Joint Committee on Finance, Public Expenditure and Reform debate -
Wednesday, 5 Nov 2014

Overview of Banking Sector: Bank of Ireland

Chairman

I welcome Mr. Richie Boucher, group chief executive of Bank of Ireland. He is accompanied by his Bank of Ireland colleagues, Mr. Liam McLoughlin, chief executive retail Ireland, and Mr. Pat Farrell, group head of communications and Government relations.

In terms of the format of this meeting, Mr. Boucher will make comments on the presentation circulated to committee members. In advance of the meeting questions were gathered from committee members and submitted to the Bank of Ireland. I thank Mr. Boucher and his staff for responding in writing to these questions and the responses have been distributed to committee members. These responses, together with the input of the witnesses today, should mean all of the key topics will be covered but, nonetheless, a question and answer session will follow to clarify matters.

I remind members, witnesses and those in the Visitors Gallery to switch off all mobile telephones. I advise the witnesses 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. Witnesses are further directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, 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 an official, either by name or in such a way as to make him or her identifiable.

Before I ask Mr. Boucher to begin I want us to agree on some ground rules to ensure everyone has an opportunity to ask questions as this will allow for the best meeting possible.

I propose that lead speakers for each group will have ten minutes, followed by other committee members who shall have five minutes and anybody else wishing to ask questions, who will also have five minutes. The clerk to the committee and I will be keeping an eye on the clock and I will advise members when a minute is remaining of their time to allow them to wrap up because I will be keeping them within their allotted time. If members have further questions I will be happy, time permitting, to allow them to speak again once I have given everyone a fair opportunity to put their questions. It would not serve the purpose of the meeting if the time is used to make statements because witnesses would not have the opportunity to respond properly. I ask members and witnesses to keep their questions and answers short and to the point to facilitate the best interaction possible. I ask members' co-operation to assist in the smooth running of the meeting. Is that agreed? Agreed. I invite Mr. Boucher to make his presentation and ask him to limit it to approximately ten minutes.

Mr. Richie Boucher

The context which frames our meeting is one of change. As members will be aware, Bank of Ireland received an investment of €4.8 billion from the taxpayer. The bank has repaid that in full. We paid in excess of €6 billion in cash to the taxpayer and the taxpayer retains a valuable 14% discretionary shareholding in the bank. There are ongoing developments in the regulatory landscape at European level which relate to our sector, including the single supervisory mechanism for banks which officially came into being yesterday, 4 November 2014. As part of these reforms, the European Central Bank recently announced the results of its comprehensive assessment of 130 banks, including Bank of Ireland group. The overall result for Bank of Ireland confirmed that the group has passed the ECB comprehensive assessment with substantial capital buffers. With regard to the wider economy, we see a strengthening of the economic recovery. The latest Bank of Ireland economic outlook, which was published last month, projects growth of 4.2% for 2015, up from our forecast earlier this year of approximately 3.4%. The economy is, therefore, recovering more quickly than we anticipated. Our meeting is timely in that context.

We provided a comprehensive presentation to members in advance of our meeting, including an overview of the bank; a guide to our strategic objectives, an update on issues relating to the comprehensive assessment; our interim management statement, which issued on Friday and is the latest information we have provided to the market on our performance and prospects; and an overview of our main businesses as they relate to our Irish operations. We have also returned to the committee the answers to a range of questions. We have given as much detail as we can in answering these questions and we have also provided guidance on where the relevant information is listed in our annual reports. We have also supplied additional documentation in the form of various public announcements.

As a public company we make extensive disclosures on a wide range of issues through various formats and media. Given that we are 86% owned by the private sector, certain information is in our judgment commercially sensitive and due to our responsibilities to all shareholders and my duties as director, we have to signal that we strive to ensure members have the necessary and appropriate opportunity to understand our strategy. As a public company quoted in the London and New York stock exchanges, all information we have provided has been verified. As this is a public discussion and we have issued a public document on the bank's trading performance, I am obliged to say on record this is not a guide to future performance of the bank and is not a solicitation for people to buy stock in the bank.

The State's 14% discretionary shareholding in the bank is a matter for the Minister for the Finance. Under our approved EU restructuring plan, with all State aid having been repaid, the relationship between the Minister and the bank is governed by our relationship framework agreement, which recognises the bank as a separate economic entity managed on a commercial basis and engaging with the Minister in accordance with best institutional practice. Our goal for this meeting is to present to and discuss with the committee our performance and strategy based on the best institutional shareholder practice.

Slides 5 and 6 of our presentation summarise an extensive document and refer to a number of issues. Bank of Ireland has made considerable progress over the past 12 months, and certainly since we appeared before the committee 12 months ago. This has been assisted by the fact that the economic environment in our core markets of Ireland and the United Kingdom has continued to improve. We have completed the repayment of the taxpayers' investment and the taxpayers have made a profit. On today's market capitalisation of €9.7 billion, the 14% shareholding that the taxpayers have in the bank has a notional value of approximately €1.3 billion. It is a significant milestone on top of our repayment to the taxpayers that we are now profitable and generating capital. We have passed the ECB's comprehensive assessment with significant buffers. We have robust funding and capital ratios which provide both security and support for our strategic growth objectives. Our defaulted loans have decreased by €1.9 billion between June 2013 and September 2014, and our new lending is on target. Our Irish consumer, business and corporate banking target in our financial plan for 2013-17 is new lending into the economy of €33 billion.

In terms of the economy as a whole, our view is that it is going through the classic phases of an economic recovery in a restructured economy. The main feature that has emerged over the past 12 months has been that internal demand and consumption are complementing the growth in exports. Bank of Ireland is the largest lender into the Irish economy. We are the No. 1 bank for SMEs. Based on our information and verified analysis of Central Bank information, we have provided over 50% of new non-property lending to SMEs in 2014 to date. We have enjoyed particularly strong performance in our agriculture, motor finance and commercial finance businesses. We provide more than 50% of new lending to the agriculture sector. Bank of Ireland's corporate bank has a market share of more than 30% and well over 50% of foreign direct investment companies bank with us. We have a market share of approximately 25% of savings products. Our mortgage business in Ireland is providing one in every three new mortgages. Our life assurance business, New Ireland, is the No. 2 overall provider of life pensions and investments in Ireland. In Northern Ireland we have a universal bank offering. We have been through a significant cost restructuring programme to position ourselves in that market. We are determined to remain in Northern Ireland and to position ourselves to reflect the particular dynamics of that market. In Great Britain, through our partnership model with the post office we are one of the largest challenger consumer banking franchises. With 3 million customers, we have more customers in Great Britain than we do in our Irish businesses. In addition, we have a very profitable acquisition finance business which operates in the US and continental Europe and which has negotiated its way through a number of credit cycles utilising its cash flow lending expertise.

Slides 14 and 15 deal with the components of the new banking union. Members will have noted the results for Bank of Ireland, which confirm we have significant buffers. Slides 17 to 20 are directly extracted from the market announcement we made last Friday. I will not go through them other than to highlight that our revenue has continued to go up and our new lending is on target. The group has remained focused on tight cost control while we continue to invest in our people, businesses and infrastructure. We confirmed in our announcement that we are in the process of a ballot by IBOA represented staff on a comprehensive new career and reward framework which was recommended by an independent arbitrator. Our asset quality trends have continued to improve in line with our expectations. We believe this reflects the work we are doing and the overall improvement in the economy. The figure for total defaulted loans has decreased by €1.9 billion since June 2013 to €16.4 billion on 30 September 2014. We continue to generate capital at a significant pace and have seen an increase of 180 basis points in our common equity tier 1 ratio from 12.3% at the end of January to 14.1% at the end of September.

Slide 24 provides some information on our new lending in Ireland. It is not up-to-date to the end of September but in our September update we indicated that lending growth had continued at roughly the same pace. We can see where our lending growth has gone, particularly in our Irish business, in our SME business, in our corporate banking and our mortgage business.

Slide 26 shows a confirmation of the group's balance sheet at the end of September.

Deputy Arthur Spring

On what page is that?

Mr. Richie Boucher

Page 26. It is a confirmation of the capital strength of the group, which is very important, obviously to give security to our depositors and other providers of services and also to demonstrate that Bank of Ireland is very strongly capitalised to be able to achieve our strategic objectives in Ireland and in our other businesses.

From the questions we received in advance from the committee, appropriately, there was a significant focus on asset quality and mortgages in particular on our Irish mortgage books. We have responded to those as best we can in the questions and we tried also to provide updates on that in the pack.

Slides 28 to 43 provide a mix of the position at the end of June, and wherever we have been able to do it, we have brought it up to date to the position at the end of September. I am advising the market that the information at the end of September is new disclosures.

Chairman

Mr. Boucher might wrap up his comments.

Mr. Richie Boucher

Yes, certainly. There is a significant amount of information on mortgage arrears on slides 28 to 43, confirming that our mortgage arrears have come down by 24% from our peak. Nine out of ten of our private dwelling home, PDH, accounts and eight out of ten of our buy-to-let mortgages are up to date. For nine out of ten private homes and eight out of ten buy-to-let cases where the customer has identified, through an SFS, a problem in paying, we can provide a sustainable solution. The solutions are set out on the slides, and in excess of 86% of those solutions and restructures are being adhered to.

There was a particular question about SME loans and defaults on the SME loans, in particular, the Irish SME loan book. The left-hand side of slide 43 shows that the defaulted loans on the Irish SME book or business banking book continued to reduce. It shows that our provision coverage had increased and it confirms that in nine out of ten of the challenged customers, we have restructures or resolution strategies in place and in 90% of those cases they have been adhered to.

We have given significant information in slides 46 to 59, which is a reference point for the business and in particular focuses on our Irish businesses, which I will quickly go through. In terms of the time factor and reflecting the Chairman's request, I will wrap up by saying that now and for the future the Bank is focused on supporting and benefiting from the Irish economic recovery, developing our relations with our existing and new customers, continuing to provide and develop solutions for customers in financial difficulty, effectively managing the developing regulatory environment, generating capital, managing risk, developing qualified, trained, committed and motivated employees to work as a team to deliver our objectives as a business, increasing our profitability, and through all the above having a sustainable business. Sustainability is important in terms of the way we look at our businesses, providing sustainable propositions to our customers and sustainable returns to our shareholders.

Chairman

Before I bring in the other members, I wish to ask Mr. Boucher a question. In regard to the net interest margin on standard variable loans, the margin the bank has in respect of those loans at over 3% seems quite high.

Mr. Richie Boucher

The margin is not necessarily based on it because we have a liquidity risk with mortgages. A mortgage is a 20 to 25-year instrument and we take liquidity risk in the provision of mortgages. We look at those as they operate elsewhere. Yesterday the Irish Government, which is, in effect, the base risk-free investment, issued a 15-year bond at just under 2.5%. Our fixed rate offering is 4.99% and that is a 2.5% margin. For our margin, and, in particular, for our capital allocation models and the capital allocation the Central Bank requires to hold against our different books, we must take into consideration our loss experience. Our loss experience on our Irish mortgage books has been different from what it has been in Europe. Another comparator I would note is that we have a business in the UK and our mortgage business in the UK is roughly the same size as our Irish mortgage business. It is a very similar type of market structure and I will return to why that is the case. The spreads and margins in the UK in which we operate are the same.

Some reference has been made to a comparison between Irish rates and European rates. A couple of features I would note in that respect is that the loss experience is different, so the capital allocation is different. However, a very significant feature of a number of the European markets is tax-based subsidies for bond markets. An example is the Pfandbriefe market in Germany where banks operate as originators and issuers and they sell their mortgages on to bond markets. If we take into account that there is tax-based or taxpayers' subsidy for those bond markets, it is not comparable. The more comparable market in terms of market structure and access to bond markets is the UK market against the Irish market.

Chairman

Thank you, Mr. Boucher. I call Deputy Michael McGrath.

Deputy Michael McGrath

I welcome Mr. Boucher, Mr. Farrell and Mr. McLoughlin. As my time is limited, I can only cover some of the key issues. I want to continue with the issue the Chairman raised, in particular about the pricing strategy for standard variable rate mortgages. The bank is currently charging in the region of 4.5% for a new mortgage if the loan-to-value is over 80%. How can Mr. Boucher justify that when his stated cost of funds is 1.15%, which have come down by about 30% in the past 12 to 18 months? The bank's margin has increased very substantially. Most people would regard a variable rate product as one where if the market conditions are bad, the rate is going to go up, but when the market conditions are good, people expect the variable rate to come down, but that has not happened. When was the last standard variable rate reduction by Bank of Ireland in respect of mortgage products?

Mr. Richie Boucher

The last reduction would have been in 2008 or 2009. There has been no significant interest rate cycle in that period. The group's net interest margin has improved in the 12 month period from 1.65% to 2.08%. That is progress but is certainly not an exorbitant margin. We have to get 98% of our credit decisions right before we can make any money or cover our costs at that particular margin. As I was trying to identify in my answer to the Chairman's question, the structure and liquidity risk one takes against mortgages are important. We are providing a mortgage which has a significant liquidity risk. We have a repricing opportunity but we are giving a 25-year commitment of money to the customer. We cannot raise that money so it is not necessarily comparable to look at our overall cost of funds. For example, if we issue a covered bond or unsecured debt in the markets, we are issuing it at about 2% to 3%. The Irish Government in raising 15-year money in the market at 250 basis points. One has to take account of the nature of the product one provides, the liquidity risks, the historic credit losses one has taken and the capital one applies. There are a range of factors in that. We have to enhance our margin but we try to ensure our products are competitive on an ongoing basis. We are a commercial business, we operate in a competitive market and we must ensure our products are sustainably competitive, that we can continue in the market, attract customers and do business.

Deputy Michael McGrath

The bank's margin has increased very substantially. Its cost of funds has reduced very substantially by about one third in the past 12 to 18 months and yet Mr. Boucher is telling me it is about six years since Bank of Ireland has reduced the standard variable rate being charged. One of the bank's main competitors, AIB, has stolen a march on it in the market and has reduced its rate. I presume Bank of Ireland will have to follow suit. Mr. Boucher will not confirm that today but, ultimately, the market will dictate the bank's reaction. I submit to Mr. Boucher that the bank is taking advantage of variable rate customers. They are being exploited. It will come as a surprise to nobody that a bank seeks to maximise profits, but this bank is profiteering on the backs of variable rate customers. Mr. Boucher made the comparison with the UK market which he said is the best comparison with Ireland.

Across the Border, Bank of Ireland offers a 1.98% fixed rate up to January 2017 if I have a low loan-to-value ratio of 60% or a 2.09% fixed rate or a variable rate of just over 2% for at least two years if my LTV ratio is 75%. There is a more competitive environment in the North. If, after two years, Bank of Ireland does not keep the rate low for a customer, he or she can switch to another bank. Customers in the South do not have that option. How can Mr. Boucher justify such a massive difference between the rates Bank of Ireland charges in the Republic and the rates it charges in Northern Ireland and the rest of the UK, given his statement to the effect that both markets are remarkably similar?

