JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate

Financial Stability Report 2007: Discussion with Central Bank and Financial Regulator.

Chairman

The second item on the agenda is a discussion on the Financial Stability Report 2007 with Mr. John Hurley, Governor of the Central Bank and Financial Services Authority of Ireland and Mr. Patrick Neary, chief executive of the Financial Regulator. I welcome Mr. Hurley and Mr. Neary to the meeting. I thank them for their flexibility in making themselves available for today's meeting. The meeting scheduled for some weeks ago was cancelled at my request and with the agreement of members, owing to the death of the mother of a member of the committee.

I remind members that this is an important day in the work of the joint committee. Before us are two people from highly respected financial institutions and to some extent the ears and eyes of the financial houses of Europe and the Western world are on us in our discussions today. Without further ado, I call on Mr. John Hurley to make his contribution.

Mr. John Hurley

Thank you, Chairman. I understand perfectly the sad circumstances that gave rise to the postponement of our earlier meeting. I thank members of the joint committee for inviting us to attend today. I am accompanied by Mr. Tony Grimes, director general of the Central Bank. Mr. Patrick Neary, chief executive officer, Financial Regulator, is accompanied by Mr. Con Horan, prudential director, Financial Regulator.

With the joint committee's agreement, I would like in my opening remarks to recall the background to the current market turbulence, to outline our approach to financial stability in the Central Bank and Financial Services Authority of Ireland and to summarise some of the main points from our recent financial stability report. I will also speak a little about recent market developments and their affects here in Ireland. Mr. Neary will outline how the Financial Regulator discharges its responsibilities in this context.

After several years, during which financial market conditions were extremely buoyant, international financial markets have experienced a substantial correction and considerable volatility during the past six months. This episode began with a significant heightening of concern globally from mid-2007 onwards about investors exposure to mounting losses in the US sub-prime mortgage market. These concerns were serious enough to disrupt a variety of financial markets including those markets which banks access for their funding. The result internationally has been a severe disruption of banks' liquidity flows and heightened concerns about financial stability. It is against this background that we present our current assessment of financial stability in Ireland and outline our role in contributing to stability in the domestic financial system.

There is financial stability where the various components of the financial system, such as financial markets, payments and settlement systems and financial intermediaries such as banks function smoothly and without interruption and with each component resilient to shock. In simple terms, a stable financial system is one that is able to absorb shocks. Instability emanating from a financial crisis can be very serious. There have been many examples of financial crises in the past in various countries that proved to be costly in terms of economic disruption and loss of output and employment.

I will now briefly describe the institutional arrangements governing financial stability in Ireland. The Central Bank and Financial Services Authority of Ireland is the institution charged with contributing to financial stability in Ireland, under both domestic and EU legislation. The organisation consists of two component entities: the Central Bank and the Financial Regulator, each with its own responsibilities. The roles are complementary and we enjoy the closest co-operation. The Central Bank's responsibilities for financial stability relate to the surveillance of the strength and vulnerability of the overall economy and financial system. The Financial Regulator's remit includes surveillance of the financial soundness of individual institutions. Both approaches are necessary for a comprehensive assessment of financial stability and our organisational structure facilitates the seamless sharing of expertise. Accordingly, colleagues from both the Central Bank and the Financial Regulator come together at all levels — director, senior management and staff — to consider financial stability issues and this joint assessment is published in our annual financial stability reports. Publication of the financial stability report is only one of a number of ways in which we contribute to financial stability on an ongoing basis.

It is generally accepted that price stability contributes greatly to financial stability. As a member of the Governing Council of the European Central Bank, I participate in the formulation of eurosystem monetary policy. The Irish Central Bank conducts market operations on behalf of the eurosystem relating to the provision of liquidity to banks in Ireland; we are responsible for the oversight of payments and settlements systems and we contribute to the formulation of the eurosystem's policies on financial stability. We maintain an open dialogue with the domestic credit institutions to review issues affecting the domestic financial system and to facilitate the flow of information between our domestic banks and the ECB. This dialogue has been intensified in recent times through regular and ongoing joint meetings of Central Bank and Financial Regulator management with the senior executives of our major banks. Furthermore, we continue to develop procedures to assess and deal with any concern of a financial stability nature that might arise. We work closely with our colleagues in the Financial Regulator's office, who in the course of their regulatory activities have important insights into the operation of the financial system. Mr. Neary will share these insights with the committee shortly.

The invitation mentioned the Financial Stability Report 2007 specifically. I will outline briefly now the approach and key messages in this report and we will be happy to explore any of these issues in greater detail afterwards.

Since 2000, we have published annually an assessment of financial stability. In similar fashion to other central banks, we publish our report to provide the information and analysis so that financial market participants and the wider public are well informed about the economic and financial environment, with particular attention to the associated risks. Armed with this information, they should be better able to make informed decisions about financial planning and decision making. Our intention is that the report conveys the importance of a stable financial system and that it should stimulate discussion of the current financial stability climate.

Our overall assessment in our most recent report, Financial Stability Report 2007, published last November, is that financial stability risks have, on balance, increased since the publication of the previous report in 2006 as a result of the more challenging international environment and its implications for domestic financial institutions.

Our central expectation, based on an assessment of the risks facing both the household and non-financial corporate sectors, the health of the banking sector, the results of stress testing of the financial system and the outlook for the economy, is that, notwithstanding the international financial market turbulence, the Irish banking system will continue to be well placed to withstand adverse economic and sectoral developments in the short to medium term. There are, however, some risks to this central outlook for financial stability.

First, by any standard, Ireland is one of the most open economies in the world, the downside of which is that the economy and its financial system are highly exposed to events in the world economy and financial markets. Second, on the domestic front, the outlook is for a deceleration of economic growth this year, with a rebalancing of the composition of growth. It is important that this moderation of activity takes place at a pace that is conducive to the health of the economy and supports the stability of the financial system. The labour market continued to perform strongly during 2007, albeit with clear evidence of more moderate employment and labour force growth than in the recent past. The outlook is for weaker, although still positive, employment growth this year, mainly due to an expected decline in construction sector employment. While this is likely to lead to an increase in unemployment, the unemployment rate is expected to remain low by international standards

Third, in the housing market, increases in interest rates which up to the middle of last year had risen from low levels have clearly reduced the affordability of housing in the past two years. There has also been a levelling off of house price increases followed by a decline. The latest published data show that prices were down about 6% in year-on-year terms in November 2007. This would mask variations. Other industry sources suggest the figure may be currently somewhat greater. These developments in the market can be seen as part of a necessary adjustment phase following many years of high house price inflation. Affordability has begun to improve again due to lower house prices and changes to stamp duty and mortgage interest relief. There are signs that the fundamental demand for housing in the economy remains strong — for example, private rents are continuing to rise, at about 11% year on year, while employment and earnings are still growing.

An additional factor is the impact of the turbulence in financial markets internationally on credit conditions in the domestic economy. The ultimate impact will depend on the possible evolution and duration of the current disruption in market activity. The potential evolution of these developments is difficult to predict and we must remain alert to the possible risks for the domestic economy.

The international banking system has been negatively affected by the volatility in financial markets, both directly through losses on their holdings of US sub-prime assets and indirectly through holdings of investments exposed to US sub-prime losses, as well as credit commitments to related conduits or special purpose vehicles. There has been a necessary reappraisal and repricing of risk across many financial market instruments and sectors. Uncertainty regarding the size and location of losses has affected confidence between counterparties and severely inhibited lending in the unsecured interbank money markets.

Central banks responded in an unprecedented manner to counteract disorderly conditions in money markets. In particular, the eurosystem, of which the Central Bank is a member, with other major central banks, moved quickly to meet the liquidity needs of the banking system. Liquidity management policies since August have been very much focused on, first, restoring and then maintaining calm in money markets. Most recently, the eurosystem conducted significant operations to reduce concerns about year-end developments. I emphasise that there is a clear distinction between these types of money market management operations to ease volatility in financial markets and monetary policy decisions made with the aim of achieving the price stability objective that is the core function of the eurosystem. These money market actions were successful in alleviating the problems at the very short-end of the interbank market. Longer term rates have not yet fully adjusted, although spreads between these rates and policy rates have narrowed considerably towards more normal levels in recent weeks. Activity in the interbank market, however, remains well below normal and will revert to previous levels only when a greater degree of confidence returns to the markets.

In summary, timely action by the authorities has mitigated the liquidity impact of the financial market turbulence on the global banking system, most of which had little or no exposure to US sub-prime mortgages. Irish banks are a case in point.

With regard to this country, during this period of exceptional turbulence, Irish banks, like their international peers, faced an environment where medium to long term funding was not as readily available on the interbank money markets as heretofore. However, adequate overnight liquidity was available at all times and since the year end, conditions in the interbank markets have eased and term funding is now more freely available and at lower interest rates.

The current position and outlook for the stability of Irish banks is positive based on an assessment of developments so far. The sector's shock absorption capacity has been largely unaffected by the turbulence in international financial markets. The domestic banking system reports no significant direct exposure to US sub-prime mortgages and only negligible exposure through investments and through links with other financial companies or special purpose vehicles which were negatively affected by the current market turmoil. The financial stability report contains an article summarising the results of a survey conducted with the banks on this issue.

