Matters Relating to the Banking Sector: Allied Irish Banks

Today we have representatives from Allied Irish Banks with us. I welcome Mr. Bernard Byrne, chief executive officer; Mr. Jim O’Keeffe and Mr. Tom Kinsella. The meeting has to conclude at 11.30 a.m. so I ask members to bear the tight timeframe in mind when they are making their contributions. I acknowledge Ms Alex Malone and Ms Thea Malone in the Public Gallery. They are daughters of Yvonne Walsh, who has been jailed for the last number of weeks and whose case is up today in court for decision following issues with EBS loans being sold to a vulture fund. They represent the human impact of these cases. I wish both of them well. They have just finished their junior certificate and I wish them the best of luck.

I draw the attention of witnesses to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, 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 a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they 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 House or an official either by name or in such a way as to make him or her identifiable.

I invite Mr. Byrne to make his opening statement.

Mr. Bernard Byrne

I thank the Chairman and members of the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach for inviting AIB to meet with it today. The committee's letter of invitation refers to tracker mortgages and other issues and we will endeavour to cover as many aspects of our business as possible. Alongside me today are members of my executive team, Mr. Jim O’Keeffe and Mr. Tom Kinsella.

This year marks a decade on from the global financial crash and it is difficult to capture the scale of change wrought across the banking sector by those events. As a completely restructured bank, we now operate in a dramatically different regulatory environment with the Central Bank of Ireland and the European Central Bank focusing in great detail on all aspects of our activity through a customer, conduct, prudential and policy lens. Within that tight regulatory framework and very detailed supervision we must maintain a well capitalised, strong and profitable institution, providing professional and efficient service to our 2.2 million customers in the fastest growing economy in Europe.

Positively, we are well capitalised and our banking activities are generating the returns required to keep the business sustainable and capable of supporting the growing Irish economy while rewarding those who provide the risk capital, both equity and debt, that are required to deliver a robust and resilient bank. This is as it should be, but the changes in the regulatory and supervisory regimes that govern how we operate have brought many changes, some with impact outside of the pure banking sector. First, at an institutional level, we and others in the industry are still working through the impact of the evolving regulatory requirements. While the level of new regulation being introduced is tapering off, the implementation phase will run for some time and will permanently require significant resources from regulators and the institutions. Second, there is a clear harmonisation of approach being adapted by supervisors across Europe. With over 120 banking groups to monitor across the EU this is understandable. The increase in capital levels generally and the standardisation of approach regarding how much capital individual activities such as mortgages and SMEs require is still developing and, on average, also increasing.

The ECB has set measures in stone to ensure the Irish taxpayer is not exposed to bank losses again should there be a further crisis. To avoid taxpayers meeting the cost of potential future bank failures, the new rules under the bank recovery and resolution directive mean banks meet a minimum requirement of own funds and eligible liabilities for "bail in". It means sparing the taxpayer future bailouts. Again this is beneficial and desirable but comes at a cost.

Risk management and controls underpin all our banking activities as we aim to provide competitive funding to homes, businesses, farms and communities across the country. The balance we must strike is to manage the bank well and efficiently, deal with the legacy issues, safeguard our customers' financial interests and support the economy. Securing a turnaround in AIB's financial performance has been achieved. Following the Government sale of 29% of its shareholding, the bank has returned €10.5 billion to the State in capital, fees, dividends, coupons and levies. The remaining shareholding of 71% of the largest bank in the country, with an estimated market cap of €13.46 billion, positions the Government to recoup its investment. While our finances are now robust and Ireland’s financial system is much safer, we should bear in mind that serious issues and challenges remain. Regulatory requirements, including conservative capital buffers, carry cost implications for banks and, ultimately, customers. It is also legally and culturally difficult for a bank in Ireland to realise its security over loans, a fact that leaves investors wary and regulators concerned about the capital required to support such activities. Other external issues such as high degrees of market turbulence in Europe, changing international tax arrangements, increased protectionism in traditional trading and, of course, a possible hard Brexit, all carry further inherent risks to the economy and, by implication, to the banking industry.

Remaining technologically advanced is critical to our position as a market-leading bank. We must be digitally enabled and provide services that meet the ways in which our customers seek to interact with us on a daily basis. In this rapidly advancing environment, we now see circa 1.5 million daily customer interactions, of which more than 1.1 million are via digital channels. We continue to innovate in this space, based on customer feedback and advances in the wider banking network in Ireland with over 270 branches between AIB and EBS, 20 business centres and a partnership with An Post which sees banking facilities available at some 1,100 An Post locations.

Stable income and well-controlled costs are now embedded features of our business model and we are continuing to resolve legacy issues. To the fore has been the tracker mortgage issue about which we have spoken at length to this committee. We are well progressed and are in the final stages of the CBI tracker mortgage examination but ultimately the CBI is the arbiter in deciding when the matter is complete. From AIB's perspective, all impacted customers across more than 30 individual groupings have been identified, contacted and restored to their correct interest rates and paid redress and compensation. The final group of outstanding cases, who are EBS customers identified as impacted in quarter 2 2018, will have their rates rectified by the end of this month and be compensated by the end of September. We will also remain ready to address any other cases should they emerge.

On the tracker issue, we regret that AIB customers endured financial loss and emotional distress where the bank failed its contractual obligations or its requirement to provide proper levels of transparency and information. When the problem came to light, AIB acted swiftly and in good faith to launch a major programme of work involving approximately 500 people deployed to implement fair settlements as quickly as possible. The complexity and scale involved in the examination and rectification meant it took more time than I would have liked and involved difficult judgement calls on the way to finalisation. Some of these were finely balanced. We will continue to commit the resources necessary to conclude this in line with the CBI's framework. How the tracker product was designed, administered and ultimately withdrawn may well continue to be the subject of discussion and investigation. My responsibility is to make sure that we had in place a programme to identify all the affected customers and deliver fair and proper treatment and to express a sincere apology on behalf of the bank to those impacted.

I mentioned earlier the requirement to ensure that Irish taxpayers are protected in the event of a future economic downturn. This brings me to another legacy issue of critical importance to the bank's strength and viability, namely, non-performing exposures. Dealing with non-performing exposures is, I realise, a contentious matter. On occasion it has been simplistically and incorrectly described as AIB selling off its customers' debts with little care for the consequences. It is very important that we set the logic behind the sale of non-performing loans, NPLs. AIB has consistently pursued a strategy of working with customers to achieve positive outcomes to their financial difficulties on a case-by-case basis. Using a suite of different solutions, we have achieved over 90,000 customer solutions including 40,000 private dwelling houses. AIB continues to provide solutions for an average of 1,000 loans per month. Recognising that many customers simply cannot repay all their loans or have inadequate security, the bank has also written off very significant amounts of bad debt to right-size loans to a sustainable level. As a result of these actions, the bank’s non-performing exposures fell from approximately €31 billion in 2013 to approximately €9.2 billion at the end of quarter 1 of this year, with continued momentum since then. We are still faced with a portion of impaired loans that remain high. For example, the portfolio that was sold by AIB last month was characterised by levels of deep long term arrears. Approximately 90% of accounts were more than two years in arrears and about 70% were over five years in arrears, reflecting a lack of any meaningful engagement and, or, debt sustainability.

Like every bank across the eurozone, AIB is required to create and hold provisions against bad or doubtful debt; the deeper the arrears, the higher the bank buffers required. Our regulators in Europe are very concerned at the persistent level of non-performing exposures in Irish banks. The end of 2019 is a very important target date for Irish banks to reduce NPL levels to European norms of approximately 5%. AIB's NPL level is currently running at 14%. In reality, all customers who meet their loan repayments are adversely impacted upon by those who do not repay. The Central Bank of Ireland has observed that a functioning secured lending market has to give meaning to security. If that security is undermined, the costs to all other borrowers are impacted. Defaulting customers, and indeed the history of defaults, mean that we as a bank must hold additional capital but this inevitable additional cost is borne across all our customer base for many years. We are determined to push on with the case-by-case resolution process and continue to have 1,500 people working with customers in difficulty across the country. Our clear preference has always been to provide solutions on this individual basis to right-size customer debt to sustainable levels. We must be realistic, however. While we have made great strides, we still have much to do.