Mr. Richie Boucher

Our average spread on new lending in our UK mortgage business, which is growing and developing, is between 3.99% and 4.5%. That is a factual matter.

Deputy Michael McGrath

Bank of Ireland has advertised that it is offering a fixed rate of as low as 2% and a variable rate of just over 2% for defined periods of time where people have relatively low LTV ratios, but those rates are much more competitive than what Bank of Ireland is charging in the Republic.

Mr. Richie Boucher

I should note that the Deputy also cited our fixed rates. We can buy fixed rate money and we offer fixed rate mortgages. We are still surprised at the lack of take-up of fixed rate money in the market. We note that the Government has made a decision to try to fix rates over a period. We try to offer attractive fixed rates. We would encourage customers to consider fixed rates. A fixed rate gives a customer certainty and control of his or her finances in so far as that is possible. We provide attractive and competitive fixed rates.

As the Deputy stated, we operate in a competitive market. We review our rates on an ongoing basis. We also bear in mind our responsibilities to all of our stakeholders - our depositors, our shareholders and the taxpayers whom we have repaid. The strategies of other banks are something we keep an eye on, but we have learned not to follow them slavishly. We consider other banks, the sustainability of their propositions and their ability to attract capital to fund themselves and meet all of their commitments to their stakeholders.

Deputy Michael McGrath

Has Bank of Ireland any intention of reviewing its standard variable rate on mortgages in light of current market conditions?

Mr. Richie Boucher

We consider what competitors do and review our rates on an ongoing basis.

Deputy Michael McGrath

Is the bank open to switcher mortgage applications? If I am with another bank, in a healthy financial position and want to transfer my mortgage to Bank of Ireland, would it be open to that?

Mr. Richie Boucher

We are-----

(Interruptions).

Chairman

Members of the committee cannot speak among themselves. It disrupts what others can hear.

Mr. Richie Boucher

I will ask my colleague, Mr. McLoughlin, to assist Deputy McGrath.

Mr. Liam McLoughlin

Bank of Ireland is certainly open to new business from switchers. However, the Irish market is dominated by tracker mortgages, amounting to approximately 60%. The inclination to switch mortgages is not as it is in other markets, but we are keen to switch business into Bank of Ireland.

Deputy Michael McGrath

When the committee asked that question of Bank of Ireland previously, the response was that switchers accounted for a low proportion of its mortgage business.

Mr. Liam McLoughlin

That is the fact. It is so low because keenness for switching mortgages when 60% of the market is on tracker rates is also low. Therefore, the quantum of switching in the Irish market is low. However, we are keen to-----

Mr. Richie Boucher

We have switcher products, but the desire of a customer to switch to a variable or fixed rate mortgage when he or she is on a tracker rate is very low.

Deputy Michael McGrath

I do not find Mr. Boucher's argument about pricing policy convincing. He was the one who drew the comparison with the UK market, calling it remarkably similar to Ireland's. He stated that the average rate Bank of Ireland charged in the UK was approximately 4%. However, the offering it makes to new customers in Northern Ireland and the rest of the UK is remarkably competitive and strikingly different from the offering it makes in the Republic. Mr. Boucher has cited a rate of 4.5% at a time when its cost of funding is probably 1% or so. That is a remarkable margin to charge for variable rate products. I am not just referring to mortgages but also to personal loans for which Bank of Ireland charges approximately 12%, to credit cards for which it charges 20% or so and to loans to small to medium-sized enterprises, SMEs, which are paying way over the odds.

Mr. Richie Boucher

I will point out that the group margin is 2%. We must take into account liquidity risks, especially as regards mortgages. It is a 25 to 30 year proposition to customers. As such, we must take a liquidity risk for that duration. The Government has taken out a 15-year bond at 2.5%. It is difficult to compare one product or its features with another. We must have subordinated capital. We must have a range of instruments of various maturities to match our different products. We are also required to take into account the weighted cost of capital against products. This must also factor in loss experience. Our loss experience on our UK mortgage book is different. To assist the Deputy, though, we will provide him with our UK and Irish mortgage rates so that he can have an appropriate comparative.

Deputy Michael McGrath

I thank Mr. Boucher. I have been signalled that I am moving on to my last question. It relates to Bank of Ireland's approach to insolvency cases under the formal Insolvency Service of Ireland process. Slide No. 40 that the delegation has provided shows that of the total 296 personal insolvency arrangements, Bank of Ireland is involved in 109, if I am reading it correctly. The number of arrangements that have lapsed due to "No" creditor votes is nine. Will Mr. Boucher confirm to the committee how many PIAs the bank signed off on that have involved material changes to the mortgages' balances? He informed us previously that the bank would not sign off on any PIA that involved a change in the mortgage balance.

Mr. Richie Boucher

I will ask my colleague to address that.

Mr. Liam McLoughlin

Turning to slide No. 40, 296 protective certificates have issued in respect of PIAs, of which Bank of Ireland was involved in 109. Of those, nine lapsed because there was a "No" creditor vote on them. At the end of September, 41 cases were still works in progress. Bank of Ireland voted "Yes" in 45 cases and "No" in 14. Those in which Bank of Ireland voted in favour of the proposal from the personal insolvency practitioner, PIP, accounted for 76% of cases. In comparison, only 67% of all cases were approved.

Deputy Michael McGrath

Has Bank of Ireland approved cases that involved a reduction in a mortgage balance?

Chairman

I am sorry, but I must stop the Deputy now.

Deputy Michael McGrath

I asked a question but it was not answered.

Chairman

And I am the Chair of the committee.

Deputy Michael McGrath

Has Bank of Ireland approved PIAs proposed by PIPs that involved reductions in mortgage balances?

Mr. Liam McLoughlin

I do not have the specifics with me, but there is negotiation in each PIP case on the terms and conditions and the outcome.

Deputy Michael McGrath

Hold on a minute. A clear policy was stated the last time Bank of Ireland appeared before the committee.

Mr. Richie Boucher

I would not be aware of whether we have. We cannot confirm that, so we will verify it.

Deputy Michael McGrath

Is it still the bank's policy not to sign off on PIAs that involve a reduction in mortgage policies?

Mr. Richie Boucher

The bank's policy is to ensure that secured mortgage debt is prioritised and to maximise recovery. That has not changed. This consistency of policy has ensured that our defaults are half the industry average. Our defaults are decreasing and we are-----

Deputy Regina Doherty

Does that include mortgages in repossession status?

Chairman

Does Senator Coghlan wish to contribute?

Senator Paul Coghlan

Briefly. I welcome the delegation's attendance.

Chairman

Is the Senator sharing time with someone?

Senator Paul Coghlan

Of course. I only want a minute. I will share with Deputies Regina Doherty and Kieran O'Donnell.

Chairman

There are ten minutes in the full slot.

Senator Paul Coghlan

I welcome Bank of Ireland's good news story. It is appropriate that we are hearing from the bank at this time. The delegation's comments on the economy are welcome and corroborate what we are being told by the Minister for Finance and others. I am delighted that the bank's rate of new lending is on target and that it is providing one in three new mortgages. It has refunded the taxpayer totally. The taxpayer only has a 14% discretionary holding now. Bank of Ireland passed the stress tests and everything is set for further progress. Will the delegation comment on the mortgage table that is outlined on page 35? Is the bank satisfied with its progress vis-à-vis all others?

Mr. Richie Boucher

We have made progress.

Senator Paul Coghlan

I accept that.

Mr. Richie Boucher

However, we are never satisfied. We must keep improving and ensuring we propose solutions with customers who are in arrears. In nine out of ten cases where a standard financial statement, SFS, has been completed, we can offer resolutions.

Up to 86% of resolutions are adhered to by customers. However, in all of these matters we have to keep on improving. We still have a high level of defaults. While these defaults, relative to our State-owned competitors, are of a different quantum, they are still very high. We still have a number of customers who are in challenging circumstances whom we have to help restructure. Where we cannot help them, we have to move it on. We are not in any way complacent or self-satisfied on this issue. We have to continue to make progress.

Deputy Regina Doherty

Bank of Ireland is repossessing some 4,350 family homes through the courts. These homes add up to a potential of a book value of €2 billion. How much of a provision has Bank of Ireland made against that debt?

The bank’s priority is ensuring the security of mortgage debt, whereas ours is ensuring security of tenure of a house for a family in co-operation with their lender. In the bank’s repossession cases, what is the least number of days since any of the families affected have paid the bank in respect of their outstanding debts? Have these families been offered another option to repossession, including the mortgage-to-rent option, the least worst option? Is it the bank’s position that there is no other viable option other than repossession?

Mr. Richie Boucher

As at the end of June 2014, our provisions for defaulted loans on principal private residences came to €1.9 billion. The provision we hold against this comes to €900 million, a provision coverage ratio of 45%. The negative equity relating to the defaulted loans is €300 million.

Deputy Regina Doherty

There is a 45% provision against the debt on the family homes with which the bank is in the repossession process. What options were offered to these 4,350 families before repossession proceedings were initiated?

Mr. Richie Boucher

The figure of 4,350 is not necessarily related to defaulted loans. Mr. McLoughlin has more detail.

Mr. Liam McLoughlin

The numbers of properties repossessed by the end of June 2014 were 247 buy-to-let and 146 owner-occupied properties. We have not repossessed 4,300 houses. We may be taking some of these cases through a legal process. Our experience, however, has been that where customers do not co-operate with the bank, once we engage with them in the legal process, the levels of co-operation tend to increase and improve. The number of properties repossessed by the bank is significantly smaller than the Deputy stated.

Deputy Regina Doherty

The number of people to whom I am referring is the 3% of the 145,000 loans which are in a resolution process, either consensually or through the legal process. That comes to 4,000 plus loans.

Mr. Liam McLoughlin

Those are accounts in various stages of arrears.

Deputy Regina Doherty

According to the bank’s submission document, the various stages of arrears are either in a resolution process consensually - either the borrower giving back the keys and the bank pursuing him or her for the debt - or resolution through a legal process, which means that the bank has initiated legal proceedings. I appreciate that the bank’s delegation has answered the question on the provision against this debt. However, what options were given to these 4,000 plus families before they reached the repossession stage, options such as a mortgage-to-rent which comes to a miniscule amount?

Mr. Liam McLoughlin

In those cases we have been through an extensive resolution process with the customers in line with the CCMA, code of conduct on mortgage arrears. That process starts when the customer is contacted about the arrears on his or her house or property. We have 790 skilled staff who are familiar with the CCMA process involved. It starts off with a network account manager in a branch meeting the customer and helping him or her to fill in an SFS, standard financial statement, a standard form from the Central Bank.

Deputy Regina Doherty

I am not trying to be rude and appreciate the process. However, has the process been completed in its entirety with the 4,000 plus families involved in repossession cases? Have other options been given to them?

Mr. Liam McLoughlin

Yes, in every case where the customer has co-operated with the bank. In some cases, where the customer has not co-operated, the process will not have been completed. They will not have completed the Central Bank’s required SFS.

Deputy Regina Doherty

How many of the 4,300 families in question did not co-operate in any way, shape or form with the bank?

Mr. Liam McLoughlin

I do not have an exact number, but I suspect it is in the region of 600.

Deputy Regina Doherty

Apart from the cases of non-co-operation, are there impediments to the bank finding sustainable solutions for these customers?

Mr. Liam McLoughlin

The bank has made significant progress in dealing with the issue of mortgage arrears. In nine out of ten cases where customers have contacted us, we have been able to put solutions in place. The only impediment is where a customer is not co-operative. In that scenario we take the customer through a CCMA-approved route towards a legal process. In 20% to 30% of these cases the customer then actually engages with us and works towards a solution. Some cases go all the way through to repossession where a case is unsustainable or the customer will not engage with us.

Deputy Regina Doherty

Apart from the options offered in the past 12 to 18 months, are there other options, say, a mortgage-to-lease as opposed to a mortgage-to-rent option, that would make it easier for the banks to provide solutions for those in arrears?

Mr. Richie Boucher

In the mortgage-to-rent scenario there are specific criteria which could be enhanced. One of the obvious necessities is either a local housing authority or a not-for-profit housing authority being willing to take the property. We have seen growth in that market. As we are a lender, we lend to not-for-profit housing authorities. It is a commercial transaction and filling a need and gap in the market. Ultimately, what it needs is someone on another part of the chain who will take ownership of the property and then lease it back to the tenant.

Deputy Regina Doherty

Is there an issue with finding these providers?

Mr. Richie Boucher

There is an issue, but it is like any market. The market will improve. In the United Kingdom housing associations are a more significant feature of the market which I believe it will grow.

Deputy Pearse Doherty

I welcome the Bank of Ireland delegation. Mr. Boucher has said the cash injected by the State into Bank of Ireland has been paid back and showed figures in his presentation of €6 billion and so on. He is actually being mischievous.

It is the equivalent of someone with a Bank of Ireland mortgage of €100,000 and a variable interest rate telling the bank when the interest reaches €100,000 that the interest has been paid back and that he or she and the bank are all square. That is what Mr. Boucher is trying to tell the finance committee.

Mr. Richie Boucher

Excuse me, Deputy.

Deputy Pearse Doherty

Let me finish. There is a breakdown of the figures. Approximately €1.5 billion in guarantee fees was paid up until the end of 2013 that had nothing whatsoever to do with the cash injection; it was because we had to guarantee the bank. The rest is mostly made up of coupons in terms of securities. Therefore, it does not have to do with the cash that was injected. Mr. Boucher should be more up-front about this.

Mr. Richie Boucher

The verification is taken from the website of the Department of Finance and answers the Minister for Finance has given to parliamentary questions.

Deputy Pearse Doherty

Please listen for one second. This is interest on products bought from Mr. Boucher's bank. It is the exact same scenario as the one I have outlined. It is interest that was applied to coupons. I refer to the fee applied by giving the guarantee to Bank of Ireland, not to paying all the cash back. They are two different things. Bank of Ireland charges fees on transactions all the time, but when it offers a loan, it still wants the capital back; that is the point. I do not want to take up the committee's time, but the public will decide this.

Mr. Richie Boucher

Exactly, but the verification does not come from Bank of Ireland; it comes from the Department of Finance's website and statements the Minister for Finance made.

Deputy Pearse Doherty

Is Mr. Boucher blaming the Minister of Finance? He is big enough to say what is required. He should acknowledge that the capital that was injected into the bank has not been paid back and that what have been paid back are the fees that applied to the products bought in terms of shares in the years in question and the fee that applied to the guarantee issued to the bank. I refer to other services offered to the bank. It is important to state this because it cost the State money to provide these services.