Given the extent of the disruption to normal market functioning internationally in recent months, it was inevitable that Irish banks, like all banks, would experience some impairment in their access to term liquidity in the interbank market. However, the comprehensive liquidity framework within the eurosystem and the significant volumes of collateral held by them means Irish banks are well positioned to access euro system liquidity. In addition, a fuller assessment of the funding patterns of Irish banks indicates there is a significant medium-term element to much of their funding, as well as a relatively wide range of funding options available.

Our stress-testing of the banking system and our extensive financial stability analysis, all of which is outlined in our financial stability report, indicate Irish banks are solidly profitable and well-capitalised, with no major exposure.

The Irish banking system continues to demonstrate its strength in the face of the international market problems occurring in recent months. As the evolution and duration of the current episode is still uncertain, it is difficult to draw firm conclusions at this early stage. Nevertheless, it is prudent at this time for all jurisdictions to examine whether there are lessons that can be learned. In that context we will be informed by what will emerge from the examination currently taking place at the level of EU finance ministers and internationally. That may help avoid a repeat of recent events.

It is not the intention to rush to judgment on these matters; this would not make sense. We need careful consideration and this is what is taking place. Many measures have already been put in place, both here and at the level of the eurosystem, long before these international credit problems arose. These measures have helped our own banks remain robust in the face of the international credit problems. They retain a strong shock absorption capacity to deal with risks that have emerged.

I will now hand over to Patrick Neary, who will deal more specifically with the role played by the Financial Regulator.

Mr. Patrick Neary

I thank the Chairman and committee members for inviting us in today.

As the Governor has pointed out, we in the Office of the Financial Regulator work side by side with our colleagues in the Central Bank on financial stability. The Central Bank examines the overall position of the economy and the financial system and is responsible for monetary policy and oversight of the payments systems. Our attention is focused on the individual institutions, their safety and soundness and their interaction with their customers. This structure results in a very robust and cohesive approach to financial stability issues here.

In this statement I will describe briefly the approach we take to financial regulation, the measures we had already put in place that have had an impact on the issues we are talking about today and our own response to the market issues as they arose. At the outset it is important to point out the current turbulence in international markets is significant, has been going on for more than six months, is still unfolding and looks likely to continue for some time yet.

We have been monitoring our domestic institutions very closely. Our domestic banks report no significant direct exposure to US sub-prime mortgages and very limited exposure through investments and credit lines extended to other financial companies or special purpose vehicles.

Ireland has a broad and deep international financial services industry with a wide range of over 10,000 financial institutions and funds operating here. Therefore, Ireland is not insulated from the global market issues that emerge. We therefore continue to remain alert and vigilant to any emerging issues.

Our purpose is to help consumers make informed decisions in a safe and fair market and to foster sound, dynamic financial institutions in Ireland. We want to ensure that consumers are protected in their dealings with financial services firms. At the same time, and as committee members will appreciate in the context of financial stability, we do not want our requirements to conflict with the competitiveness and efficiency of markets or with the financial soundness of firms. We target our resources at those businesses and activities with the higher and more complex risk profiles and with the propensity to have the greatest impact in the event of failure. We cannot guarantee a zero-failure outcome, no regulator could do that, but we try to ensure that our focus is on the areas that need it.

This approach to regulation places heavy responsibilities on the firms themselves. Boards and management must have proper risk management systems and controls in place and be accountable for the integrity of their own systems and processes. They must be transparent and act with prudence and competence. These are some of the basic criteria that sustain a principles-led approach to regulation. Of course we will continue to set and monitor standards for financial service providers and financial markets but they must be clear about their own responsibilities. The approach I have described is in keeping with the Government's Better Regulation principles of necessity, effectiveness, proportionality, transparency, accountability and consistency. Whenever we introduce new requirements, we believe it is very important that we follow this guidance.

I would like to say a few words about some of the measures we have developed and introduced that have led to both us, as regulators, and the financial services industry being well placed to respond to the various market issues that emerged in recent months. I believe these measures have played a very important part in how we have been able to deal with recent events. Of most significance in this regard has been the new liquidity regime for banks which the Financial Regulator introduced in July last year. This new regime enhanced the existing qualitative requirements with a new emphasis on internal controls and systems, stress testing and contingency plans. It moved to a forward looking quantitative requirement that obliged banks to comply with prescribed ratios in various time periods. Prior to the formal commencement of the new regime, Irish banks were active in the money markets, structuring their funding to be ready for compliance. This proved very beneficial when the market difficulties emerged.

Beginning in early 2006 we also took a number of measures, above normal regulatory requirements, to increase the capital that banks are required to set aside for certain categories of higher risk property lending. These have been directed towards the area of speculative commercial real estate and high loan-to-value ratio mortgages. We undertook a review of our guidance on the manner in which banks assess the ability of their customers to support higher repayment burdens, should interest rates increase. Following the completion of this review, the Financial Regulator decided that all home mortgage loan applications should be assessed at an interest rate at least 2.75% above the prevailing ECB rate. This helped standardise the approach across different credit institutions and different products.

Our statutory consumer protection code establishes a consumer protection framework which includes both a structured set of general principles and more detailed rules that apply to larger firms, like banks and insurers, as well as to intermediaries and small brokers. The code ensures suitability is taken into account when selling financial products. The ability of customers to meet their financial obligations under these products — in short, affordability — is an important element of this suitability assessment. We have provided targeted consumer information campaigns and education initiatives and have produced cost surveys on a range of financial products and services.

All of the measures I have mentioned were developed and introduced before the market turbulence materialised in August last year. They formed part of our ongoing enhancement of good regulatory practices. While we could not see around corners and did not anticipate the market events of recent times, it was certainly useful that these practices were already embedded in the system when market issues arose.

I would also like to briefly inform the committee of some of the additional supervisory actions we have taken as the difficulties in the market emerged. As would be expected, the Financial Regulator has widened and deepened its monitoring of the institutions it supervises. As the liquidity issues have persisted this interaction has intensified in terms of our contact with firms and with other regulators, with a particular focus on market liquidity. We have required banks to submit weekly, instead of quarterly, liquidity reports. These reports are extensive and include, for example, details of liquid assets and cash flows allocated to the relevant time band and the use of committed facilities by the credit institution. The facility for more frequent liquidity reporting was already allowed for in the overall framework and has proved valuable in ensuring that the Financial Regulator has up-to-date information on the liquidity position of banks and the banking sector.

The submission of more frequent liquidity reports has been supplemented by increased direct contact with banks. In conjunction with our colleagues in the Central Bank we have had frequent contact with senior management in the banks as well as almost daily contact at other levels. This type of direct, regular contact allows for a full and open exchange of views between us and the banks and promotes a banking system-wide understanding of these crucial issues. We are also closely monitoring market developments, in particular the availability and cost of funding in the international money markets and have been in close contact with our regulatory colleagues overseas. It is vital that there is strong co-operation where banking groups have operations in several jurisdictions. As regulators we co-operate by informing each other about the activities of institutions where we have a common interest. This continues to happen.

We must continue to stress the importance of having a sound, stable and well functioning financial system. Recent events demonstrate the global nature of financial services and the need to have protection where and when necessary, starting at the point of sale and supported by sound and robust regulatory requirements and adequate capital provided for the risks undertaken.

As the Financial Regulator we will continue to work very closely with the Governor and the Central Bank, utilising the structure which allows us to share all necessary information, to ensure that these matters are kept to the forefront of our shared agenda.

Chairman

I thank Mr. Neary and Mr. Hurley for comprehensive and somewhat reassuring reports.

Deputy Joan Burton

I welcome our visitors who must have been busy since the last August bank holiday and the collapse of the Ormond Quay vehicle. The stability report contains several references to the housing market and our high level of dependence on the construction sector and expresses the hope, as in previous reports, for a soft landing. Do the steep reductions in house prices pose a risk to financial stability, particularly if the knock-on effect is negative equity and foreclosures? This would reduce liquidity in the domestic banking system given the concentration of banks' resident loan portfolios in property-related businesses as the speakers pointed out.

A striking feature of the Irish housing market over the past ten years has been that mortgages have gone from an average of 20 or 25 years to 40 years. Would the speakers agree that played a significant role in creating the housing bubble? In many instances, these 40-year mortgages are either already in negative equity or facing the prospect of entering it. What impact will this have on the banks? Unless they have been bundled and sold or transferred to diverse financial instruments, these mortgages are obviously included in their balance sheets.

I accept that Irish banks are not necessarily exposed to American sub-prime debt. However, is there a possibility, particularly in light of the way in which sub-prime difficulties developed in the United States, that a proportion of debt created in Ireland in recent times is of a lesser quality? Is the position in this regard being monitored? The report refers to the high level of household debt but states that overall net worth and the positive outlook for the economy were mitigating factors in this regard. I agree with that assertion. What is the current position, particularly in view of the fact that the scenario has changed?

In some ways we are caught up in the perfect storm as regards international financial markets. What impact will this storm have on Ireland? I accept Mr. Neary's comments regarding regulation and the fact that more inspections are taking place. I am sure those at Société Générale in France wish the authorities there had a system similar to that which obtains here. Mr. Neary stated that European central banks are working together. However, difficulties have arisen at both Northern Rock and Société Générale and we are quite exposed to the perfect storm to which I refer.

The Governor referred previously to poor sentiment on the part of the London Stock Exchange towards Ireland. The Central Bank and Financial Services Authority of Ireland's analysis from September 2007 states that financial institutions here have lent €25 billion to the construction sector and €75 billion to real estate interests. How many of these loans to construction and real estate interests have been rolled up? The term "rolled up" refers to the fact that until now many developers who obtained sizeable loans could, in a rising market, postpone paying some or all of the interest until their developments were completed and the properties sold on. What is the extent of that phenomenon at present on the balance sheets of Irish banks? How much of the interest on these debts has been rolled up? Has the position been assessed and what is the risk element involved?

