Report on Local Public Banking: Discussion

Our first session will see a discussion with the Central Bank on the Report on Local Public Banking in Ireland. I welcome Mr. Ed Sibley and his colleagues to the meeting. I advise the witnesses that, by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to the committee. If they are directed by it to cease giving evidence on a particular matter and they continue to do so, 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 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. Sibley to make his opening remarks. I advise members that he has to leave. He might indicate when he is going.

Mr. Ed Sibley

I have a flight to catch. I thank the committee for the invitation to discuss the recent Report on Local Public Banking in Ireland. I am joined by Mr. Patrick Casey, the Registrar of Credit Unions, and Ms Anna Marie Finnegan, head of policy in the registry.

I will address three topics that intersect between the scope of the report and the work of the Central Bank. First, I will provide an overview of the process for bank authorisation. Second, I will outline developments in the provision of credit to the SME sector. Third, I will discuss the regulation and supervision of the credit union sector.

Since 2014 the ECB has been the competent authority for the authorisation of banks in Ireland and across the eurozone. This means that applications for bank authorisation are dealt with in a consistent manner across the entire eurozone.

In practical terms, the national competent authority in Ireland, is the Central Bank of Ireland and it assesses applications in consultation with the ECB prior to a recommendation being made whether to approve the application or not. To this end the Central Bank of Ireland has dedicated authorisation teams following processes that are transparent, predictable and consistent. The assessment of an application will consider the financial resources the firm has available to it, the sustainability of its business model, governance and risk management arrangements and its ability to recover if it gets into difficulty. Applicants that can meet the requisite standards in these areas will be approved.

Turning to SME's, the Central Bank of Ireland understands the importance of SMEs to the Irish economy. Small and medium enterprises account for the vast majority of active enterprises by number and employ about two thirds of the Irish workforce. In Ireland the majority of SME investment is financed through internal funds. For external financing bank lending and leasing are the two largest sources of funds. In recognising the challenges faced by the SME sector, the Central Bank of Ireland has issued regulation aimed to strengthen protection while also facilitating access to credit.

The provision of credit to SMEs in Ireland was undoubtedly severely impacted by the financial crisis. Total credit outstanding to non-financial, non real estate SMEs stands at €16.2 billion as at quarter 1 2018, which is significantly lower than it was at peak. Default levels remain high at 23% of total loans outstanding and three banks have a market share of 87% of all new SME loans issued in the first quarter of 2018. This concentration together with the high historic levels of default in Irish SME lending are contributory factors to interest rates for Irish SMEs being higher than average interest rates for SMEs operating in other countries in the eurozone.

New bank lending is recovering and has risen from €2 billion in late 2013 to €3.75 billion as of the first quarter of this year. This recovery has been broad based across industrial sectors but two sectors are predominant, agriculture and wholesale and retail trade, and they account for 42% of new bank lending into the SME sector.

The credit market has shown a reduction in the SME application rate for bank financing since 2012 until 2017, but has stabilised and started to recover somewhat since. The market for financing is most common among medium sized firms and lowest among micro sized firms, that is those with fewer than ten employees. The rejection rates have declined from March 2012 to March 2016 and have stabilised in 2017 and 2018, but are still higher than European averages. Micro firms experience significantly higher rejection rates than other SME types.

The establishment of the Strategic Banking Corporation of Ireland has provided a further source of funding to Irish SMEs. Total loans drawn down from inception to end of March 2018 stood at €952 million. There are also a range of asset based financing firms, peer to peer lenders, invoice discounters, leasing firms and other types of non-bank financiers that have entered the domestic market in recent years.

Credit unions play an important role in Irish society and in the financial system. The role and ethos of the sector reflect the primary objectives and purpose of credit unions to promote thrift among their members and the creation of sources of credit for members' mutual benefit at fair and reasonable interest rates.

Our role in respect of credit unions is reflected in our statutory mandate to regulate with a view to ensuring the protection by each credit union of the funds of its members and the maintenance of financial stability and the well-being of the sector as a whole. The Central Bank of Ireland is supportive of further developments of credit union business models. The consolidation and strengthening of the sector has seen improved standards in the running of credit unions and their financial resources but further progress is required on embedding governance, risk management and operational capability. The emergence of larger and more sophisticated credit unions presents additional opportunities. Credit unions are already permitted to provide commercial loans but are not currently particularly active in this type of lending. The Central Bank of Ireland will be very shortly consulting on proposed changes to the lending framework for credit unions and the proposed revisions also provide increased capacity to engage in both home mortgages and commercial lending for those credit unions with the financial strength, competence and capacity to do so. Should credit unions wish to become involved in a local public banking model, they will need to ensure the continued protection of members' funds and comply with legislative and regulatory framework that applies to credit unions.

I hope my contribution has been useful in terms of the topics the committee wishes to discuss.

I invite Deputy Doherty to speak.

Go raibh maith agat.

I welcome our guests to the committee. I will be as brief as I can, given the time constraints as other members may want to come in. What is the Central Bank's position on the Sparkasse model as referred to in the report that was published by the Government, as to whether there should be that second tier of banking in that model?

Mr. Ed Sibley

We are certainly open to this and we can see that there is legitimacy in the concerns that have been raised on access to financing for SMEs. We do not have a position as such. If a public bank sought authorisation, then we would look at it on its own merits and subject to the four areas that I outlined. I would have no issue with authorising such an application.

I appreciate the role of the Central Bank in the authorisation process. If such an application was made that role would obviously have to kick in. It is four years now since Governor Honohan responded to me in this committee when he said, and I quote:

There should be a second tier of banking which is geared more towards local concerns, with local managers and a greater level of local awareness. This would be on a scale larger than the credit unions. They could be the nucleus of it, but the credit unions as they stand are too small individually to be really effective suppliers of services. This is all a long-term vision. The entry of large international banks into the Irish system does not seem to be coming down the tracks, although these things can change.

The Governor clearly advocated that type of second tier of banking, recognising gaps that were there in lending to SMEs.

Mr. Ed Sibley

We certainly welcome that model and as I have identified there is clearly a very concentrated banking market and there are areas that are less well served as a result. More competition would be welcome to ensure that those needs are met.

As to the concentration, Mr. Sibley has provided figures which state that 87% of the market share of SMEs were in three banks. He also referred to this level of concentration and the historic levels of default as being some of the contributory factors for high interest rates for SMEs. In his view, looking at international experiences, what should the market share be for such as these three banks? What type of concentration should we be looking at if we were to have a more normalised banking system here?

Mr. Ed Sibley

I am not sure one could say what should be the case. Clearly, that is a very high level, particularly from an SME sector perspective, it is higher than in the mortgage market, which is also relatively highly concentrated. There is much discussion from a European perspective about other parts of Europe being over-banked, that is having too many banks, and the impacting of this on the sustainability of the banking systems in other jurisdictions. This is not a like-for-like comparison.

I also noted in my opening remarks that there are other sources of funding for SME's and a lot of SME investment is driven through Internal Funds. There are studies that show that Ireland is mid-table on SME access to finance, if one looks at it in the round, and not just bank but other available finance.

Mr. Sibley has given an example of new bank lending to non-real estate SMEs, which has increased from €2 billion in 2013 to €3.75 billion in the first quarter of this year. What should we be looking at and how far out are we from where we should be as a normalised banking system? From the Central Bank's point of view, should it be much more or a lot more or does it believe that lending to SMEs is still suppressed or at normal levels? I am trying to get a range from the Central Bank as to where it thinks lending should be at now. Mr. Sibley's survey shows that micro-firms are experiencing a high level of negative responses from lending institutions.

Should lending, from the Central Bank's point of view, be increased?

Mr. Ed Sibley

We would certainly hope that there continues to be investment. The SMEs are continuing to invest in their businesses. In and around 23% of SMEs look for finance. I would suggest that a large number of them are financing investment on their own account or through other means. Certainly we would, from an economic perspective, be hoping that SMEs continue to invest in their business. Again, it is difficult to be precise in terms of figures. What we can see is that the total stock of SME lending has reduced from in and around €30 billion in 2010 down to €16 billion as of today. There was a high degree of and unsustainable levels of indebtedness at that period. We would expect SME lending to continue to recover to some extent.

In terms of the figures that Mr. Sibley has presented for new bank lending, is any of that re-financing old debt?

Mr. Ed Sibley

I am sure it is.

A large portion of the new lending on mortgages from banks, about 20% or thereabouts, is what the banks are lending now so it is not necessarily new financing.

Mr. Ed Sibley

The nature of SME lending is such that there will be revolving credit, there will be some degree of movement within that and then there will be new financing. I do not have the breakdown.

The Government in its report has strongly argued against a second tier Sparkassen model and that the banks of recovered SMEs are receiving the credit. Is Mr. Sibley suggesting to this committee that it is not as plain sailing as that, there are high levels of concentration and there is still some demand that is not being met? Is that an accurate reflection on where the Central Bank is as opposed to the Department of Finance?

Mr. Ed Sibley

I did not talk about demand per se. I think there clearly are still relatively high levels of rejection rates. Interest rates are clearly higher here than in other jurisdictions. If one considers this in the round, as I discussed it, there are studies that show Ireland is mid tier in terms of financing SMEs if one looks at it beyond just banks.

Looking at the report, it does call out that it is a concentrated market. It does touch on potential roles for credit unions and other bank finance. It articulates, I think, that there are potential areas for consideration. It also identifies the need for public investment in order to set up the model that is being proposed, and it is a decision for the political system whether that is warranted.

Mr. Sibley has again mentioned interest rates. In his opening statement he talked about the concentration and the high level of defaults as contributing factors to high interest rates for SMEs.

Mr. Ed Sibley

Sure.

Does he see any ingredients out there that will result in an improvement? Are there any signs that we can expect interest rates to be reduced for SMEs and reduce them to a more normal level when compared with the rest of Europe? Are we, given the level of concentration and the dominance enjoyed by the three banks in terms of SMEs, sure that there is no competition here and that we are likely to see those elevated interest rates being imposed on businesses for a quite a period yet?

Mr. Ed Sibley

I can see that there are similar factors at play here as in the mortgage market which is a degree of growth in the economy, a recovery of the banking system, some degree of increased competition between the banks, and also some degree of competition coming from outside of the banking system. All that, and continued addressing of the legacy of debt and non-performing loans should, hopefully, address that issue over time.

I thank Mr. Sibley for his comments. One of the reasons that this session has arisen is because a delegation from here visited Germany a number of weeks ago, in particular to assess the Sparkassen model.

We looked at the operation of Sparkassen. We met officials from Sparkassen in their headquarters and we went to Lüneburg where one of the Sparkassen banks are located. Several features struck us. First, they had an old-style type of banking. Trainees come in from school and do in-house examinations. It was like the banking system here years ago. There is heavy orientation, in-house training, courses and banking examinations. The model is based on a low-risk model. These banks charge a percentage on top of the cost of funds from deposit-holders. They are not publicly owned as such. That is something of a misnomer. They are regionally organised - that might be a better term. Ultimately, the beneficial interest will return to the municipal authority in the region. There are many attractions to the model in that they are prohibited by law from engaging in speculative lending. They are regionally based. We met members of the public in Germany and I did not meet one German who had a negative view of Sparkassen. They have Landesbanken as well - that is a separate issue.

I want to deal with the credit unions and post offices. I am not looking for a State bank but I am looking for a public bank. The credit unions and the post offices provide a network. The post office is ultimately State-owned while the credit unions are not.

Mr. Sibley made one point that struck me in particular. He said that a survey undertaken by the Department of Finance showed that those seeking microfinance experienced higher rejection rates than other small and medium-sized businesses. I would have thought there was scope within the model and regulation of credit unions to fill the void where small and medium-sized business lending should be. I note that An Post has made reference to bringing a partner on board for home loan lending. What if the credit unions provided a back-office national facility whereby loan applications would come and be adjudicated upon? It could operate a little like the Housing Finance Agency. I know the agency is doing that role in some form for home loans. How does the Central Bank view that idea?

I have a particular personal view that we need another pillar. I believe we need a public banking pillar. What would be required, on the face of it, from a regulation point of view to allow the credit unions to move into that sector? The Central Bank could put limits on the level of small and medium-sized business lending. The credit unions have a network, staff and credibility with the public. They are similar to Sparkassen in Germany in that way. Will the Central Bank officials give me their perspective? I am trying to flesh out what the regulators would look for to allow the credit unions in particular to move into this sector from a prudential viewpoint. I note An Post is going into the home market as well.

Mr. Ed Sibley

There is a considerable amount in that. I will make some comments and then I will bring-----

We went out and we saw the banks in operation. There were many attractions. I am unsure whether the Sparkassen model in Germany would work here but there was much to be said for a public banking model. What elements could we bring back? Are there key elements we could take to be adapted within the credit union system and post office system to provide another public banking pillar? Currently, there is no such offering to customers in place within the small and medium-sized business lending sector or the home loan sector.

Mr. Ed Sibley

I can certainly see the attraction to that old-style banking, as Senator O'Donnell has described it, and certain models deliver that.

There is the public banking, Sparkassen-type models and also examples such as Handelsbanken, which is a Swedish bank that is privately owned but very much focused on relationship management. Typically, it would have an extensive branch network and has been reasonably successful with that model. I have a degree of familiarity with the Sparkassen model. When I was in the UK, I used to supervise Landesbank there. I appreciate those-----

It is not perfect.

Mr. Ed Sibley

There is a connection and there were some challenges that the Landesbank had-----

I refer to the core Sparkassen model.

Mr. Ed Sibley

There is a lot of similarity. Senator Kieran O'Donnell has mentioned the similarity between the Sparkassen model and the credit unions in how they are set up to serve the local area. That has proved reasonably successful but it is not without its challenges. If the committee spoke to the regulator there it would discover that were problems some of the time.

I am fully aware that some of the Sparkassen models have an over concentration of lending in certain regions. If they are, for example, in a region dominated by cars, there may be an over concentration. Landesbank was a 100% subsidiary of Sparkassen. It went into speculative lending-----

Mr. Ed Sibley

It did.

I am aware of all of that. I am zoning in and looking at the credit union movement which has enormous trustworthiness with the public. Some of the credit unions got into trouble but came through relatively unscathed. They are based in every town and rural area in Ireland. They have resources and have €7 billion on deposit with the mainstream banks. I believe there is a need for competition. The regulator will take the view on Sparkassen in Germany that they put the other banks under unnecessary pressure, Deutsche Bank being one of those. I am aware of that. I will not have this perfect but I am not coming back to Sparkassen with rose-tinted glasses.

Mr. Ed Sibley

I understand that.

I am coming back to it to see what can be taken from the model to allow us to progress putting a public banking model in place. I refer to one owned by the members, not privately owned, and that is not a State bank but is a bank that can serve needs. The credit union network appears to tick many of those elements. My question is what other elements would Mr. Sibley like to see in there from a prudential perspective to allow things to move in that direction? I refer to it serving the small and medium business sector as well as people looking to get their starter homes.

