Spokespersons for each side have 20 minutes to speak; other Senators have 15 minutes. The debate is to conclude not later than 4 p.m. Is that agreed?
Banking and Credit System: Statements.
Was a time limit agreed on the Order of Business? There may be no need to curtail the length of the speeches.
Yes, it was agreed on the Order of Business.
I welcome the Minister to the House.
Many people wonder why I was so insistent over a protracted period on a debate on the banking system. It was not because of any personal difficulties I had with the banks but because I wanted to reflect the views of bank customers who, over the past two years, have been loud in their criticism of bank service and charges.
For historical reasons, the banks have assumed the role of economic arbitrators, and decisions taken by bank directors and management now reach into the fibre of society. All banks allocate considerable resources to persuading the public that their ways are in the public good and that their motives are philantrophic, yet, when criticised they retreat and say they are profit-making institutions.
Complaints arise basically from the fact that the banks were always identified as people friendly. The perception now is that banks are anything but friendly, and many Irish customers believe themselves held to ransom for the banks' mistakes in foreign investment. Accordingly, for many of them the loyalty they once felt — that one started with a bank and continued for a lifetime with it — no longer exists. I suggest that banks take seriously the criticism and charges being levelled at them because they are now facing into a more competitive market than previously with further integration of this country into the EC. If they do not do so, they may find that the customer base on which they have relied may not continue.
People have complained to me about being charged incorrect rates, mistakes made in accounts, intimidation in the small firms sector and centralisation of decision-making. Long gone is the day when one could rely on a bank manager to stick by decisions made at local level and to look after one on a personal basis. People complain about the high levels of charges and inordinately high interest rates on bank cards of 27 per cent to 33 per cent, and it has been suggested that their charges are no different to those of moneylenders except that moneylenders show what the charges are, so that one knows where one stands.
This debate affords us the opportunity to warn and inform the banks that they are losing the goodwill of customers, and to remind them that they were publicly castigated by the present Taoiseach when he was Minister for Finance. The time has come for banks to take note, and I suggest that they set up an information service. The services of the Irish Bankers' Federation will do nothing to eradicate the present perception unless banks change their overall policy.
The concept of bank charges is well established according to the Irish Banks Information Service. No one objects to paying charges if they are fairly applied and if the effective cost in dealing with the bank can be identified.
There are a wide variety of charges, ranging from fixed amounts such as account maintenance charges, accepting direct debit mandates and accountants' requests, to variable amounts for nonautomated transactions, handling notes lodged, withdrawals, etc. These charges can be substantial for businesses with a large number of transactions and particularly so for retail businesses. Charges can be reduced in some instances but in a large number of cases bank charges add substantially to the cost of running a business.
Many retail outlets lodge cheques and cash. They cash cheques for customers who cannot avail of the restricted banking hours. When retailers withdraw money in coin they are faced with another charge and this is quite unfair. The retailer in these circumstances could be deemed to be giving a banking service and, rather than being charged for it, he should be compensated in some way. At the end of the day the retailer feels he is being faced with a double-edged sword.
Recent research by the Irish Banks Information Service claims that the same "basket" of current account costs amount to on average 58 per cent less here than in the UK. However, it would be interesting to establish if the "basket" includes all charges. A significant point to be made here is that most UK banks pay interest on current accounts that are in the black, while Irish banks pay nothing. The information sheet supplied by the IBIS states:
If the full cost of bank services were to be reflected in interest rates charged or paid, all customers would end up paying for them. As it is, banks charge their services only to those customers who benefit for them.
This would be fine if a customer could determine whether the charge was fair, and if he could determine in terms of an overall interest rate the total cost of his dealings with the bank. As it is, it is extremely difficult for a business man to compare his costs with those applied by another bank, or those incurred by a similar business. At least where moneylenders are concerned, the interest rate quoted usually includes all charges. With the banks the true cost of doing business can be almost unidentifiable. Banks should provide a list of all charges with every account rendered to the customer, and information should be readily available and easily identifiable in all banks as part of customer information services.
It is worth noting, that while banks do quote the annual percentage interest rate, (APR) relating to loans, overdrafts, etc, provided by them, this rate does not include surcharges, for example, for exceeding sanction limits or for not clearing an overdraft for 30 days; these add significantly to interest costs for the borrower. Banks should always show the effective rate of interest charged, not just the quoted rate.
I also question the banks' attitude and decisions relating to the small business sector. This sector suffers most from the two-faced approach, in that business men have to pay up to 4.5 per cent on fully secured loans. Interest rates in Ireland are quoted in terms of and A, AA and the AAA ratings, depending on the sector within which the borrower operates. The most preferential rate is the AAA applied to Government-backed and blue chip businesses. Most businesses have AA rating, while the personal borrower has an A rating. For this reason there is a difference of up to 4.5 per cent between the rates charged to the blue chip sector and those applying to the personal borrower. While this might appear reasonable as it helps to compensate the banks for the perceived greater risk, the banks are becoming more and more risk averse.
Irish banks were never and are not now in the business of taking risks in this country. This is seen in the substantial returns banks obtain in Ireland. This causes a major distortion and inequity within the banking system. It is my view that there is cross-subsidy from the small and medium business sector to the large business sector. Individual clients having access to large funds, foreign if necessary, expertise and personal contacts are in a position to negotiate rates, often at minimum or no profit to the bank.
Banks are quick to point out that they do not make a profit on some of their services. Let them tell us the percentage of contribution to profits of each of the three categories of customers, the single A, the double A and the triple A borrower. Then we will see the true reason for the 4.5 differential in interest rates.
The banks are seen to make substantial returns in profits from their operations in Ireland. On the other hand to compete abroad they have been forced to take risks with some obvious disasters. It is suggested that part of the reason for our recession is that banks are looking for a far greater return of profits here to compensate for losses abroad. This means that they are more cautious than ever in their lending policies, with detrimental consequences for job creation. How can businesses develop if finance is not available? In this country the banks have done well and it is now time they took the lead and assisted businesses to develop and grow so that the economy can be turned around and a substantial number of jobs created.
The banks will claim that theirs is a commercial enterprise trading to generate profits for their shareholders in a competitive market and that they react to customer demand.