Mr. John Hurley

I will answer some of the questions. There may be a number of them in respect of which we will be obliged to obtain additional information and communicate further with the committee. Perhaps Mr. Neary will deal with the question relating to the sub-prime issue and the new regulation coming into effect tomorrow in respect of the relevant institutions.

When considering the housing market, we must place recent events in context. In the period 2002 to 2006, house prices increased by approximately 50%. The adjustment that is taking place must be understood in this context. Before 2002, the increases that took place were even more substantial. In mid-2006, I spoke about a gap opening up between the fundamentals driving the housing market and prices. Essentially, my concerns related to overvaluation and the gap to which I refer coming into play for the first time. What is happening at present is that the gap is being closed. There was a gradual easing of prices in 2007 and month-by-month reductions occurred. The last published figure was 6%, though some market commentators would put it a little higher now. We need to put it in that context. Two interesting things are happening at the moment. First, is the easing of prices and the taxation changes relating to stamp duty and mortgages. Second, is the growth in rents — approximately 11% — which is indicative of a demand for accommodation in the economy. The greater alignment of the cost of buying and renting creates a healthier environment for the housing market.

The fundamental question about financial stability depends on the health of the economy itself. Our economy has been very strong in recent years but we are seeing a reduction in growth this year, though we still forecast growth in the region of 3% of GDP. Clearly there are some risks, given what is happening internationally, but that would be a creditable performance and better than most countries in Europe. Unemployment is low, currently 4.6% overall, and we see it increasing over the course of this year. However, it will be a moderate increase and we will still be in a strong position vis-à-vis other countries. While employment remains strong I see financial stability remaining strong.

Our banks, as I said in my introductory comments and as Mr. Neary said, have practically no exposure to the sub-prime market, either directly or indirectly. They have very little exposure to hedge funds, private equity or monoline insurers. We are in a strong position, given the fact that there is significant turbulence in the financial markets. The capacity of our banks to borrow on the interbank market is impaired, as it is for all banks across the globe, but we have seen significant improvements since the beginning of the year as a result of the significant injection of liquidity and monetary policy operations which have taken place since 9 August.

Overall, I see the adjustment taking place in the housing market as being an inevitable adjustment and very important for the medium to long-term health of the economy. That is something I pointed out in previous reports, particularly in the middle of 2006 when we suspected that a gap was opening up between the fundamentals driving the housing market and the prices being demanded.

On the question relating to equity and mortgages, the bulk of mortgages were taken out some time ago. Recent borrowers are clearly more at risk in a situation where prices are easing. However, the important thing for the housing market is that people who buy a house are making a long-term, not a short-term investment. The bulk of people who have taken out mortgages have considerable equity gains in their properties as a result of the increases to which I referred earlier.

Mr. Patrick Neary

I wish to respond to the question on the impact negative equity might have on the soundness of individual banks. The Governor has already said that a key element in any mortgage is the repayment capacity of the borrower. The impact of negative equity runs parallel to repayment capacity from the point of view of the bank. If a person is employed, his or her income is maintained and that individual is able to meet the repayments. The fact that a house is worth less than the loan is not material from the point of view of the soundness of the bank. It becomes relevant if a loan goes into default.

We were asked how we anticipated the current situation. The market spiked in 2006 and there was a very significant increase in house prices. It was at that stage that the regulator reacted. We insisted that banks maintain a much higher capital requirement for the higher loan-to-value residential mortgages. It was as a result of that spike and the dramatic increase in house prices that we took that measure. At the same time we also saw a tendency for banks to provide credit for high-value speculative land banks. We felt that was a risk area that we should also address through higher capital requirements. We did so by increasing the capital requirement by 150%.

From a bank's perspective repayment capacity is the big issue and whether, in the event of default, it has the capital buffer to absorb the loss. Our code, which was introduced last year, also requires lenders to agree a remedial action plan with a borrower where it detects arrears starting to emerge and to try to assist the borrower to manage his or her financial commitments and not allow the situation to worsen. It is very important that such measures are taken to help borrowers who are experiencing difficulties. The indicators that we look out for to assess the soundness of an individual bank are arrears and provisions. There are no indicators emerging yet that there is a significant increase in default levels or arrears levels.

Deputy Joan Burton

I would like to ask the regulator about the practice by financial institutions of allowing rolled-up interest in the case of people who are borrowing for speculative land purchases where, as the Governor said, the price of land has been bid up very heavily in the past number of years. It is permitted under accounting rules to roll up the interest and effectively defer the payment by capitalising the interest until a development is in hand or close to commencing. In the context of a slowing housing market, to what extent do banks in Ireland operate that practice? Does the regulator know the extent of the exposure? In my constituency there are large groups of flat and apartment blocks which are dark at night. There are no lights because they have not sold. Perhaps they will sell over the next two years.

In regard to major construction projects, builders are telling everybody they are finishing off what they are doing and that they are waiting to start the next phase. That is the reality on the west side of Dublin, and I do not believe the area is particularly atypical. What is the practice of the banks in this respect?

In the context of rising interest rates, it must be quite expensive for developers who bought land at very high prices and where the interest payments must be accumulating. Is the Financial Regulator watching that issue in particular? Are people being allowed to continue to roll up interest or is there a point where they have to revalue the land banks if prices are falling and cut their cloth accordingly?

Mr. Patrick Neary

There is no prescriptive accounting policy that determines that one must repay interest on a periodic basis. Accounting allows for interest to be rolled up. Equally, we would not have a very prescriptive requirement on banks to depart from that accounting convention. It is a matter for their boards and management to determine the risk profile they want to have, and the appropriate credit policies to have in place. It is not our experience, as a general rule, that interest roll-up would be normal practice. That is not to say it would not occur and that in the case of individual clients it would not be allowed or facilitated. Loan relationships are extremely complex. The whole relationship would have to be examined by the bank which should consider whether commitments in respect of a particular exposure to say, a land bank, could not be covered by way of security offered by the client from other areas of his or her business. One must take exposure in the round. We would advise the banks, in managing these exposures, to take them in the round and to ensure there is an orderly take-out from a particular loan or credit arrangement with the client. This is a matter for the boards and management. Were we to confine or restrict the Irish banks in this regard, we would be putting them at a competitive disadvantage.

Deputy Joan Burton

Is Mr. Neary aware that young couples who have been sold a rolled-up mortgage parcel by some of our banks and who miss approximately three payments and build up arrears of approximately €6,000 are not allowed to roll-up these loans but are instead hauled into court and have severe penalties and fines imposed on them by the lending institutions? Consequently, what started out as a €6,000 debt within a six-month period normally ends up as a €24,000 debt. A young couple facing into negative equity and experiencing unemployment or other difficulties are getting a rough ride at the moment. I do not want to see anybody facing into financial difficulties.

Mr. Neary is, understandably, concerned about the big banks but what about fair treatment for smaller individual customers? Those involved in the cases currently before the courts are facing astronomical charges.

Chairman

I will allow Mr. Neary to answer the Deputy's question but I must then move on to other members.

Mr. Patrick Neary

I certainly do not want to see any customer experiencing that kind of distress. There are a number of issues at play here. First, there are a range of product choices available to borrowers and I do not believe any of us would want to restrict the choices available. It is important that credit assessments are done properly and that affordability is tested. I mentioned earlier that financial institutions should cover the risk of increased interest rates. Financial institutions are required, as part of the affordability process, to ensure all loans are tested at 2.75% above the ECB reference rate.

The code also requires lenders to deal sympathetically and early with people experiencing repayment difficulties. This is an important part of the process. We would advise lenders to engage in a humane and sensible approach to managing a mortgage before reaching for their guns and taking clients into the court process.

Chairman

I call Deputy Peter Power.

Deputy Peter Power

If Deputy Bruton is taking questions from the Minister for Finance at 2.30 p.m. I have no difficulty in deferring to him.

Chairman

Deputy Power may put his questions. Deputy Bruton will be called immediately after him.

Deputy Peter Power

I thank Mr. Neary and Mr. Hurley for attending today and for their generally upbeat assessment in respect of the liquidity system. They did not refer specifically to the Northern Rock situation which has developed in Britain in the last few months and the capacity of the Irish system to withstand a similar shock. Is our regulatory framework sufficiently robust to deal with that type of situation?

There has been an institutional tension in the United Kingdom as to how to deal with the Northern Rock situation. Is such a situation the responsibility of the Governor of the Central Bank or of the Minister? Our system has three pillars, namely, the Minister, the Central Bank and the Financial Regulator. Do we have the institutional stability to deal with that sort of situation, were it to occur in Ireland? I do not think such a situation will occur but I put the question, nevertheless.

Neither was mention made by Mr. Neary of the difficulties caused in France in the last number of weeks by the situation in Société Générale. To what extent are we exposed to that sort of shock to our system? Does the regulation of financial institutions go to that level, or is it a question of inhouse auditing and management? Does Mr. Neary see the Financial Regulator having a role in preventing and monitoring such situations?