Mr. Ed Sibley

I will turn to Mr. Casey in a second. I guess this is connected with Deputy Pearse Doherty's question as well on whether there is a gap, or the perception of a gap at least, between where the credit unions are operating and where the banks are. There is also the question of whether the credit unions, to some extent, can close up that gap and serve needs like that at a micro level sufficiently well on an individual basis - I say that because they are individual entities - or is there a need to bring them together? Alternatively, is there some way to create something entirely new? That is, ultimately, the question being posed.

The model I am looking at is to let the credit unions operate individually. If they are moving into an area, however, there must be prudential lending and skill sets available to enable that lending to be assessed. I wonder can Mr. Sibley come up with a suitable model for the credit unions. They are doing it at the moment with home loans where they have appointed Link ASI, previously Capita, to look at home loans as they come in. Can something similar be done in the small and medium enterprise sector to allow any credit union to offer the facility but with a set of skills in the back office to enable loans to be properly assessed?

Mr. Ed Sibley

Senator Kieran O'Donnell is describing some kind of shared services model-----

Yes, that is correct.

Mr. Ed Sibley

-----that supports the credit unions at the front end. That is certainly something we have engaged with.

They would have to come together with a well-formulated well-thought-through proposal that has the shared-service model behind it in some say. I will hand over to Mr. Casey now.

Mr. Patrick Casey

At issue is the concept of using the network of 259 credit unions. I understand there are 540-odd locations if we include branches. That concept is valid by way of coverage. Mr. Sibley has mentioned the notion that credit unions are individual entities that lack size and scale and, therefore, could benefit from access to expertise, including the benefit of access to scale by working together. Certainly, in the support services area we can think of the Canadian model-----

That is the model I am thinking of.

Mr. Patrick Casey

In Canada there are central credit unions set up by provincial areas. Those central provincial credit unions serve the credit unions in their areas with liquidity and various back-office supports. It is a concept that has worked. It has served the Canadian model rather well. In the USA they have similar arrangements as they have in Australia too.

I suppose it raises competition considerations, if we are talking about a competing community or public bank coming into existence, to the extent that such a public bank would be both providing shared service supports to credit unions on the one hand as well as competing with credit unions in respect of deposit sourcing or the provision of loans on the other hand. That raises competition issues.

Mine is a more simple formula. Credit unions would remain individual credit unions that have to make prudential requirements. However, as it stands, my colleagues and I believe there is currently a gap in the market to service micro or small businesses in rural communities, cities and towns. The credit unions could come together. Individual unions could pay a levy to a central shared service operator to enable them to access expertise relating to the assessment of SME loans above a certain level. In that sense the shared service would not be competing with the credit unions. They shared service would be funded by the credit unions to enable them to have access to the skill-sets to assess micro-loans. A potential borrower could walk into any credit union and that arrangement would provide the comfort in terms of the regulation by the Central Bank.

Mr. Ed Sibley

That shared service model is definitely plausible but it would require credit unions to come together and work out how to make it work as well as ensuring that they continue to respect their common bond in terms of where and who they are lending to. If it is helpful we could touch on another point. We are aiming to consult this week on changes to the long-term lending rules we have, including thinking about micro and SME lending as well.

Mr. Patrick Casey

Senator O'Donnell may be aware that we have been looking at the lending framework that applies to credit unions having concluded a consultation earlier this year on the investment framework that accommodated the provision of social housing funding. We are looking at proposals to remove the current lending limits for five and ten-year loans. This is connected to the rigidity that has to do with the fact that the denominator is loans. That has caused some issues for individual credit unions – this has been touched on previously – and has also caused some pro-cyclical issues. One option is to replace these with new tiered concentration limits for house and commercial lending. That would involve a base level of limits for all credit unions but then higher levels and more flexibility for those which can demonstrate the capacity to undertake additional lending from our prudential perspective. That would cover both categories - house and commercial lending. I am conscious that much of the discussion here is in SME sector rather than the house lending sector.

Credit unions are permitted to provide commercial loans, as they are termed under the credit union framework, for up to 50% of their regulatory reserves.

Currently the sector has about €90 million outstanding in loans to SMEs, with an average loan size of about €20,000, which would be quite different from the average loan size that the three main banks operating in the market would provide. Currently, credit unions are only using about 10% of the existing framework capacity. They have an opportunity to meet any demand at a local level for SME lending. I would say their typical SME loan is to a small, local owner-managed business such as a shop, trades person or farm. That is their traditional sweet spot in terms of lending into SMEs. That is linked to personal lending in a way; it is coming through the member channels that they have rather than varying outside them.

We did send a questionnaire to the sector during the preparatory work for our forthcoming consultation to ascertain the appetite among those who thought there was a need for a change in the framework. What they saw in total lending for five years from now, to 2022, was only €136 million. We need to ground the discussion in some realism as to the demand the credit unions themselves see in respect of SME lending; it is not significant from their own perspective.

Does Mr. Casey believe that under the current rules there is sufficient scope for the credit unions to go further?

Mr. Patrick Casey

Yes; they are using one tenth of their current utilisation.

What is the 90%? How much additionally could they lend?

Mr. Patrick Casey

It is almost €900 million if they lent fully on the current framework. Very shortly we will be sharing the consultation papers with the committee. We are talking about increasing that for credit unions that are stronger and can demonstrate the capability. There should be ample capacity in that space.

What is the witnesses' reaction to the Government report on local public banking in Ireland? I will summarise what I see as the essence of the report and the witnesses can feel free to give a different assessment. The key lines are that there is not a compelling business case for the State to establish a new local public banking system but that there is no impediment to Irish Rural Link and so on taking action themselves although they are not going to do it with State funds. That is effectively what the report says. If they want to go and get the money and do it, there is no impediment but the State is not going to provide funds. I interpret that as being negative rather than positive about the establishment of local public banking. The bottom-line point is that the State is not going to provide money to do it. That is somewhat ironic given the amount of public money that was pumped into private banks to rescue them from the crisis. It shows clear favouritism towards the current private banking system. Is that a fair assessment? What does the Central Bank think of the report, to the extent that it has a position?

Mr. Ed Sibley

As I described earlier, having looked at the report and the response to it from Irish Rural Link, I can clearly see that there is an acknowledgement of the concentration in the market. There are some inhibitors to bank finance in Ireland and, typically, SMEs in Ireland use bank finance less than in other parts of the EU. The report identifies that setting up a public bank would require some degree of State finance. That is the conclusion of the report. It describes some business model challenges as well, on which I would not have a particularly strong view either way.

From a Central Bank perspective, there is a fundamental question there in terms of authorising a bank to both lend responsibly and also to fund itself responsibly. Banks need capital and without that capital being in place there is nothing for us to authorise. I have personally met Irish Rural Link a couple of times and we have met the Sparkasse representatives so we are certainly happy to accommodate, engage and discuss. We are going through much authorising activity at the moment so we are well versed in that but there are basic fundamentals involved in authorising a bank and unless those fundamentals are in place it is not possible for us to authorise one.

More generally, does Mr. Sibley accept that there is a problem with the model of banking that we have in Ireland and in most countries at the moment where banking is mostly private and for profit? Even where there are State-owned banks, in reality they are run on that same model which has proven to be problematic, both in terms of the immediate scandals that we end up dealing with here such as mortgages going to vulture funds and the tracker mortgages issue, but also in terms of bigger problems which have cost society a huge amount of money in the last decade or so. I subscribe to the argument that banking should be treated as a public utility. It has many of the features of a utility and it should be regulated and owned as such. How does Mr. Sibley respond to those points?

Mr. Ed Sibley

With regard to how we view the financial system as a whole, our role is to act as public servants. That is why everyone who works in the Central Bank goes to work and our absolute desire, aim and ambition for the financial system is that it serves the needs of the economy and society as a whole in a sustainable way over the long term. The work that we have done since the crisis - which is still being done - to address those fundamental problems within the banking system and in other parts of the financial system has most definitely improved the resilience of the system and hopefully moved us to being in a situation where the system can serve the needs of the economy and its consumers over the long term in a more sustainable way but there is still work remaining to be done. We have seen that in the issues of tracker mortgages and the recent work on banking culture. There is still work to be done on the problems in the institutions. The Deputy asked a more political question on our views on public and private ownership and that is a matter for the political system rather than for me.

I liked the phrase Mr. Sibley used that banks should serve the interests of society and consumers etc. It seems to me that in the past decade society has more been serving the interests of the banks than the other way around. Does Mr. Sibley believe it is the case that on the whole, the private banking system that we have does serve the interests of society and the economy as a whole?

Mr. Ed Sibley

It does so imperfectly. If we imagine a circumstance without functioning banks - and in the history of Ireland we have already stared down that barrel before - and we see that as the alternative proposition it can clearly be seen from the point of view of what is good for the economy and for society that the banking system serves a function but it does so imperfectly.

Does Mr. Sibley agree with the proposition that there is an implicit State guarantee and effectively an implicit public subsidy to private banks as a result of having banks that are too big to fail which we obviously saw in practice in this country in the course of the last decade? A recent study concluded that the total implicit State guarantee for private banks within the EU is €240 billion. Does that not contradict the point of a private, free market and laissez-faire system because in reality if a bank becomes too big to fail then not only will it not be allowed to fail but investors also know that it will not be allowed to fail and in effect the bank has a subsidy which also serves to benefit the existing big banks in the market as opposed to new entrants?

Mr. Ed Sibley

Unfortunately, that was the case in the past. Ireland is an example of this. We saw it in multiple other jurisdictions across Europe, as well as in the US and beyond. Since the onset of the financial crisis, a huge amount of work has been done to try to address this problem, make banks more resolvable and enable our resolution authorities to bail in private funding of banks. While that work has progressed, it is not as far along as I would like. As I said earlier, the resilience of the system has been improving through the mechanisms that have been put in place. The work that has been done at European level includes the creation of the European resolution mechanism and the efforts to push banks to make themselves more resolvable. As I said in my opening remarks, one of the four things I look for is the ability of firms to recover if they get into difficulty. Resolvability is the mirror of that. While we expect firms to be able to recover, we are also working hard to make sure they are resolvable. They are more resolvable than they were, but as of today they are not fully resolvable. This implies that there is some element of subsidy, albeit a much reduced subsidy than was previously the case.

I would like to ask Mr. Sibley a quick question about the figures compiled by the Central Bank. Has the Central Bank produced figures for 2017 and 2018 setting out the amount of bank credit loaned to businesses in certain categories? I refer to non-financial corporations, for example. Does the Central Bank have figures for all businesses excluding national financial corporations? Does it have separate figures for categories like the SME sector and households?

Mr. Ed Sibley

Yes. We have pretty granular or very granular data which I have attempted to summarise in my opening remarks. We can look at lending to households by type.

Does Mr. Sibley have those figures with him?

Mr. Ed Sibley

I have figures by sector for SME lending, broken down across total stock and default rates, for example. I have figures for total lending into the Irish system as a whole, based on the size of the banks today. I have figures for many categories. If there are specific requests that I cannot answer today, I will be happy to take them away.

I have mentioned categories like non-financial corporations. I am looking for figures for all businesses other than corporations. I am also looking for figures for SMEs and households.

Mr. Ed Sibley

I have provided numbers to try to articulate the size of SME lending. The total-----

I understand that. I am trying to get some other figures from Mr. Sibley. If he does not have them with him, he might be able to provide them at a later stage.

Mr. Ed Sibley

Yes. I want to make sure I understand the request.

We will get those figures from Mr. Sibley.

Mr. Ed Sibley

Yes. We publish a large amount of data and information. If I do not have the right figures, or if I do not have the figures that the committee is looking for with me today, I will be happy to-----

Okay. I will give Mr. Sibley the detail before he leaves.

Mr. Ed Sibley

Perfect.

Is there an average interest rate that is being charged to SMEs for different loans?

Mr. Ed Sibley

Yes. There is one thing that is important to look at in this context. We have spoken about mortgage interest rates. There is a degree of variation within the average. The variation for SMEs is quite significant because there are different sectors with different risk profiles, as well as different levels of loan size.

Does the Central Bank have those figures broken down into categories?

Mr. Ed Sibley

Certainly, we have information on interest rates.

I want to categorise the different levels of debt so I shall list the sectors that I am talking about.

Mr. Ed Sibley

That is fine.

The CIA compiles reports on each country and has estimated that on 31 March 2016 Irish debt amounted to €2.15 trillion. How did that organisation calculate the overall debt of a country? It publishes figures for each country in different years and I looked at its figure for 31 March. Does the Central Bank analyse the rationale behind that figure?

Mr. Ed Sibley

I am not familiar with the report. Again, I am happy to follow up on the matter. Is that the report that is netting off public assets and private debt?

Yes, it does all of that. Does the Central Bank analyse those reports for accuracy and so on?

Mr. Ed Sibley

The Central Bank will look at lots of different information. Certainly it would take great credence of information from all reports compiled by respected bodies that look at the finance for states.

Is the Government attached to or liable for debt created by the financial services sector?

Mr. Ed Sibley

I ask the Chairman to explain his question a little bit more.

I mean within the financial services.

Mr. Ed Sibley

Does the Chairman mean loans that the sector has made or loans to them?

Mr. Ed Sibley

The short answer is no. There is the likes of the deposit guarantee scheme, which does offer protection to deposit holders, but it is ultimately a call on other financial services. Similar to the discussion that I have just had with Deputy Paul Murphy, the aim of making firms resolvable is to address any implicit taxpayer support.

Mr. Sibley mentioned in his opening remarks the report on community banking model here.

Mr. Ed Sibley

Yes.

I mean the Strategic Banking Corporation of Ireland, SBCI. What is that bank? Is it regulated by the Central Bank?

Mr. Ed Sibley

No, it is not. It has the word "banking" in its title rather than "bank".

The SBCI has the word "banking" in its title and handles a lot of taxpayers' money, in terms of the Government.

Mr. Ed Sibley

Typically, and certainly elements of its lending are channelled through other entities rather than directly by the corporation itself. It is not a regulated bank, no.

Does the Central Bank have any oversight on the SBCI whatsoever?

Mr. Ed Sibley

We are not responsible for overseeing that, no.

Even though the SBCI holds a sizeable amount of money. Has it lent €1 billion?

Mr. Ed Sibley

It is €950,000, I think. That is what I said, yes.

Mr. Sibley's opening statement dealt generally with stuff and did not really go into commentary on his view of the Government's report. Was that deliberate?

Mr. Ed Sibley

To be honest, I am not entirely clear on what the committee wanted to hear from us. Having looked at the report, clearly there is a question of what one would do in terms of authorising, which is where we would have responsibility here. There is clearly a concern in the system around SME lending, so that is why we talked about SMEs. There are clearly connections with the credit union sector. In five minutes, which was my instruction, I tried to cover the areas that I thought intersected, in terms of Central Bank responsibilities with the topic that the committee wanted to discuss. That is basically the driver behind my opening statement.

Does Mr. Sibley think that the main pillar Irish banks are being protected by Government policy?

Mr. Ed Sibley

Personally, no.

Does Mr. Sibley think that the banks are being protected to the exclusion of community banking initiatives such as Sparkassen or others?

