Joint Committee on Finance, Public Expenditure and Reform debate -
Wednesday, 25 Sep 2013

Matters Relating to the Economy: Discussion with Governor of Central Bank

Chairman

Before we commence, I ask Members to switch off their mobile telephones and not to put them on silent, please. When the banks were before us a fortnight ago, there were many complaints from the public listening in or watching the meeting and from the press room - the press may not have been in the Press Gallery but were watching the proceedings on monitors - because they were not able to hear what was happening due to sound distortions caused by electronic equipment. Having a telephone or an iPad on silent mode is not sufficient. If Members' iPads use a 3G system they will need to turn off the cellular connection and operate strictly on Wi-Fi. The same applies to laptops and other electronic devices.

With the technical lesson out the way, we move on to matters relating to the economy, including mortgage resolution, banking and credit provision. I welcome Professor Patrick Honohan, Governor of the Central Bank of Ireland. The Governor previously appeared before the committee on 16 January. We are pleased to welcome back the Professor.

Professor Honohan will make opening remarks, which will be followed by a question-and-answer session. Before we start, I remind members, witnesses and those in the public galleries to switch off all mobile phones. I advise the witness that, by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given. They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or persons or entity by name or in such a way as to make him, her or it identifiable. 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 any official by name or in such a way as to make him or her identifiable.

Professor Honohan will recall from my correspondence to him that I am looking explicitly for information on the areas which arose from our recent meetings with the banks. I indicated that he might define what is an acceptable, sustainable solution in dealing with distressed mortgages, together with the datasets that are to be used to ensure uniformity of reporting for direct comparative purposes. An issue that the committee looked at when the banks were before us was how we will be able to make comparisons between them because when they brought their formulas to us there was no uniformity in their approaches. Another issue to consider is how debt resolution may be looked at post-retirement. Finally, when we spoke to some of the banks they told us they used modelling that was not prescribed in the resolution processes, which included concessions on mortgages. We are interested in hearing Professor Honohan's thoughts on those matters in his opening comments or in the course of our engagement this afternoon. I invite Professor Honohan to make his opening comments.

Professor Patrick Honohan

I thank the committee for its invitation to speak on the complicated issue of mortgage arrears. I also welcome the opportunity to explain the Central Bank's policy on other matters that the committee may wish to raise.

My opening remarks will be a bit longer than usual, but the committee deserves and is entitled to that. I have previously discussed with the committee the extremely slow progress that was being made by the banks in arresting the growth in mortgage arrears, processing the cases that had fallen into arrears and implementing sustainable solutions. Things are still not moving as quickly as the Central Bank would prefer; the indications are that the process is working, momentum is building, but there is some way to go.

What is the Central Bank's goal in addressing the problem of mortgage arrears? Its approach has been driven by both of its main regulatory objectives, prudential supervision and consumer protection. The consumer protection goal of fair and reasonable treatment has been targeted through, for example, the CCMA, the code of conduct on mortgage arrears, to which I will refer to later. The mortgage arrears targets have been crafted using the prudential powers, though there will also be a side benefit to the consumer. We have manoeuvred our powers to achieve the results that are needed for the nation. Figuring out exactly how to achieve these important policy goals while working within constitutional, legal and practical realities has presented novel challenges to the Central Bank. Although progress is still too slow, I am satisfied that the approach is correct and is progressively yielding results.

It is almost two years since the Central Bank launched the mortgage arrears resolution strategy which has steadily ramped up requirements on banks to improve their policies, processes and staffing around this issue in order to accelerate results on the ground. In March, as part of this process, and with a view to enhancing measurability of progress, the Central Bank introduced a regime of quantitative targets for ensuring that sustainable solutions are found more quickly for distressed mortgages.

The banks having reported compliance with the first quarterly set of targets and the Central Bank has started the process of auditing a sample of the cases to see whether the solutions proposed by the banks can truly be regarded as sustainable. The internal guidelines under which this audit will be carried out have been finalised and posted on the Central Bank’s website. They have been on the website in draft form for the past three months, but despite our nudging and pointing people towards them there has not been much, if any, public commentary on them. They have been finalised and we are starting to work with consultants on the audits.

The question of what is sustainable is key. In a nutshell, a sustainable arrangement is one which is affordable for the borrower in both the short and the long term, and provides sufficient clarity on what happens to the collateral at maturity. The guidelines seek to put sufficient flesh on this basic concept to allow the criterion to be audited, while not being so restrictive as to prevent innovation in solution design. There is much concern about the initiation of legal proceedings and it is a big part of this exercise. The March 2013 targets document set out three modes of generating a sustainable solution. The first, preferred, type of solution is an arrangement where payments are re-established on the original schedule, if it can be afforded, or an agreed revised schedule. This is a re-arrangement or restructuring. The second mode is where the borrower opts for a personal insolvency arrangement. This was not available to borrowers at the end of June so there are none of these in the first wave. The third mode, available to the bank only where an arrangement could not be reached or is not appropriate, involves voluntary surrender or repossession of the property.

Although each of the banks has reported compliance with the targets for the end of June 2013, it is notable, though perhaps not surprising, that more than 60% of this initial wave has followed the third mode. I have provided committee members with a table showing the aggregate figure and the mix between restructures and voluntary surrender or repossession of principal dwelling homes and buy-to-let properties.

With regard to why the banks have relied so heavily on initiating legal proceedings in the first wave of actions under the mortgage arrears resolution targets scheme, subject to verification in the audit process, it is possible most of these cases involve protracted periods of arrears with limited co-operation from the borrower, notably in providing the information needed by the lender to arrive at a better solution. We have only reports from the banks and are interacting with them to obtain more particulars; we do not have the result of the audit. Up-to-date borrower information provided to the lender is essential if the lender is to design a better sustainable solution potentially not involving repossession. Neither the lenders nor the Central Bank expect repossession will be the preferred solution in the end for most of these cases. In most cases, engagement by the borrower will make the legal course unnecessary. If so, as always the best course of action for the borrower is to start to engage by providing the necessary information to the bank to find out what better course is available.

The Central Bank’s code of conduct on mortgage arrears provides a strong protection framework for borrowers who engage with their lenders. Under the code of conduct on mortgage arrears, lenders are required to engage proactively with their customers to help them address the situation; they must carry out a full assessment of the borrower’s situation based on the standard financial statement and each case must be examined on its individual merits. Lenders are required to explore all their options and where they do not offer an alternative repayment arrangement they must inform the borrower of the reasons for this and what alternatives are available. The code of conduct on mortgage arrears provides that lenders may only commence legal proceedings for repossession only where they have already made every reasonable effort to agree an alternative arrangement. The banks are not simply complying with our targets for sustainable solutions, by law they must comply with the code of conduct on mortgage arrears.

I must stress the Central Bank has no mandate to prevent lenders proceeding to repossession if the borrowers refuse to engage, provided the lender has followed the procedures mandated in the code of conduct on mortgage arrears. Any bank proceeding lightly to legal recourse with co-operating borrowers without satisfying the procedures of the code of conduct on mortgage arrears, or where alternative sustainable arrangements are available, is evidently not acting in a manner consistent with the targets regime. This should be detected through the audit and corrective action would be required.

Let us stand back and ask how household debt has become such a big problem. That household mortgage debt would represent the biggest potential source of loan losses after developer loans was evident from an early stage in the crisis. It was also clear the problem would not emerge all at once, but would grow as distressed borrowers ran through their savings and, to the extent that unemployment was the problem, found it more difficult than they expected to secure a new job. The ultimate scale of the problem has been hard to predict and we did not expect the banks to be so persistently ineffective in getting their arms around this problem and delivering sustainable solutions. The best available sustainable solutions can take several forms. Some merely involve identifying where the defaults are not justifiable given household resources, and such borrowers need to be brought back on track. Others, especially buy-to-lets, may involve a surrender of the property to the bank or its assisted sale, with some sustainable treatment of the shortfall. In other cases, the lender cannot be confident of recovering all of the loan, but can be protected against the risk of forgiving more than is needed by the device of a split mortgage. Other schemes are possible. None of these arrangements is ideal. They generally imply a great disappointment for the borrower and a loss for the lender relative to what was originally envisaged, and I am sure such language is an understatement.

The Central Bank is not empowered, nor could it be, to insist on debt forgiveness for any particular borrower. Relief for an insolvent borrower from indebtedness is determined ultimately through the insolvency procedures for which legislation has so recently been reformed and in a direction which is rightly much more favourable to the insolvent debtor than previous legislation. The Central Bank helped to advise on the drafting of this legislation and has been supportive of its aims. Use of the legislation will be an important means of ensuring over-indebtedness problems, especially those involving multiple debtors, can be resolved. The point of the targets is that it should be possible for lenders to avoid imposing the costs and delays of a personal insolvency arrangement or bankruptcy on many insolvent debtors by coming to sustainable negotiated solutions which are better for both borrower and lender.

There has been much talk about split mortgages. With regard to whether this is the Central Bank’s preferred outcome, various types of solution are possible to deal with a situation where the initial repayment promise looks unsustainable. If appropriately designed, and the criteria have been set out in the sustainability guidelines, a split mortgage can be a sustainable solution depending on the borrower’s circumstances. It can allow the lender to take explicit account of future improvements in the borrower’s circumstances, while providing the borrower sufficient assurance of affordability now and in the future. However, it provides only one of several possible approaches. Banks have begun to experiment with other models which can give them and the borrowers the assurance the repayment will be back on a firm basis. The Central Bank does not advocate any particular solution but it must be sustainable.

The committee mentioned an approach outlined by Ulster Bank, and without going into detail the high-level response is that on the face of it this approach seems to have most of the ingredients needed to be considered sustainable. While the Central Bank has set out its sustainability guidelines, nobody, least of all borrowers, would be served by the Central Bank attempting to place a narrow straitjacket preventing innovation around possible solutions within the guidelines, and the Ulster Bank approach may be an example of this. Banks are beginning to learn from experience the elements which differentiate an ineffective engagement with arrears customers from the kind of engagement leading to an arrangement which is not only sustainable, but is in fact sustained because it matches the borrower’s abilities and motivation. Some banks have gone further than others down this road.

With regard to whether the banks should be doing more to achieve sustainability, despite all of our efforts, and despite real progress in policies, processes and staffing, far too many arrears cases have remained untreated, whether sustainably or not. For example, of 98,000 personal dwelling home accounts more than 90 days in arrears at the end of June, 74,000, or three out of every four, were not yet in an arrangement.

Why have the banks been so slow in acting? It may be, as many have suggested, that the delay in correcting the legislative defect identified by the Dunne judgment represented a delay, although it should not have deterred non-repossession actions. The moratorium, which was enforced by the Central Bank, and the code of conduct on mortgage arrears, CCMA, restrictions, which are designed to prevent harassment by debt collectors, have likely contributed to some delay, but they have also been used by lenders as excuses. In any event, the moratorium and other CCMA rules have been streamlined in such a way as to retain sufficient protections for distressed borrowers - a legitimate and important objective - while generating little or no obstacle to efficiently organised collection procedures. The legislative defect identified in the Dunne judgment has also eventually been corrected, as we had recommended. More important has been the fact that the task required a much more focused and effective organisational effort at scale than the banks at first realised, a deficiency that they have been progressively overcoming - with pressure from us, of course - since we started to audit and critique their procedures more intensively in 2011. This is ongoing in parallel with the targets.

There is also a gap between the analysis of the Central Bank and that of some of the banks with regard to the need for clarity and predictability about the solutions being proposed. The Central Bank wants to be sure that there is sufficient clarity about the arrangement, for example, in regard to the treatment of the borrower's liability for the shortfall in a loan following an assisted sale or repossession or for the warehoused part of a split mortgage. Some of the banks have expressed the opinion that a degree of uncertainty about how these elements will be treated could help ensure that they recover as much as possible. The Central Bank believes the contrary. With such a widespread systemic problem of debtor distress, greater clarity on what is residually owed in these circumstances is safer for the lender - it is also better for the borrower, of course - in guarding against any erosion of the debt servicing culture, as well as helping a broader restoration of household confidence, which will help the wider economic recovery and, through that, boost loan recoverability, which is the banks' concern. In particular, the Central Bank regards as unwise the creation of a situation where, because of such uncertainty, the lender and borrower hold inconsistent expectations about what will be enforced and recovered on a particular loan.

There has been a degree of wishful thinking among some of the banks, a belief that many cases will cure themselves even without energetic action by the lenders. Leaving well enough alone is not, however, an adequate approach. Delay worsens the prospects for both lender and borrower. This truism is now being acted upon more expeditiously. The Central Bank does not have executive or management control of the banks' operations. That must remain the responsibility of the boards of directors of the banks if we are to get this working properly. However, the Central Bank is using its powers to the utmost extent to overcome the delays. The process is working. It is still too slow, but momentum is building.

I look forward to members' questions.

Chairman

I thank Professor Honohan. I will go over the procedural aspects of this meeting. The parties' lead spokespersons will engage with Professor Honohan for 15 minutes, after which we will move to a second rung of ten minutes and so forth.

I welcome Professor Honohan to this meeting once more. I commend him on the targets that have been put in place. However, the committee has concerns. When Professor Honohan appeared before us on 12 January and answered questions posed by other members and I, he seemed hesitant or reserved on the issuing of targets to the banks. At some point after engaging with us in a robust discussion, he introduced targets. Why did he change his mind?

Professor Patrick Honohan

With respect, the record will show that I stated early in that session that targets would form part of our toolkit. I went on to stress to the committee that we did not want to rely exclusively on a high-profile target as our only tool, as such a tool could then become the only target that the banks tried to hit by fair means or foul. We wanted to avoid that. By and large, we are doing so. It is a problem with isolating any single target. Although we have targets as part of our toolkit and they have a high profile, they are not the only measures we are taking.

Chairman

Does Professor Honohan accept that through the implementation of targets, two outcomes have been achieved? First, banks have been focused on what they need to do. Second, an accountable and measurable process has been put in place for the public to observe how the banks reach resolutions with people in distress.

Professor Patrick Honohan

An advantage of targets is that one can tell a bank that it has or has not done what it said it would by a certain date. The troika has been using this technique across policy areas. When it heard what we were doing and that the Oireachtas was enthusiastic, it latched onto this as another target to be included. As has been evident in recent years, when people set concrete policy targets that must be delivered by the end of June or September, it focuses the mind and stuff gets done. Sometimes, it gets done in an unsatisfactory way, but progress is made.

Chairman

Some targets will always be easier to reach than others. Following the Keane report, a host of resolution processes such as split mortgages and so on were suggested. When the banks appeared before us, it became apparent that a letter to a customer who had not been engaging was allowed to be counted as a resolution process. Without exception, the greater part of the banks' 20% targets seemed to comprise written correspondence. The committee is concerned that a letter can be defined as a resolution process. It may be the case that a letter to a customer who is not engaging with a bank is the commencement of a resolution process, but it is not a structured resolution process. How did these letters come to be recognised as meeting the target?

