JOINT COMMITTEE ON EUROPEAN SCRUTINY debate -
Thursday, 4 Nov 2010

Proposed Directives on Deposit Guarantee and Compensation Schemes: Discussion

Chairman

We will deal with COM (2010) 368, a proposal for a directive of the European Parliament and of the Council on deposit guarantee schemes [recast]; and COM (2010) 371, a proposal for a directive of the European Parliament and of the Council amending Directive 97/9/EC of the European Parliament and of the Council on investor compensation schemes.

On behalf of the committee I welcome from the Central Bank Mr. Paul Molumby, head of payments and settlements systems, and Mr. Eoin O'Brien and Mr. Stephen Giffney; from the investor compensation company limited, ICCL, Ms Anne Troy, chief operations officer, and Ms Neasa Counihan; and from the Irish Banking Federation, Ms Eimer O'Rourke, head of retail banking and Mr. Felix O'Regan, head of PR and public affairs.

I wish to advise that by virtue of section 17(2)(l) of the Defamation Act 2009 witnesses are protected by absolute privilege in respect of their evidence to the committee. If witnesses are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a member of either House, a person outside the House or an official by name or in such a way as to make him or her identifiable. Members of this committee have absolute privilege. However, I remind them of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

We will have a short presentation from each of the bodies represented. Once the presentations are completed, a question and answer session with members will follow. I am sure members will have a number of questions on various aspects of their concerns. I ask Mr. Molumby to begin.

Mr. Paul Molumby

I am head of the payments and securities settlements function of the Central Bank of Ireland. We are here in response to the committee's invitation to discuss EU proposals on the deposit guarantee and investor compensation schemes. I will give a short opening statement on the deposit guarantee scheme after which Ms Troy will present on the investor compensation proposals. We will then take questions.

The Central Bank of Ireland is responsible for the administration of the Irish deposit guarantee scheme and in the Central Bank I am responsible for the operational aspects of the Irish deposit guarantee scheme. We have reviewed the latest Commission proposals with a view to assessing the impact they may have on the Irish deposit guarantee scheme. The Department of Finance is primarily responsible for policy aspects and the Central Bank has submitted its views to the Department.

By way of background, the Irish deposit guarantee scheme protects eligible deposits in banks, building societies and credit unions authorised in Ireland. The scheme is funded by the credit institutions through deposits with the Central Bank. In the event of a credit institution being unable to repay its depositors, the compensation amount payable is the total amount of deposits held by a depositor with the failed institution, subject to a maximum amount of €100,000 per individual.

Under regulations, the compensation payment process is initiated where the Central Bank has determined that a credit institution is unable to repay deposits due to its financial condition; or a court has appointed a liquidator or examiner to a credit institution. At present, were such a process to be initiated the Central Bank is obliged to pay compensation within three months. This payout period will shorten to 20 working days from 31 December 2010, under the terms of Directive 2009/14/EC.

It is very important that we make a distinction between the deposit guarantee scheme and the Government guarantee provided under the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009, the ELG scheme. The latter is a separate scheme which protects deposits in excess of €100,000 and other liabilities in participating institutions. This scheme is sometimes known as the Government guarantee. We have no responsibility in the Central Bank for the operational aspects of the Government guarantee scheme. The EU proposal for a recast directive, which we are discussing today, relates to the deposit guarantee scheme rather than the ELG scheme.

Like many other reforms, the proposed directive has its origins in the financial crisis of recent years. The proposal is a comprehensive reform of EU deposit guarantee schemes and follows on from the EU emergency measures taken in 2009, through Directive 2009/14/EC, which principally dealt with increasing the level of coverage to €100,000 for all schemes. The four key elements of the draft directive are the simplification and harmonisation of the scope of coverage; faster payout times; revisions to funding arrangements; and enhanced co-operation between deposit guarantee schemes across Europe. I will briefly discuss these four elements.

Under harmonisation of coverage, the maximum level of compensation will be set at €100,000 per customer per credit institution. This is already the case in the Irish deposit guarantee scheme and so has no implications for us. In addition, cover would be extended to deposits of all non-financial companies, whereas at present, only the deposits of small companies are eligible for compensation. This has the effect of simplifying the eligibility rules and the associated administration. The proposal excludes from protection certain financial products with an investment character, in particular those that are not repayable at par and those whose existence can only be proven by a certificate. It should be noted that these exclusions would be negligible in the context of the overall level of depositor protection.

Payout times will be reduced from the period of 20 working days that will come into effect at the end of this year under Directive 2009/14/EC, to seven calendar days proposed to be effective from the end of 2013. The proposal also imposes obligations which are prerequisites for faster payout, such as improved access by the deposit guarantee scheme to customer data in institutions and requirements on credit institutions to hold depositor data in necessary formats, for example a consolidated or single view of each customer's deposit data and tagging deposits for classification.

The ambition of achieving a faster payout to depositors is supported by the Central Bank. Achieving a payout in a matter of days will require investment in systems and processes in the operating of deposit guarantee schemes and in credit institutions. We fully support the supplementary measures in the draft directive such as the tagging of deposits and the requirement that credit institutions will have to provide deposit guarantee schemes with aggregated depositor information. The Central Bank considers these measures essential prerequisites to achieving a reduction in the payout period. We will work with credit institutions to facilitate implementation of these.

As a small caveat to the Commission's proposal for a seven-day payout, we note that in any event of payout there are likely to be a small number of accounts or depositors which may require an element of investigation and verification. It would not be feasible to pay out for every single one of these accounts within seven days, and therefore, we advocate that allowance be made for some exceptions from the seven-day payout rule proposed for the end of 2013.

The proposed revisions to funding arrangements include a provision that all schemes be pre-funded with the proposal setting a target level for this funding of 1.5% of eligible deposits, to be reached by 2020. This fund would be based on annual premiums from credit institutions and on the risk profile of each institution. This represents a significant change from the current funding mechanism in Ireland, under which credit institutions maintain a deposit with the Central Bank equivalent to 0.2% of their total deposits. The new funding arrangements will impose an additional cost on credit institutions as it is phased in by 2020. Committee members may be aware that a broad range of reforms are being discussed internationally in the aftermath of the crisis. It is important that the interactions and synergies between these reforms are taken into account and a holistic view is taken to implementation so that the full effect on credit institutions is understood.

The draft directive proposes an obligation to establish a mutual borrowing facility between deposit guarantee schemes. The Central Bank believes this is worthy of consideration. However, we feel the current proposal by the Commission needs to be revised. In particular, the general obligation on deposit guarantee schemes to lend may not be appropriate in all circumstances - for example, where a deposit guarantee scheme fund has already been diminished due to payouts or could be required in the short term to meet obligations to its own depositors.