Mr. Ed Sibley

I genuinely do not think that.

Does Mr. Sibley think that there is room in the market for Sparkassen or the credit union to be enabled to contribute, in terms of economic activity, the €7 billion that they have with the mainstream banks?

Mr. Ed Sibley

Clearly, there is a role for credit unions. We touched on this, on a number of different occasions. We only touched on it. I am a very strong believer in the role of the credit unions. They can play a really important role, from a financial inclusion perspective. They can play a really important role in terms of local communities. We are, as Mr. Casey has outlined, examining the lending frameworks that exist today to make sure that they are fit for purpose for today and tomorrow. Clearly, there is a role for credit unions. There are potential opportunities for others to play a role in servicing SMEs in other parts.

If one looks at how banks are lending within Ireland it is relatively well geographically dispersed. In and around one-third of new lending takes place in Dublin. However, other jurisdictions are relatively well dispersed. There are lots of other options for SMEs. Maybe it is not enough but there are lots of other options for SMEs in terms of access to finance. Leasing plays nearly a bigger role for SMEs in terms of total finance than bank lending does. Internal generation of funding plays a much bigger role in terms of the investment SMEs do than bank finance. Then we have other possibilities. Peer to peer lending is increasing and so on. There are other players in the market, not necessarily just banks. I do not want to overly focus on one particular study but there has been a study of the European system and SME access to finance. Ireland would rank below the likes of the UK, Germany and Austria but above the likes of Italy, Portugal, Greece and Cyprus.

Is that for access?

Mr. Ed Sibley

For access to finance, if we look at it in the round as opposed to just looking at it purely from a bank finance perspective.

SME businesses have told me that they find it impossible to get funding and often the only route open to them is the likes of group funding. I mean people who would come together, make available a sum of money and they test one out then in terms of one's business plan. That loan is then offered at a huge interest rate. That situation is damaging the economy and an SME sector that employs so many people, and employed almost 1 million people at one stage. The statistics hide that fact. Deputy Pearse Doherty asked Mr. Sibley whether the existing arrangements within the bank were part re-financing and, actually, it is.

Mr. Ed Sibley

It is, yes.

And at a higher interest rate. If one goes to the bank now, if one has ever had any sort of blip in one's credit position one will not get money anywhere except on a market where one is paying massive interest rates. That is why the concept of a community bank or a credit union to examine a local application, or an application from a local business or whatever it might be, is hugely attractive because SMES find it simply impossible to trade at a micro level. Also, banks make it even more impossible by selling off one's overdraft. I know that Mr. Sibley must catch a flight.

Mr. Ed Sibley

I have a bit more time. Clearly, as Mr. Casey has described, we are looking at the approach to the lending regulations. We have not talked about the Credit Review Office yet today, which does valuable work.

Those who feel that they have a strong case for gaining credit can appeal to the CRO. It has overturned-----

I have seen SBCI applications being refused by a bank. The customer goes to the CRO, which finds in his or her favour but the bank still says "hump off, you are not getting a loan". We are talking here about community banking and the model already exists in the form of the credit union movement. Mr. Casey is the person in charge of credit unions, is that correct?

Mr. Ed Sibley

He is the registrar of credit unions, yes.

Why not sensibly expand that network and the ability to lend money through certain credit unions that have the management systems and knowledge in place? The network is there. Why not allow the credit unions to apply-----

Mr. Patrick Casey

We are not preventing them in any way. They have ample capacity to undertake commercial lending. The outstanding stock of SME loans in the credit union sector is approximately €90 million but the sector has the capacity to lend around ten times that amount today.

Is Mr. Casey confirming today that there is no regulation in place that would prevent them from lending the difference between their €90 million and their €900 million?

Mr. Patrick Casey

It is down to the credit union's own business model, risk appetite for SME lending, credit choices and so forth. It is for the board of a credit union to define what it wants to lend. The orientation of a credit union clearly is to lend within its common bond and to lend to local businesses, tradespeople and farmers, shopkeepers and so on. That is the bedrock of borrowers from a credit union point of view, with an average loan size of €20,000.

What of mortgages?

Mr. Patrick Casey

The credit union sector is already involved in mortgage lending. Approximately 110 credit unions are involved in mortgages with €165 million in mortgages outstanding today.

In terms of Mr. Casey's engagement with credit unions, do the credit unions seek direction or information on regulation from him? Does the registrar's office have conversations with credit unions that include suggesting methods of developing their businesses? Are the conversations open, with the aim of improving the credit union system?

Mr. Patrick Casey

Credit Unions today are free to provide mortgages or commercial loans to their members if they have the risk appetite. They do not need regulatory approval to do so. The sector engages with us at individual credit union level or between like-minded credit unions or with the representative bodies, regarding business model initiatives. We have a business model team in place to support credit unions.

What is the Central Bank's view of the credit bureau? If a person's name is on the credit bureau list, lenders will not extend credit to him or her. How long does that last? Is there a way of dismantling some of that to allow for loans to be extended? Are the banks and credit unions sticking rigidly to it?

Ms Anna Marie Finnegan

The purpose of the central credit register is to make good quality information available to lenders, including credit unions. When they are underwriting or making loan decisions, they must have access to information on all outstanding exposures that an individual borrower might have and on their historical experience with previous debt. That does not specify what decision has to be made. It is just information to inform the credit decision.

Is the bank happy that a lender can make a decision, regardless of the background?

Ms Anna Marie Finnegan

We would expect lenders to take the information available into account but they can also take other information into account. Once they can demonstrate that they have established a capacity to repay, we are comfortable.

Mr. Ed Sibley

I have a number of comments in response to the Chairman's previous question. The credit union sector gets more support from the Central Bank than any other sector that operates in Ireland-----

They are worth it.

Mr. Ed Sibley

It is an important point to make. There is a high level of engagement, including information seminars, CEO forums, sessions with boards, quarterly meetings with the representative bodies, town hall meetings, road shows that the teams go on and so forth. The bank meets hundreds of credit union staff and we publish information and guidelines for them. As Mr. Casey has described, we have a dedicated team to support credit unions in the context of business model development. They get a huge level of support from the Central Bank because we believe they have an important role to play, in terms of their responsibilities. We also take our mandate, in terms of the well-being of the sector, extremely seriously.

Deputy Doherty has one short question before we conclude.

It would be useful for this committee to focus more on the credit union sector and have Mr. Casey come before us again to go through some of this in more detail. Mr. Casey gave the impression that credit unions should just be lending and that there are no restrictions or regulations preventing that. Obviously, we as a committee know that there are such restrictions. We prepared a very important report on the restrictions, particularly the fact that the amount of lending in a credit union should not exceed 15% of loans that have a maturity of ten years or more. We called for that restriction to be loosened. Mr. Sibley gave a lecture in Trinity College recently suggesting that it will be loosened. I ask Mr. Sibley to provide more details on the proposals that will be put out for consultation.

My other question is for Mr. Casey. Is it the case that one of the credit union movements has received all of the authorisations required from the Central Bank to involve itself in the housing sector? We understand that the Credit Union Development Association, CUDA, has passed all the tests and met all the requirements. The Minister of State, Deputy English, in response to questions on credit unions investing in social housing said that one of the credit union movements is ready, has gone through all of the processes and has the money available. I ask Mr. Casey to clarify whether it is CUDA or the Irish League of Credit Unions, ILCU, that has been through all of the processes, is ready and has the money available. Has the Central Bank authorised a structure, model or SPV?

Mr. Patrick Casey

In response to Deputy Doherty's second question regarding a structure connected with social housing investment by credit unions in a tier three approved housing body for the purposes of social housing, the Central Bank has not received any proposals from any third party whatsoever on that concept. We have not been party to any discussions or received any proposals. I am not aware of any proposals in that area but as Mr. Sibley alluded to earlier, we would be delighted to engage with any of the representative bodies or credit unions which have a proposal to bring forward but we have not-----

Would it require authorisation from the Central Bank?

Mr. Patrick Casey

We have not engaged on it so-----

My question is whether it would require authorisation.

Ms Anna Marie Finnegan

What is set out on the regulation is that it must be a regulated entity or a regulated investment vehicle. Whatever vehicle is established would need to meet that definition. To that extent, yes, it would require to be regulated.

What I just put to the witnesses is on the record of the Dáil, in response to a question on credit unions and social housing. The Minister of State said that one of the credit union movements is ready, has gone through all of the processes and has money available. He also said that he could not be any clearer than that. The witnesses are telling us that the Central Bank has not been involved in those discussions. Is that correct?

Mr. Ed Sibley

That is the information that we have today but it is plausible that is coming through authorisation in another part of the bank because it would be an investment entity. We can check that and come back to the Deputy on it.

The Deputy's first question referred to lending. Clearly, there is a responsibility on individual credit unions in terms of decisions they make on lending with regard to the safety of their members' funds and their own risk associated with that and the common bond areas we have described. Mr. Casey has described that a little bit already but perhaps he could expand a little on the consultation.

Mr. Patrick Casey

We are planning to consult the sector. As members are aware, the deputy governor has indicated that previously and I mentioned it earlier but I will reiterate what has been said. We are proposing to remove the current five and ten-year maturity limits that are expressed as a percentage of loans, and that is connected with rigidities that are well understood within the credit union sector. From a prudential perspective we see a degree of procyclicality connected with low loan to asset ratios in credit unions being prevented from lending long term because they do not have significant short-term loans outstanding, and replacing those with tiered concentration limits for both house and commercial lending. We are planning to consult in relation to that in the coming days, so we will be sending out a consultation paper and seeking the views of the sector and sector representatives and we will share a copy of that consultation paper with members. I think that is what the deputy governor was referring to in Trinity College recently.

Is it only that area that the Central Bank is looking at, namely, the five year and the ten-year rule? Is the Central Bank looking at the 15% as well, or will that remain in terms of the concentration of overall lending?

Mr. Patrick Casey

We are talking about removing the existing maturity limits in the proposal and replacing them with new concentration limits for house and commercial lending.

One of the biggest criticisms I have in terms of the regulation of credit unions is that the Central Bank has not applied a tiered regulation, as a one-size-fits-all approach is not the solution. It was argued here a couple of years ago that we should take the current approach and then move to a more tiered system. Will we now take a tiered approach or will there be flexibility for different types of credit unions?

Mr. Patrick Casey

There is a tiered aspect to what has been proposed in that those that are stronger and are capable of demonstrating that they have core prudential foundations will be given increased flexibility both in relation to house and commercial lending.

What about the timeframe? I know the consultation will happen within weeks but how long is it expected to be before decisions are taken and that we will see changes if they are introduced?

Ms Anna Marie Finnegan

We are anticipating publishing this consultation paper in the next day or two, so that is imminent. We will provide just over a two-month consultation period to facilitate people to provide us with submissions. We will then go through an internal process in terms of assessing those submissions and the various views expressed. That normally leads to a process of refining proposals and then we will have an internal process within the Central Bank itself. The last step in the process is the statutory consultation we are required to undertake under section 84A of the 1997 Act. To an extent, it is a little difficult to put a specific timeline on it because any piece of the process can take longer than anticipated. Our own broad plan is that we would publish final regulations in the second or third quarter of next year.

Mr. Ed Sibley

To be clear, credit unions today can undertake commercial lending and mortgage lending, and many do. There is inherent tiering in the proportionality that we apply in terms of the approach to engaging with credit unions of different size and complexity, our expectations in terms of credit unions from a minimum standards perspective, and what we expect if they want to have more sophistication in terms of their business model. There is very much proportionality and, as a result, an element of tiering in the approach that we take today. The suggestion that we would spend more time focusing on the credit union sector is something that we would be very happy to accommodate.

In that Dáil debate there was a reference to an October deadline. Is Mr. Sibley aware of that?

Mr. Ed Sibley

If it is an investment vehicle it would come into a different area of the bank to the registry. We will follow that up and confirm.

That brings us to the end of this session. I thank the witnesses for their attendance. We will suspend for a few minutes and go into private session.

Sitting suspended at 3.05 p.m. and resumed at 3.50 p.m.

I welcome the representatives from the Credit Union Managers Association, CUMA; the Credit Union Development Association, CUDA; the Irish League of Credit Unions; Irish Rural Link; the Public Banking Forum of Ireland; and the Money Advice and Budgeting Service, MABS.

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 joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person 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.

There will be several opening statements. I will start with Mr. Molan.

Mr. Tim Molan

I thank the members of the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach for their kind invitation to meet them. The Credit Union Managers Association, CUMA, represents CEOs and senior managers of credit unions in the Republic of Ireland and Northern Ireland. Our members manage the daily interactions with a membership of approximately 3 million people. In the Republic of Ireland, while the number of credit unions has declined in recent years owing to mergers, the number of credit union offices has not. We still manage services across more than 400 offices. Our services are delivered through a variety of channels, people to people, by telephone and online. We continue to evolve and improve these service offerings.

Ours is the largest movement of co-operatives on the island of Ireland, owned and governed by our members and their representatives and staffed by committed and highly qualified professionals. Ours are not-for-profit co-ops, born out of and embedded in communities. Our service to members, the overwhelming majority of the public, is driven by the member interest of that element of the Irish public. Our co-ops are and remain the original public interest financial institutions operating in the financial services sector. We are, undoubtedly, pleased that for four years in a row credit unions have been voted number one for customer experience in the CXi, Ireland customer experience report. That has never happened anywhere else worldwide and it is a tribute to the member-centric, service culture of our 4,000 staff members and directors spread throughout urban and rural areas. For more than 50 years we have delivered excellent services in communities. We have responsibly built up our reserves and expertise. We have quietly and purposefully provided savings and loans facilities, survived recession without any bailout and are expanding our loan books again to meet renewing member demand. We enforced member care before mainstream banking had customer care imposed on them. We adopted and adapted to regulation when it was imposed. We adapted to accelerated mergers and are adapting to new demands as our members' needs change. Throughout that time we continued to deliver our core business.

Since our inception we have lent money for personal and commercial purposes. We still do so today. Loans for commercial purposes have been part of the lending portfolios of credit unions for many years and still are. The 2016 credit union regulations gave greater definition to commercial loans and limited commercial lending to 50% of a credit union's regulatory reserve, which is equivalent to 5% of the overall assets of a credit union if it holds the minimum reserve requirements. In March 2018 commercial loans accounted for 1.9% of the €4.5 billion credit unions had out on loan. It was equivalent to 0.51% of our assets.

Given that we could be lending up to 5%, or more where there are higher regulatory reserves, there is considerable headroom in credit unions for greater levels of commercial lending in suitable circumstances. Credit unions have both a public interest and a member interest to serve and must lend responsibly. We need the frameworks, policies, procedures, systems, personnel and expertise to continue to lend responsibly, including when we are lending in the commercial domain. These standards should apply to all financial institutions and other entrants in this sphere. There was in the past and is currently a willingness to address the standards expected by regulation. There is an expectation and evidence of increasing engagement by small local businesses with credit unions. We are open for business and anxious to engage meaningfully and responsibly with the members and future members of communities. We invite commercial interests in communities to come and talk to us.