Professor Patrick Honohan

Let me provide an example of the sort of situation that could give rise to letters being used more than other methods, particularly given the large backlog that is being handled. Although it is not the case universally, one can imagine some instances in which a bank has heard or received nothing from a borrower, including payments, for one, two or more years despite many attempts to make contact in line with the CCMA. The bank has no basis for devising an alternative solution. It has no way of knowing how much someone is earning. It might not even know where that person lives.

We considered this issue when we saw it coming down the tracks. Should the Central Bank tell the banks to commence legal proceedings because that is the only course available to them? We decided to say, "Yes". There was no other possibility. How could the banks move? However, it is not the end of the story. As the Chairman stated, it is only the beginning of the story.

Chairman

That brings us to the point.

Professor Patrick Honohan

May I cite a number?

Chairman

Let me add another point. The committee is not contesting the position that letters need to go to customers who are not engaging with the banks. We would encourage distressed customers to interface in a detailed manner to ensure that they are being represented well when engaging with the banks. The difficulty lies in the fact that the figure was set as 20% in resolution. A letter is not resolution.

Professor Patrick Honohan

The targets were set by the Central Bank. We defined how they were to be met. This is how they are being met. It is compliant with our rules. However, it is only the start of a process. It is a mode of starting the process and is only available where the other courses of action have proven ineffective.

I will cite a significant number. It is not for the system as a whole. When interrogating the banks, we try to dig beneath the numbers. I do not have all of the figures. For one of the largest banks, of the cases in which letters have been sent, 80% related to borrowers who were more than one year in arrears and 50% related to borrowers who were more than two years in arrears. We are seeing this situation in respect of most of the letters. It is only the beginning of a process - I hope - in which the customer re-engages and gets a proper solution.

Chairman

We will come back to that later because owing to time constraints I need to move on to other issues. On the issue of sustainability in relation to mortgages, the definition in this regard appears to be the ability of a person in financial distress to meet some level of obligation in order to remain in the family home. I am speaking in this regard predominantly about residential mortgages rather than those taken out on buy-to-let properties. I would like to tease out the following issue which I raised in correspondence earlier this year with Professor Honohan. Bank of Ireland, Allied Irish Bank and Ulster Bank have stated that at this time they are prohibited from engaging in resolution processes that run into the time of retirement. For example, where a person is in positive equity and in receipt of a decent pension and can well service the interest proportion of his or her loan and, possibly, even pay a proportion of the capital, the banks are not allowed to engage in a resolution process with that person. When I examined the representatives of Allied Irish Bank, Bank of Ireland and Ulster Bank on this issue they said they were favourable to this type of approach but are prohibited from doing so. Why is this?

Professor Patrick Honohan

The fact that we have rules means everybody will say, in a vague type of way, that they cannot do this or that because of those rules, which is fine.

Chairman

The banks are very clear about this.

Professor Patrick Honohan

They are wrong. I will try to find the wording which sets out the qualification in that regard, which, I think, is 70 years of age. The rule is that an overall ceiling of 70 years of age will apply for the Central Bank to consider a term extension, which I think is what the Chairman is talking about in the context of the issue of sustainability, unless there is firm evidence that an older age limit can apply. There is an out. The banks could say that the reason they are not granting the term extension is because they do not believe the person will after 70 years of age have any money to pay them. Instead, they are saying they are prevented by the Central Bank from doing so, which is not the case. The Central Bank rule provides for a ceiling of 70 years of age unless there is firm evidence that an older age limit can apply.

Chairman

The language used in correspondence from Professor Honohan's office is that these resolution processes must be dealt with within the lifetime of the loan. All mortgages are issued on the basis of a loan being repaid prior to a person reaching retirement age. Either the banks are not understanding the Central Bank properly or I am hearing a softening of the Central Bank's position on this issue. Perhaps Professor Honohan will clarify the matter. I am sure the chief executives of the banks are listening to these proceedings. When I put this question to them they were specific in their response that they cannot do this because the Central Bank will no allow it. Is Professor Honohan now saying the Central Bank will allow it?

Professor Patrick Honohan

This is a very complicated area.

Chairman

I am speaking about this applying on a case-by-case basis rather than across the board.

Professor Patrick Honohan

I know that. It is complicated for people to understand everything we are trying to achieve. It is true that we did not roll out our sustainability guidelines in March. The reason we did not do so is because we had not landed on wording we felt was robust enough to cover most cases. We had the right language in place by June, which is that a ceiling of 70 years of age will apply unless there is firm evidence that an older age limit can apply. We have tried to ensure we use wording which accommodates as many circumstances as possible. We are prepared to revise what is in place but we believe what is provided is acceptable. I would not be surprised if there are misunderstandings because this is a new area.

Chairman

It is evolving.

Professor Patrick Honohan

We cannot look to other countries to resolve this issue because they have not had this problem or had to apply a scheme of targets of this type.

Chairman

Professor Honohan has led me to my next question. As the process evolves, new modelling, solutions and resolution processes will inevitably arise. I am not suggesting that the subscribe list is written in stone and cannot be changed. The objective is to ensure resolution processes are based over the lifetime of the loan. Life is not like that. For example a person in his or her early thirties may not be able to service a mortgage at this point and so putting in place for him or her a 20-year process is not practical. A resolution process of one or two years may be a better approach. Does Professor Honohan see the prescriptions he is providing moving in this way, particularly for young couples or people who are in the early years of their mortgage and may be able to get back into employment?

Professor Patrick Honohan

It is an issue of clarity about what happens at the end of the process and sustainability in the long run. We want steps to be taken over the next number of months which will provide clarity for the borrower. The borrower may be under particular stress at this point and be in a position to make higher payments later. However, this must be documented. The action must be taken now.

Chairman

I have a couple of other questions for Professor Honohan arising from his opening remarks. The concession type mortgage provides for a reduction in the interest rate for a determined period and payment of capital and interest at a lower monthly rate. Ulster Bank uses the split mortgage option extensively. Is Professor Honohan indicating this evening that this is an accepted resolution process?

Professor Patrick Honohan

It includes most of the ingredients. I would like the banks to do a little more around clarity in regard to what happens at the end of a process. It is a sustainable solution for particular types of persons. It is a match between the person and the solution.

Chairman

As I indicated earlier - Professor Honohan will have coalface experience of this - we are learning how to model solutions as the situation evolves. There are variations of solutions being applied by different banks. It is important there is consistency of approach between the financial institutions. Currently, the split mortgage available from Allied Irish Bank and Bank of Ireland differs in that in respect of AIB, interest on the warehoused portion of the mortgage is also parked and in respect of Bank of Ireland that interest is payable. I understand that Bank of Ireland is currently considering making distinctions between people on variable interest rates and tracker rates in the context of split mortgages. There are many different variations of solutions. While the solutions being proposed by Ulster Bank are accepted as meeting the targets, are other solutions being applied that the Central Bank considers are not doing so?

Professor Patrick Honohan

There are so-called solutions-approaches which will not help borrowers who are unable to pay existing mortgages. They do not go far enough in the direction of addressing the affordability issue in the short term and, in particular, the clarity around what happens at the end of the process.

Chairman

Can Professor Honohan give an example?

Professor Patrick Honohan

In so far as I understood what the Chairman said about Bank of Ireland's split mortgage, it does not contain sufficient clarity around what happens towards the latter end of the mortgage term. That is a much more important issue than is the issue of the rate of interest applied. I do not believe that is the key, although it could be relevant. The key is the clarity at the end.

Chairman

Is the Central Bank facilitating or allowing Bank of Ireland's solutions to be counted in the 20% target?

Professor Patrick Honohan

We are auditing cases. A split mortgage proposal by the Bank of Ireland would be matched by the auditor with the circumstances of the borrower. The question then asked will be if that proposal is good enough for the borrower. The original payment scheme might be sustainable for the borrower if he or she has stopped paying despite being able to. One can say that a split mortgage of that design is of no use. It is just a solution that does not move in the direction we need for borrowers who cannot pay the original scheme.

Chairman

Is Professor Honohan saying that some of the approaches currently being applied may not meet the sustainable solution requirement?

Professor Patrick Honohan

We are not giving the green light to everybody. We are auditing. That is all I will say at the moment, and I have probably been too forthcoming in discussing particular banks.

Chairman

Thank you.

Deputy Michael McGrath

I welcome the witness and thank him for his opening statement. I am critical of that statement in a number of respects. First, he is endorsing the approach of the banks while being critical of the pace at which they roll out solutions. He has given an endorsement of the approach without the Central Bank's auditing of the target performance of the banks by the end of June being completed. That is the wrong approach, although Professor Honohan has argued that the correct approach is being taken-----

Professor Patrick Honohan

Could I clarify that point? The drafting of the submission may be misleading because what the Deputy has said was not my intention. My intention was to indicate that the approach of the Central Bank and the belief that it should be done in co-operation with other authorities is correct. At this stage I am not passing judgment - either favourable or unfavourable - on the way the banks are responding. I fully accept it is too early to say that.

Deputy Michael McGrath

Professor Honohan later stated that the process "is working"-----

Professor Patrick Honohan

Yes.

Deputy Michael McGrath

The witness reached that conclusion in his mind but indicated that process was "still too slow", although "momentum is building". He has given a pretty strong defence of the bank's approach while criticising their inaction in the past and repeating some criticism about the slow speed of the process. In general, he is giving a pretty strong defence of the banks' approach. At least, that is my interpretation of what he has said.

Professor Patrick Honohan

I do not wish to give that impression, so I thank the Deputy for drawing my attention to it. I am saying that our approach is the right one and we are gaining momentum. I am not saying all the banks are doing the right thing for the right people. They are getting through the volume.

Deputy Michael McGrath

The reason I argue that Professor Honohan should withhold judgment is that we may be surprised at what the audits discover. For example, as the Chairman noted, the outstanding issue to emerge from the hearings we had with bank representatives three weeks ago was an extraordinary reliance on legal action or the threat of legal action to count towards mortgage arrears resolution targets. Professor Honohan gave an example of somebody in arrears of one or two years and not having made a payment, and nobody could make a reasonable objection to the bank at least threatening legal action in that case. We have all come across cases where people are in arrears of a few hundred euro and no reasonable effort has been made by the bank to formulate an alternative arrangement to restructure the mortgage, meaning the bank has gone straight to a threatening legal letter. I submit to the witness that such action is a breach of the code of conduct on mortgage arrears. Professor Honohan indicated in his submission that lenders may only commence legal proceedings for repossession where they have already made "every reasonable effort" to agree an alternative arrangement.

Professor Patrick Honohan

Yes, absolutely.

Deputy Michael McGrath

There is no question that in all the 15,000 cases in which legal letters have been issued, not every reasonable effort has been made to rescue the mortgage. The banks have not done so and Professor Honohan should not be giving an endorsement of their approach until the issue is concluded.

Professor Patrick Honohan

I absolutely agree with the Deputy and I do not intend to endorse it. We will come down very strongly on the evidence mentioned by the Deputy. I have specifically included a statement that a bank's proceeding lightly to legal recourse with co-operating powers is not tolerable. It is not tolerable under the code of conduct anyway, which we revised in May this year, regardless of targets. That is a bedrock and a legally enforceable issue for the banks; there will also be consequences if targets are not met.

Deputy Michael McGrath

Why did the audit of the banks' performance not commence before now, given they reported, I presume, in early July in respect of the quarter to the end of June? The Central Bank knew since last March that this would happen, so why was it not crawling all over the banks in the first week of July to check that targets had been met? The process has only commenced, so when will it be finished?

Professor Patrick Honohan

We will have first results in November and the process will finish by the end of the year. It is not something we can get into and out of quickly. I have asked why the process has taken so long and the answer involves procurement, etc.

Deputy Michael McGrath

Why did that not start in March?

Professor Patrick Honohan

I do not know how long procurement takes. I will sort of put my hands up in that respect. It would have been nice for the process to start on 30 July but we are six or seven weeks later than that. It was not our intention to drag our heels but I do not want to make excuses, such as the fact that there were other items being audited.

Deputy Michael McGrath

By November it is hoped to publish on the results to the end of June.

Professor Patrick Honohan

We will have initial results in November and publish something by the end of the year.

Deputy Michael McGrath

A key issue is that the Central Bank has regulatory responsibility on the prudential side to supervise banks and ensure they are performing functions correctly, and there is also a regulatory function relating to consumer protection. When I consider the mortgage arrears targets programme, it is very much designed on the prudential side. I argue that it is skewed firmly in favour of banks. The witness's definition of a sustainable solution is as he has outlined, including the commencement or threat of legal action. We have seen that in over 60% of cases reported by the end of June, that was the solution of choice for banks.

Professor Patrick Honohan

Yes.

Deputy Michael McGrath

That is what happened. There is no definition from the consumer perspective. The Central Bank has a function, from the perspective of consumer protection, to give those in mortgage arrears a clear definition of a sustainable solution, and they have a right to a solution where they meet required criteria. Why has that not happened?

Professor Patrick Honohan

This is the way we are approaching the matter, with all our legal powers and as effectively as possible. It is a pincer movement. We are protecting borrowers through our code of conduct on mortgage arrears and we are using powers we could otherwise ignore to force banks to act when the people in them might think they can sit around and let the process play out. We do not see that as good for consumers, the economy or, ultimately, the banks. We are using prudential powers to enforce targets, and that is why the wording in the targets is prudential language.

Deputy Michael McGrath

Yes.

Professor Patrick Honohan

The code of conduct, which was revised in May this year in order to be more effective, is catching the banks on the other side of consumer protection. Between those two processes, we are getting maximum impact, using all our powers.

Deputy Michael McGrath

Where is the definition of a sustainable mortgage from the perspective of a person in arrears?

Professor Patrick Honohan

The banks must deliver the sustainable mortgage. The definition is elaborated upon in our guidance. The three elements for the targets in March, including rearrangement, personal insolvency arrangement or legal letter, are modes rather than a description of what is sustainable. In a nutshell, a sustainable mortgage is affordable in the short and long term, with sufficient clarity at the end. The Deputy has raised a very interesting point. It would benefit borrowers if there were more available support from operations similar to the Money Advice and Budgeting Service. A big funding push on that front would help. We are very positive about that.

Deputy Michael McGrath

The witness made no criticism in his opening remarks of the mix of solutions offered by the banks. Considering the latest official data for the end of June, we are still not seeing long-term forbearance measures coming through in any significant way. There is no real sign of split mortgages, permanent interest rate reductions or debt-for-equity processes. Is the witness satisfied that the mix of solutions being offered is correct, or is it still skewed in favour of short-term measures, as evidenced by the number of cases involving interest-only payments, arrears capitalisation, payment moratoriums, etc.? That is what we see.

Professor Patrick Honohan

The process has still not moved far enough. The Deputy has data up until the end of June and he is correct in that there is very little evidence of longer-term solutions. I have access to the ground, although the Deputy has better access to some parts of it, but from what I hear, the approach of banks has been shifting quite sharply over the past few months. They have realised that the approach to the challenge must be changed. I think they are moving in that direction.

Deputy Michael McGrath

I will move to the issue of strategic default, as it was raised time and again by bank representatives when they came before us. One representative estimated that of the arrears book, approximately 20% is made up of strategic defaulters.

