JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate

Credit Issues: Discussion.

Chairman

The purpose of the meeting is to discuss the credit flow issue with banking and business representatives. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I draw the attention of our guests to the fact that while members of the joint committee have absolute privilege, the same privilege does not apply to witnesses appearing before the committee.

I welcome the following: Mr. Donal Forde, managing director, Allied Irish Banks; Mr. Ritchie Boucher, chief executive, retail financial services, Bank of Ireland; Ms Patricia Callan, director, Small Firms Association; Mr. J. J. Killian, chairman, ISME; and Mr. John Power, chief executive, Irish Hotels Federation. I thank them for forwarding written submissions, copies of which have been circulated. I invite each of them to make a five-minute summary presentation of his or her submission. I call first Mr. Killian to make his presentation. He will be followed by Mr. Power, Ms Callan, Mr. Forde and Mr. Boucher.

Mr. J. J. Killian

I thank the joint committee for allowing us the opportunity to air our views on the current situation in the banking sector. The relationship between the SME and banking sectors is dominated by Bank of Ireland and AIB which, between them, have 76% of the SME market. If Ulster Bank is added to the equation, this market share becomes 92%. The feedback received from SMEs indicates this relationship is historically uneasy because SMEs are intrinsically risk takers, while invariably banks are risk averse. In recent years the relationship has improved on the back of better access to finance, if not on the back of better service from the banks.

There is clear evidence of credit tightening by the banks in recent months and a return to the "them and us" relationship of former years. Anecdotal feedback from around the country indicates SMEs are having problems with credit, loans and conditionality of lending which, in turn, are hampering their ability to do business in difficult times. The cost of credit in Ireland is 32% above the average figure charged by European banks, while the interest rates charged to businesses are 11% above the European average. One third of businesses in this country pay over €1,000 per annum in interest and bank charges, a significant burden. Surveys have indicated that 60% of companies have queried their bank charges, while 35% have received refunds on these charges. Do banks have to be challenged before fairness comes into play? The figures confirm that banks in Ireland are consistently the most profitable in Europe which is achieved on the backs of Irish SMEs.

The conditionality surrounding the securing of loans is a cause of concern. Since 2003 the instances of demands for personal guarantees against loans have increased from 51% to 62%. Most of these personal guarantees are worth at least twice the amount of the loan required. This negates the banks' argument that high rates derive from the risk involved. Another worrying trend is the growth in the retention of personal guarantees by banks after loans have been fully paid.

Credit flows to SMEs slowed significantly between June and September this year. Loans to non-property related businesses have declined, as Central Bank statistics will confirm. Lending outside the property sector in the third quarter of the year has increased by 7.3%, as against 12.3% for the same quarter last year. Credit to the manufacturing sector has decreased by 30% in the first nine months of this year. An ISME survey from last August confirms that 20% of companies were refused an extension to credit facilities, while 17% of businesses had their facilities reduced following a review. A sample taken in mid-November shows that 54% of companies had applications for new finance or extensions of existing credit refused. Over one half of these companies have been in existence for over ten years. A considerable number of companies are being refused credit facilities, while a large number which are approved for credit cannot avail of it because of the stringent conditions attached.

I will give a couple of examples. A profitable core company in business for 30 years required a loan of €100,000 for stock but was refused, despite offering collateral of land worth four times that amount. A Dublin company in business for ten years was informed by its bank that its overdraft was being reduced from €20,000 to €9,000 in the next six months. A Kildare company in business for over 40 years and with an excellent credit record required €100,000 to purchase product at good rates but was refused. There is no doubt about the current lack of credit and it is slowing the wheels of commerce. Companies which experience late payment cannot pay their own suppliers, creating a domino effect which will have a huge impact on previously profitable companies. We are seeing the impact of this lack of credit in the growing numbers of redundancies. The average payment period has increased to 65 days, while 35% of companies wait 90 days to be paid. This is because cash flow is impaired by the lack of credit from banks. SMEs have very restricted access to credit, with the result that their ability to expand and grow is stunted and they will find it increasingly difficult to hold or expand market share. Less activity on the part of these companies means reduced spending in the general economy and a negative impact on local economies. The banks need a strong SME sector but, by restricting credit, they are ultimately damaging their own business.

A number of banks have recently announced a specific fund for SMEs but ISME has yet to be convinced that this is not a PR exercise. All the most recent anecdotal evidence indicates there has been no easing of credit and we remain to be persuaded by the banks' statement that they are open for business. We accept that they have to exercise caution in their lending policies but blanket refusals to even profitable companies will hurt every aspect of the economy. The SME sector badly needs immediately available funding in the coming months, not more discussion about initiatives. We need flexibility and normal lending criteria and need them now. The banks must aggressively pursue European Investment Bank funding and make it available immediately on favourable terms to SMEs. The option of the State taking over and operating a bank, in a way similar to the ICC and ACC, may require consideration if the situation deteriorates further.

The State has again rescued the banking sector and in return for its guarantee it must demand that banks facilitate small business activity, as they have in the United States, the UK and elsewhere in the European Union. Additional lending facilities and more flexible loans must be offered to businesses by the banks if we are to stave off further closures and job losses. The economy cannot recover if banks do not support SMEs through easier access to credit facilities. Action by the banks is required immediately if further damage to the economy is to be avoided. They have a hugely important role in supporting enterprise in Ireland and it is now time for them to step up to the plate. The SME sector requires a fair relationship with the banks which can no longer view SMEs as mere borrowers; they are stakeholders that the banks can partner in helping to turn the economy around.

Mr. John Power

I thank the Chairman, Deputies and Senators for inviting the Irish Hotels Federation to make a submission to the joint committee.

This has been a very challenging year for hotels and the estimates suggest key room occupancy will fall from 64% to around 57% or 58%, at best. In addition, there has been a decline of 2% to 3% in important room yields. These factors contribute to most hotels entering the winter cash-flow trough with lower cash reserves than in previous years. As a result, there is a need for additional winter seasonal working capital, not just maintenance of the current level.

Members throughout the country, almost 80% of whom run small, family-owned businesses, tell me that the banks are not interested in increasing facilities for hotels. In some cases local bank managers have been asked to seek means of reducing exposure to the hotel sector. This anecdotal evidence is substantiated by the Central Bank's figures relating to sectoral credit; they show that in the year to September 2008 credit growth for hotels and restaurants was only 1.3%, compared to 12.9% for the overall private sector.

Members also inform us that where loan repayments have been rescheduled, banks are insisting on higher rates of interest, charging facility fees, requesting increased security and guarantees and, in some cases, valuations of hotels. All of these are expensive additional requirements. Banks have admitted on a number of occasions that where they once competed with other banks to provide initial credit facilities, they have taken the opportunity of the current environment to re-examine and renegotiate margins.

While the federation welcomes the statement by the Minister for Finance on Sunday regarding the recapitalisation of the banks, we believe this funding should result in additional credit facilities for the productive sectors of the economy, including hotels. It should not be soaked up to improve the balance sheets of banks without loosening the credit squeeze, as was the case in the United Kingdom. This may be good for the banks but it is not efficient from the national economic perspective. The maintenance of hotel and tourism business infrastructure necessitates a more supportive lending approach.