Mr. John Hurley

I could not comment on the institutional arrangements in the United Kingdom. It is a matter for themselves. Our institution was designed in such a way that financial stability is at the heart of it. That was the reason for the structure we have. A great deal of consideration was given to this by the Government at the time. After reflecting on it for quite some time, it was felt that because of financial stability issues there ought to be an overall institution which combined both pillars, central banking and financial regulation, with the closest co-operation between both sides but with independence for the Financial Regulator in terms of detailed regulatory work. That is the institutional arrangement we have. It has worked extremely well since 2003 and particularly well since this issue arose on 9 August 2007. The four people present today quickly met financial institutions, and monetary, economic and regulatory information came together. We met all our leading institutions and we continue to do so. The arrangements are very robust.

Deputy Peter Power

Were those meetings formal or informal?

Mr. John Hurley

The meetings were arranged directly with the chief executive officers of the financial institutions, who came into the Central Bank with their managements to discuss the situation with the team who are here today.

There are arrangements with the Department of Finance. The Central Bank and Financial Services Authority of Ireland and the Financial Regulator meet regularly with the Department to discuss any issues which might arise in relation to financial stability. That is an ongoing institutional arrangement which has been there for some years. It is interesting that the same type of institutional arrangement is now commonplace in the European Union, as a result of decisions taken at ECOFIN. They are the critical parts of the institutional arrangement which are in place to deal with this situation.

Each jurisdiction examines the situation in its own area to make sure everything is being looked at, as a consequence of what has happened in recent times. That is being done. We also take into account what is called the roadmap. That is the decision made by ECOFIN in October 2007 setting out a list of issues to be examined and necessary recommendations to be brought back for consideration by Ministers in the course of 2008. Various deadlines have been put in place for dealing with this in the course of this year. I mentioned at the beginning that Ministers were anxious there would not be a hasty reaction to some of the problems that had occurred but that serious deliberation would be given to some of the recommendations that might be brought forward. That is currently taking place. We, the Central Bank and the Financial Regulator, fit into that process through the institutional arrangement I mentioned, and are part of that process. The Tánaiste and Minister for Finance is part of that process. The lessons from this will be taken on board and the changes or adjustments that are needed will be made.

To reiterate, we do not have the problems that have arisen elsewhere. We have no exposure directly to the sub-prime market, indeed indirectly our exposure is negligible. The data are set out clearly in the financial stability report. We have a very well developed collateral and monetary policy operation framework within the eurosystem to which our institutions have access for liquidity purposes. That has been operating very well since 9 August 2007 and has facilitated greatly the interbank rates coming back to much lower levels and the availability of funding at the beginning of the year.

Mr. Patrick Neary referred to the very significant changes in liquidity introduced by the Financial Regulator in advance of the difficulties that arose in the financial markets. We were well placed to deal with some of the issues that arose. That does not mean we cannot learn from the discussions that are currently taking place in the European Union in accordance with the roadmaps set out by Ministers. If there are issues that we must take on board, we will do so.

I will ask my colleague, Mr. Neary, to comment further on the situation in France. When the situation first emerged, clearly we were very conscious of the arrangements that had been put in place some years ago for an independent audit of the risk management practices of all our institutions.

Mr. Patrick Neary

I am sorry I cannot discuss the affairs at Société Générale, but the issue that arises relates to risk management and controls. I will address the question as to how we would react and respond to this issue here.

As members may know we operate a principles-led approach to supervision. That essentially requires boards of directors of regulated entities to set out their tolerance for risk and ensures that management has a system that relates the risk in the institution to the level of capital and has a method for monitoring compliance. Our role in all of that involves oversight of the quality of the institutions corporate governance, including the risk management and internal control systems. We have set out in our licensing standards and requirements for banks, provisions relating to internal controls and risk management. How we do it in practise is that we carry out our own inspections and do an assessment of these controls and processes on-site. We also do some work off-site where we look at financial accounts and regulatory returns in internal audit reports and so on.

At the point of new authorisation of entities, we impose fitness, probity and competence requirements on directors and senior management. As the Governor stated, we have a regular programme of meetings with senior executives. Finally, the external auditors have a statutory reporting requirement to us as well and part of their mandate is to look for material deficiencies in the internal control systems, which they then must report to us. It is a combination of all those approaches that ensures good oversight of the risk management process.

Deputy Richard Bruton

I propose to share my time with Deputy Kieran O'Donnell, who must also attend Question Time.

It is reassuring to know that the banks have low exposure to sub-prime lending, the private equity, hedge funds and the bonds reinsurance which the Governor mentioned. At the same time, we have witnessed the halving of the banks' share price and the finger of complaint appears to be pointing at lending to the construction and commercial real estate sectors. I notice from his report that this appears to have grown really rapidly. I think there was about 260% growth in lending to these sectors in the three-year period to June 2007. Although it has come down somewhat, this report indicates 67% of bank lending to companies is in the real estate and construction sectors.

The key question is whether public policy, including that of the Central Bank, has been too sanguine about the growing importance of lending to these sectors in the banking system. The Governor and regulator gave reassurances that people who are able to pay will continue to do so, even if there is negative equity. That is not always so certain in the commercial rental sector.

Some changes in practice were introduced in mid-2006 but it still seems an extremely high proportion of bank lending is going to those sectors. Should the Central Bank have addressed this matter earlier or more effectively? Have the regulator and the Central Bank put too much faith in loan-to-value ratios? Essentially, the rapid growth of lending seen in this country creates a growth in the asset value. If we rely on loan-to-asset value ratios, it is almost a self-fulfilling issue.

It has been indicated that tougher stress-testing rules have been put in place, with a figure of 2.75%, but yesterday the Financial Services Authority in the UK detailed a particular category of borrowers, with 1.4 million people at risk of default or difficulty to some degree. It appears to have a more hands-on approach of identifying areas and driving intervention in a timely manner to deal with problems before they come up. Have we something to learn about delving beneath the surface, although we want to retain a principle-based approach?

The press has spoken about the remuneration packages of senior people in the financial services world. Colloquially, they seem to be paid on the basis that if they go to a bookie shop, they get the money returned if they back losers but get more if they back winners. There are bonuses if they do well but there is nothing on the downside. Is that a factor and should there be prudent regulation to make the issue sound?

What is the reliance on the rating agencies, which have come under scrutiny? In the Ormond Quay case, there was a AAA rating, although they got into extraordinary difficulty. To what extent do we rely on these rating agencies? I know there is now a move to look again at the conflicts of interest which have arisen with these rating agencies. Is there an Irish perspective on this?

To turn to the sub-prime sector, I have seen disturbing reports recently that there is an element of built-in excess charges. It is almost as if some of these sub-prime players expect a default and have integrated significant legal charges into default arrangements so they could nearly make money out of default as well as the very high rates being paid. Has the Central Bank or the regulator analysed this and will they be in a position to report to the Dáil soon on the practices? I know legal responsibility has only now been taken up in this respect. Will there soon be a report on the extent of these practices and protection of consumers? There is a concern regarding excessive charging.

The UK has moved well ahead of us in terms of introducing a deposit protection scheme. Some eyebrows were raised about the approach taken by the UK and it seemed to pull back somewhat. We have yet to see any sort of a consensus approach coming from the EU, long after the original difficulties arose. Will we have an Irish view on this and, if so, when will we see it?

With regard to Ireland's industry and the clear risks out there, what is the view of the regulator and, in particular, the Central Bank of the changes in policy targets and instruments that we should be looking to now? Broadly speaking, what does the Governor see as the policy targets and policy instruments we should seek? The International Monetary Fund, IMF, refers to fiscal instruments and it is new for that body to encourage co-operation across a number of countries on such initiatives. The National Competitiveness Council has mentioned setting inflation and competitiveness targets for Ireland. Are there policy initiatives the Oireachtas should consider as a means to pre-empt risks the country may face?

Deputy Kieran O’Donnell

I thank the witnesses for attending. On page 6, the Governor suggested Irish institutions were not greatly exposed to sub-prime markets. The financial stability report made reference to a survey and mentioned that one of its shortcomings was that a number of financial institutions may participate in joint ventures or create special purpose vehicles to access the sub-prime sector. Some institutions may have replied that they are not exposed but are involved in off-balance sheet investments. This would seem to introduce a degree of uncertainty.

What roles do the Central Bank and the Financial Regulator have regarding financial institutions that have no branches in Ireland but that deal with Irish customers? What assurances can be given to these customers that their dealings with such institutions are safe? I note that the financial services authority is seeking that banks undergo stress tests on their business models. Will Irish financial institutions be asked to do likewise? I think this would be a welcome measure.

Regarding mortgages and stress testing, I note that in July it was decided that mortgage loan applications should be assessed at an interest rate 2.75% above the prevailing ECB rate. Should this measure have been introduced earlier and, if so, why was it delayed? Banks have seen significant growth in home loans for first-time buyers, a very exposed group that, in many cases, have 100% mortgages. Has the Central Bank asked financial institutions to show the profile of their home loans? Has the risk attached to such loans increased in the past two or three years? What measures are in place to ensure a large number of repossessions will not occur if people run into difficulties?

Mr. John Hurley

We will try to share the questions. Deputy Bruton's first point related to share prices and it is important when examining what has happened in Irish equity markets to remember that the Irish index doubled between 2000 and 2006. Even allowing for the slightly weaker performance of equity markets in 2007, we are still outperforming our peers for the period from January 2000 to January 2008. The Irish market went up by around 34% while some other indices fell, such as the FTSE by 13% and the Standard & Poor's by 7%.