They choose, for whatever reason, not to pay their mortgage despite having a capacity to do so. Professor Honohan has remained silent on this issue and I am critical of him for that. He has allowed all of those who are in mortgage arrears to have that cloud hanging over them, that one in five or more are deliberately not paying their mortgage despite having the money to do so. I have proposed that the Central Bank should go into the banks and independently verify whether that is the case. It would add to the debate and improve our knowledge. All it requires is the Central Bank to examine a sample of mortgage files in arrears and to give us a report as to whether the claims by the banks stand up or are bogus. We must have that information.

Professor Patrick Honohan

It is an interesting proposition and the Deputy has written to me about it. I think the concept of strategic defaults is a phony concept. There is a huge variety of circumstances where people are not paying their mortgage fully. There can be all sorts of reasons for it. It can be that they cannot afford to pay all of their debts and they have decided, rightly or wrongly, that they will pay the short-term debt first because they think they will be able to get back on target with the mortgage. That could be very common. One might find that the banks who hold the mortgage are saying that this is terrible as people are paying everything else, but not the bank. However, is that strategic default? That is people managing their affairs as best they can. They might also be prioritising things that it is unrealistic to prioritise. It is certainly true that they might not realise that they have to adjust their living standards. It is complex. I am not prepared to say, "I have looked at this and the number is 25", because I do not know what the concept means.

We have been doing the type of research mentioned by the Deputy. I referred to it in a speech a couple of months ago and I am told we will be publishing some material of that type, but it will not say what the percentage of strategic defaults is. With regard to the payment of debt, will all of the mortgages that are in arrears now be paid in full or substantially in full by the end or will none of them be paid in full? I am sure that many of the mortgages that are not being fully paid now will eventually come back on track and be fully paid. That means there are arrears now which do not reflect the true ultimate situation.

Deputy Michael McGrath

I am glad the Governor has broken his silence on that issue today. It is important that he has described strategic default as a phony concept. The vast majority of people I meet who are in arrears are genuinely trying to make ends meet and are making great sacrifices to repay their mortgage.

Professor Patrick Honohan

I am sure the Deputy would agree at the same time that there are some-----

Deputy Michael McGrath

Yes, that is agreed. However, it is not acceptable and the Governor should challenge the assertion being made by the banks, in public, that 20% of those not paying their mortgage are deliberately not doing so. That casts a slur on the 100,000 people who are in arrears of 90 days or more, and it is not fair. The Governor should challenge it, go into the banks, test a sample of those in arrears and give us the facts. We deserve to have the facts. It is not fair to have that thrown at people who are living daily with the struggle of trying to pay their mortgage. I put that challenge to the Governor.

I will move to a final issue, the Governor's statement yesterday about the tapes that were released by the Irish Independent concerning the former Anglo Irish Bank. He said in the statement that no new issues have been identified relating to suspected criminal offences that require any further statutory reports of suspected offences to the authorities. It is not for me or any other individual to reach conclusions as to whether criminality existed at that or any other bank, but it is fair to point out that the broad mass of Irish society was shocked when those tapes were aired publicly and reported on in the Irish Independent. Most people find it incomprehensible that the matters were not at least referred to the authorities and let them, as the competent bodies, assess whether there was any wrongdoing that required further action by way of prosecutions. How has the Governor arrived at the conclusion that the matter should not even be referred to the authorities?

Professor Patrick Honohan

As the Deputy knows, I raised this question right away when these tapes emerged. I repeat that the behaviour in the tapes is outrageous and, indeed, more broadly, the mismanagement of that bank is almost beyond belief. That is clear. Incidentally, I have looked at some of the headlines. My grandfather was a sub-editor in the Irish Independent and he would turn in his grave to see our very legalistic statement turned into "Central Bank sees no wrong" - yes, it does see wrong - and "Central Bank gives clean bill of health" - absolutely not. However, there is a bar. As the Deputy knows and has acknowledged in a way, it is a far remove from that to the statement we have here. Why did we issue that statement yesterday? It was not to stop anything, and it does not stop anything. We owe it to the public not to pretend that we have sufficient new evidence of criminality. We cannot say we are working on it and that we have sufficient evidence when we do not. We owe it to the public to say: "We looked at this. We said we would look at it and we did, but we do not have anything new". We are not slow to go to the Garda with suspicions of this or that. We do that, and we do not talk about it. In this case, however, there was a big public airing, but we have nothing new. That is all it means. It does not mean something else might come up or that other things can be going on about it. I wish to put that clearly on the record. It was because we want to communicate fairly and squarely with the public.

Deputy Kieran O'Donnell

It is regrettable that I must follow up on the point about Anglo Irish Bank. It appeared in the media yesterday, in advance of a very important discussion here on mortgages. It must be cleared out of the way, so I have a couple of questions about it. Did the Central Bank already have on file the Anglo Irish Bank tapes that were put into the public domain three months ago and did it seek legal advice? The response Professor Honohan gave to Deputy McGrath is not conclusive or detailed enough, so he might elaborate on it. He made the point about being honest to the general public. The public put more than €30 billion into this bank. These are ordinary people. This is nothing personal, but I am angry about this, particularly in view of the mortgages issue. Perhaps Professor Honohan would deal with that point on Anglo Irish Bank. The mortgage crisis has been ongoing for the last five years. It is taking too long. Will Professor Honohan deal with the question on Anglo Irish Bank and give us the reason why, as distinct from an observation?

Professor Patrick Honohan

Let me try to explain.

Deputy Kieran O'Donnell

Why did he issue such a statement yesterday?

Professor Patrick Honohan

That is why I issued a statement. One thing is why I issued the statement and another thing is why the statement was the way it was rather than some other type of statement, which is the question the Deputy is asking.

Deputy Kieran O'Donnell

No, my question is very simple. I want to know the background as to why Professor Honohan issued the statement.

Professor Patrick Honohan

The other question was whether the Central Bank had the tapes on file. No, we did not have those tapes.

Deputy Kieran O'Donnell

Was that the first occasion Professor Honohan had heard the tapes?

Professor Patrick Honohan

Yes. Before my time, in early 2009, was the commencement of looking at certain matters that were going on regarding Anglo Irish Bank and the decision was taken by the Financial Regulator at the time, under the previous legislation, fairly early in that process to transfer all of that file to the Garda. The Financial Regulator was out of that in terms of communicating. It had said, "Look, we have a problem here and we will pass it on". Of course, the Central Bank and staff have provided all the information the Garda has required on the various matters since then. However, the regulator did not look for any further files from there because it was passed over to the Garda. I understand that at that stage in early 2009 some transcripts of some tape recordings were passed to the Central Bank, and I have seen those transcripts. They do not include the materials that were put into the public arena by the Irish Independent this year. The Central Bank had no sight of those recordings. I think in one or two cases there are Central Bank voices on the recordings, but we did not have our own recordings of those conversations. Those tapes must have been recorded on the other side in Anglo Irish Bank. I hope that is clear. We have been out of that investigation since before my time, since 2009. A deliberate decision was taken.

Deputy Kieran O'Donnell

It was new evidence.

Professor Patrick Honohan

All of that was new evidence, yes.

Deputy Kieran O'Donnell

Okay.

Professor Patrick Honohan

Now the question is, after saying that there seemed to be something new in a public statement in June or July - I cannot remember which - raised expectation.

Deputy Kieran O'Donnell

In fairness, the professor would have stated that himself at the time in terms of his deliberations with a publication in Germany, at the time.

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

-----in terms of his deliberations with a publication in Germany, at the time.

Professor Patrick Honohan

I want to make it very clear. Not only was it extremely - I do not know what words to use - domestically. I also wanted to use the opportunity to dampen down any collateral damage abroad. I used the opportunity to do that.

Deputy Kieran O'Donnell

Yes.

Professor Patrick Honohan

I think it was a good opportunity. I said that, yes, there is new information here and there was new information. Why does it turn out then that we are not actually doing anything?

Deputy Kieran O'Donnell

To the ordinary person out there.

Professor Patrick Honohan

To the ordinary person and me too. This is new information and it looks like there is something here.

Deputy Kieran O'Donnell

We need to get something with-----

Professor Patrick Honohan

There is not a smoking gun.

Deputy Kieran O'Donnell

In the limited time that I have-----

Professor Patrick Honohan

I do not propose to tell the Deputy.

Deputy Kieran O'Donnell

In the limited time that I have left the professor needs to work with me.

Professor Patrick Honohan

It has to do with-----

Deputy Kieran O'Donnell

The professor needs to work with me on this matter.

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

From a point in June-----

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

-----where basically he stated, in the public domain, that what had happened here was a "deliberate misrepresenting the position of the bank with a view to assessing financial support"-----

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

-----from the taxpayer in 2008, to a position where we now have a statement which reads: "No new issues have been identified that relate to suspected criminal offences." The professor needs to explain that in layman's terms.

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

Please explain.

Professor Patrick Honohan

Was there a theft or an attempt of theft, that is the sort of legal issue that arises. So, we have to look at what then happened between Anglo Irish Bank and the Central Bank, what communications, what attempts, if any, to put this apparent strategy into effect were made and that is where there is nothing. We went and linked them up.

Deputy Kieran O'Donnell

The ordinary man is looking in is saying that the banks are on record, are on the tapes and it is in the public domain, that we will give it €7 billion-----

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

-----and we will coax them into the front room.

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

We will coax them into the kitchen so we can then bring them into the front room. Is that right?

Professor Patrick Honohan

That is not enough for a court. What we looked into was what did they actually do.

Deputy Kieran O'Donnell

Now Professor, that is not the point. The point is-----

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

This was new evidence.

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

Why was it not passed by the Central Bank on to the statutory bodies?

Professor Patrick Honohan

We have a statutory obligation to provide or inform the relevant authorities - and it could be the Garda - of a suspected criminal offence.

Deputy Kieran O'Donnell

Yes.

Professor Patrick Honohan

Apparently, because there is nothing more really than the telephone conversation so it is not a sufficient evidential basis on which to ground a suspicion of a criminal offence.

Deputy Kieran O'Donnell

Could you not have done it in a way? Did you seek legal counsel or advice on this?

Professor Patrick Honohan

We have legal advice on this, yes.

Deputy Kieran O'Donnell

Why could you just not have passed on the information to the statutory authorities without giving a particular viewpoint of your own? This was new evidence.

Professor Patrick Honohan

Sure they read the newspapers too.

Deputy Kieran O'Donnell

No. Previously Professor, you did pass on tapes to the statutory authorities.

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

Why did you not pass on the current tapes as well, in the interest of consistency alone?

Professor Patrick Honohan

I cannot see exactly where the Deputy is coming to here. We looked into this to see if there was anything between the tapes and what happened between the Central Bank and that bank that would form an evidential link. That is what we cannot find. The rest of it is in the public arena and we do not need to.

Deputy Kieran O'Donnell

With due respect, the role of the Central Bank, the investigative role in this particular case, and I am not saying rightly or wrongly-----

Professor Patrick Honohan

No, we do not have an investigative role. We have a role to inform people if a suspicion arises.

Deputy Kieran O'Donnell

If you do not have an investigative role and you passed on the previous Anglo Irish Bank tapes to the statutory authorities, I would have thought that it would be logical to pass the current tapes on.

Professor Patrick Honohan

We could have done that. We could have said, "Oh, we looked at all this thing and there is a lot, we got a lot of information, we passed it on to the gardaí and we are not going to tell you what is in it". I think that would have been deception of the public.

Deputy Kieran O'Donnell

With due respect, and I hate having to pursue this because I am really going into the mortgage thing. Is there any investigation under way on any particular aspect?

Professor Patrick Honohan

This does not stop anybody doing any further work on this. It does not block anything.

Deputy Kieran O'Donnell

The professor is missing my point.

Chairman

The Deputy is over his five minutes.

Deputy Kieran O'Donnell

If there is an investigation under way and evidence comes into the public domain, it would be normal that this evidence would be passed on to be looked at by the statutory bodies.

Professor Patrick Honohan

There is no requirement of such a process.

Deputy Kieran O'Donnell

It would be good practice.

Professor Patrick Honohan

This is not evidence of the type that we would require.

Deputy Kieran O'Donnell

It would be good practice.

Professor Patrick Honohan

I do not think that it is good practice. I think it would be contrary to good practice to pretend that we would use our information about the interaction within the firm, combine it with the public information and claimed we had found something when we have not found something. That would be contrary to good practice.

Deputy Kieran O'Donnell

The public, I think, want to see this investigation carried out. I ask the professor to, even at this point, consider passing over the information without prejudice.

Professor Patrick Honohan

I will be facetious. Does the Deputy want me to send them a copy of the Sunday Independent?

Deputy Kieran O'Donnell

No. That comment is facetious, with due respect.

Professor Patrick Honohan

Yes, it is but that is what you are saying.

Deputy Kieran O'Donnell

I think your role-----

Professor Patrick Honohan

I am drawn to saying that because-----

Deputy Kieran O'Donnell

We take our role on the committee quite seriously.

Professor Patrick Honohan

Exactly.

Deputy Kieran O'Donnell

This is about, if you want it in brass tacks-----

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

This is about over €30 billion of taxpayers' money going into an institution.

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

That has basically cost every man, woman and child in Ireland. With due respect, this information, if it has been published and is new evidence, could it be passed on, without prejudice, by the Central Bank to the statutory bodies? I will leave it at that point and ask the professor to reflect on it. Can I move on to mortgages?

Professor Patrick Honohan

Yes.

Deputy Kieran O'Donnell

I wish to make a couple of points. First, it is five years since we had the mortgage crisis and it is too little too late. I agree with Deputy Michael McGrath on the fact that the audits are now only being conducted and is a huge delay.

Second, I would like the Governor to comment on the inconsistencies between the various institutions. The fact is that Bank of Ireland is charging a normal interest rate on its split mortgage and it has only given 19 of them up to the end of June. He said that the banks have evolved more in regard to the products that they are putting out. PermanentTSB has gone from 1,000 assisted voluntary sales at the end of June to 2,000 at the end of September. I would like to hear the Governor's comment on that particular point.

Third, the Governor went on record a number of months ago but it is not in his statement today. This is nothing personal; this is business. He is on record as saying that the banks have adequate capital and, in a best case scenario, they got €5.8 billion of taxpayers' money in June 2011 to deal with the issue of write-offs in the banks. Does he believe that they adequately capitalised to deal with that measure at this particular time?

Fourth, with regard to the targets that are set down by the banks, it is about putting sustainable solutions in place. I ask the Governor to deal with those points. The banks are not moving fast enough. Are they, in reality, capitalised? Perhaps he will comment on the inconsistencies between the treatments or solutions that are provided by the various institutions.

Chairman

That is the Deputy's last question because it will take time for the Governor to respond. Is the Deputy finished questioning?

Deputy Kieran O'Donnell

Yes.

Professor Patrick Honohan

On the question of inconsistencies between the banks, I imagine that this will end up where the banks actually are offering roughly the same mix. They will have discovered what works and what does not work. I am not uncomfortable, at this stage, with the fact that banks are offering a different mix of solutions. I am not uncomfortable with that.