Proposed enhancement to the level of co-operation between deposit guarantee schemes in cross-border situations would allow the Irish deposit guarantee scheme - that is, the host scheme - to act as a single point of contact for depositors at branches in Ireland of a failed institution covered by the deposit guarantee scheme in another member state - that is, the home scheme. The responsibilities of the host scheme include communications and payout on behalf of the home scheme. This will require sharing information between schemes. The Central Bank supports this approach as it has potential benefits for deposit guarantee schemes and depositors. However, it has suggested some small revisions, particularly in regard to the obligation of the host scheme to pay out on behalf of the home scheme in advance of receipt of any funds from the home scheme.

The Central Bank welcomes the broad aims and ambitions of the proposed recast directive on deposit guarantee schemes. The proposals are beneficial from the perspective of the depositor and give confidence in deposit guarantee schemes to assist in maintaining financial stability. In particular, under this scheme depositors would receive compensation more quickly than was previously the case.

Investment in processes and systems across the deposit guarantee schemes and credit institutions is required to facilitate the new funding mechanism, faster payouts and closer co-operation between deposit guarantee schemes. These developments will need to be planned and managed with the industry to ensure that deadlines can be met. We are already working on that. This is a draft directive, and certain aspects may be clarified or changed as it goes through the EU approval process. The Central Bank will closely monitor developments.

Ms Anne Troy

As Mr. Molumby said, I am the chief operations officer of the Investor Compensation Company Limited, which I will refer to as the ICCL, with the committee's permission. I propose to make a brief statement about the role of the ICCL in investor compensation, our interaction with the EU Commission while it was developing the new investor compensation directive, and some of the provisions of the draft directive.

In March 1997, the European Council adopted a directive providing a minimum level of protection for investors in circumstances in which fraud or insolvency resulted in the inability of an investment firm to return investment instruments or money to investors. The investor compensation directive laid down certain basic requirements for investor compensation schemes to provide a harmonised minimum level of investor protection across the European Union. It was left to each member state to implement a scheme and to determine the most appropriate way of organising and financing such schemes. In Ireland, the directive was implemented through the Investor Compensation Act 1998. Under this Act, the ICCL was established as a company limited by guarantee and having a share capital. There are three shareholders: the Central Bank of Ireland, the Irish Stock Exchange and the Irish Association of Investment Managers. A principal objective of the ICCL is to establish arrangements - for example, funding and payment procedures - to ensure that eligible clients of a failed firm receive compensation, within the parameters set down in the Act, as quickly as possible. The structure adopted in Ireland - that is, the establishment of a specialist company to put compensation arrangements in place - has also been used in a number of other member states of the European Union.

The investor compensation directive applies to all authorised investment firms, including credit institutions authorised to provide investment services. In addition to transposing the directive into Irish law, the Investor Compensation Act 1998 also provides for compensation arrangements to apply to a large number of authorised intermediary firms, most of which are insurance intermediaries, which were not covered by the directive. The ICCL, after consultation with stakeholders, established two funds. Fund A is for investment firms authorised under the 2004 markets in financial instruments directive and certain firms authorised under the Investment Intermediaries Act 1995, known as IIA firms, while fund B is for retail intermediaries authorised either under the Investment Intermediaries Act 1995 or the European Communities (Insurance Mediation) Regulations 2005.

The scheme is funded by contributions from firms in funds A and B, and the rates of contribution are set every three years following a consultation process. Current contribution rates vary depending on membership category and are based either on the number of eligible clients of the firm or on the firm's income from investment and insurance business. The scheme will pay compensation where an authorised firm is unable, due to its financial circumstances, to return money or investment instruments owed to a client. Investors will be compensated if they are eligible investors and have dealt with a firm that has been authorised to conduct business. The scheme will not pay compensation where a loss to the client arises as a result of poor advice or where the value of a client's investment declines because of market or other economic forces.

Once a determination has been made that a firm is unable to return investments to its clients, an administrator will be appointed either by the court or by the Central Bank, and investors will be given at least five months from the date of the court ruling or determination by the Central Bank to make a claim. The administrator is charged with examining all claims and certifying them for payment. This process can take a significant amount of time. Once a claim has been certified by the administrator, the ICCL's role is to make payments as quickly as possible; it is obliged to do so within three months of the date of certification. To date, the average time for the ICCL to pay a claim after it has been certified is ten days.

Since its establishment in 1998, the ICCL has had experience of three failures - two in 1999 and one in 2001 - and we have paid out a total of €8.3 million in compensation to investors. At present, the amount of compensation payable to each eligible investor is limited to 90% of the amount lost, subject to a maximum payout of €20,000. This amount reflects the obligations imposed under the investor compensation directive and is generally consistent with the levels of payment available in most other member states of the European Union.

I turn to the proposed directive. In early 2009, in the wake of the financial crisis, the EU Commission undertook a review of compensation arrangements, including the investor compensation directive. The objectives of the review were to ensure a sufficient level of protection to consumers, to improve the functioning of the directive, to remedy any regulatory gaps and to provide for greater co-operation between member states' schemes. As part of the review, the Commission consulted a range of stakeholders, including investor compensation schemes. The ICCL took part in that process, responding to questionnaires and participating in meetings. The main issues to arise from that process related to the funding of the schemes, the coverage of compensation, the minimum level of compensation and how to deal with delays in paying compensation to consumers.

The outcome of that process is the draft directive, which proposes to amend the original directive of 1997. The major changes proposed are set out in the explanatory memorandum to the directive. We note that the draft directive is being discussed by Council working groups in Brussels. In due course the proposal will be subject to scrutiny by the European Parliament. In the course of this work the provisions, as laid out, may change. The ICCL has examined the current proposals from an operational point of view. Consideration of the policy issues involved is primarily a matter for the Department of Finance which has sought the views of the ICCL in developing its approach to the negotiations in Brussels.

Broadly speaking, the ICCL welcomes the directive. We share the Commission's aim to update existing provisions to provide greater security and confidence for investors. We note that some of the proposals may result in somewhat higher compensation costs which may have implications for the rate of contribution from the firms covered by the ICCL. The directive proposes that each compensation scheme should have a minimum target fund of 0.5% of liabilities. This proposal is particularly welcome because it provides useful guidance to compensation schemes as to the appropriate total level of funding to be maintained. We note that further work may be needed to clarify how to calculate the level of the target fund.