The period since December 2007 shows that Irish financial institutions, like financial institutions worldwide, have been affected and are down by around 10% but the range for European indices is down by 13% to 21%. We should take a broad view of this topic and put changes in context because different movements occur at different periods and the movement in the Irish equity market since 2000 has been substantial.

Regarding construction, our reports in recent years have called for rebalancing of the economy. A reduction in the overall contribution to the economy by construction, particularly of housing, is needed and is happening.

Mr. Neary will deal with the regulatory action. It was timely and we have been stress testing the financial institutions on all these issues from the bottom up and the top down to ensure that they remain sound.

Deputy Kieran O’Donnell

Nevertheless, loans were being given to first-time buyers at rates that they could never sustain in the long term. The stress-testing was neither sufficient nor early enough.

Mr. John Hurley

Mr. Neary will deal with the decision on the loans. Our understanding is that financial institutions were required to test the borrowers' ability to pay those loans.

It is essential that the role of rating agencies is examined in the context of any changes to the roadmap. They are important but there are issues regarding conflicts of interest and different ways of rating assets to be considered.

The roadmap covers this and I expect recommendations to emerge from that process. The recommendations on the road map over the year have different timescales, for example, the deadline for the deposit protection scheme is mid-2008. Action has been taken on all of these issues. The Ministers were anxious that there would not be a sudden unconsidered approach to the issues that have emerged, that is why they have been sequenced.

Deputy Joan Burton

Will Mr. Neary send me a reply to the question of rolled-up interest in the construction and retail sectors?

Mr. Patrick Neary

I will.

Senator Feargal Quinn

I congratulate both Mr. Hurley and Mr. Neary on their explanations. I was going to congratulate them on the production of the 2007 report which was ready on 30 January until I discovered that the report only related to the period up to last September. Is that the normal procedure? They have kept us up to date on changes which have occurred since.

I have a certain scepticism about the relationship between the two bodies before us today and their relationships with the cosy world of the club of banking. I believe my concern that they are seen to be part of that cosy club is shared by the outside world. Will they put my mind at rest on the question of who represents the customer? They have two kinds of customer, one of whom Mr. Neary described very well. The other is the businessperson who is attempting to run his or her business and finds himself or herself tied down by regulation. Mr. Neary talked about efforts to mitigate the effects of that regulation but I do not see the words "impact analysis" in his presentation. He mentions necessity, effectiveness, proportionality, transparency, accountability and consistency. One of my concerns relates to our ability to be competitive in the years ahead. A regulator makes regulations which make it less easy for a business to create jobs and wealth in the economy.

I have a question which is not, perhaps, directly related to stability. The single euro payments area, SEPA, came into being this month. To what extent does it change the jobs of the Financial Regulator and the Central Bank? Are they prepared for it and ready to protect us from anything that may arise as a result? On 20 December the European Commission found the interchange fee charged by Mastercard to be against European competition rules. It gave Mastercard and, probably, VISA six months to cease and desist from charging the fee. The interchange fee is the fee banks charge to each other and pass on to a trader who then includes it in his or her costs and passes it on to the customer. The amount involved is reckoned to be between €10 billion and €15 billion per annum which is incurred by the trader and, ultimately, customers. Poland has already outlawed the fee and the decision is being appealed. Is this an issue in which the Financial Regulator and the Central Bank take an interest? Will we take steps to protect the citizens of Ireland — customers and traders — from having to pay these costs? The matter is not strictly related to stability but, in view of other questions put today, I would welcome an answer.

Mr. John Hurley

I will answer the Senator's question on the financial stability report. When we publish a report, we set a deadline and stop data collection on a particular date. I update the data entry and have given an assessment of the situation in various speeches since. We are working on the next stability report to be published in the course of this year. There must be a cut-off period or a deadline.

In terms of the single European payments area, SEPA, and maybe Mr. Neary will deal with the other question, a very significant change is taking place. Since the euro was introduced, notes and coins have been circulating throughout the euro zone and payments can be made on that basis right across the euro zone. However, that was not the position in regard to non-cash payments. It was not the position in regard to credit transfers, direct debits, nor was there universal use of cards across the euro area. The purpose of this change is to ensure that payments can be made across the euro area as if they were being made domestically and at the same charge. That decision regarding the same charge was made some time ago. The introduction of SEPA in the past couple of weeks was not so much about cost as about putting in place the mechanism for making payments.

Credit transfers have been introduced. Direct debits will come in later in the year when the directive has been transposed. Cards have also been used from the beginning of the year. It is a very significant change and very important in terms of the efficiency of the euro area, and it extends beyond the euro area into other European countries and a few countries beyond that. It is, therefore, a very significant change. The benefits and savings are quite significant. Depending on the usage it could substantially enhance growth in general. That is the scale of the change that is taking place.

In terms of the charges, that is a position taken by the Commission. It is a Commission responsibility. Clearly the outcome of that is very important for the whole charging system in regard to the card schemes mentioned. As the overseer of payment systems generally in Ireland, the Central Bank will take the outcome of that on board. I think that answers the Senator's question.

Senator Feargal Quinn

It was initiated independently in Poland. Did we not feel obliged to initiate such steps?

Mr. John Hurley

We are keeping up to speed with what is happening as a result of the Commission initiative. It is also tied up with the development of the card schemes across the euro area in general and is linked to SEPA. We need to watch the outcome of that and then, as the overseer of payment systems in this country, take on board the outcome of that process.

Chairman

Does Mr. Neary wish to respond?

Mr. Patrick Neary

I hope I can allay the sense of scepticism about our relationship. We may look very relaxed here but it is not always so. It is useful nevertheless to allay any concerns the committee may have.

Over the past few months it has been demonstrated clearly to me that there has been a seamless opportunity within the organisation to exchange vital information about individual banks as it emerged, to inform the Governor where we saw risks emerging, and for the Governor's team, when he saw difficulties emerging or threats on the horizon, to keep us informed about how the European authorities might react to these difficulties. Our structure has proven itself very well over the past few months.

There are other advantages which have been achieved since the Financial Regulator was established five years ago. These include the sharing of services and the avoidance of duplication of operating costs. That has contributed significantly to maintaining a fairly tight budget for the regulator over the past five years. I hear what members of the committee are saying. We will be extremely vigilant about how we manage the shared services and how we co-operate on the financial stability front. I can give the committee very strong comfort in regard to how well that is working.

Senator Feargal Quinn

Is there a customer representative or panel?

Mr. Patrick Neary

Yes. On the regulator side, we are guided in the manner in which we go about our business by two panels, a consultative industry panel and a consultative consumer panel, each comprising 20 representatives. Various sub-groups and working groups assist us and provide us with advice on our regulatory proposals on and how we deal with customers.

Regulatory impact analysis is an issue dear to our hearts. I share the view that we are not necessarily disciples in terms of regulation for the sake of regulation. We support impact analysis and cost benefit analysis and seek to ensure that regulation yields genuine tangible benefits. While this is a challenge, it is embedded in the better regulation principles and it is at the top of our list.

The landscape has been transformed during the past five years by the fact that consumer protection now comes within the mandate of the Financial Regulator. The consumer protection code also extends to small firms. The manner in which banks and financial service providers deal with small and medium enterprises is covered by the consumer protection code. The statutory consumer director within the Financial Regulator has a statutory mandate to ensure that financial services providers act in the best interests of consumers. This is our mandate.

I hope I have answered all of the questions asked.

Deputy Edward O’Keeffe

I welcome Mr. Hurley, Mr. Neary and their officials to the meeting. While they are confident in terms of what they say, it does not read that way in the financial and business papers. Ireland is a small economy. The global market appears to be in real difficulties. The Irish economy and Irish stock market recently lost in the region of €40 billion. This money must be recouped from somewhere. Many pensions and investors have been affected by this loss. No matter what criteria, formula or table is used, the people who invested in these pensions and so on have incurred substantial losses. Many of them are in difficulty and are critical of what is happening.

I appreciate we live in a free market economy and that the world moves on. However, the global scene does not look good. We cannot be protected regardless of what regulation is put in place. It is obvious there is a serious recession blowing across the Atlantic from the United States of America into the UK and Ireland. Ireland is an open economy and we are already feeling the affects of that recession. We are on the eve of a recession which will have a devastating effect on our economy.

I have a few questions to ask. The ECB rate is being overridden by the banks. This is an indication of a liquidity problem and a shortage of money to finance borrowings. Irish consumers have benefitted during the past four or five years from a stable ECB rate. However, there has been a turnaround in this regard during the past four or five months. Building societies are currently advertising an increase in rates.

Is there too much competition in the banking sector? I have been a member of this committee for the past ten years. This committee previously discussed the issue of bank charges and their potential to destroy the consumer. We did not turn our attention to the real issues. The enormous influx of foreign banks into Ireland has created competition. However, with competition often comes a weakness in the system. Often banks take on customers who may not be good for business. There are banks, building societies and financial institutions on all sides of our main streets and towns. This leads to real competition which in turn leads to the problems outlined earlier. I do not know how to overcome that because one must get market share. I am sitting beside Senator Quinn, who has been very much in business.

Over the past ten or 15 years Japan has experienced deflation with zero interest rates. There is now a tendency in the world economy for interest rates to be further lowered, as has happened in America. The ECB may follow. How attractive will that be for us? We are now in a completely new field. In recent days I saw the Government roads allocation of approximately €140 million per month. This is not nearly enough to take account of inflation and other factors. The Government is aware that a problem is approaching and is taking precautions.