I wish to move on to the issue of arrears which is the primary focus of the committee in terms of mortgages. With regard to the data the bank has, Mr. Boucher talked about redemption and improvement in large numbers. I take it that with people getting back to work or other factors, the financial position has improved. The arrears capitalisation figure for private domestic homes is 1,060. Reference is made to a total of 2,373. Is it the case that there was a natural improvement in these cases?

Mr. Richie Boucher

Are there several linked questions?

Deputy Pearse Doherty

No, I just want an answer.

Mr. Richie Boucher

My colleague will answer that question.

Mr. Liam McLoughlin

On redemptions, the number of cases included as being 90 days past due is determined by the Central Bank and the listed number of principal dwelling house cases is in the figures published at the end of December. As the Deputy said, there has since been redemption for a variety of reasons-----

Deputy Pearse Doherty

It happened naturally; the bank did not do anything. The arrears capitalisation figure-----

Mr. Liam McLoughlin

We worked with those customers as part of a collection of processes-----

Deputy Pearse Doherty

The bank did not offer them anything. Their own financial circumstances improved.

Mr. Liam McLoughlin

We worked through a process-----

Deputy Pearse Doherty

On arrears capitalisation, the situation of those concerned improved, which meant that they were not only able to take on the mortgages-----

Mr. Liam McLoughlin

No. In the case of arrears capitalisation, this is where we worked with customers using one of our existing solutions such as a term extension. The person must prove over a period of six months that he or she has met the terms of the arrangement with the bank. We agreed as part of this that we would capitalise some arrears of those concerned because they had shown a track record of performance. We have worked actively with the customers involved.

Deputy Pearse Doherty

Is Mr. McLoughlin saying the 1,060 customers subject to arrears capitalisation had an additional product offered to them?

Mr. Liam McLoughlin

They went through a resolution process. In that case the primary product was arrears capitalisation, but the customers worked with us over a period and proved their capability.

Deputy Pearse Doherty

There is another category numbering over 2,000. I refer to where there was a mix of solutions. Will the delegation clarify whether arrears capitalisation involved people who just had arrears capitalised or people who were offered services in addition to arrears capitalisation?

Mr. Liam McLoughlin

The figure of 1,060 pertains to those for whom arrears capitalisation is the primary solution. The customers have worked with us over six months to prove their capability. The figure of 2,277 in regard to-----

Deputy Pearse Doherty

I want to stick with the figure of 1,060. The only service or solution these debtors received from the bank was arrears capitalisation because they were not offered a split mortgage term extension or an interest write-down. This means that their personal circumstances had changed such that they could deal with the mortgage, plus the arrears they had built up.

Mr. Liam McLoughlin

In a number of cases, that would be the position.

Deputy Pearse Doherty

That is the question I asked a couple of minutes ago. The point I am making is that almost 50% of the cases involve people whose circumstances changed and for whom the bank did not really have to do anything for them whatsoever other than recapitalising the arrears.

Mr. Liam McLoughlin

In all of these cases, we would have worked and engaged with the customer through our mortgage advisers and-----

Deputy Pearse Doherty

Yes, but the bank did not offer them any solution. It telephoned and gave them advice and all the rest.

Mr. Liam McLoughlin

There was no product solution, but there was support.

Deputy Pearse Doherty

The bank did not do anything for these categories. In real terms, it did not offer them a solution, save for saying it would bundle all their arrears into the mortgage when it found out they were able to deal with their debt. The other 1,300 were able to deal with the matter themselves. The figure is very low in terms of the products or services the bank provided for individuals in mortgage distress.

Mr. Richie Boucher

Regarding the mortgage arrears target, as we said, the number of customers in arrears and default has reduced. The forbearance we provide and characterise in our accounts is also set out in the accounts, which show exactly the number of customers who have been forborne outside the MART and its specifics, which pertain to Central Bank targets and measures. The fact of the matter, as our accounts demonstrate, is that the number of customers in arrears has reduced, as has the number defaulting. The number of forbearances we have in place has increased. Some of thee are obviously connected to a recovering economy. Some are obviously connected to people being able to deal with unsecured or other debt, while some have to do with the actions we have taken. In any situation there is a combination of factors. I completely agree with the Deputy in that regard.

Deputy Pearse Doherty

The point I am making is that when one removes from the equation those whose fortunes naturally improved as a result of the recovering economy or another reason, one finds that the number of genuine solutions that have been provided is quite low.

Mr. Richie Boucher

We have a preference for customers whose conditions naturally cure. Most would prefer people's conditions to cure because of economic circumstances or their own. I agree completely with the Deputy in that regard.

Deputy Pearse Doherty

On the personal insolvency service, Mr. Boucher stated at a meeting of this committee on 10 April that the bank’s policy and practice were to have no debt write-down.

Mr. Richie Boucher: For mortgage debt.

Deputy Pearse Doherty

Yes. When I questioned him, Mr. Boucher said the bank would torpedo any personal insolvency proposal that required a debt write-down on secured debt. Is that still the practice and policy of the bank? Alternatively, is somebody going behind Mr. Boucher’s back and writing down debt or agreeing to the personal insolvency proposals?

Mr. Richie Boucher

We have set out clearly what the PIPs are. In Bank of Ireland’s case, we took a market leadership position over two years ago to say unsecured debt should be written down first. That has been a policy of the bank and reflects the process in which we have engaged. We pioneered a pilot initiative with the other banks to state that if a customer had a personal loan with us and a mortgage with AIB, we would take the write down and vice versa. That has been the consistent application of our policy.

Deputy Pearse Doherty

I understand that and it is uniform across the banks. My question is whether it is still the position that Bank of Ireland will veto every personal insolvency proposal that requires it to take a debt write-down on secured debt.

Mr. Richie Boucher

Our policy and procedures are such that we prioritise secured debt. This has resulted in the number of cases of arrears and defaults on Bank of Ireland’s book reducing. The figure is 50% of the industry average and our provisions are higher than the rest-----

Deputy Pearse Doherty

I understand that, but I am going to ask Mr. Boucher my question again. Will he confirm what he told the committee on 10 April?

Mr. Richie Boucher

I repeat that our policies and procedures are as I outlined on 10 April. We prioritise secured debt.

Deputy Pearse Doherty

Let me put it a different way. Of the 45 proposals to which Bank of Ireland stated “Yes”, did any contain a write-down of mortgage debt?

Mr. Richie Boucher

I am not aware of whether they did.

Deputy Pearse Doherty

Therefore, they did not.

Mr. Richie Boucher

I am not aware of it. I do not have the information to give the Deputy verification one way or the other.

Deputy Pearse Doherty

Does Mr. Boucher believe officials in his bank are going behind his back to write down debt?

Mr. Richie Boucher

I am not aware of that.

Chairman

We must move on.

Mr. Richie Boucher

If I say “No”-----

Deputy Pearse Doherty

As Mr. Boucher has only suggested 45 proposals, I ask him to inform the committee in writing on those proposals.

Mr. Richie Boucher

I have no problem with that. However, because it is a public committee, I do not say something unless I have checked. That is what I am saying. Our practice, policies and process remain the same. The Deputy has asked me a specific question. I do not have the answer. I will come back with the answer. I have absolutely no problem with that.

Deputy Pearse Doherty

I thank Mr. Boucher.

Deputy Arthur Spring

There is probably a more humble approach from Bank of Ireland this time in the Oireachtas Joint Committee on Finance, Public Expenditure and Reform than we had previously.

Chairman

I ask the Deputy to deal with his phone, which is causing interference.

Deputy Arthur Spring

The policy to date as implemented by the market is such that Bank of Ireland seems to be an outlier in how it is treating people. I will ask some questions to get to the fundamentals of how it is dealing with people in personal insolvency.

Mr. McLoughlin said that 67% was the average and that 75% of the cases being put before Bank of Ireland are being resolved. Is that correct?

Mr. Liam McLoughlin

I ask the Deputy to repeat the question.

Deputy Arthur Spring

The average across the industry is 67% and Mr. McLoughlin said that Bank of Ireland had 75% of the cases.

Mr. Liam McLoughlin

Does this relate to personal insolvency arrangements?

Deputy Arthur Spring

Yes.

Mr. Liam McLoughlin

Based on the activity over the past 12 months, outlined on page 40, that is the number we are saying, yes.

Deputy Arthur Spring

That is correct.

Mr. Liam McLoughlin

So 80 cases have been approved and we have been involved in 59 of those and we have approved 76% of those cases.

Deputy Arthur Spring

In what percentage of those cases was Bank of Ireland the lead creditor, and did it vote to accept the arrangements?

Mr. Liam McLoughlin

The Deputy is asking for a level of detail I do not have to hand at the moment.

Deputy Arthur Spring

This is a fundamental question, because I have been given figures which suggest that where Bank of Ireland has been the lead creditor it has voted against acceptance of the personal insolvency route, but where it has been the unsecured creditor it has voted for it on every occasion. That skews the results in favour of the bank. It meets its targets but it is keeping people on the line and ultimately the deal it is proposing is the only deal in town. That seems to be the robust attitude Bank of Ireland is taking with people, particularly with regard to PDHs.

Mr. Liam McLoughlin

That is not information I would agree with or have to hand. I would have to take that away and follow up on it.

Deputy Arthur Spring

Is there a policy or strategy as to how Bank of Ireland will deal with personal insolvency when it is the lead creditor and when it is the junior creditor? I need to know that.

Mr. Richie Boucher

We look at each case on a case-by-case basis, but also consistently with our policies.

Deputy Arthur Spring

Is there not an overarching policy that when Bank of Ireland is the lead creditor it is more difficult, but when it is the unsecured creditor it accepts the arrangements?

Mr. Richie Boucher

We look at it on a case-by-case basis. We look at what we think is the best solution from our perspective and what works for the customer. Whether we are the lead creditor does not necessarily make a difference.

Deputy Arthur Spring

Is Mr. Boucher aware of the Central Bank report, Mortgage Repayments after Permanent Modification, written by Anne McGuinness?

Mr. Richie Boucher

It is not a report that I am familiar with.

Deputy Arthur Spring

It is probably the best report that has been prepared on how restructured loans are being dealt with. What percentage of restructured loans are going into arrears or going into a potential default position again in Bank of Ireland?

Mr. Richie Boucher

Some 86% of the restructured loans we have are continuing to perform.

Deputy Arthur Spring

Is Mr. Boucher saying they are continuing to perform after being restructured?

Mr. Richie Boucher

That is correct.

Deputy Arthur Spring

So 14% of all of those are being restructured too harshly. Would that be an accurate suggestion?

Mr. Richie Boucher

I think it might be considered the other way around. One tries to give the customer the bounce of the ball. One expects some restructures to fail. If one-----

Deputy Arthur Spring

But the percentage-----

(Interruptions).

Deputy Arthur Spring

Mr. Boucher has just said-----

Mr. Liam McLoughlin

Just to clarify the numbers, our numbers are 86%. The industry average - this is publicly available information - is 80%. In our case, almost nine out of ten nationally meet the terms of their conditions. The MART basis is a different measure. Bank of Ireland's MART numbers are 91% compared with the industry-----

Deputy Arthur Spring

I would think that it is the reset button when Bank of Ireland is telling people that it will restructure. As a former banker, I would say the bank is starting to deal with the customer from scratch again. Earlier Mr. Boucher said that the bank needed to hit 98% accuracy in mortgage lending in order to fulfil its requirement to break even.

Mr. Richie Boucher

Deputy-----

Deputy Arthur Spring

If 14% of people are out after one year, where will we end up overall? Is that an acceptable level? I can only imagine the pressure individuals are under as a result of this.

Mr. Richie Boucher

Obviously, Bank of Ireland is a public company and we are in the market. The market looks at our challenged loans on the basis of whether arrears are going up or down, whether new customers are coming into that category, the provision coverage against those defaulted loans and the percentage of sticking where we restructure. The 86% is a position about which we stand in the market. The market makes a judgment as to whether our restructuring is sustainable. I concur with the Deputy that restructuring for the sake of restructuring does not do anything for us or for the customer. We seek to restructure and the market will continue to review the adequacy of our provisions when reporting on our defaulted loans because there is no point in reporting defaulted loans coming down if one restructures then. I agree with the Deputy.

Deputy Arthur Spring

I thank Mr. Boucher. I think where he has gone with this is exactly where we need to go. We are here on behalf of the State which has a 14% shareholding in the bank at the moment. I believe Bank of Ireland is taking a different approach to people in arrears from all other institutions. We had the announcement yesterday from the Irish Mortgage Holders Organisation as to how it is dealing with AIB customers and the capacity to deal with it in a robust manner. How many people who are in arrears have had to sell their houses? As Deputy Regina Doherty pointed out earlier, there are 4,000 people against whom Bank of Ireland is considering taking legal proceedings in respect of their private homes, potentially losing their homes. In the event of their losing their homes, does the bank keep them on the line for the money they were not able to repay?

Mr. Richie Boucher

There are two components to the Deputy's question.

Deputy Arthur Spring

I will stick with the latter.

Mr. Richie Boucher

The first component-----

Deputy Arthur Spring

I will stick with the latter, if Mr. Boucher does not mind.

Mr. Richie Boucher

Slide 35 shows that our defaults and our arrears are vastly different from the other banks. That is an important context. My colleague will answer the second part.

Mr. Liam McLoughlin

We talk to customers about the residual debt and what they can afford. We work with customers to-----

Deputy Arthur Spring

Does Bank of Ireland write it off?

Mr. Liam McLoughlin

No, we do not write it off.

Deputy Arthur Spring

So Mr. McLoughlin is telling me that when somebody is stressed to the point of losing their personal home requiring the family to move out of the home, not only does the bank take the home from them, but bank tells that person, "You still owe us the money even though you are in financial dire straits". That is unbelievable in this day and age.

Mr. Liam McLoughlin

In the case of the mortgage, it is a personal debt. The property is the security so it is a personal debt.

Deputy Arthur Spring

Obviously the person does not have the capacity to pay on his or her home.

Mr. Liam McLoughlin

We talk to that customer about what he or she can afford.

Deputy Arthur Spring

There is no reset button. The only real thing they can do is to head towards bankruptcy and try to start out again for themselves.

Mr. Liam McLoughlin

As I said, we have a reasonable conversation with customers about what they can afford.

Deputy Arthur Spring

They obviously cannot make repayments. They are trying to make a start in life again and Bank of Ireland is putting them on the hook until they pay everything. If I was a banking analyst, I would recommend buying Bank of Ireland shares at one level because I think it is screwing everybody to the point that it is getting every last penny it is owed out of them. As the State is a shareholder, we have an obligation to see the bank do well, but I think it has gone over the top on it. I think it is doing damage to the brand of Bank of Ireland. People in this country talk. Bank of Ireland is an outlier in the way it is treating people. My key point is that it is too harsh.