Collateral is a major issue for small business. There are understandable reasons for requiring security from certain firms, particularly those of high risk with poor track records. However, it is not acceptable to seek business and personal collateral from an established and profitable business where the owner has already invested a substantial amount of finance and where the ratio of asset-backed security to the loan is greater than one to one. Many business people believe that the level of security required by banks is excessive, particularly from firms with borrowings of less than £50,000. The matter takes on additional importance if, having secured an initial business or personal loan with assets available, further borrowings for growth or working capital are not available because excess security is tied up. It is also important to stress that all banks should automatically rescind collateral security pledges when the loan has been fully paid off. Certain instances have been quoted to me that suggest this is not always the case.
While the major incentive for setting up business is that of limited liability which by its nature restricts the person's exposure, one criticism of banks is that they negate the benefits of limited liability by their insistence on personal guarantees. Most small businesses do not have in-house financial expertise and are dependent on their accountants and bankers for financial advice and many accountants believe that small businesses are not getting optimum benefits from the banks. For example, customers with a current account are charged overdraft interest at 13 per cent while their deposit account earns only 6 per cent with no word of advice from the bank on switching. Surely the bank should inform customers of possible higher interest rates available elsewhere? If they do not, the customer's interest is unprotected. Customers' money on deposit should be earning the maximum interest.
Another area of concern for small businesses is whether the banks have sufficient knowledge of the customer and the business sector. In a small firms survey a large percentage of respondents said it was important that the banks had such knowledge. However, in the survey, fewer than 50 per cent of the banks were rated as good and 20 per cent were rated as poor. These results give rise to concern as to whether the banks can satisfy customer needs.
The banks now market various insurance products. One will find it difficult to obtain an ordinary annuity mortgage on applying to one's bank. One will be pushed in the direction of an endowment mortgage, advised of the benefits of pensions and offered one operated by one of the bank's subsidiaries. There is no guarantee that this is the best approach for the customer.
The additional role of the bank manager, as an adviser whose interests are served by ensuring that businesses and financial affairs are conducted as profitably as possible is under threat. It is neither in the bank's nor in the customer's interest for a customer to take out a loan he is unlikely to repay. The risk of loss to the bank outweighs any profit margin it might make on lending. Prudence, therefore, governs the bank approach to lending and that in the long run benefits the customer as well.
The same, however, cannot be said of insurance products. At the very least banks should inform customers that other products are available from other companies. There is a strong argument for not putting all your eggs in one basket. If one takes out a mortgage with the bank all one's liabilities may be secured against one's property. On the other hand, a mortgage from a building society will not automatically give a bank access to a house as collateral for an overdraft. I strongly believe that it is a mistake to purchase any financial services from a bank other than those offered in the normal line of business. One of the lessons to be learned is the need for small businesses to be better informed on alternatives and to negotiate with banks on all aspects of bank service.
It is essential, therefore, that business organisations inform their clients of the need for financial planning and the correct allocation of different types of finance, and that alternative financial arrangements be available. As an example, the Small Firms Associations approached an insurance company recently and a group rate covering insurance for cars and property was arranged for all association members. The result was a premium saving of 40 per cent across the board. An arrangement like this should be undertaken by the banks.
Firms should often insist on meeting bank managers on location or on the firm's premises. In those circumstances, firm managers would be more comfortable and confident and this would also allow bank managers to see a business at first hand reducing the risk that a business and business person will be seen only as an account number.
I suspect that bully boy tactics are being employed within the financial services sector, particularly by the Bank of Ireland as provider of financial services at Irish airports. This matter was raised by Deputy O'Donoghue previously and did not get the attention it deserves.
Aer Rianta recently granted a licence to the first rate Bureau de Change, a wholly owned subsidiary of the Bank of Ireland, to issue tourist VAT refunds via bank outlets at airports. The Bank of Ireland is a totally new entrant into this market, which is already well serviced by two established small Irish companies, one in Spiddal, County Galway, and the other in Killorglin, County Kerry, employing 200 people in a range of services.
The decision to introduce an additional supplier of the service was taken we were told in the interest of creating competition. Surely this rings hollow in the light of Aer Rianta's long standing and ongoing policy to grant the Bank of Ireland a monopoly in the supply of financial services at Irish airports? The Bank of Ireland is currently canvassing the retail customers of the existing suppliers of this service from information contained in their sales literature. They intend to gain a substantial share of this mature market through a system of kickback payments to retailers funded directly from the tourist market.
To prove this latter point, I ask the Minister to bear with me while I quote directly from the sales literature of the Bank of Ireland subsidiary:
1. Every retailer with 5,000 vouchers receives a payment of £3,075.
2. What it all adds up to is an absolutely first rate opportunity to make money from tax free shopping in your retail outlet.
Surely the purpose of the VAT refund scheme was to benefit tourists and not to create profits for Aer Rianta and the Bank of Ireland.
I referred to two companies operating in Spiddal and in Killorglin and I would like an immediate investigation carried out because if the Bank of Ireland and Aer Rianta are permitted to exploit this monopoly position then 20 jobs in those two factories will go before the summer is out with further consequences for that small industry in the future.
Some years ago the Bank of Ireland awarded a "Business Idea of the Year" award to the company in Spiddal for what were termed "their innovative proposals in the VAT refund area." The bank itself assisted this company in the development of the scheme and was in turn provided with much confidential information pertaining to the affairs of that company. This company has now been targeted by the bank and with co-operation from Aer Rianta they are in collusion to drive this company out of that section of the market. The company considers it important that the Minister would ask his colleague in the Department of Tourism, Transport and Communication to ensure that Aer Rianta, a State body under Government control, do not lend support to this most undesirable development with detrimental results for the tourist industry that is vital to all of us.
I thank the Minister for staying with us and I thank the Government party for scheduling this debate. The initial reaction of the financial mandarins both in and outside the public service was to throw their hands up aghast at the idea of letting mere mortals in this House, and maybe elsewhere, loose to discuss the financial institutions. How could we be trusted? What would we say about them? We might attack the Establishment. This debate is a healthy sign.
Share prices have plummeted in the last few minutes since Senator O'Keeffe spoke.
