The main purposes of the Bill are to provide for the control, through the agency of the Central Bank of Ireland, of the setting up and operation of banking businesses and the soliciting of deposits from the public; to facilitate the merging of banking businesses in the interest of more efficient banking and to remove the anomaly between the existing statutory provisions requiring parity between Irish currency and sterling and this country's obligations as a member of the International Monetary Fund. Several other changes are also proposed. These relate chiefly to the Central Bank and the Bank of Ireland and I shall be referring to them in greater detail in the course of my remarks.
The Bill is the first major change proposed in banking legislation since the passing of the Central Bank Act, 1942, under which the Central Bank of Ireland was established. The Central Bank superseded the Currency Commission which was set up under the 1927 Currency Act, the Currency Commission being the first native institution given power to regulate the issue of Irish currency following the establishment of the State. This power and some other powers of a minor nature possessed by the Commission passed to the Central Bank.
The 1942 Act also gave the Central Bank the general function and duty of taking such steps as it deems advisable from time to time to safeguard the integrity of our currency and ensure that in the regulation of credit the aim shall be the welfare of the whole community. Since 1942 the Bank has widened the scope of its activities in various ways, bringing them into line with the activities of central banks in other developed countries. It has done this in harmony with the commercial banks and with the support of the public as well as of the banking system.
Some examples will illustrate the progress made by the Central Bank since it was founded. The Bank's legal tender note fund—the backing for the currency—which originally consisted almost entirely of sterling, has been substantially diversified. In addition to sterling, it now holds gold, US dollars and US Federal Government securities, as well as assets representing this country's subscription to the International Monetary Fund and a balance in the general fund of the Bank. Over the years our external reserves have come increasingly under the Bank's control. The foreign exchange assets of departmental funds have been transferred to the Bank. In 1968 and in 1969, following the sterling support arrangements—generally referred to as the Basle arrangements—most of the sterling assets of the associated banks were similarly transferred. Thus, virtually all the country's external reserves are now controlled by the Bank.
In 1955 the Bank, for the first time, helped to improve the liquidity of the associated banks by rediscounting Exchequer Bills and Bills of Exchange. It has since, as and when appropriate, continued to exercise this function. In 1958 regulations were made requiring the associated banks to settle their domestic clearings through the Central Bank and to maintain deposits with the Bank for that purpose. In 1965 the Bank commenced the issue of guidelines to the associated banks on domestic credit creation. The issue of comprehensive advice every year on credit policy, covering the entire banking system, is now an important function. In 1965 also, responsibility for the day-to-day administration of foreign exchange control was transferred from the Department of Finance to the Bank.
In 1969, the functions of the Minister for Finance relating to payments to and receipts from the International Monetary Fund were transferred to the Bank as provided for by the Bretton Woods Agreements (Amendment) Act. The Bank also has responsibility for the operation, as far as this country is concerned, of the special drawing rights scheme which was put into operation by the IMF in 1970. Arrangements have also been made under which issues of Exchequer Bills are now made through the Central Bank. In addition, the issue and registration of various National Loans is now the responsibility of the Bank.
Another new activity of the Bank is the fostering of an active money market. The centralisation of the external reserves, which I have already mentioned, is relevant in this context. For the same purpose, arrangements have been made for the acceptance by the Central Bank of a wide range of shortterm deposits from the banks and finance houses, for active dealings by the Bank in short-dated Government securities and for the issue of exchequer bills to the banks at more frequent intervals. Money which was formerly placed in London is now being placed at home and a native money market has been initiated with the Central Bank playing a role of increasing importance.
Under the present Bill many new powers and duties will be conferred on the Bank. As I have already mentioned, a major purpose of the measure is to give greater protection to persons depositing money in banks and finance houses, all of which will have to hold licences issued by the Bank before they can accept deposits. This is necessary because nowdays the potential saver is faced with a bewildering range of deposit-taking institutions, domestic and foreign, many offering attractive inducements, such as high interest rates and easy withdrawal terms. The business of dealing in money is no longer the preserve of the banks as that term is commonly understood by the general public. In this situation, the existing supervision of the opening and operation of banks is clearly inadequate and needs to be strengthened.
At present, anybody can open a business to take deposits from the public on obtaining a licence from the Revenue Commissioners, which must be issued on application and payment of a fee of £1. A licence is required, however, only if the business accepts deposits payable on demand or on not more than seven days notice. If the business uses in its name or in advertising the word "bank", "banker" or "banking" or any analogous word, it must make a deposit of £20,000 with the High Court in cash or securities, but otherwise it is free to conduct its business without making any deposit. Apart from powers to collect information, the Central Bank has scarcely any formal supervisory or controlling function in relation to banking and similar businesses.