Accountants and financial consultants throughout the country will say that Bank of Ireland is the last institution people want to deal with on mortgages and debt. The witnesses are potentially damaging the brand. As a shareholder, I say that is not good enough. AIB stands in much better stead with the public because it is writing down money and restructuring debts. It is not coming after people to screw every last penny from them or forcing them to give up their personal homes.

I have a fundamental problem with much of this. At one level Bank of Ireland has a licence provided by the Central Bank. The State bailed it out. I do not want to get personal and I wish the witnesses all the very best in what they are trying to do. However, their line of tack is wrong. Bank of Ireland is given a licence by the institutions of the country to do the best thing by the people. I believe the witnesses need to re-evaluate. I will be writing to the Minister for Finance, as the custodian of the 14% stakeholding. I will be writing to the public interest directors. I think the brand of Bank of Ireland is potentially damaged at the moment, largely due to the policy it pursuing. It needs to ease off a little. It has gone too far with it on many fronts.

Chairman

The Deputy has one minute.

Deputy Arthur Spring

I ask the witnesses to reconsider their overall strategy.

I will ask Mr. Boucher one more question to wrap this up.

Why has Bank of Ireland taken a different approach from the other banking institutions? Are the bank's fiduciary responsibilities the reason for this difference? Are its shareholders satisfied with the manner in which it is pursuing debtors?

Mr. Richie Boucher

We take our responsibility seriously. Notwithstanding different views about the issue, we have repaid all the State aid, as has been confirmed by the European Commission. The taxpayers are in profit in respect of their investment.

Bank of Ireland has two State-owned competitors. Whatever definition one uses for repayment, these banks still owe taxpayers €24 billion. Slide 35, which refers specifically to mortgages, shows that AIB's defaulted loans amount to €5.5 billion, while those of Permanent TSB amount to €4.7 billion. Bank of Ireland's defaulted loans amount to €1.9 billion and our arrears are half of the industry average. Our restructures stick for longer and we have more resolutions in place on our book, relatively speaking. That is the context in which one must look at Bank of Ireland.

Deputy Arthur Spring

Bank of Ireland has more customers put to the cosh than any other bank. That is the fundamental issue I am raising.

Mr. Richie Boucher

I do not believe the figures bear out the Deputy's statement. Allied Irish Banks has defaulted loans of €5.5 billion.

Deputy Arthur Spring

Yes, but it is dealing with them in a way that allows people to move on with their lives subsequently.

Mr. Richie Boucher

It is a use of taxpayers' money, which is a different statement for me.

Deputy Arthur Spring

We are in this together, not as institutions.

Mr. Richie Boucher

Our view is that taxpayers' money should be returned and they should decide themselves what they want to do with it.

Chairman

We must move on. Senator Thomas Byrne has five minutes.

Senator Thomas Byrne

I wonder sometimes about the function of these meetings. While members are allowed to speak and ask questions, where is the policy response? I am not sure there has been any policy response at Government level since our most recent meeting in April. Whatever we say about mortgages and repossessions, in the summer of 2013 the Government had a law voted in that facilitated the banks. Many of us bitterly opposed the legislation at the time. I am not surprised the banks have used the law to their best advantage as they have been allowed to do so by the Government. We must show some realism on this issue. My party continues to bitterly oppose the law in question and we stand up for those who have been driven into the courts as a result of the actions of the banks and the change in the law made by the Government in the summer of 2013. Those are the facts.

The Government introduced a number of schemes, including the mortgage-to-rent scheme, to assist people in difficulty. What are Mr. Boucher's views on the mortgage-to-rent scheme? Given that a number of stakeholders are involved in the scheme, it is important to hear the views of Bank of Ireland on it.

Mr. Richie Boucher

My colleague, Mr. McLoughlin, will respond to the Senator's question.

Mr. Liam McLoughlin

I will first provide figures and then address the scheme. Bank of Ireland has proposed 226 cases as part of the mortgage-to-rent scheme. Of these, 90 are proceeding and 136 did not meet the criteria. We had a very good discussion about some of the issues arising from the scheme at our meeting in April. Since then, Bank of Ireland has been involved in active discussions with the various parties, including the approved housing boards and the Department. I believe we are close to producing a very good protocol in this area. A meeting will take place in the final week of November to bring the matter to a conclusion. We are moving to a much better position in regard to the scheme.

Senator Thomas Byrne

Flawed as they are, the criteria applying to the scheme are reasonably clear. How was Bank of Ireland able to propose a large number of cases that subsequently did not meet the criteria? Were there different interpretations of-----

Mr. Liam McLoughlin

The issues that arose were predominately related to funding capacity and the location of premises. Some premises were outside of large estate agents that would be of more attraction to the housing boards or Department.

Mr. Richie Boucher

The criteria are maybe more at the specific property side, which is a more difficult thing to ascertain upfront with the customer.

Senator Thomas Byrne

The scheme provides for very clear valuation limits. I presume no mistakes were made in that regard or was valuation an issue?

Mr. Liam McLoughlin

Valuation is probably the one remaining matter to be resolved between now and the end of November. We believe there is an approach that will get us there.

Senator Thomas Byrne

We have been messing around with this scheme for two years. I am not blaming the banks but the Government because it has done nothing. It is only now, after two years, that we may reach a resolution. This scheme could work well if the Government were serious about it.

Mr. Richie Boucher

The not-for-profit housing associations also need to develop. As I said, what we see in the United Kingdom is a sector that we would encourage.

Senator Thomas Byrne

Is Mr. Boucher proposing to pass Bank of Ireland's bad mortgages on to not-for-profit housing organisations and then charge them interest?

Mr. Richie Boucher

We have made the provision. Regardless of whether the not-for-profit sector deals with us, we are prepared to provide finance to them.

Senator Thomas Byrne

Mr. Boucher told us earlier that Bank of Ireland will deal with them on a commercial basis.

Mr. Richie Boucher

We are in business.

Senator Thomas Byrne

The number of mortgage-to-rent solutions Bank of Ireland proposed appears to be very low. Is it not the case that the banks operate as the gatekeepers to the scheme in that it is for them to decide whether to make a mortgage-to-rent proposal?

Mr. Richie Boucher

To return to the Senator's earlier point or assertion, we have every interest in seeing a scheme such as this work. We do not have any commercial reason not to want it to work.

Senator Thomas Byrne

What is the reason for the low number of solutions proposed?

Mr. Richie Boucher

Many of these things take time to develop.

Senator Thomas Byrne

Two years in the middle of a crisis is-----

Mr. Richie Boucher

One needs to have a funder at the other side.

Senator Thomas Byrne

Has Bank of Ireland contacted either the Department of the Environment, Community and Local Government or Department of Finance to express its frustrations about the operation of the scheme given Mr. Boucher's assertion that he wants to work?

Mr. Richie Boucher

We participate actively in working parties to try to identify how we can assist.

Senator Thomas Byrne

I hope the scheme works because it has been a disaster for the past two years. The Government promised that the scheme would be a solution to many vulnerable people who have been let down. Let us wait and see if good news emerges at the end of the month. Perhaps the joint committee should follow up on that issue.

Deputy Kieran O'Donnell

I welcome Mr. Boucher and his colleagues. Given the importance of having a functioning banking system, I welcome Bank of Ireland's recovery and return to profit. To take up Deputy Michael McGrath's point on interest rates and charges, an examination of the figures indicates that the standard variable rate across the Bank of Ireland group is approximately 4.5%. Is that figure correct? I refer to the rate available to first-time mortgage holders.

Mr. Liam McLoughlin

The answer to the Deputy's question is on page 9. A variety of factors that feed into the pricing of a mortgage, including, for example, the loan-to-value ratio. In terms of a variable rate-----

Deputy Kieran O'Donnell

The figure is in or around 4.5%.

Mr. Liam McLoughlin

That rate applies to fewer than 50% of mortgages. The accounts show that our average loan-to-value for mortgages in the first six months of this year was about 72%. Based on this, that would be priced at 4.30%.

Deputy Kieran O'Donnell

The point I am making is that the variable rates Bank of Ireland is charging first-time mortgage holders here and in the North are more or less comparable.

Mr. Liam McLoughlin

Based on the loan risk and loan-to-value, 4.30% is a fair number.

Deputy Kieran O'Donnell

The two year fixed rate for a mortgage with a loan-to-value ratio of greater than 75% is 4.35% in the Republic and 2.09% in the North. Why is the rate charged in the North less than half the rate charged here? Is it the result of the lack of competition in the market in the Republic?

Bank of Ireland and Allied Irish Banks control a large part of the residential mortgage book in Ireland. The former has been ahead of the curve in that it has returned to profitability ahead of AIB, yet it is the latter bank that has seen fit to reduce its variable rate by 0.25%. Why has Bank of Ireland not followed suit and reduced its variable rate? Why is the two year fixed rate for a mortgage with a loan-to-value ratio of greater than 75% charged in the North less than half the rate charged in the South?

I do not wish to go over old ground but I wish to get to the nub of the issue. Bank of Ireland has increased its margin by 43 basis points or approximately 26%.

This more or less corresponds with the reduction in the general cost of funds to the bank itself and Mr. Boucher might elaborate on that. The question simply is about what the bank is not doing. It strikes me as being reasonably logical, in that Bank of Ireland states it is a bank that is in pretty good nick and condition, yet its main competitor in the past week has given a reduction of 0.25% to hard-pressed mortgage holders and to first-time buyers. Moreover, in the North, Bank of Ireland is giving absolutely identical customers a fixed rate for two years that is half the rate it would give to them in Ireland.

Chairman

There is one minute in this slot.

Mr. Richie Boucher

First, I do not think we can compare the customer and our loss experience is quite different, so the capital required is different.

Deputy Kieran O'Donnell

With due respect to Mr. Boucher, Bank of Ireland is, more or less, charging the same variable rate. This clearly looks to me-----

Mr. Richie Boucher

That is a fixed rate and it reverts.

Deputy Kieran O'Donnell

It appears to me that Bank of Ireland is pricing in the market.

Mr. Richie Boucher

When we quote the rate to the customer, the annual percentage rate, APR, is the reversionary rate.

Deputy Kieran O'Donnell

I accept that but it is after the set period.

Mr. Richie Boucher

There are different attractive features. For example, in Ireland, we will waive 1% of the mortgage to offset stamp duty. We will make different offers in different markets.

Deputy Kieran O'Donnell

The question I am asking is very simple.

Mr. Richie Boucher

We compete across every market.

Deputy Kieran O'Donnell

But in the limited time. Therefore, does Mr. Boucher perceive that Bank of Ireland does not have enough competitors, whereby the bank is required to give a rate reduction to customers?

Mr. Richie Boucher

This is a competitive market. It is becoming an increasingly competitive market. The competitive intensity is increasing and will increase. Any business that does not think it faces competition today or tomorrow, particularly the latter, will go out of business. We must be competitive to remain in business.

Deputy Kieran O'Donnell

Briefly, if one looks across the market here, the variable rates are more or less the same with all the banks. However, AIB has given a reduction of 25 basis points or 0.25%. This is a significant reduction for an individual. Why is Bank of Ireland not doing so?

Mr. Richie Boucher

It is using taxpayers' money. AIB owes the taxpayers €20 billion and has decided on how it is going to use some of that. We will remain competitive in the market.

Mr. Liam McLoughlin

If I may, Deputy O'Donnell asked about fixed rates and in the Republic of Ireland, Bank of Ireland in July reduced all of its fixed products, being one, two, three and five years, by between 20 and 55 basis points.

Mr. Richie Boucher

To reflect the cost of fixed-rate money going out, I was talking about-----

Deputy Kieran O'Donnell

It is the same cost of money in the North as down here.

Mr. Richie Boucher

Deputy, we have a liquidity mismatch.

Chairman

My apologies but we must finish on this slot. Does Deputy Paul Murphy wish to speak?

Deputy Paul Murphy

I apologise that I was obliged to miss part of the meeting. I was attending a meeting about workers being paid less than €5 per hour on a State contract.

I will start with material the joint committee has gone over before my time here. In respect of Question No. 32 about the compensation of the chief executive officer and the board, obviously in the response of the bank, it effectively told members to look it up for themselves. Can Mr. Boucher spell out for members the compensation package he was on last year and the previous year?

Mr. Richie Boucher

It was the same for the two years. My pay was €619,000, there was €34,000 as other compensation and then there were payments into the group pension fund. I cannot recall but I believe the total was approximately €843,000. These are the components of it and that is what is contained in the annual report. The payment the group made into the pension fund was €186,000.

Deputy Paul Murphy

I thank Mr. Boucher. Does he think it is justified that the salary cap of €500,000 will be exceeded in his own case?

Mr. Richie Boucher

As I have stated a number of times, my position on the board and my compensation is decided by the shareholders of the bank. It is put to a vote of the shareholders each year. It was put to the shareholders in May of this year and 1% of the shareholders voted against me being re-elected and 1% voted against the pay.

Deputy Paul Murphy

Does Mr. Boucher think the fact he was one of the executive director at the time of the bank bailout should have any bearing on, for example, the assessment by the Government, which is a shareholder, of his performance? Given that Mr. Boucher was there at the helm at the time of the bank bailout, for which we all paid and continue to pay in terms of water charges, etc., should that not mean he is not at the helm any more?

Mr. Richie Boucher

I cannot say anything more. I stand before the shareholders. I stood before the shareholders when I was appointed to the position. The shareholders could decide whether I did that job. That was in February or March of 2009. I stood before the shareholders in 2010, 2011, 2012, 2013 and 2014 and they decide whether I am doing the job. That is their decision, Deputy.

Deputy Paul Murphy

I have a problem with the decision some of the shareholders are making.

To turn to the arrears figures, by my calculations, if one adds together the SME corporate loans arrears, the mortgages in arrears and the property and construction loans in arrears, the bank has €16.4 billion in arrears out of a total of €83.3 billion, which is very close to 20%. Is this not very high?

Mr. Richie Boucher

Yes, absolutely. I agree completely. It has come down. As we have discussed with all our shareholders and stakeholders, the defaulted loans are still too high. The question of how the defaulted loans come down is a key criterion on which as a company we are judged by everyone. The first factor that is a contributor to this is to ensure - in so far as we can and the economy is a function of this - that the number of customers defaulting reduces. In each of our portfolios, the number of customers defaulted has reduced. Then, there is the absolute quantum of defaulted loans and what is one's provisional coverage. What is one's best estimate of one's loss against that? We hold provisional coverage of just under 50% of coverage against our estimate of potential loss, taking account of the collateral and so on that we hold. Then, we look at the defaulted loans and whether they themselves are reducing. Are the arrears coming down, are we holding sufficient coverage ratios and are there defaulted loans? It is still too high. It peaked in early 2013 and is reducing. It is a very significant metric and it is much too high.

