be an emphasis on consumer protection but there must be an appropriate balance struck. If we learned one thing from the current regime it should be that at the time, in 2003, when the structure was set, the emphasis was on that side of things. There was a decision to separate the prudential supervisor on the banking side from the Central Bank, even though they were in the same authority. With the benefit of hindsight, that was probably the wrong decision.
The proposals currently before us to combine it into a single function are right. The prudential banking supervisor will be able to pool the intelligence and information collected with the financial stability mandate of the Central Bank. When the two are put together, there is a much more complete picture of what is happening in the economy, where threats are building up and where there may be systemic risk.
On the regulatory structure, it is important that mandates are balanced. It must be clear who is responsible for what in the regulator, with strong levels of accountability. More important than structures, however, is culture. We must have smart regulation and that can only happen if there are people of the necessary level of competence and expertise. I sit on the industry panel and in our previous reports, which can be accessed on our website, we consistently called for a stepping up of investment in expertise in human resources, training and IT, so there is an IT capacity to analyse and process huge volumes of information coming from the regulated entities. Those are the areas where there must be a focus in future. The shortcomings in the system are more cultural and are based on people rather than on structures. It is important that we fix that.
The issues that beset the domestic sector cannot solely dictate the regulatory approach because the wholesale international sector has a different set of requirements. We cannot manage all risk or we will kill financial innovation and stifle growth.
There has been a lot of debate about rules versus principles. A rules-based regime is not the panacea one might think. Across the global economy, there were failures in all jurisdictions and some of the greatest failures were in rules-based systems, such as in the United States and in Britain, where there were highly prescriptive rules-based regimes. There are areas where we need greater clarity and prescription but to focus solely on rules versus principles is a false argument.
We must also bear in mind that domestic regulation will not exist in the same autonomous way that it did in the past. We have learned from this crisis that these are global issues. The risks that got transmitted through the system and that caused the failures were global and therefore we must have a global response. Our regulatory system must evolve in tandem with what is happening at EU level, where a whole new supervisory framework is being set up.
There is also the question of the establishment of a systemic risk council to look at financial stability to see where in the EU risks might be building up, with asset price bubbles, and to then sound the appropriate warnings, asking national governments to take action. We must be fully plugged into that system and into everything that happens at international level through the financial stability board and other standard setters and regulators. There must be an alignment of regulatory effort around the areas of greatest systemic risk. That is what I mean by smart regulation. There must be a concentration of resources where the risks are greatest.
We are not a regulator, although we support regulation, and in that context I am happy to take questions.