We have virtually an "open door" policy. There are over 80 bankers' licences currently in force. This number includes the eight associated banks and their subsidiary companies and about 20 other Irish concerns without known external affiliations. The remainder are subsidiaries, branches or affiliates of external institutions; most of these commenced business within the past decade. The Bill provides for a regulatory licensing system with the Central Bank as the licensing authority. The Bank will have discretion in granting licences but will not be able to refuse a licence without the consent of the Minister for Finance. The applicant may make representations to the Minister who must consider them before giving his decision. A licence may be refused only if refusal is in the interest of the orderly and proper regulation of banking. Conditions may be attached to licences.
With the Minister's consent, a licence may be revoked on certain stated grounds, namely if the holder so requests, if the business has ceased, if the licence holder is unable to meet his obligations, fails to maintain the required deposit with the Central Bank, is convicted on indictment of any offence under the legislation, is convicted summarily of an offence involving fraud, dishonesty or breach of trust, or if the circumstances have so changed that the licence holder would not be granted a licence under current practice. The licence holder may make representations to the Minister for Finance regarding the proposed revocation and the Minister is obliged to consider any representations.
Every licence holder will have to keep a deposit in the Central Bank equal to 5 per cent of his customers' deposits within the State, subject to a maximum of £500,000 and a minimum of £20,000. The Bank will have power to prescribe books and records to be kept by licence holders, to inspect the books and records and to obtain returns from the licence holders. If it appears that a licence holder has become or is likely to become unable to meet his obligations, the Bank may direct the licence holder to suspend the taking of deposits and the making of payments unless with the Bank's permission. The licence holder will have a right to appeal to the court against any direction. Directions may also be given by the Bank as to the information to be published in any advertisement or requiring the cessation of advertising. There are special provisions to facilitate depositors in recovering their money through court action where a licence holder fails to pay amounts due.
I am satisfied that it is necessary to give these extensive powers to the Bank in order to ensure adequate protection for depositors. The controlling authority must be in a position to act quickly if there is good reason to believe a default is likely to occur. Action after a business has defaulted could be too late.
The Bill also contains provisions designed to give more effective control of credit by strengthening the monetary policy instruments available to the Central Bank. The Bank has operated monetary policy in recent years by means of credit advice to the banks, with a fair degree of success in normal circumstances. The gradual emergence of a more complex and sophisticated banking system makes it desirable to provide more formal powers of control. Variable reserve and liquidity ratios are used by many central banks as a strong and flexible instrument for regulating the amount of bank lending and it is considered that the administration of monetary policy would be strengthened by giving similar powers to the Central Bank. The Bill provides, therefore, that the Bank will be able to require holders of banking licences to maintain specified ratios between different types of assets and liabilities.
In view of the increasing number of banks in Ireland, it is in the interest of the public generally that facilities for the clearance of customers' cheques should be widely available on reasonable terms. It is, therefore, provided in the Bill that licensed banks will be required to accept from customers, for collection and crediting of the proceeds to the customers' accounts, cheques drawn on other licensed banks. It is also provided that the Central Bank will have power to supervise the conditions under which these facilities are made available, including arrangements whereby one licence holder acts as banker for another.
I referred earlier to the rapid increase in the number of banking and financial institutions which have opened here in recent years, many of them of external origin. The foreign banks have helped to introduce new skills and techniques and to promote the inflow of investment capital. When the associated banks were closed last year, they provided much-needed banking services. They have been welcome for these reasons. Nevertheless, the Government consider that widespread penetration of Irish banking by external interests would be undesirable. We have a long-established and well-developed banking system with branch banks widely spread throughout the country. It might, indeed, be said that we are already overbanked. Our attitude towards the opening of new banks and of new branches of existing banks must, therefore, be one of caution. Our policy would, of course, have to have regard in due course to any obligations we might incur as members of the European Economic Community regarding participation by non-nationals.
Provisions are included in the Bill to facilitate the transfer and merger of banking businesses. I hope these provisions, which are basically similar to those of the National Bank Transfer Act, 1966, will be availed of to rationalise our banking system in a way that will make for greater efficiency and more economic use of banking resources. The two major banking groups have rationalisation schemes in progress and I trust that these will contribute to a great improvement of the banking structure. At the same time, I should add that the Government are fully alive to the dangers that might arise from too great a concentration of banking.