Where does the Governor of the Central Bank see the world economy going and what effect will it have on Ireland? I am concerned, as an investor, that we are facing a real problem when I see great amounts of money wiped off the stock market, which is the barometer of any economy in a free market society.

Mr. John Hurley

The financial turbulence of recent months is very significant. We see the United States economy slowing and action being taken by the authorities. The IMF commented this morning that global growth will slow somewhat this year and it expects growth in the United States to slow significantly. The global environment has changed in recent times.

This is a small open economy. This is one of the risks for us. We must be realistic. There are things we cannot do or change. It is unlikely we will have any effect on what is happening globally. We must be sensible in deciding what we can do to position ourselves to deal with a global downturn, if that is what emerges, and to deal with the upswing when it comes. It is too early to say how serious these events are, globally. We need to wait for some time. There are conflicting indicators. Yesterday, I saw that some of the durable goods indices are up very significantly while other indicators are down. We need to wait and see.

Our economy has had a very good performance in recent times. Even in the midst of the adjustment in the property market and with the financial turbulence, we still expect credible growth of about 3% this year, which compares very well with growth in other European countries. Even though there will be some increase in unemployment, it will still be low by international standards.

We must focus on competitiveness. This is a small open economy and we must compete in the global economy. If growth in the global economy is reducing somewhat there will be pressure on our market share as we export into that economy. We must look at our competitiveness and make sure that we take the actions necessary to ensure that we are competitive in the future. Our productivity levels are a critical aspect of this. We have had a very good record on productivity for several years. This record began to slip a little in 2004 and 2005, essentially because of the composition of growth in this economy and the emphasis on the construction and services sectors. However, we have seen that improving in 2006 and 2007 and we need to focus on that. To maintain productivity levels we must do a number of things. We must boost competition. One can have too much competition but we must boost it in this economy. We must continue to invest in our infrastructure and make sure it contributes to the effectiveness and efficiency of the economy. That is being done. I am glad to see that we are continuing to invest in our infrastructure. We need to improve educational standards. This is critical for the economy in the future. Research and development are also important. We must ensure the macroeconomic stability is maintained and that we remain a flexible and agile economy, which has been our strength in the past. We must concentrate on this issue.

We are strong enough to cope with the global downturn, which I indicated in my opening address. Our economy is strong and our unemployment levels are low. Our fiscal position has been good and provides the buffer to now deal with a downturn. The automatic stabilisers are capable of working and being consistent with the master criteria. We are in a good position to come through this period but we should focus on some issues that would help us take advantage of the upturn as we come out of this.

I will ask Mr. Neary to answer the questions on loans but it seems the critical issue in the loan system is to maintain standards of lending. Mr. Neary, in his opening statement and comments since, has indicated this is a critical issue for the Financial Regulator. Regulation here has this as a key focus, and it is critical in dealing with some of the points raised.

Mr. Patrick Neary

To briefly add to the Governor's comments, it is true the cost of funds in the interbank market is increasing. It is also true that as banks consider their funding needs and try to spread sources of funding around, they will be forced to compete more actively in the market for those funds. This will result in an increased price being paid. We should not forget depositors also exist and they are set to benefit from an increase in interest rates being paid. Depositors paying in savings and other deposits will have that knock-on effect from the increase in interest rates.

I could not speculate on interest rates and I would never say I could look around corners. This will persist for the moment while turbulence exists in the financial markets, and it is a function of the international markets that liquidity is being sought. As a result, the price is being pushed up, and this will persist for the foreseeable future. I confess to taking quite a localised view of this, with my opening statement reflecting that our focus is primarily on the health, strength and soundness of the Irish banks. I reiterate that with regard to their liquidity, we have been very active in ensuring they have widespread medium-term funding available to them.

Deputy Edward O’Keeffe

I have comments on competition. I regularly read Mr. Hurley's statements because he is a neighbour and former constituent. If the euro stays at $1.47 and 76 pence sterling, this puts exporters in a very awkward position. Those in our constituencies have complained about this, although I am not sure how we can overcome the problem. We have seen these cycles before and about ten years ago we experienced a similar position. Irrespective of what has been said today, we are in a cycle that is creating a difficulty for us.

Stress testing has been mentioned, although I do not believe it has much influence. If someone has a cardiac complaint or wants to have a heart problem treated, he or she goes for a stress test. Many a man has fallen, coming out the door from one. Stress testing with a figure of 2.75% on an interest rate of 4% leads to a pretty hefty mortgage rate of 6.75%. I know it is a guide but I have other examples as well. A French bank recently had difficulty and wrote off €6 billion or €7 billion yet there were swipes at Anglo Irish Bank and AIB. The message for us is quite clear from that. On the basis of the cycle we are in, there is trouble ahead.

Chairman

Would Mr. Hurley care to respond?

Mr. John Hurley

There is no denying that since August, international financial markets have been turbulent. This turbulence has manifested itself in different ways and we are now undoubtedly seeing a slowdown in growth, in the United States in particular. The extent to which this will affect the global economy remains to be seen — this morning the IMF referred to a slowdown in global growth. Growth is still strong in the euro system but I expect that it will be affected by the American downturn. After a full analysis of the euro zone we left interest rates unchanged at our meeting on 10 January.

Many factors are influencing the outlook in the euro zone at the moment. There has been a sharp spike in inflation in recent months and that is likely to persist for much of 2008; in the medium term the risks to the inflation outlook are on the upside. The reappraisal of risks in financial markets, which we have discussed, is still evolving and the outlook for growth in the United States economy has deteriorated. Growth prospects reflect not only continuing problems associated with sub-prime markets, which we have discussed, but also the emerging impact on the US economy generally, especially consumption and consumer sentiment. I referred earlier to the actions taken by the federal reserve and the US Government to address these concerns. Recent data suggests the euro area has not been affected to the same extent but the events confirm the downward risk to growth that was referred to in the statements by the governing council. The governing council continues to monitor these developments closely.

Deputy Martin Mansergh

I welcome this meeting with the Governor of the Central Bank and the Financial Regulator and feel it is particularly timely given the international financial turbulence that has been referred to. I understand from the witnesses' answers that, while we should not under estimate the risks and challenges ahead, there is no question at the moment of our economy being devastated.

I note that the report was signed off at the end of September so I want to know whether what it says on page 33 is still regarded as valid. It says that "The underlying fundamentals of the residential market continue to appear strong, as evidenced by rent increases. The central scenario is, therefore, for a soft, rather than a hard, landing." A certain Sunday newspaper has bombarded the Government with suggestions that the economy is going through the floor and that special measures should be taken beyond those already taken. It suggests, without prejudice to the Finance Bill, that instead of a soft landing we are headed for a hard landing and that emergency measures should be taken to prop up the housing and construction sector because of its importance to the economy. The other view, which, so far, is that of the Government, is that a healthy correction is taking place and that it should not overly intervene to stop such a correction occurring. I would be glad of the witnesses' view on the matter.

This is a time of financial challenges and many indebted people may wish to reduce their exposure to debt. I have noticed in recent advertisements by financial institutions warnings that customers with fixed term loans could face penalties should they pay off loans early. What are the views of the Central Bank and the Financial Regulator on this? Is it right that people who wish to consolidate their financial positions should be deterred from doing so? Why should there be penalties for paying off loans early, apart from the fact that in the short term it causes unnecessary administrative costs?

The governor of the Bank of France has caused some controversy by saying that he had decided not to inform the President of the trouble at Société Générale for some time after he learned of it. In a similar situation would Mr. Hurley decide not to inform the Minister for Finance or what would his position be?

Mr. John Hurley

We expect growth to be approximately 3% this year and unemployment to increase a little but remain low in comparison with other economies. The debt to GDP ratio is one of the lowest, and the fiscal position has been good and facilitates adjusting to the slow down. Although growth will be lower than in recent years it is likely to be good when compared with that in other European countries. I have outlined the risks, and there is a great deal of uncertainty in the global economy that we must take into account.

House prices increased significantly in recent years but in the past year have slowed or reduced by 6%, according to published data, but some information from market sources suggests a little more. This adjustment is inevitable and necessary for the medium to long-term health of the economy. We could not continue to build 80,000 or 90,000 houses a year and prices could not continue to rise at the rate they had been doing such as in 2006 when they increased again by 12% and in some months 15%. I said then that I saw a gap opening between the fundamentals supporting the housing market and market prices. That gap is being closed now which has improved affordability and rents have grown showing a demand for accommodation. As the relative costs of buying and renting align there will be greater strength in the market. Mr. Neary will talk about fixed-term issues and penalties.

I have referred to our institutional arrangements and relationship with the Department of Finance. There is a standing group which meets to discuss any issues with significant implications for financial stability. Much thought went into designing our structure. Since 9 August last, when financial stability issues reached critical levels, it has been extraordinarily useful to have in place a single institution, incorporating the Financial Regulator and the Central Bank, the officials of which — who have had access to a seamless flow of information — have been able to deal with this matter. We met the financial institutions together and put across one message in respect of financial stability.

The Financial Regulator has, as Mr. Neary stated, other responsibilities which are carried out independently. However, we deal together with critical issues such as those to which I refer. That was the thinking behind the structure put in place by the Government.