The draft directive extends the cover provided to include undertakings in collective investment in transferable securities, UCITS investors. The ICCL does not cover UCITS, but would be prepared to make the necessary arrangements to administer any such extension of the scheme. The proposal to provide cover for the failure of a third-party custodian would certainly improve protection for investors but greater clarity is needed as to how this would work in the context of existing insolvency law and how this cover would be funded. At present, compensation payments are limited to 90% of the loss. The directive of 1997 explains the rationale for this provision as follows: "in order to encourage investors to take due care in their choice of investment firms it is reasonable ... to require investors to bear a proportion of any loss". The new draft directive proposes to remove this restriction so that claimants will be compensated for 100% of their loss, subject to a maximum payout. This is an improvement in the cover available to claimants, which may have some implications in regard to the funding of the compensation scheme.

The directive also envisages a fixed maximum payout of €50,000 per investor. The maximum level in Ireland at present is €20,000. An increase in the maximum payout is certainly warranted, if only to take account of inflation in the intervening period. An increase to €50,000 appears to be reasonable, when compared with the maximum payout under the deposit guarantee scheme, DGS, of €100,000, and taking into account the need to provide confidence to investors. On the other hand, indications are that the number of claimants that would benefit from an increase to €50,000 would be relatively small. The experience of the ICCL and the more recent experience of compensation schemes in other member states suggest that more than 95% of claimants would be fully compensated within the €20,000 maximum. The increase in the maximum payout will certainly have an impact on the funding of the compensation scheme.

The directive proposes to provide for early payment of part of an investor's losses. One third of the initial assessment of a claim would be paid by the compensation scheme not later than one year after a firm has been determined to be unable to return money and instruments. The balance would be paid out later once the claim had been fully certified. It usually takes some time to calculate accurately the losses sustained by claimants when an investment firm fails. In the first instance, clients are given time to make claims. The administrator then has to determine the value of individual claims, notably the applicable value of financial instruments. It may be that there are client assets available but until they have been allocated to individual clients the losses of the claimants cannot be known and certified by the administrator. For these reasons, it can take a period of years to pay compensation. The directive rightly highlights this as an area for improvement. The ICCL supports that objective. However, we are conscious that, in the absence of certification by the administrator, in the case of early payment there will always be a danger of overpayment and subsequent claw-back from claimants.

The directive makes provision for inter-scheme borrowing. This is the Commission's response to the need for lender of last resort facilities for investor compensation schemes. While these provisions are to be welcomed, the short payback time of five years does not address the core issues.

The ICCL welcomes the directive, notes the improvements it provides for claimants and will closely follow the negotiation of the directive, to be conducted by the Department of Finance.

Chairman

I thank Ms Troy for a comprehensive presentation. I call on Ms Eimer O'Rourke of the Irish Banking Federation.

Ms Eimer O’Rourke

I am joined by Mr. Felix O'Regan, also of the Irish Banking Federation. We shall follow those comprehensive presentations with some observations and comments on the two directives.

I shall move through the slides relatively quickly. First, in regard to the deposit guarantee scheme, DGS, the EU directive was reviewed last year and a new directive issued that year. The principal changes at that point were to introduce the €50,000 payment level with a view to introducing a subsequent level of €100,000 and reducing the timeframe for pay out from three months to 20 days. At an overall level, the Irish Banking Federation, IBF, attaches great value to well-functioning deposit guarantee schemes in view of their important role to safeguard financial stability and ensure a high level of depositor protection. The significance of the deposit guarantee scheme has been proven again during the recent financial crisis. The IBF fully supports the European Commission's objective to enhance the functioning of the schemes and, most important, we support the greater harmonisation of many aspects of the schemes because this will benefit depositors throughout Europe.

The proposals for the latest recast directive include proposals in a number of areas. Most important, perhaps, they look at the timeframe for pay out and the financing of the scheme. Implementation of the proposals will be over a variable time line. Depositor information is also covered. Depositors will be better informed about whether their deposits are covered and about how a deposit guarantee scheme functions generally. The Commission's proposal introduces an information template to be countersigned by the depositor and a mandatory reference to deposit guarantee schemes in account statements and advertisements.

Regarding the scope of coverage, as was noted, Ireland already has the €100,000 level in place. We support the move to harmonise coverage level of €100,000 across the European Union and the directive confirms and delivers this. The Commission's proposal also seeks to simplify and harmonise the scope of coverage. Most discretionary exclusions have become mandatory, especially the exclusion of authorities and financial institutions of any type. Deposits in non-EU currencies are covered under the law, as are deposits of all non-financial companies. Deposits are now more clearly defined, which is a positive development in the move towards faster pay-out.

With regard to the timeframe for pay-out, the amendments to the directive made last year reduce the timeframe from three months towards 20 days which the recent European Commission proposals would reduce further to seven days by the end of 2013. For the deposit guarantee scheme to effect payment within such timeframes it will be necessary for credit institutions to restructure certain aspects of their customer databases to align them with the scope and coverage of the scheme. Typically, this is referred to as "developing a single customer view". Effectively, it means credit institutions must be in a position to provide the aggregated deposits of any single depositor at any time. The Irish Banking Federation has been working closely with the Central Bank during the past year on a project to identify the changes needed to develop an implementation plan for this reduced timeframe. With regard to the situation in other countries, to our knowledge, the United Kingdom is the only country in the European Union which is well positioned to implement the shortened timeframe. It remains a significant project for banks and deposit guarantee schemes in other jurisdictions.

Financing arrangements are also detailed in the proposals. We support a proportionate and long-term approach to achieve harmonised deposit guarantee scheme funding in Europe. The draft directive proposes that deposit guarantee schemes should have funding levels of 1.5% of eligible deposits after a transition period of ten years. If this is insufficient, credit institutions would have to pay extraordinary ex post contributions of up to 0.5% of eligible deposits, if necessary. This level may require further consideration. The proposed level of funding is somewhat higher than those required by other schemes worldwide. For example, the United States has a funding level of 1.25%. This could lead to competitive distortions. Also, such a level may not have sufficient regard to the current and forthcoming policy initiatives to strengthen crisis prevention measures. The directive proposals envisage that the basis for contributions would be eligible deposits and moots the possibility of changing this to covered deposits at some future point. Covered deposits refer to the first €100,000 of eligible deposits rather than full sum of the deposit. There may be merit in bringing forward the deliberations on this aspect to better align the financing of schemes with their potential liability.

The proposed directive also places restrictions on deposit guarantee schemes in investing in ex ante funds. It may be appropriate to consider whether these are suitable absolute limits. For example, Article 9(2) requires the deposit guarantee schemes to diversify their portfolios such that they would not hold more than 5% of their financial means and securities issued by any one issuer. Equally, the definition of available financial means in Article 2(1) restricts low risk assets to securities that have a maximum residual maturity of 24 months. It may be the case that the limits with respect to diversification and maturity could be overly restrictive and they may need to be considered further.