Part IV of the Bill deals with the standard unit of value. It expresses the par value of the Irish pound in terms of gold and provides that the Government may, by order, change the par value after consultation with the Central Bank. There has been some misunderstanding of this provision. What is intended is solely a technical change. The existing position is that the 1927 Currency Act established a fixed parity between the Irish pound and the pound sterling. Under this provision the exchange value of the Irish pound, while remaining the same as against sterling, automatically follows changes in the value of sterling vis-à-vis other currencies. This position is inconsistent with the obligations arising from our membership of the International Monetary Fund. These obligations are set out in the following three quotations from Article IV of the Fund's Articles of Agreement:—
(1) "The par value of the currency of each member shall be expressed in terms of gold ..."
(2) "A member shall not propose a change in the par value of its currency except to correct a fundamental disequilibrium."
(3) "A change in the par value of a member's currency may be made only on the proposal of the members and only after consultation with the Fund."
Acceptance of the obligations was approved by the Bretton Woods Agreements Act of 1957. The present Bill will remove the contradiction between that Act and the 1927 Currency Act.
As I have already made clear, the question of devaluation of our currency in relation to sterling does not arise. The Government have no intention whatsoever of changing the existing parity with sterling and the policies we are committed to following will ensure that no such eventuality will arise. Indeed, we are looking forward to the prospect of membership of the European Economic Community in which, if present proposals materialise, there will be a progressive movement towards fixed parities between the currencies of all the member countries. I hope that no more need be said to dispel misapprehensions on this score, particularly as financial confidence is so important a foundation for economic development. Given this importance, I have no doubt that Senators will act with a sense of discretion in any comments they may make.
The last part of the Bill—Part V— contains a number of miscellaneous provisions. The former Currency Commission had power to carry on normal banking activities but, although the functions of the Commission generally were transferred to the Central Bank, the 1942 Act has been construed as limiting the Bank to the specific powers listed in the Act. It is proposed to restore the express power to engage in banking activities, particularly in view of the further provision, to which I will refer in a moment, namely the proposed transfer of the Exchequer Account to the Central Bank.
The provision regarding reserve bonds is related to the transfers— which I mentioned earlier—of sterling by the associated banks to the Central Bank for inclusion in the official reserves. In the first instance, it is proposed that the bonds be issued against some of the sterling transfers. It is considered desirable that power should be available to the Bank to issue these bonds so that they may be available to licence holders as a form of transferable domestic liquidity reserve for use within the banking system. It is expected that they will facilitate the development of the domestic money and bond market.
The proposal to transfer the Exchequer Account from the Bank of Ireland to the Central Bank will bring our practice into line with that of other countries. The Bank of Ireland also holds the registers of several Government Stocks and the Land Bonds registers. Arrangements are being made to transfer these to the Central Bank but legislation is necessary only in respect of the Land Bonds registers. Almost from its establishment under the pre-Union Irish Parliament, the Bank of Ireland has acted as Government banker. It is only fitting that I should say that the Bank and its officers have over the years carried out this function in an efficient and helpful manner and that I should express the Government's thanks to them. The transfers are being arranged by mutual agreement and will be phased over a period to facilitate both sides.
At present the Bank of Ireland, by reason of the charter and the special legislation under which it operates, suffers from some disabilities as compared with the other banks to which the Companies Act applies. Provision is made in the Bill to remedy this so that, in future, shareholders of the Bank of Ireland may be in the same position as shareholders of the other banks in regard to the management of the business.
There is doubt as to whether the Moneylenders Acts apply to some forms of banking. Under the Bill, holders of licences are, as such, being exempted from any obligation they might have to register as moneylenders under these Acts, leaving the control and regulation of banking to be dealt with under the provisions of the Currency and Central Bank Acts.
The maximum number of members of the board of the Central Bank is eight, in addition to the governor. Of the eight, three, known as banking directors, are drawn from a panel elected by the associated banks, that is the eight commercial banks which were the shareholding banks in the former Currency Commission and which were associated with the Central Bank by the 1942 Act. Changes in the banking scene since then, including the emergence of two predominant groups amongst the associated banks, make it necessary to review the arrangements. The existing procedure of selection of banking directors by means of a panel system is overelaborate in the new circumstances and, following the various mergers, it is not considered necessary to have three directors representing the associated banks. The Bill provides, therefore, that in future the Minister for Finance will appoint two banking directors from amongst persons who are directors of associated banks. As the total number of directors will remain unchanged, the Minister will be able, if he so wishes, to appoint a further non-banking director and thus broaden the representation on the board.