The progress that has been made to date in achieving a normalised banking system has been at times overshadowed by these issues but normalisation is happening, particularly against the backdrop of the improving Irish economy. Growth in new lending is continuing and last year alone AIB approved €14.4 billion in loans, with actual customer drawdowns at €9.4 billion, up from €8.4 billion on the previous year. Mortgage lending rose by 17%, business lending rose by 15% and personal lending was up 16%. Leading indicators of activity remain strong, which points to continued good economic growth here. The favourable external environment is supporting exports, with domestic spending underpinned by continuing low interest rates, unemployment falling below 6% and rising household incomes, as well as the ongoing rebound in construction activity. This should result in a further rise in new lending activity this year.

While GDP growth is forecast at 4.5% overall in 2018 and unemployment is predicted to drop below 6%, we remain alert to the challenges and risks that lie ahead. The uncertainty regarding Brexit, the slowdown in UK economic activity and the strength of the euro against sterling obviously present potential headwinds. While many of our customers have been diversifying their export base quite significantly in recent years, the impact of a downturn in the UK would almost certainly impact their performance. We have 21 Brexit advisers across the bank who specifically help customers to work out alternative plans to mitigate exposure to Brexit-related risks. However, given the openness of our economy, a deterioration of global economic conditions and adverse geopolitical developments, particularly in Europe and the US, would have a negative impact here. Some emerging markets have come under pressure this year while there is concern at recent moves towards more protectionist trade policies.

The lack of housing supply in the major urban areas is clearly one of the main infrastructural difficulties facing the country from a social and economic viewpoint. In helping to play our part in alleviating the current crisis, we have ramped up activity in the bank's development lending sector and we are the primary bank to many of the country's largest development groups. We have expanded our lending teams significantly over the last two years and established a group to support mid-sized development companies. Our focus is not just providing real estate finance, although this is critical, it is also on increasingly on facilitating social and affordable housing. We have already supported a very successful affordable housing scheme in Ballymun, with a view to funding more such projects. We also provide long-term funding to a number of approved housing bodies, with the launch of a €100 million social housing development fund. AIB also launched an enhanced mortgage-to-rent scheme in conjunction with iCare Housing and the Irish Mortgage Holders Organisation and has offered a significant number of vacant residential properties to the Housing Agency for consideration.

As I mentioned at the start, banking today operates to a different model to that which predated the financial crisis. The consequences of banks' financial strategies must now be matched by responsibility for the social impact of their actions. Regulation has been brought to a new level involving intense supervision and resulted in a strengthening of our financial foundations. From my perspective, however, the really crucial element of a sustainable AIB is continuing to evolve our culture while rebuilding and maintaining high levels of trust and confidence among members of the public. I know there is still much to do in this regard. Ultimately, the quality of AIB's service to its customers and communities will determine its long term sustainability. Our responsibilities extend to those customers, to Government, to our regulators, to shareholders and to the economy generally and we will continue to work to ensure our stewardship remains solid and deserving of that confidence. I thank the committee and look forward to any questions.

I thank Mr. Byrne for his presentation. At the outset, I wish to ask about the implications for AIB of the Nadine Thompson case yesterday whereby the bank was found to have failed to notify her that her debt had been transferred to a separate entity in 2006.

Has AIB made provision for that? Are our guests surprised by the finding?

Mr. Bernard Byrne

I will ask Mr. O'Keeffe to refer to that issue specifically.

Mr. Jim O'Keeffe

This relates to the transfer of loans between AIB and our mortgage bank. In her commentary yesterday, the judge was just giving an update in respect of some previous commentary or a decision that she had made which clarified some of the position in that regard. That is something we are considering at this point in time but the outcome of the update and commentary has not caused a problem from our perspective in terms of the transfer of those loans.

Mr. O'Keeffe is not at all concerned that there might be wider implications in the context of other people who were not notified about the transfer of their loans.

Mr. Jim O'Keeffe

The update was helpful and we are now considering it.

I am sure we will talk about it again at a later date. On what date did the bank accept that the EBS cohort was affected by the tracker mortgage situation?

Mr. Bernard Byrne

I do not know the exact date offhand. It was certainly in the past couple of months. I do not know if Mr. Kinsella knows the exact date.

Mr. Tom Kinsella

It would have been in March.

When was the first complaint received?

Mr. Bernard Byrne

Again, I do not know the precise date but we would have received communication on that issue, as I am sure others did. Let us move on with it. We were very familiar with the issues associated with that particular cohort. We have even discussed our position and thoughts on this grouping in this room. It was not some completely new set of facts that emerged in respect of this particular issue. We felt the situation in respect of this grouping was reasonably conclusive based on the contractual position and what the individual customers had signed, which, effectively, was a waiver form which acknowledged that in the event of them swapping off tracker rates, they would have no entitlement to trackers. We were in discussions with the Central Bank which felt that we should give more weight to issues around marketing materials and other correspondence and to some ambiguities associated with language. These ambiguities were in other materials, not in the contracts. We gave that a lot of consideration and ultimately determined that we would include that group. It was not, therefore, a new consideration or issue from that point of view. We were aware of the grouping. This is one of the issues which we refer to as finely balanced. Some of these issues are finely balanced in terms of how it is decided to go in any particular direction.

Is it not because of the cases of so many determined families and advocates such as Padraic Kissane that this was exposed? The Central Bank ultimately determined the final matter. It was not just a matter of AIB working through all this and making decisions. If it was not for those determined families and advocates such as Padraic Kissane, this would never have come to the fore. It would be honest of Mr. Byrne to accept the role that the families and these people have played in bringing this issue to light and in bringing AIB reluctantly to the point at which the 500 cases are being considered.

Mr. Bernard Byrne

From our point of view, the correct interpretation is that, as part of the Central Bank's programme - which has running for a long period - a very detailed and procedural set of work needed to take place. We completed our work and KPMG completed its work. Ernst & Young carried out a review and discussions took place with the Central Bank. That is the basis on which decisions are made. It is not on the basis of extraneous issues or the extent to which those issues are brought to bear by others. Perhaps they are of relevance but our process is based on the Central Bank review. We comply with that process.

I would say that the families and the people who were impacted upon are extremely relevant. We will agree to disagree on that. I know we are very limited on time, but who was responsible for the scandal in AIB?

Mr. Bernard Byrne

The Senator asked me that question on the previous occasion. I am happy to repeat the conversation.

Will Mr. Byrne please indulge me?

Mr. Bernard Byrne

What we said the last time was that, based on the investigations we have carried out and on a review of the issue, this situation dates back to 2008 when the tracker mortgage product was withdrawn. That was a period in which there was very significant turbulence in the financial markets generally and there was dislocation in terms of the funding cost. That was the reason the tracker product was withdrawn. Based on what we could see, it was withdrawn from the marketplace.

Is Mr. Byrne not concerned that his bank, even at this stage, cannot identify who made this mistake which ended up costing the State €230 million? Is he not really concerned?

Mr. Bernard Byrne

We have a different perspective on this. The Senator is of the view that there was an individual or a set of people who consciously chose to do this. Our perspective is very different. We believe this issue arose as a result of the withdrawal of a product. People did not consider the implications. No person was taken off a tracker. Some 104,000 customers remained on trackers at that point in time. There was not a set of people taken off trackers. The issue related to what would happen in the future with regard to further reversionary issues. That is why it has taken the path it has taken.

The bottom line is that what was done cost the State €230 million and nobody is responsible. That is of concern to every Irish citizen. It will continue to be a concern. The bank implements a 20% stress on foreign earnings when an applicant seeks a mortgage. I understand the rationale for that but, given the nature of our island economy, using the maximum available stress rate is a step too far. I should note that other banks do not even entertain applications in sterling so it is welcome that AIB does, but many cross-Border workers are affected. They effectively find that they need an extra 20% of income to access a mortgage that their neighbours do not. Will Mr. Byrne look at this issue which affects Irish citizens living in the South?

Mr. Bernard Byrne

We keep all of these things under review. Unfortunately, this is a practical reality if one looks at what has happened to exchange rates over the past 18 months. The movement in exchange rates demonstrates that it is reasonable to apply a stress of 20%.

Mr. Byrne is not going to look at it at all. He is going to-----

Mr. Bernard Byrne

No. I said that we always keep these things under review. However, it is a requirement for us to consider the stress associated with such applications. We apply a stress of 20%, as the Senator said. We have disclosed that. We do not think that is unreasonable at this point on the basis of where things stand. However, we keep it under review.