Deputy Kieran O'Donnell

PermanentTSB is clearly doing assisted voluntary sales on people who are less than 90 days in arrears. There is gross inconsistency. The Bank of Ireland charges a higher rate of interest on a split mortgage than other banks. There are clear inconsistencies. The ordinary person looking in and perhaps a mortgage holder, if they are being financed by the public purse-----

Chairman

The Deputy is out of time.

Deputy Kieran O'Donnell

I find it difficult to understand that the Governor is happy with the inconsistencies.

Chairman

The Deputy's time is his time but if he continues he will prevent the professor responding to him and the time will have expired. If the Deputy interjects once more I shall move on to the next questioner.

Deputy Kieran O'Donnell

Please accept my apologies.

Chairman

I call Professor Honohan.

Professor Patrick Honohan

As I say, there are a number of banks here, some of them are more effective than others and some of them are much further on in processing. The Deputy mentioned the PTSB and he will see that a much bigger share of its proposed solutions are in re-arrangements and I think that it is ahead. Supposing we had said, "I think we will impose the same system on everybody, and since the oldest bank will have that then that will be the one that will apply".

I do not think anyone would be happy with that approach. I am glad to see that some banks have moved ahead of others because they give a signal to other banks of what needs to be done and how. At this stage, I am not unhappy with diversity but I expect the diversity will converge fairly quickly as we go through this process.

The second question concerns whether the banks have enough capital to get through this. A lot of capital was put in two and a half years ago. The banks certainly have loads of capital and have assigned loads of provisions to deal with the mortgage arrears situation. That is not a barrier to their moving much faster. Will they ever need more capital? Yes they will because capital requirements are increasing all the time. Next year we will complete the stress test. I am not saying there is no question of more capital being needed but, for the moment, it is not a barrier to them applying solutions. Was the third question related to the first?

Deputy Kieran O'Donnell

That question concerned the split mortgages and the fact that Bank of Ireland are charging commercial rates.

Professor Patrick Honohan

As mentioned in response to the Chairman, the split mortgage designed by Bank of Ireland does not seem to do much.

Deputy Pearse Doherty

I welcome the Governor to the committee. As the Governor said, people were exercised when they heard the Anglo Irish Bank tapes. They are probably more exercised at the statement released by the Central Bank that it will not issue a report. I found it difficult to follow what the Governor was saying about why he has not referred the tapes to the Garda Síochána. The Garda Síochána has the tapes.

Professor Patrick Honohan

Yes.

Deputy Pearse Doherty

I find it difficult to understand why the Governor did not say that to the committee. The Central Bank has not decided to issue a report on any regulatory wrongdoing or regulatory breach-----

Professor Patrick Honohan

No, it is not that. Can I answer that point?

Deputy Pearse Doherty

The Governor can reply when I finish the question. The two individuals who played a prominent role in those tapes, which the Governor refers to as being wrong, were kept within the bank for a long period. They were paid bucket loads of money on the watch of the Governor. The Central Bank knew in 2009 that recordings on that telephone line had been requested by the Garda Síochána. The minutes of the Central Bank meeting discuss the handover of the tapes. Why did the Governor allow these individuals, who did so much damage to the reputation of the country through the nonsense going on in the tapes, not to mention the other damage that could potentially be done, to remain within the bank and to be promoted to senior roles in resolving the Anglo Irish Bank mess?

Professor Patrick Honohan

That is a good question. I will also answer the first point that Deputy Pearse Doherty made. We are not just looking for regulatory breaches; we were looking for a link between what was in the public arena in the Sunday Independent and the interaction between Anglo Irish Bank and the Central Bank. I referred to it facetiously in response to Deputy Kieran O'Donnell and I am sorry for that. That is what is potentially of value as a finding of evidence of some criminal activity and there was a failure to find that link. We do not have evidence of them following up in any effective way on what the gameplan was. That is what is missing. Even for an attempted criminal offence, standards are higher than one might think. We often come up against the high evidential standard and the definition of various crimes. At the Committee of Public Accounts in June or July, Matthew Elderfield pointed out that it is very difficult to take sanctions against individuals with the structure that is in place. Also during the summer, the British Parliamentary Commission on Banking Standards produced a report based on the British banking crisis and the various things that could be done. One of the things that it suggested, which the Central Bank has been considering for quite a while, is a novel criminal offence of reckless misconduct in the management of the bank. The parliamentary commission recommended that offence. We are talking about mismanagement on a large scale. You are the Members of the Oireachtas. We have come up against legislative barriers.

With regard to the next question, the Central Bank did not have the recordings in spring 2009. The Financial Regulator at the time was sent a transcript of part of communications between the Central Bank and Anglo Irish Bank. It was sent by the new management of Anglo Irish Bank but it was a selected transcript.

Deputy Pearse Doherty

For clarity, were these the transcripts of the tapes requested by court order by the Garda Síochána from Anglo Irish Bank in March 2009, discussed at the board meeting in 2009 and subsequently given to the Garda Síochána in 2009?

Professor Patrick Honohan

I think we are talking about the same tapes. However, they are selected transcripts and they do not have all of the elements we are now focusing on. That is why I said they were new. It is not as if we had all of this stuff, which would cast doubt over certain persons and pose questions about who should be running a bank. Alarm bells were not ringing. There was new management and a new board of directors in Anglo Irish Bank. We were relying on the new top management and the new board of directors to deal with its staff. We did not have any alarm bells ringing.

Deputy Pearse Doherty

Who provided the Financial Regulator with transcripts of sections of those tapes and why were they not the most important sections?

Professor Patrick Honohan

I asked that question. This was in the early stages of the investigation and people said that they wanted to have information on a specific point but the reply was that they were trying to get it from the tapes and we were given some material. A limited amount of material was provided in the early stages and then it was passed on to the Garda Síochána. It was not pursued in any greater depth.

Deputy Pearse Doherty

Does the Governor regret that the Central Bank deemed these two individuals fit?

Professor Patrick Honohan

I will not make a comment on that. I regret we did not know more.

Deputy Pearse Doherty

The subject of today's committee meeting is the mortgage issue. However my final question concerns this topic. I am deeply upset that the Central Bank has not issued a report. I take on board the excuses of the Governor but it is in the public interest to make comments known in respect of this. A report should have been issued to the Garda Síochána and the Office of the Director of Corporate Enforcement.

Professor Patrick Honohan

I will take the comments of the Deputies back to the Central Bank Commission and we will look to see whether there is a public interest in providing more information. We are not in the business of holding on to information or preventing it from coming out.

Deputy Pearse Doherty

I appreciate that because the Financial Regulator and the Central Bank are the best placed to give views on potential breaches. To paraphrase the Central Bank statement, it says that after listening to the tapes, and examining the tapes released in the Irish Independent, the Central Bank has come to the conclusion we have discussed. Has the Central Bank only listened to the tapes in the possession of the Irish Independent?

Professor Patrick Honohan

Yes.

Deputy Pearse Doherty

There are hours of tapes from the recordings of this room. The committee is in the dark and has only heard what the Irish Independent has decided to release. Selected, edited versions of the tapes were given to the Irish Independent. Given the importance of the sum of money involved to the State, why has Central Bank not requested all of the tapes to scan them to see if there were regulatory or criminal breaches?

Professor Patrick Honohan

We have looked into the question asked whether there is more we should be doing.

I think the reason we have not done this is that it is an undirected search into a body of tapes. It is not clear to us how we can effectively achieve any result from that. It is basically a problem of a giant haystack and we have not solved that haystack problem. If there was a way to imagine how to do this and get some value out of it, we would do it and we will do it. So far, though, we have not come up with that.

Deputy Pearse Doherty

Can I suggest to Mr. Honohan that someone from the Central Bank should go down to any high street shop and buy a tape recorder, and then he should put a couple of people in a room and listen to key people who were involved in Anglo Irish Bank, who said that they picked figures out of their backside to give to the Central Bank, who claimed they were going to go down swinging their arms and demanding a cheque, who claimed that this was part of a strategy to entrap the State into bailing out a bank when they knew the figure involved was a lot higher. To say that the Central Bank has not figured out a way to do it is incredible. We know there are tape recordings of very senior individuals of the bank to which Mr. Honohan has access and which he can listen to. Then he can make a determination as to whether those recordings or confessions, whatever one wants to call them, contain regulatory breaches. I genuinely have to say that the Governor's comments are disappointing. I put it to him that the only reason the Central Bank has done this - and the bank knew of the existence of the tapes in 2009 - is that-----

Professor Patrick Honohan

No; wait a minute. No.

Deputy Pearse Doherty

-----the Sunday Independent released them.

Professor Patrick Honohan

Of course it is. We did not know-----

Deputy Pearse Doherty

The bank has done the bare minimum and listened to the Sunday Independent extracts that we have all listened to. Other material is not in the public domain. Nobody else has access to it bar the Central Bank, an Garda Síochána, the Director of Corporate Enforcement and some former directors of Anglo Irish Bank. We cannot do it. Professor Honohan said earlier that we are the Oireachtas and we devise the laws. He is the Governor of the Central Bank. He must listen to the tapes and find out if there have been any breaches.

Professor Patrick Honohan

Well, as I said, we have not arrived at a way of doing useful work in this area. If and when we do we will do it, but there are other players. As the Deputy knows, it is open to the Garda to do this as well. We are not an entity that investigates criminal matters. If criminal matters come to our attention we pass them to the Gardaí. So it is a bit undirected to suggest we get hold of hundreds of hours of tapes and trawl through them. There may be people who would have a great financial interest in doing this and they might be able to do it but we are not going to get any more money out of Anglo Irish Bank. If it is to do with criminal matters, we have no authority in that regard. Anyway, it is a question we have looked into. I may not have given the best technical answer and my colleagues may ask me why I did not point out this or that difficulty, which I have forgotten about.

Deputy Pearse Doherty

Okay. I only have a couple of minutes left. In September 2011 and again in 2012, the Governor came in here to talk about the issue of mortgage arrears with his arms swinging, saying the banks were not doing enough and were not being aggressive enough and that the Central Bank was breathing down their necks, but the arrears crisis has got worse. I put it to him, as I have done before, that he is the top dog. He is the person who can actually force the banks to do stuff.

The Minister for Finance said yesterday on the Dáil record: "Letters threatening repossession or legal action could not in my opinion be considered as a sustainable solution under the mortgage arrears targets". He went on to say that repossession should only ever be considered as a last option. He is very clearly saying that it is not in the targets. It is not allowed to be included in the targets. We know that AIB has issued something like 6,000 letters. We had representatives from the Bank of Ireland saying that the letters AIB issued are not the same as the letters they issued because they actually go to the court and it is the start of a process. Why has the Governor been silent on this? Can the Governor not say to the committee that letters threatening repossession or legal action are not, in his opinion, considered a sustainable solution? That is the first point. The second is the fact that the banks are running rings around the Central Bank. The spirit of the targets was about reaching conclusions and finding solutions for people who were in genuine mortgage distress. Forgetting the 16,000 legal letters of repossession, it is pathetic what the banks have done in terms of real solutions. The last time the Governor was before this committee he mentioned that if the Central Bank set targets, the targets would be reached but not in the appropriate way. Why is the Central Bank not doing more? We have had to wait six months after the targets were given to the Central Bank to find out if it would okay them. Then last week the Central Bank came out with a statement to the effect that one year on from setting the targets, it was satisfied that 75% of those in mortgage distress will still not have a concluded agreement with the four banks. We have had representatives from the four banks before this committee who were unable to agree on whether interest-only mortgages or split mortgages, with the residual debt hanging, were acceptable to the Central Bank. There are only four or five banks involved. How come, six months into this process, there is so much vagueness that the CEOs of the four main banks still do not know what the Central Bank means by long-term solutions to mortgage distress?

Chairman

That is the Deputy's final question.

Professor Patrick Honohan

The Deputy made a lot of remarks there and I am not going to challenge every one of them, obviously. I have never said that I am satisfied with the situation. I am satisfied that our approach is the correct one and not an incorrect one. There are people who would say we should not be interfering with what the banks are doing. I am not in that space. The banks will complain that we are pushing them around while Deputy Doherty will say that they are running rings around us. The net result is that the banks have not had the capacity and, to some extent, the willingness to reach sustainable solutions. That is why we brought in the term "sustainable" because they have been willing to let this situation run and letting it run has contributed to a rise in the arrears because nobody can see the clear end to this process that should be evident. We are not satisfied.

Did other countries do it better? A bit better, yes. They started earlier. At the time when the banks were struggling for survival here - which is not an excuse but probably the explanation - and not doing anything on the mortgages, banks in Iceland, which had been swept away and re-started, started to get to grips with it. It has taken them three or four years but now they are well ahead of the Irish banks. It is a question of process and effectiveness. We have seen one of the banks, with perhaps a simpler book, with a much more effective process. It is not soft on the borrowers but is disciplined and organised. It has got results. The other banks are looking around and seeing that they could and should be doing that. As I said in my introductory statement, which I put together in a way that tries to clarify that, it is a question of failures of process and failures of policy, as well as differences of policy between us and the banks. Banks are not going to get away with those differences. In the first wave they could rely on the legal letters because they only had to reach 25%. The next wave will be harder.

Deputy Pearse Doherty

My first question was whether the Governor concurs with the statement from the Minister for Finance that letters threatening repossession or legal action could not be considered sustainable solutions. Does the Governor agree with that statement?

Professor Patrick Honohan

I always agree with the Minister.

Chairman

Excuse me; sorry. I must say to members that if their priority question is going to be their last question, they will run out of time. The Deputy should have asked his main question earlier. We are now at 17 minutes and the limit is 15. I must move on to the next contributor.

Deputy Pearse Doherty

On a point of order, can I get the answer to my question, which I asked within the time allocated to me? It was a very simple question of whether the Governor agrees or disagrees. With respect, the Governor tried to explain it but did not answer the specific question.

Chairman

The Deputy had his three questions.

Deputy Pearse Doherty

It is the Chairman's job to try to ensure that an answer is given.

Chairman

Yes. The Deputy is correct; it is my job to make sure. I have warned Members before that when they are coming up to the end of their time they should not ask heavily loaded questions because they will run out of time.

Deputy Pearse Doherty

It is a "Yes" or "No" answer.

Chairman

I can ask for a "Yes" or "No" answer but I would say to the Deputy, for future reference, that if his last question contains two or three supplementary questions or two or three different points, it will not be answered within the time. Can I get a "Yes" or "No" answer from Mr. Honohan with regard to the Minister for Finance's comments yesterday?

Professor Patrick Honohan

I always agree with the Minister for Finance. I ask the committee to pay attention to the wording I used. I said that the third mode is available to a bank where an arrangement cannot be reached or is not appropriate. That is where it can be used. This is the first wave of the use of the third mode.

Deputy Kevin Humphreys

I propose to give the last five minutes of my time to Senator Hayden because she has a pressing appointment. The Governor is very welcome. Can I ask him to confirm a couple of reports I have picked up on? Not everything in the newspapers is correct. Did representatives of the Central Bank, the EU and the IMF meet over two days to agree a blueprint for a bank health check that will look at the asset quality of the Irish bank loans? It was reported in The Sunday Business Post last weekend that Ernst & Young and KPMG have been appointed to carry out these stress tests or health checks and have started work on them. Are those reports correct?