I thank the Leader of the House and the Minister for Finance who obviously gave the nod at last to this debate. We are all responsible people and there is a major problem with the banks, in that perception of their role and of their behaviour does not always correspond. Their public relations machines in recent times have been working overtime and doing a good job. Banks are latter-day converts to the need to let the rest of us, mere mortals or general practitioners, know what they are doing and how they do it. There are many real difficulties but some perceptions are unfair. I think this debate will contribute towards easing the difficulties in this area.
There is no doubt that in recent times the banks have come in for much criticism of the way they conduct their business. They, albeit late in the day, recognise the poor public image they labour under. To be fair, much of it is more in the realm of perception than of reality and some is based on misinformation and misunderstanding of their role and how they operate. We hear criticisms of bank profits being too high, interest rates penal and charges out of control. It is said there is little or no competition between the banks and they are squeezing on credit. It would appear they can get little right. Given their importance in our economy it is just as well they can rebut most of these criticisms to a large extent. Even they admit, according to David Went at the IMI Conference this year, that they have failed miserably to get across an understanding of the need for profitability to the man in the street or, perhaps more importantly, he said, to the politicians. Perhaps this is a start to the process, it is a two-way process and we all have to learn. The bankers need to learn about the politicians' role and whom we represent and the politicians have to try to understand and become more informed about the role of banking in our economy generally.
The fact that we are here today is testimony to David Went's statement. There have been calls for some time from all sides of this debate on our banking system and it reflects growing criticism by the man in the street. Our bankers should not be alarmed at open discussion. Perhaps teasing out and identifying problems will lead to a greater understanding all round of the banking role. We in this House are not specialists, we are merely GPs, with the notable exception of one or two Members of the Chamber.
Banks play a vital role in our economy so there is no argument among us about the need for proper regulation to ensure stability in the financial markets and to protect the interest of depositors and shareholders. With the single monetary policy and single currency around the corner, the banks are being told that it is up to them to grasp the opportunities of the Single Market. Whether we are looking at deregulation or re-regulation I am not sure, but major changes there will be in bank regulation, with many EC directives coming into force which will impact directly on them. We have the second banking co-ordination directive, own funds and solvency ratio directive, banks accounts and branch accounts directives, money laundering directive, consumer credit directive and there will be more to come such as the deposit guarantee schemes directive, large exposures directive, consolidated supervision directive, the investment services and capital adequacy directive. I will not begin to try and explain these but is it any wonder the man in the street is confused? He did not know what was going on before, and now all these new charges are being foisted on the system.
I list these directives to indicate the enormous changes in regulation that are being or will be introduced. I read recently that regulations should not be so unduly onerous as to stifle development and the full potential of the banks' contribution to our economic well-being. Neither must regulation prevent the operation of market forces nor prevent banks from taking higher risks to secure better rewards and that heightened regulatory control, which is necessary to counter-balance deregulation, should not remove the commercial process. There is little chance it will because that has nearly come to a halt already, I would suggest. I think it was the Chairman of the National Westminister Bank who voiced those views, and I agree with him, but my problem rests with the fact that even now before deregulation the banks are not operating the commercial process as I would like it, and they are not taking risks, let alone higher risks, to secure better rewards.
The latest Finance Bill augurs badly for any improvement in risk investments with the changes in the DIRT rules which have been introduced to counter the outflow of money, as and from the abolition of exchange controls. They may be good to counter that difficulty but they certainly augur badly for increased investment risks by the banks. Maybe not, maybe the new special deposit accounts will attract so much savings that the banks will have extra money on hands and will be looking for projects to invest in and to which to lend. This whole area needs urgent analysis.
What do I say to would-be entrepreneurs in Wexford where we have a jobless total of 24 per cent? What do I say to those who want to start up small businesses, who have well researched ideas and markets identified, with the help of research and development grants from the IDA, but who can get no seed capital, no investment capital, no venture capital or start-up money of any kind from our banks? What role are the banks playing in this most important sector of our economy? The pension fund managers are looking for blue chip or low risk investments, all tax-based incentives are virtually gone, ostensibly to stop abuse, but if we are serious about creating jobs, about reducing the dole queues, we must tilt the balance in favour of wealth creators, particularly small businesses. All this talk from the Minister for Education about creating an enterprise culture in our schools will come to nothing if our financial institutions, primarily our banks, feel they cannot take the risks needed in investing venture capital and start-up money or in the expansion of existing small businesses. The situation will get worse after the abolition of exchange controls, as fund managers will look abroad to spread their portfolios into low risk investments or high return deposits. There is an urgent need for research and analysis in this whole area to see how much the perception of the problem actually matches reality in this area.
There has been a confluence of events in recent times which have all been pointing in one direction, namely to a credit squeeze which the banks will vigorously deny. Exchange controls are being removed. There are changes in the capital gains tax — we now have one rate — so there is no incentive to hold on longer to avail of a higher tax rate. There are restrictions on the business expansion scheme and thresholds on limits in investment in that area. There is a squeeze on IDA grants, with the banking sector at best cautious, if not actually operating a credit squeeze. We will be kind and call them cautious, particularly with start-ups in the small business area. There are changes in the DIRT tax. The banks need to subsidise overseas losses, they will vigorously deny that but it is in the overall equation. Such a confluence of events all point away from high risk investment, even if there might be a chance of more reward at the end of the day in some cases. The banks are, at best, cautious; being honest about it, they just do not want to know.
Small start-up companies have been affected for a long time, now development companies are being affected and, in time, the effect will be passed on to bigger companies. It is hard to analyse the effect statistically but we need analysis. At a time when we are embarking on the Single Market which will be fully in place on 1 January 1993, when we will have a tariff and barrier-free Europe with the free movement of goods, people and services, when open competition comes into the whole area of financial services, it is hard to understand the attitude of banks towards investment, particularly in start-up small companies.
Venture capital companies themselves have moved to lesser and lesser risks. The DCC is now more of a holding company. Companies dealing in software have particular difficulties because they do not have many fixed assets as collateral. Where do they go to for investment needs, particularly at this time? We have the whole controversy over the need for personal assets as collateral and security which has been dealt with. It is very emotive and I know the banks are changing their approach in this area. It did enormous damage to the concept of banks and banking by the extortion of the personal collateral and personal assets from those trying their best to create wealth, to create jobs and to get our economy up and going.