I ask that Mr. Byrne ensures that it is because he owes a debt of gratitude to all of the citizens on this island. That would be one way to facilitate people and not to mitigate against people who work on the other side of the Border, which should not be there. Why did AIB not answer the question of when 100% of the deferred tax assets will be used up? We did not ask when 89% would be used up. I ask Mr. Byrne again, when will 100% be used up? He must have considered this.

Mr. Bernard Byrne

The answer is that we do not definitively know because it is a calculation based on profitability at any point in time. What we gave was a set of estimates based on a prediction of future profitability. That gives an estimate. If one applies a similar number, the projection ends up being somewhere around 17 to 18 years, but it is a projection based on a set of assumptions that will ultimately vary depending on the actual financial performance of the bank.

Does Mr. Byrne understand why ordinary workers would not understand why his bank is paying no tax while making billions of euros in profit?

Mr. Bernard Byrne

Again, this is a topic we have talked about before. When one looks at the issue of deferred tax, as part of the initial bailout credit for €3 billion of deferred tax assets was given to the State. The bailout was reduced by that amount. It was part of that original consideration. The value of the bank's total assets already include a deferred tax assets. That is realised as the State sells down its share holding. So the 29% sold-----

I know the mechanics of it, I am talking about the morality. People who are struggling to pay their mortgages are paying a huge amount of tax.

Mr. Bernard Byrne

I would argue that the mechanics and the morality make up the same point, which is the question of when the State wants to get its cash back.

It is a matter of tax fairness and tax justice. That is what Irish people want. In terms of the sales to the vulture funds and the buy-to-lets, what is the average write-down AIB gives when it is selling off packages of loans?

Mr. Bernard Byrne

We do not disclose average write-downs. I might ask Mr. O'Keeffe if he wants to make any additional comments.

Mr. Jim O'Keeffe

In the recent loan sale, we disclosed that we sold loans we were carrying for €1.1 billion for a consideration of €800 million. Outside of that, we do not disclose any details in respect of the loans because, against that, we are carrying provisions at any point.

I will finish with this. I find it very difficult to make sense of the fact that AIB has such a write-down for a bunch of funds that will then flip the portfolio over in the short term, will make huge profits but will pay no tax on it, when a restructuring could possibly be done. My concern is that ultimately, tenants in those properties will be turfed out or their rents will be hiked.

Mr. Bernard Byrne

I think it is important that we look at the portfolio we are talking about. Some 70% of this portfolio is more than five years in arrears, while 90% is more than two years in arrears. The ideal scenario is that we can engage and restructure. We agree on that. When we end up in this scenario, we are talking about non-engagement or non-presentation of solutions.

Would AIB consider somebody just paying interest only as being a performing or a non-performing loan?

Mr. Jim O'Keeffe

It depends on the circumstances and the debt. There are some cases where that is an agreed position and there are others where it is not. It could be part of a wider connection where there are other difficulties. However, to add to the point on the discounts that are taken when this happens, those discounts are made available to customers every day by the 1,500 people we have deployed to this. During the same period we were working on the portfolio sale, we highlighted as part of our communications that we restructured over €400 million in additional loans. Had those loans not been restructured, they would have formed part of that sale. As we went through that process those loans also received write-downs and write-offs. Those write-downs, write-offs and discounts are provided on a daily basis to customers with whom we are working.

That does not reflect my experience and I will finish with that.

I would like to welcome Mr. Byrne and his colleagues this morning. I thank them for their opening statement and questionnaire in advance. I will start with the sale of the loan portfolio to Everyday Finance DAC. It is composed of 800 customer connections involving 3,700 assets. My understanding is that 800 customer connections could involve a multiple of that number in actual distinct customers. The witnesses have said the assets are underpinned by investment properties. Can they give us a description of what is involved the portfolio? Is it principally buy-to-let residential properties? Moreover, what is involved in the portfolio where going-concern businesses are concerned?

Mr. Bernard Byrne

I will ask Mr. O'Keeffe to answer.

Mr. Jim O'Keeffe

The key point about the portfolio is that it is heavily underpinned by investment assets. The connection has a very significant proportion of investment assets.

What does Mr. O'Keeffe mean by that?

Mr. Jim O'Keeffe

That means either investment buy-to-lets, commercial real estate or land and development of some nature.

Mr. Jim O'Keeffe

They are the main assets that form part of the 3,700 assets the Deputy has referred to. That was the key driver in that portfolio. We discussed this previously when we discussed the portfolio. As the Deputy says, the wider connection relating to that investment debt forms part of it.

I am interested in the amount of going concern businesses that are part of the process that have connections or assets which are being sold on. Has Mr. O'Keeffe any estimate of the number of actual businesses whose loans are being sold?

Mr. Jim O'Keeffe

We have not discussed or disclosed information about the portfolio in more detail than what I have just outlined. However, where there were going concerns in the portfolio, that is one of the key restructuring pieces that we do as part of our normal restructuring. We work to deal with the investment assets through a sales process. We typically arrange a bridge to sale to sell those down in order that we can protect the underlying trading business if there is one. The portfolio was predominantly driven by an investment assets.

The transfer date is 27 July 2018. Customers have been formally notified of that in writing since about the third week of May. Is it too late now for any further restructuring? Is the book closed?

Mr. Jim O'Keeffe

It is from our perspective but I should explain two aspects of it. The first is that while we were working through this, we continued to work with customers to restructure. At this point, we have a team that has been set up to work with customers if there are any proposals etc. that we can work out with them to share with the purchaser. The purchaser will consider proposals even at this point.

Just to be clear, AIB cannot engage or enter into any new restructuring agreements in respect of loans that are being sold.

Mr. Jim O'Keeffe

That is correct.

They are actually being transferred on 27 July. Related to that, AIB wrote to customers who have an overdraft to notify them that it would be removed from 27 July because their loans are being transferred completely. AIB informed them in writing that the letter they received constituted formal demand for repayment of the debit balance, if any, and that any outstanding debt on the account is due for immediate payment on this date. AIB has called in the overdrafts of those businesses that are part of this portfolio and have overdrafts with the bank. How will that work in practice for these businesses? AIB's entire relationship with them is being transferred over to Everyday Finance DAC. If these businesses lose their overdrafts on that date and they are not provided with a corresponding one by the new loan owner, it could be the end of those businesses.

Mr. Jim O'Keeffe

This was a part of working through this. I must give the context here all the time. These are very long-dated arrears where businesses with heavily connected investment debt have failed to engage with us to help us help them to protect the business over that period. What we did do, because we recognised that issue, is identify where people were using their overdraft and wrote to them. The letter was very clear. We dealt with the cashflow issue. We said to customers that at the end of July, their overdraft would complete and the balance would transfer at that point in time. That gives them the opportunity, if they require the cashflow that is in that limit, to draw it down and use it on a normal credit current account basis. To be fair, that was the best solution we could consider to solve the cashflow problem in a different way before the loan transfers. In fact, we also identified the customers who we felt needed to be contacted and we tried to make contact with them. Unfortunately, due to the nature of the portfolio, again the engagement was difficult.

Mr. O'Keeffe is saying that if a customer has an overdraft limit of, say, €50,000, and their current balance is a debit of €10,000, until 27 July they can draw down the balance to carry an overdraft of €50,000 over into their relationship with Everyday Finance DAC. However, how that new loan owner regards that overdraft is entirely its own affair. Is that what he is saying?

Mr. Jim O'Keeffe

Exactly. Just to be clear, this deals with a cashflow issue but the debt is still created. That is important. We are engaging with people and explaining the process to them, when we can talk to them, and we are very happy to do that during the process.

To stay with that example, if a customer had a balance of €50,000 overdrawn which was at their limit on the transfer date and Everyday Finance DAC is not in the business of providing overdrafts, it will not recognise that as an overdraft any longer. It becomes a loan.

Mr. Jim O'Keeffe

Exactly.

This could have implications for the business, but Mr. O'Keeffe is saying they are on their own at that point. It is a matter between them and the new-----

Mr. Jim O'Keeffe

Just as an item of clarity, if they remained with us they would still be at the limit of their overdraft. It is an overdraft, but it is not a cashflow solution for them.

I understand but their being at the limit of their overdraft with AIB does not trigger any additional enforcement action from AIB's point of view. However, a €50,000 overdraft carried over to Everyday Finance DAC, which the latter regards as a loan and calls in, creates a completely different dynamic. That is fine, I just wanted that clarity.