Professor Patrick Honohan

Yes, this is all part of the balance sheet assessment of the banks. I should explain. The Deputy will recall that we did a big stress test on the banks in March 2011.

Deputy Kevin Humphreys

Yes.

Professor Patrick Honohan

The original idea was that we would do one of those every year. We decided here in Dublin that it was not such a good idea. We did not have enough new information, etc. We told the troika it was not a good idea and it eventually agreed it was not a good idea. We have now decided to break it into a number of phases. This is the first one since 2011. We will do one part of it before Christmas. We will do the other two parts of it in the first half of 2014. I could use all of our time explaining what is to be assessed. A great deal of work is being done at present. We have engaged many firms. Basically, they are repeating much of the work that was done in the spring of 2011. They are doing it better. They have a little more time to do it. One of the other Deputies asked me why it took so long to commission the audits for the mortgage arrears. There is always something else going on as well.

Deputy Kevin Humphreys

Time is tight and the Chairman is very harsh. The reports are true.

Professor Patrick Honohan

Yes. There is no great secret about it.

Deputy Kevin Humphreys

That is fine.

Professor Patrick Honohan

There was a two day meeting last week. There have been many meetings over recent months to plan all of this thing. It is supposed to dovetail with the balance sheet assessment that will be done in the new banking regulator in Europe.

Deputy Kevin Humphreys

That is grand. The answer to my question is "Yes". This work has been given to KPMG, which audited Irish Nationwide Building Society, and to Ernst & Young, which audited Anglo Irish Bank. KPMG was recently replaced as AIB's auditors. It has been reported that it is now checking the loan book as well. Ernst & Young previously audited EBS, which is now part of AIB. It has been reported that Ernst & Young is carrying out the test for AIB, part of which it audited. Ernst & Young is currently being sued over its auditing of Anglo Irish Bank. Considering the legacy issues relating to the banking collapse and the fact these firms previously audited these banks, would it not have been better to look outside Ireland for a team of auditors, as we did previously when we engaged BlackRock International? The real point is that we need to ensure we do not make the same mistakes we made before now. Is it really credible to allow institutions that were tied into our banking collapse to carry out this extremely important work?

Professor Patrick Honohan

This is a good question. I am glad the Deputy has asked me it. The first thing I want to say is that BlackRock has been involved. We engaged it at an early stage before we made the decision to delay this exercise. It has been closely involved in validating our methods. Much of what we once had to get external interests to do is now being done in-house. BlackRock has been working with us on this matter. This phase, which is the first of three phases, is not the high end part of the work. We are not relying on these particular consultants to deliver the final result for which we are looking to see whether capital is needed. This part of the exercise involves basic data validation and backward-looking provisioning. I ask the Deputy not to worry because BlackRock and similar institutions are involved and will continue to be involved in the overall validation of the exercise.

Deputy Kevin Humphreys

Is the work that these companies are carrying out important?

Professor Patrick Honohan

I am satisfied they are able to do this work.

Deputy Kevin Humphreys

I am putting it to the Governor-----

Professor Patrick Honohan

The Deputy asked if it is important. Yes, it is important.

Deputy Kevin Humphreys

It is important.

Professor Patrick Honohan

Of course it is important.

Deputy Kevin Humphreys

I suggest there is a credibility issue.

Professor Patrick Honohan

I do not think so.

Deputy Kevin Humphreys

I understand that Ireland is a small country with a limited number of suitable companies that have the necessary experience of this activity. If we look back at what happened, as we have to do if we are to learn lessons, we will be reminded that these companies were tied into previous audits and have deep links with the institutions that are being examined. I am just saying I do not think it is credible to go back to them to carry out this work. Can Professor Honohan not see the logic of what I am putting to him?

Professor Patrick Honohan

The Boston Consulting Group, which is a completely external group, is overseeing the operations and the work of the companies that the Deputy so disparages. It is not all that easy to commission speedy work by auditors in quantity. There are dozens and dozens of people. I am satisfied that we have sufficient quality and sufficient oversight of this work.

Deputy Kevin Humphreys

I am not talking disparagingly of the individuals. I am sure there are fantastic individuals working in these companies.

Professor Patrick Honohan

Yes.

Deputy Kevin Humphreys

There has to be a certain degree of credibility. It does not boost my confidence in this process when Professor Honohan says it being overseen by BlackRock International and the Boston Consulting Group. It seems that people are being brought in to oversee the auditors because there is a lack of confidence in their ability to do this job.

Professor Patrick Honohan

The Deputy cannot have it both ways, if I may say so. He cannot say on the one hand that we should bring in outsiders rather than hiring people who have no credibility, and on the other hand that it is not good enough when it is pointed out there are outsiders involved. We are overseeing it in the Cental Bank.

Deputy Kevin Humphreys

Professor Honohan said that there are outsiders overseeing the auditors.

Professor Patrick Honohan

Yes.

Deputy Kevin Humphreys

That is not the point. If one feels there is a need for outsiders to oversee the auditors, maybe one would be better off giving the outsiders the work in the first instance. I say that on the basis of the credibility problems that have arisen before now.

Deputy Peter Mathews

The Boston Consulting Group, Barclays Capital and BlackRock International got the first prudential capital assessment review 100% wrong.

Chairman

The Deputy is getting it wrong at the moment because he is last on the list of speakers.

Deputy Kevin Humphreys

I will move on because it is obvious that Professor Honohan and I are not going to get very far with our disagreement on this matter.

Professor Patrick Honohan

I am not entirely disagreeing with the Deputy. It would be nice to have a wider group, but there are practicalities.

Deputy Kevin Humphreys

I ask Professor Honohan to look at those practicalities. We have to go back to the people at election time and say we are using credible companies to oversee these institutions and make sure they-----

Professor Patrick Honohan

That is absolutely crucial. I am confident that this exercise, taken as a whole, will be seen as credible by the market.

Deputy Kevin Humphreys

I would like to revisit an old chestnut that I always seem to raise with Professor Honohan. The Central Bank recently published an extremely interesting document looking at the effectiveness of the security market programmes in stabilising Irish bond yields. Have Professor Honohan or his colleagues examined the purchase prices of the billions of Irish bonds currently held by the European Central Bank, the times of the bonds and the amount of profits that have been made on this? Since last I raised this matter with him, has Professor Honohan discussed with any of the other central bank governors in Europe the arrangements for these profits to be given back to Ireland, in line with the agreement that was put in place in the case of Greece? Does he believe it is appropriate that we are being discriminated against in such a way by the euro system? I do not want to hear again that Ireland is not Greece. Although I have read the report, I cannot put a figure on the profits. It has been suggested that the level of the profits is €2 billion or €3 billion. Perhaps the officials from the Central Bank can take the figures out of this study and give us a precise figure for the profits that are being made. In light of the current discussions on what to do with €500 million in our current budget, one way or another, it would be of benefit if we could get our hands on this possible €2 billion or €3 billion. Can Professor Honohan give me a precise figure in this regard? I know the money is shared around the different central banks. We will get some small amount of that profit. I believe we should receive the same deal that Greece got. We should receive those profits. I want to know what conversations have been taking place. Has a figure been put on those profits?

Chairman

I need to be excused for a couple of moments. Deputy Kieran O'Donnell will take the Chair in my absence, with the permission of the committee. I will return shortly.

Deputy Kieran O'Donnell took the Chair.

Professor Patrick Honohan

I will give Deputy Humphreys the ECB answer to his question. It is relevant because the ECB has acquired these bonds. I will elaborate on what appears to have happened in the case of Greece. The profits of the ECB and the national central banks-----

Deputy Kevin Humphreys

Yes.

Professor Patrick Honohan

-----are not being transferred to Greece by the Central Bank as that would be contrary to the Treaty of Rome, under which one cannot engage in monetary financing. However, national governments, which are receiving profit flows from the national central banks, are being told: "Here is an amount which you may pass on to Greece if you so wish." The passing on, therefore, is being done by national governments. The scheme the Deputy is outlining involves national governments using some of their resources, albeit resources provided by the national central banks, as part of the assistance to Greece. In the case of Greece, it has not been a question of the European Central Bank or national central banks deciding to provide a gift. If one wanted to pursue this matter, it would be a question of going around to all the European governments.

Deputy Kevin Humphreys

There were two parts to my question. I ask Professor Honohan to respond on the figure as to the profits that were made.

Professor Patrick Honohan

I do not know the figure but I can probably find out the answer.

Deputy Kevin Humphreys

At our previous meeting, the Governor indicated he could not find out the figure.

Professor Patrick Honohan

Did I?

Deputy Kevin Humphreys

Yes.

Professor Patrick Honohan

Perhaps I can find out. I will pursue the matter.

Deputy Kevin Humphreys

How did the Greeks find out how much the profits were?

Professor Patrick Honohan

In the context of all this negotiation, it was agreed that this would be calculated and reported to the Greek Government. If we were Greece and we were heading down this road, there is no doubt something similar would happen.

Deputy Kevin Humphreys

Ireland is not Greece. A deal was done that benefited Greece to the tune of several billion euro.

Professor Patrick Honohan

It was agreed by national governments.

Deputy Kevin Humphreys

Professor Honohan's statement that he will help the joint committee by obtaining the figure is positive in light of the speculation that surrounds this issue. Perhaps he and the Minister for Finance will assist us further by adopting the approach I have outlined, which I believe would generate considerable savings.

Senator Aideen Hayden

I thank Deputy Humphreys for sharing time and welcome the Governor of the Central Bank to the joint committee. My comments will focus on mortgage arrears in the buy-to-let sector. Since the beginning of 2013, the number of receivers appointed to landlords' interests in buy-to-let properties under the deed of mortgage has increased significantly. As the Governor is aware, having referred to the matter, the Land and Conveyancing Law Reform Act 2013, which was recently passed by the Seanad, will facilitate the recovery through the courts of a greater number of buy-to-let properties. I note from the documentation provided by the Central Bank that, by the end of June 2013, of the buy-to-let mortgages where solutions had been proposed, 74% were either to be surrendered or legal action was to be taken. This figure significantly exceeds the solutions provided in the principal dwelling sector.

The rental sector accounts for 20% of the entire housing market. Families live in rented dwelling and, as the property market recovers, they fear that greater problems will emerge. There is evidence that receivers are entering properties, taking rents from tenants, treating them as the legal occupiers and seeking to remove them without giving appropriate notice.

Professor Honohan indicated the Central Bank's approach was not only about achieving regulatory objectives but also involved consumer protection. There appears to be no consumer protection available to tenants in buy-to-let properties. Given that the mortgages for such properties were granted on the basis that the properties would be let, damage to tenants in the sector was reasonably foreseeable. Guidance issued recently by the Irish Banking Federation appears to indicate that, while it is perfectly fine for tenants to pay rents to receivers under deeds of mortgage, the receiver has no obligation to the tenant in respect of repairs. I do not regard this as reasonable consumer protection. Does the Governor have any comment to make on the issue?

Similarly, the Governor indicated the code of conduct on mortgage arrears is designed to protect consumers. A code of conduct is not available for buy-to-let mortgage arrears. If such a code were in place, it would ensure greater transparency among the financial institutions and by landlords and tenants and ensure the financial institutions respected and upheld tenants rights.

Acting Chairman (Deputy Kieran O'Donnell)

I suggest the Senator ask a question, after which she can interact with the Governor.

Senator Aideen Hayden

Everything I have said is essentially a question.

Acting Chairman (Deputy Kieran O'Donnell)

I am trying to be helpful.

Senator Aideen Hayden

The issue is the treatment of the buy-to-let market. The Governor's comments on repossessions in the sector have been very gung-ho. There is clear evidence that vulnerable tenants are being poorly treated in this process. My questions relate to the actions of the receivers and comments made by the Irish Banking Federation. What is the Governor's view on a code of conduct for buy-to-let mortgage arrears?

Professor Patrick Honohan

As formulated, I understand the Senator's question relates to the tenants rather than owners of the property, although it may relate to both.

Senator Aideen Hayden

My question specifically relates to the tenants, although in respect of landlords there is a clear issue around the fragile recovery of the market. There is evidence that the buy-to-let market is being targeted as the property market recovers. My main interest is in the position of tenants. Mortgages in the buy-to-let market were granted specifically on the basis that there would be tenants in occupation of the properties in question. As the Governor noted, consumer protection comes within the mandate of the Central Bank. Therefore, protection of tenants is part of its mandate as they have an equitable interest in the situation.

Professor Patrick Honohan

I am not quite sure of the correct answer to the question but the matter is probably not part of our mandate. As with all other consumers, tenants should be protected. However, they are not consumers of financial services and do not come within the perimeter of the Central Bank's jurisdiction. The owners of buy-to-let properties or borrowers could in principle be treated as consumers. The behaviour of banks in relation to all borrowers is governed by a number of codes. The specific codes on mortgage arrears relating to residential owner-occupier property would not be appropriate to the buy-to-let market. I do not share the concern expressed by some that proceeding to sales of buy-to-let investment properties, whether on the basis of a voluntary surrender, assisted sale or something else of that nature, would necessarily cause any disturbance to the stability of the housing market.

Senator Aideen Hayden

The relationship between landlords and tenants is governed under the Residential Tenancies Act 2004. There is clear evidence that receivers are ignoring the Act.

Professor Patrick Honohan

The Senator's question is whether the Central Bank should take some steps in this matter. The matter probably does not come within our sphere. I will check the position and provide an answer.

Acting Chairman (Deputy Kieran O'Donnell)

I suggest Professor Honohan revert to the joint committee on the issue.

Professor Patrick Honohan

I will do so.

Deputy Stephen S. Donnelly

I thank the Governor for coming before the joint committee. As always, he is showing openness in his interaction with us. The Governor noted in his opening statement that the early indications suggest this process is working. In my opinion, the contrary is the case and the process is not working, certainly not in the interests of the economic recovery of the country. We see a major variation in the type and quality of offers the banks are making to borrowers and in differences in the behaviour of the banks in terms of what is acceptable. Some are engaging in very good behaviour, while others are engaging in very bad behaviour.

The joint committee has observed that a large number of the so-called solutions offered so far are either legal letters or what I would describe as "extend and pretend" solutions, that is, term extensions and so forth. When representatives of several of the banks appeared before us recently, their chief executives stated that, as a matter of banking policy, they will not engage in any write-downs of debt, notwithstanding the requirement to do so as part of the insolvency legislation. If the banks do not provide write-downs, where it is appropriate to do so, citizens will be forced into unnecessary bankruptcy.

The reason the process is not working is that arrears are not the problem but a symptom of the problem.

The problem is that many Irish households have too much debt relative to their current and near-term income. I believe the process as it is playing out will just hide the problem. Let us say, for example, that all the arrears are cleared by the end of next year. Then, as this is played out, the quantum of debt will, by and large, be the same, as the level of household income. Ergo, the problem will not have been resolved but will simply have been hidden. There is a huge opportunity to get this right, if we can mandate solutions like debt wreck and if we can, for example, stop Bank of Ireland from pretending that charging the full amount of interest on the shelved proportion is anything other the normal loan split in half. I believe that Mr. Honohan, as Governor, is a key person to do this.