The statistical map is difficult to draw but, at the very least, the banks are being overly cautious and the trend is very worrying. I am being kind when I express it that way. Those who took stakes in the small companies market on our stock exchange now find it impossible to trade in those stocks. That source has become very unpopular. We must take account of the ability of people to trade in small stocks on the market. Something needs to be done in this area if there is to be a future at all, and I question it.
Now with European Monetary Union round the corner, the Single Market and, hopefully, the ratification of the Maastricht Treaty, our companies, more than ever, need to invest in market and product development, in management teams and staff skills and in new facilities and equipment to ensure that they are better than our competitors. This present time is critical for investment, and it is a time when the banks are holding back.
There are mixed views on the abolition of Fóir Teoranta. Reasonable criticism suggested that too much money was spent preserving uncompetitive entities. Now we need to look to increasing investment either through the State or semi-State structure or by incentives in our banking system, to allow existing companies, which are potentially viable, to become more competitive with the open market around the corner. We must allow the IDA to become more involved in companies before they go to the wall. They should not just be involved in counting heads in terms of job creation, they could also say that potentially they saved 100 jobs by investing in measures to increase competitiveness. I think we were a little simplistic in assessing performance in this sector. I would like even greater IDA investment to improve competitiveness in the areas I mentioned, before it is too late, so that we can identify viable companies which have enormous potential if they get help with competitiveness, at this critical time in European development.
We must recognise that the banks are answerable only to their shareholders; apparently they do not have a social brief. We must restore the necessary incentives to them. I suggest that tax based incentives are the only carrots that will do the job. There may be others that I am unaware of which will ensure that there is a policy of high risk-taking for, hopefully, a better reward in this area. I am afraid the banks must accept a lot of the criticism that they are squeezing on credit. Bank lending has slowed down measurably in the last two years and it is obvious that all applications are put under a microscope. The banks will blame the economic climate and decreased economic activity, but surely the squeezing of credit continues the downward spiral of economic activity, particularly when prospective borrowers are offered no alternative sources of income.
The banks will say the operation of the Companies Act, 1990, is causing difficulties for them. Mischievously, I would suggest that the squealing by the banks is a good sign; obviously the Companies Act is working very well. However facetiousness apart, we must analyse what they are saying because I am afraid they will use what they perceive as difficulties with the examinership section of the Companies Act to increase their squeeze on credit and to restrict investment even further. They may feel unviable companies are sheltering under the examinership system and not facing up to facts.
Examinership for potentially viable companies is an enormously important weapon in our company armoury, but let us look at what the banks are saying. Let us have a cold critical analysis. They may be squealing unduly or there may be justification in what they are saying, but let us be sure that any difficulty that may exist will not restrict credit even further, particularly for those who have no other source of credit. I urge the Minister to look at the area as soon as possible.
The IBF supports strongly the concept of examinership but they feel the manner of operation is forcing banks to examine their own policies of lending on a secured basis. If this is added to the difficulties in lending, particularly lending on a secured basis, there will be nowhere for the money to be put, particularly the extra money they may get with the special deposit account facilities that were granted in the recent Finance Bill.
They accuse the examinership system of being used to shelter badly managed companies which have little prospect of being viable. They also state that it is unfair to creditors and competitors who are being placed at market disadvantage by non-viable companies using this system. This is worthy of urgent scrutiny particularly when one considers that up to April this year, 116 companies have used the examinership system; 61 of those were in the Goodman Group and six were in the UMP Group. Those cases got a lot of publicity. Many of us formed our views of what was happening during those examinerships and the view of the public was that criticism could be levelled at both the banks and the companies. Let us have an official analysis and let us be sure that, whatever else we have done, we get that right.
I want to raise another matter with the Minister about which I feel very strongly, that is, the Government are effectively forcing the local authorities to pay bank charges. I know the banks initially mooted the idea that local authorities would have to pay bank charges, but I put to the Minister that the local authorities are different from corporate entities. That was recognised by the banks in 1926 when they entered into an agreement with the local authorities. Maybe the banks were afraid of nationalisation at the foundation of the State, I do not know, but they accepted the position of local authorities as economic generators and facilitators. Minister Flynn promised to go to Government and publicly told the managers that he would not accept those changes. Minister O'Hanlon, also, did not agree and suggested a tendering procedure. The banks have now threatened to resign as treasurers. The Government have backed off and, with the banking cartel being operated, we have a stalemate which will do untold damage to local government.
Minister Smith may change that.
Where is local government reform? Let us postpone any bank charges at least until we have reform in place, until we have proper financing of local government so that they can pay any extra charges and let the principle of subsidiarity we hear so much about in Euro-speak mean something, so that local government is truly local government and not just rubber-stamping national Government decisions. I urge the Minister to ensure the banks postpone bank charges until the local government package is in place and the structure and financing of local government can be put on a proper and realistic footing.
In conclusion, I read recently that Mr. Peter Sutherland talked about the potential of cherry picking of products, customers and services now that we are to have open competition. I feel that the recent Finance Bill was good for the banks; it has helped in many areas to level the playing field. We have difficulties in that we have attracted more safe deposits rather than risk investment. That will have to be handled, but I would urge the Minister, above all else, at this critical time in our economy and in our banking system, to look at the real problem in relation to investment, particularly in small start-up companies and to investigate the so-called credit squeeze. I understand NESC are looking at this area and I hope that they would issue a report on it soon.
An Leas-Chathaoirleach
I would ask the Senator to conclude.
I hoped I could go back to Wexford, to the people who have been educated at great cost to the national taxpayers, who have good ideas, who are eager to create wealth and jobs to reduce the 24 per cent unemployment statistic that we have in our county, and to point these young and not so young people towards reliable sources of development capital, but on the eve of the ratification of the Maastricht Treaty and the Single Market, I am afraid I cannot.
I, too, would like to join with others, including Senator Doyle, in congratulating Senator O'Keeffe on his initiative on what is a very crucial issue for every individual in the country.