I refer now to the tracker mortgage issue. The prevailing rate cohort constitutes about 5,800 customer accounts at this point. From AIB's point of view, is that matter closed?

Mr. Bernard Byrne

Yes.

By Mr. Byrne's understanding of the position of the Central Bank, are there no outstanding matters for clarification or engagement with the Central Bank on that matter?

Mr. Bernard Byrne

Obviously the cohort is included within the overall framework, so anyone within that cohort has the right to appeal and to effectively review what is provided for by that framework. As such, while we have made our determination in respect of the cohort, every individual within it has the ability to appeal through that process.

I notice that there have been 333 appeals in that process and more than half have been either upheld or partly upheld.

That is quite a significant turnaround. Have any prevailing rate customers been included in those appeals and gone through the system?

Mr. Bernard Byrne

My understanding is that they have not.

Mr. Tom Kinsella

The prevailing rate appeals have not been judged on yet by the appeals panel. There are about 22 appeals lodged but the appeals panel has not got to them yet.

From the bank's point of view, the matter is closed and, with the exception of the appeals process-----

Mr. Bernard Byrne

Based on the information we have and where we are.

If customers want to take it further, they have the appeals process, the ombudsman and then the court.

Mr. Bernard Byrne

Yes.

I suspect that is where this issue will end up and that it will go the distance. There is a legitimate issue there. It is down to interpretation and I think it is going to be decided in a court of law. It would have been far better if it could have been resolved to the customers' satisfaction at the level of the bank but that is not going to happen.

Mr. Bernard Byrne

We have discussed this and the committee has also discussed it with the Central Bank.

Mr. Bernard Byrne

We think the position is the right position at this point.

For the overall cost, the bank's provision is about €230 million. Is that correct?

Mr. Bernard Byrne

Yes.

That includes redress and compensation. Are the administrative costs to the bank included?

Mr. Bernard Byrne

There are elements of that included but as the programme has gone on for a period of time, there are operational costs that we just deal with on an operational basis. It is predominantly for the items to which the Deputy referred.

Has the bank made provision for a possible enforcement fine?

Mr. Bernard Byrne

We have not made any provision in respect of fines at this point.

There is an ongoing enforcement investigation by the Central Bank.

Mr. Bernard Byrne

Both AIB and EBS are now in enforcement so there is that possibility. It is a separate bank issue.

I want to ask Mr. Byrne about the EBS mortgage rates. Why is there a 55 basis point difference between the AIB rates and the EBS rates? People view EBS and AIB as one and the same thing now. Perhaps Mr. Byrne might clarify the standing of EBS within AIB. What is it as an independent entity and why is there a difference of more than 0.5% in the variable rate mortgage offer?

Mr. Bernard Byrne

EBS is a separate licensed entity subject to full, separate regulation according to the Central Bank rules. We have discussed here before that the main offering from a mortgage customer point of view that we have in the AIB group is in AIB, which dominates in terms of our market share. We use EBS as a challenger brand, and the proposition from EBS is consistent with how others are positioned in the market. The offer from EBS is effectively a competitive offering relative to other players in the market that have cash-back type offers as their predominant feature. AIB offers a standard variable rate mortgage predominantly while that from EBS is effectively a cash-back offer with a standard variable rate. The incremental cost, as we have touched on before, reflects the change and difference between the propositions by EBS and AIB.

The witnesses see EBS as competing with AIB.

Mr. Bernard Byrne

We see it as a competing proposition, as do the customers who use it.

In terms of new mortgage drawdowns, what is the current market share for AIB and EBS respectively?

Mr. Bernard Byrne

I think it is roughly 7% for EBS and about 22% for AIB.

That is about 30% combined.

Mr. Bernard Byrne

We have Haven as well, which is a broker brand, which would bring it up to the low 30s.

Senator Horkan is next.

I will ask someone else to go first. I want to look at a few more points.

I want to focus on the tracker scandal. Mr. Byrne has said that he recognises that the bank failed in its responsibility to provide proper levels of transparency and information and that now it has implemented fair settlements for everybody affected. Would he accept that, in its assessment of the problem and implementation of fair settlements, the bank has taken the narrowest possible view of who those affected are?

Mr. Bernard Byrne

No. I do not think that has been the case. Collective thinking changes on this over time. Views and positions change. At the beginning, as we have said before, we accept that we were being quite legalistic and bank-centric in interpretation. With some of the original issues that may have emerged back in 2013 and 2014, the issues that would have gone to the ombudsman etc., those findings which were supportive of the bank's position were correct but based on a strict interpretation of the position. What we are saying is that it has evolved and now there is a broader perspective taken in respect of looking at all of the issues associated with it to see on balance where that gets to and I think the position has to balance on the other side. The fiduciary responsibilities to the operation of the bank, the shareholders and the State are associated with getting the balance right between all customers and all the stakeholders. I do not think it is a single issue on which we can ever be absolutely definitive but definitely the approach is much more focused on the overall position as opposed to a strict interpretation.

Let us take a very large cohort of people. Mr. Byrne might be able to tell me how many people this is in terms of AIB and EBS - those who were on a fixed rate, who came off it at a time at which tracker mortgages were available, but were not offered a tracker mortgage at that stage. Mr. Byrne is saying those people are not entitled to compensation. Is that correct?

Mr. Bernard Byrne

I might talk to Mr. Kinsella about this in a second. The Deputy is referring to a group of people who were on a fixed rate-----

Yes, those who came off the fixed rate and went straight back onto a variable rate and were not offered a tracker although it was available at the time.

Mr. Tom Kinsella

They would have had the option to go on a tracker.

They would or they would not?

Mr. Tom Kinsella

They would have.

Let me give a concrete illustration of this. I suspect and presume there are thousands of people in this cohort. I have emailed the witnesses in respect of this example. The facts, I understand, are not in dispute between the bank and the customer. He took a mortgage out with EBS in 2003 when a tracker mortgage was not available. He went onto a one-year fixed rate in 2004 and came off that on 30 June 2005 but was not offered a tracker interest rate. The final response from EBS, which says he is not entitled to compensation, says there was no contractual obligation on EBS to specifically offer him a tracker interest rate. Reference is made to the fact that there were ads and so on at the time and it is suggested that he should have known himself and should have asked for it.

Mr. Bernard Byrne

As the Deputy knows, we do not get involved in individual cases in these fora. We are very happy to look at any individual case. We need to understand the interpretation and the issues associated with it. We will have made a determination decision around those cases. We have over 30 cohorts. It will not be one we have not considered. Based on what the Deputy has said, it is hard for me to give an answer.

Mr. Tom Kinsella

It sounds to me like all options were open to the customer. The customer would have had an option of a tracker rate at that stage but I would need to see the details of the individual case.

I emailed you about this the other day and raised it the last time AIB was before the committee. I even signed the form to get responsibility to act on his behalf. To be clear, EBS is saying that he had the right to get it. If he knew about it, he could have said he wanted a tracker and EBS is saying it certainly would have given him a tracker. The point is that it did not say it to him. It was not included in the offer letter. I was told the bank could not produce a copy of this letter as it only retains copies of these letters from 2008. However, the bank could confirm that a tracker interest rate was not mentioned in that letter or when he went into the bank. He was not offered the information about a tracker being available to him. I presume there are thousands of people in this position in terms of AIB and EBS.

Mr. Bernard Byrne

In general I would say of somebody who never took out a product and never had a product, that it is hard to see how they would have a right or entitlement to that product. I would need to look at the case.

That is the point. That is the case EBS is making. The code of practice was not in operation at that time but one would hope that the bank would generally operate in the spirit of the code of practice. The code states that before providing a product or service to a consumer, a regulated entity must gather and record sufficient information from the consumer to enable it to provide a recommendation or product or service appropriate to that consumer.

The letter to the guy says that the bank confirms that it was standard practice to inform customers of all interest rate options at the time of application and on request. The tracker is an interest rate option and he was not informed about it at the time he came off the fixed rate. It also says that EBS staff do not provide advice on which interest rate option to choose, that it is the customer's decision and the obligation rests with him or her to advise the bank accordingly. Is that not in conflict with the spirit of the code of practice, which is to provide recommendations and so on that are appropriate to the customer?

Mr. Bernard Byrne

No. We do not have the advisory function in that capacity. That is clear in my counter point of view.