Banking does not merely relate to profit-oriented companies; it is a fundamental business service and an element of national economic policy. Transparent mechanisms must be put in place to ensure any injection of funds will result in a meaningful increase in the availability of credit to businesses in the real economy. Recent welcome announcements by banks have referred to increases in funding for enterprises in the hotel sector but, to date, there has been no evidence of a loosening of availability of urgently needed seasonal facilities. The availability of additional seasonal funds must be confirmed to enterprises in the next two to three weeks. That is the nature of this seasonal sector and the funding would be of limited use if we had to wait until March or April for the position to improve. There is a great urgency to this matter and we call for the immediate establishment of an SME credit monitoring committee to report within two weeks of the end of each month on the volume of additional lending to SMEs, including the hotel and guesthouse sector.

It is also urgent that the banks' lending and loan application skills, which have been honed in the past 13 or 14 years of growth, be adapted to the current economic circumstances. The assessment culture, which in the past was based on growth business models, will be redundant until the economy returns to growth. Lending assessments must reflect the current realities of the economic decline. The objective must be the survival of businesses. If necessary, there should be risk sharing with Government and the banks to increase lending to sectors such as the hotel and guesthouse sector. We have in mind initiatives such as: loan guarantee schemes to fund additional requirements for the winter seasons; a supportive approach by banks to serious cases of loan difficulty; and a clear statement by the Government, as happened in Northern Ireland, of an easing of the tax payment requirements, including commercial rates, to facilitate the cashflow of enterprises and risk improvement for lending agencies.

The Government must show clear leadership. In the absence of adequate lending by the banks within the coming weeks, the Government must establish a direct lending mechanism to enterprises or directly fund lending through the current banking system. We no longer have organisations such as the Industrial Credit Company, Fóir Teoranta or the ACC directly implementing State lending policies without strict criteria. Their function needs to be restored.

I thank you, Chairman, for inviting us to address the joint committee. I trust your report of this critical matter will confirm the need for urgent and effective leadership, with actions to protect very important industries, such as our own. The hotel and guesthouse sector employs approximately 60,000 people, brings enormous benefit to the Irish economy and impacts on almost every region of the country.

Ms Patricia Callan

I represent our 8,000 small business member companies, all of whom employ fewer than 50 people. They operate throughout the country and in all sectors of the economy. I am sure all members realise the extent of this problem. I recently sat through a Dáil debate on this issue. We have heard words from the Tánaiste and Minister for Enterprise, Trade and Employment, Members of the Oireachtas and the banks but we need delivery. I must stress the urgency of the problem. We are losing 700 jobs per week because businesses are closing due to lack of money. I know we are in a recession and things are changing but we must keep our eye on the objective of having an economy at the end of this crisis and not merely a financial sector.

We welcomed the measures taken to protect the banks because we felt they would allow credit to flow back into the rest of the real economy. Unfortunately, so far there is no evidence of this happening. We welcomed the announcements by individual banks that they were putting aside extra SME money, but we wait to see if that money is delivered to the businesses which need it.

With regard to finance from the European Investment Bank, its next scheduled meeting is in March 2009 and no decision can be made until then. For those reasons, I call on the committee and the Government to make the European Investment Bank wake up and realise that March is not soon enough and that we are in crisis. If a €15 billion fund has been established it should be available to our banks, which want this money but cannot get it.

The promises that come with recapitalisation will not be fulfilled until January or February. We must look more immediately to Government guarantees of small business loans. Such a measure has been introduced in recent weeks in France and Germany and has operated in the past in the United Kingdom. Much more work needs to be done on the idea that the Government will guarantee small business loans to the banks, which will make them less risk-averse. We originally called for an operational small business fund of €600 million, and that amount in the form of a loan guarantee scheme will guarantee us that we get this money directly to small businesses. If we can do that now it will mean businesses survive and it is also part of our job maintenance strategy. When we lose jobs it is very hard to replace them. As director of an organisation that deals with entrepreneurs all the time, I can tell the committee that people who set up still go out of business. Even in the boom times approximately 40% of small businesses failed in the first five years. We have very solid businesses which have been around a long time, understand recessions and need a helping hand through this. If we can deliver it for them we might have an economy at the far end of this recession.

The other fact that has come to us in the multiple surveys and analyses we have done with members is that the Government sector is a slow payer. This causes pressures. The deliberate delays in giving and paying for contracts have knock-on implications across the board. Rather than allow them to shore up their cashflows, it is imperative that direction is given to the Government that it follows the lead of the UK Government and introduces a ten-day payment period on its own bills. That is something simple to do that would have fantastic results in getting cash moving around the economy again. That is a key issue on which we hope the Oireachtas joint committee will support us.

The key is the idea that banks must make decisions on businesses on the basis of risk, and we accept that. However, the strong feeling among our membership is that the pendulum has swung too far back across from being too loose and free. That is why people are particularly frustrated. In recent years, matters such as personal guarantees are arising as a matter of course. People in this country cannot understand that it means something to have a limited liability company. If one has to give a personal guarantee it makes a nonsense of our entire corporation protection. Yesterday I took a call from a gentleman in Galway who was livid about this issue. He has been in business for the best part of 40 years and has never given personal guarantees. Although he has more than enough security in assets, nothing could be done, but he would be given any amount of money if he gave a personal guarantee. That must be seriously examined. The question of how long these personal guarantees last has been raised as an issue. People often sign them for a particular project but they might be much broader than that and come back to haunt them at a later date. We need to watch that issue.

We recently did a survey which showed that in the last six months the cost of working capital has increased for 51% of our member companies and the cost of investment finance for 39%. While business banking does not follow the interest rates set by the European Central Bank, there needs to be much more transparency around charges and rates. It is not good enough to say businesses negotiate locally. We need clearer rules and guidelines around all those matters.

I re-emphasise that numerous people have contacted us with a litany of examples I can circulate to people. It includes everything from large overdrafts of €400,000 down to €4,000. There seems to be a major divergence between what people are told at branch level and head office, and where decisions are made. There is a job of work to be done around communications generally. As an economy the biggest issue is trust. Notwithstanding my colleagues from the financial institutions present, in whom I have great faith, people do not trust what they say. An example is the recent announcements on SME financing. That is why it is really important we establish this round table on small business with the Central Bank, the Financial Regulator, the Departments of Enterprise, Trade and Employment and Finance, SMEs and the banks to legitimise what is happening on the ground. If we do this, people will believe people when they say lending is at the same level it was or accept the rationale offered. This is the reason in terms of the national economy we need to have some credibility at all levels. We strongly advocate this approach.

I thank the Chairman for the invitation. We welcome the debate. I hope, if we maintain this pressure, we will deliver for businesses and their employees.

Mr. Donal Forde

I thank the Chairman for the opportunity to be present and outline the role we in AIB are playing to support the SME sector through these difficult and testing times. We have a relationship with 150,000 SME customers, about one in two of all businesses in Ireland, and are the lead provider of credit for the sector. That business is managed through a network of 1,200 relationship managers who service and advise business owners in every community. Our 150,000 SME customers are the heart of our franchise in Ireland. We have a substantial interest — indeed, self-interest — in ensuring we provide them with the best possible level of credit support. When I presented to the joint committee earlier this year, I wanted to make it clear at that point that AIB was doing this and that we were very much open for business. In the intervening period, the crisis on the international financial markets has intensified and economic conditions at home have deteriorated significantly but, notwithstanding these developments, the volume of AIB's outstanding loans to the SME sector has grown to its highest level ever and is continuing to grow. We were open for business in June and are still open. We are keen to meet the needs of our customers wherever and whenever possible.