I consider the Irish banks' role in our economy as being a very crucial role, in fact it is absolutely key to the economy and to the prosperity of this country and in relation to jobs. I would also like to pay tribute to the skill, dedication, expertise, excellence and tremendously high standards which Irish bankers demonstrate. We are very fortunate to have such excellent people in our banking system. That does not mean everything else I will say will take the form of praise, but we do have an excellent banking system, we do have exceptionally skilled, exceptionally able people in our banking system. It is crucial that we should, because we are entering into an increasingly competitive, difficult and yet crucial world of financial transactions. The cosy sort of cocoon in which we have lived for many decades is coming rapidly to a close. It is essential that our banks, our bankers and our financial institutions generally are able to compete effectively to do justice to themselves and to this country. If they are not capable of doing so, we will be in a sorry state.
Nonetheless the banks here, in some ways very deservedly, are extremely unpopular. They are in no sense customer-friendly and this is a very sad situation. In some ways this is a dangerous situation. I am sure our Minister for Finance is very down to earth, practical and very astute in what he has done, but there are populist suggestions which would not be in the long term interests of the Irish people or of our financial institutions. I am sure it would get quite a lot of support if at a political meeting the idea came up of taxing the banks more. That would be a very popular suggestion. It is sad that that should be the situation. All of us have to take some degree of responsibility for it. The banks have been very remiss and have failed in their relationship with individual customers, companies and the public. They have often adopted a cold, arrogant and sometimes ignorant attitude. In a sense that is their business, but to some extent it is also our business. Their unpopularity is dangerous because I will go on to the next point, which is profitability of banks.
It is absolutely essential that our Irish banks be profitable, and highly profitable; but at the moment if they announce increased profits, they simply draw down upon themselves further criticism. In the sort of relationship which they have with the public that criticism and that unpopularity is very understandable. It is also most unfortunate because, as I said, profits and profitability for our banks and financial institutions are essential if they are to continue to develop, if they are to be competitive, if they are to maintain a healthy situation and if they are going to provide the Irish people and Irish companies with the services which we will increasingly need.
One way in which, as individuals and as companies, we see some of the deficiencies in the banking system is in relation to the current role of bank managers. This is a matter which is a deliberate policy decision of the banks. They have brought about, for very good and very understandable reasons, a situation in which the actual role and discretion of the individual bank manager, albeit a very senior man, has been extraordinarily diminished. They have also increasingly relied, for very understandable reasons but to an excessive extent, on such ideas as credit rating, credit scoring, trying in so far as possible, and beyond, to reduce all matters in relation to lending to figures. Far more important than the security that an individual or a company can offer and the manner in which it can demonstrate that it can, for example, repay a loan, is, or should be, the repute of the individual himself or herself or of the individual company. Yet the experience of all of us has been that this is not the situation. There are individuals who should probably never get a loan from any financial institution, but nonetheless they can slip sometimes quite readily through credit ratings and credit gradings, partly for the very reason that such people are totally unscrupulous and will provide documentation which apparently fulfills various requirements. On the other hand, a given individual, whom a bank manager may have known for ten, 15 or 20 years and whom he knows perfectly well will, no matter how difficult it may be, ensure that he fulfills the requirements of the loan and pays it back, may be turned down for a loan purely because he does not fulfil the necessary technical requirements. I am not saying that they are not important — of course they are, they are essential — but the balance has gone too far and has been seen to go too far. We all know of too many examples of this.
The actual discretion of the manager of a bank in relation to the level of lending is almost absurd. A man of great seniority in a major city bank would have perhaps, a limit of £10,000, £15,000 or £20,000. This is an absurd situation. If the man, after 20 years of experience in such a senior position, is not capable of taking a decision up to a far higher figure, then he should not be in the job in the first place. One can perhaps say that there should be more training programmes in the assessment of individuals and in the actual granting of financial facilities. That is a matter for the banks. The present situation is not in the interests of the banks themselves and compares — very sadly, but perhaps understandably — with what appears to the public, and are in reality, glaring mistakes, fortunately not very often made by our own banks. I pay tribute to their general success, but nonetheless in total terms the banks do not have internationally a great reputation because of the errors they have made in foreign loans and in the property market. I am deliberately moving outside this country to refer to one or two of the leading international banks who have lent enormous sums to a property company which has got into difficulties. There are going to be a tremendous financial problems in sorting out that situation.
One aspect that has not got much attention is the fact that hundreds and perhaps thousands of borrowers who are in no way related to that situation will nonetheless be penalised because of an error between the banks and this institution or group which led to excessive lending to one particular borrower. It can be annoying for the individual to be lectured, although that is perfectly logical. However, it does not alter the emotional and, in some ways, the rational response. I will give a couple of examples of matters which rightly annoy people and which if corrected could greatly improve the relationship between the banks and their customers. Banks could be much more customer oriented and customer friendly. One or two banks across the water are beginning to realise that it was an error to take away so much discretion from the bank managers and attempt to pass it on to regional committees and other bureaucratic bodies, which fit very well into the large institution but do not really suit the customer and, as experience is beginning to prove, do not suit the banks either.
I will briefly refer to the European position. We do not know how it will develop, but there will be enormous change in such matters as capital liberalisation and the whole subject of monetary policy. I will quote from the White Paper on the Treaty on European Union. It states:
The main implication for all member States of monetary union is that each shall lose sovereignty in the monetary field. In Ireland's case, this will be most visible in the area of official interest rates, the determination of which will be the exclusive responsibility of the ECB. For Ireland this loss, however, must be seen against a background where, even today, sovereignty in the area is heavily circumscribed.
These implications, although they are very serious, also have overall benefits which could be enormously important to us — for example, in facilitating a general lowering of interest rates and in many other aspects. We have a good banking system here. They may not have the full range of expertise and therefore we must welcome the foreign banks who come in with this sort of expertise. However, the people running our banks are extremely capable, although perhaps a little stuck in the past. They have certainly taken on some of the bureaucratic faults of banks elsewhere, but basically they are very efficient and it is to our advantage that they should be efficient and profitable. I hope they will take some of our advice on board.
As far as this debate is concerned it is a case of the long threatening coming at last. It must be almost two years since Senator O'Keeffe began what I would call the "O'Keeffe initiative" and, to be fair to him, he has persisted in his wish to have this debate. The fact that it has taken place at all is in many ways due to his efforts, his persistence and the fact that he came up with the idea in the first place.