Mr. Kevin Johnson

CUDA is grateful to the joint committee for the invitation to participate in this discussion on the recently published report on local public banking in Ireland. CUDA was formed in 2003 and represents many of the largest credit unions in the country. It also provides a wide range of support services for its members, as well as for a growing number of credit unions nationally. In its early days it was the representative voice of its owner member credit unions in communications with legislators and regulators. It has since evolved and provides not only a voice for members but also an increasing level of support facilities in the areas of regulatory compliance, risk management, shared services and competency development.

CUDA which also manages the Solution Centre has a vision for a credit union system in Ireland that builds on credit unions' standing as the trusted source of financial services for members. According to that vision, credit unions can help to shape the society in which we want to live through financial education and the provision of credit for small businesses and community purposes now and for future generations; continue to provide loans for members' individual everyday and longer term needs, while dramatically expanding the points of access to credit; continue to provide secure savings though enhanced investment options, and offer real choice to people to meet their financial needs. This is a comprehensive vision and we have delivered on several aspects of it, including through our mortgage support framework, a wide range of digital channels and digital engagement facilities and a green energy better home partnership. We continue to seek solutions to enable credit unions to contribute to resolving the housing emergency and are well on the way to delivering on other product and process solutions, including lending to small businesses.

CUDA has studied the report and agrees with its statement:

Credit unions are looking to play an increasing role in the Irish retail financial landscape into the future and the Central Bank is assisting credit unions in developing their business model. This may also provide a channel for increased lending to the rural SMEs in some cases, subject to the capacity of individual credit unions.

This is a key component of the societal element of our vision. The continued importance of the success of the SME sector to Ireland cannot be underestimated. Ireland has almost 250,000 micro and small enterprises and 43% of private sector employees work in these small firms. Many small business owners are existing members of their local credit union and their success and the continued success of credit unions are inextricably linked. That has always been the case. Faced with massive youth unemployment in the 1950s, a group of people came together around the idea that the solution to that crisis was co-operative self-employment. However, there was no money with which to start and grow businesses. As Nora Herlihy, one of the principal founders of the credit union movement in Ireland, said in 1982, "[the] object in promoting the Credit Union idea was to show the people how to accumulate that money from their own savings and resources."

The report defines public banking as involving a state or other public actor owning a financial institution. The stated purpose of the report was to investigate the possibility of local public banking in Ireland based on the Sparkassen model and evaluate its potential in an Irish context. The report states: "The ethos of Sparkassen is not profit maximisation; rather it is public interest based, promoting financial inclusion and economic development within their regions."

We could easily replace the reference to "Sparkassen" in that quotation with "credit unions" and have an excellent summation of the objects of credit unions contained in section 6 of the Credit Union Act 1997, as amended. According to the report, the evidence suggests applications for credit by SMEs are falling in Ireland and, conversely, the supply of credit, both to SMEs and retail customers, is increasing. However, the question arises as to whether prospective borrowers are receiving fair value. Speaking at a Small Firms Association event in November 2015, the previous Governor of the Central Bank, Professor Honohan, questioned the absence of interest rate reductions and wondered whether it was the result of limited competition in the sector. As he put it, "We could all do with more competition in the banking system." CUDA believes credit unions are naturally positioned to bring that competition to the market.

Credit unions are expert at providing consumer loans, savings and payment facilities and loans for owner-managed businesses. More credit unions are providing home loans and working to bring extended current account related facilities to the market. In the Solution Centre we have focused on making it easier and more convenient, through the use of technology, for members to engage with their credit union. The report correctly acknowledges that "Credit unions are looking to grow their services to small and medium-sized businesses and in doing so fulfil their role as an action group for community development through mobilising local resources for investment in the small firm economy". An essential ingredient of this development is the review of credit union lending terms and category limits. In November 2017 the CUAC review report implementation group forwarded a detailed submission to the Central Bank. We thank all stakeholders in the group, in particular the team at the Department of Finance for its very supportive work in this area. It is also very encouraging that a consultation paper reviewing the limits is imminent from the Central Bank, the recent references of which to this issue have been very positive.

The report correctly recognises that the credit union sector is active in the Irish SME lending market. As such, the independent external evaluation being commissioned by the Department of Finance should focus on addressing the elements that will facilitate credit unions in delivering the benefits anticipated from a local public banking concept. They will include utilising the credit union network and prudently using members' savings for productive and provident purposes such as loans to the SME sector. To this end, we will work with other stakeholders to apply expertise to a model that enables credit unions to bring a range of standardised credit facilities prudently to the market. Another element is an assessment of how the attractive interest rate frequently referenced in other jurisdictions might be replicated here and how it can be provided in a sustainable manner. Recognising that not all credit unions may have the capacity to provide these facilities, there should be a review of the common bond legislation to enable such credit unions to introduce members and/or collaborate on such loans with participating credit unions. A level playing field must also be provided for by regulating peer to peer lending to ensure protections apply to consumers of crowd-funding. The Central Bank's codes of conduct and the protections which they provide for consumers should also apply to crowd-funding platforms. Similarly, providers of PCP finance should be subject to the regulatory requirements credit unions must meet.

I again thank the committee for its kind invitation and look forward to addressing questions members may have.

Mr. Ed Farrell

I thank the joint committee for the invitation to attend. The Irish league of Credit Unions represents more than 250 credit unions operating in over 500 communities in Ireland. Ours is an indigenous, local, democratically-led, volunteer based and co-operative financial movement. Credit unions and the credit union ethos which emphasises not only accessibility in the community but also local leadership are already the embedded cornerstone of what the country needs and people want locally.

The meeting is in response to the publication of the Government's report on local public banking in Ireland. From a credit union perspective, it also takes place in the context of the committee's own unanimously agreed to report on the review of the credit union sector which it published last November. We are also meeting in a specific political context in which the confidence and supply agreement has concluded and the CUAC review process is concluding. In the circumstances, credit unions are looking for a move from aspiration to action. The commitment to develop a strategy for the growth and development of the credit union sector has long been in gestation and, if fulfilled, would provide the local public banking service communities need.

The challenge now, and it is essentially a political one, is whether kind words of reassurance are going to translate into political prioritisation. The challenge credit unions face is the challenge for the development of more localised banking and financial services, that we are ambitious to lead. The challenge is not a lack of goodwill, but the much scarcer commodity of determined prioritisation.

In the report of the committee, it was recognised that the ‘common bond’ structure inherent in the credit union movement is essential in underpinning the community and democratic base of credit unions. The common bond is the essential fabric of what binds community and credit unions together. Its continuance is correctly supported by the committee, and is clearly the obvious foundation stone for enhanced financial services delivered at local level.

In a world of globalisation and homogenisation there is consolidation among credit unions. There is also a continued enhanced level of service provided by credit unions in over five hundred separate communities. As credit unions are membership based and co-operative, we have values that banks do not. Because of our common bond, we are a real community of members saving together, and lending to one another. A mark of our values is that, for the fourth year in a row, Irish credit unions have come first place in the annual Customer Experience of the Irish CX Impact Awards which were announced on 16 October 2018. Customer experience is measured by how customers perceive an organisation’s brand through their interactions with its employees. The fact that the credit unions are the only organisation in the world to win this accolade in four consecutive years speaks for itself.

The next step, to deliver financial services locally through credit unions is to deliver now as the CUAC review process concludes on the commitment to "develop a strategy for the growth and development of the credit union sector”. The welcome report on public banking is a backdrop to inform that development as is the excellent report of this committee. A strategy of itself, however, will not be sufficient. Any strategy worthy of the name must be accompanied by an implementation plan. Implementation to be effective must marry policy driven by the Department of Finance with regulation which is the responsibility of the Central Bank. Any initiative which falls into the void between the two - a void where credit unions have already spent too long - is pointless. Political prioritisation must be accompanied by effective means to translate aspiration into action. This has to be the critical move-on required to progress this issue.

The credit unions have been moving on; for example, among other things, they are now processing electronic payments and issuing mortgages. These are significant and welcome developments, but the scale of what we can do is severely restricted by regulation. Our aim is to deliver current accounts and debit cards, and support our members with the full range of services they need on a day to day basis. We are ambitious to deliver lending for SMEs and family farms and we are ready to invest in social housing as asked by Government.

Local public banking is an idea whose time has come. I can say today that the foundations are in place, and those foundations are credit unions.

I thank Mr. Farrell. I now invite Mr. Boland to make his opening statement.

Mr. Seamus Boland

I thank the Chairman and members of the committee for inviting Irish Rural Link to make a presentation on local public banking.

Irish Rural Link is a national voluntary organisation, representing communities from Donegal to Kerry, from Galway to Wicklow, across the midlands. We are very proud to be involved in the proposal. We made an extensive submission to the consultation process investigating a local public banking model for Ireland and we appreciate that the joint committee's Report on Local Public Banking has taken this submission into consideration at great length. Irish Rural Link is delighted that the report recognises the merits of public banking models and people have listened to our arguments as to how this will add to the financial stability of our regional economies. However, we have responded to the report in a formal rebuttal as we found misunderstandings within the report with regard to our proposed model. I have included a copy of that rebuttal in the submission to this committee.

I draw attention to two areas in which we were disappointed at the lack of understanding shown in the local public banking report, competition in the banking market and the Sparkassen model and how it differs from the pillar banks.

We are particularly disappointed with the view in the report that an Irish local public bank would risk crowding out the private sector institutions. The Government has often stated a desire to increase competition in the banking sector so it seems counter-intuitive to be afraid of the effects of introducing competition apparently on the basis that it would reduce the oligopoly profits of existing market players. We note that in the past, the ACC and the ICC banks played an enormous role in the development of the economy of Ireland.

It is also unfortunate that the report has some inaccuracies in relation to their understanding of the Sparkassen model and how it operates in Germany. An invitation was extended to the officials carrying out this investigation to visit Germany to see at first hand the model in action but they did not avail of this opportunity. We are delighted that Irish Rural Link and our partners were able to facilitate members of this committee to take part in such a visit and we are confident that this has substantially enhanced the members' knowledge of the operation of the model. Coincidently, my colleagues Ms Sinead Dooley and Mr. Noel Kinahan are just back from such a trip with members of the Joint Committee on Business, Enterprise and Innovation, which I am sure was equally well received.

We are very much looking forward to participating in the stakeholder forum as part of the independent external evaluation referred to in the Government’s report.

It should be noted that we have submitted proposals for the terms of reference and we are awaiting a reply to that. I am sure that this forum will provide the opportunity for Irish Rural Link and other stakeholders such as the credit union movement - and we are glad to see their representatives here today - to participate in the process.

We make it clear that by adopting the model of public banking, this creates an opportunity to bring another dimension to our banking sector. It is not a new idea as we have had it before.

Irish Rural Link has no vested interest but wants to ensure that the well-being, financial and social, of rural Ireland continues and is not lost or dependent on the current pillar banking system.

We would welcome questions.

I thank Mr. Boland and invite Mr. Maye to make his opening statement.

Mr. Seamus Maye

I thank the Chairman and members for inviting us to make a presentation today. Given the brevity of this presentation and the fact that Irish Rural Link has adequately dealt with the micro issues in its rebuttal letter, we intend to devote our time to highlighting the macro issues involved and the joint consultation group’s abject failure to adequately inform Government of the machinations of the banking industry, in terms of regulatory failure; credit creation and the monopoly thereof by the pillar banks; the difference between creating credit for the real or productive economy and creating credit for financial transactions; and why Basel I, II and III regulations do not and cannot work effectively; why another financial crash is considered by many as inevitable; why artificially high interest rates being charged by our current pillar bank oligopoly are wholly incompatible with driving our indigenous economy; the imperative to introduce competition in the Irish banking sector; the illegal suppression of our credit unions and the fallacy of turning our post office network into an “agency bank” for the benefit of pillar banks and not post masters or communities. It is worth remembering that a partnership banking arrangement with An Post has already failed back in 2010.

The consultation group’s Government report incredibly has failed to take into account the article in the Constitution that deals with competition. Article 45.2.iv specifically states: "That in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole." We ask why Government, the Central Bank of Ireland and the Department of Finance repeatedly put the interests of pillar banks before those of the people, the indigenous economy and the general socioeconomic well-being of our country.

In that context, Professor Steve Keen of Kingston University in London has said that "the financial sector should be the servant of the rest of the economy, not the master but at the moment, it's the master of not just the economy but of the politicians as well .... [so] to break the nexus, we need a complete political shift". In the 1960s, the term "regulatory capture" was coined by an economist, Professor George Stigler, to describe the domination of regulatory agencies by big business through lobbying and selective information sharing. He claimed that regulatory capture is endemic and that regulatory agencies tend to be understaffed, unaccountable and peopled by bureaucrats, many of whom are drawn from the industries that are being regulated and see themselves as partners with industry rather than its overseers. Two economists, Dr. Daniel Kaufmann and Dr. Pedro Vicente, published a paper on legal corruption in 2011. It describes such corruption as taking many forms, including "cronyism, patronage and state 'capture' - when powerful groups manipulate policy formation to serve their own interests rather than the public interest".

Irish pillar banks currently have a monopoly on the creation of credit. The effect of this is to put them in control of the economy. They decide how much money will be created, to whom it is loaned and for what purpose. There is no effective control over bank lending. Pillar banks continually lend for speculative purposes. This leads to asset bubbles such as the property bubble, which brought about the financial crash ten years ago. Investment in the productive economy is kept to a minimum. The Basel regulations, which include tier 1 capital requirements, incorrectly assume that banks act as financial intermediaries by accepting deposits and lending the same deposits out again. The reality is that banks are creating money largely for speculative purposes with virtually no cap on credit creation. While this leads to high short-term profitability, it inevitably creates asset bubbles and ultimately leads to banks that are too big to fail. This partly explains why banks are not lending in any meaningful way to SMEs, microenterprises and farmers. Where they are lending, there is no ceiling on the interest rates being charged. This means Irish consumers pay the highest interest rates in Europe.

The circumstances I have described, in which pillar banks can charge what they like, is continuing unchecked and unchallenged, mainly because the Government and the captured Department of Finance refuse to countenance competition in the banking market. High interest rates apply only to those who succeed in obtaining credit from pillar banks. The reality is that banks are simply not lending to the productive economy. There is ample evidence of this in various ISME reports. There is a host of anecdotal evidence from farmers and people involved in small and medium sized enterprises. The figures that have been reported are exacerbated by the fact that many customers are being informally refused before they go to make formal applications. Such refusals are not taken into account in the official figures. We see this time and again.

The Minister for Rural and Community Development, Deputy Ring, has acknowledged the roadblock facing the indigenous economy arising from the behaviour of the pillar banks. As he said in April of this year:

There is a problem and I am hearing every single day as a rural Deputy, not as a Minister, how banks are dealing with consumers. We do need a bit of competition in the market. Banks have certainly lost the sense of what they used to do and are certainly not there for the people anymore. They are there for themselves, not for the ordinary general public who need banking services.