On the provision of credit, we have €9.5 billion in SME loans outstanding, an increase of 6% on the corresponding period last year. We have €3 billion outstanding in overdrafts, an increase of 11% on the corresponding period last year. Our number of new credit sanctions has grown by 20% on the corresponding period last year. In addition, we have just launched an extensive support package for our SME customers, within which is a commitment to maintain the figure of €3 billion outstanding in overdrafts, while making an additional €1 billion available in working capital. This will be done through loan restructuring and interest and capital moratoria. We have committed to a €200 million fund to support new business start-ups. These numbers point to the depth and substance of our support for the sector.

I refer to the cost of credit. The global financial crisis has completely distorted the order and structure of money markets and caused a substantial increase in the underlying cost of funds. Many of the factors involved are poorly understood in all quarters and frequently and wrongly attributed to an increase in the bank's margins. AIB's margin on outstanding SME loans has not increased in the past 12 months and we constantly strive to make sure the dramatic changes that have taken place in the underlying cost of money are set out clearly and transparently for our customers. We have elaborated on each of these factors in detail in our submission to the committee.

On the conditionality of credit, AIB has not changed its credit criteria or standards for SME lending which remain the same as they were for a number of years. Each day relationship managers work to support sustainable businesses and provide credit facilities for them, as is obvious from the figures I have shared with the committee. However, given the difficult economic conditions and the uncertain economic outlook, it is inevitable that more businesses will struggle to demonstrate they are creditworthy or, in some cases, viable in changed and difficult economic times and we will not be able to accommodate such businesses to the degree they would wish. Where difficulties arise, we ask businesses to engage with us at an early point and our disposition is to be as helpful, supportive and rational as we can in the circumstances. The SME sector is at the heart of our business in Ireland and our objective is to support the sector in every way we can in the interests of our customers and the economy, as well as in our own self-interest. We are pursuing this through the provision of more loans and overdrafts than ever before and by a comprehensive support package which we recently launched. We pursue our objective by maintaining the same credit margin at a time when margins are widening the world over and trying to explain what is happening to the cost of funds in a clear and transparent manner. We are leaving our credit criteria unchanged and working to support sustainable businesses in any way we can.

We are getting the balance right. I assure the committee that we continue to act in the best interests of the sector and the broader economy.

Mr. Ritchie Boucher

On behalf of the Bank of Ireland group, I thank the Chairman, Vice Chairman and members of the joint committee for giving me the opportunity to address some of the concerns raised by their constituents and the wider business community.

Previous speakers have identified the vital role SMEs play in the economy. Bank of Ireland recognises that 97% of businesses are SMEs and that they contribute almost €10 billion in VAT, corporation tax and income taxes in Ireland. Another important statistic shows that in the past 15 years Ireland has become an entrepreneurial country. A recent global entrepreneurship monitor shows that Ireland is second in the European Union for early stage entrepreneurship, with 8% of the adult population engaged in entrepreneurial activity.

Bank of Ireland is a broadly-based financial institution and a core participant in the economy with a critical dependency. We employ 13,500 people in Ireland and have over 600 business bankers and specialists spanning 276 locations. We are in every centre of commerce in Ireland and continue to open new branches, including ones specifically catering for business customers, the most recent of which is a new business centre at Greenogue industrial estate in west Dublin. We have nearly 1 million personal account customers and 120,000 business account holders. We have 595,000 credit card and 195,000 mortgage accounts. Bank of Ireland is number one in the market for consumer banking, number one for mortgages, number one for credit cards and number two for business banking, as my colleague Mr. Forde pointed out. We have a desire and an ability to be number one for business banking in Ireland and have invested heavily in our propositions.

Previous speakers identified the issues facing the SME sector. There has been a massive slowdown in the world and the economy. There have been particular issues with the provision of credit, not just in the financial sector but between businesses. Sales and order books are down. Some 55% of our customers, recently surveyed, showed sales and order books to be down year-on-year. A specific issue which we believe has exacerbated some of the credit issues in the economy has been the reduction of credit insurance limits which impact on the ability and willingness of customers to provide credit for each other. The weakness of sterling is a very significant issue, particularly for our customers in Border counties who export to the United Kingdom. It has also significantly impacted on the hotel sector, while our SME customers in the retail trade have to watch their customers drive past them to do their Christmas shopping in the North of Ireland.

Costs and wage inflation have been significant issues for SMEs in the past three years but for the wrong reasons, namely, the decline in the economy; they are now down significantly and much more manageable. Cash flow and working capital are single biggest issues facing SMEs. That has always been the case and always will be but it will be exacerbated by the extent of the recession.

Bank of Ireland has a desire to be the number one bank in Ireland. To achieve this we need to be the number one bank for the SME sector. We want to and will support viable businesses but must recognise that some are not viable and cannot be supported. My colleague from the SFA has pointed out that 40% of start-up businesses fail in good times and that figure is rising. However, it is very important that we have an economy when we emerge from the current recession. Bank of Ireland has a huge stake in the economy. We need to recover our costs and make a profit from our lending activities and provision of business banking services in the long term. We provide transaction free banking for start-up businesses for the first two years because we recognise the issues they face. We hope these businesses will value the services we offer and recognise that over a period of time we need to charge for them. Our interest margins must remain highly competitive, in line with our aspiration to grow market share, as have done.

A challenge faces SMEs and we want to get our decisions right in supporting them. However, we cannot support some customers. We will make wrong decisions, deny credit to customers who deserve it and provide it for customers who, ultimately, will not be able to pay us back. We will make mistakes but should make reference to the absolute statistics. In November Bank of Ireland opened 500 new business accounts every week, 350 of which were business start-up accounts. On average, we continued to deliver €125 million each week to SMEs by way of term debt. Our overdraft levels have remained consistent at roughly €2.6 billion and there has been greater usage of our overdraft limits in this period. We recently announced business support funds of €250 million specifically for SMEs which follow other funds aimed at specific sectors which we believe have growth potential. In this regard, we have provided €150 million for the nursing home sector and €80 million for medical professionals. Our approval rate for loan applications to our central credit department remains in excess of 80%.

We are progressing and working hard with the European Investment Bank, EIB, which we see as an important source of funding. Bank of Ireland has availed of over €1 billion in support funds from it to loan to its customers over a period of many years. We have negotiated strongly and actively with it on these new funds. We share some of the frustrations of our customers about the pace of progress in moving towards the next fund. However, we caution that while a new fund from the EIB will be helpful and beneficial, it will not be a panacea for all of the lending activities that must take place.

Bank of Ireland is very conscious of the vital role the SME sector plays in the economy; a healthy SME sector is vital to the long-term success of our business. In our own interests, we want to grow our market share in the sector. Bank of Ireland has publicly stated Ireland is its core franchise and any steps we take to reduce the size of the balance sheet for the overall group will not be at the expense of that core franchise. We know the current economic conditions are difficult and that a period of adjustment is required before growth resumes. This period of adjustment requires Bank of Ireland to be supportive of viable customers and open to business for new, sensible business opportunities.

Chairman

I thank Mr. Boucher and all of the representatives for their presentations. There appears to be disagreement between those representing small businesses and the banks. How can we help east and west to meet? The message from the SFA and Irish Hotels Federation is that there is a lack of lending facilities. However, the banks tell us that lending facilities are still being provided. Has there been any change in lending criteria in the past year? Have outside factors impacted on what appears to be happening to a number of people who are seeking funding?