Reference is made in the letter to the fact that tracker mortgages are being advertised at the time and that he should have known about it. Mr. Byrne thinks that it is fair to expect a customer with no knowledge of relatively complex financial products to initiate a conversation himself or herself after seeing an advertisement for a tracker mortgage, wondering what it is and wanting to get one. Mr. Byrne does not think the bank had an obligation to say there is a range of options for the customer is coming off a fixed rate, one of which is a tracker rate, another is a variable rate, etc.

Mr. Bernard Byrne

I do not know if my colleagues have anything to say. A challenge with all this is that it is very clear today that a tracker mortgage has turned out to be a good product. It was not very clear back then-----

Mr. Bernard Byrne

-----that a tracker was a good product. It was not known. It is sometimes difficult to apply logic to a position that we now know to be true versus the history of the issue. That is evidenced by the draw-down statistics that took place over that period on how people drew down products, whatever level of information they had. The tracker rate was not any different from a standard variable rate product or people's position and thoughts on fixed rates. A number of people moved to fixed rates because it was cheaper at the time. It is hard to apply that logic backwards and say a bank should have said this because it should have known. I do not think anyone realistically could have known.

Do the witnesses accept that the bank should fully inform customers of the options available to them when they are deciding on a rate, which includes the array of options?

Mr. Jim O'Keeffe

Mr. Byrne's point is that we have to be careful with regard to the bank getting into advice on rates. That has been a long-standing position for all the banks. I am conscious of the intent of trying to address the question but we need to be careful since we do not have the specifics in front of us. The customer would have taken out a loan in 2003, as the Deputy has outlined. At that point, the customer would have been made aware of all the rates. That would be part of the process. Then there would have been a set of terms and conditions and the running conditions of that product, which would set out what would happen over the intervening period. Tracker rates came in later in that period. When the bank introduced rates, it did not advise customers on rates because they could go either way. We all forget that tracker rates went the other way for a considerable period so that would have been incorrect advice to the customer. The key point is that the tracker was freely available to customers, had they chosen it in that period, but it was not attached to the original product that they would have taken out.

The issue is the difference between "freely available" in theory and legal reality versus "freely available" with regard to the information available to a customer. There is a serious information imbalance between the customer and bank. A bank has an obligation to assist the customer in overcoming that information imbalance by giving the information. How is the customer meant to ask for a tracker if he or she does not know that the tracker is available?

Mr. Jim O'Keeffe

The Deputy used the words "freely available in theory". It was not in theory. That was the practice at the time. It was freely available.

If the person does not know about it, it is not freely available to that person.

Mr. Jim O'Keeffe

Unless anyone else wants to comment further, the Deputy has indicated that he has sought information from us, with authority to provide it, and I think the best thing to do is come back to the Deputy specifically about the case. Otherwise, we will get into speculation related to the customer. What we have outlined about the customer taking out the product with specific terms and later having the option to avail of the tracker rate is probably at the crux of this.

I welcome the witnesses. The first question I have relates to the 500 EBS customers. It is a number of years after the bank's formal investigation started. We appreciate AIB was probably one of the first out of the tracks to get to grips with this, although getting fully to grips with it took quite a long time. Why are we now just learning about the 500 EBS customers?

Mr. Bernard Byrne

We briefly discussed this earlier. I will give a summary again. We accept that this group is coming later in the process. There is no debate about that. We have talked about this group here before. This has been our position on the contractual issue associated with this and the waiver form that was signed by the individuals when they drew down the tracker rate. Not having had a tracker entitlement in the beginning, when drawing down the tracker they effectively signed a one-page waiver that said if they ever moved off the tracker, they had no entitlement to go back. That was the position which we held and we felt it was supported by the position of not including them in the overall programme. As part of the Central Bank investigation, which was a later process, and an investigation with EY, having a discussion about consistency with us and across the industry, they have engaged with us and all the cohorts extensively. They pushed us on this one to think more about ancillary and other materials associated with this, rather than the contractual position and what the customer signed. When we did that and took into account their perspective on ambiguous language and other materials that were more available, we went back to the view that we would include this group. I mentioned "finely balanced" in my statement. These things are finely balanced with regard to how one determines which way to go in fairness to everyone. We know that everyone wants a tracker. That is not the point. The question is how we get to the point of deciding whether somebody has a sufficient entitlement and it is fair across every perspective. Based on that interaction with the Central Bank, we decided to include this group. That is why it is late.

Does Mr. Byrne now accept that they have a legal entitlement to a tracker and always had it?

Mr. Bernard Byrne

I have said exactly what it is. On the pure legal side, it is a much more difficult argument. With the overall position and our perspective of being focused on the customer, taking the weight of evidence related to it, we have included it.

This probably goes to my next question. We heard from bankers that came before this committee, though I am not sure if it was Mr. Byrne or another CEO, who said that as part of their apology to their customers for the wrongs visited upon them by the bank, they approached this in an overly legalistic manner as opposed to a customer-focused approach. When that apology was being made, they were talking about a couple of years ago and said that they were now customer-focused. Can we not read from what Mr. Byrne has explained to the committee that AIB was, until a couple of weeks before the Central Bank pushed it, taking an overly legalistic approach as opposed to a customer-focused approach?

Mr. Bernard Byrne

It is not as binary as that. There is a legal position which we looked at and examined. We made a decision which was that we felt this group was not included. I have explained that the Central Bank engaged us significantly in a conversation on it. In particular, it brought a perspective relating to ambiguous language in other materials separate from that. We gave way to that since it is a competent authority that looks at these things. Whether people like it or not, some of these decisions are finely balanced as to which way one goes and that is why we have ended up in the position we have decided on.

I am not sure if Mr. Byrne heard "Morning Ireland" today. We heard another clip from the Anglo Irish Bank tapes. As we know, David Drumm wakes up this morning in a prison cell, starting a five and a half year sentence. We heard the behind the scenes voices of the bankers and the attitude they had at that time. Much has been said about the culture. I appreciate that the management team in AIB is not the management team that existed at the time of the crash.

Does Mr. Byrne believe there is still an issue in the bank relating to culture? I am not suggesting it is as severe as evidenced in the tapes but I am asking whether there is an issue nevertheless.

Mr. Bernard Byrne

I did not hear the conversation on "Morning Ireland". Culture is important and we recognise the culture that existed in banking needed to change. We are still on a journey of change but we have made a lot of progress. The business has focused a lot on being clear as to our purpose and how we implement that, culturally, with accountability, collective responsibility and customer focus. We have a continuous series of engagements between staff and customers to develop that. We have more to do because one does not change culture overnight. I believe, however, that we are in a positive position in terms of intent. We are continually improving and our approach to complaints is moving in the right direction. The Central Bank is carrying out a culture review in conjunction with the Dutch central bank and we are comfortable with that engagement.

The Central Bank is arguing that reckless trading should be a crime. It is not a crime here but it is a crime across the water. The Central Bank has been arguing for this for a number of years but the Government has refused to make it a crime. In a submission to the Law Reform Commission, the Central Bank argues that senior bankers should be held accountable for actions under their remit, rather than just where their fingerprints are found on an action. The Bank proposes that each senior banker would have to provide a map of his or her areas of responsibility so that they could be held accountable for any wrongdoing that happened within their area. Does Mr. Byrne agree with those proposals?

Mr. Bernard Byrne

The Deputy has outlined a very generic position, which I accept. The senior manager regime he describes is, in some respects, what they have in the UK. It is very important that people spend a lot of time being clear about what is in the map and what are their responsibilities. If such a law was brought in, that is the way we will operate.

Does Mr. Byrne think it would help the culture in the bank?

Mr. Bernard Byrne

The challenge with all these things is to get the balance right between prescription and culture. One cannot prescribe a culture - one has to create it. Regulations and rules are needed but some issues need to be allowed to develop into the culture of an organisation.

This is about jailing bankers if they did wrong and taking away the defence that wrongdoing was the fault of one of the junior staff. It will mean that Mr. Byrne, or the equivalent in another bank, will have stated he was responsible for a certain area and can be held accountable by prosecution. It is more than culture - it is about accountability.

Mr. Bernard Byrne

It is about accountability. I do not think everyone's sole objective in life is to jail bankers-----

Our sole objective is to make sure bankers do not do what they have done with tracker mortgages, overcharging business customers or evicting people without sufficient notice and so on. If more people thought they would face the same circumstances in which David Drumm finds himself this morning, there would be less likelihood of some of these scandals repeating themselves.