Banks have been the centre of controversy in Irish political life for many years. Many people are of the opinion that as far as banks are concerned the small customer cannot win. When dealing with banks the odds are stacked against the small person and there is little they can do to rectify this. The perception is that in effect the banks are a cartel and have little interest in changing that situation. As far as business is concerned, the impression is that banks are simply into making safe bets which are highly secured; they take low risks and almost everything else is secondary to those considerations.
Let nobody be under any illusions as to the reason banks exist. Their main priority is to make profits for their shareholders and proprietors. It is as simple and crude as that, and anybody who doubts that are not living in the real world. Let none of us be carried away or fooled by their advertising programmes. Their fluffy, frothy, fuzzy PR advertising talks in terms of "friendly banks", the "bank of a lifetime" and "come in and say hello". Can anyone think of a lower form of gibberish than an advertisement saying "come in and say hello"? Is that not absolute rubbish from people who belong to the real grim world of profit-making, of analysing consumer throughputs and the grim world of money being made on each transaction? More recently they have formulated delightful advertisements, which in my view succeed in insulting both the people of Cavan and the people of Cork all in the space of one advertisement which talks about "Cavan one, Cork nil", or perhaps it is the other way round.
Over the years the banks have made huge profits while at the same time sustaining very large bad debts. In one of their recent reports the Bank of Ireland draw attention to the fact that £175.3 million has been set aside for bad debts. The Allied Irish Banks set aside £174.1 million for bad debts. How can banks afford to live with those huge losses while at the same time making huge profits? During the period in which bad debts were incurred the Allied Irish Banks made a profit of £143 million. The Bank of Ireland, while providing for bad debts of £175 million, made a profit of £120 million. I find it difficult to see how those figures can be rationalised while at the same time the banks claim their customers are not being fleeced.
Bank earnings and return on assets are very satisfactory and compare well with overseas banks. The Bank of Ireland were able to make a profit of £120 million while losing £60 million in New Hampshire and £50 million in Great Britain. It appears the Irish customers are picking up the tab for those losses. We must recognise this, and the banks have a lot of explaining to do in this regard.
While all of this is taking place the banks claim that the customer is not being fleeced. I am unable to rationalise or understand how this can be the case. For example, the banks allege that their staff have made huge strides in improving real standards of living and income over the years. They draw attention to the fact that 20,000 people are now employed in the banking industry. There is a very interesting article by Damien Kiberd in the Sunday Business Post of 29 March. He draws attention to all those factors and in particular to the anomalies and contradictions, which simply cannot be rationalised without one coming to the conclusion that the Irish customers are picking up the tab for all this carry on.
A number of speakers have drawn attention to bank charges. This matter has received a great deal of attention recently and much of that attention arises from the publication of a survey by the Consumers Association of Ireland. It is obvious from that survey that information on bank charges is not getting through to the customer. The survey states that 24 of the 55 branches surveyed did not readily provide leaflets on their charges and that customers are not told about their charges in advance. Charges are not clearly displayed in many of the banks. Some 50 per cent of the banks surveyed in Dublin did not display their charges and more than half did not have information readily available in the form of a leaflet. The policy seems to be one of providing information only on request in the hope that the customer will not look for it. Why do banks not display a list of their charges outside their premises in much the same manner as restaurants display prices?
The concept of free banking, as developed by the banks, has been a source of considerable irritation recently. Much of the advertising in relation to free banking has been misleading. While, in some respects, free banking has been offered to the public, the reality is that considerable bank charges still exist for cheque guarantee cards and so on. Therefore, the offer of free banking to the public, in the words of the Consumers' Association of Ireland, is a farce. It is ridiculous and entirely unacceptable that banks should operate in that manner.
Over the years a difficult relationship has developed between the banks and the farming community. During the period when land prices were rapidly inflating it was widely believed that much of the inflated prices of land was due to the banks giving money to farmers willy-nilly and the primary drive and purpose behind giving out that money was to maintain and hold their share of the market, come hell or high water. Consequently, that led to enormous difficulties for many farmers. I know that banks cannot be expected to set and control the price of land, but the banks have a responsibility and their actions have a bearing on prices. In the last analysis banks appear to be in a position to continue making enormous profits while living with bad debts which in many cases have been generated through their own recklessness and stupidity.
Much the same type of phenomenon has been seen in Dublin city in recent times in relation to the price of public houses. Banks seem to repeat many of the errors they made with the farming community in the way they give money to people buying pubs in this city. I wonder if the price of drink in Dublin is not at least partly related to the manner in which money was given to people buying public houses in this city? That seems to be an important factor in stimulating price increases and in leading to the development of public houses, particularly in the suburban areas, which resemble football fields and big stadia rather than what most people associate with public houses.
Much frustration has been experienced by people who are refused credit. The banks appear to have adopted a policy of providing minimal information in that regard. They seem to have taken a Trappist monk vow of secrecy and silence and give minimal information to those who have been refused credit. I do not dispute their right or duty, in some circumstances, to refuse credit, that goes without saying. However, they have an obligation to explain to customers the reason credit is refused and to explain to them the factors they took into consideration in refusing the credit. For example, they should state if the person's employment, place of residence or past credit history was a factor in their refusal of credit. Their present policy of secrecy is not acceptable or justifiable.
I want to contrast the behaviour of banks with the manner in which credit unions have dealt with the public. Credit unions have provided a great service to the public and the banks have a good deal to learn from the manner in which they deal with their clients. I agree with the sentiments expressed by Senator Doyle in relation to the present difficulties facing local authorities in regard to free banking. The Government should hold their nerve in this regard. The local authorities are under pressure at present and this will place an extra burden on them with which they will not be able to deal; I do not believe the banks should be allowed to get away with this one.
Banks should be encouraged to develop more innovative financial packages for business. They have been quite sluggish in this regard; there is great opportunity and potential for the banks to introduce new ideas, new packages and ways of getting around the security difficulties with which they are faced at present. Banks have been given a clear message from this debate and I hope they take it seriously. The public have been expressing a great deal of disquiet and resentment in regard to how the banks deal with them, but there is great scope for the banks to improve their act and to provide their customers with, in the words of Senator Conroy, a "more customer friendly banking service".