Building adequate funds is not an insignificant task and the directive, correctly, seeks to consider alternative complementary approaches. We have some reservations about the proposals in respect of borrowing between national schemes and the issue must be examined more closely by the Commission. Generally, the role of deposit guarantee schemes is not to act as a lender of last resort, which role is better filled by central banks. Allowing borrowing between schemes without precautions might have more risks than benefits. The deposit guarantee schemes should be allowed to use alternative borrowing arrangements, if necessary, but these should include the possibility of borrowing from the capital markets or the Central Bank.

Another possibility brought forward by the banking industry in Europe was to consider funding by means of a pledge which could make it easier and, therefore, faster to build up target funds. Assets acceptable as pledges should not only include government bonds but a sufficiently wide range of securities, including, as a minimum, those which are acceptable as collateral for loans from the Central Bank.

The directive considers the issue of risk-based contributions. We support risk-based contributions on the principle of fairness. The development of a risk-based model is a complex matter which should carefully balance effectiveness, complexity, clarity and fairness. Contributions from credit institutions to deposit guarantee schemes will consist of both non-risk and risk-based elements. The latter will be calculated on the basis of several indicators reflecting the risk profile of each credit institution. The proposed indicators include capital adequacy, asset quality, profitability and liquidity. The non-risk element will relate to the amount of eligible or, possibly, subsequently covered deposits. The risk-based proposal is valid but complex and could give rise to certain anomalies. For example, an institution could end up paying differently into two schemes, depending on the composition of the scheme membership. Therefore, the matter requires careful consideration and calibration.

Cross-border aspects are intrinsic to many EU directives. With respect to cross-border co-operation, we understand the European Union proposes that the host deposit guarantee scheme should serve as a single point of contact for depositors acting on behalf of the home deposit guarantee scheme. This means that where a consumer is in Ireland and the institution is paying into a scheme in another member state, the Irish deposit guarantee scheme would be responsible for communication with Irish depositors and paying out to Irish depositors on behalf of the home country deposit guarantee scheme. Clearly, there are valid objectives to this, but we must ensure we reflect appropriately on whether the addition of an extra entity in the process could run counter to the objectives of fast pay-out.

With regard to migration between schemes, the draft directive does not clarify in great detail how banks could leave one national scheme and join another. For example, this could take place as a consequence of mergers or the transformation of a subsidiary into a branch. This is an especially important issue in the context of a successful single market operating in the European Union and further clarity may be required in this regard.

Before discussing the proposals on investor compensation, I advise the committee that I am an IBF-nominated director of the Investor Compensation Company Limited. However, I am here in my capacity as head of retail banking with the IBF, not as an ICCL director.

The banks' main interest in the investor compensation scheme directive emanates from the perspective of the banks' role as a distributor of financial products and depositories of undertakings in collective investment in transferable securities, UCITS, funds. We support the objective of having a high degree of investor protection where investor compensation schemes play an important role. Investor compensation schemes are one element of a comprehensive network of retail investor protections which include, notably, the regulations set out in the market in financial instruments directive, MiFID, as well as the UCITS directive. It is important to note that investor compensation schemes are fundamentally different from deposit guarantee schemes and we caution against direct modelling on this basis. While the latter play an important role in ensuring financial stability, the former principally serve the objective of investor protection. The proposals published in July set out an increase in the level of compensation from €20,000 to a fixed level of €50,000. The amendments provide that these should be harmonised, rather than kept at a minimum level. However, a level of €50,000 may be too high. Our understanding is that the experience of failures demonstrates that the majority of investors are covered by a €20,000 pay-out. It is proposed that ex ante funding levels should increase to 0.5% of the value of financial instruments and moneys held, administered or managed.

As with the deposit guarantee schemes, the Commission has proposed the introduction of a borrowing mechanism among the schemes as a last resort tool. This would mean schemes could borrow from others if their funds were insufficient to cover their immediate needs and that a proportion of ex ante funding in each compensation scheme would have to be available for lending to other schemes. We hold similar reservations both in this regard and about the parallel proposals for deposit guarantee schemes. The scope of the directive has been widened to cover third-party custodians and UCITS. There are complexities in this regard and it may be necessary to interrogate in more detail how this would work, given that the investor’s relationship is with the company with which he or she has dealt with in the first instance. Under the proposals, investors would receive more detailed information from the firms on what was and was not covered under the compensation schemes.

Senator Paschal Mooney took the Chair.

Acting Chairman (Senator Paschal Mooney)

I thank all of the witnesses for their presentations. They are detailed and add some clarity to a complex issue the committee has wrestled with over the last number of meetings. Our Chairman and Deputy Kitt had to leave for a vote in the Dáil and will return.

Senator Alex White

I want to work out where there might be controversy so we can go about our business efficiently. Can anyone identify where the points of controversy are likely to arise in the agreement and enactment of this directive? From what we heard from the Central Bank and the ICCL, it all sounds very sensible. If there were queries in the Irish Bankers Federation submission, they seemed to relate to the 1.5% that it thought might need to be looked at again. The concerns about competitor distortions were noted, the relevant figure in the United States is 1.25%. We often hear concerns in debates about competitor distortion and I am never sure how seriously to take those arguments because we do not know. It is not a huge difference. Would investors look elsewhere? Is that what is meant by the expression of concern about 1.5%?

Ms Eimear O’Rourke

It is not that investors will look elsewhere, but banks work in an international market and banks here must compete internationally. It is valid to look at the level, although there will never be a completely correct answer. It will always be challenging for the entities involved to determine the appropriate level. We are looking elsewhere and we can see a different level; we must ask about that.

Senator Alex White

Can someone explain how the level has been devised? Where does the 1.5% figure come from? Does it have a rational basis?

Deputy John Perry resumed the Chair.

Mr. Paul Molumby

It comes from the European Union preparation and analysis. A document came with the proposed directive that makes reference to some of the EU research for the 1.5% figure.

Senator Alex White

What are the issues that would persuade the Commission to revise the 1.5% figure downwards? I am trying to tease out what we should worry about as legislators when we look at this directive. What should we be concerned about? Ms O'Rourke made another point about the compensation level rising from €20,000 to €50,000 and there was a query about that. What do we need to look at there? It sounds to the layperson that the higher the level of compensation available to someone in this situation, the better. Are the witnesses concerned about the funding implications? Ms Troy said relatively few claims are for more than €20,000. Surely funding could be adjusted in a way that would give comfort.

Ms Eimear O’Rourke

Increasing the level substantially leaves a certain openness about what might be needed for funding. It is always a challenge to understand the level of funds that must be made available to meet the claims. Our understanding is that the level of claims is broadly within the €20,000. It might need to be adjusted slightly but not quite to the same extent. The open nature of the liabilities at an increased level leaves potentially larger sums and over-funding is required to legislate for that.