One of the other reasons for the move relates to efficiency. It would not have been advisable, in a small country, to duplicate services and resources, particularly as some of those services were being paid for by the business community. It is important that costs should be as low as possible. Another reason is that in a small economy it is necessary to share skills. Our resources and skills base are both limited and we must ensure that we make the best possible use of them. The latter is facilitated by the structure that is in place.

Mr. Patrick Neary

I wish to reply to questions on warnings regarding fixed interest rates on loans and on debt consolidation. The issue is one of transparency. Consumers must not be taken by surprise and hit with unexpected charges as a result of their wanting to break loan agreements and convert from fixed to floating rates or to shop around and switch their mortgages among lenders. Under the code, we insist on full disclosure of all charges and fees that are payable if the terms of a loan are departed from in any way.

The position regarding consolidation is both good and bad. Consolidation is an option that suits quite a number of people. Our message to consumers is that, in the first instance, they should take advice on whether consolidation is the correct option for them. There are a couple of dimensions to consolidation. First, one may extend the period of one's credit by quite a number of years. The overall cost of credit is, therefore, quite significant when one includes everything. The second point is that if one's package involves consolidation of unsecured lending into a mortgage, the person involved must be advised that he or she is putting his or her home at risk, particularly in the event that he or she is unable to honour the terms of the rearranged contract. We strongly advise consumers to take advice and be alert to the issues that may arise before consolidating their debts through mortgage products.

Deputy Martin Mansergh

I appreciate that consolidation can mean two things. I understand Mr. Neary's comments regarding consolidating debts and bringing them together. However, I was referring to consolidation in the sense of reducing one's debt.

On the question of straightforward fixed-term loans with a single institution — I am not referring to switching among institutions or anything of that nature — if a person has the facility to pay off a loan early, should there be charges involved? If the answer is "Yes", does Mr. Neary consider the level of such charges to be too high?

Mr. Patrick Neary

A process is provided for in law, namely, via section 149 of the Consumer Credit Act, under which charges to be applied in respect of financial products must be approved by the Financial Regulator. A number of criteria relating to this process are set out in the Act. Charges that are being applied must be approved by the Financial Regulator.

I reiterate that we would not want to see customers being hit with surprise charges. It must be spelled out to consumers at the point of sale that if they seek to vary the terms or conditions of their contracts, certain charges will apply. Such charges should not be a matter of surprise, they should be explained up front and all the implications of the products and the charging structures should be spelled out to consumers.

Deputy Edward O’Keeffe

Following on from Deputy Mansergh's question, in the case of a fixed loan an institution will borrow the funds against a fixed price. In recent times, with rates increasing, a person repaying a fixed loan should not have to pay any surcharges or interest. In the past, when interest rates were falling, it was a different story. Are there rules in that regard?

Mr. Patrick Neary

Can I reply to the Deputy in writing? I do not feel adequately briefed to answer that question today.

Deputy Edward O’Keeffe

Of course.

Chairman

We are dealing with stability today.

Deputy Terence Flanagan

I reiterate my colleagues' comments and thank the Financial Regulator, the Governor of the Central Bank and their staff for their presence. In connection with the housing market, is the regulator concerned about the number of repossessions in the past year? Some 465 repossession summonses were issued by the High Court, compared with 311 in 2006. What can be done to help people who fall on difficult times? Our economy has hit a rocky patch and, with an uncertain outlook for the future, it is difficult for people who find themselves in such a situation.

It is estimated that 15,000 people have taken out sub-prime mortgages in the past five years. Can the regulator comment on whether those figures are correct? There is no regulation at the moment but the Financial Regulator said there would be regulation from this week onwards. Can he confirm there will be new industry guidelines on reckless mortgage lending and new penalties for mortgage professionals found guilty of reckless lending and deception in selling products to the most vulnerable people in society, particularly those with bad track records and poor credit ratings, at whom those products were targeted? Is it possible for a report to be issued to the Oireachtas in, say, two months on lending practices by the mortgage industry, particularly practices that undermine consumer rights? We could then identify the problems and ensure better regulation.

Is the Governor concerned about the downturn in the US economy? It is having a negative effect on the Irish economy, particularly given the number of multinationals based here. Is there anything we can do about that? The fraud which took place in a back office section of Société Générale last week was on a major scale. Are there any plans for extra audits or checks to ensure all our banks are adequately protected?

There are thousands upon thousands of empty apartments lying empty throughout the country, a fact that is perfectly obvious at night-time, yet new apartment blocks continue to be built. How does the Governor see that issue developing in the future?

Mr. Patrick Neary

I will answer the questions on repossession and the size and number of sub-prime mortgages. We have a rough estimate that the outstanding stock of sub-prime mortgages amounts to approximately €1.5 billion. The data are about a year old and, therefore, somewhat out of date. It is the equivalent of approximately 1.2% of the total outstanding residential mortgage lending here. The trouble is that we do not regulate these entities and they do not report statistical information to our statistical collection department in the Central Bank. However, that will change on 1 February when we activate the new authorisation requirements for sub-prime lenders. That process will include fitness, probity and competence tests for the people involved. They will also be subject to the consumer protection code which requires them to ensure that lending products they provide to their customers are suitable. That may result in people who have heretofore qualified for mortgages not getting them because they may not be able to persuade these entities that they have the capacity to repay and may find themselves without access to mortgage credit. We should bear that in mind. On the sell side, the code will also require that the individuals dealing with the customer should have minimum competency qualifications. They should have the necessary expertise and professional qualifications to sell the products. That is also a by-product of the code.

In regard to the number of repossessions, I reassure the committee that is not a place in which we want to see any consumer. It is a very serious matter. We expect lenders to sit down with borrowers who are experiencing repayment difficulties and try to work out a common sense repayment structure that will get them over the hump and, in time, perhaps get them back on an even keel. Let us not rule out, however, the possibility that it may not be possible to put such an arrangement in place and repossession may be necessary to achieve closure of the process. There is a judicial process that provides for that eventuality.

On the question of reporting back to the Oireachtas in a couple of months' time, I do not want to make a promise that I will not be able to fulfil. The authorisation process will take three months. We have to make sure we can roll out the code and gain experience in working with this new cohort of authorised institutions. I do not believe I will be in a position to make a meaningful report to the Oireachtas in a couple of months. If the committee could allow me some flexibility on that, I would much appreciate it.

I will ask my colleague, Mr. Con Horan, to deal with some of the issues that have arisen in regard to the report on Société Générale.

Mr. Con Horan

In regard to the Deputy's question, we contacted the institutions we supervise immediately after the events in Société Générale became known to find out, first, whether there was any exposure and, second, what measures they are taking to ensure similar issues do not arise here. We have had some contact with the French authorities and we are learning a little more in regard to the issues that are evolving as a result of this fraud. However, we need to fully understand the circumstances. When they are clearer we will get back to the institutions we supervise and drill a little deeper to ensure the same issues do not arise for Irish banks.

Senator John Hanafin

I welcome the representatives of the Central Bank and the Financial Regulator.

Chairman

Allow me to interrupt for a moment. Deputy Flanagan posed a question to the Governor.

Mr. John Hurley

There were two questions. One related to the US and the other related to vacant apartments. We have talked a little about what is happening in the US and the slowdown in the economy. It is too early yet to say how significant this is particularly as we have seen action taken by the Federal Reserve and action is to be taken by the fiscal authority. We must wait to see how that works. I believe there will be some impact on global growth as a consequence of that and, in time, probably some impact on the other areas of growth.

So far as we are concerned in Ireland, we must be realistic about what we can do. It will not be possible for us to influence what is happening in the United States. However, we must respond sensibly in terms of how we maintain our competitiveness to ensure that we can trade into a global economy that is somewhat reduced and where markets are a little more difficult for us. Competitiveness is important. I mentioned in this context that productivity is critical. We must focus on our productivity levels and try to increase productivity growth. While it has been good to us for many years it has reduced in recent years. We need to focus on issues that will enhance productivity. Much is being done in this regard. I referred earlier to the significant investment in infrastructure currently taking place. Macroeconomic stability is important. We need to continue to be flexible and we need to invest in education and research and development, and ensure we do not price ourselves out of these markets. If we are sensible going forward, given the economy is relatively strong despite the adjustment taking place in the housing market and the turbulence taking place internationally, we can expect good growth this year in comparison with other countries. We must be conscious of this and remain sensible in terms of the decisions we take.

As regards the stock of accommodation, when discussing this earlier I mentioned some of the positives that are emerging, namely, affordability is improving owing to price reductions and changes in taxation. On the other side, rents are increasing by 11% year-on-year. This is a sign of demand for accommodation. As the cost of houses and rents come more into kilter there should be movement in the housing market. Some market commentators have suggested this will take place in the latter half of 2008 but this remains to be seen.

Senator John Hanafin

In welcoming Mr. Hurley, Mr. Neary and the representatives of the Central Bank. I am conscious of the fact that they have been very successful in this country. We have avoided the major financial difficulties experienced in other jurisdictions. The reality is that stress testing by the lending market has been successful with relatively few repossessions, though we would like if there were no repossessions.

The UK experienced difficulties with Northern Rock, an issue on which the UK financial regulator and governor of the Bank of England were not at one leading to certain difficulties. The UK does not appear to have handled that specific problem as well as Ireland. For days on end we saw on ITN, BBC and RTE queues outside banks. A queue implies a shortage. When a problem arose in respect of Northern Rock in Dublin somebody suggested — he or she should be commended for doing so — that people fill in their withdrawal slips, go home and return later that day to receive their cheque. Financial markets run on confidence.