I propose to share my time with Senator Lanigan. I welcome this debate. It is historic that we should have a debate on the banks. I thank the Minister for coming here, but that is not surprising having regard to the attention he has always given to us. I also thank Senators O'Keeffe and Wright for calling for this debate.
I have had long association with the banks in good and bad times and I see a change recently in their style of personnel but, of course, that is true of all sections of the community. I appeal to the banks to be more caring with small industries, particularly where job creation is concerned. Every Senator who has spoken has made that appeal. It is wrong, at a time when we have an extraordinarily high level of unemployment, not to listen to genuine cases — and I use the word "genuine" carefully. However, I want to pay tribute to banks and bank managers who have listened in the past. In the cultural field, in Waterford city the AIB have listened with great care to a particular case and I want to put that on record.
They are doing a good job too.
They are a good company. I am not here to bash the banks; I do not believe that is the aim of any Senator in this debate.
I would like to pay tribute to the building societies. It is fortunate that they came into existence because, as somebody who served on local government for a long time, I know that some people would not have been able to purchase their home were it not for building societies and other banking agencies. In that regard I appeal to whatever Minister is in charge, whether it is the Minister for Finance or the Minister for the Environment, to stop the banks levying charges on local authority accounts. There was a time when banks were glad — and I am talking about the AIB and the Bank of Ireland — to have the custom of the county council and the urban council in County Clare, and they approached a certain politician to make sure they got them. They should remember those days and should not levy charges on the local authorities.
The word "hedging" was used this morning in regard to the financial transactions of certain companies and there is nobody better than the banks at hedging in certain areas. When canvassing on Maastricht in recent weeks concern was expressed that we are handing over our banking powers — I do not know how much control the Minister has over the Central Bank at present——
Precious little.
——to a central group of bankers in Europe. It is fortunate the Taoiseach is out of the country at present. People are concerned that we are handing over our banking powers to a group of European bureaucrats. I would like an assurance from the Minister that we are not handing over the control of our banking system to Europe. The Minister may tell me that the European Parliament will have the last say, but the Government have a responsibility to the electorate, who trust them to make the right decisions. I will give a simple example of what can happen in a bank with all this "press button" technology — and bankers should take note of this. Recently a customer had £300 in one account and owed £40 to another account and, without any consultation with that customer, the bank transferred £40 from the account with £300 to the account with the shortfall. That is an example of what is happening.
On the positive side, as Senator Conroy stated the banks employ more than 20,200 people at present, an increase of 6 per cent from 1988 to 1991, representing an expenditure of £450 million annually on wages and wage related payments. That is their financial position, but they should be more receptive to people who have viable businesses. I heard recently of a family company who were being pressed for money by the banks, and it was because a member of the family was strong enough to stand up to the banks that they were able to survive. At that time the company employed approximately 325 people and it is now viable. That is an example of what is taking place.
As regard investment a woman told me recently that for a £40,000 investment the annual return is about £1,800. The banks and the Minister will benefit if they note this debate because we must all work together to create jobs, and we need the banks with us to do that. We want to create more jobs and we do not want to hand over power to Europe so that the Minister for Finance would not be accountable to us.
I join other speakers in welcoming this long promised debate. I want to pay tribute to Senator O'Keeffe for his persistance and to the Leader for allowing the debate.
First, I want to talk about the role of the Central Bank. There is no doubt that the Central Bank under the Governor, Maurice Doyle, has been the worst inhibitor of progress here over the past number of years. He is awash with money and is telling the Minister for Finance when interest rates should or should not be lowered. The Central Bank has played the worst role it could play in any economy.
I want the Minister to go to the Central Bank and ask them to release that money into the Irish economy because if it does not, business cannot progress. I blame many people for allowing the Governor of the Central Bank to let high interest rates develop when they could have been dropped months earlier than the Central Bank said and jobs would have been created. The Central Bank is more to blame than industry, the Congress of Trade Unions, the Government, and employers for the stultification of Irish enterprise and industry. I appeal to the Minister to put pressure on the Central Bank to drop interest rates when the opportunity arises. That would benefit the Exchequer, business customers and the country in general. It is the Central Bank that play a conservative economic role. People do not realise that a delay of four days in a 0.25 per cent drop in interest rates can have an enormous effect on the economy. I appeal to the Minister, following this debate, to ensure that the Central Bank play a more positive role in channelling funds into the banking system and into industry by reducing interest rates.
I am amazed we had not heard of the Irish Bankers' Federation until there was talk of this debate. Apparently, they have been in business since 1973 and have published their third annual report. What were they doing between 1973 and 1989? Obviously, they were not working for the Irish consumer, they were working for a small number of Irish banks.
Thankfully, there has been an extension of the banking system and, hopefully, the ICC, the ACC, the Trustee Savings Bank and the building societies will provide full banking facilities in the near future. The banks have been working in a non-competitive market-place for too long and hopefully, now that we are getting closer to European Union, the non-competitive nature of Irish banking will be developed and the customer will benefit from a more open society.
The range of banking services has increased over the past number of years, but at a cost to the customer. They had to have a strike to open through the lunch hour and to extend opening hours. It is crazy that an industry providing a service to business is not open on Saturdays and until recently was not open at lunch time and closed their doors at 3 p.m. In other words, they get rid of the customers and do their own thing behind closed doors.
Bank charges are a major problem. In the AIB or Bank of Ireland it will cost you £35 to meet your manager, if you allow the manager to charge you; this is crazy. If a customer came to me I would hope to sell him something but I would not charge him for his visit. With regard to interest rates and the provision of information, there is a note on everybody's bank statement which shows the base rate but it also shows there are extra charges and penalties. A notice should be displayed inside the bank. Such notices are not displayed in 90 per cent of the banks. Most people want to know the rate per £1,000 per month when they are borrowing money. Even if this is supplied by the bank people are not told how much the charges will be. Even if the banks quote £100 per £1,000 per month, charges added on make that £100 £150 per £1,000 per month.
There is no such thing as a bad debt written off by a bank. Generally speaking people who create bad debts in banks are those who have been paying high interest rates and high charges for many years. When they go bankrupt the bank go to the Exchequer and write off the bad debt provisions against their profits. But they have made profit from the customer in the first place. In essence bad customers are the people who make money for the banks. Profit is not a dirty word in my mind. The banks have to make profit. Ayone who thinks that profit is a dirty word is a nut case, because if one does not make profit one cannot exist. The fact is that banks need profits to exist.