Mr. Bernard Byrne

That is a perfectly valid view. My opening statement mentioned factoring balance into all these decisions. There is a consequence of every action. One has to determine what one wants. The more prescriptive something is, the more people will do it but a heavily regulated system cannot compete with a non-heavily regulated system so one needs to decide these things in the context of looking for an organisation to be nimble, agile, flexible and to compete against fintech, for example. That is not for us to decide but there is no action without consequence.

Deputy McGrath mentioned the 333 internal tracker mortgage appeals but there are 117 before the financial services ombudsman, one of which has gone through the internal appeal process. These are people who are not satisfied with how the bank has dealt with this issue. As CEO, can Mr. Byrne guarantee to the 117 customers that if they win their case at the financial services ombudsman, AIB will not appeal it through the courts?

Mr. Bernard Byrne

I cannot give that guarantee and the Deputy knows I cannot. I do not know the circumstances of each case so I cannot guarantee I will abrogate responsibility for them. This is for the reason referred to in the Deputy's previous comment, namely, that I may well have responsibility in some other way that may impinge on the issue. Our objective will be to be fair to everyone. The case to be determined and considered by the ombudsman may be reasonably clear in terms of findings. We have worked closely with the ombudsman on all the issues and we have only one finding against us generally - that is, outside the tracker issue. We are working to solve all issues as quickly and expeditiously as possible.

That is disappointing because there have been delays in the process arising from another bank appealing the FSO decision, stalling the resolution of the tracker mortgages issue for many years. Yesterday, the Central Bank announced a programme of changes relating to switcher mortgages, in which tens of thousands of customers can benefit by about €1,000 in the first 12 months if they switch. It believes one in five should switch, both between banks and within a bank. By 1 January, banks will have to put in a suite of measures to inform their customers of better options. What is AIB's intention in this regard? Will it come in on 1 January or does it intend to introduce it at an earlier stage? Can the bank indicate whether it has done any analysis of the potential for its customers to switch internally? How many would benefit from a lower rate within AIB? How will the bank approach the recommendation from the Central Bank that individuals be informed of better options in a bank, including in the area of loan-to-value ratios? Can the bank write to a customer, who has a loan of €180,000 which has been brought down to €90,000, and suggest they get a valuation with a view to getting a lower interest rate?

Mr. Bernard Byrne

Part of the challenge in answering the question is that it was yesterday. We have not thought through a position on the recommendations; we did not know in advance what they were going to be. We believe the offerings we have, in terms of the standard variable rate and our front and back book pricing, put us in a different position from many in the market. Our front rate pricing, which is the most attractive offering we have for new customers, is the exact same price as the back book price for the majority of our customers. We have had this position for quite a while. We also have an obligation, with which we comply, to inform customers on an annual basis about rates across the institution. If we can do it earlier and it is the right thing to do we will do that but I have not seen the detail or worked through how it would play out.

In Mr. Byrne's opening statement he set out the argument for the increased costs in the area of interest rates and the regulatory requirements which are designed to make sure we do not have another bust, including the need to be well capitalised. He spoke about security and stated:

If that security is undermined, the costs to all other borrowers are impacted. Defaulting customers, and indeed the history of defaults, mean that we as a bank must hold additional capital

I do not want the witnesses to forget they caused this, though this is not mentioned in the opening statement.

If the reckless trading in the banks at that time had not happened - I know the witnesses were not in their current roles at that stage - we and many others in the country would not be in our current position. The bank, legislators and society in general must be continuously reminded that we all fell asleep and during that time the country was wrecked. It should be included as an indicator that the banks carry a burden of responsibility in this regard.

Mr. Bernard Byrne

I accept the Chairman's point. All I was trying to do with the opening statement was bring to life the reality. If everybody changed tomorrow, the European Central Bank would still have a set of views on how we need to model for pricing, including pricing for mortgages and small and medium enterprises. It is based on experience over the past seven or ten years. It is not some theoretical view that the European Central Bank holds of what happens going forward. Regardless of its cause or whether we wish it away, we are subject to a pan-European environment that is slightly less concerned with history and more concerned with how capital is allocated across banking systems. My comment was not meant to be annoying or resolving and I apologise if it was taken as such.

There is no need to apologise. It is a conversation we all need to have from time to time.

Mr. Bernard Byrne

Exactly. I was attempting to have a bit of the conversation and say there is a consequence to how we go forward as the rules are set elsewhere.

Mr. Byrne mentions defaulters and litigation, with people trying to defend themselves. Many are lay litigants. That is part and parcel of what we must deal with and what was created by the bailout and the behaviour of banks.

In the court case that was decided yesterday Allied Irish Banks suggested that a previous decision might be misinterpreted and relied upon in future litigation and would result in a degree of litigation chaos and uncertainty in law. That was part of the argument put forward by the bank. The bank wanted the judge to amplify the reasoning behind that legal decision. In the course of the submissions, the counsel for Allied Irish Banks informed the court that €7.8 billion of bank loans had been transferred. This relates to AIB mortgages. The end result was that the judge refused to accede to the request of the bank that the court should revisit the judgment. The bank is left with the dilemma, as set out by its own counsel, that there could be chaos and €7.8 billion of transferred funds are now in question. I know the decision was only made yesterday and the bank must consider it but how will it affect the sale to Everyday Finance? Are there in the sale cases that now may go to court? Will the bank examine each of the 800 customer connections in the sale to ensure none of them could be affected by yesterday's decision?

Mr. Bernard Byrne

I will comment and Mr. O'Keeffe might come in at the end. The Chairman referred to the request for an amplification of the judgment. The judge indicated that the decision made was not in dispute with respect to the final determination of the matter. A reference had been made to the Asset Covered Securities Act 2001. The judge stated she did not need to revisit her judgment because, effectively, that was not central to the matter and she had not given due consideration to it and would not give consideration to it as there were other cases that somebody else could choose to take if parties wished to have that matter determined. She indicated that what she had considered in respect of the matter should not be seen as a considered opinion on the topic. Therefore, she was not revisiting the decision. This is only a preliminary view but the decision yesterday does not increase or change the issues associated with it. We need to consider the position. The determination made yesterday does not undermine any of the positions we have.

Senior counsel for Allied Irish Banks made the arguments about chaos and the €7.8 billion. The bank must have some concerns.

Mr. Bernard Byrne

The matter has already been clarified to a fair degree by the judge's judgment, which was that she was not making a determination in respect of that particular matter at the time.

We will leave that issue there. What is the updated position on EBS agents?

Mr. Bernard Byrne

EBS is effectively a third party franchise operation and there is an agency arrangement in place for core franchises. Am I referring to the right topic?

EBS had agents.

Mr. Bernard Byrne

They are effectively tied agents of EBS.

It had agents. There is the matter of EBS, its agents, how they were represented and the case that is ongoing with Mr. Byrne's bank.

Mr. Bernard Byrne

As EBS is operated as a franchise, an EBS outlet will be run by an agent. The agent is effectively an independent contractor operating under a set of terms of conditions for the franchise. They are our agents and we refer to those as agents. From time to time those agents change or, in our opinion, they may not comply with the terms or something commercial happens that ends the relationship. There are some former agents who have taken actions against EBS on the basis that the contractual break or whatever happened was not correct. It is a litigation matter between agents and EBS. That is my only awareness of an agent position.

The agents have written to us and I want to ask about them. We agreed earlier to invite these agents to make their case to the committee. Apparently, they reached some form of agreement or understanding with EBS before EBS was taken over by AIB, however Mr. Byrne wants to describe it. Will EBS resolve that with its agents without any intervention from AIB or does AIB have a concern around the resolution of the matter?

Mr. Bernard Byrne

This has been running for a while and there is a normal contractual process with some of these agents. There can be contractual disputes. I know AIB is involved operationally with some of these matters but I am not aware of anything new in respect of these issues at this point.

Mr. Jim O'Keeffe

I am not either. I am aware of the issues in the period. Is there concern that there is not appropriate engagement, either at the litigation side or in a wider sense?

Will the witnesses check out the position and revert to the committee on it?

Mr. Bernard Byrne

I met a number of these agents a number of years back. If it is the same matter, it has been running for a very long time.