I have a specific question in respect of our exposure in global markets to trading in commodities. On my way here today I passed through Urlingford and saw a Garda car, two Army jeeps and a security van which may have been carrying up to €1 million. These vehicles are permitted to pass through red lights and have a free run. How can a person trade €50 billion without anyone knowing? It is extraordinary that a major European bank could put itself at this type of risk and that those who took that risk, and the trade, were not automatically reported to the financial regulator of the country involved. It is beyond belief given what happened with Barings Bank which went bust because in a similar situation somebody took a position which cost the bank Stg£800 million. It is bizarre. I hope it could not happen here.

I ask that the Governor, in his European capacity, ensures that trade of this magnitude is brought to the attention of the financial regulator of the nation state. We must ensure this does not happen again. We do not live in a vacuum. We could very easily be affected by another strike of this type. Were it to happen again, the market could react in a very negative manner involving all financial institutions.

Similarly, if he is in a position to do so, I would like the Governor to answer the query regarding his own opinion on what should happen to interest rates at the next ECB meeting. Should we follow the United States or should we take inflation as a more important criterion in deciding how interest rates should go?

Mr. John Hurley

Mr. Neary and Mr. Horan have talked about the recent problems in France. Information on these events is still unfolding. Clearly, there were significant failures which need to be addressed. In this country in previous years, we have been very conscious of this danger. At one stage our financial institutions were asked to audit their risk management arrangements using external auditors to ensure that issues such as this could not arise. No one can say this can never happen again, in this country or anywhere else. However, in so far as it is possible within the regime operated by the Central Bank and the Financial Regulator with the financial institutions, we are very conscious of this danger. Mr. Neary may wish to talk about it. Since these events unfolded, the Financial Regulator has been in touch with the financial institutions on the matter. Mr. Neary may wish to comment on that.

With regard to interest rates, I referred earlier to the different influences affecting the present outlook. There has been a sharp spike in inflation in recent months. This is likely to persist over much of 2008. Over the medium term inflation in the euro area will remain on the upside. We have seen a great deal of uncertainty and a reappraisal of risk in financial markets is still evolving. The outlook for growth in the US economy is deteriorating. We see the actions by the Federal Reserve and the US Government. They are aimed at addressing these concerns. Recent data in the euro area do not indicate the same level of impact on growth, although over time we could see some impact. The data confirm the downward risks to growth. These were referred to in our statement. We continue to monitor all developments very closely.

Mr. Con Horan

The events in the Société Générale were extraordinary. I concur with the views expressed on the level and magnitude of it. When the news broke we immediately began to contact the institutions in Ireland. I am glad to say a number of them had already commenced their own investigations and analyses of their positions to see if similar events were occurring. I am glad to say that was not the case. Irish banks are conscious of this danger but there is no doubt that, as regulators, we need to be very heavily focused on this area. We will seek to learn lessons from Société Générale and that is an evolving process. When we know the facts and what actually went wrong there, we will take action directly and contact our institutions to make sure that all possible measures are put in place.

Senator Liam Twomey

This discussion is important and timely. The Central Bank looks after the banking system and the Financial Regulator looks after the customer. It is important to know that the system and the customer will both continue to be protected.

Mr. Hurley referred to the importance of maintaining competitiveness. He places considerable emphasis on productivity levels. Productivity levels in the private sector of the Irish economy have increased by 46% in the last number of years. How much more scope is there for productivity to increase? How did other markets, such as the United States, increase productivity levels when they were already very high? Are we talking about more investment in technology rather than in people? It is important for us to know that. Some comment should also be made on the social aspects of this issue. Increases in productivity may mean more people in the workforce working longer hours. What does Mr. Hurley feel about a comparison in the productivity levels between the private sector and the public sector, as well as the cost in both sectors?

The Financial Regulator has concerns. The total debt of the Irish nation is much the same as it was 25 years ago. The only change is that responsibility for the debt has shifted from the State to the individual. Even though the system may well survive any potential downturn in the next 12 months, we cannot be so sure about individuals. If we are all collectively shouldering the same debt that we carried 25 years ago, there will be a lot of fallout if things do not work out in the next 12 months. We may talk about restructuring loans, substantial corrections, volatility and other nice words we read in the newspapers, but the reality is that people will be in significant financial trouble in the next 12 months if these things come to pass.

What can now be done? There is a huge social cost when people lose their homes. They lose their jobs and get heavily into debt. The fallout can be terrible for society and not just in terms of a loss of consumer confidence.

Mr. John Hurley

Some very significant gains have been made in competitiveness and productivity in recent years. It gets a bit more difficult to do this as we move on, but the key is that we must continue to invest. There is investment in infrastructure and we now need to invest in improving our educational standards and in our research and development. We also need to maintain our macroeconomic stability and to continue to be flexible as an economy. These are the important things. Competition is also critical in providing efficiency.

We went through a period of good productivity growth, which has been reduced in the last couple of years but has come back again in recent times. We need to take the necessary action to allow for continued productivity growth. That will help us significantly, especially in markets that will be highly competitive from now on.

The critical thing about private sector debt is the state of the economy. To the extent that we have very good employment levels in this country, and the repayment of debt is not a big issue. The problem arises if there is a significant downturn in the Irish economy as a consequence of what is happening globally. That is not happening at the moment and economic growth continues to be reasonable. We expect about 3% growth this year. Unemployment is quite low but we expect some increase this year. It will still be moderate in comparison with other European countries. As long as employment remains strong, repayment of debt is not likely to become a very big issue overall. There will clearly be individual instances where this will become a problem. However, for the economy as a whole, debt is linked with overall employment levels.

Mr. Patrick Neary

The Financial Regulator's approach to personal borrowing has come under a number of different headings. We launched consumer information campaigns and we have issued a lot of guidance material about loans, mortgages, investments and so on. They are available from the Financial Regulator. We have also had a few successful television campaigns alerting people to the fact that we have a new website which offers financial planning capabilities. Members might be familiar with the bus campaign, where we encourage people to use that website, which is now at the disposal of the public. The message to all consumers is to get advice, before they make important financial decisions, from a professional financial adviser who is authorised by us and covered by our code of conduct. The code of conduct in the selling relationship between the regulated entity and the customer is that the entity is obliged to demonstrate how the product it is selling is suitable. Part of that assessment is affordability. We spoke earlier on about the requirement that one's ability to repay should be stress tested at 2.75% above the European Central Bank base rate to make sure that one is able to absorb increases in interest rates.

In the event that consumers experience difficulty in meeting their repayment obligations, we advise them to seek help early, to try to work out the difficulties in a common sense way with the lender or the product producer. We advise them to try to avoid concealing this information until it is too late for anybody to do anything about it. Such people may end up in an overwhelming situation that can only result in pretty drastic consequences. People should act and disclose early so we can implement some sort of remedial action.

Senator Liam Twomey

The witnesses work closely together. Should we be telling the consumer to be thinking about saving rather than spending for the next year, or do they feel that the stability is there as people are saying? There used to be a theory that if a person's mortgage was more than 40% of disposable income, then that person would be in trouble. I am sure if all loans and other debts are added up and are a certain percentage of a person's disposable income, then that person is also in trouble. Should consumers stress test their personal finances by obtaining such figures from the Financial Regulator?

The system is the responsibility of the Central Bank. Public sector productivity has only increased by 9% in the last number of years, yet it makes up 20% of the overall growth of the economy. What sort of advice is being given to the Government by the Central Bank on improving productivity? We have waited four years for the consultants' contract to be negotiated. There has been little or no change in productivity in the last few years. What sort of advice is being given to instill confidence, rather than just going on a wing and a prayer?

Chairman

I do not wish to curtail any questions, but we are dealing with the stability report today.

Mr. Patrick Neary

Thank you, Chairman. I am in absolute agreement with what the Senator is saying. We must send out a strong message to consumers. To coincide with the new year, we spoke about a financial makeover in our recent information campaigns to consumers. We would encourage everybody to take a comprehensive look at their financial position and seek advice on the right thing to do. I cannot encourage consumers either to spend or save. Each one of them should get advice about their own particular circumstances, but it should become normal practice for people to reflect on their financial position every so often and take good advice about it.

Chairman

On that good piece of advice, I thank Mr. John Hurley, Mr. Patrick Neary, Mr. Tony Grimes and Mr. Con Horan for accepting our invitation to this meeting of the Joint Committee on Finance and the Public Service. I thank them for the comprehensive report they gave and the forthright answers they provided to the committee. It has been a useful exercise at a time when internationally there is turbulence in the financial markets. It is good to find people who can give a positive view of our own situation. I again thank the delegates for attending.

The joint committee adjourned at 3.35 p.m. sine die.

JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate - Wednesday, 30 Jan 2008

Financial Stability Report 2007: Discussion with Central Bank and Financial Regulator.

Mr. John Hurley

Mr. Patrick Neary

Mr. John Hurley

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. John Hurley

Mr. John Hurley

Mr. Patrick Neary

Mr. John Hurley

Mr. John Hurley

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. John Hurley

Mr. John Hurley

Mr. Patrick Neary

Mr. Patrick Neary

Mr. John Hurley

Mr. Patrick Neary

Mr. John Hurley

Mr. John Hurley

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Con Horan

Mr. John Hurley

Mr. John Hurley

Mr. Con Horan

Mr. John Hurley

Mr. Patrick Neary

Mr. Patrick Neary

JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Wednesday, 30 Jan 2008