Senator Paschal Mooney

One of the key questions is the view regarding the consequences of the directive once it is adopted. Will it ensure the mistakes that led to the current banking crisis are avoided in future? This is as much about confidence in financial institutions as it is about guaranteeing people who have invested in a particular banking institution; it gets some of their money back. How would the witnesses respond to those concerns?

Ms Eimear O’Rourke

One perspective is that the scheme, by virtue of simplifying and harmonising certain aspects, is more straightforward for people, they will know what is covered and what is not. That in itself enhances confidence. There is also a full range of crisis management activities being developed at EU level. The directive plays a part as one of a number of activities.

Senator Paschal Mooney

The main criticism of financial regulation in Ireland has been of the light touch approach. That is what got us into this mess. We were not unique in this regard. I personally blame President Reagan and Prime Minister Thatcher for initiating "the markets are right" attitude in the mid 1980s that led to the culture that brought us to where we are right now. Light touch regulation did not serve this country well and there are still unanswered questions surrounding the structures put in place at the start of the century. Now that the Central Bank and the Financial Regulator are combined and there is a more robust regime, will this directive ensure the rules are enforced and that financial institutions will be properly funded, supervised and held to account?

Mr. Paul Molumby

The deposit guarantee scheme is an insurance and compensation mechanism for depositors. The framework as proposed in the directive and the current obligations of the scheme ensure the scheme will be funded in the event of a pay out. There are obligations on institutions to ensure data are prepared and held, as referred to by the IBF, and there are obligations in the proposed directive to ensure those framework aspects are adequately prepared and implemented and, indeed, stress-tested by our counterparts across the EU. It establishes the framework, ensures the systems and procedures are in place and regularly tested to ensure the capability is in place. It is an insurance scheme, it is not planned to invoke it but we want to make sure it can be invoked.

Senator Paschal Mooney

Looking at the costs from an Irish point of view, banks, by the end of 2020, must increase the fund to a total of €2.7 billion. That implies an average annual contribution by banks of €340 million for each year to 2020. In light of the current state of the Irish banks that are in deficit, not in profit, is there any indication from where this money will come? Will it be taxpayers' money that will fund it?

I link that to the question relating to credit unions where again the implications are that there would be an annual €22.5 million contribution by credit unions for each year to 2020. Recent reports indicate that several credit unions are already in severe financial crisis and that they will have to be funded out of the reserve fund the credit unions set up.

Is Mr. Molumby reasonably confident that our financial obligations will be met once this directive comes into place? I appreciate he cannot look into a crystal ball but I ask him for an opinion. It seems to an ordinary layman or laywoman that we have banks that are in deficit being funded by the taxpayer to survive and yet they are expected to pay this amount of money into a fund on an annual basis.

Mr. Paul Molumby

It is for the banks to ensure they have adequate sums to pay into the fund. It is well defined and well posted, to which I believe the Irish Banking Federation, IBF, has made reference. Credit unions are covered by the deposit guarantee scheme and like all institutions participating in it, they will be required to make a contribution to the fund also.

Senator Paschal Mooney

The Germans, the Swedes and the British, in the earlier discussions on subsidiarity issues, have now been dealt with because as the Chairman pointed out to us earlier, the eight week period - the yellow card system - has now passed and therefore the subsidiarity issue is no longer an issue. However, the Germans in particular were concerned, and I believe the Swedes and the British to a lesser extent, about moral hazard. I could not help but feel that they were pointing the finger at Ireland as well as the peripheral countries because of the banking meltdown here. Would Mr. Molumby be concerned that once this debate on the directive gets into the detail, we might be encumbered with more onerous financial implications? I refer not to us but that the directive might be so encumbered because of the German position. They seem to be concerned about moral hazard. To put it simply, is that an issue for Mr. Molumby?

Mr. Paul Molumby

It is something we cannot ignore. The two presentations referred to the co-operative arrangements and the mutual borrowing arrangements proposed in the directive, and I spoke about some reservations in terms of how that might be structured in the event of, say, an Irish scheme being asked to lend to an Estonian scheme but if that Irish scheme was required to pay out to Irish depositors, where is the priority towards the Estonian depositors under governance of Estonia? Those matters need further debate although I am not clear whether that should be on a prioritisation basis. They are policy matters and we would work with the Department of Finance on them but it is certainly an issue that will need to be given consideration.

Senator Paschal Mooney

My final question is for the Irish Banking Federation. Would Ms O'Rourke have an estimate for the administrative cost of the changes that will be required to introduce the DGS provisions, for example, IT infrastructure and such like? Allied to that, in her opinion at what stage of readiness are the Irish banks to operate the requirements of these more rigorous funding levels, not just now but also in the context of the absence or the ending of the Government guarantee scheme? This is all conditional. Right now it looks to be positive because the existing Government guarantee scheme for depositors is in excess of €100,000 but that is not a permanent position. It is unlikely that by 2020, and we cannot predict the future, the scheme in its current guise will continue. There will be extra pressure, therefore, on banks. How does Ms O'Rourke read the future? I am very aware, as are all of us, that we are predicting in a financial environment that is extremely volatile and, in light of recent years, perhaps will continue to be volatile worldwide.

Ms Eimer O’Rourke

With respect to the IT cost, I do not have a precise estimate. I do know that the task is significant and it will have a significant cost. In terms of restructuring the customer database, that is where the main IT piece comes into play. The institutions have started to put together their assessment of what is required in that regard but they look like significant projects and therefore they will have significant costs.

On the state of readiness to fund at the levels set out, it is one of many demands on the banking sector. They will have to meet it. It is a fundamental part of their business.

In the context of the removal of other Government guarantees, all I would say about that is that the other Government guarantees sit on top of the deposit guarantee scheme. In any event, whether there is or is not a Government guarantee in place, the institution involved has to pay into the deposit guarantee scheme and any claim made by a depositor would be from the deposit guarantee scheme in the first instance up to the €100,000. The Government schemes cover over and beyond that, but it certainly is part of a challenging framework for institutions in the future.

Chairman

I am still not clear on the €340 million and the credit union costs of €22 million in terms of where that money will come from and whether the Central Bank is up to policing that given its track record to date. The Irish Banking Federation might answer the question regarding the level of deposits. With the high cost of borrowing money abroad and the amount of money on deposit currently, the estimate of €2.7 billion over ten years, as Senator Mooney stated, is a major issue but it is being glossed over here somewhat with regard to the reassurances. On what is the €340 million based? Will it be ring-fenced? The cost for credit unions is €180 million. What is the latest financial estimate of the total level of deposits in banks and credit unions by 2020 based on? We have all got these reports and estimations previously but is it not a fact that those figures will change daily with the high cost of borrowing money on the world market?