Before we submitted our detailed proposals to the joint consultation group, we engaged with the Department of Finance and the then Minister for Finance, Deputy Noonan, to make proposals in respect of public and community banking. They responded to us by saying that public and community banking would bring no additionality to the banking sector and to the needs of Irish consumers and small businesses. In many ways, the views put forward by the consultation group in its report were to be expected. It could be interpreted that the outcome of the consultation was a foregone conclusion and that the consultation was no more than a mechanism to fulfil commitments made by the Government in the programme for Government. More commitment is needed.

The consultation group has made multiple references to the Strategic Banking Corporation of Ireland, SBCI. We dealt with the SBCI in detail in Appendix 2 of our presentation to the Joint Committee on Communications, Climate Change and the Environment. The SBCI is merely an on-lender, with the bulk of its loans - over €700 million to date - going to the pillar banks. This strategy serves to further consolidate the oligopoly enjoyed by the pillar banks. It allows them to gouge huge profit margins from further on-lending. I remind the committee that 80% of funds on-loaned are guaranteed by the SBCI. The funds provided to the SBCI should, at the very least, have been made available to credit unions and post offices.

They could more prudently have been used to assist in setting up public and community banks. As it stands, the SBCI model borders on the provision of illegal state aid to the pillar banks, at a time when post offices and credit unions continue to be suppressed.

The real problem is not funding - it is a culture of reverence to the pillar banks that does not serve the public interest. This fundamental aspect of the matter must be changed if Ireland is to build a self-sustaining indigenous economy. Western countries are realising the folly of allowing banks that are too big to fail to dominate their economies. Four of the larger credit unions in Canada now have banking subsidiaries. There is a clamour to reintroduce postal banking in Canada's 6,000 post offices. Mr. Bernie Sanders, who is a former presidential candidate in the United States, recently introduced the Too Big To Fail - Too Big To Exist Act, which provides among other measures for the break-up of US banks that have a total exposure of more than 3% of that country's gross domestic product. It is time for Ireland to take the lead in financial and banking reform. We can start this by quickly convening the promised stakeholder forum, setting a tight timeline and bringing in the requisite experts in the field of finance and financial reform to assist stakeholders in arriving at long-term workable solutions in the public interest. I thank the committee for its time.

I thank Mr. Maye. I invite Ms Annmarie O'Connor of the Money Advice and Budgeting Service, MABS, to address the joint committee.

Ms Annmarie O'Connor

On behalf of MABS, I welcome the opportunity to participate in the joint committee's consideration of the substance of the report on financial inclusion and related matters. The report and the submissions point to a variety of concerns to be addressed in the development of banking and financial services in Ireland. The report touches on many issues that are pertinent in our case work, including the role of banks in the lives of our clients, the potential role of post offices and credit unions in meeting the needs of our clients, access to affordable credit, the potential of financial technology, unresolved issues in the mortgage market and developmental opportunities for people and communities that are under-served in their consumption of vital financial services. While we view the primary goals of the proposed local public banking model positively, we have a focus on the needs of a wider segment of the population. We have a sense of the factors which lead to financial exclusion in day-to-day access to banking, such as the availability of accessible, expedient and low-cost payment mechanisms and affordable forms of credit. We understand the need to have the ability to extract best value from increasingly complex financial products. Many people have come to distrust banks and are increasingly wary of any potential toxicity in the financial products they consume. While we welcome innovative initiatives that seek to include specific groups in the productive economy, we do not want to see the emergence of a merely partial solution to widespread and systemic issues.

Since the beginning of the recession, MABS has assisted approximately 250,000 households through its face-to-face service. Virtually all of them have experienced a breakdown in relations with financial service providers. Our strong links with credit unions help our clients to build a bridge back to affordable and sustainable credit. We have worked with all of the main banks with the aim of re-establishing productive relationships. We are now dealing with a changing client group. A higher percentage of our clients is now waged or self-employed. There is an older age profile. Their debts are more substantial. The changing landscape is making our work for our clients more difficult. Our concern for their future access to affordable, simple and reliable banking and financial services is now more acute. Although a great deal of positive progress has been made towards the goal of improving the banking and financial services environment, our view is that the banking, payments and credit needs of atypical consumers have not been given sufficient attention. Many of our clients have impaired credit ratings, but they are not necessarily high-risk consumers. Viewed from the perspective of a remote and centralised lending unit within a commercial credit institution, they may face barriers in accessing affordable credit. High-cost credit is a poverty trap. We have seen the damage caused by sub-prime lending. Other solutions are needed. The proposal in the report is to be welcomed as part of a proactive search for such solutions.

Deep and widespread social scarring exists as a lasting legacy of the recession and the banking collapse. Some people have achieved solutions, but those whose loans have been classified as non-performing and sold on to funds are a significant ongoing concern for MABS and other stakeholders. The sale of non-performing loans represents a severing of relationships between banks and their customers. For many people, the distress of a loan sale is compounded by not knowing what might come after some resolution to their mortgage arrears is achieved. They have real concerns about how they will bank and what access, if any, they will have to affordable credit in the future.

In its submission on the report, CUDA rejects the idea that credit unions be "relegated to acting only as the 'poor man’s bank'". We likewise would disagree with such a proposal. If, however, for the purposes of today’s discussion, the poor man may represent someone who lives on a low income, who has experienced a reduction in their income, or who has some fragility or unpredictability in their income as a consequence of the nature and type of their employment, but who nonetheless plays a productive economic role and needs to have access to affordable banking, credit and payments systems, then we need a bank or a financial services provider that will meet all of those needs. Perhaps local public banking could be a partial solution.

We know from debt advice agencies in other jurisdictions that local public banks and debt advice agencies can work effectively together. We would like the opportunity to contribute to a more in-depth appraisal of how debt advice could be married in a practical and sustainable way within a proposal on local public banking in Ireland.

The report refers to the potential of FinTech and we feel strongly that this needs further exploration. We therefore welcome the Department of Finance’s statement in the report that "emerging trends, such as FinTech will be kept under review for their potential to develop initiatives that could deliver credit in a more effective and less costly manner". We see scope for a sandbox type regulatory regime that could exploit both FinTech and RegTech to the benefit of our client group, reducing cost and facilitating access for the types of consumer we have described previously in this paper as atypical and potentially underserved by main banks and financial institutions.

I thank Ms O’Connor. Before we start, at the end of the previous session we asked the representatives of the Central Bank about the obstacles in the way of the credit unions almost fulfilling the role of a community bank. They said that they had loaned €90 million and they could loan €900 million with business mortgages and so on. What is the obstacle? If the Central Bank tells us that there are no obstacles to the credit unions doing that, will Ms O'Connor outline what the obstacles are? Deputy Pearse Doherty also raised this question with the Central Bank representatives. With €7 billion in the bank, as it were, why can the credit unions not let that money find its way into the economy, housing, business, loans and so on?

Mr. Ed Farrell

There are rules and limits within the regulations so there is an amount that we are allowed to lend for longer-term loans. Mortgages and most of the bigger business loans would be longer, five years plus loans. We are allowed to do 10% of our loans for in excess of ten years and we are able to do 20% of our loans for in excess of five to ten years. Post the recession and the financial crisis, credit unions are emerging and coming into that space. The representative bodies are helping credit unions into the mortgage and home loan space and into the small medium enterprise, SME, space as well but it takes time to develop expertise. Much of the expertise in credit assessment for mortgages and, more particularly, for business lending retired from the other players who got themselves into bother during the global financial crisis and the recession. We are all working hard to increase the amount of lending within the SME, home loan and mortgage spaces.

We have put proposals to the various Departments and to the Central Bank about centralised vehicles for both of those areas but they are not finding favour. We engaged with the Department of Business, Enterprise and Innovation and the Strategic Banking Corporation of Ireland but it has funds from other sources and it is not looking to collaborate with credit unions in the SME space. The Central Bank changed its rules for investment in centralised vehicles this year. It took the social housing piece on board but it did not take on board the concept of a central vehicle into which credit unions could invest money for onward lending from a centralised, more risk-managed position than individual credit unions, which by and large do not have the underwriting skills developed to the point where they feel confident enough to do the bigger SME lending on their own backs and putting all of the risk on their own balance sheets.

A centralised vehicle would be safer and would be a way of sharing risk, but the Central Bank has not endorsed that one. It is looking more to each individual credit union, which we feel is a slower way.

On the last question and the response received, the Central Bank essentially said that the credit unions can continue to lend money and they have many ways of doing it. It also said that out of all of the financial sectors, it devotes the most time to the credit union sector in terms of giving the credit union supports. At some stage after the meeting, will Mr. Farrell provide the committee with a list of the problems that the Irish League of Credit Unions sees in the context of the credit unions developing their space relative to the answers that were given by the Central Bank, because there seems to be a difference of opinion or emphasis? Will Mr. Farrell say why the Sparkasse model cannot be rolled out by the credit union movement? The credit unions have €7 billion so why can they not step up to plate, work with Sparkasse to roll out that model of community banking, get the licence from the Central Bank and so on?

Mr. Tim Molan

There is considerable headroom and scope for business lending. At the minute, 0.51% of our assets are in commercial lending. We were doing commercial lending up until 2011 and 2012, and at that stage a number of restrictions were placed on credit unions. Many of those have now been lifted but not all of them. There is still considerable headroom there to do lending but we need to be realistic. If one is to engage in something such as commercial lending, one has to have the structures in place, the staffing, the risk appetites and the risk management capacity. These are not built up over night and they cannot be just plugged in and played with. In the past two years in particular, much advancement has been made in those fields, so it would be inaccurate to say that advancement is not being made. There are credit unions seriously addressing those areas which are also engaging with the Central Bank in those areas, but there is no simple plug in and play model.

Public banking, or whatever term we put on it, is not something that can just be dreamed up, plugged in and be had working tomorrow morning. There are 50 to 60 years of experience in the credit unions. We have got some things wrong but we have got many things right along the way as well. As my colleagues from the Irish League of Credit Unions, Mr. Farrell and Mr. Johnson, were saying, there are serious efforts going on behind the scenes of co-operation between the co-operatives and the credit unions to fill those gaps.

Our colleague from the Money Advice and Budgeting Service, MABS, spoke of dealing with issues such as impaired credit ratings. These are very much part and parcel of the landscape of reinvigorating Ireland, with which we have to deal with not only on a personal level but on a commercial level.

Mr. Kevin Johnson

I would also like to make an observation on that. When we talk about the credit union movement in Ireland, at times we can perceive it as being one single entity. The point Mr. Molan was making is that a comparison between it and the public banking model is not a simple direct one. We have 261 independently owned and independently regulated entities. As we started to broaden the offerings from the basic consumer loans to products such as home loans, we found that a degree of expertise and systems were needed to support that. Initially, we found that the limits that were referred to made it very difficult for any one credit union to do it in a sustainable way on its own. It has encouraged and enhanced much more collaboration. We certainly have seen that. There are some different approaches to how that might work but, overall, if it ends up offering a wider range of service and a better proposition for members and the wider community, it is a good thing.

Regarding the regulator, we have a job to do on the credit union side and the regulator has a job to do on its side. We have to extend the collaboration into that space also and ensure that we are not doing anything to the detriment of each other. Ironically, we both share the same vision, which is around protecting people's funds and using those savings in a productive manner. I would not like to think that it is all about confrontation with the regulators. It is about trying to find a way to work together.

I welcome our guests. For as long as I have been involved at national level there has been discussion on expanding the role of the credit unions. We had Ed Sibley from the Central Bank and members of his staff and Mr. Patrick Casey, the regulator of the credit unions, before the committee. Effectively, they told us that as far as they were concerned, there was no issue in terms of the capacity of the credit union movement to lend to both the SME sector and the home loan sector. Mr. Molan referred to a point they made, which is that there is a capacity to lend up to 50% of the credit union regulatory reserve, which is just short of €1 billion. Currently, 90%, or €900 million, of that is being lent. They believe there is also capacity in terms of lending to the home loan sector.

We are very supportive of public banking and the credit union movement expanding into that role. We need to get down to the hard facts. Does the credit union movement have the capacity to increase lending to the SME and home loan sectors? Are there any regulatory issues that prevent that? The Central Bank has said that the credit unions have the capacity to lend up to 50% of the credit union regulatory reserve, which Mr. Molan said is equivalent to 5% of the overall assets. Is there something else involved, and Mr. Farrell touched on it, which makes the regulatory capacity that the Central Bank has indicated unworkable for the credit unions in terms of meeting those targets? There is no point in reinventing the wheel if the wheel is a small bit rusty and needs a new tyre.

I want to get down to the issue of the capacity of the credit union movement within the existing rules to lend to the SME and home loan sectors. How does that marry with what we have been told by Mr. Ed Sibley, deputy governor of the Central Bank, and Mr. Patrick Casey, the regulator of the credit unions?

Mr. Kevin Johnson

The point I was trying to make about the 261 individual entities is that when one starts talking in aggregates it is irrelevant. It does not mean anything. If one credit union is not in that business, it has 100% capacity and another credit union that is in that business and doing the job very well and being prudent could well be tipping the ceiling. To blur them together and say there is 50% capacity is meaningless. The point I was making is that they are individual entities.

Fine. Would individual credit unions be engaged in commercial lending to the level of 50% of their regulatory reserve?

Mr. Kevin Johnson

It is fair to say there is capacity there.

I have reached the point where I want detail. I am utterly supportive of the credit unions.

Mr. Kevin Johnson

Sure.

We need to get down to brass tacks. We need to know if the credit unions have the capacity within the existing regulatory rules to engage in SME lending, or is there some barrier? The Chairman alluded to this earlier. He asked the exact question I intended to ask. It is the only question we need answered. The regulator implied that the capacity existed but the credit unions were not increasing their lending. We need to know the real facts.

Mr. Kevin Johnson

We know the position regarding the home loan sector as we proactively work with a group of credit unions to support them in delivering home loans. A number of them have been doing it for the past 14 months and, as a result, they find as they look at the pipeline that they are starting to hit the limits. That is the reason the consultation paper due out in the next few days is very important.

That would be in within the CUDA family.

Mr. Kevin Johnson

There are also other models to help credit unions do that. We know of other credit unions that got there on their own merit in the past and then literally had to stop because they hit the ceiling. To try to tell them that the overall average has capacity is meaningless.

Mr. Kevin Johnson

Of the 261 credit unions, a relatively small number are getting there but it is growing. There is no point in waiting and having to shut down shop and then start all over again.

Can I hear from Mr. Farrell and Mr. Molan as they are at the front line? Will Mr. Farrell tell me what the real story is here?

Mr. Ed Farrell

That is not the real story. As in the case of speed limits on roads, there is capacity there. The rules allow credit unions to loan up to the 50% limit and some are further down in that respect. Credit unions started 60 years ago and they provided a service very much in the personal space. It is not an automatic assumption that credit unions will engage in any SME lending. They have been engaged in some of that lending and they probably did more of that before the crash and then wound it down.

Mr. Ed Farrell

There would have been restrictions from the Central Bank at that time to exit commercial lending but they have got back into that. The credit unions are not a mini-version of the ICC or ACC banks that were mentioned. Ninety percent of credit union lending is personal lending with more of it in recent times being for mortgages within the same macro-prudential rules as apply to the banks. Mortgage lending to the set of people who are working is safe enough. The SME sector is a riskier set. As Mr. Johnson said, some credit unions are further down the road of making that offering. Some are probably not going down that road at all.