Mr. Donal Forde

A number of very substantial changes which have taken place in the broad economy are central to this issue. SMEs have a problem with late payments and all that goes with them. Creditor days are extended and cash flows stretched. These must be managed. As a result, the business environment is much more difficult. AIB has not changed its credit criteria but there are changes which help to inform the apparent difference in views. First, even those businesses which are approved reasonably quickly are required to present much more detailed proposals. We are a lot more challenging of their assumptions and the cash flows which form part of them. We are much more testing of their plans and outlook for the next 12 months. This is absolutely appropriate and I am sure no member of the committee would see it as other than appropriately cautious and prudent. I can empathise with our customers who are on the receiving end of these requirements because they must feel very challenging and rigorous. However, that is not a description of tighter credit, which is an inappropriate term.

Second, in times past banks had a great deal more latitude and discretion in being tolerant of people who got into difficulty. Regulations have changed. A year ago the capital requirements directive — Basel ll — was introduced. There is not an SME which does not know about it. Previously, if a loan went out of order, the bank and the customer could determine the timeframe within which it would be sorted out. The new regulations stipulate that a customer whose account is out of order for 90 days must be classified as being in default. This creates real problems for the bank because it requires capital and cost from our perspective. It is a huge issue for a customer to be classified as being in default because it casts a shadow on his or her credit worthiness for a long time. Very intense activity takes place when an account goes out of order to find a solution to the problem within a short time. A customer who is on the receiving end of that activity feels the bank is putting pressure on him or her. However, it does not have any discretion in the matter, for the reasons I have outlined. That is a change in the environment. It is also labelled "tighter credit" but is, in fact, a regulation to ensure things are kept in proper order from everyone's perspective.

Third, because of media coverage of the current difficulties, we are contacted by customers who are fearful that we will not renew their overdraft facilities. There is no basis for their fear. We have made it very clear that the aggregate overdraft figure of €3 billion will remain and have been reassuring customers that they have no reason to fear. Their anxiety stems from media coverage and a sense that the world is changing dramatically.

These three factors create an environment which is more anxious and in which there is a great deal more stress. However, it is not correct to speak of a change in lending policy or a tighter supply of credit from the banks. The statistics I have shared with the committee reflect the reality. Outstanding loans and overdrafts are greater in number. Any objective analysis must start with that fact.

Deputy Richard Bruton

When you speak of the banking crisis in the terms you do, there are many banks with many different issues and problems. I am speaking for AIB. I am saying unequivocally, on the record, that the banking crisis, as you describe it, is not impairing the conduct of our business in Ireland for which I am responsible.

Deputy Richard Bruton

None of these people is an AIB customer.

Mr. Donal Forde

You were referring, I do not doubt, to anecdotes, some of which have been mentioned this morning. I am sure some of them are valid and true, but many of them are cases where customers will say they have very substantial assets to back X or Y, but the value of those assets is a matter of judgment. You cannot comment on any one of those cases, I fear, without getting into the specifics of exactly what is being represented and what is reality. I am not saying there are not problems out there. Absolutely there are. We are having them every day. I am as anxious as you are to start from a standpoint where the notion is recognised as untrue that banks, or AIB specifically, are substantially reducing credit. That is not true. The numbers speak for themselves. There are many other issues to speak of. It is wrong to suggest that the banking crisis as it relates to AIB is impairing business. There is so such instruction to me from the AIB Group. I have every latitude to grow my business if I can find good, solid, viable, sustainable businesses to invest in.

Deputy Joan Burton

When the Minister undertook the €440 billion guarantee by the taxpayer to the banks, there were quite a lot of statements by the Minister then and subsequently that the purpose was not just to rescue the banks which had come and asked for support, particularly in relation to liquidity, but that the liquidity made available and guaranteed by the taxpayer would be available to the general economy, to small and medium businesses and to larger business around the country. The anecdotal evidence we hear around the country involves consistent, verifiable reports that small and medium businesses in different sectors, which this time last year were in a friendly positive relationship with their managers, are being greeted with a tougher reception. Both banking representatives have acknowledged that is the case and, given the current conditions, we understand that, but the heart of the guarantee advanced by the Government and the taxpayer was to ensure that when the banks were given liquidity, it would flow into the economy. They must be more convincing about what is happening. I acknowledge the presence of Mr. Farrell of the Irish Banking Federation. The anecdotal reports and evidence furnished by people contacting Deputies and political parties who have long relationships with various banks, including those represented at the meeting, is that the terms and conditions relating to the amount of overdraft or loans, the cost of facilities and facility changing, personal guarantees and the period for which such guarantees are required and the overall assessment of the business and the underlying assets that may be offered as collateral, have become much more difficult.

I agree there is a sense of fear but we are trying to find out the steps that need to be taken to deal with the issue and remove it. References were made to the European Investment Bank. Irish banks rarely engaged with the lending structures of the bank. I am delighted that positive negotiations are taking place but why did it take so long? Was it because the profit available through the use of that lending mechanism was less than that available through more traditional mechanisms?

A number of sectors are experiencing structural problems. The hotel sector is engaged in important activities but its collateral is mostly rooted in property. Is the crash in property values the critical difficulty for this sector in that there may be a perception that there is excess capacity in an industry facing difficulty? If so, is there a structure through with the difficulties can be addressed? The banks, no less than ourselves, will acknowledge tourism is vitally important in generating foreign exchange but they also have a difficulty. I do not know if relationship managers, counsellors or bankers get to watch "It's a Wonderful Life" on Christmas Day but Frank Capra said it all in the 1930s when he said banks could squeeze the life out of people or throw them a lifeline. We do not want to return in five years' time to review what did not happen at this meeting. Instead, as in the film, we should be able to look back on all the good that came out of it.

In the context of the guarantee, the Government stated it had spoken to the banks several times on the subject of structures. Reference has also been made to a loan guarantee scheme relating to credit insurance. To what does this refer? Mr. Boucher attended a previous committee meeting at which I asked him about rolled-up interest. In his presentation today he said €50 million in funds was being made available to SMEs, €150 million for nursing homes and €80 million for medical practitioners. Is that activity or property-based lending?

The Governor of the Central Bank believes banks are continuing to lend to the construction sector in order to ensure projects are finished. That is a perfectly feasible strategy but it leads me to believe that, while credit continues to be advanced, it is directed only to certain areas and is not available to the people who have made presentations this morning, at any rate not in the amounts necessary for the proper functioning of the economy. Am I correct?

Mr. Ritchie Boucher

The Deputy asked whether the nursing home lending was property related and the answer is yes because we are financing the asset. The medical fund is primarily for medical equipment but also, to a degree, premises. Funding for a medical practice is not typically for working capital. It is our desire that, where we are halfway through a project with a customer, be it a housing scheme or an apartment block, it is in our interests and that of the customer that we see the project through, even if profitability is likely to be much lower. It does not suit anyone to leave an apartment block half built; we gain stronger collateral by completing it.

As I said, Bank of Ireland separates property lending from SME lending and our deleveraging will not be at the expense of our core franchise. Unlike my colleague who runs our UK division and those in the capital markets division, I do not have restrictions on the amount of lending in which I can engage. However, lending demand, particularly for productive investment, is low in the economy.

Deputy Burton asked several questions about EIB schemes, of which our competitor banks have availed for some time. By their nature, they are not for working capital but for periods of between three and five years and more in the nature of term loans. In conjunction with the EIB, we have been trying to deal with some of the difficulties we and our customers face in drawing down new EIB scheme moneys. My colleague, Mr. Damien Young, is charged with responsibility for dealing with this issue. The EIB has been receptive to our suggestions and, we believe, taken them on board. We cannot speed up the process of EIB lending and must bear in mind that there will be specific restrictions on what can be done with the money. I worked in the ICC a long time ago, at which time EIB lending was very important to the economy. However, it had to be for a productive investment with specific criteria relating to job creation and so on.