Who is in charge? My understanding was that up until recently, the Central Bank did not have much power to direct the banks. Therefore, in preparation for the meeting today, I took a look back at the new Central Bank Act which came into effect in July, which gives the Central Bank significant new powers. Part 7 of the Act gives the Central Bank power to issue directions to the banks. One of these powers is that if a financial institution is conducting business in a manner that could jeopardise or prejudice the rights and interests of customers, the Central Bank can direct that bank. This means the Central Bank could give a direction and part of that direction would be to tell the banks how they can operate. Part 8 deals with the type of regulations the Central Bank can make, one of which is a provision specifying requirements which are to apply in regard to the provision of financial services to a customer for the purpose of determining the suitability of the financial services to the customer etc., provisions about making loans available etc.

I am not a lawyer, but in Mr. Honohan's opinion does he now have the power he needs, if he so chooses, to direct the banks? For example, could he say to Bank of Ireland that the Central Bank will not allow it use its pretend split mortgage. Could the Central Bank tell all of the banks they must use debt for equity in conditions it deems acceptable. Does the Central Bank have the power to do that or does the Oireachtas need to give further legislative authority to it to get this process moving properly.

Professor Patrick Honohan

My impression is that we have the powers we need to get this done. It is different when we talk about criminal matters, but on the mortgage issue it is not a question of saying that if only we had the powers, we could force them to do this or that. It is a question of what we can force them to do that will induce them to act on a case by case basis that will deliver the results we want. I would be fearful that if we lock them into a situation where they must do one thing and not another, in a specific directive that would straitjacket them, the banks will say they no longer care what they do and will just follow mechanically the instructions provided by the Central Bank. We are not equipped to go through 120,000 cases of arrears and adjudicate on the rightness or wrongness of them. We only see a sample of these.

Deputy Ciarán Lynch resumed the Chair.

Deputy Stephen S. Donnelly

Thank you, so the Central Bank has the power.

Professor Patrick Honohan

We have the power, and if we need more, we will ask for it.

Deputy Stephen S. Donnelly

What is the Central Bank going to do about this banking lottery that is going on, where if one happens to be with Bank of Ireland, one is in trouble? However, if one happens to be with AIB, one is in less trouble. We have this banking lottery. What is the Central Bank going to do about the fact that now, a few months into the process, some banks are beginning to offer more sustainable solutions? What about the huge number of people who have been offered the bad sustainable solutions? How is the Central Bank going to use its powers to ensure consistency?

The second part of my question is very important for these borrowers. If I am a Bank of Ireland customer and I have been offered a terrible solution and have been sort of bullied into accepting it, and if the Central Bank then says it is going to insist on consistency, will I be able to come back to my bank and say that Governor Patrick Honohan has declared that what the bank has offered and pushed me into is not sustainable and that I want a better deal?

Professor Patrick Honohan

We work on a case by case basis. Therefore, one cannot say so-and-so was offered this, but I was not offered it, because it is not an "it". Obviously, the banks are going to and should match the design of the restructure in line with the income, resources and potential of the borrower.

Deputy Stephen S. Donnelly

My question was -----

Professor Patrick Honohan

The Deputy's question concerned different banks.

Deputy Stephen S. Donnelly

My question is what is the Central Bank going to do to get that consistency.

Professor Patrick Honohan

I am not seeking exact consistency in the treatment of all persons. Nobody gives that as an objective. What we want is that everybody will have a sustainable solution.

Chairman

The Deputy has had over six minutes.

Deputy Stephen S. Donnelly

My last question concerns sustainability. Two of the key words in the Governor's statement and in this process are "sustainable" and "affordable". If we ignore the pretend split mortgage from Bank of Ireland, the split mortgage in most cases looks at what happens if the household improves its financial situation. The bank will knock on the door every three years or so and say it wants half of what the Government has not already taken. This equates to a marginal tax rate of 76% for the rest of their lives. Does Professor Honohan believe that is a sustainable solution?

Professor Patrick Honohan

The exact way in which the split is defined is up to the bank. The Deputy is pulling -----

Deputy Stephen S. Donnelly

We know what it is, they came in and told us two weeks ago. On the basis that for many people it constitutes a 76% marginal tax rate, does Professor Honohan believe that is sustainable?

Professor Patrick Honohan

Let us look and see. The committee gets a sort of sound byte, but let us look and see on the files we will audit exactly what the banks are offering in particular circumstances. The main advantage of the split is in a case where there is a huge improvement in the household's income. The banks should not expect that they will get the warehoused -----

Deputy Stephen S. Donnelly

I understand. I am sorry to cut across the professor, but I have run out of time. My question is whether Professor Honohan accepts that the split mortgage as it has been described to us, which will constitute a 76% marginal tax rate, meets the Central Bank's requirements.

Professor Patrick Honohan

I have seen versions that I think will work.

Deputy Stephen S. Donnelly

Do those versions include ones where the Government takes 52% -----

Professor Patrick Honohan

Does the Deputy want me to take one example and say it does not work?

Deputy Stephen S. Donnelly

I want Professor Honohan to take the example the banks have told us they are using, which is that the bank will take 50% of the net additional income, constituting a 76% marginal tax rate.

Professor Patrick Honohan

I am not going to adjudicate here without seeing the circumstances.

Deputy Stephen S. Donnelly

I have just told Professor Honohan the circumstances.

Professor Patrick Honohan

Yes, but the Deputy has not told me the circumstances of the borrower. I will hedge that answer, because I do not want to knock out some scheme that may very well be working.

Deputy Joe Higgins

With regard to the Anglo Irish Bank tapes, Professor Honohan was quoted in a German newspaper a few months ago as saying that it seemed that the Anglo bankers were deliberately misrepresenting the position of the bank, with a view to accessing financial support. Was it after that the professor went and looked to see in detail what these characters said in subsequent meetings with the Central Bank and did he then establish that they did not misrepresent the position of the bank in their dealings to attempt to get funds and is that why he says there are actually no new issues?

Professor Patrick Honohan

Broadly, that is right. I do not want to say that we have established that nothing happened, but we have not established that something happened. In other words, we have not found any evidence that they put those ideas into reality.

Deputy Joe Higgins

So is it that it was macho, juvenile bluffing by these guys talking among themselves?

Professor Patrick Honohan

We are looking for the connection, but we cannot find it.

Deputy Joe Higgins

It does not seem credible. These guys, in what they thought were private conversations, were hatching plots to be underwritten for the speculation they had carried out, by the taxpayer eventually, yet the Central Bank says it could find nothing. Did it look very deeply?

Professor Patrick Honohan

We looked fairly hard, but have not found anything. Remember, they did not get the money. The issues changed and they got rescued in a different way.

Deputy Joe Higgins

Professor Honohan said there are three modes by which the crisis mortgages can be resolved, the third of which is eviction. All of these modes are to the advantage of the banks. The Central Bank contemplates no general write-down for ordinary homeowners in serious negative equity, whether or not they are in arrears. Many people who are not in arrears are in deep hardship trying to make their monthly payments. In 2010, Professor Honohan was instrumental in bouncing the Fianna Fáil-Green Party Government - admittedly hapless, punch drunk and bedraggled - into going for a bailout and the troika programme.

It is not a bailout of the taxpayers or of the Irish State incidentally, but a bailout of the big European institutions and bondholders who had gambled wildly in the Irish property market. This has led to a consequence of further austerity that is still grinding down our economy and our people. Professor Honohan was prepared, along with his colleagues in Europe, to allow the private debts of the perpetrators to be underwritten on the backs of the Irish working class people, but there was nothing whatsoever for the victims who are the mortgage holders and the young generation of workers who were blackmailed into paying these horrific speculative prices for property.

I would like to comment on split mortgages. Can anybody contemplate the vista of people having these debts hung around their necks for the next 40 years until they are into their 70s or even 80s? Apart from the morality of this, it is clear that this is a huge drag on our economy, which is still bouncing around the bottom. A write-down to the current value of people's homes, and therefore a write-down of the monthly repayments, should be how we overcome this problem in a global sense, while releasing billions that will go into the real economy and help to revive it. Why does Professor Honohan not contemplate that?

Professor Patrick Honohan

I would like first to take advantage of the Deputy's question to repudiate the idea that in some way, I bounced a government into doing something that was bad for the country. I did not bounce anybody, but I did encourage what I believe to be an action that was in fact protective of the provision of public services, albeit on a constrained basis. I believed that any other action, such as a delay until things got even worse, would have constrained the Government even more in the current years. I firmly believe that and I think there is a tendency to reinterpret history. In fact, the members of the Government of the day took their decisions with their eyes wide open. My influence was only one of many. It was obviously the right thing to do, but there may have been a better solution to the wider debt crisis in Europe. In terms of what is available to Ireland, however, and regardless of one's perspective, we have been working on the best course these past few years which allows the best levels of resources to the people of Ireland, because it allowed that additional borrowing in those years.

The Deputy has spoken about money being made available for restructuring of banking debt. It was either Deputy Humphreys or Deputy O'Donnell who pointed out that very large sums of money from those amounts borrowed as part of the programme have been set aside to enable the banks to absorb those losses that will inevitably occur from the mortgage crisis. Our attempt is to get them to move faster to recognise that and to create the sustainable solutions which will in fact cost-----

Deputy Joe Higgins

They come in here and resolutely say there will not be debt forgiveness, as they call it. I do not call it that. The Governor, Professor Honohan, was prepared to underwrite a policy where the billionaire bondholders were bailed out on the backs of the Irish working class people, but he will not contemplate such relief for those who were their victims.

The national debt is about 120% of gross national product. The annual payments on interest are about €9 billion this year. How much of that is accounted for by funds borrowed for the bank bailout? The troika programme is supposed to be finished in about one month or two. The Irish economy continues to bounce along the bottom. Growth is minimal and austerity has had a devastating effect. Can the Governor give a guarantee that in 12 months or in two or three years, the financial markets will not look at this country and decide we are incapable of meeting our payments and so will not advance further funds, or raise interest levels to massive heights, forcing the country into another bailout, with massively punitive austerity policies? Can the Governor say that this is absolutely ruled out?

Professor Patrick Honohan

The path of adjustment, to which the Government has committed itself and has maintained up to now, is the best chance of not only getting the debt under control - it is coming under control and this should be the peak year - but also for getting to a growth path when people understand that the adjustment has been concluded. That is why I am not in favour of postponing this adjustment. Getting to the end of this adjustment as fast as possible will mean that confidence can return domestically, people can see light at the end of the tunnel, and the growth can come back. The combination of discipline and growth is what will assure lenders and everybody else that things are under control.

I listened to Ashoka Mody, who is a good friend, and I agree with much of what he says. The only difference is that my view is that we should get the adjustment over with as soon as possible in order that we can get that upturn, whereas he is saying that perhaps we can get the upturn without the adjustment, and I do not think that would work as well.

Deputy Dara Murphy

The Governor's colleague in the European Central Bank, Mr. Trichet, indicated that he would not be taking part in the banking inquiry. Has this been discussed at board level of the European Central Bank? Is that his view or is that the position of the ECB?

Professor Patrick Honohan

Mr. Trichet is retired from the ECB. This matter has not been discussed at the governing council at all. He pointed out that when parliamentary committees and so on want to know about central bank issues, they look for information from the national central bank governor. In Ireland's case, that is me. If there is such an inquiry and the ECB is called, I presume the Governing Council will ask me to represent the ECB point of view, but that will only be a small part of my evidence.

Deputy Dara Murphy

The Governor said he wants to be open about the matters surrounding the Anglo tapes, which is welcome. Would he prepared to make the legal advice he received available to the committee?

Professor Patrick Honohan

I do not know. That is the sort of question for which somebody will say there is a reason I cannot do so, but I will look into that.

Deputy Dara Murphy

Representatives of the banks were before this committee a few weeks ago, and most of us were of the view that the definitions they were using and the Governor's definitions are conflicting. We have been through that already today. For the next stages of the reporting, does the Governor feel he has to be more prescriptive in the definitions as we move towards the more difficult solutions?

Professor Patrick Honohan

I think so. We will find that certain cases are not good enough, not sustainable and the policy of the bank is not right so it has to go back. We will be doing quite a lot of that. It is crunch time towards the end of the year and we will also reach a difficulty at the next stage after the proposals, which is called concludence. To be honest, the troika has got its teeth into this and states that the concludence must be soon and must be quick, which is probably good from one point of view, but I am nervous that the banks will not be able to get to that stage. There is quite a crunch of delivery and on the one hand I am in favour of the troika's pressure to get the maximum done, but then I worry the whole process might go off the rails. We must keep it on the rails.

Deputy Dara Murphy

The troika, the Government and the Minister have all set the banks targets. The banks came in here and they were delighted with themselves. They had all achieved their targets, most of them with plenty to spare. Professor Honohan stated that the banks are getting through the volumes. Does the Governor believe there is a danger that because under the mode two and mode three offers - reasonably or very unsatisfactory solutions for people - they will move through to unsatisfactory solutions just to achieve the targets they have been set?

Professor Patrick Honohan

That is a very important point and a very important danger. I think it more likely that the repossession route will be interrupted by a re-engagement with the customer and the possibility of doing a restructured instead of a repossession arrangement. I see that as being the desirable route out of this, although we cannot rule out that there will be repossessions.

Deputy Kieran O'Donnell took the Chair.

Deputy Dara Murphy

I think we all know there will be some repossessions. I refer to the targets to be achieved and the percentages of sustainable solutions. What thought has been given by the Central Bank to setting targets which accept there will be a percentage of repossessions but which will also try to force the banks towards a percentage of split mortgages and perhaps a percentage of write-down as we near the end rather than the start of the process? Politicians believe that the Irish taxpayer has recapitalised the banks for a percentage of people to have the boots of the banks lifted off their throats. In Professor Honohan's opinion, will the Central Bank be directing banks, either at the middle or at the end of the process, that the only solutions now available involve write-down or forced split mortgages? Will the Central Bank give the banks targets of numbers to achieve?

Professor Patrick Honohan

I do not wish a situation where instead of hoping for a minimum amount we end up having a target for the number of repossessions. We are aiming for-----

Deputy Dara Murphy

I suggest we look at the reverse situation, that there is a minimum amount we will not allow and a maximum number of repossessions that this State will allow.

Professor Patrick Honohan

I do not think we are at the point of worrying about that yet. I remain optimistic that the best practices from some banks will be adopted by the other banks as we continue. In fact, a committee such as this has a function in discussing-----

Deputy Dara Murphy

Professor Honohan has stated that the Central Bank does not need new powers and that he is happy with what powers have been provided by the Government. Would new powers be required to instruct the banks in that regard?

Professor Patrick Honohan

I do not think so. While I am not necessarily buying into the particular approach the Deputy is describing, so far as powers are concerned, some colleagues argue we should ask for such and such a power, but in my view, we have extensive powers. The Oireachtas has granted us extensive powers and I know we will use them as necessary. It is a question of getting the right instruction - the instruction that works - rather than whether we have the power to give the instruction.