When the Decimal Currency Act, 1970, was debated in the House, a point was raised about the validity after the end of the changeover period of informal contracts drawn in £sd terms. To remove any possible uncertainty, I have decided to include a provision in this Bill substantially repealing section 14 of the Decimal Currency Act, 1970. In addition specific provision is made to secure that the £sd system may continue to be used for all contracts and other transactions. I am advised that these measures will suffice to ensure the continued validity of contracts made in £sd, whether formal or informal and no matter when made.
The provisions of the Bill will add considerably to the responsibilities of the Central Bank. It is important that the Bank should have the freedom and discretion, as well as the administrative competence, to enable it to discharge these responsibilities fairly and efficiently and with full regard for the public interest. I have every confidence in this respect in the Bank's board and staff.
When the Central Bank was being established, the relationship between the Government and the new institution was considered, and the then Minister for Finance said in the Dáil that:
It is intended that there should be the fullest co-operation between the Government and the Central Bank. The Government does not, however, propose to interfere with the administration of the Bank which will be independent in the carrying out of its functions. This independence is possessed by almost every Central Bank throughout the world and is a very desirable provision.
I have already mentioned the general function and duty ascribed to the Central Bank by the 1942 Act which are to take
...such steps as the Board may from time to time deem appropriate and advisable towards safeguarding the integrity of the currency and ensuring that, in what pertains to the control of credit, the constant and predominant aim shall be the welfare of the people as a whole.
This statutory function of the Bank in relation to monetary policy does not, of course, diminish the ultimate responsibility of the Government in that sphere. There can be no question about the responsibility of the duly-elected Government for national economic policy, of which monetary policy is an important and integral part. The need for integrating monetary policy with general economic policy and the ultimate authority of the Government in regard to both are evident. They are fully recognised here and throughout the world.
At the same time, because of basic public interest considerations and historical experience, it has been recognised universally to be desirable to have a special institution, differing in constitution from, and enjoying more independence than, a Government Department, charged with the immediate responsibility for monetary policy. There are very few independent countries in which there is not a Central Bank. In some countries the ultimate authority of the Government for national economic policy is expressly indicated by a statutory provision for the issue of a policy directive by the Minister for Finance to the Central Bank. Elsewhere, the ultimate authority of the Government, even though it may not be expressly defined, is nonetheless undisputed. Everywhere, subject to this ultimate need for reconciliation of monetary with general economic policy, the maximum independence and discretion is assured to central banks.
In our case the relationship between Government and Central Bank rests as much on mutual confidence as on statue. It is sustained by frequent consultations between the Minister for Finance and the governor of the Central Bank on all aspects of economic policy, by a frank interchange of information and comment in the policy field and by the fact that the Government has an official representative on the board of the Bank. It has worked well since the establishment of the Bank in 1943. The Bank has always had regard to national economic policy in considering monetary policy and I have no doubt that it will continue to do so. I do not regard the provisions of the present Bill as calling for any change in the basis of the present relationship.
I do not wish to dwell on the dispute which for many months last year suspended the country's main banking services. It caused widespread trouble and inconvenience to the business community and private persons alike and it is now clear that in its overall effects it was damaging to the economy, mainly as a result of the excessive expansion of credit which took place. Professor M.P. Fogarty has made a valuable report to the Minister for Labour on the dispute and the Central Bank will be publishing shortly the results of its survey, with the Economic and Social Research Institute, into the economic effects. In addition to these official inquiries, the dispute and its consequences have been widely debated over the past year. There is nothing to be gained from continuing to hark back to past events. The lessons are clear and it must be the aim of all concerned to avoid any recurrence. I welcome, therefore, the discussions now taking place within the banks between management and staff and trust that a new era of fruitful and harmonious relationships will emerge.
Meantime, the powers proposed in the Bill will put the Central Bank in a strong position in various ways to deal with banking problems, whether arising from a bank closure or otherwise. The Bank will, for example, be able to engage in any necessary banking activity, including clearing activities. It will also, as I have already indicated, hold the Exchequer Account.
I am asking the House to approve the proposals in this Bill. I believe they will add considerably to public confidence in our monetary institutions and strengthen the efficiency of the monetary system, which is indispensable for successful economic and social advancement.