Deputy Paul Murphy

In Question No. 24, members asked what proportion of the bank's existing mortgage holders would not have qualified for a mortgage under the proposed new Central Bank mortgage deposit and loan-to-earnings ratios. In its answer to Question No. 24, the bank referred members to its answer to Question No. 25. However, the bank's answer to Question No. 25 does not answer the question. If, for example, the 20% ratio was introduced, what percentage of the bank's mortgages would qualify?

Mr. Richie Boucher

It is difficult to give a verified answer to that question because it is somewhat hypothetical. That is the product we offer. If, for example, we stated we could no longer offer someone a 90% mortgage, a proportion of our customers would say they were a bit disappointed but would take the 85%. It is hard to be definitive as to who would not have qualified. We make an offer to the customers, who state they would like this or that. When we assess customers, the primary assessment we make is on income capacity. We see the mortgage as security but as my colleague pointed out in response to an earlier question, we are looking at loans to individuals based on their assessment of their income capacity. If we look at the multiple in particular, there are two features to that. We look at the income multiples and the income multiple is the primary criterion under which we assess someone. If the income multiple does not meet our assessment of a person's ability to repay a mortgage, the loan to value is not a deciding factor. We start with the income capacity and then consider the potential drags on people's income. We also then assume that interest rates will not stay the same forever. We will assume in a sensitivity test that we will add approximately 250 to 300 basis points to make sure that if interest rates rise, a customer's repayment capacity, everything else being equal, still remains sufficient for the customer to service the mortgage. Thereafter, the loan to value comes into play. I do not know whether my colleagues wish to add anything to that.

Deputy Paul Murphy

What if we take the hypothetical out of it? I accept there are people who perhaps, if the new rules-----

Mr. Richie Boucher

If I can help in a different way, I will try to give the definitive answer. A material proportion of our customers would not qualify because of the loan-to-value cap in particular. We believe that a lot of our customers would qualify under the income potential but the loan-to-value cap would cap that number. There is then an obvious concern as to whether customers would take on unsecured or other forms of higher interest-bearing debt to try to deal with that. This is an obvious issue we would face. We will be looking at this issue and will decide on whether to make a submission to the Central Bank. However, in answer to the Deputy's question, the income criteria are more likely not to be the issue for the customer. It is the loan to value and the ability to get the deposit.

Deputy Paul Murphy

Did Bank of Ireland make representations to or, either on a formal or informal basis, lobby the Central Bank on this issue?

Mr. Richie Boucher

We have not done so, but we have an opportunity to consider whether we wish to make a submission. We have not made a decision on that matter.

Deputy Paul Murphy

Is it accurate to say the number of repossessions is increasing year on year?

Mr. Richie Boucher

Yes.

Deputy Paul Murphy

What does Mr. Boucher believe is the reason for this?

Mr. Richie Boucher

There is a combination of factors involved. We go right through the CCMA process to the end. If we consider the way the mortgage book has evolved, there was a spike in the number of defaults and we restructured as many mortgages as possible. Inevitably, however, in view of what had happened to the economy and a range of other factors, the issue began to manifest between 2009 and 2011. There is a factor in that regard.

Deputy Paul Murphy

What does Bank of Ireland do to protect people to ensure they are not thrown out of their homes? There are two elements to this. First, there are repossessions of owner-occupied properties and, second, there are repossessions of buy-to-let properties, in respect of which the ratio is significantly higher than the former. I refer to the example of the Coyne family whose landlord, I accept, was not a Bank of Ireland customer. However, tenants are being thrown out of their homes because they are being repossessed by the banks.

Mr. Richie Boucher

I will provide a very specific example in that regard. We are selling a portfolio of approximately 1,000 homes on the market, of which some 800 are received buy-to-let properties. We specifically say in the documentation that where there are existing tenants, they will be protected. It is a case of buyer beware. We are of the view that if a person is a tenant and meeting the terms of the lease, it may be better for him or her to deal with a different landlord who has the financial capability to meet his or her commitments as a landlord. There is some potential in this regard. People who have greater expenses in other markets are coming into ours and stating, "We can provide and meet our commitments." If we appoint a receiver for a buy-to-let property, the tenant's lease will be taken by the receiver. A number of potential buyers are looking at these properties for income purposes. They see the income potential, the consistency of the tenants and the opportunity involved.

Deputy Paul Murphy

In the context of owner-occupiers, it would make certain financial sense for Bank of Ireland to adopt a more aggressive stance in terms of restructuring and repossession because of the fact that prices are increasing and properties would be worth more to it. Has a more aggressive policy been adopted? I was contacted in the past week by someone in Tallaght who claimed that Bank of Ireland had initiated repossession proceedings against them in court without any real attempt having been made to negotiate an alternative solution. In other words, the bank has made a quick move to repossess.

Mr. Richie Boucher

I cannot discuss specific cases. If, however, the Deputy sends the details to me or Mr. McLoughlin, we will have the case to which he refers reviewed. Repossession crystallises losses for us. The customer's income capacity is the key element to which we give consideration. Our strategy on restructuring operates in observance of the CCMA, etc., and is defined on the basis of income capacity as opposed to the absolute value of the property.

Chairman

In order that people will have an idea of where we stand, I will outline the position on the next four or five speaking slots. Two members of the committee - Deputy Ciarán Lynch and Senator Aideen Hayden - are still to contribute. We will then hear from Deputies Lucinda Creighton and Peter Mathews. We will then return to Deputy Michael McGrath to commence the next round of contributions.

Deputy Lucinda Creighton

How much time will we each of us have to contribute?

Chairman

Five minutes.

Deputy Ciarán Lynch

I welcome Mr. Boucher, Mr. Farrell and Mr. McLoughlin. I wish to pose two questions, the first of which relates to the standard variable rate and the second to the recent announcement made by the Governor of the Central Bank, Professor Honohan, on loan-to-value ratios. We have been thrashing out these matters all afternoon and, as I understand it, the position is quite simple. If a customer is paying at a rate of 4.4% and the bank is borrowing money at 1.5%, the margin of profit for the bank is 3.25%. What is an acceptable margin of profit for Bank of Ireland in this matter? Where does the bank stand on the net interest margin? Is there a level of acceptability of profit and are there circumstances where the bank is taking too much profit and pushing customers too far in the context of the margin to which I refer?

Mr. Richie Boucher

The overall group margin is 208 basis points. It has improved, but if it had remained below 200 basis points, we would not be in profit. That is an important factor. We are obliged to consider different products in terms of their maturity profiles. It is important for us to bear in mind the fact that in the context of a mortgage, we are taking deposits short in the market and making a commitment to the customer that we will lend to him or her. Therefore, we have a liquidity risk. In our asset classes, mortgages drive the single biggest liquidity risk. In the context of the UK market, one of the biggest strategic mistakes the bank made and our largest single issue was related to the liquidity risk it faced with its mortgage book there. We had grown the book, depended on securitisation markets and taken money on a three to five year basis. Liquidity risk is a factor.

Deputy Ciarán Lynch

There was a stage when I had control of the amount of time-----

Mr. Richie Boucher

My point is that if one considers the position on a specific product, what the Deputy is saying might be true. However, we are obliged to look at the liquidity risk right across our profile.

Deputy Ciarán Lynch

I understand that. No one is going to buy a house for €200,000 tomorrow morning. People buy houses over a 20 or 30 year period, with an APR, a fixed rate or a tracker rate applying. The net sum of the final payment will be the actual amount a customer pays for his or her house. A mortgage has a running rate over its lifetime, as does the margin. At present, the margin is 3.25%. I understand the bank is obliged to make a profit, but I want to know if a review is required of the current level of profit. When Mr. Boucher appeared before the committee previously, we dealt with the issue of split mortgages and the manner in which Bank of Ireland was dealing with them. At the time it was retaining the interest on the warehouse portion of mortgages to the full extent. Mr. Boucher went away and reviewed the position and the bank then reduced the margin of profit on the split side of mortgages. In this instance Mr. Boucher needs to take the same approach because the margin of 3.25% is very profitable for the bank.

Mr. Richie Boucher

On the previous occasion I indicated that we would examine the matter to which the Deputy refers. However, I cannot make an absolute commitment on how we price our products. I gave a commitment on the previous occasion to consider the position because I figured we could do something. However, I cannot make a commitment to the committee in respect of how we price products. It would be disingenuous for me to leave anyone with the impression that I might be in a position to take action in that regard. We consider our products on an ongoing basis in order to ensure they are competitive and sustainable and that we can obtain good returns on them. If our products are uncompetitive, the bank, as a business, suffers.

Deputy Ciarán Lynch

The Governor of the Central Bank, Professor Honohan, recently made a significant announcement on loan-to-value ratios. It now seems that if someone wants to purchase a property, he or she must come up with a deposit of 20% of the overall amount involved. In the aftermath of the announcement to which I refer, has Bank of Ireland adopted a formal position or indicated what its position is likely to be in this matter?

Mr. Richie Boucher

We have not done so. The Central Bank has set out a process and we have an opportunity to make a submission to it, should we so wish to do so. We have not made a decision in that regard. As I understand it, if we do make a submission, it will be released for public information. We have not made a decision on whether we will make a submission or the form such a submission will take if we do decide to make one.

Deputy Ciarán Lynch

Those at this table, regardless of whether they are Government or Opposition Members or representatives of the bank, and people who are watching proceedings from outside are of the view that, despite the housing crisis, the citizens of Ireland are going to continue to purchase homes. In order to be sustainable, the housing market must be open to first-time buyers. However, such buyers come with high loan-to-value risks attached. In that context, the 80:20 ratio announced by the Governor of the Central Bank presents a difficulty. In the past people ignored the regulator and the Central Bank and we know to where that led. There is a great deal of merit in what the Governor of the Central Bank is saying. In that context, is there a need to consider putting in place a different type of mortgage product which would reduce the risk involved and permit financial institutions to lend above the loan-to-value ratio for mortgages?

This would permit lenders to loan above the loan-to-value rate of mortgages. I say this on the basis that some kind of mortgage insurance is in place, as is the position in Canada and the Netherlands. Canada is significant as it did not experience a housing bubble like Ireland. Will Bank of Ireland consider a different type of mortgage that will facilitate first-time buyers and meet the Central Bank's criteria? It would have to contain an insurance caveat.

Mr. Richie Boucher

We have operated in markets where there is insurance and it is something we will consider. One must be very careful when it comes to counter parties because one does not expect mortgages to go bad next year. Effectively, a person is taking a risk that the Central Bank does not want the person to take. If people are prepared to take the risk what will they be paid and will they answer if they are called? We have seen such markets operate and are interested in assessing such a proposal. If it can work we will participate but the counter party risk is an important consideration.

Chairman

Before I call Senator Hayden I will ask a question a question on this issue. Is a 20% deposit too high for a first-time buyer or are income levels more important?

Mr. Richie Boucher

Our primary focus is income capacity and potential when assessing mortgages. We recognise that this is a difficult area and we are concerned that if people cannot obtain finance from a mortgage they will seek other sources of expensive, short-term finance. This has been a feature of the market in the past. If we make a proposal we like it to be carefully considered and supported. Income potential is our primary consideration. By definition, first-time buyers are starting out in life and have less ability to amass cash.

Senator Aideen Hayden

I welcome the witnesses and share Deputy Lynch's view on concerns relating to the Central Bank's statement on access to home ownership. I am interested in the comments that were made on an insurance product and it has been noted today that such insurance products were quite common in the 1980s and 1990s. The loan-to-value ratio was lower in those cases. I am concerned about the ability of people in contract employment to access funding. Could the witnesses come back to the committee on how such a product could work in the market? The Minister for Finance has asked the committee to consider the recommendations of the Central Bank and we should broaden our net as far as possible. The level of home ownership in Ireland is almost at an all-time low - it has dropped by over 10% in the past five to seven years and that is spectacular.

Mr. Richie Boucher

We would be glad to that. We can draw on the resources of some of our large shareholders. We will ask a large shareholder from Canada to give us the benefit of its knowledge as it is a big insurance company. It participates in such markets. Fairfax Financial Holdings is a shareholder and a big player in Canada. We will be delighted to assist and draw in resources from investors and supporters of the bank.

Senator Aideen Hayden

When he does this, perhaps Mr Boucher might give us his views on the scheme introduced by the UK Government on this - I think it is called the "begin to buy" scheme. Is it worthwhile? I ask for as broad a response as possible on this.

Mr. Richie Boucher

We can share our experience of the UK market.

Senator Aideen Hayden

A colleague raised the buy-to-let issue and repossessions. I note Bank of Ireland repossessed 300 principal private residences in the first six months of the year and a further 300 buy-to-let properties. Are the witnesses aware of a report published recently by the Private Residential Tenancies Board, PRTB, in association with DKM Economic Consultants, Red C and the Economic and Social Research Institute, ESRI? It recommended an amendment be made to the forthcoming Residential Tenancies (Amendment)(No. 2) Bill to clarify legislation on properties in the hands of receivers, be they rent receivers or otherwise. The amendment would see receivers step into the shoes of landlords and acquire all of his or her obligations for the avoidance of doubt. Do the witnesses have a view on this PRTB recommendation? As I said, the PRTB report was produced with DKM Economic Consultants, Red C, the ESRI and Ronan Daly Jermyn.

Mr. Richie Boucher

The practise, when we have rent receivers, is that the receiver is obliged to observe all contracts and obligations on both sides.

Senator Aideen Hayden

I am not making a comment on how Bank of Ireland's receivers act.

Mr. Richie Boucher

By definition, we think what the Senator said is a good idea.

Senator Aideen Hayden

Is Bank of Ireland in favour of an amendment to the law to clarify this?

Mr. Richie Boucher

We think clarity is appropriate when a receiver steps into a contract. We have a big business in the UK, including a buy-to-let business. We are aware of the concept of one-year secure tenancies and the attached obligations and arrangements. A move towards rental properties will become a feature of the market in future no matter what we do as society is moving in that direction. There will be more professional landlords. International companies that specialise in this area see opportunities in Ireland and this is not necessarily a bad thing. Large companies have the capabilities and expertise to meet obligations as landlords because they see the area as a business. To run a business properly they need tenants to pay rent and they need tenants to be comfortable in making such payments. For this to happen such large companies must meet their obligations. I believe the rental system will evolve to include larger entities that want contracts and certainty.

Senator Aideen Hayden

Could I ask the Chairman to see that this view is passed up the line to the Minister for Finance?

The report by the PRTB also recommended the introduction of a code of conduct on mortgage arrears relating to buy-to-let properties. We all know there is now a code of conduct on mortgage arrears relating to family homes but not buy-to-let properties. This is an important issue due to the instability in the market caused by extensive repossessions of buy-to-let properties.

Chairman

We will make a note of the Senator's request.

Mr. Liam McLoughlin

A reference was made to 621 repossessions in the first half of the year but page 14 of the presentation shows Bank of Ireland had 113 repossessions in the first half of the year.