There is overcapacity in the hotel sector which faces specific issues due to the weakness of sterling vis-à-vis the euro because this matter is causing severe difficulties. As banks do not like surprises, we encourage our customers to come to us early when they forecast that there will be issues with their businesses. The more we know and the earlier we find out, the more we can work with our customers.

We welcomed an initiative by John Power and the IHF early this summer. The IHF saw that activity levels would be low during this traditionally strong season for the hotel industry and held seminars for members, encouraging them to approach banks with their financial problems and need for an overdraft. I hope the Bank of Ireland has worked with its customers in such initiatives. It did not wish to participate in some of the growth in the hotel sector in the past three to four years. The vast majority of our hotel customers are those Mr. Power described as three star, family-owned Irish hotels. We still see them as very viable businesses, although they have suffered significantly from drops in tourism revenue. Nonetheless, they still provide important services in their communities; weddings are held there, with the annual GAA dance, from which good revenues come, but, undoubtedly, some of our customers have been over-exposed through a rapid decline in spending in the economy, fewer tourists coming to Ireland and other issues.

It is difficult to think of a Government guarantee scheme that would be available to everyone; it would be difficult to administer and would not work. However, I believe there can be guarantee schemes for sectors experiencing readjustment, as such schemes have been used before, and where there are short-term issues. The Government, the ultimate guarantor, can recognise short-term issues that can be dealt with. It took a specific initiative to deal with a crisis in the pigmeat industry; support was given that recognised the industry as important and viable. It was hit by a hammer blow but it was considered it could recover. We welcome this approach and see it as our duty to support our customers in that industry during a difficult time. Government guarantee schemes need to be targeted towards where they will be used.

Deputy Joan Burton

Mr. Boucher is speaking as if he deals with businesses in sectors; the same may be true of Mr. Forde also. He refers to nursing homes, the hotel industry and medicine as specific sectors. A person who runs a business connected to retail merchandising and so on in an industrial estate in the greater Dublin area may have heavy rent commitments. He or she may be worried about what 2009 will bring. What should small diverse businesses do? Should they go to their bank and discuss their credit and other requirements for the coming year? Are some people receiving notices that their overdraft facility which they may not have fully used has suddenly been cut? Members of the committee are trying to get a sense of the banks' strategic approach. What is their advice to a customer who is moderately okay but, like most people in business, concerned about how things are developing?

Mr. Ritchie Boucher

Specific sectors sometimes have specific credit dynamics. It is important that our colleagues on the front line know the type of questions a nursing home owner, for example, will ask and what type of loan we can provide for that business. We use our knowledge and expertise to spread credit across our business.

Someone once said we had nothing to fear but fear itself. We sense that some of our customers are afraid to talk to us.

Deputy Kieran O’Donnell

Are they afraid of the answer they might get? Out of sight, out of mind.

Mr. Ritchie Boucher

It is a failure on our part if people feel they cannot talk to us. Every problem must be discussed at some point, as it will not go away. We encourage our customers to come and talk to us early. We encourage them to work with their financial adviser, if they have one. We encourage them to talk to us about the viability of their plans and be realistic about the prospects for their businesses. Because we recognise that growth will be a problem we want to discuss the viability of their businesses. I have two messages. First, if customers have issues, I ask them to come and talk to us. Second, we are open for business. My front line bank colleagues have sales and new account targets at which I look every week. I question my colleagues charged with responsibility for these areas of our business. They tell me that when they cold-call a local accountant, for example, looking for business, they are greeted with surprise that we are still open for business. I struggle to figure out how we can all work together to get the message across that banks are open for business. We are not open for every piece of business that comes our way, as we will decline propositions. We will tell some customers that we can no longer support them.

Deputy Joan Burton

At what critical point would Mr. Boucher tell a business the bank could no longer support it? Is there a key factor?

Mr. Ritchie Boucher

There is a range of issues. A business may have expanded too rapidly and be unable to support its debt. We work with customers. A specific aspect of our €250 million scheme is to convert previously revolving credit facilities into term loans. The problem may simply be one of adjusting the repayment capacity. Also, a market may have disappeared. Some businesses are very dependent on the construction sector for parts of their business. As very little building work will take place in the next two or three years, such a company will not survive. I acknowledge that we will make mistakes. We may fail to support businesses which deserve to be supported and lend money to people who will fail. We are not perfect.

Deputy Seán Barrett

Could we hear from the representatives of firms in response to what these two gentlemen have said? I am confused.

Chairman

I will allow Deputy McGrath to ask his question first.

Deputy Seán Barrett

It would be worthwhile to allow them to respond to the points made.

Deputy Michael McGrath

I, too, welcome the representatives and thank them for their contributions. I want to make a few points and pose a few questions.

It is difficult for us to separate the issues involved in the banking system from the recession in the economy and its impact on every business. I am very interested in knowing the extent to which the demands of business on banks have increased, given that there is a significant problem in consumer sentiment, the banks are monitoring the current accounts of every business very closely, those current accounts have, in general, deteriorated and the banks have responded by taking a far more rigorous approach, as Mr. Forde said. It is difficult to know the extent to which businesses are going to the banks with new ideas and initiatives and the banks are refusing. Is it that the needs of business have increased dramatically and the banks are taking a conservative or cautious approach to them? It is difficult to separate these issues but we must tease out the matter as best we can.

Deputy Bruton raised an interesting question on loan to deposit ratios which the bankers addressed. They said as a group that there would be a reduction in the ratios but that has not happened and will not necessarily happen in Ireland. There appears to be a policy decision in the banks to revert back to the more traditional system of relying on deposits rather than accessing credit on wholesale markets. Mr. Forde referred to the dramatic changes in the wholesale markets in recent months, in particular, which has posed difficulties for him. He should outline to the committee the practicalities because many do not understand them: how difficult it has been to access credit, the change in interest rates and how this has impacted on the services and products he can provide for business.

I want to mention the "R" word and I do not mean recession. I hope the Chairman will allow me to ask the bankers whether a recapitalisation of the banking system would help improve credit flow and the availability of finance to the SME sector. I know they will not comment on the position in their own banks, but perhaps they might give us an industry-wide perspective as best they can on whether such a recapitalisation will directly help to improve credit flow in the system which is our ultimate objective.

I would also like to ask about some of the figures presented. Mr. Forde, in particular, gave very specific figures for the levels of loans and overdraft facilities offered to SMEs. The figures for loans were up 6% on the corresponding period last year, while the figures for overdrafts were up 11%. These are incontrovertible facts, but is there a distortion in the figures due to the construction sector? Regarding the increase in the value of the loan book, in particular, without going into the detail of the sectoral statistics of the Central Bank, are debts rolling forward while interest accumulates? This presents a picture of an increased loan book industry-wide, but is a distortion caused by construction finance? It would be very helpful if the representatives commented on this.

How quickly do the banks hope the EIB's €15 billion fund will work its way into the system? It will not help on the overdraft facilities and working capital side, but where small businesses have projects that require funding for a three to five year period, how quickly can we hope to see the money flowing through the system?

Mr. Donal Forde

I thank the Deputy. I will take the questions in reverse order.