Mr. Paul Molumby

The figures are based on information the Central Bank collects as part of its prudential returns and of the obligations banks have with the Central Bank-----

Chairman

It must be based on a projection of the level of deposits at that particular time. I come from a business background and if we take the calculation of the 1.5% of retention as a safeguard fund, what are we talking about in that regard? We need to have the real figures. The figures Mr. Molumby projects would be on deposit to generate that money. A total of €340 million is a lot of money, and there is an expectation in Europe that we are safeguarding this fund for a bank in default in the context of its non-payment capacity. It must be based on a deposit per year, and there must be a yearly projection on that.

Mr. Paul Molumby

I will give the Chairman some detailed information on that. The Central Bank carried out a survey of deposit accounts in June of this year. The survey applied to the banks covered by the deposit guarantee scheme. The total value of the accounts surveyed was €208 billion. Of the accounts surveyed, 98% had a balance of less than €100,000.

Chairman

Would Mr. Molumby repeat that?

Mr. Paul Molumby

A total of 98% had less than €100,000-----

Chairman

Mr. Molumby is talking about €208 billion-----

Mr. Paul Molumby

-----of total value of accounts surveyed.

Senator Paschal Mooney

Are they deposit accounts or investment accounts?

Mr. Paul Molumby

They are deposits.

Chairman

How much was on deposit?

Mr. Paul Molumby

A total of €208 billion.

Chairman

Repeat that figure?

Mr. Paul Molumby

In June of this year the Central Bank carried out a survey and the total value of accounts surveyed was €208 billion. That is the basis of this. If the committee wants me to go through the mathematical projections-----

Chairman

This is an important point in the interests of ensuring transparency and putting information in the public domain because we could be talking in circles. We need to be clear on this if we are signing up to a directive on Ireland's capacity to retain €340 billion.

Mr. Molumby might also deal with the matter of the credit unions. I would like to know on what the figure of €22 million is based and to know about the level of retention and about his estimation that the credit unions will have €108 million as a safeguard fund by 2020. He might conclude on the banking issue first.

Mr. Paul Molumby

In the June survey the total value of accounts surveyed was €208 billion, of which 98% had a balance of less than €100,000. In value terms, accounts with a balance of less than €100,000 accounted for about 33% of the total value. The survey indicates that up to €90 billion would be eligible for compensation under the DGS. That is probably a likely overstatement but let us be conservative because the actual liability of the scheme is due to the fact that the survey was account based rather than per depositor and the scheme covers per customer per institution.

Credit unions have in the region of €12 billion potentially eligible for compensation under the deposit guarantee scheme across their 2.9 million membership.

Chairman

On the due diligence exercise carried out on the initial figures, will Mr. Molumby quantify the valuations in terms of the percentages he gave of 33% and 98%?

Mr. Paul Molumby

Certainly. I am referring to a point in time, namely, June of this year. Of the accounts surveyed, 98% had a balance of less than €100,000 and in value terms the accounts with a balance of less than €100,000 accounted for 33% of the total value.

Chairman

Calculating 33% of that figure works out at €90 billion. What was the total figure?

Mr. Paul Molumby

It was €208 billion.

Chairman

Then it would be less than that.

Mr. Paul Molumby

The survey in June indicated there was approximately €200 billion in deposit accounts.

Chairman

That would work out at €70 billion. This point is important. The 2% represents the-----

Mr. Paul Molumby

The 33%.

Chairman

That represents €70 billion based on Mr. Molumby's estimation. He said that the total amount on deposit was more than €200 billion.

Mr. Paul Molumby

I said €208 billion.

Chairman

That would mean the 2% represents €138 billion.

Senator Paschal Mooney

I think what Mr. Molumby is saying is that under the compensation scheme the figure would be of the order of €90 billion, is that correct?

Chairman

Is it not €70 billion?

Senator Paschal Mooney

No, I think it is €90 billion.

Mr. Paul Molumby

For banks. I am talking about the banks. I have not spoken about the credit unions. The Chairman asked me to deal with them and I will do so.

Senator Paschal Mooney

In the survey carried out did Mr. Molumby go into more detail in regard to the €208 billion? Does it cover short-term deposits or long-term deposits, Irish nationals only or is it a global figure, irrespective of the source of the funds?

Mr. Paul Molumby

I do not have that detail.

Senator Paschal Mooney

What backing institutions have that money?

Mr. Paul Molumby

I do not have that level of detail. The information provided was in terms of the discussion around funding rather than for the deposit guarantee scheme in terms of the obligations in that respect and rather than an analysis of the structure of a deposit base. In the event of the proposed directive being implemented, this scheme would act as the host scheme. We were concerned with the deposit base of banks rather than the structure of that deposit base.

Senator Paschal Mooney

For the purposes of clarity, the figure for the amount of money on deposit reported widely in the media has been of the order of €100 billion, or am I reading a different figure? Is Mr. Molumby now saying that the totality of deposits in this country is €208 billion and not €100 billion, which is the figure that has been circulated in the media in recent weeks?

Mr. Stephen Giffney

The €208 billion represents the balances with Irish authorised institutions across the other member states as well as here. The deposit guarantee scheme covers all deposits of authorised institutions across the other member states.

Senator Paschal Mooney

Am I correct in surmising that the €100 billion is exclusive to Irish institutions and that there is another €108 billion that is invested or lodged-----

Chairman

That is a major distinction.

Senator Paschal Mooney

-----in European institutions? Would that be correct?

Mr. Stephen Giffney

I am not familiar with the €100 billion figure.

Senator Paschal Mooney

I am sorry for throwing out that figure, but that is the one that has emerged. Recent reports indicate that the value of deposits have increased from €86 billion to €98 billion. If we agree that is the figure, am I correct in surmising that this figure is exclusive to Irish institutions and that the balance, as per the figure Mr. Molumby has given us, would be invested in non-Irish institutions?

Mr. Stephen Giffney

It would be represented in branches of Irish institutions in other member states.

Senator Paschal Mooney

Branches of Irish institutions. Therefore, it is all within the Irish banking institutions.

Mr. Paul Molumby

It is important to clarify these figures and the questioning is in regard to the coverage of the Irish deposit guarantee scheme. As currently set up, the Irish deposit guarantee scheme covers Irish banks, irrespective of where they are located.

Senator Paschal Mooney

I appreciate the distinction but I must confess it comes as somewhat of a surprise, albeit a pleasant one, that €208 billion of Irish citizens' money is lodged in Irish institutions.

Mr. Paul Molumby

I want to be clear on the distinction here. This is the total deposit accounts in banks at a point in time. This could well include inter-bank deposits and highly liquid deposits that might be in banks overnight for a point in time of a day. I understand the Senator's question is in regard to consumers and small depositors. The figure I gave was the total deposits of Irish banks.