Senator Aideen Hayden

I am repeating what was reported in newspapers this morning - they are obviously wrong.

Mr. Liam McLoughlin

The actual figure is 113 repossessed properties. The figure in this morning's newspapers referred to accounts, not properties.

Senator Aideen Hayden

I am more concerned about the principle than the figure.

Mr. Richie Boucher

I wish to point out that 113 repossessed properties is a low number. We tend instead to appoint rent receivers.

Senator Aideen Hayden

My final question relates to the report we produced. Will Bank of Ireland be happy to fund an independent service for distressed mortgage holders as AIB has?

Chairman

We have agreed that nobody can exceed the allotted time so I cannot allow that question. The Senator can ask it on the next round.

Deputy Peter Mathews

It is five and a half years since the extraordinary general meeting of Bank of Ireland, under its then governor, Mr. Richard Burrows, in the Savoy cinema. The goal was to carry out life-support treatment on the bank. Does Mr. Boucher remember that day? He said to me "Peter, we go back a long way".

Mr. Richie Boucher

I do not think I said that. I think it was the other way round.

Deputy Peter Mathews

You said that. I was talking about risk management and control of the bank.

Mr. Richie Boucher

As I recall, the conversation was the other way round, but I remember the event.

Deputy Peter Mathews

No. Mr. Boucher is wrong and must be corrected. He is in need of a reminder. When I referred to risk policies at Bank of Ireland referred to in the annual report, Mr. Boucher said to me, defensively, "Peter, we go back a long way. Please be reasonable." Those were the words spoken by Mr. Boucher.

Mr. Richie Boucher

I have no recollection of that.

Deputy Peter Mathews

I am setting a scene. We are now fast forwarding five and a half years, because that was the court of directors then and this is the court of directors now. This is key for today's setting and conversation because we can all get lost in the micro-management of the balance sheets, funding and arrears and so on. On page 62 of Mr. Boucher's submission today, look at the court of directors at the top of that pyramid and see what their key responsibilities are. I am suggesting that Mr. Boucher should have had the governor and a couple of non-executive directors here with him today. I am going to go through them with him and ask him to see the point that is being made.

On top of the risk pyramid of a €125 billion or €130 billion balance sheet, the board has the ultimate oversight and accountability for the risk and related control environment in the group. It is responsible for reviewing and approving risk appetites, risk framework and policies. All the detail in here this afternoon has been about the execution of those policies. Mr. Boucher has hesitated and ultimately refused to answer Deputy Doherty's question as to whether there are no write-offs in cases where the loan had originally been secured but the security is insufficient. The loan has had full examination and stretching in order to be repaid by the customer and there are no write-offs. That is a credit policy.

We will go through the members of the court of directors. Governor Archie Kane has been a year and a half in the Bank of Ireland and he comes from England, from Lloyd's Bank. Kent Atkinson, director number two, comes from England again, and has also been at Lloyd's. Mr. Boucher himself is the longest-serving member of the court at seven and a half years. Next is Pat Butler, who has previously worked mainly with McKinsey and abroad, and has been on the court of directors for two years. There is only one lady and she is English. I would say that there are very few Irish experienced people on that board in terms of understanding the effects on the people of Ireland of all the bank's algebra and accountancy.

I will go back to that day in March 2009, when Bank of Ireland got €3.5 billion of preference share injections to keep the group alive. That was the right thing to do. But it is not acceptable to be insensitive to the customers of the bank. In Ireland we have €20 billion or so in mortgage loans on residences. How many thousand loans are in that? Is it ninety-something thousand?

Mr. Richie Boucher

I will have to check that.

Chairman

There is just one minute left in this slot.

Deputy Peter Mathews

This is totally unfair, and the Chairman knows very well why.

Of those mortgage loans, if there are 160,000 clients - call it 150,000 - there are about three and a half people per loan affected who are living in those houses. That is half a million people. There have been a lot of suicides, deaths and illnesses because of the unreasonable stress. Income, or the capacity to repay, is the primary thing the bank considers when it considers loans. If Mr. Boucher lost his job tomorrow he would have no income. He should think about that and about the people who have no incomes because they had to take reductions, lost their jobs or have had to emigrate.

There has to be far more accountability, as the top of that pyramid in Mr. Boucher's presentation says. I am a bit passionate about this, but it is very justifiable passion. In this world, we all have to do what is right with our lives, not just what the algebra says can be done. Mr. Boucher said at one stage that we have to try harder. Who is "we"? Why is there only one lady on the court of directors? Ladies represent at least half the households of the 150,000 customers.

Mr. Richie Boucher

Is that the Deputy's question?

Deputy Peter Mathews

No, these are a few points. This is to highlight the context, which should be done before coming down to the number-crunching. How much are the provisions on the loan book? What is the total for the group?

Mr. Richie Boucher

The total is €16.4 billion of defaulted loans of which our coverage ratio is about 50%, so it is roughly €8.2 billion. I do not have the figure in front of me but I will confirm it for the Deputy.

Deputy Peter Mathews

That is very important and I will say why. It is because if the management of the bank messes around with provisions, increasing them or writing them back depending on the policy on whether or not to write off, and depending on the value in the loan-to-value algebra - by the way, what is "value"? Where do the values for these properties come from?

Chairman

Mr. Boucher can just answer that question and then we will move on to the next speaker.

Mr. Richie Boucher

The values are based on the type of property - for residential property we look at the index. We look at where the index is gone. We take an assumption that the house price deflation has been 55% from peak. We then look at the portfolios----

Deputy Peter Mathews

Sorry to interrupt, but does Mr. Boucher believe that the property prices in Dublin have increased by 23% in the last year?

Mr. Richie Boucher

I look at the statistics, but we do not take them----

Deputy Peter Mathews

They are bunkum because they are a very small volume compared to the what the volume of transactions should be in a city the size of Dublin. It is at about a one third normalised level of volume. But if Bank of Ireland allows itself to use that as an index for deciding on whether to write back some provisions, it is doing something that is not quite honest.

Chairman

I thank the Deputy.

Deputy Peter Mathews

And it is massaging profits at a material percentage level and that is not right either.

Chairman

Deputy Mathews-----

Mr. Richie Boucher

For the record, I assure the Deputy that we do not base all our decisions on property prices in Dublin.

Chairman

Deputy Mathews-----

Deputy Peter Mathews

No. Sorry, Chairman. One of the directors who was responsible for policy sold out his investment for half a billion euro in June.

Chairman

I will actually ban Deputy Mathews from speaking. Mr. Boucher should not answer that question.

Deputy Peter Mathews

He was an influential director on policy.

Mr. Richie Boucher

And someone else bought it.

Chairman

I ask Mr. Boucher not to answer.

Deputy Peter Mathews

Was it to support the bank? Why did he----

Chairman

Does Deputy Mathews wish me to suspend the meeting?

Deputy Peter Mathews

These are the important questions.

Chairman

Deputy Mathews never takes any respect for the Chairman and then he wonders why we sometimes have to interrupt him.

Deputy Peter Mathews

Why did the Chairman allow me in at this stage of the meeting, when I was here first this afternoon?

Chairman

We agreed beforehand how it was going to work and Deputy Mathews was given eight minutes, which is more than most people are given to speak here, but then again, the Deputy does not have any appreciation for that. I invite Deputy Creighton to speak.

Deputy Peter Mathews

I do have appreciation, and that is why I waited until now.

Deputy Lucinda Creighton

I have a number of questions I would like to tease through. Picking up where Senator Hayden left off, figures released by the Irish Mortgage Holders Association, IMHO, this week are very impressive. The collaboration between the IMHO and AIB is very successful and I would be interested to hear Mr. Boucher's thoughts on that. Might Bank of Ireland consider a similar arrangement? I believe 1,330 mortgage issues have found long-term resolutions in less than 12 months and almost 500 of those involve people who were actually faced with losing their homes. They have managed to resolve their difficulties through mediation between the IMHO and AIB. I feel strongly that it would be in the interests of Bank of Ireland as well as its customers to consider a similar approach.

Mr. Richie Boucher

If we look at slide 35 in the presentation, this shows our book compared to AIB's. It is not for me to talk about AIB's policies, but certainly €5.4 billion in defaulted loans is a big issue and assistance is required. We use third parties, although we do not often name them, who assist us. AIB is using one third party, they have a very significant issue and that is their decision.

Deputy Lucinda Creighton

The benefit of having a named third party is that people know where to go. It is transparent, open and accessible to everybody.

Mr. Richie Boucher

I am not sure there is that transparency about the process, though.

Deputy Lucinda Creighton

Maybe it is worth considering.

I have a major concern about the condition of the property market in Ireland. We all know that the insidious relationship between developers, banks and government landed this country in an extraordinary mess in 2008. One of my key priorities is transparency, particularly when taxpayers' money is involved. I have some questions relating specifically to the Wilbur Ross consortium. That investment was probably a pivotal turning point for Bank of Ireland - would Mr. Boucher agree with that?

Mr. Richie Boucher

Absolutely.

Deputy Lucinda Creighton

How involved was Mr. Boucher in securing it?

Mr. Richie Boucher

With that investment, my key role was seeking investment. I met probably over 200 potential investors in the bank, a wide range of them. I presented the bank's pitch book, which was a publicly disclosed document. We then had roughly 20 investors, and different investors expressed sufficient interest at that time, in our opinion because the Department of Finance was underwriting it and they could depend on the Department of Finance to have the wherewithal to follow through their investment. Certain criteria were set out for the investors, including that the Government would not backstop any investment.

Deputy Lucinda Creighton

The Department of Finance was, therefore, very much involved in securing the investment.

Mr. Richie Boucher

We had to confirm to the Department and to the State as the underwriter, that we would like to let these people move to the next stage, due diligence. They signed non-disclosure agreements. As part of signing such an agreement, if they decided not to proceed with their investment they could not trade in the bank stock or any bonds related to the stock for a period of six months. Entering into due diligence is a very important consideration for a potential investor because they are potentially locking themselves out of a market. Those investors then met a number of my colleagues. I was the chief executive, so I was intensely involved in the meetings with all investors.

Deputy Lucinda Creighton

As was the Department of Finance. Is that correct?

Mr. Richie Boucher

It was probably more us, but the Department of Finance was the underwriter, so before we said we would allow someone to look at due diligence, we had to ensure that the Department of Finance did not have a specific issue. It was not involved in the pitching of the bank's story.

Deputy Lucinda Creighton

Kennedy Wilson was a small part of that overall consortium investment.

Mr. Richie Boucher

A very small part of the consortium, yes.

Deputy Lucinda Creighton

To what extent did Kennedy Wilson play a role in convincing others to invest in the bank?

Mr. Richie Boucher

One of the things to note about the investors is that they were not acting in concert. They were different investors. They are different types of companies. That was made very clear to the shareholders and was confirmed by the Stock Exchange. The core investors were Capital and Fidelity - each either the second or third biggest fund managers in the world. They would have made a separate investment. Because of the nature of the investment at the time, which was in the middle of a rights issue, the investors had to come together for the specific purpose of taking up the stock. The investors have confirmed, to the Stock Exchange and to their own regulators, that they did not act together.

Chairman

Just one more question from Deputy Creighton.

Deputy Lucinda Creighton

I have a series of questions and it is pointless if I cannot get answers to them. As I understand it, Kennedy Wilson had already bought a servicing division of Bank of Ireland before its investment took place as part of the Wilbur Ross consortium. Is that accurate?

Mr. Richie Boucher

Absolutely. That is a matter of record.

Deputy Lucinda Creighton

A former Bank of Ireland employee who had previously headed up that division was subsequently given a head of division role in Kennedy Wilson after the sale was made. Is that correct?

Mr. Richie Boucher

I am not sure we should go into an individual-----

Deputy Lucinda Creighton

I am not naming anybody but it is a matter of public interest because-----

Mr. Richie Boucher

There was an individual who was employed by us and then Kennedy Wilson recruited him. That happens.

Deputy Lucinda Creighton

A Department of Finance official who had a specific role in securing the private investment was hired by Bank of Ireland afterwards. Is that correct?

Mr. Richie Boucher

I do not think that is true. If Deputy Creighton is referring to Mr. Torpey, who is a member of the group executive committee, he joined the group in 2012.

Chairman

I would prefer if no names are mentioned.

Mr. Richie Boucher

The Deputy mentioned-----

Deputy Lucinda Creighton

No, I am not mentioning a name.

Mr. Richie Boucher

She is mentioning a name.

Deputy Lucinda Creighton

I am just trying to establish a sequence. My understanding is that the head of unit who had responsibility for overseeing private investment-----

Chairman

I would prefer that we were careful not to mention any names.

Deputy Lucinda Creighton

OK. The issue is whether Mr. Boucher sees any conflict of interest in hiring a senior official from the Department who played a pivotal role in selling taxpayers' investment in the bank. I think that is a pertinent question from point of view of-----

Mr. Richie Boucher

We must recruit talent and retain talent in the group. If a capability is needed in the group, a role that cannot be filled by anyone in the group, and we see a talented person who is on the job market, we hire that person.

Chairman

I have to stop it at that. Time is up.

Deputy Michael McGrath

I will be brief. Just a few additional questions, if I may. Under the troika programme, which is now concluded, there was provision for a central credit register, to be established as one of the key reforms in the financial sector. The legislation was passed in 2013 but the roll-out of the central credit register has been delayed. Can Mr. Boucher advise what impact, if any, that has on the bank's operations, its capacity to make lending decisions and its assessment of customers' creditworthiness? Does he have a view on whether it would be helpful if that were introduced?

Mr. Richie Boucher

We see a credit register as being very important. It is a hindrance at the moment because unsecured credit is not verified. In the other countries we operate in, and in most countries in the world, there is a credit register, where the providers of credit are registered so that people know. It would certainly assist our underwriting process. In particular, it might assist with challenge credit management.

Deputy Michael McGrath

Does Mr. Boucher know why it is delayed?

Mr. Richie Boucher

We are doing our utmost to be part of-----

Deputy Michael McGrath

Mr. Boucher has not yet been given a date when it will be up and running.

Mr. Richie Boucher

I have not been given a specific date.

Deputy Michael McGrath

I wish to raise the issue of many homeowners who, in a sense, are trapped in the property they are in because they are in negative equity. They might have a tracker mortgage rate. Bank of Ireland introduced a product in April 2013 for people on tracker mortgages who wish to move so that if they qualify for a mortgage they can keep the tracker rate plus 1% for five years on that original portion of the mortgage and any additional mortgage is at the variable rate. The uptake seems to be quite poor. Bank of Ireland has approved about 400 cases and about one third have been drawn down. Would Bank of Ireland be willing to review that product to see if it could be made more attractive? Surely from the bank's point of view, if it is lending additional money to creditworthy customers that money will be at a variable rate, so it will be making a profit on that and clearly it would be transformative for many people in that situation. Could he comment on that and a related issue of people in negative equity who may be trapped in apartments with two or three children, a completely unsuitable environment for such families? What help is the bank giving to people in that situation to move if they can qualify for a mortgage?