We met representatives of the Sparkasse foundation on a good few occasions when they were over here. The credit union movement in Ireland has a foundation that dates back to helping African countries and former Russian republics to build credit unions.

We asked the Sparkasse people if they could they help us with more SME lending and some current account debit cards. They have not done so as yet.

I am not talking about Sparkasse. Do the existing rules and regulations provide the capacity for the credit union movement to grow SME lending without the need to introduce new regulations or reinvent the wheel?

Mr. Ed Farrell

They do. The current rules allow individual credit unions to offer more SME lending.

Why, allowing for the individual factors Mr. Johnson outlined regarding larger credit unions, why is the level of commercial lending only one tenth of overall capacity? Why does the level appear to be so low?

Mr. Ed Farrell

As I have said, it is not something that certain credit unions do at all. It depends on how far from the capital city and other cities one goes. The economy is flying, although it is not flying as much the further out one goes.

What route should we take to increase the level of SME lending and the number of home loans offered by credit unions?

Mr. Ed Farrell

There should be some help in the de-risking. We spoke about a centralised facility. To return to the Chairman's comments, we reached out and there were some visits from Sparkasse to see if its foundation arm could help credit unions by demonstrating its German SME lending model. We could introduce the concept of the "county town" or, in a geographical sense, larger credit unions becoming brokers or agents of the strategic banks.

It is about de-risking.

Mr. Ed Farrell

It is about de-risking and giving us the confidence. Many of those with that expertise have retired from of the banking sector since the recession. Some people are still around. It is about giving everybody the confidence to start into what would be a pretty new business line and ensure that it is done correctly. That is what the world has learned.

Mr. Tim Molan

There are a few issues, the first of which relates to classification. We might have a bit of a statistical understatement in this regard. The issue of the classification of business loans only arose after SI 1/2016, which brought a lower entry level of €25,000. A significant amount of lending to small enterprises is below €25,000. It is a surprisingly large amount and it was not reflected in the most recent set of statistics from March.

It had to be €25,000 or above to be classified as commercial.

Mr. Tim Molan

Yes. It is a statistical matter. There are swings and roundabouts because when one goes above the entry point of €25,000, the level of regulation surrounding an application for €28,000, for example, is significant. I am not saying it is wrong; it is prudent. There is a much higher bar that is addressed in this respect. As my colleagues have stated, there are two ways in which this can be enhanced. The first involves taking the hard road of building skill sets within our individual credit unions-----

Mr. Tim Molan

It would be very useful to have the ability to use credit union service organisations to help with the underwriting, which is the most serious part of this. Regardless of whether we like it, we must do our underwriting well. We are of no service to anybody starting in business or engaged further along if we do not do the underwriting well.

Deputy Eugene Murphy took the Chair.

It is about skill sets and de-risking.

Mr. Tim Molan

There are two things we must do. As somebody working on the front line, I know there has been an uptick in commercial lending.

Mr. Tim Molan

There has also been an uptick in demand. That must be acknowledged. We are not-for-profit organisations and it is our job - it is in our interest as credit unions - to get small businesses prospering in our communities.

The Chairman has asked me to hold the fort in his absence. I am not a member of the committee and I am here in substitution for Deputy Michael McGrath. I presume it is all right with everybody.

Mr. Kevin Johnson

I have a quick point about capacity. We know the financial capacity is there and there are different ways of addressing the issue of expertise regarding capacity. There was a question about the benefits of a public model. The issue we must consider is access. We must ensure there is a nationwide offering in order that people, irrespective of their common bond, can be supported by the credit union system. It is more of a legislative than a regulatory matter, but it is something we must factor into this as well.

I thank our guests.

I wish to comment on some of the specific credit union proposals. The Department has compiled a report on local public banking and what has become known as the Sparkasse model in the context of filling the gap that many have suggested exists. Do the witnesses support the concept of a Sparkasse model being introduced instead of credit unions filling the gap in respect of lending for SMEs? I want to get a sense of where our guests stand.

Ms Annmarie O'Connor

The report does not necessarily address the concerns of our clients in MABS, particularly as it focuses primarily on SMEs. We have outlined the gap we perceive in the provision of credit to consumers. I am not sure the model addresses that. The report highlights the potential of digitalisation. Digitalised financial services should be considered in more depth. There is scope there for at least some of our clients' needs to be addressed.

Mr. Kevin Johnson

We fully support the concept of greater competition and alternatives for consumers. We do not believe we need to start a new banking model from scratch in order to meet those needs. The credit union movement can do it but the enhancements we set out earlier will be needed.

I appreciate that.

Mr. Ed Farrell

We feel the same, more or less. The credit unions and post offices are already in place so there are ways and means of avoiding starting from scratch or having to set up other entities. In other words, of getting to businesses more quickly.

Mr. Seamus Boland

We put forward a solution. I can reiterate many times what I have already stated here and in other places. There is a problem and it has come about because of the demise of ACC and ICC. They worked hand in hand with credit unions and other banking systems. To be honest, most rural businesses, especially those of farmers, would not exist were it not for ACC. I remember benefiting hugely because it was the only institution that would lend.

We are not talking about a model that will damage the credit unions. It should not damage them, the post offices or anyone else.

What the report states very clearly - the terms of reference in this regard are being worked through at the moment - is that we have got to figure out how to create an alternative banking model. That may well involve the credit unions. Senator Kieran O'Donnell asked some probing questions in terms of identifying the obstacles. Right now, the position is not very good. The banks' situation is very clear as far as we are concerned. Members of Irish Rural Link are still being refused loans. People are still not getting the access to loans and facilities. If those in this room can come up with a better model than Sparkasse, Irish Rural Link will be quite happy. We are not a vested interest and are not going to gain anything out of what might happen. We are simply saying that if we do not, under the terms of reference set out by the Department of Finance, explore the next step, we will be running away from the problem.

Mr. Seamus Maye

In response to Deputy Pearse Doherty, the first thing we have to do is break up the monopoly or oligopoly of the banks. People in this country are being charged outrageous interest rates. The pillar banks effectively have over 90% - it might be 95% - of the market. The way it currently works, those in the indigenous economy have their hands and feet tied. We absolutely need change. We have advocated two forms of change. One involves the New Zealand example and what has been done there regarding post offices. We believe that must be brought into post offices here. The Government is not listening to us and wants to bring in an agency type bank instead. The latter would do nothing for communities. We are huge fans of the Sparkasse model for obvious reasons. It has been in existence for over 200 years and we know it is unbreakable. Where we differ slightly is that we see that there are two networks in Ireland, namely, the post office network and the credit union network. We have adequate infrastructure but we still have problems.

The Government has promised a stakeholders' forum. Much of what is being discussed here should probably go to that forum. We could iron out the differences, clarify the position and then come back to the committee. One thing that has to be done if we are ever to have a thriving indigenous economy is to break the banking oligopoly. The Public Banking Forum of Ireland acts in the public interest and represents farmers, small businesses and citizens. We want to see credit available at competitive prices and believe this can be done through the existing networks.

Mr. Tim Molan

We believe there is an alternative to the banks. It is an alternative that we have been building fairly steadily, cautiously and prudently. We do not believe there is a need to introduce another banking system. We have memories going back eight and ten years when competitor banks were brought in. When it was no longer profitable or insufficiently profitable, they withdrew. We are from and of communities and we have always made our mark in terms of the needs of our members and communities. That is what we will continue to do and we will go forward on that basis.

Some of that was addressed in the opening statements. I just wanted to get a handle on where the organisations stand. My party and I are long-time supporters of public banking. With the pillar banks not meeting the needs of certain sections of society, it would be a terrible crime if we missed the opportunity to deal with the issue of public banking, whether that means the credit unions being able to tap into SME lending in a bigger way. I fear that time will pass and the matter will get kicked into this forum. There will be some discussion and we will then hear that there is a bit more lending from the pillar banks, that there might be even more the following year and that the problem has been resolved. At that point, we will be back to the monopoly scenario.

I am not convinced that the credit unions are going to move into this area any time soon. I would not suggest that the credit union movement should jump in. The last thing we want to be doing is fast-forwarding five years and asking the credit unions how they got it so wrong, why their underwriting was not done and why they did not have the skills to deal with this. That is the challenge. When there are so many different independent credit unions, how do we bring them all together and release them from some of the shackles on them? A consultation paper is going to be published. However, I am concerned that we equip credit unions with the necessary infrastructure and capabilities in order that it might meet some of the needs a Sparkasse model would meet. If the credit unions are going to move into that area, what needs to happen and how can we move matters forward?

Mr. Tim Molan

First, I would like to offer Deputy Pearse Doherty some reassurance. It is five years, almost to the day, since the commencement of the 2012 Act. It was actually commenced in October 2013. That was the most significant and revolutionary change in Irish credit unions since the Credit Union Act 1966, which was introduced by the late Jack Lynch. In those five short years, the capacity for change in the credit union movement has been absolutely staggering. We had complete change in our governance structures and the introduction of some of the things Mr. Johnson and Mr. Farrell mentioned. For example, one of the ways in which we could address commercial lending would be on an A1 product basis. We have seen that in the agriculture sector whereby four credit unions began offering what are termed "Cultivate" farm loans. A significant number of credit unions, probably 50, are now offering such loans. Under this model, a product was created and an approach was adopted in respect of underwriting, etc. If this can be done for agricultural lending - the small businesses in this area are much complex in nature - then it can certainly be done on a commercial level.

Certain credit unions have also moved into the area of offering current accounts. There are, essentially, two current account offerings. Some credit unions have begun offering plastic cards to customers. For the past five years, as well as getting restrictions lifted and engaging in a really vigorous and challenging regulatory regime, we have managed to do those particular things quietly and under the radar. I am much more optimistic about the capacity of my colleagues and the capacity of the directors, who come from the members' communities and all of the other communities around here, to actually change and deliver. I assure the Deputy that we will not be found wanting in those areas.

I am not underestimating the capacity of the credit union movement to change and adapt. Mr. Molan outlined clearly how that has happened and how credit unions have had to respond to the Credit Union and Co-Operation with Overseas Regulators Act 2012, as well as some of the advancements that have taken place. I am concerned about some of the shackles, as I have referred to them, or the restraints on the movement and whether they will be lifted to allow for the credit union movement to meet its full potential and to act as that movement which fills the space that people are talking about Sparkassen filling.

Some of the change is happening quickly but then some of it is also very slow. I am a huge advocate of the credit union movement but nowadays people are using their iPhones to pay for goods. Mr. Molan mentioned plastic cards, which are not available across the board. There are restraints.

It is going to take another year to lift the shackles off the credit union movement and allow to move forward some of those that have met their threshold in respect of lending to small and medium enterprises or very close to it. There has not been a very good response from the Central Bank on some of these issues. Mr. Molan can respond to that if he wishes.

I also want to ask about the debate that has been taking place on the credit union movement in respect of using its members' assets to invest in social housing. The Minister had suggested that CUDA, of which Mr. Johnson is chief executive officer, was now in a position to invest in a special purpose vehicle set up by one of the approved housing bodies, AHBs.

It was also suggested that the Irish League of Credit Unions, of which Mr. Farrell is the chief executive, would be in a position to do so by the end of October. Has that been resolved? Is the credit union movement now in a position to invest substantially in social housing? Is the vehicle that was designed by the approved housing bodies the way the credit union movement believes its contribution should take place in addressing the social housing needs or would it prefer a different bespoke instrument to be set up?

Who wishes to take that? Does Mr. Johnson want to reply?

Mr. Kevin Johnson

I have no problem taking that question. There were many questions there, so I will just touch on them and try to break them down. If we take the first point, there are some vehicles there, albeit they may reside outside of this jurisdiction. They would, however, qualify, so there is potential there. CUDA has been working on this for six years. It is pathetic, to be quite honest. Our concern was that we never wanted to do this by way of investment. I will make that clear again today. It is still not our preferred way. Our preferred way would be to amend the legislation to allow credit unions to lend for housing.

I referred to it in the document as an emergency because that is what we believe it is. We have a social housing problem but we also have a real affordable housing crisis. We see members of our credit unions, people who are doing essential work, who cannot afford to rent or buy a house. It is a bigger societal issue. It is not a society we would like to see existing now or in the future. For that reason, our belief is that we can prudently lend to support part of the solution. As I said, we do not necessarily believe it should be restricted to tier 3 AHBs. There are other co-operative housing initiatives that have proven very productive and fruitful over the years that we would like to be able to help.

That being said, much good work was done and regulations were brought in to allow the credit unions to invest in an approved vehicle that then lent to tier three 3 AHBs. There are a variety of solutions. It is not necessarily the AHBs themselves establishing a special purpose vehicle. There are other potential solutions. We have done quite a bit of work on this ourselves. This, however, is where the real problem comes in. There is little point in establishing and commencing such a vehicle if the projects are not there. For all the good potential reasons that exist, these things, unfortunately, are costly to establish and to run. There is little point in commencing something like that if we do not have the projects to be funded from it. That is where the real problem lies. I know all of the discussion is around setting up Irish collective asset management vehicles and special purpose vehicles. The real issue, however, is getting projects to take those funds. That is the real concern.

Does anybody else wish to make a comment? I call Mr. Farrell.

Mr. Ed Farrell

I am more in agreement there. There was reference to the league in October. We have been engaging with various arms, including the Department, the Irish Council for Social Housing, ICSH, and the AHBs to see where is this fund. We were engaging with the Central Bank originally but it has changed the investment rules, as Mr. Johnson said, since earlier in the year and not the lending rules. Rebuilding Ireland clearly laid out that money was going to be made available and support would be provided to an Irish Council for Social Housing special purpose vehicle. We have been trying to ensure that vehicle is created and assuming that it was going to be created. This goes back to July 2016.

It was stated then that it would be compliant for credit unions. It was stated it would be made certain that the rules in place for the credit unions since earlier this year would be taken on board and it would be a Central Bank regulated vehicle. It has to be that way to provide an extra layer of safety for the credit union money going in, which is different from private money going in to it. It has been very difficult to get clean facts on where it is. It looks now like the special purpose vehicle fund is being created but it will not be ready in October or this side of the new year. It looks like it will not be Central Bank approved or authorised at that stage.

The question is whether the credit union movement will have to build a bridge or a buffer of a regulated vehicle to take the money and then invest it into the approved housing body vehicle. The comments about the projects are relevant as well. Land for these approved housing bodies seems to scarcer because there is an upturn. It depends on the different parts of the country but it is particularly the case in the tier 3 approved housing bodies. They are more in the populated areas with a heavy density and the land values are increasing in those areas. We said we were happy enough with October, but this is near the end of October and I am pretty sure it is not going to be October or even this year.