Senator Paschal Mooney

I take the point but it is relevant in the context of what we are discussing in that we then base the contributions of the banks and credit unions on that figure, even though it is a moveable feast. As the Chairman reiterated, this implies at least an annual contribution of €340 million by banks for each year up to 2020 and a presumption of €22.5 million in respect of credit unions. Would that be correct?

Mr. Paul Molumby

We need to stand back and ensure that we are not mixing apples and oranges, so to speak. We are speaking about the change in the structure of funding for the banks as we move towards the directive and to the 1.5% of eligible deposits. In terms of eligible deposits, there is a move from the current position, which is 0.2% of the total deposit base, to 1.5% of eligible deposits. There is a significant distinction between eligible deposits and the total deposit base. I am concerned that in terms of some of the numbers being bandied about and the quick calculations being done by members, they may be mixing apples and oranges, so to speak.

Senator Paschal Mooney

Would Mr. Molumby agree that there is an assumption that 60% of the deposits will be eligible for coverage under the revised DGS?

Mr. Paul Molumby

No. Based on our analysis of the banks as at a point in time in June of this year, I believe it will be 33%. I said that, in value terms, accounts with a balance of less than €100,000 accounted for 33% of the total value.

Senator Paschal Mooney

Am I correct in deducing that the implied annual average contribution - I am basing my question on a figure of 60% - would be about roughly half that, or is that too simplistic?

Mr. Paul Molumby

My colleague, Mr. Eoin O'Brien, would like to make a contribution.

Mr. Eoin O’Brien

To clarify the position, the figures that have been thrown out of €340 million for our banks and €25 million for our credit unions are based on the current state of play, namely, the survey to which Mr. Molumby referred, and the current state of play in credit unions. They are not based on future projections. If, over time, the level of eligible deposits changed at banks, obviously that would change the funding implications for the scheme. As someone referred to earlier, the 1.5% of eligible deposits is to a certain extent a moveable feast.

Senator Paschal Mooney

I thank Mr. O'Brien for that intervention. Therefore, the annual contribution could be anything up to, or even beyond, €340 million because it is a moveable feast. He is talking in percentages and, like the Chairman, I am trying to get figures.

Mr. Eoin O’Brien

The level of funding will be based on eligible deposits.

Senator Paschal Mooney

As of now.

Mr. Eoin O’Brien

Eligible deposits with banks can change owing to the nature of banking.

Senator Paschal Mooney

We all understand that.

Mr. Eoin O’Brien

The figures being used there are based on a current state of play. They do not assume projections. They assume that the current level of deposits would be maintained and if this is the case over ten years, then this would be the funding implications for the banks. Obviously, these numbers are rough to a certain extent. If the level of eligible deposits changes, that would have implications for it with the fund.

Senator Paschal Mooney

This raises the issue which the Chairman and I have been talking about. Is Mr. Molumby confident the Irish institutions will be capable of meeting their financial requirements in the event of a default? One is talking about a considerable sum of money.

Mr. Paul Molumby

I would want to ensure I am very responsible in any commentary I make in terms of the banking system. As regards the word Senator Mooney used - I think it was the capacity of the banks to pay - I am speaking about the operational aspects of the deposit guarantee scheme-----

Senator Paschal Mooney

I understand. That is fair enough.

Mr. Paul Molumby

-----and how we set it up. I do not want to get into conjecture.

Senator Paschal Mooney

Mr. Molumby is talking about the nuts and bolts of how the system works. I fully appreciate that and I was not attempting to direct him away from it. It is because of the current state of the Irish banking system from which we are emerging, which it is hoped will improve for all our sakes and that the banks will become independent, functioning and profitable institutions, that I was attempting to establish whether the taxpayer would be liable for considerable sums of money every year up to 2020 in the event that the State would continue to be liable for funding the banks' day-to-day operations.

Chairman

This is a natural reaction to what was said. Once this becomes law, the Financial Regulator will become the statutory body dealing with this. Will we not be in a position to guarantee the 1.5% of the fund? That is an important question. Clearly, that is the nub of the issue. The directive that is coming in will give a guarantee. Once this becomes law, it is the Central Bank that will have the statutory role of policing this.

Mr. Paul Molumby

As is the case. I would not want there to be any misunderstanding. The current deposit guarantee scheme stands and covers up to €100,000 per customer per institution.

Chairman

That is in the State-owned banks. That is in all financial institutions covered by the State guarantee, is it not?

Mr. Paul Molumby

No. On the deposit guarantee scheme, there are two, as I mentioned in my opening-----

Chairman

Of course. That is 0.2%, not 1.5%.

Mr. Paul Molumby

Of total deposits. That is the funding. The key point I want to ensure is that there is a clear message that the deposit guarantee scheme is available and stands to cover-----

Chairman

It has gone up by 600%.

Mr. Paul Molumby

The structure - I will take Mr. Giffney's point now - of the funding is changing, as the Irish Banking Federation, IBF, has mentioned and as we stated here, from 0.2% of total deposits to 1.5% of eligible deposits. Undoubtedly, that is an increase in funding levels.

Chairman

It is a massive increase. Can Mr. Molumby explain the survey which was carried out? What level of accreditation was given to this survey? Who carried it out? Was it a self-assessed survey or was it carried out by the Central Bank? Is it an audited report? We all see surveys which are very much a matter of box ticking.

Senator Paschal Mooney

To be helpful, would I be correct in assuming that it is like a photograph as of that time, that it is moveable and that the figure may not be relevant?

Chairman

On the point about the survey, are we talking about a considerable sum of money?

Senator Paschal Mooney

We are.

Chairman

Was that carried out by an independent person who conducted an audit on the banks? On what is the survey based?

Mr. Paul Molumby

I will ask Mr. O'Brien to contribute on the detail of the survey. On Senator Mooney's point, it is a point in time at a particular date, and I suspect 30 June but must seek clarification. It is, at that particular date, at that night, the level of deposit balances in Irish banks.

Chairman

That is very important and brings me to my next question. Mr. Molumby mentioned the global figure of €200 billion. Perhaps I missed this point but my question relates to the level of deposits in Irish banks. That is important because one can get confused because everyone in the country is talking about bonds and billions of euro. We want to know about what is in Irish banks, not in banks outside the jurisdiction which would be under the European remit. As part of the EU regulatory directive, the level of deposits will be very much Ireland's statutory obligation once this becomes law. In Irish banks, that is based on projections of €340 million.

A second question arises in light of credit unions. Credit unions are not included in the European directive. What policy change will be brought in to incorporate credit unions, which are outside the remit of the directive?