Deputy Dara Murphy

I have a question about the Central Bank's audit process. Will it prove the success of the process if banks are told they have not achieved their targets? Is there an excessive emphasis on everyone saying that they are working through the process, including the Central Bank, the Government, and certainly and definitely the banks? Will the audit prove that the Central Bank's process is robust if, for example, it is determined that bank A or bank B has failed?

Professor Patrick Honohan

I think that is correct. We have to be completely prepared to say that we have found a mixed bag and that we told banks to go back because a part of their policy is not working and it is not right. If we do not do that, the process is ineffective. If I come to this committee in a few months time and say that we had to fail this amount and that amount, I suppose I will be criticised that I did not set up sufficiently clear targets. It is a complicated process. We are not prepared to allow policies that are not-----

Deputy Dara Murphy

I have a final and brief question about split mortgages where the warehouse portion will apply to somebody who reaches the age of 70. It would seem to me that would have to be allowable. Is that how Professor Honohan sees it?

Professor Patrick Honohan

We have explicit wording about how to deal with the warehousing of the split mortgage towards the end. To some extent that is guided by the way in which the personal insolvency arrangement requires the arrangement not to leave the person effectively homeless at the end. It would be stupid to have a split mortgage arrangement where somehow after retirement or at the age of 70, a bank would say: "That is it; here is the warehouse and we are taking the house." We are not allowing that.

Deputy Richard Boyd Barrett

I thank the Governor, Professor Honohan, for his attendance. I will summarise what the banks have said last week at the committee and what the Governor has said. The banks said, more or less: "We lent in good faith - maybe a bit recklessly. A big financial crash came along and people are in difficulty but we have the right to get our money back off mortgage holders. If they would only just engage with us, because we really want to engage with them, we will be fair and reasonable with them. The problem is that too many people are strategically defaulting or not engaging with us."

Professor Honohan has given a slightly more critical narrative in that he probably says: "The banks are not doing as good a job as they could." Broadly speaking, however, he is going along with the idea that heading along the current trajectory will mean it will be all right on the night with the current framework. I put it to the Governor that the banks are telling us an absolute fairy tale, that the Governor is blindly optimistic about what is actually going on and that there is a financial bomb likely to explode on the balance sheets of the banks, with pretty devastating consequences for our economy and for the citizens of that economy.

I want to illustrate that point with an example which, in my view, is typical. I will not mention names. A young couple from Dún Laoghaire, both working and with a low to middle income, take out a mortgage to buy a house in Wexford. They do not want to live in Wexford. Back in the day, the bank offers them money to buy a house in Dún Laoghaire. They decline because they believe they would never be able to afford it. They decide they want to get on the property ladder but they decide to be sensible and go to Wexford and hope eventually to work their way back to Dún Laoghaire. The crash comes. Their income has decreased by about 20%. The house they bought for €250,000 is now worth €80,000 to €90,000. Payments were at about €1,200 a month and they are now just about able to pay €700, and barely so. This is a less than interest-only arrangement, which means the debt is building up on them. The woman becomes pregnant and very soon will be unable to work so that their income will drop even more. For two years they write to the bank, begging for a permanent solution. All they get from the bank is moratoriums, temporary solutions and so on. Only when I raised the issue with the chief executive officer of that bank at a committee meeting when I said the bank was not engaging with the customers, does this couple finally get an appointment to meet the bank. At that meeting the bank representatives offer them another temporary arrangement whereby, because things may turn around and perhaps in a year or two, some sort of split mortgage can be considered. The couple, quite rightly, decline. They say they are sinking into a mire of debt and such an arrangement is no good to them. They point out that the bank recklessly lent to them and actually encouraged them to take out even bigger loans. They had hoped that the bank would be realistic, but after the meeting they conclude they have no choice but probably - although they have not fully decided yet - to hand back the keys. If this happens, the banks, which Professor Honohan says cannot afford to give a write-down, will be forced to take a write-down.

Professor Patrick Honohan

I did not say they could not afford to give a write-down.

Deputy Richard Boyd Barrett

On a previous occasion when I asked Professor Honohan whether there could be a write-down to current market value for distressed mortgages, he asked who would pay for it.

Professor Patrick Honohan

Mechanically, for everybody, no.

Deputy Richard Boyd Barrett

The banks are going to take a bath.

I put it to Professor Honohan that there is a high level of so-called non-engagement because huge numbers of people cannot afford to pay. Those to whom I refer have lost their jobs, their incomes have been reduced and they simply cannot afford their repayments. Sooner or later that is going to manifest itself and either a massive hole will be blown in the balance sheets of the banks or wholesale repossessions will occur. The latter will lead to the creation of such a massive hole in any event because the banks will take a bath in respect of the properties they repossess. Are we prepared for such an eventuality? Are the stress tests relating to the banks adequate to deal with an outcome such as that to which I refer? In light of the figures the banks supplied to the committee last week, all the evidence points towards the fact that people just do not have the money to pay, that the hope that everything will be all right on the night is just a fantasy and that this whole matter is just going to explode in our faces.

Professor Patrick Honohan

The Deputy has characterised very well the sort of situation where there is a clear need for restructuring of such debts. The banks will be obliged to take a loss in respect of such restructuring, that is for sure. Do the banks have enough capital? They have large blocks of capital into which they have not yet made great inroads. They have taken some provisions but they have not crystallised the loans in question into sustainable solutions that will give rise to a cost for them. Do they have enough? That is a different question. They certainly have enough to facilitate large amounts of restructuring. As stated earlier, they will need more capital. However, that is not the point. The point is-----

Deputy Richard Boyd Barrett

The point is that ordinary people whose incomes have collapsed or who have lost their jobs are of the view that what the banks may consider to be sustainable is utterly unsustainable from their point of view.

Professor Patrick Honohan

The Deputy is absolutely right. They have not been offering many sustainable solutions.

Deputy Richard Boyd Barrett

In the cases to which I refer, the only sustainable solution would be to write off a significant portion of the debt but the banks are refusing to do that. Professor Honohan and the Government are stating that we cannot afford-----

Professor Patrick Honohan

No, I did not say that we cannot afford it. What I have said in the past - which is true - is that negative equity calculations are not the basis on which a general write-down should be entered into. That is because some people whose properties may be massively in negative equity can afford to repay their borrowings. That is not the issue; the issue actually relates to affordability of the mortgage. That is where we are at and the description the Deputy has given relates to a lack of affordability. I agree that-----

Deputy Richard Boyd Barrett

With regard to the figures and in an attempt to quantify what is involved, what proportion of the approximately 200,000 people who have entered restructuring arrangements, whose mortgages are in arrears, etc., will be able to repay what they owe without defaulting?

Professor Patrick Honohan

More than the Deputy thinks but fewer than the banks think.

Deputy Richard Boyd Barrett

Has the position been quantified? Is the figure 50%?

Professor Patrick Honohan

This is all part of these balance sheet assessments and stress tests. I am really not going to attempt to provide the Deputy with a number on that because this is what the exercise involves. There is no point in sitting back and doing some calculations - well, there is some point in doing so - because that does not get to the heart of the matter. The main issue is that we are forcing the banks down this road and step one involves allowing them to write letters. However, it is only step one. I am agreeing with the Deputy that there has to be a large number of restructurings and that mode one must come into play.

Deputy Richard Boyd Barrett

When Norway experienced a similar crisis-----

Professor Patrick Honohan

A much smaller crisis. If we were experiencing a small crisis, we would deal with it differently.

Deputy Richard Boyd Barrett

Should we not inform our friends in the ECB that this is their problem too? Is it not the case that we should we impose a solution similar to the Norwegian model whereby we write down distressed mortgages to current market value plus 10%, whatever that value might be, and inform the ECB that this is also its problem? Should we not do this and face reality? At present, we are not facing reality and huge numbers of people, and the economy in general, are being crushed as a result. The ECB is certainly refusing to face reality.

Professor Patrick Honohan

I agree that we should face reality and we should do so rapidly in respect of the loans. I am not sure that the other aspect of the Deputy's solution would work.

Deputy Richard Boyd Barrett

In respect of cases where people are dealing with their banks now and where there is evidence that those banks engaged in really reckless lending in the past - individuals I have met are willing to testify that some institutions were literally throwing money at them, encouraging them to take out loans that they knew were crazy or providing bad advice - is the Central Bank position to intervene? Can evidence of reckless lending of the kind to which I refer be a factor in people's current negotiations with the banks? Can someone provide evidence to the Central Bank to the effect that a bank behaved in an utterly reckless fashion in the past? If that is possible, can the Central Bank intervene?

Professor Patrick Honohan

No, we would not intervene on a case-by-case basis. I do not think that would be part of our-----

Deputy Richard Boyd Barrett

Why not?

Professor Patrick Honohan

We do not deal on a case-by-case basis, rather we deal with the policies of the banks. We monitor samples and so forth. The courts and the Ombudsman deal with those sort of matters.

Deputy Richard Boyd Barrett

In other words, there is evidence that there was reckless behaviour at a high level in the former Anglo Irish Bank and a lot of evidence can be provided by individual customers in respect of the reckless behaviour of various other lenders but there is nothing the Central Bank can do in either instance.

Professor Patrick Honohan

Yes, because that is not part of our remit. The position should have been regulated in the past. The consequences for individual borrowers do not fall within our remit.

Deputy Richard Boyd Barrett

That is pretty weak, is it not?

Deputy Arthur Spring

I welcome Professor Honohan, Governor of the Central Bank, back before the committee. Will he indicate if he is aware of the quantum of money that was written down by the banks in order to transfer developers' loans to NAMA?

Professor Patrick Honohan

It was something of the order of €30 billion or €40 billion. I can easily obtain an exact figure for the Deputy. It is a well-known amount.

Deputy Arthur Spring

In March 2011, BlackRock International carried out a stress test and identified the fact that a problem existed with regard to the mortgages held by many of the banks. Is Professor Honohan aware of the quantum involved in that regard?

Professor Patrick Honohan

I am not going to attempt to remember those numbers.

Deputy Arthur Spring

There is a purpose to my question. Professor Honohan does not have to provide the numbers, I am simply asking whether he is aware of them.

Professor Patrick Honohan

Yes. BlackRock did not identify a problem, rather it proposed a larger quantification of that problem.

Deputy Arthur Spring

I thank Professor Honohan. I am led to believe that the amount involved is in the region of €9.4 billion. Last week the Department of Finance identified the quanta that were allocated to the different banks. For example, it was indicated that Bank of Ireland has a problem to the tune of approximately €2.4 billion and that the amount relating to AIB is in the region of €3.3 billion.

Professor Patrick Honohan

Yes.

Deputy Arthur Spring

I presume the same stress tests, etc. were used in respect of the various banks. Is that an accurate conclusion on my part?

Professor Patrick Honohan

Yes.

Deputy Arthur Spring

Have we recapitalised the banks to a level where, if the eventuality arises, they will be obliged to use up the €9.4 billion to which I refer?

Professor Patrick Honohan

Yes.

Deputy Arthur Spring

Okay. If that is the case, are the banks going to use up all that money?

Professor Patrick Honohan

The Government hopes not. Why? Because it could then recover the remaining money and use it for other things.

Deputy Arthur Spring

Do the banks hope they will not have to use it all up?

Professor Patrick Honohan

Who are the banks? Bank managers-----

Deputy Arthur Spring

I am referring to the shareholders in and directors of the banks.

Professor Patrick Honohan

Yes.

Deputy Arthur Spring

If it is Professor Honohan's view that it would be to the benefit of Bank of Ireland not to use up the €2.4 billion and of AIB not to use up the €3.3 billion, then I would completely concur with him. I deal with this matter on a daily basis on behalf of my friends, my family and my constituents. In that context, it is of the utmost importance that Professor Honohan, as Governor of the Central Bank, ensures the banks draw down every cent of the amounts identified. I am of the view that this must happen because the nature of the fiduciary duties of the shareholders in and directors of the banks - particularly Bank of Ireland and AIB - means that their loyalties lie not with the people of Ireland but with those institutions. That is good company practice. From what I can establish, Bank of Ireland is intent on using as little of the €2.4 billion as possible. If that is the intention, then the bank's share price will soar, dividends will increase and those who invested in it after we entered Government will enjoy handsome rewards on the back of what were unquestionably negligent lending policies in the first instance.

They have been allowed to get away with the mess they have created and they are not being forced to take a hit. Does Professor Honohan have the ability to force them to take the quantum identified by BlackRock?

Professor Patrick Honohan

First of all, I am not going to make any argument for the shareholders of the bank, but I would point out to Deputy Spring-----

Deputy Arthur Spring

I want to stick with the questions if I can. The questions solely revolve around this matter, namely, whether Professor Honohan has the ability to force AIB, Bank of Ireland and Permanent TSB - all the banks that are licensed by the Governor of the Central Bank on behalf of the people - to draw down every single penny they have been identified as using.

Professor Patrick Honohan

The capital was injected by the Government to support the risk - indeed, the certainty - that significant losses would be incurred on mortgages. The Central Bank is incapable of taking away the property rights of the banks but what it can and is doing is obliging the banks to come up with sustainable solutions – in other words, to accept the losses early rather than late.

Acting Chairman (Deputy Kieran O'Donnell)

A specific question, Deputy.

Deputy Arthur Spring

It is a specific question.

Acting Chairman (Deputy Kieran O'Donnell)

In paragraphs 2.4 and 6.1 of the mortgage arrears resolution targets, the Governor makes specific reference to the fact that the Central Bank can impose more severe reserve requirements if the banks do not comply with the targets. That is the question Deputy Spring has asked. Would Professor Honohan address that specific point?

Professor Patrick Honohan

I will address it.

Deputy Arthur Spring

I am trying to keep this simple, but that is the question.

Professor Patrick Honohan

We can and will enforce the requirement to have an additional provision, but Deputy Spring’s question potentially goes beyond that to require that solutions are provided on a case-by-case basis to borrowers.

Deputy Arthur Spring

I fully accept that the situation has to be dealt with on a case-by-case basis. It is not like NAMA and the developers. I will outline how it adds up. If a system were put in place by international bodies that were brought in to quantify the magnitude of the problem within the individual banks, then fundamentally, I want Bank of Ireland and AIB to use every penny of that and to give my generation a break. However, the opposite is the case. We have just acknowledged that it is in the interests of the bank, the shareholders and the directors of the bank to draw down as little as possible of the funding because that would be more profitable for the bank.

Professor Patrick Honohan

Excuse me-----

Deputy Arthur Spring

Just give me one second. The Governor can speak as much as he wants, but I get a restricted amount of time. I do not care if we have to write a new law but it is imperative that my generation gets a break, that the banks and institutions are put on the line for the full quantum and that we do not end up in a situation whereby AIB uses €3 billion and Bank of Ireland uses €500 million and the remaining €1.9 billion is used potentially for lending for new mortgages and picking up distressed mortgages. A new generation – not my generation – would be riding on the back of profitability and entering into sustainable mortgages. Does the Governor see the issue from my perspective?