I would like to get clarification on that because the information on the record from the Minister is that CUDA has been through all of the processes and that it is now able to invest in a special purpose vehicle set up by one of the approved housing bodies. That is our understanding. There is a special purpose vehicle, CUDA is approved to invest in it and the league is likely to be in a position to do that in October. I presume it is the same special purpose vehicle that we have been talking about and to which reference was made in the Minister's comments to the Irish Council for Social Housing and the process that it was involved in. Has a special purpose vehicle been set up? I am slightly confused.

Mr. Kevin Johnson

No, we have not established one. I want to be clear. We have, however, over the past two years done considerable work in understanding what is required and how it could be set up. To be completely transparent about this, we have done everything other than seek final approval from the regulator for that. All that work is there and can be done. As I said earlier, however, what is the point in hitting the go button and incurring the cost if there are no projects? That is the real dilemma.

One of the things that should be said is that when the regulations - and a lot of work by many people went into developing those - were commenced by the Central Bank, only a month later the classification of the tier 3 approved housing bodies changed. In fairness, that is a game changer as well.

There is another issue. Wherever the funds are sourced, be it the Housing Finance Agency, HFA, credit unions or other private sources, it all counts as being on balance sheet. The approved housing bodies are now going to find themselves restricted by how much they can borrow because of that and we know the knock-on effects of that.

I will stop the Deputy there because Mr. Maye and Mr. Boland have both indicated they want to make a brief comment. I will then let Deputy Pearse Doherty back in. I call Mr. Maye.

Mr. Seamus Maye

I want to clarify what we were speaking about earlier in respect of Deputy Pearse Doherty's question. The Public Banking Forum of Ireland's position is that we need to establish ten public banks around the country and that was our position in the submission we made to the consultation. That is where we see the collaboration between the credit unions and Sparkasse. We are not ruling out the Sparkasse people and we are not ruling out credit unions.

Mr. Seamus Maye

We think the establishment of the public banks, which would do all of their business through the branch networks of the credit unions, is where collaboration is required and that is why everyone needs to sit around a table. I hope I did not mislead.

I thank Mr. Maye for the clarification. I call Mr. Boland.

Mr. Seamus Boland

I pretty much agree with what Mr. Maye has said. We said eight whereas he said ten, so let us argue the point. The question is spot on. The reality, as outlined by my colleagues in the credit union, is that the slowness of the Government and the Department of Finance is trying to protect the existing banking system. That is why the slowness is there in allowing some flexibility and regulation to favour the individual, the potential homeowner, or the community. While we have a banking system at the moment with one kind of bank and another in a kind of zombie place, we are going to have this type of slow deliberation on allowing either the credit union movement to be regulated so it can lend more or a public banking system. We believe public banking is the way forward. Where there is no public banking system, then the existing banking pillars continue as they are. That slows down the Government, slows us down, slows people down who are not in housing, and slows down the country. That is what is happening.

I hear Mr. Johnson's point very clearly on the classification of the approved housing bodies and how that has potentially torpedoed what was on offer six years ago and should have happened many years ago. That is why I talk about the frustration about the length of time being taken. That was out of the hands of the credit union movement. Mr. Johnson mentioned that he thought the best solution was for the credit union movement to become a lender as opposed to an investor. Will he explain to the committee who exactly he was talking about when he mentioned lending as opposed to investing? I ask him to clarify whether he was just speaking about people who want to purchase homes.

Ms O'Connor spoke of a sandbox-type of regulatory system which would help to serve the atypical customer. Will she let us know a little about that and has there been engagement with the Central Bank on that proposal?

On the public banking model and what the report suggests, I agree everyone needs to get around the table, and the sooner that forum is convened, the better. I hope it is done with genuine motivation. The Sparkasse proposal was always pitched to support small and medium enterprises. The Government's report suggests perhaps a narrower focus and finding a niche or a gap in the market would be more appropriate. Has that been considered or would it be something that is perhaps appropriate for the forum to consider? I would like the witnesses' views on that.

I thank the Deputy. I call Mr. Johnson.

Mr. Kevin Johnson

I will answer very quickly on the question of to whom we would lend. We submitted a draft amendment spelling that out. I would be very happy to send it again. We would be lending to all tiers of the approved housing bodies and to housing co-operatives. We would be very interested in being able to lend on a collective basis to anyone involved in social or affordable housing.

The only affordable housing scheme in the State at the moment is the Ballymun scheme. It has an arrangement with AIB as the credit unions cannot fund a co-operative.

Mr. Kevin Johnson

That is correct.

Is that the type of area CUDA would like to get into?

Mr. Kevin Johnson

Absolutely, and we would encourage more and more of that. I would be happy to send on the wording that we have.

Ms Annmarie O'Connor

We have raised the issue of sandboxes in a submission to the Central Bank on its consultation on digitalisation. A sandbox is like a safe regulatory space for small start-ups in order that they do not have to invest in the regulatory overhead at the outset. Many countries do this and many different ideas have emerged. I think there is potential in this space because the research indicates that in respect of lending, some FinTechs are bringing atypical consumers into a kind of prime or near-prime market because they have other detail over and above the credit rating in terms of informing their lending decisions and so on.

The other issue is payments. In our view, there is huge potential for our clients under PSD2. Do not ask me about the technical detail, but the research indicates that if payments can be sped up, cashflow is eased. There is a lot of potential in the area of SME lending as well. What I would regret is if we did not put time and investment right now into looking at the social potential of FinTech for our clients and indeed for the underserved populations this report concerns. We would then have a missed opportunity.

Mr. Seamus Boland

To be clear, the SME sector represents the largest employer in rural areas. Rural and regional economies have suffered severely in this recession which, insofar as SMEs are concerned, they are still not out of. What we are saying very clearly is that the terms of reference must be published very shortly and this forum must meet urgently. We would have preferred if it got on to the business of looking at the logistics of a public bank rather than talking around it. Deputy Doherty made a good point earlier. Are we going to try to kick the matter further to touch and somehow hope it goes away? Irish Rural Link will not be going away from this subject any time soon. We want it dealt with urgently. Otherwise, we are a prisoner of the current banking system.

Is the Deputy happy with that?

I apologise for not being here for all the interactions. Many of my questions have been addressed, so I will be very brief. I am very interested to hear Mr. Boland's and Mr. Maye's commentary. If I understand their statements correctly, they are saying the Sparkasse model would fill a gap in respect of lending. Could I get an understanding as to whether there is a geographical bias in this regard, so to speak? Are we talking about the midlands, the north west, the south west or the south east? If I understand Mr. Boland correctly, if there were a better lending model, there would be no need for another banking system. Do I understand him correctly, first, on the geographical considerations?

Mr. Seamus Boland

Regarding geography, in our very detailed proposal we mentioned the midlands as a potential place to look at. The midlands are very much affected by the recession. The Western Development Commission has shown that the level of lending has reduced considerably in recent years in the midlands. The region is suffering, but the reality is that the south west and the north west have suffered enormously as well. That is the answer to the geographical question. I do not know if it answers the question.

Mr. Seamus Boland

Let me be very clear. We are talking about a public banking system. The clue is in the word "banking". It is exactly what it is: a banking system. It should be remembered that Sparkasse is not insisting, and never did, that we adopt the German model absolutely because that is not possible. What we need to do is adopt the Irish model of public banking. We are very clear that it is a banking system.

We proposed eight regions. We talked about synergies with the credit unions, An Post and whoever else. I think everyone would step up to the plate from then on, but it is a banking system.

Deputy John McGuinness resumed the Chair.

I take some comfort from the representative organisations' interventions today. If I read them correctly, they are stating they are open for business and ready to adopt new mechanisms to enhance their offerings and try to move into the very space referred to where there is a gap. The proof of this is, for instance, in CUMA and Mr. Molan's intervention on the 2016 regulations, in which he stated that in March commercial loans accounted for 1.9% of the €4.5 billion credit unions had out on loan, equivalent to 0.51% of their assets. Do the delegates take some comfort from these proceedings that there is scope, subject to a move by the Central Bank, the Department of Finance and, one hopes, these Houses, for the credit union movement to step in and plug that gap?

Mr. Seamus Boland

I do, but are the credit unions going to become part of a banking system? That is the question. I am not necessarily saying they should not or will not; I am simply saying these are questions for the forum to look at. Again, let us go back to the reality. We also want to keep every single credit union open, but not every single credit union, especially the smaller ones which serve an enormously valuable purpose in being small, will be able to loan huge amounts of money. That makes sense. I think my colleague said one would have to look at this and I would be quite glad to see them looking at it. However, it should be remembered that there are, to quote Mr. Johnson, 261 units throughout the country. How does one manage the legislation in order that all of them can work with cohesion? The worst thing that could happen, if the credit union was suddenly to become a banking institution, is that there could be pressure on it to start closing branches. That would be a real danger, unless we work this out properly. Let me be clear: Irish Rural Link is not a vested interest. Whether the Sparkasse model is picked-----

That is understood.

Mr. Seamus Boland

I say it in order that the committee will understand it because what we are saying is that we need a proper alternative banking system.

Mr. Boland can take it that that is understood.

Mr. Seamus Boland

I know, but I just wanted to be sure.

Moving along very quickly, this is more of a general question which concerns the perception I would have had perhaps a year or so ago that the public perception was that credit unions were being put through the wringer by the Central Bank in terms of regulation. There was much discussion at this committee about that process. If I read the tone of the delegates' interventions today correctly, one senses that there has been some improvement in that relationship, or else they are couching their language in very careful terms. I do not know, but I would like to hear from the representative organisations about their perception of the relationship with the Central Bank in respect of regulation and the future of credit unions. Short interventions or answers will suffice. I will start with Mr. Johnson.

Did Mr. Maye want to come in?

Mr. Seamus Maye

I will answer Deputies Sherlock and Doherty.

Deputy Doherty mentioned the report which referred to niche markets and gaps in markets. We must be very clear that the public banking forum's proposal was for an all-encompassing full banking service model that would, on the one hand, compete with the commercial pillar banks and, on the other, provide a long-term sustainable platform for the survival and growth of credit unions, post offices and the indigenous economy. We expect the report to refer to niche markets because the Department is all about protecting the banking oligopoly.

We are very similar in what we are proposing, that is, eight or ten banks throughout the country. Each and every part of the country must be serviced and needs a public banking service; therefore, it is a nationwide matter, although I think a pilot scheme, perhaps in the midlands to start with, was mentioned.

The representative bodies are going to speak about regulation. It is clear that the rules and regulations that have been applied to credit unions during the years are in breach of competition law because they discriminate against credit unions in favour of banks. They apply dissimilar conditions to similar transactions but dress them up as something else. I see that the Central Bank seems to be modifying its stance in that regard but it ought to be. It has a lot more to do.

In the context of regulation, what is the state of the relationship between the Central Bank and the representative organisations?

Mr. Kevin Johnson

It is very challenging. There should be a healthy tension in the relationship between the regulator and the regulated. The key is that it is healthy. The Central Bank stated the credit union sector was the one with the highest level of engagement. If that is an offer to us to choose our level of engagement, we will take it. We would opt to reduce our level of engagement if we had the choice. We are, however, respectful of the role the Central Bank has to play. It is critical, but we need it to be more constructive. It has certainly improved, but we need to see it continue to improve. There is a responsibility on credit unions and their representative bodies to put ideas and proposals to the regulators in this area. We have become better at taking advantage of what the rules permit today, not necessarily having looked at them in the past. This equips us to better present our case to the Central Bank, with home loans being a perfect example. We have demonstrated that credit unions can provide them prudently and serve segments of the market that are not being served.

The three bodies represented had a considerable input into the CUAC review, which led to a very thorough report highlighting a lot of the things that had not been delivered. An implementation group, in which we, the Central Bank and the Department of Finance participate, was set up and we are working through the issues. I share Deputy Doherty's concerns about timing and the pace at which things move. We made a thorough and detailed submission on longer term lending in November last year and hope the consultation paper will come out in the next few days. As the Deputy said, there will be another extended period before we see regulations.

Mr. Ed Farrell

We agree. It will be the middle of next year before there will be changes. As Mr. Johnson said, the engagement is better, but we must not underestimate the number of regulations there are for the credit unions. There has been no easing of regulation. A very heavy regulatory regime is still in place for directors and staff of credit unions. The consultation paper, about which we talked, is coming out tomorrow and a lot of work was done to get it through. On the other side, strategic business model development is being undertaken. The Central Bank has recently put together a group which comprises credit union CEOs only. There are no representative bodies or volunteer directors represented on it. The Irish League of Credit Unions believes the law charges directors with responsibility for strategy, while the CEO and staff implement it. Therefore, we do not see eye to eye with the bank on that issue, notwithstanding the fact that the relationship is improving each year.

Mr. Tim Molan

The level of regulation has not eased, but we have got better at managing it. An important point was made about the ability of smaller credit unions to be responsive in business and other lending. The vehicles about which my colleagues spoke are very important. Scrutiny by public representatives in a public forum such as this is very valuable as it informs the pace at which things are done, as well as the nature of what is being done. It is important that smaller credit unions and their communities not be excluded by virtue of the collectivity of assets.

As I have to ask a question in the Dáil in about two minutes, I will ask some quick questions and check the Official Report for the answers.

I commend everyone present for their efforts, but I am particularly interested in what Mr. Maye said. He mentioned regulatory capture, but there is also political capture. Are we captured by the Central Bank that tells us what we can and cannot do based on a fear of spooking the market? We heard this during the course of the banking inquiry. Is it preventing us from catering for the market on behalf of the people?

It is great that the delegates are trying to drive this process. Is the Government and the State engaging superficially on the issue? We have had the report and will now have engagement, while there is the promise of another forum. If we were to succeed in providing public banking services based on the Sparkasse or the Kiwi PostBank model, as promised in the programme for Government, would it not require the State to drive it? I find that Departments and the Central Bank use divide and conquer tactics as a mechanism not to move things forward. If CUDA had one view, the credit unions another and Irish Rural Link yet another, even if there was little separating them, the Department and the Central Bank could state they did not know what they wanted and could not, therefore, move things forward. Might it be the case that the delegates are the wrong drivers and that we need the Minister to come here to say he will introduce a model?

In the context of the discussion on the indigenous economy, Sparkassen are only allowed to lend in certain areas and support certain things. They do not lend money to people to buy speedboats but to support the economy and employment in rural areas. As I know the views of credit unions and Irish Rural Link, I ask my questions of Mr. Maye.

Mr. Seamus Maye

The Deputy asked if there was political capture, as well as regulatory capture. The answer is, "of course." We would not have had the banking crash or an orgy of credit ten years ago if the body politic had not been captured, as well as the regulatory body. This cannot go ahead without political input. Politicians must separate themselves from the Department and the Central Bank.

I take the opportunity to give one example of the indigenous economy. It relates to the agri-sector, in particular the beef sector. We produced a report recently, in which there is a section on the fifth quarter. I do not know if anybody knows about the fifth quarter, but it is the waste product from cattle - the intestines, bones, ears and head.

May I interrupt Mr. Maye for one moment?

Mr. Seamus Maye

Yes.

Senator Reilly has to leave to vote, but he is anxious to put a question before he leaves. If Mr. Maye holds fire, I will allow the Senator to put his question.

Mr. Seamus Maye

Sure.