Mr. Paul Molumby

I will be as helpful as I can. The survey reflects a point in time and covers Irish banks. Mr. O'Brien may wish to comment further on the survey and the basis of it.

Mr. Eoin O’Brien

The survey was carried out by the Central Bank. It surveyed all Irish authorised banks which are part of the deposit guarantee scheme. I believe the date of submission was 30 May of this year. The survey took place in June and was taken by the Central Bank itself.

I will clarify a couple of other points. On the change in the funding from 0.2% to 1.5%, the 0.2% is of total deposits and the 1.5% is of eligible deposits, which is a smaller subset of the total deposits.

I point out that a deposit protection fund is in place to which banks contribute and which amounts to approximately €600 million. That is already in place and is ready.

Chairman

Would Mr. O'Brien repeat that point?

Mr. Eoin O’Brien

The deposit protection scheme has an ex ante fund.

Chairman

Would that be a separate scheme to this?

Mr. Eoin O’Brien

No. It is the current arrangements for the scheme. That will obviously change. It is 0.2% of deposits that banks currently contribute to the deposit guarantee scheme. That is currently on deposit with the Central Bank and amounts to roughly €600 million.

Mr. Paul Molumby

Some €608 million is the balance in the deposit protection account at present.

Mr. Eoin O’Brien

One last point I would make is that, once again, the figures that are being used for the €300 million are based not on a projection as such but on the state of play as of the survey.

Chairman

Will the €610 million become part of the fund of €2.7 billion by 2020? Will it be part of the residual payment into that fund?

Mr. Paul Molumby

That €600 million is money that under the current funding arrangements the institutions covered by the deposit guarantee have on deposit with the Central Bank and it is ring-fenced in the event there is invocation of the deposit guarantee scheme.

Chairman

No doubt the State will not run parallel schemes. No doubt when this scheme becomes law the existing scheme will be cancelled, or perhaps Mr. Molumby might explain otherwise to me. I could not see the justification for running parallel schemes. Will the €610 million, which Mr. O'Brien indicated is ring-fenced, be part of the €2.7 billion the Central Bank expects to have by 2020?

Mr. Paul Molumby

I share the Chairman's views. I do not expect parallel schemes. I would expect that this directive would be transposed into legislation to replace the current deposit guarantee scheme and the funding arrangements in the proposed directive would be a replacement of the existing funding arrangements.

Chairman

That clarification is very important. I would be concerned when one sees the state of play, the reduction in the level of deposits and the lack of confidence in the banking sector in light of the fact that people may not be investing deposit money into the banks. The fund will have €2.7 billion by 2020. It is a great deal of money.

Mr. Paul Molumby

I want to be very clear that no one should take soundbites or whatever from these discussions in respect of the deposit guarantee scheme. We must be responsible - as is the case - and ensure there is no question of the deposit guarantee scheme not being available. We must also ensure customers will have access to their deposits.

Chairman

That is very clear.

Mr. Paul Molumby

Credit unions have been covered under the deposit guarantee scheme since June 2009. The draft directive is not intended to alter the scope of the institutions covered by the deposit guarantee scheme.

Chairman

Will there be a policy decision in that regard?

Mr. Paul Molumby

I expect that the Department of Finance will be working on the process in that regard.

Chairman

When the new scheme replaces the existing scheme, which covers all financial institutions, will a suitable provision be included in the directive?

Mr. Paul Molumby

I wish to ensure everyone is aware there is no intention to alter the scope of the existing deposit guarantee scheme under which credit unions are covered.

Chairman

How binding is the survey? The amount of money involved is huge. How confident is Mr. Molumby that the survey is accurate? There are many caveats with regard to the level of information provided in surveys. Was due diligence carried out by the Central Bank in respect of the information provided by the financial institutions?

Mr. Paul Molumby

I will ask Mr. O'Brien to comment on this matter in a moment. As he stated earlier, the information in the survey was gathered as part of the returns from financial institutions to the Central Bank.

Chairman

The information was, therefore, provided as part of a self-declaration process on the part of the financial institutions. Was it independently verified?

Mr. Paul Molumby

The answer, per se, is “No”. However, we must take comfort from the broader range of regulatory inspections that are carried out by the Financial Regulator and the regulations that are in place.

Chairman

Let us consider the past history of the banking sector. It emerged, on foot of investigations carried out, that the information provided by elements within that sector in recent years was completely inaccurate. It also emerged that there was a high level of concealment and that the figures provided were not completely transparent. Would Mr. Molumby not be concerned with regard to what might happen in respect of the information provided by the financial institutions in the context of the survey?

Mr. Paul Molumby

I would respect the regimes and the regulatory environment that are in place. Our focus now is on the current deposit guarantee scheme and on ensuring we take on board the provisions of the directive and implement the operational capability going forward. Does Mr. O'Brien wish to comment further on the validation of the survey?

Mr. Eoin O’Brien

No.

Senator Paddy Burke

How does the Central Bank assess the risk profiles of each of the institutions? When it carries out such assessments, does it grade one institution against another? Is the relevant information made public or is it held by the Central Bank? Are members of the public informed about whether one institution carries greater risk than another?

Mr. Paul Molumby

The Senator's question relates to the funding arrangements for the scheme whereby there will be a risk element involved. The proposed directive makes clear what the primary elements of the risk bases would be and refers to capital adequacy, asset quality, profitability and liquidity. That is contained within the draft directive. We have done no work regarding the direction of the deposit guarantee scheme and that type of risk analysis. As stated, the current funding arrangements that apply in respect of the deposit guarantee scheme mean that financial institutions must maintain deposits with the Central Bank that are equivalent to 0.2% of their total deposits. This is a direction going forward and, in the context of the deposit guarantee scheme, we have not considered matters in that regard at this juncture.

Chairman

I thank Mr. Molumby, Mr. O'Brien, Mr. Giffney, Ms Troy, Ms Counihan, Ms O'Rourke and Mr. O'Regan for the important information they have provided during these proceedings. Officials from the Department of Finance will be attending a committee meeting next week to discuss this very important directive which is due to be transposed into Irish law. Members are delighted with the level of information provided by our guests provided. We will be obliged to carry out a major due diligence exercise in respect of the directive and if our guests wish to supply any information additional to that which they have provided, they may forward it to the secretariat. If, following our meeting with the officials from the Department of Finance, any questions remain unanswered, we may be obliged to recall those who have appeared before us today.

A report on this matter will be laid before both Houses for discussion. The State now holds a majority stakeholding in Allied Irish Banks plc. It is also a stakeholder in Bank of Ireland and a number of other financial institutions are in full State ownership. The committee still has to obtain as much information as possible in respect of deposit accounts, the credit unions, etc. to ensure the position will be made crystal clear to the citizens.