Mr. Richie Boucher

I will ask my colleague to take that question.

Mr. Liam McLoughlin

We introduced that product in April 2013 in response to extensive customer research on the needs of customers in tracker mortgages. There have been over 400 applications under the standard terms, which are a five-year product with a 1% uplift in rate. The reason, we feel from customer feedback, that only one third have drawn down is that they are struggling to find the right house for themselves. They have approval and that approval stands, but they cannot find the appropriate property to move into, so it is a supply challenge in the first instance. We are not getting feedback on the product itself. There are different products in the marketplace from other suppliers that have been launched in the second half of 2014 but they are all about the same. It is predominantly a supply issue, particularly in the Dublin area.

On negative equity, we also introduced last year negative equity trade up-trade down for customers and those products are of a similar nature and have proved to be quite popular for customers who are in that situation but we will give negative equity loans in those situations where customers are in difficulty up to 175% loan-to-value, LTV.

Deputy Michael McGrath

I just want to ask a technical question. If someone is on a variable mortgage and when they got the mortgage they were in a certain LTV bracket of maybe over 80% but some years later the property value has increased, they have more equity in the property and they fall into a lower LTV band, which would attract a lower interest rate, can they revise what band they are in or are they fixed in the band at which they entered when the mortgage was drawn down?

Mr. Liam McLoughlin

They are fixed in the band they enter when the mortgage is drawn down.

Deputy Michael McGrath

No change.

Mr. Liam McLoughlin

No.

Deputy Michael McGrath

That cannot be changed. What is the typical tracker rate being paid by Bank of Ireland customers? It is what plus ECB, typically?

Mr. Liam McLoughlin

It is in the public domain. It is 105 basis points above the ECB rate.

Deputy Michael McGrath

That is 105 plus the ECB rate. My final question is in the context of the Central Bank's proposed minimum mortgage deposit, which may or may not happen.

Could I ask the bank what impact the introduction of non-recourse lending would have in Ireland? Would it have an impact on interest rates and the bank's disposition towards risk? It strikes me that if people are being required to stump up a deposit of 20%, there should also be a commitment on the part of the bank that the borrower's liability would end with the property.

Mr. Richie Boucher

In that case our loan-to-value ratios, LTVs, and income multiples would reduce and the rates would go up because it is a very significant change in the risk profile. That is off the top of my head but my gut feeling is that is what would happen.

Chairman

Two more committee members have not managed to contribute yet. Does Senator Barrett wish to speak? I will call Deputy Boyd Barrett first.

Senator Sean D. Barrett

Thank you, Chairman.

Chairman

A number of committee members wish to speak. I will offer them another opportunity to speak. Does Senator Hayden wish to contribute?

Senator Aideen Hayden

Yes.

Chairman

I gather that all members wish to speak. If the witnesses do not mind, I suggest that we take a coffee break first for ten minutes.

Mr. Richie Boucher

It would be very helpful to me personally if we could take a break.

Chairman

Mr. Boucher can leave but I ask members not to leave until I compile a list of those wishing to speak. We will come back in ten minutes.

Sitting suspended at 4.45 p.m. and resumed at 4.55 p.m.

Chairman

I will call members in the following order: Deputy Boyd Barrett, Senator Sean Barrett, Deputy Pearse Doherty, Deputy Kieran O'Donnell, Senator Thomas Byrne, Deputy Arthur Spring, Deputy Pat Rabbitte, Senator Aideen Hayden and Deputy Peter Mathews.

Deputy Arthur Spring

If Deputy Michael McGrath was first, you should proceed in the order in which you started.

Chairman

You are right.

Deputy Arthur Spring

Deputy O'Donnell should be next.

Chairman

No, the two members of the committee who have not spoken will be next.

Deputy Pat Rabbitte

The discrimination against Deputy Mathews and myself is shocking.

Chairman

I call Deputy Boyd Barrett.

Deputy Richard Boyd Barrett

Many questions I have about the banking sector are directed more to the Government than to individual banks. However, I have a few questions for Mr. Boucher. Does he accept the proposition that his bank, along with others but his would be at the top of the league table, is profiteering in terms of the interest rates it is charging on loans compared to its European counterparts? This was raised earlier but I was not present, and I apologise for that. The evidence from the briefing we were given is that the bank is engaged in serious profiteering in respect of the interest rates being charged, compared to what banks in the rest of Europe are doing. How would Mr. Boucher respond to that? How does he consider it morally justifiable, given that the bank would not exist today without the bailout it was given by ordinary citizens of this country?

Mr. Richie Boucher

The Deputy would not expect me to concur with his assertions, but I will outline some facts. Our net interest margin is 2.08% across the group. If one compares that with banks in Britain, the US and many European banks, it is a low net interest margin. Relative to that, it is a recovering net interest margin, but it would not be construed as an exceptional net interest margin. That is a fact. There are different funding structures, different loss experiences and a range of things that impact on banks' pricing models. We compete for our business in Ireland and for our business in the UK, continental Europe and in the US in different parts of our businesses. We compete on the basis that we want our customers for the long term.

We must have products that are sustainable. We have seen entrants into markets, including this market, who have had unsustainable business models. They come in with pricing structures or business models that just do not work and they leave or collapse. Some of our competitors have collapsed.

As to the Irish taxpayer, one of the key focuses of this bank, perhaps distinguishing it from other banks, is the absolute focus we had on repaying the State aid and to bring the taxpayers a profit. The taxpayers have it.

What we have returned to taxpayers is cash that can be used for other purposes. Banks should never have been supported by or needed support from taxpayers. We must ensure we put structures in place to make sure that will never happen again. Part of the way we have to think about running our business involves the return of taxpayers' cash for them to do what they like with it, which is very important. This has been at the heart and a key component of our strategy in the past six years. To be quite frank, I do not see the same attention in other banks.

Deputy Richard Boyd Barrett

In the briefing document we have been given it is suggested the average rate for mortgage business in Ireland is 4.5% compared with 2.64% in the eurozone. Is Mr. Boucher disputing this figure?

Mr. Richie Boucher

I attempted to answer that question earlier.

Deputy Richard Boyd Barrett

I apologise, but I was not here.

Mr. Richie Boucher

There are very different features. In particular, in a lot of European markets there are state-sponsored and taxpayer subsidised bond schemes such as in the internal Pfandbriefe bond market in Germany. Similar schemes are operated in the United States - the Fannie Mae and Freddie Mac schemes. Our contiguous market with the same structures, in particular in terms of access to bond markets, loss experiences, etc., is the United Kingdom where there are equivalent broad spreads. It has a different currency, but the base rates are not and do not look a lot different. Let us look at the pricing of all of our products. Our net interest margin is 2.08%.

Deputy Richard Boyd Barrett

I am running out of time.

Mr. Richie Boucher

I have tried to help the Deputy as much as I can.

Deputy Richard Boyd Barrett

It probably comes back to what I said earlier - my beef with how banking works here has more to do with the Government and its policies. Mr. Boucher made an interesting comparison between the Europe-Irish and Europe models. It bears more discussion, but, unfortunately, we do not have the time to do so.

I wish to ask about two related matters. First, there is the matter of repossessions, voluntary surrenders, not just of principal private dwellings but also of buy-to-lets and so on, and the fact that a lot of people have been forced to give up their homes or are being put out of them by receivers. Why do banks require tenants who are paying rent to be put out?

I have not read all of Mr. Boucher's document, but he has said Bank of Ireland is now one of the biggest or possibly the biggest lender to the construction and property and corporate sectors. He has trumpeted the fact that it is engaged in a lot of lending in these areas. I put two and two together and it seems all of this property has been made vacant as receivers move in and that commercial property is being bought up by others who are presumably financed by banks like Mr. Boucher's. Banks get control of this property and in the meantime tenants are put out. Rents are then jacked up, which is great for the people to whom he lends and the bank, but the consequence is a housing crisis and another property bubble.

Chairman

I suggest the Deputy leave time for Mr. Boucher to reply.

Deputy Richard Boyd Barrett

Does Mr. Boucher accept that his bank is contributing to the problem? Does he agree with me that this is happening and that banks are profiteering from it?

Chairman

Mr. Boucher can make a very short reply.

Mr. Richie Boucher

The Deputy could not expect me to agree with him. Let me give a specific example. If we appoint a rent receiver to a property to get the rent which is being diverted to the landlord, to whom we have lent the money, we have a vested interest in keeping the income flowing. I mentioned the thought process in response to an earlier question. We are selling a portfolio of approximately 1,000 properties, of which about 800 are buy-to-lets. We specifically say in the document that we have said to potential acquirers that it is tenancy protected where there are tenants. For the buyer, it is caveat emptor, as he or she knows the tenants are protected.

Chairman

I thank Mr. Boucher, but I must stop him and call Senator Sean D. Barrett.

Senator Sean D. Barrett

I again welcome our visitors. Let us look at the document which states:

There were problems of credit quality, sustainable lending practices and adequacy of internal procedures ... Auditors, therefore, did not feel that commenting on the implications of such business model problems fell within their proper remit.

Do we have better auditing of Irish banks than when Mr. Nyberg wrote this comment? Does Bank of Ireland have the same auditor? Is he or she performing better than he or she was then?

Mr. Richie Boucher

I hope everyone involved has learned. We have learned and changed processes and procedures. We had an investigation conducted by a third party which investigated whether we were improving. We made a number of changes. I suspect a lot of people have learned.

Senator Sean D. Barrett

Did the bank keep the same auditor or get a new one?

Mr. Richie Boucher

It is the same one. We have PwC, but the audit has changed.

Senator Sean D. Barrett

Has the level of property lending, as a percentage of total lending, decreased since the crisis?

Mr. Richie Boucher

The book has probably shrunk. The proportion of new lending for property is down.

Senator Sean D. Barrett

That is essential. Mr. Boucher has mentioned that there is a need to ensure it will never happen again and that Irish banking must lose its fixation with property.

Mr. Richie Boucher

Yes. As lending to the construction industry is part of the economy, having a balanced lending profile is important.

Senator Sean D. Barrett

Senator Thomas Byrne mentioned the 20% deposit to loan value proposal by the Central Bank. Does Mr. Boucher have a response to it?

Mr. Richie Boucher

We do not. There is a process under way and an ability to make a submission. We have not made a decision on our submission and if we do, we will decide what form it will take.

Senator Sean D. Barrett

It is important. Mr. Nyberg reckoned that if we had had a 20% figure, Irish banks would have been €62 billion better off. The bailout amounted to €64 billion. The bulk of the problem stems from the deposit to loan ratio.

Mr. Richie Boucher

I am not familiar with the extrapolation of Professor Nyberg.

Senator Sean D. Barrett

Is it not important that banks participate in this debate, as Mr. Boucher said, to ensure this will never happen again? Mr. Nyberg has provided an exact replica. He has said €62 billion of the €64 billion would not have arisen if we had a 20% deposit ratio.

Deputy Richard Boyd Barrett

I am not familiar with that component of the Nyberg report and how it was derived. It is most important that it be decided by income and that banks not be glorified pawnbrokers. Ultimately, it is a judgment call on the capacity of the customer in terms of income. The security is used to repay the bank in a case of default. It is the cashflow of the customer that is judged, whether it be a business, corporate, construction company or a consumer.

Senator Sean D. Barrett

Director compliance statements were considered to be necessary in 2006, but I think they were opposed by the Department of Finance. Did the Bank of Ireland oppose requiring such statements?

Mr. Richie Boucher

I am sorry, but I am not familiar with them. I do not know what the Senator is talking about. I am not familiar with the subject matter.

Senator Sean D. Barrett

As Mr. Boucher said, we need far better management in the Central Bank and the Department of Finance but also in banks. The position would be much better if there had been no opposition to director compliance statements in 2006. Does the bank have a higher standard for directors now than duing the crisis?

Mr. Richie Boucher

There are a couple of features and I do not know the specific area to which the Senator is referring. However, there has been a significant tightening of corporate governance procedures by quoted companies. We are quoted on the Stock Exchange. Bank directors must now be approved by the board of the Central Bank. They go through a comprehensive and extensive process. It was public knowledge that my position as chief executive of the bank had been reviewed by a third party on behalf of the Central Bank. It had analysed my role before the crisis and whether I was a fit and proper person to be chief executive. There was an independent third party report compiled for the Central Bank. It is called the fit and proper regime, a regime which applies in the United Kingdom and Ireland.

In this respect, the Central Bank has a very important role to play in deciding whether someone is an appropriate person to be a director of a bank.

Chairman

Will the Senator make this his last question?

Senator Sean D. Barrett

Has Bank of Ireland shifted the deposit base because that was the other ingredient? Banks were borrowing far too much in the wholesale market and not enough in------

Mr. Richie Boucher

One of our big mistakes as a bank was funding a UK mortgage book in securitisation markets. It is now retail-funded, in particular, by deposits collected. How do we think about our deposit base in general terms? Its capital and customer deposits fund the loan book and the liquid assets we are required to hold are funded in the wholesale markets. Its a model where the bank must be self-funded and each of our businesses, including Mr. McLoughlin's, Retail Ireland, our UK business and corporate business, is self-funded. They must gather their own deposits.

Deputy Pat Rabbitte

Now that the stress tests are out of the way, what are the bank's expectations in terms of lending to the SME sector? Does Mr. Boucher have projections for the year ahead now that the stress tests are behind Bank of Ireland?

Mr. Richie Boucher

In our case, we do our own internal stress testing. We ensure we have enough capital to protect ourselves and our depositors and to meet our strategic ambitions. The outcome of the stress tests did not come as a big surprise to Bank of Ireland because it had its own internal capital models; therefore, the availability of capital and funding for at least the past two years had not been an impediment to our lending desires. We had put out to the market that our strategic plan, our own internal stress testing, would have us lending approximately €33 billion in new money into the economy in the period from 2013 to 2017. Passing the stress tests was nice and it was an important part of the regulatory process, but it would not have had a material impact. Obviously, if we had failed, it would have had us in a very different context but passing did not mean that the desire or credit appetite changed.

One of the most important responsibilities I have relates to the fact that we have private sector capital, which was injected into Bank of Ireland. They were not people who felt sorry for the bank but people who believed in the Irish recovery and that the bank could participate in that recovery. They expect us to deploy that capital; that capital can only be constructively deployed by us in lending new money safely. A significant pressure on us as a management team is to safely deploy our shareholders' capital because if we do not deploy it appropriately, they will sell their shares and put the money where better opportunities can be found. That is how the private sector works. There is a significant strategic requirement on us to lend into the economy. What we must do is make sure it is safe and sustainable.