Mr. Boucher has spoken about the approach of Bank of Ireland to the EIB funds. We have been engaging with the EIB for longer than Deputy Burton might give us credit. The discussions have been taking place. Later this week or early next week we will have some indication from the EIB on the quantum of money that will be made available to Irish banks, particularly from AIB's point of view. With respect to the quantum of money that will be made available to Irish banks, my understanding is that it will be a little disappointing. It will not be as much as we hoped for and I am not sure it will be available as early as we would wish but we are told we will hear directly from them at the end of this week or early next week. We are pressing to get as much as we can. Deputy McGrath's comments are well made. They are about project and investment finance and I fear it will not do much to alleviate the working capital pressures we have been discussing. He suspects this is where the distortion in the numbers is. The numbers I prepared cover SMEs without any element of construction finance. They are sanitised to remove all construction finance. The numbers are absolutely true and we forwarded them as a record of what we were doing with SMEs. They are not tainted by construction finance.

With regard to the recapitalisation of banks, part of the difficulty in the debate is that banks are banded together as if we are all the same. We are not. AIB has made it clear it does not believe it needs capital and that additional capital will not do anything for the business for which I am responsible. I reiterate there is no constraint on my business from the AIB Group in engaging in as much lending as I please. We have made it clear that we can accommodate the rightful emphasis on reducing the loan to deposit ratio and our dependence on the wholesale markets. This can be done within a group such as AIB which has diverse businesses without any impact on the Irish business. That is the strategy we are pursuing and I have given the numbers that validate it. I am sure that is not the same for all banks but it is for others to account for themselves.

With respect to the changes in the money market, we went to some lengths in the detailed submission to the committee in dealing with this because when one talks about the price of credit and margins, there is a great deal of confusion and misunderstanding and we tried to set out the position. Some of it is technical but I hope we have done a reasonable job in trying to explain it in simple terms. I refer to three key points. First, the benchmark all banks use to price money for SMEs is the three-month rate that applies in the market. Historically, it was a one-month rate but there were changes in the liquidity requirements of banks a year ago, which I do not criticise because they were good and timely and helped banks' position themselves through these difficult times. They require us to make sure loans are matched by at least deposits beyond one month, hence the figure of three months. Many businesses are frustrated with us and asking, "Why are you asking me to base my loan on the basis of three months rather than one month?"

It depends on the amount. The larger the amount the higher up the chain it goes. A low amount would be dealt with by the local branch manager.

Mr. J. J. Killian

I thought I might leave the room in a more optimistic mood but I share the disappointment of Deputies Bruton and Burton at what I am hearing. The two main banks which control almost 80% of the SME sector utter the same mantra that they are open for business but anecdotal evidence from thousands of companies to which we listen on a daily basis completely contradicts what they are saying. The problem is conditionality because, although the banks invite businesses to go to them, the terms they impose cannot be accepted. We all agree that times are difficult but the banks are making them more difficult. The playing pitch is much tougher and the banks are making it worse. The cost of overdrafts and term loans and the requirement for personal guarantees mean the playing pitch is not what it used to be.

I do not agree with Ms Callan that there was a time when the banks were free and easy in their lending because that was never the case. However, they are making it very difficult. Deputy Burton will agree that the evidence from companies all over the country is that the scenario has changed. Relationship managers are not the people they were; companies are finding it very difficult to get credit and do not feel they can do business with their bank. Napoleon was fond of saying war was 95% information. One of the great fears relates to a lack of information. The Government and the banks have been vague on recapitalisation; we do not know what will happen and it looks as if there will be months of negotiation and prevarication. The firms which are struggling which may not be able to pay employees next Friday cannot waits for months for the discussions to be completed; they need flexibility and common sense. They need banks to engage in old-style banking. These are strange times in Ireland. Banking is not about shareholders anymore; banks have a role to play in the public interest. It is time for them to step up to the plate in that regard, as companies cannot wait.

Mr. John Power

To reflect what Mr. Killian said, the risk profile has changed dramatically. The criteria used as recently as early 2008 no longer apply. As Deputy Burton said, there are specific structural issues in the hotel sector, a heavily borrowed, capital-intensive sector in which profit margins are low. This structure made sense during a period of growth in the economy but it is no longer growing. We need additional funding and support to get us over this hump. However, the model being used by banks does not recognise this. It is not that people have difficulty maintaining the same levels of overdraft facilities as last year, although I have heard of such cases. There is a need for additional funding due to economic circumstances. We will either emerge from this with a lean, efficient hotel sector or with many casualties. The banks, the Government, the Irish Hotels Federation and the industry must work together to get through this period, but this issue has not been addressed.

We hope for the provision of additional funds to improve liquidity in the banking system. Many members of the Irish Hotels Federation, other than those represented today, are funded by banks. Some members have attitudes very different from those expressed. Everyone faces a big challenge that cannot be measured in the same way as in the past. If the committee does anything, it should send a strong message that the hotel industry is in survival mode and needs a survival strategy, not necessarily a good lending strategy. We are not asking the banks to take risks but believe the State, the banks and the industry have parts to play in ensuring we come through this period. It is urgent that action be taken due to the seasonality of the business.

Ms Patricia Callan

I want to pick up on four specific points. What struck me first was that while both banking representatives said we had become more rigorous technically, that was not the same as it being difficult to get finance. A small business owner or manager being put through the mill might previously have telephoned the bank on a Friday and had a request for overdraft facilities granted verbally. It was not necessary to fill in forms but that has changed; that is why people think the process used to be easy but is not any more. The details of cash flows, business plans, delays and so on are all part of the problem in people's minds — they are also part of the problem in reality.

Mr. Forde has mentioned that every business person knows about the Basel accord on banking supervision but nobody I have spoken to has heard of it, including many business journalists. I have been explaining it to people in recent weeks. There should be a national education campaign because it is tied up with this mess.

Mr. Boucher has said the banks cannot gain on normal working capital. Is that correct?

Mr. Ritchie Boucher

We cannot gain on overdraft and revolving working capital. As part of one's submission one had to identify the margins one typically had in this type of lending. We confirmed in our application that we would not increase our margins in the use of EIB funding. That is part of the application process.

Deputy Kieran O’Donnell

With normal working capital one cannot do so. A permanent increase in working capital is mentioned. That is the nub of the issue.

Chairman

Deputies Chris Andrews and Morgan may speak. We will then move to the next section.

Deputy Chris Andrews

Day in, day out small businesses come to us to express serious concern about the effects their dealings with the banks are having on their businesses. Then one reads the submissions from the banks and it is bewildering to me and many others that there is such a major contrast between the two positions. When one considers the profits made by the banks during the years were made on the backs of small and medium enterprise owners, it is time the banks listened to the Minister for Finance's call for patriotism. They should act in a patriotic way but are not doing so. I know there are difficulties but when things turn around, the banks will be the beneficiaries of having made a commitment to small and medium enterprises. Nobody suggests they support weak businesses but people are asking for an extension to or an increase in overdraft facilities. Businesses which normally have payments to make in January may not be able to make them until March if they do not receive their own payments. Therefore, banks should oil the wheels in that regard.

There is a common perception that business has frozen and that the banks need to get the message across that they are open for business. Bank of Ireland and AIB are two of the best students in the class in that regard. The AIB submission states it has €9.5 billion outstanding in SME loans, an increase of 6% on the corresponding period last year, and €1.3 billion outstanding in overdrafts, an increase of 11%. However, the Central Bank states that in the third quarter loans outstanding to non-property related businesses declined between June and September. In the context of recapitalisation and the possible mergers of banks, will the stronger banks be in a position to take on the weaker ones?

Chairman

That is a matter for another day.