I apologise. I did not expect to find myself in this position. As I did not even know if I would get here, I did not bring all of my information with me.

I am a big supporter of the credit unions, Irish Rural Link and the Sparkasse model. When I was in Germany yesterday, I spent the full day hearing about it, with some people who are in the committee room. So enthusiastic were they that we nearly missed the flight back.

The public bank issue is the one Mr. Maye has been addressing. I know that Mr. Boland is also interested in it. There is an opportunity for more cross-fertilisation between the credit unions, An Post and this model. All bets are on the table.

I have a short amount of time because I do not want to miss the vote. The comment was made that the credit unions would like to see the legislation amended in order that they could lend. That would take time to do. Reference was made to the special purpose vehicle. Is that something that would allow them to move forward more quickly, just at that particular end of things? I could not agree more with what was said about lending larger amounts, but will credit unions not be limited to lending to their members? The Sparkasse model is public banking and Sparkassen only lend within their region. As a consequence, they are significant contributors in their region. One of them paid more than €500 million in tax to the local authority in a short period. Nobody owns the Sparkassen; they are owned by the public, which is the reason they are called public banks. Senior bank officials, local politicians - something which might make people in this country nervous - and customers are all represented on the board. They have a supervisory board. They are very keen to help us to set up the model here.

I do not believe we need another long report, forum or whatever else. We need action and I will call on the Minister to take it. Let us have a forum and tight terms of reference that will allow us to do the work that needs to be done. Let us receive a time limited report and get this on the road as there is a huge gap in the market. The geographical location limit is to protect the local area in order that the money will stay there and benefit the area. It is not the case that one area takes precedence over another. We need to see movement now in dealing with the obstacles. I know that the delegates have been exploring the various co-operation options with each other, but we must take off the local jersey and try to make this happen for rural areas. Let us get back to the old ways of banking, which is what the Sparkasse model is. It has been around for 200 years. It is about walking the land, going into shops and businesses and understanding people and their community because they are part of it. It is about lending while being able to make the risk assessment on more than just what is written on paper because there is background knowledge of where a business, family or person sits in the community, which is hugely important.

I encourage the delegates to continue to fight the fight. I will make as much noise as I can about it. We are aware of all of the problems outlined in terms of capture and protecting our own banks which we need, but they do a different job. That is clear from what happens in Germany where we heard a presentation by a man who had a great business. He went to Deutsche Bank - I do not mind mentioning it - with his idea and it funded him to a point and then stated he could have no more. He went to a Sparkasse and it took him on. He now has a turnover of €10 million which is growing. As the business is in the area of the Sparkasse, the €10 million is being generated in the community and tax is being collected by the local authority. The Government should not worry too much about the risk because it would get the money back in tax, jobs and a better society. Never mind the money - community cohesion is more important than money.

I wish the delegates well. I will certainly raise the issue with the Minister to expedite matters as quickly as possible. I am sorry, but I must leave.

I am sorry for interrupting Mr. Maye in order to allow Senator Reilly to contribute. Perhaps Mr. Maye might finish responding to Deputy MacSharry's questions and then deal with the Senator's remarks. I apologise to Deputy Eugene Murphy.

Mr. Seamus Maye

I was just giving an example of the indigenous economy and what we can do. It is worth taking about the beef sector in the context of that economy. The fifth quarter is the waste product for which farmers are not getting paid. They do not get a cent. It consists of the heart, liver, kidneys, tongue, stomach, skirt, tripe, intestine, embryonic fluids and so on. The fifth quarter is the most valuable part of the animal but there is no money to back farmers to set up co-operatives to process the fifth quarter. For example, the fifth quarter is now used in the making of pharmaceuticals, cosmetics, household and industrial goods, ointments, binders for plaster and asphalt, footballs, lubricants, soaps, lipstick, face and hand creams and ingredients for explosives. In addition, fatty acids are used in the production of chemicals, biodegradable detergents, pesticides and flotation agents. Bones, horns and hooves are used to make buttons, bone china, piano keys, glues and fertiliser, and also gelatine for photographic film paper, wallpaper, sandpaper, combs, toothbrushes and violin string. More than 100 individual drugs, including insulin, are derived from cattle. That is the answer for our agricultural sector. If, however, one approaches AIB or Bank of Ireland and states that one is going to do some of the things I have just outlined, one would be laughed at. That is just to put it in perspective. That is why we need public banking and community banking. That is why the German economy is the fourth largest in the world. We need to stop talking and get moving.

Mr. Seamus Boland

I reiterate that we are talking about reviving rural economies and creating a financial situation that is based on those rural economies and regions. As Senator Reilly said, it is not going to affect the banks. At a national economic dialogue conference a couple of years ago, an employer stated that the banks find it much easier not to process what they call small accounts because it is too expensive to do so. Those accounts might involve €1 million or €2 million. The banks prefer massive accounts. In regional economies, one always has smaller businesses which are significant and create enough employment but which require greater attention from the lender than they receive. That is the reason we have a proposal on community banking.

My contribution will be short. Most of the questions I wanted to asked have already been asked and answered. There is no point in delaying the witnesses any longer. I know Mr. Boland and Mr. Maye well and I also know Mr. Farrell and some of our other guests pretty well. Over the years, I have given total support to what they are trying to do. It appears that we could get agreement among the witnesses on a rural bank but they are like the fox who has been caught in his den - if he puts his head out, he will be shot. That is the way I read it. I have been listening to the debate all afternoon. Despite their will, plans and best efforts, it appears that someone is waiting outside the den to take them out if they emerge.

In reply to a parliamentary question last month, the Minister of State at the Department of Housing, Planning and Local Government , Deputy English, indicated, "One of the credit union movements is ready; it is through all of the process and has money available. I cannot be any clearer than that." To me, that is worth nothing any more. I am of the view that there is a lot of blocking going on. I will put some direct questions and any of our guests can answer them. In terms of getting this up and running, are we as far from our destination as we are from Timbuktu? Rural banking, as it was provided by the pillar banks, is gone. There is no counter service in the branch Strokestown, County Roscommon, where I live. That is a joke. The position is the same in towns in many counties. We will not have any banking service soon. We are lucky to have the credit unions.

We need this public bank. As a previous speaker indicated, the banks do not want small accounts and they do not want people calling to branches. The tell people they will call out to the community and that, as a result, there is no need for customers to visit branches. My worry is that we are a long way from achieving this, however. I hope I am wrong but I ask that someone comment.

Mr. Seamus Boland

Like us, some of the members have visited Germany. When we did so, we found that in certain regions, particularly near Stuttgart, the impact and influence of Sparkassen, the name of local public banks, is huge. In effect, the local Sparkasse governs the economic development of an area. The Sparkasse model helps created thousands of jobs, both in terms of the people who work for the bank as well as indirectly. That is what we are talking about. It should be remembered that during the recession, the Sparkasse model was the banking service or structure which did not fail. Had it not been in place, Germany would have very different problems now. This is the model that is in place and we should develop our own Irish version. The people in the room have the skills and capabilities to do so. That is what we are asking for. I go back to the question on who is stopping it. While Irish Rural Link has met with a great deal of support across the political system, there is a hard core - perhaps in the Department of Finance and among the members of the banking fraternity - which sees this as a threat and does not want to move it forward. We need bravery and leadership at this stage.

Mr. Seamus Maye

I have a short answer for Deputy Eugene Murphy. He asked a straight question and I will give him a straight answer, which is "Probably not". I read out what the Minister for Rural and Community Affairs, Deputy Ring, had to say about the desperate state of banking and how badly everyone needs public banking. While it is just an example and it may be unfair, when the Minister crosses the M50 and enters the Pale, the Government's stance is that there is no compelling case for public banking. Which is it and why is this the Government's stance? Everyone knows there is a compelling case for public banking. As such, the problem is at Government level. It is a political problem, a problem in the Department of Finance, a Central Bank problem and an ECB problem. These are the entities which are preventing this from going ahead.

That can be judged by the fact that if one reads through the report, it is all about varying the proposal. The fact that Ministers were not available to attend today in order to discuss this matter is a further indication that the political system does not have the backbone to do what is necessary. Now that we are discussing the confidence and supply agreement, one never knows what might happen. Fianna Fáil might find itself again and ensure that public banking is put back on the agenda.

I welcome the witnesses, most of whom I have known for a good while. We know what is needed. We know what medicine is required in rural parts of Ireland. We have seen the new land agency and Mr. Farrell and Mr. Johnson are here from the credit unions. My understanding is that credit unions are not allowed to lend money in the new land agency context. That shows the unwillingness to even think about credit unions. The first thing one has to do is think about someone. If I want money to buy something, the first thing I do is contact the credit union. However, credit unions have not even been thought about in the context of the new land agency. The attitude is that we will just go for the commercial option. Credit unions are being stymied. The big problem for them is that they have a great deal of money. If they have money that is not attracting a return in terms of interest, they are in trouble. Any business which does not make money will not survive. Mr. Maye has travelled the country, north, south, east and west. I have fought with and against Mr. Boland down through the years. The Chairman and I are always talking about people being whipped out of their houses and about the housing crisis. We are blue in the face from talking about it. The bottom line is that we can publish all the reports in the world, but the people who matter do not want to make the decisions.

They would rather ensure that vulture funds, rather than someone in Ireland, are catered for. They would rather ensure that we borrow money in order to ensure that someone in Europe is made up than to help some community get a few per cent in interest under a community banking model. I get so fed up when I talk about this for a simple reason. Decisions are made by the Central Bank. As we know from a year ago, to get a small movement in the Central Bank is like trying to put a jigsaw together over months. One ends on one's backside and one has to get up and go forward again.

Those of us from rural Ireland know that AIB, Bank of Ireland and Ulster Bank do not want to be there. They have let people go. They left most small towns once the State came to their rescue and bailed them out. They do not give two damns about small villages. If we had a public banking model along with the credit union sector, they would open branches in places where there is a pub and a shop and facilitate people. One could put in a loan application on a Monday and get a phone call by Wednesday night to say whether it had been approved. To be fair, most people are helped. It is about whether the decision to facilitate what is envisaged is made by the Central Bank and, perhaps, the ECB. The Chairman would know more about that than I. Ultimately, there needs to be a willingness in government. A Government cannot say something has to be done, but it can create the environment and push the buttons behind the scenes to make it happen. It is a sad thing to say to the witnesses. They have travelled the roads and will continue to do so because they are believers. That is rightly so. However, it depends on whether the will is there. People will probably look at the polls and vote for the same Tweedledum and Tweedledee who are still screwing rural Ireland by not giving us the facility to use our own money to build infrastructure, etc., in our areas and help those who would invest in public banks or the credit unions to get a return. However, the will does not seem to be there. Everyone will tell the witnesses that they are great fellows. Their heads would nearly swell up with everyone telling them they are good. The bottom line, however, is whether there is action. Unless we get action, we are going nowhere.

Do any of our guests wish to make a final comment on any of the issues raised?

Mr. Seamus Maye

I agree with everything Deputy Fitzmaurice said. For example, the Strategic Banking Corporation of Ireland raised €1.25 billion which came from KfW in Germany, the European Investment Bank and the Council of Europe Development Bank. When one particular submission said €170 million was required, however, the Department said it was ridiculous and that it could not come up with that much. Some of the other submissions did not look for money at all. Our submission, which was a substantial one, mentioned KfW, the EIB and so on. As far as we are concerned, the consultation group had made its decision before it started its work. We have to get real about this.

Mr. Kevin Johnson

While credit unions cannot solve all the problems Deputy Fitzmaurice outlined, we are very well positioned and willing to contribute to meeting many of the needs that exist. This type of discussion is useful because it helps us to understand some of the needs which, perhaps, are not being met. In my opening remarks, I outlined our vision for credit unions. To condense and summarise that, it is really for the local credit union to be the financial hub of a community. That is really what we are trying to do. It was interesting to listen to Senator Reilly talk about his visit to Germany. He might well have been talking about a visit to any credit union.

He could easily have been talking about a tiny credit union. Everything he talked about in terms of knowing individual customers and communities already exists. The concern we have is that there is talk of establishing a new entity, which requires capital investment, licences and infrastructure but it is not actually needed. We have all of the foundations of community banking in the credit union system. That said, while the financial term is "banking", credit unions do not want to be banks. We are credit unions and the one thing we want to ensure is that the regulations and legislation continue to protect our uniqueness. The erosion of that uniqueness is something about which we are concerned. We also want a level playing field. There are other entities out there providing consumer loans through the likes of personal contract plans or store credit, for example. These may appear very convenient to consumers but they are not regulated and do not provide the same level of consumer protection that is provided by credit unions.

Mr. Seamus Boland

I wish to acknowledge Deputy Fitzmaurice's remarks. We certainly had some fun travelling around the country together dealing with another matter. On this matter, let us be clear. Irish Rural Link is asking that this is solved because if we walk away from it and decide to leave the pillar banks the way they are and protect them at all costs then job creation in rural Ireland will not happen and the financial health of rural Ireland will not improve. There are problems to be solved and regulations to be drawn up. We proposed a public banking system. We could have sat outside the gates of Leinster House and done what lots of other groups do, namely, make loads of noise but offer no new proposals. We put forward a very detailed proposal. It could be argued that we risked getting our heads cut off and, in a sense, the Department tried to cut bits off the proposal. However, it is still on the table. When it has been proven to be useless and a better idea is on the table, we will be quite happy. Right now, however, Ireland needs a local public banking system.

Mr. Tim Molan

I support Mr. Johnson's comments. Capital is important and we are significantly more capitalised than any banks in this country. My colleague spoke about the model that did not fail. I remember a statement being made in the Houses of the Oireachtas to the effect that there was a €1 billion hole in the balance sheets of credit unions. We never found it because it was not there. Capital is important, as are the reserves. We have over 18% in realised reserves.

One of the issues that was not addressed today, although I mentioned it earlier, is micro-lending. That is very important in terms of the regeneration of our communities and is certainly an area in which we are involved. It is not being picked up in the statistics because it is below commercial levels. I also want to stress the importance of a level playing field. We are the original peer-to-peer lenders but there are others in that space now that are not subject to the same level of regulatory scrutiny as the credit union sector, to the detriment of consumers.

I thank each and every one of our guests for coming along today. I also thanks those who accompanied them. These are priority issues for this committee in terms of community banking, credit unions and trying to find a solution.

Deputy Fitzmaurice, who is a very strong voice for rural Ireland, described the steep hill that the organisations have to climb. They have to continue with the work they are doing. The committee will assist in every way possible. If our guests have suggestions or want to come back again - or if there is any way we can support them through the work we do - we will facilitate them. I speak on behalf of members and, as Chairman, I make that commitment. The Government needs to take heed of the conversation we have had and of the efforts the representatives are making. In terms of the confidence and supply arrangement, I will press for forward movement in respect of the matter we have been discussing. I know it was contemplated in the previous confidence and supply document. We have work to do and, in that context, I urge the witnesses not to give up. This is an important model for the future.

The joint committee adjourned at 6 p.m. until 3.15 p.m. on Thursday, 8 November 2018.