It is the same issue and the agents are still anxious to bring it to an end. To that end, they asked to appear before the committee and we have agreed to a meeting. In that context, I ask the bank to give us its view on the matter.

Mr. Bernard Byrne

To summarise, there is a contractual dispute and we think it is finished. As they do not like the answer, it is a contractual dispute and a litigated matter.

We are trying to have it revisited.

Mr. Bernard Byrne

Fine.

I ask the witnesses to look at it and come back to advise us as to a "Yes" or "No".

Mr. Bernard Byrne

Okay.

Deputy Doherty mentioned that Mr. Drumm is in a prison cell. I mentioned Ms Yvonne Walsh and her case but I will not ask the witnesses about it. Members of her family are here today watching proceedings.

Much of what is happening in the courts could be avoided by people engaging with the banks or vice versa. I am not referring to the pros and cons of the case itself. I am just making the point that it seems extreme that a mother can be jailed so quickly, almost on a criminal basis, without the matter being resolved until later today when it takes years to do anything else. There is a human cost in the sale of properties to vulture funds and other entities. Regardless of what the witnesses might think about litigation and people testing cases in court, be they lay litigants representing themselves or legal professionals acting on their behalf, it is staggering that something like this could happen in Ireland today. As legislators, we need to focus on the reasons for it. Ms Walsh's two daughters are present. They are 15 years of age. I find it upsetting, but I cannot imagine how it has affected them and their lives. Banks have to consider everything in the context of rights, family homes and how people are affected by the decisions that are being made.

I will touch on a few points that might not have been covered much. It was mentioned that the 2013 figure of €31 billion in non-performing loans had been reduced to €9.2 billion by the first quarter of this year. Some of that was due to repayments and write-downs. Is there a breakdown of how the bank got from one to the other?

Mr. Bernard Byrne

I do not know the figure off the top of my head.

Some of those loans were restructured or repaid.

Mr. Bernard Byrne

We have those numbers. I do not have the ones for that exact period with me, but we can get them for the Senator.

Do they give any idea of what the write-downs amounted to?

Mr. Bernard Byrne

A significant proportion. Depending on cases, between 30% and 50% could have been written down. There may be an easier way to consider this. We had €17 billion in provisions against the €31 billion. We now have €9.2 billion. Impaired loans - the really challenging pieces - probably amounted to €6.3 billion, for which we had a 44% provision, or €3.4 billion. We have used €14 billion of our provisions to restructure that debt, very small amounts of which have been released back into the profit and loss account. The majority was used to effect restructures for customers who engaged.

Some loans have been cash recovered, some have been restructured. Will Mr. Byrne provide a breakdown or analysis?

Mr. Bernard Byrne

The majority of the provisions have been used to restructure facilities with individual customers.

Some of that is debt still outstanding but performing, some of it was cash recovered and some of it has been written off because there was no hope.

Mr. Jim O'Keeffe

The scale of what Mr. Byrne has outlined is right. When we discuss cash recovered, we sometimes set it aside from the restructuring, but it all forms part of the one piece. During that period, customers would have been given the opportunity to sell down properties and so on, after which cash would have flowed. We would also have put customers on normal terms and conditions in their restructured loans, which would form part of the cash recovered category. The reduction is either down to restructuring and the associated performance of that restructuring or debt write-off. There are probably two large blocks to the reduction.

Will the witnesses be able to provide us with the details?

Mr. Jim O'Keeffe

Yes.

Mr. Bernard Byrne

The €31 billion figure did not stay static. It has grown since 2013. There were moving parts.

I accept that, but these are the figures from the witnesses' opening statement.

Mr. Bernard Byrne

Yes.

How many vacant properties are in the bank's possession?

Mr. Jim O'Keeffe

In our most recent disclosure, we disclosed that we possessed more than 600. There are two parts to this. We have been active in - we initiated it, really - our work with the Housing Agency. Or, rather, once the agency approached us, we were one of the first out of the blocks. We have worked successfully with the Housing Agency since the beginning of last year. We offered 500 properties initially, of which the agency contracted approximately 180, amounting to €27 million. Following a series of phases since then, each involving approximately 250 properties, we have shared more than 1,000 properties in total with the agency. Of our current stock, we have offered 380 properties and received acceptance for approximately 270. We have some of those that we had offered previously but were not suitable for the agency. We are working through the vacant property stock, primarily with the Housing Agency.

Are those properties located in every county or are they concentrated more in urban areas or rural areas?

Mr. Jim O'Keeffe

They are distributed. From our various interactions, I understand that the Housing Agency is examining areas across the country that may have needed greater consideration initially. The rules around types of stock and so on may have been tight at the beginning. To be fair, the Housing Agency is now taking a pragmatic view of what it is doing. Our properties are located across the country.

How many vacant properties are still on the bank's books?

Mr. Jim O'Keeffe

Just over 600.

Is that AIB and ESB combined?

Mr. Jim O'Keeffe

That is everybody. We have been working through that number with the Housing Agency. A significant number are on offer and have been accepted.

I will touch on the Everyday Finance portfolio of May 2018. They were the bank's customers, but the record is fairly dismal. The average balance is €1.4 million, with 800 connections and 3,700 assets, which is approximately 4.5 assets per connection. Will the delegation give us some idea of what was happening? All of these people were loaned money, there were many connections and the average value is high. I appreciate that an average is an average and there are customers with €5 million, €6 million or more and others with €500,000 or less.

Mr. Jim O'Keeffe

That is not unique to this portfolio. These are the types of cases we have been working on restructuring. The significant drop that was required to reach our current position involved their restructuring in smaller or larger scales. That has been successful. The remaining cases have primarily not engaged or reached the point of a restructure. In many instances, it has been a question of investment. Deputy Michael McGrath referred to the concerns around trading businesses where individuals or businesses reached out and started investing in other asset classes but the core cashflow from the assets was unable to sustain the wider position. For a long time, our solution has been to examine each case, try to dispose of the investment properties, realise where the business is in the value cycle and then try to protect the core business.

Did many of these cases involve speculative land acquisition? Did people who owned successful businesses buy fields believing they would become property developers in time, but then the land value vanished and the loans were still there?

Mr. Jim O'Keeffe

To describe them as a homogenous group of customers would be wrong of me. Every scenario is present. However, this portfolio was heavily underpinned by investment and, therefore, suffered heavily from the crisis that emerged.

Investment in what?

Mr. Bernard Byrne

It is reflective of some of the difficult outcomes of what happened during the boom period. People were investing in all sorts of thing, collectively and collaboratively, in many arrangements.

And banks, including the witnesses', threw money at them.

Mr. Bernard Byrne

It was the overall environment.

Mine was not too pejorative a phrase.

Mr. Bernard Byrne

The complexity of those positions has led to many challenges.

Time, Senator.

I will just make a couple more brief points.

As many as 500 people deal with trackers, 1,500 people work on NPLs on a case-by-case basis and there are almost 10,000 staff in total, including almost 1,000 earning between €100,000 and €200,000 and so on. The issues concerning tracker mortgages and NPLs will be resolved. What work will staff be given instead?

Mr. Bernard Byrne

The Senator has referred to the 1,500 people who work as part of the financial solutions group. That activity will not stop but it will downsize significantly as we normalise. A reduction of more than 500 people in respect of that number is probably a reasonable expectation but that is probably a 2020 position. Some of the people are contractors. We engage contractors when needed.

Are contractors included in the figures for staff that were mentioned in the questionnaire?

Mr. Bernard Byrne

Contractors will not be included. It depends on the nature of the contractual work. If a contractor works full-time and has been with us for a year then he or she will be included in the staff figure. However, if a contractor moves in and out of the workplace to work on various projects then they will not be included. Long-term the headcount is reducing. A headcount reduction will take place in the financial solutions group. A reduction will also take place in respect of the tracker programme but some of those positions are contractual positions. I mean contractors are engaged to do specific work at specific points in time. There are countervailing pieces on the other side, which is increased complexity in operations and what we do on the regulatory side. It is not all one-way traffic in terms of headcount issues. The Senator has referred to two situations that are true but there are other issues that act as a counterbalance.

I would like a breakdown of the salaries from zero euro to €100,000. We asked for the salary bands starting with zero euro to €10,000, €10,000 to €20,000, etc. Everyone earning €100,000 and over has been lumped in together.

I attended a presentation where Mr. Byrne was one of the speakers. On that occasion he referred to Ireland having a noisy environment in its discussion of the banking sector. I ask him to explain what he meant by the term "noisy environment."