Deputy Chris Andrews

As Deputy Bruton said, some banks are in a difficult position. The ECB has stated it will not make further cuts to interest rates if banks do not pass them on. Will the Irish banks be responsible for the ECB deciding not to make any further cuts or will they pass on interest rate cuts as they are made? As Ms Callan said, companies are looking to do business and develop and expand and the banks need to give them the message that they will work with them.

Deputy Arthur Morgan

When do the bankers expect funds to arrive at the doors of SMEs from the EIB? Do they appreciate that cash flow issues mean credit between companies is a huge problem? Some of the companies to which I refer are very solid, long-term businesses but are being refused credit. Do the bankers accept that is the case? Do they also accept that the current state of affairs is only a bottleneck? It means businesses are struggling to survive and unemployment is growing for a daft reason. The bankers say the criteria for lending are no different but the conditions have changed. How do they explain the difference to somebody running an SME? Also, why are bank charges so high?

How did SMEs get this so wrong? Is the Small Firms Association being misled by its members? According to the banks there are no difficulties and it is a case of business as usual. Perhaps some of the witnesses can explain where this is going wrong.

Senator Marc MacSharry

I have a number of questions and will be as quick as possible. Mr. Forde spoke of the Basel accord earlier and, having worked in the SME sector, I can assure him I never heard of it. He raised it in terms of regulatory restrictions. Are there measures the banks would like to take to help SMEs that they are prevented from engaging in due to regulations?

Having worked in the banking sector, I know that technology is relied on to determine creditworthiness for loan applications made by sole traders. Mr. Boucher has admitted the banks may make mistakes in this regard. To what extent is the human aspect being introduced? Has more responsibility and discretion been given to senior lending managers and local managers?

In terms of a projected analysis of foreclosures in 2009, what has been done and to what extent is it envisaged that foreclosures will increase? What strategy is being employed across the banking sector to minimise foreclosures in the interest of assisting business?

I know different banks have different views on recapitalisation but, in general terms, what is the opinion of the banking sector on private equity versus Government capitalisation? Which is best for the banks and does this tally with what is best for Ireland Inc.? After all, Ireland Inc. is the greatest concern of this committee.

I was writing furiously and if I have missed some, I will be happy to answer them.

Senator Marc MacSharry

There were questions on human discretion and private equity versus Government intervention.

Mr. Ritchie Boucher

The Senator asked about the use of technology instead of human discretion in deciding loan applications. We sometime neglect the fact that a particular customer may have a wider aspect to his or her relationship with the bank than was first perceived; that is why we have an appeals process. Very often our colleagues on the front line do not outline the full extent of the relationship on a credit application; that is why we have an appeals system. My colleagues on the front line have business targets relating to lending and new accounts that must be met. Their objective is to loan money and they are judged on that basis. They should engage in safe, prudent lending. We have a mechanism that ensures a senior underwriter will look at an appeal relating to an application that may have been rejected using a score-based system. This is important, as we have 276 branches, are very strong in local communities and must understand the extent of the relationship we have with a customer. It may be that a customer did not think it important to tell us about other assets and forms of cash flow he or she might have. We are working hard to train our colleagues on the front line to gather as much information as possible; the more information the customer gives us, the more appropriate the decision we can make.

My answer to the question of whether capitalisation should be undertaken by the State or the private sector is much the same as that given by Mr. Forde. Is capital available? What are the terms and conditions and the investment horizon? If capital is to come from a private source, one must understand the extent to which that source buys into the bank's strategic direction and the source's investment horizon. That is as much as I can say on the issue.

Mr. John Power

To get back to Deputy Morgan's question on why we are telling different stories, we are in different positions and have different objectives. We are in a position of survival and need additional funding. As I said, there may be a difficulty in having existing levels of funding confirmed. There is a real difficulty in getting additional funding. That is the main problem we face due to the current economic circumstances.

Deputy Arthur Morgan

Sound businesses are being affected.

Mr. John Power

They are sound businesses which are going through a rocky patch due to circumstances that even the Irish Hotels Federation did not anticipate when it gave instructions to members at the end of the summer. None of us forecast a GDP performance of minus 4% or minus 5% in 2009. We must gear ourselves to handle these circumstances and need seasonal funding to do so.

Mr. J. J. Killian

To answer Deputy Morgan, I do not think our members got it wrong. We have oceans of anecdotal evidence from members and are getting two different stories. It is up to the committee to decide which is true.

Deputy Arthur Morgan

I agree with Mr. Killian and believe the members of ISME.

Deputy Kieran O’Donnell

I welcome the delegates. I understood the purpose of the meeting was to help the small business sector access funding. We have gone off on tangents and I wish to return to the main question. The CEOs of the banks represented, with the CEOs of the other two quoted banks, appeared before the committee on 2 July. At that meeting the banks stated they were part of the economy and not operating in isolation. It has been stated they are open for business. Mr. Forde has stated the number of overdraft and loan facilities has increased. Bank of Ireland and AIB account for almost 80% of banking business in Ireland, yet the Central Bank statistics for October show that overdraft facilities had decreased by 9%. Overdraft amounts are being transferred to term loans; yet the value of term loans has reduced by €74 million.

The banks appear to be living with "Alice in Wonderland", as if there are no problems. I was self-employed for many years and the banks are acting as if nothing has changed. They have been given a taxpayers' guarantee of €440 billion which is paid for, in part, by many of the small business people who cannot get funding from them. Furthermore, they are about to receive €10 billion of pension holders' money for capitalisation. Today we have learned that accident and emergency services in hospitals are to be closed, yet the banks are acting as if nothing has changed. Everything has changed. They need to step up to the mark but are not doing so. Their representatives are acting as if the problem lies with the small business sector. The figures they are providing are not consistent with those provided by the Central Bank. Why are bank charges in Ireland 32% higher than the EU average? Why are interest charges 11% higher? When he appeared before the committee in July, Mr. Forde stated that while the banks' margins on all loans had been 1.5%, they were then 1.25%, yet the bank document presented today states they are between 1.75% and 3.75%. Why has the position changed?

My understanding of the EIB fund was that it would provide working capital. Businesses have a problem with survival. Mr. Boucher spoke about good businesses which were finding it difficult to survive. The banks fall into that category but taxpayers, including small businesses, are bailing them out. What are they doing for small businesses? Their representatives have repeated today, almost verbatim, what they told the committee in July. If a business has a difficulty, will its bank guarantee an overdraft facility for three months to allow time for proper scrutiny? Will banks repossess the houses of small business people?

We are being spun a line and I will not put up with it. The banks have been guaranteed by the State and the small business sector. They must do something to ensure the small business sector survives to provide jobs. What are they going to do?

Senator John Hanafin

Much of what Deputy O'Donnell has said is correct. There are glaring inconsistencies in the banks' figures. Much of the problem has been visited on the Irish banks by international occurrences. There was over-emphasis on property lending but, in normal circumstances, we could have had a soft landing. I remember the old adage that one can always borrow an umbrella when the sun is shining but when it is raining, the owner will want it back.

The representatives of the banks say there have been no changes in lending policy. On the other hand, they tell us they are implementing the Basel directive and decreasing their loan to deposit ratios. It would not be possible to implement the Basel directive using the banks' subsidiaries. It would be too significant a reduction in money from those markets. If 70% of AIB and Bank of Ireland business is conducted in Ireland, only 30% is conducted abroad, yet they say they will ensure the capital requirements directive will apply to the 30% conducted abroad. That would take huge sums out of the market. The banks also state their loan to deposit ratios will be reduced from 150% to 130%. That means they must be taking money out of the system.