Professor Patrick Honohan

I can. I have a great deal of sympathy with Deputy Spring's approach but I cannot go as far as to define the issue in the terms in which he framed it. I agree that the banks and the Government hope that they will be able to recover some of the money that has been put in and the Government can use it for other purposes.

Deputy Arthur Spring

I am the Government. I do not want to see any of it back. I want to see the whole lot of it used for the purposes of that generation getting a break. Can we facilitate that and is that Professor Honohan’s remit?

Professor Patrick Honohan

Partly, not exactly in those terms, but what we are trying to achieve here with this will have substantially that effect. While enforcing sustainable solutions, losses will be incurred by the banks and they will absorb that from their capital. As to whether I can be sure all of it will be used up, I cannot.

Deputy Arthur Spring

I will find a way to ensure that every single penny of the money is drawn down and that my generation gets out of the fix. It is incumbent upon the Governor, who has said to the committee today that management in certain banks were mismanaging their authority in their organisations-----

Professor Patrick Honohan

Yes, in the past.

Deputy Arthur Spring

Has there been an internal investigation in any of those banks?

Professor Patrick Honohan

The ones I was referring to have been liquidated and all the people are gone.

Deputy Arthur Spring

Has there been an internal investigation-----

Professor Patrick Honohan

There have been-----

Deputy Arthur Spring

-----in any bank in Ireland?

Professor Patrick Honohan

Yes.

Deputy Arthur Spring

In which one?

Professor Patrick Honohan

All of the banks have had internal investigations but not particularly of the type Deputy Spring would like.

Deputy Arthur Spring

When the banks were before the committee I asked Bank of Ireland if it had an internal investigation and it said that it had not. I am perplexed as to why the Governor does not know whether there have been internal investigations.

Professor Patrick Honohan

The Central Bank has not carried out investigations.

Deputy Arthur Spring

Yes, but Professor Honohan is the Governor of the Central Bank and the banks operate under a licence provided by the Government. It is the most important licence this country has the capacity to provide. If those who have licences are acting in such a way as to mislead or mismanage, the effects are enormous beyond all proportion, as we are finding out now. I want to know why there has not been an internal investigation. I also want to know whether those involved in mismanagement are in receipt of pensions. Is the money we put into banks being used for the purpose of shoring up a €1 billion pension pot shortfall in the banks? Why are people not being held accountable? There are specific guidelines in the Office of the Director of Corporate Enforcement on the role of a banking director. We need to consider potential negligence, corruption and downright inability to direct and govern banks. I cannot understand why that has not been done.

Professor Patrick Honohan

I am not quite sure what Deputy Spring is looking for from the Central Bank.

Deputy Arthur Spring

I am looking for justice. I want this generation to see the banks have been held accountable, that the mismanagement of systems by the Government and banks is something that will not happen again and that those who were responsible will be held accountable. We must put systems in place to ensure that.

Professor Patrick Honohan

We have imposed extensive penalties on banks for mismanagement.

Acting Chairman (Deputy Kieran O'Donnell)

Time, Deputy.

Deputy Arthur Spring

I have about 45 seconds left on the clock.

The Insolvency Service of Ireland has given mortgage holders of my generation the capacity to play hardball. However, if one is a personal insolvency trustee it is to one’s benefit to put the argument that the person should accept what the bank is providing because ultimately the trustee wants the mortgagee to take it because he or she gets paid by the bank. That is a fundamental problem in the system.

We must establish the situation from the point of view of the Irish Credit Bureau when a person enters into some form of arrangement with a bank. In some instances the Irish Credit Bureau, after having been made aware of that fact, has put a moratorium on people’s ability to draw down credit, whether that be a college loan for a child or for the purchase of a car or other simple, basic item. That is not appropriate because people are in a programme for a prolonged period.

Deputy Kieran Lynch resumed the Chair.

Chairman

Deputy Spring should note that he is running out of time and should finish.

Deputy Arthur Spring

My generation want a line in the sand. People want certainty. They do not want to find out that they have to deal with something again six months later. The mental and economic capacity of our generation to contribute to society as we want hinges on this issue. The fate of my generation is decided by Professor Honohan’s ability as Governor of the Central Bank to ensure that the banks draw down every single penny and put it on the State. We must make sure we can continue and not let the banks off the hook.

Professor Patrick Honohan

It will not let the banks off the hook. My overall aim is the same as that of Deputy Spring, namely, to allow distressed mortgage holders to move forward with clarity in a situation that is affordable for them. I am fully in line with him on that, although I am unable to frame it in precisely the same way as he did, but the ultimate goal is the same. This is really important. I know there is disappointment about what has been achieved so far. I too am disappointed. Our policy is going in the right direction but it has only started.

Deputy Arthur Spring

I agree but certain parts of it need to be fixed. I thank the Governor of the Central Bank for attending the committee. There is nothing personal in what I have said. This is something we really need to solve. I could speak about the matter for hours on end.

Senator Sean D. Barrett

I welcome my former colleague from Trinity College. When we started out, were letters ever intended to be part of resolution? The reason I ask that question is that when the banks were before the committee they said that this was a really good trick and that they invented the idea of the letters so as to postpone matters. There was almost a smirk on the faces of the bankers.

A letter costs 60 cent or something and does nothing but allow them to meet in a fictional way the targets the Central Bank has set. I refer to a second concern that arose recently. As Professor Honohan is aware, I introduced a Bill in the Seanad to separate utility banks, zombie banks and so on and had some discussions with the Department of Finance. There was an EU deadline with regard to submissions on structural reform and while I submitted my Bill, nothing else came in from Ireland. We are approaching the fifth anniversary of the guarantee next Saturday, 28 September and the Department of Finance has indicated it will take up this issue in Council. However, while the Central Bank may have done so, as far as I am aware, the Department of Finance did not send in anything. There is that frustration that we are not getting to grips with the problem.

My third question pertains to the case-by-case approach. I believe we will get nowhere with 98,000 accounts in arrears on a case by case basis. Do we have loan-to-value or debt-to-income rules in force? Deputies Higgins and Boyd Barrett may recall the precise numbers but in one case, a guy who owed AIB €340,000 had an income of €34,000. I believe members asked whether the person who gave that loan is still working for the bank. If one uses simple rules like an 80% loan-to-value ratio or a loan limit of two and a half times one's income, probably three quarters of that loan was reckless. This will come back to haunt us in respect of the €64 billion we gave to the banks but let us do it and stop the sending of letters and meddling around. Professor Honohan mentioned the Oireachtas has not passed legislation on reckless lending but that case involved a debt-to-income ratio of 10:1. While I am sure Professor Honohan already has access to it back at the bank, the Royal Institution of Chartered Surveyors has published a lot of stuff recently and as other countries work on these micro-prudential rules by changing the ratios I mentioned, are we doing this? While members did ask some of the banks with what loan-to-value ratios they were working at present, one could still be waiting as one would not get an answer out of them. This raises the question as to whether we really have got this sector under control, given the immense damage it did to the country. Is there anything to be done about the education of bankers? Alternatively, are they simply guys with smirks on their faces who have been getting away with it for five years now and who are stringing people along? They are in fact keeping up the price of property or all around the place because they will not move towards resolution, as the Governor wishes them to do. Moreover, resolution does not include writing letters.

A final point is that in the Governor's opening statement, he noted "Others, especially buy-to-lets, may involve a surrender of the property to the bank". I have been trying to make the point that this property could be a person's principal private residence, which has been rented, as are the majority of properties in places like Switzerland and Germany. As the tenant is paying and it is the landlord who is bankrupt, can one really countenance a surrender of property to the bank because it is a buy-to-let? I cannot and must state that whoever takes that on has bought a piece of paper, that one collect rents from time to time and must pursue the landlord. This kind of eviction appears to infringe all our ideas that a family home should be protected. Regardless of whether it is owned with a mortgage or rented, it is a principal private residence and there is considerable concern that buy-to-let resolutions are pursuing tenants. It is not they, but the landlords who are doing the defaulting. I will conclude by noting Professor Honohan is very welcome.

Professor Patrick Honohan

As for the question of letters, it was inevitable in the first stage that the banks would seek the easiest cases. In other words, the easiest for them were those which they could justify on the basis of a long period of no payment, no engagement and so on. Consequently, they can easily satisfy the first quarter's requirement by such pursuit but this cannot and will not be the end of the story. However, we must make sure that the banks maintain and improve their capacity to then process the cases and not deal with them in the unsatisfactory way described by Deputy Boyd Barrett. On legislation, I am aware there have been Private Members' initiatives on legislation in the banking area that potentially are very useful. I will just make the point that in the last number of years, we have more or less exceeded our allocation in the legislative programme with all the financial legislation that has been required and so we probably would get short shrift on that. However, the time may perhaps come for that in due course.

On the question of loan-to-value and debt-to-income ratios and controlling bank behaviour in that way, I am very much in favour of that and it could have been done in the run-up to the crisis. It is not perhaps the most urgent pressing need now, in the sense that the issue now is in getting banks to make any loans, even with a very low loan-to-value ratio. They are not making extravagant loans like they used. However, it is in our toolkit and we can activate those sorts of limitations in due course. I am unsure whether putting a floor on loan to value would be the way to get more lending and do not think that is a practical way to proceed. As for the education of bankers, there are a lot of initiatives, albeit not on the part of the Central Bank, whereby the Institute of Bankers in Ireland, in co-operation with UCD and so on, is expanding the programme there. While it is not something about which I know much, it obviously would have been very valuable had it been available previously. The question of tenant rights and the buy-to-lets appears to be outside our purview. While I acknowledge there are issues there, I do not think it can be used as a reason to halt and leave people who simply cannot afford them with buy-to-let properties. One cannot state that because there might be a tenant issue, one cannot possibly proceed to clean up that situation, leave the borrower in a situation he or she can afford and move the process along. It is not really for me to propose anything on the tenant situation, as that would be in a different sphere.

Senator Sean D. Barrett

On the issue of loan-to-value and debt-to-income ratios, now that this hopefully is being done much more sensibly than in the past, one could state in retrospect that by such rules, a loan was reckless. One could state there is no point in pursuing a case to get €340,000 out of a person who has an income of €34,000 and that this was reckless as defined by the rules now in place. While speed limits may not always have been there, in retrospect people who were driving around at twice the current speed limits were engaging in reckless behaviour even before we had such limits. Consequently, one could use current sensible prudential rules and state that one judges AIB to have been daft in very many cases and while this will have to come in addition to the €64 billion, we should get things moving on the other front. As for the licensing issue, I would be worried by some of the people who appeared before the joint committee. As for requirements that people would actually know some economics to run a bank, it did not happen very much in the past.

Professor Patrick Honohan

I hope that was not a case of special pleading.

Senator Sean D. Barrett

Certainly not. However, I believe there is a problem in this regard, which members may discuss in a different context. Certainly, however, the witnesses were impressive in their lack of acknowledgement of the damage they have done to the country. An absence of basic economics was a feature of all the representatives of the banks who appeared before the joint committee and it would be useful, were the Central Bank able to correct that in any way.

Professor Patrick Honohan

As the Senator is aware, it is relevant, as well as in respect of the point made by Deputy Spring.

Chairman

The Governor and the Senator may continue their collegial academic discussion-----

Deputy Joe Higgins

May I pose a final question?

Chairman

Yes, you may.

Deputy Joe Higgins

If the Governor does not have to hand the relevant figures, he might forward them in writing to the joint committee. Does he have an estimate of the quantum of negative equity in the case of owner-occupier mortgages for the four main banks? Second, does he have an estimate of the Exchequer payments this year in interest on the national debt? How much of that is accounted for by funds borrowed for bank bailout purposes?

Professor Patrick Honohan

On that, I can provide the Deputy with one nice fact.

Chairman

I will also allow Deputy Boyd Barrett in, as I wish to wrap things up.

Deputy Richard Boyd Barrett

I have two brief questions. I am aware it is not the Governor's job to pass judgment on Government economic policy.

Given the serious mortgage distress people are in and the huge arrears crisis, is Professor Honohan worried that any measures that may be imposed in the coming budget that will cut people's incomes will deepen the mortgage crisis?

Deputy Kieran O'Donnell

If the banks do not deal with the mortgages in what Professor Honohan regards as a sustainable way, how quickly will he impose the extra reserve targets provisions, as set under the resolution targets?

Professor Patrick Honohan

We will get the numbers on negative equity Exchequer payments for the Deputy. On the Exchequer matter, a nice rule of thumb is that if we are at 120% of GDP, as was mentioned, roughly 40% concerns banking. Therefore, if we did not have the banking losses, we would be at only 80%.

Deputy Richard Boyd Barrett

Three billion euro next year. We would not need an adjustment.

Professor Patrick Honohan

On the question of the budget, the budgetary profile and what has to be taken out of Government spending or gained through taxation has been factored into our estimates. It will not be a big surprise on budget day when the adjustment is taken account of.

Deputy Richard Boyd Barrett

I asked whether Professor Honohan expected more people to go into arrears.

Chairman

I will allow the Deputy to ask a supplementary question later.

Deputy Richard Boyd Barrett

That was the question.

Professor Patrick Honohan

Arrears have not slowed down very much so I do not believe this will kick into a new trajectory.

Deputy Kieran O'Donnell

What about the targets?

Professor Patrick Honohan

We said they would have to put it into their 2014 accounts. We have other tools also.

Deputy Kieran O'Donnell

Pray tell.

Professor Patrick Honohan

We can make life quite difficult but that was the concrete measure-----

Deputy Kieran O'Donnell

How quickly will the Central Bank make life quite difficult?

Professor Patrick Honohan

We are giving the time for this thing to mature so we will know exactly what we ought to do in the 2014 accounts. We will keep the pressure on all the time.

On the question of why this was not examined in the past, one must note all the people at the top have gone, more or less. There are one or two notable exceptions. The shareholders are gone; they were wiped out, so the new shareholders are new people. Irish taxpayers-----

Deputy Kieran O'Donnell

The Irish taxpayer.

Professor Patrick Honohan

Irish taxpayers in most cases. Even in Bank of Ireland, they are either new investors or people whose bonds were paid off at a very low rate in equity. The old shareholders were wiped. That includes the British banks also in that their shareholders got a terrible hit. Although one may not like the current lot of bankers, it is a mistake to merge history into one particular category. Maybe it would not make any difference.

Deputy Joe Higgins

Could we be sent the figure on the quantum of negative equity?

Professor Patrick Honohan

Yes.

Chairman

I thank the Governor, who, despite the statement in our note to the effect that he was to attend with his colleagues, turned up on his own to deal with us, as usual. The committee members appreciate his having made himself available for an extensive period this afternoon. As he knows, the target figure is moving to 35% in October, and 15% at the end of the year. We have signalled to the banks that we will be seeking to speak to them again in early 2014, at which time we might wish to speak to the Governor.

Can I have agreement that SI 358, which was raised by Deputy Doherty, can be put on the agenda for discussion next week? Agreed.

The joint committee adjourned at 5.45 p.m. until 3 p.m. on Wednesday, 2 October 2013.