I am sure that it was not us that Mr. Byrne was talking about.

I wonder. I did not get an opportunity to question Mr. Byrne and that is why I have asked him now.

Mr. Bernard Byrne

I am not sure which presentation the Senator is referring to because I have used the phrase a few times. Investors ask me about Ireland all of the time and I generally reply in that way to calm people down. Ireland is a noisier environment than investors are used to because Ireland is a smaller country.

Was Mr. Byrne referring to us?

Mr. Bernard Byrne

I did not mean the committee.

Or the Chairman even.

Mr. Bernard Byrne

There is a cohesion between a political system that is connected to the population because of its size, the media and the commentary. Many topics are talked about openly. On the one hand, I have described this as a good thing because we talk about everything. On the other hand, what happens in legislative terms is practical. That is the way I describe the situation in Ireland but investors, on average, look across big universes and they say, "That is very noisy" and they hear things. I end up responding a lot to their general question about what is going on here by describing Ireland as a very noisy environment to calm people down.

Deputy Micheal McGrath wants to come in again and then I will call Deputy Mattie McGrath.

I will allow Deputy Mattie McGrath to proceed.

I thank the Deputy for his generosity. I also thank the Chairman for the invitation to attend this meeting. I am delighted to address our friends from the Allied Irish Banks, Mr. Kinsella, Mr. Byrne and Mr. O’Keeffe.

I have a question for Mr. Kinsella and I want to discuss the noise comment too. In terms of the banking sector, I agree that there is a lot of noise but the bank built up a lot of that noise with loose lending. Let us remember that the noise relates to human stories. A couple of girls have just left the Gallery and the Chairman raised their sad case earlier. Unfortunately, there are many sad cases. I wish to criticise Allied Irish Banks for its lack of engagement. The bank has told politicians, the people and committees that it is engaging but that does not happen. It is nigh impossible for genuine people who want to work their way out of their financial difficulties, for their sake and all of our sakes, to get a face-to-face meeting with bank officials. These genuine people have been put through enormous stress and trauma, and ended up with ill-health. God knows, there have been many suicides and many other devastating issues as a result. We are all in this together and trying to work our way out of this. I am accompanied by a couple today and I hope that Mr. O'Keeffe would give them-----

We cannot deal with individual cases.

I appreciate that. I ask Mr. O'Keeffe to shake hands with the couple, greet them and arrange to engage with them because they have been dangled on a string. The situation is not all their fault because the bank has also made errors. I call for sensitivity and engagement. Every time a meeting has taken place they have met someone different, which is hurtful. These people live in their homes, they are trying to keep their businesses afloat, trying to raise their children and grandchildren and look forward to retirement, in many cases, and need to be dealt with respectfully.

Describing Ireland as having a noisy environment is another issue. The people to whom I have referred need to be engaged with in a meaningful way and that is all I ask the bank to do. I thank the Chairman for the invitation as I am not a member of this committee.

Mr. Bernard Byrne

On the issue of engagement, we agree and we accept the fact that we do not always get it right. We do not say that every time we position ourselves that we get it right all of the time. We have a significant number of people involved, on a permanent basis, in trying to resolve these issues and we have a lot of issues to get through. It is our intention to engage as proactively as we can. Sometimes we do not get it right and we are always open to examining these matters again. Does Mr. O'Keeffe wish to comment?

Mr. Jim O'Keeffe

Clearly, the Deputy has asked me to meet the people present and I will do so. I must be fair to the 1,500 people who work on these issues day in and day out, and many of them are watching these proceedings. They do a great job in their engagement with customers. We do not get the process right all the time. Sometimes we must ensure that we use the right language and share the right information, etc. so that we can consider a matter and move it on. Of course I will meet the people after the meeting.

I wish to ask Mr. Byrne about NPLs. Project Redwood has been sold. How much has the sale reduced the ratio?

Mr. Bernard Byrne

It probably has knocked a couple of per cent off. Our last disclosed number was 14% so it is now, I think, between 11.5% and 12%.

How will the bank reduce the percentage to 4% or 5%?

Mr. Bernard Byrne

The overall programme is the same, which is case-by-case restructuring. The norm for us is 1,000 a month. We cannot guarantee that number because it depends on a series of factors but that continues to be the run rate. We have committed to keep all of the resources in place to make sure that we do that. We have also said to the committee that in order to hit that target we do not envisage the disposal of a private dwelling home portfolio. That is not part of our strategy to get to the number. There may well be other issues, including portfolio sales of other types of assets, that we need to get to. Fundamentally, the more engagement and restructuring, the more likely it is but I have outlined the primary choice and how to get there.

Are further portfolio sales planned at this point?

Mr. Bernard Byrne

We know the portfolio and what we want to do. If we can restructure it all, then fantastic. However, we have to work through them all on the basis of getting them ready for sale. I cannot definitively say that to the Deputy. Anyone who engages will be able to come with a restructure if they do.

When is the bank's next trading update?

Mr. Bernard Byrne

Our next trading update is off the back of the half-year results, which will be 27 or 28 July.

Has the bank published its profit forecast for 2018?

Mr. Bernard Byrne

We do not have a forecast. In the market, there is an analysis consensus.

On the housing market, there is a growing affordability crisis for young couples and individuals who want to buy, and for people who want to trade up, in terms of houses and apartments. The Central Bank's rules are in place, which have acted as a slight brake on property price growth. How does the bank view the market? Is it concerned about the market? Where does it see the market going? I reiterate that there is a growing affordability issue for people now.

Mr. Bernard Byrne

This is one of the key topics going forward. There are many statistics on the number of new builds floating around but let me use general numbers to demonstrate momentum. I am sure most people would agree that 30,000 units per annum is required to have a clearing level of stock. There will probably be about 20,000 units this year. Again, we can argue about the numbers but we are well short.

The number of units being built is growing annually. We will get to between 23,000 and 25,000 units next year and beyond. That will still cause a huge pent-up demand to exist because we have had a supply imbalance for a long period. I do not know the exact number but more than 50,000 units would be a reasonable estimate of pent-up demand.

Most people agree that the pricing issues that are evidenced in the market are far more driven by the supply-demand imbalance than by any other issue at this point in time and will not be resolved by any mechanism other than supply ultimately getting ahead of demand. We are probably two to three years away from that. That is a guess. Then it will have to overshoot annual demand to meet the pent-up position.

The macroprudential rules, which we understand, are acting as a brake at this point in time. That is appropriate because way too many properties are being sought versus the supply, so the only thing that happens is the price goes up, which is not helpful to anyone. To the extent that the macroprudential rules are there and act as a dampener on this at this point in time, that is an understandable and good thing. It creates capacity later on if supply tips over and exceeds demand, and pricing should come down. Ultimately, there is still a stock of affordability that can be brought on but the measure should not be price changing all the time for it so we are supportive of the macroprudential rules being a useful mechanism to effectively prevent too much demand coming in - there is still excess demand - but even more demand coming in.

Does the bank see prices continuing to go up until supply increases?

Mr. Bernard Byrne

Yes. Supply-demand will be the driver of it.

Deputy Mattie McGrath referred to the human stories we encounter. I do not have all the details, but is there is one outstanding tracker case that involved, tragically, a suicide, and that the property concerned has been deemed to be a lost property as a result of the tracker issue, and the case remains unresolved? I do not want Mr. Byrne to go into any detail but is he aware of such a case? If such a case is true, as it has been presented to me, then it needs to be dealt with quickly.

Mr. Bernard Byrne

I am not aware of any unresolved tracker lost property issues but perhaps there are. I certainly would not be able to comment on any particular case associated with that. Anything like that would be given the utmost sensitivity from our point of view. I do not know if anyone has a particular comment to make.

Mr. Byrne and his colleagues might discuss it as a team and come back to me privately please.

Mr. Bernard Byrne

That is fine. Okay.

It not only applies to AIB but the other banks have been open to taking such individual cases and whether they worked out, at least the bank makes its staff available to deal with those issues, which is a good as part of the resolution process. The witnesses will be pleased to hear that that brings us to the end of the meeting. They can thank Mr. Juncker.

Mr. Bernard Byrne

Europe has helped. I thank the Chairman.

The joint committee adjourned at 11.25 a.m. until 9.30 a.m. on Thursday, 28 June 2018.