Deputy Pat Rabbitte

Is Mr. Boucher saying lending to the SME sector is a function of economic recovery, rather than anything to do with the stress tests? The view has been that in Bank of Ireland managing its internal ratios in preparation for the stress tests, it was more niggardly in terms of the extension of credit than it might otherwise have been.

Mr. Richie Boucher

That might have been a perception across Europe. I probably feel that in the Irish context, we had been through a lot of stress tests on the AQR processes, etc. The situation involving us and AIB did not come as a surprise to the market or anyone else. We account for over 50% of new lending into the economy. A feature has been the fact that a lot of our new to bank lending would have involved a refinancing of people from other banks. A particular feature we have noticed since March 2014, particularly in the SME business that comes within Mr. McLoughlin's remit, is that over 50% of our new lending involves customers who are doing new things rather than refinancing or rearranging their finances with banks exiting or where they are uncomfortable, etc. That is an important component of the recovery. Bank lending tends to track behind economic recovery and then to go a little beyond GDP. Our ambition is to beat GDP. We hope we have competitive propositions and that we are extremely focused on the market. We lend to all sectors and have particular features. We are lending over 50% of new money to the economy. We reported in our pre-close statement on Friday that the pace of new lending was picking up also.

Deputy Pat Rabbitte

On the construction sector and the supply side problem in the marketplace, some of the builders left standing have come to us with stories to the effect that they could make a significant contribution to dealing with the supply deficit if the bank would carry them for the 12 to 18 months needed to clear a site, deal with planning, get the design work and all of the other things that need to be done completed, but, again, the banks generally have not been forthcoming, whether it is related to the stress tests or another reason, and that work on sites that might have been developed in the past 12 months or in the immediate future are not being facilitated because the banks will not carry them.

Mr. Richie Boucher

We see it as an important sector. We think lending to that sector must be balanced and kept as a proportion of our balance sheet and that we must manage the risk. Nevertheless, it is a sector in which we want to participate. One of the key ingredients that may be missing in some instances is equity. We will provide 65% or 70% of the finance, but if we end up with equity in a business, things have gone badly wrong for us and the customer. We are not equity providers. I will set out a simple sum. If we provide €1 in equity capital, that deprives us of €10 worth of lending capacity because it is like for like on capital; there is that multiplier impact. In addition and to be quite frank, we do not have the skills set. We hope we have a better skills set in lending, but it is quite a different skills set in the case of equity. We are seeing funds coming in with mezzanine debt, which is higher coupon and a more risky form of debt; therefore, if we provide a figure of 70%, one will have a mezzanine provider who will have a much higher debt and provide 15% but one still needs equity of 15%. However, I do see funds coming in.

Chairman

I apologise, as I must cut Mr. Boucher short.

Deputy Kieran O'Donnell

Does Bank of Ireland now have any ECB funding?

Mr. Richie Boucher

My colleague will remind me, but-----

Deputy Kieran O'Donnell

A total of 75% of the bank's funding is in the form of deposits.

Mr. Richie Boucher

It is roughly about €6 billion, of which about €3 billion represents NAMA bonds.

Deputy Kieran O'Donnell

Some €3 billion from the ECB.

Mr. Richie Boucher

Yes.

Deputy Kieran O'Donnell

Is it €6 billion in total?

Mr. Richie Boucher

There is a figure of €3 billion in NAMA bonds, of which about €1.5 billion represents our participation in the long-term refinancing operation, LTRO, while about €1.5 billion is normal frictional-----

Deputy Kieran O'Donnell

What percentage of the bank's overall funding comes from the ECB at this point?

Mr. Richie Boucher

Of our wholesale funding-----

Deputy Kieran O'Donnell

A total of 75% of the bank's funding is in the form of deposits. How much is coming from what would be known as the wholesale bank market and what percentage comes from the ECB?

Mr. Richie Boucher

At the end of June, we would have had €75 billion in customer deposits and wholesale funding of €23 billion, of which €17 billion was from private sources, while €6 billion was from monetary authorities, of which €3 billion was accounted for by repo in respect of NAMA bonds.

Deputy Kieran O'Donnell

Has the bank reached a level where its ECB funding has stabilised?

Mr. Richie Boucher

We see it continuing. It partly depends on NAMA redeeming the bonds. About €1.5 billion represents participation in a carry trade, with which the ECB is very comfortable. The other €1.5 billion is considered to represent normalised money market operations by the Central Bank.

Deputy Kieran O'Donnell

The strategic fund coming from the German bank was launched during the week. How does Mr. Boucher anticipate it functioning in getting funds to the SME sector?

How does Mr. Boucher see it operating? How will people be able to access the funding through Bank of Ireland?

Mr. Richie Boucher

That is something on which we are working closely with the NTMA. We have a commercial desire to see it happen. It is a cheaper form of funding which we can pass on to our customers. We are working out with the NTMA some of the-----

Deputy Kieran O'Donnell

When is it anticipated that it will be up and running and people will be making applications to Bank of Ireland?

Mr. Liam McLoughlin

The discussions we are having indicate that it will happen in the first quarter of next year.

Deputy Kieran O'Donnell

I have one final question.

Mr. Liam McLoughlin

The time factor relates to working out the details, as Mr. Boucher said.

Mr. Richie Boucher

The Deputy is asking about practical issues such as how it will work in practical terms.

Mr. Liam McLoughlin

These are operational issues.

Deputy Kieran O'Donnell

Yes. I appreciate that it is almost 6 p.m. The first time Mr. Boucher came before a committee was in July 2008 when the banks were going through a very difficult time. How have practices changed in Bank of Ireland? What has it learned from the experience? What is now being done differently? What is happening that was not happening then?

Mr. Richie Boucher

One of the key things is the subject about which we have just been talking - the funding structure. The banks should really fund their loan books from customer deposits. The capital structures are very different. At the time, banks throughout the world had capital ratios of approximately 5% or 6%. We are running at approximately 14%. That is the level of capital we have available. We have restructured the way in which our boards function. We have a very specific risk committee. We looked at one of our problems or issues - the structure of our balance sheet in percentage terms. When one's balance sheet is very big, it has the potential to fall and we have shrunk the business. We have had to get out of businesses in which the asset selection was good but we could not support capital liquidity.

Deputy Kieran O'Donnell

Has the bank become too risk-averse?

Mr. Richie Boucher

I hope not. Becoming gun-shy is absolutely a big issue.

Deputy Kieran O'Donnell

I thank Mr. Boucher.

Senator Thomas Byrne

Deputy Lucinda Creighton referred to the arrangement AIB-EBS had with the Irish Mortgage Holders Organisation. Has Bank of Ireland considered a similar arrangement? Would Mr. Boucher see advantages from the bank's point of view in drawing up a similar formal arrangement with an advocacy group that could work at arm's length from the bank on behalf of customers? Obviously, it would have advantages from the customer's point of view.

Mr. Richie Boucher

In effect, a third party contractor is providing services for AIB. We use third party contractors in a range of our businesses. Given that AIB has €5.4 billion in defaulted loans, I can understand it needs help. It is getting help, which is an issue for it.

Senator Thomas Byrne

Does Mr. Boucher think the bank is being helped by-----

Mr. Richie Boucher

Clearly. If the Senator had €5.4 billion in defaulted loans, he would be looking for help from wherever he could find it. From our point of view, we have made a great deal of progress and continue to look to approve. The primary engagement has to be with the bank. There should be transparency where taxpayers' money is being spent.

Senator Thomas Byrne

What does Mr. Boucher mean by "transparency" in this context?

Mr. Richie Boucher

A third party contractor is dealing with taxpayers' money. AIB has €20 billion that was invested by the taxpayer. Some third party contractor is deciding who is granted a mortgage or a write-off and who does not.

Senator Thomas Byrne

Obviously, Mr. Boucher has concerns about that arrangement. Is that the case?

Mr. Richie Boucher

I am just noting the fact.

Senator Thomas Byrne

Mr. Boucher does not see Bank of Ireland using "a third party contractor," as he has described the organisation, to help people.

Mr. Richie Boucher

We use third party contractors in different areas. Our mortgage book has continued to improve. Our defaults have continued to come down and we can restructure. We can offer a restructure to 90% of customers who provide us with a standard financial statement. Different banks are in different positions in the marketplace.

Mr. Liam McLoughlin

We have 790 staff looking to support our mortgage arrears book. We have 250 branches across the country. Mortgage advisers are professionally trained to support people in mortgage arrears and financial difficulty by offering them sustainable solutions. We have over 50 network account managers working with customers face to face. This ensures customers have someone to work with when they complete their standard financial statements.

Senator Thomas Byrne

They are working for the bank which, as we keep being reminded, is a public limited company.

Mr. Liam McLoughlin

Yes.

Senator Thomas Byrne

That is fair enough. Is there a role for some other organisation to be contracted in, independently of the bank, to advise people separately?

Mr. Liam McLoughlin

What we have done in that case is-----

Mr. Richie Boucher

I am not sure about that. I really cannot comment on a relationship to which we are a party. I cannot comment on the nature of that relationship, the role, the level of transparency or what happens.

Deputy Peter Mathews

I would like to begin by making some observations and asking some questions in this big context. The officials are here to give an overview of the banking sector in Ireland. That is their calling card and they have kindly given us a great deal of material - financial details and percentages, etc. - running to over 80 pages. I have tried to bring everyone back to our core responsibility of who devises the policies and strategies of the Bank of Ireland group. I have made the point that most of the court of directors are unrepresentative of Irish households and short on experience of Ireland, in terms of its finance, economy and demographics and everything that accompanied the collapse of the economy. It is easy to be remote and distant and not to see the impact of what happens when one is in a boardroom and how it translates in people's homes. The figures show that for every household or customer mortgage in distress, the lives of at least three people are being ripped apart. That is the average, but sometimes four or more are affected. It is a serious matter and up to those who understand the machinery of balance sheets, portfolios and ledgers and how it happened to deal with it. I applaud them for getting the group's loan-to-deposit ratio down to 111%, which is the right figure for the group.

Mr. Richie Boucher

Yes.

Deputy Peter Mathews

I think it was between 158% and 161% between March 2008 and March 2009, which was shocking. If we take a 160% figure and measure it against the surplus using the 90% figure, the prudential, steady-Eddie bank balance sheet management amount, we will see that the average is 70%. That figure - 70% - is the keel that should have been obtained if things had not gone out of control over seven years up to 2008 and represents measurable culpability of 75% on the part of the partial creators of the asset price bubble which had developed on the back of the credit pyramid bubble. That is simple. Ann and Barry readers could explain it and we do not need a banking inquiry to tell us that. The banks, particularly the court of directors at the top of the pyramid, were culpable in those seven years. The auditors were also culpable. They should have been saying, "Guys, stop expanding your balance sheet at this unsustainable rate." I will explain why.

I am sure the delegates have read Tim Geithner's book Stress Test, a good name, which has been out for a couple of months. In it Mr. Geithner writes about the size of the domestic banking sector in the United States, which is just over 100% of GDP, or $12 trillion. In Ireland the culpability of the boards of banks collectively and AIB specifically is measurable because the weighted average loan to deposit figure was 173% across the Irish-owned banks. The banking system went from three times to over five times the size of national income. That is the credit pyramid and that is what the banks did. We know what they are now saying to the people whose asset prices collapsed. By the way, the 23% figure is illusory, as I said. It is not true because the prices of these transactions do not represent the volume of transactions. In the same way, Bank of Ireland share price today - 30 cent - when multiplied by the shares outstanding does not equal the market value of Bank of Ireland. Similarly, the 23% figure that is based on a few transactions in Dublin does not apply to the whole property market and the banks have a responsibility to tell the Government that, as they are at the coal-face of the experience, as Mr. Boucher knows.

Chairman

That is great, Deputy.

Deputy Peter Mathews

I would like to say one last thing.

Mr. Richie Boucher

Does the Deputy have a question?

Chairman

There is no question.

Deputy Peter Mathews

The guarantee that the bank-----

Chairman

The Deputy must stop.

Deputy Peter Mathews

I ask the Chair to give me one more minute to say one last thing. This is-----

Chairman

No, I do not care.

Deputy Peter Mathews

Perhaps Deputy Richard Boyd Barrett will cede one minute to me.

Chairman

It does not make a difference.

Deputy Richard Boyd Barrett

I think I am only going to have one minute.

Deputy Peter Mathews

The guarantee was given on the back of false information.

Chairman

The Deputy must know that he must conclude.

Deputy Peter Mathews

I told Mr. Patrick Honohan in July this year that the guarantee was voidable as a result.

Chairman

Would Deputy Richard Boyd Barrett like to ask a question?

Deputy Peter Mathews

Mr. Honohan was very upset because it was true.

Chairman

Deputy Mathews can absolutely guarantee himself that he will not be allowed to speak again at this committee if he does not stop right now. I call Deputy Boyd Barrett.

Deputy Richard Boyd Barrett

My questions are about lending in the property, housing and construction sector. I want to get my head around what is happening in that sector at the moment. Will Mr. Boucher explain how he is making decisions about lending to property developers at the moment, what proportion is given to them of the finance they need to carry out a construction development and what criteria are being used? My concern is that we would repeat all the mistakes of the past. How is that working? Is the bank lending to people to buy up property that was left over from the collapse? How is that working? In the document, there is reference to working in terms of public private partnerships. Will Mr. Boucher say something about the types of public private partnerships in which the bank is collaborating and how that works? What is the balance between its involvement and that of the State sector? Could he give some examples?

Mr. Richie Boucher

First of all, on the issue of lessons and things we do not do - which is worse, what you do do and what you do not do? We do not finance landbank acquisitions in the construction sector. They should be financed by equity. The maximum loan-to-value rate would be somewhere between 65% and 70%. We need to see pre-sales for the commercial market, but we recognise it is not possible to get pre-sales in the residential market. Those are key criteria. We also do not do an equity release from the single property nor do we lend against an uplift in value. Those are some of the lessons we learned. One of the other big lessons from the past is the need to keep an eye on the peripheral vision of the market. We thought we could work our way out of certain situations. We were not as conscious of to what was going on in other banks. That was a mistake we made.

Chairman

I would like Mr. Boucher to draw it to a conclusion because it was quite a long question that was asked.

Mr. Richie Boucher

On the public private partnerships we have been involved in, there is the N7 project and some schools financing, where we finance the constructor in partnership and then we do a long-term term-out loan for the operation of the thing. There is an equity participation. With the constructor or contractor, we take an element of the construction risk - that it can be completed - and we take the trading or take-on risk.

Chairman

On behalf of the joint committee I thank all of our witnesses from Bank of Ireland for participating in this meeting and the material they supplied to the committee. There are a few questions asked of Mr. Boucher on which he might revert to the committee. Thank you all for your time.

The joint committee adjourned at 5.35 p.m. until 2 p.m. on Wednesday, 12 November 2014.