I am worried by the interbank rate which is high because there is no confidence in the banking system. There has been a systemic failure in international markets to ensure there is proper banking regulation. Perhaps we should have known this earlier. The John Ruznak, Nick Leeson and Société Générale episodes should have warned us. Now Mr. Bernard Madoff has made off with $50 billion. All of this comes on top of the criminal acts of Lehman Brothers and Bear Sterns and the failures of Freddie Mac, Fanny May and AIG. There is a litany of problems.

Chairman

Will the Senator, please, deal with the matter under discussion?

Senator John Hanafin

The matters to which I refer are relevant to the current crisis. They affect the inter-bank rate because confidence is what allows banks to lend to each other. Can the banks give the committee an undertaking that they have no publicly unknown or unheard of loans to international hedge funds which may be about to fail?

The Oireachtas and the Government ensured confidence in the banks was maintained. That confidence was not given by 166 Deputies and 60 Senators of their own volition, but on behalf of the people. Having been treated in a very proper manner by the State, there is an onus on the banks, particularly at Christmas time, to ensure no homes are repossessed and that everything possible is done to ensure there are no foreclosures. It makes good business sense to work through difficulties with customers and allow for repayment holidays. Solicitors and auctioneers cost money. I worked in the financial services sector for 17 years and I am well aware that repossession is bad business, bad public relations and very expensive. Having been treated properly by the public, the banks should have a very different attitude to foreclosures and arrears.

Senator Feargal Quinn

Mr. Ritchie Boucher

It is very important that we try to work together to instill some confidence in the economy. Entrepreneurs are the bravest people.

Deputy Seán Barrett

If I were a representative of ISME or the Irish Hotels Federation, I would go away from here extremely disappointed and frustrated. I have heard absolutely nothing in two and a half hours that would give me confidence that we as a society are prepared to deal together with the problem facing this country. It is all one-way traffic. We are spending our time in the Dáil bailing out banks. I was part of a Government in the early 1980s that had to bail out Allied Irish Banks because of their failure in business terms in buying ICI and not having proper management control over it. Now it is time that the banks should help to bail out other people. It is like insurance — everybody wants the good risks. When it comes to the dodgy risks or the difficult risks, obstacles are put in the way.

The banks have not given us any hope that they will change their practices to help the small business people throughout the country. They did not say they would review the management structure and give more authority to the local manager to meet a business person, to understand the problems. It is the same old story. It goes up the line, a faceless person makes the decision and somebody has to break the bad news. The banks are an essential part of this democracy, just as we are. If they do not operate in accordance with normal practices in a democracy, we are all doomed. That is the reality. We are either here to help each other or to make statements and speeches that go nowhere. I went away after the July meeting with the banks and the Governor of the Central Bank and asked myself why we were all fools, why we were not out buying shares in Bank of Ireland, Allied Irish Banks and Anglo-Irish Bank. Look at the share prices today. That is the level of confidence the public have in the banking system. The share price indicates a huge problem. That problem is that the banks gave bad loans to people to buy land banks at inflated prices. The banks gave the money and small businesses are now suffering. That is the truth and everyone knows it. The banks have stricter overdraft regimes because they cannot upset the borrowings on land banks, whose values no one knows. Until we face up to this problem, I do not know what the Government should do. According to the representatives of the banks, there is no problem. Why are we considering recapitalisation if there is not a problem in AIB or Bank of Ireland? Why should banks seek guarantees for loans if sufficient money is available?

Today's witnesses from the small and medium-sized enterprise sector represent ordinary people throughout the country. They did not come here to spill stories. They are simply repeating what they hear from their members. Someone must fill the massive gap between the banks and the people representing business. Having listened to this discussion for two and a half hours, I am flabbergasted. The banks seem to have planned no action, except to hold a seminar on Basel ll. Who is Basel? I am reminded of a vulgar song. A bank customer whose business will close next Friday if he cannot continue his overdraft does not want to learn about Basel. People are losing their jobs.

We must get back to basics. Banks must change their systems. They should bend over backwards to help people, remembering the days when people bent over backwards to help the banks out. They should not forget what the taxpayer did to solve the problem for banks. It is time they tried to solve the problems of ordinary people in ordinary small businesses throughout the country. I ask them to come up with positive proposals before we leave this meeting so that the other witnesses can go back to their members and say, "It was worthwhile going up to Leinster House. I think we might get some movement".

Will the banks give more power to local managers to deal with difficult cases or will all decisions be taken "up the line" by some faceless individual? Will systems change? Could that possibility even be discussed? Everyone wants the good risk but it is the person who is struggling who needs a confidence boost. When I started in business, nearly 40 years ago, I went with my accountant to meet a bank manager. The manager had the power to give me a £5,000 overdraft. I never used a penny of the overdraft but it gave me the confidence that put me on the road to business. Every risk taker needs a friend who will judge his character and tell him he will be a success. That can only be done by meeting a person, face to face, and listening to his story. Putting the story on a piece of paper and sending it up to headquarters is completely different. The person in headquarters does not see what the person looks like and does not know his role in the community. In today's world, we need people to make decisions based on individuals.

Today's witnesses represent people who have worked hard all their lives. They do not want their businesses to fail. They need banks to give them a dig-out. We can talk about Basel and all the other restrictions until the cows come home but one must give confidence and hope to people. I hope today's meeting will give some hope to small business people. I do not know what further action the Government can take to sort out this mess.

Having listened to representatives of the two main banks for two and a half hours I still do not know why their share prices are so low, why there is such a lack of confidence and why there is mistrust between people and between banks. Is it because one did the dirty on the other with the package deals that floated around the world? There is a complete lack of trust in the banking system. We must try to find a solution to this problem so that people will not lose their jobs and businesses will not fold up.

Deputy Terence Flanagan

I thank the witnesses for attending this meeting. I strongly agree with Ms Patricia Callan's observation that the pendulum has swung too far and that while too much credit was provided during boom times companies now find it extremely difficult to get finance. This is what I hear from business owners.

I have some questions for Mr. Boucher and Mr. Forde. Having received the Government backed guarantee, what help have banks given to businesses now facing difficult times? For example, how long will the moratoriums on capital repayments be? What specific forms of help are the banks giving to businesses?

What is the level of take-up of the new funds to help SMEs? Are they fully subscribed and are the banks facing difficulties with them? What percentage of the banks' loan books is presenting difficulty and how much leniency is being shown to clients? What percentage of their loan books consists of clients whose credit will be withdrawn by the banks? Can the Government do anything further to improve the situation for businesses? It was said today that Ireland is one of the last countries to take up the EIB scheme? Is this correct? If so, why is that? If the scheme commenced in September, why are we only now seeking help from it?

Deputy Barrett referred to the banks' share prices. Can the banks explain the drop in bank share prices? What confidence measures can the banks give to the market? For example, will they write down some of the large loans they have given to property developers?

JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate - Tuesday, 16 Dec 2008

Credit Issues: Discussion.

Mr. J. J. Killian

Mr. John Power

Ms Patricia Callan

Mr. Donal Forde

Mr. Ritchie Boucher

Mr. Donal Forde

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. J. J. Killian

Mr. John Power

Ms Patricia Callan

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Ritchie Boucher

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Ritchie Boucher

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Ritchie Boucher

Mr. John Power

Mr. John Power

Mr. J. J. Killian

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

Mr. Donal Forde

JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Tuesday, 16 Dec 2008