The customer-friendly bank is a thing of the past. I have a very friendly bank manager at present. The banks run hot and cold. One day they are throwing money at you and the next they are looking for it back. This hot and cold system has to cease. People who are computer literate are the people banks want at present. Anybody can go into a bank now with a stream of computer paper which will be sent up to headquarters in Dublin. They will assess it there, and the length of the computer paper influences whether you get your loan or not. The lad who goes in with muck up to his oxters may be well able to do a deal, but he is not wanted anymore unless he has a good record. He is too busy working to give money to a computer expert to produce the papers for the banks. The expression "Lift the roots and run" was used. The Appropriation account has proved this year that the lift the roots and run system works in the areas of taxation and banking. The tax officials could not get at many people who owed tax because they had no addresses or had gone out of the country. The same thing applies in banking. Those of us who have to stay in Ireland are being screwed to the ground by the Revenue Commissioners and the banks.
I went into the Provincial Bank in 1957, when I was in Dublin. I was called a runner at one stage when I was going around Dublin. We used to get a list of customers and had to find out whether a particular person was good for £1,500. We would meet all the lads from the other banks in Stephen's Green — the lads from the Ulster Bank, the Royal Bank and the Provincial Bank. We would all have our lists and ask each other: "Is this fellow good for so and so?" We would all write "Not known at this address", but that was banking. Eventually we might meet somebody who knew the customer, or we might even go to the man's house to see if he was living there. By going to the house we would find out whether he was good for the £1,500 or not. In those days the amount was probably £100, not £1,500.
The fact is that there are bankers in the country lending money on paper who never see those to whom they are lending. They are dealing with agents of the people. They have never seen the premises. They will give money to people with IDA grants because they know that they have the benefit of the IDA grant. They could not care less what happens in the future because there is no such thing as a bad debt in the bank. The Minister for Finance picks up the bad debts of any bank. They have ways of getting rid of their bad debts by writing them off against their tax. Banks do not pay tax the same way as we pay tax. The banks have a role to play. Certain banks are playing a good role, but the Central Bank has to be brought into line. On the other hand, the banks have to become more consumer orientated. If they do that, they will do a good job for the Irish economy and not just for the individuals who are here today.
There can be no doubt that the biggest single issue on the political agenda at the moment is job creation. There is an absolute need to create jobs around this country. That is the unquestionable position. One of the most valuable methods of job creation has to be through small enterprises, the small unit or the small local business. I would submit that the great failure of the banking system at the moment is that they are not playing an adequate role in job creation activity around this country by supporting small businesses or small enterprises which create jobs.
I would not question the rights of the banks to make profits. Basically they are in the business of making profits. That is not at issue. But I would question their lack of proper social input into the economy in the job creation area. I would question the efficacy of their investments abroad and their full support of the major corporate sector, often in dubious circumstances, when they deny funding to small enterprises. There is a public perception among people whom I met on a day to day basis that the banking system in this country has supported institutions like Goodman International. They have invested money abroad and in America but at the same time they are unwilling to invest in small enterprises or in the local entrepreneur, the person with a new, good idea at local level. I could list many examples of this.
Less than one year ago Senator Lanigan was recalling some personal experiences to the House. In similar vein I have no inhibition about recalling this experience to the House. One year ago my wife and I became involved in a small business enterprise which created one full-time job and a number of part-time jobs. It had the potential to create one or two more full-time jobs. Thank God, that enterprise has been successful. But I have no inhibition about saying that if it is a success and remains a success, it is despite the banking system rather than with the co-operation of the banking system here. That experience is repeated throughout this country in many cases. It is top of our agenda now to create an enterprise culture, jobs and an educational system here which would lead to job creation. The whole spirit of the Culliton report is one of job creation. It is orientated towards small business. At the very same time as that is the case, our banking system is running in an opposite direction.
Much attention has been paid to the level of bank charges. There is a whole range of changes to the average user of the bank. Sometimes the charges are totally unintelligible to the customer and they certainly do not seem just. There is an extortionist range of charges. They must, and do, create a problem for the individual. I would emphasise that the perception of the public — and it is a perception I go along with until it is proved otherwise to me — is that the banking system is more interested in the corporate sector and in the major customers than in the small individual customers.
The bank strike was essentially about shedding jobs. When you take away all the talk about the banks' dispute, what it was ultimately about was the desire on the banks' part to shed labour, to computerise and to bring in "plastic" banking. Through that method they hoped to direct from the bank premises 70 or 80 per cent of their customers. The average individual or small customer using the bank would communicate with the the bank through a hole in the wall. The bank could then concentrate exclusively on the major corporate sector, the big institutions and big businesses, leaving the smaller customers on the fringes. They could proceed to make money in a more comfortable and smooth fashion.
Senator Lanigan made a point worth developing and reiterating. It relates to the fact that decisions about local business enterprises, whether they are urban or rural based, are made by faceless people without direct contact with the customer. Traditionally, in all of the small towns in Ireland and in the villages of Dublin, whether it was Ranelagh or Chapelizod, the bank manager had an intimate knowledge of local circumstances. He had an intimate knowledge of business prospects in the area. He had an acute knowledge of the individuals in his area. Such a manager was in a position to make a fairly sound judgment in relation to investing in a project or not investing in a project. The discretion is now removed from the local managers. The decision-making process is removed to the higher echelons. All that is in front of the people at that level is documentation. To prepare the required documentation and to submit it at that level is in itself a very expensive process.
I know of a marvellous job creation development in my own constituency in what had been a small country forge or engineering plant. It has now expanded into a massive engineering plant giving jobs to considerable number of people. It developed gradually with local support. It would have been recognised as a worthy project at that time by those who had local knowledge but to somebody dealing with computers with projections and calculations in a remote office in the capital city, theroetically it would not have looked as a sound bet.
There are many people who win local awards for enterprise and who have very good ideas for new projects. They may not necessarily have security; often they will need some unsecured funding or less than fully secured funding. They will need a support system. If one were to apply rational, objective criteria to all these cases, by and large they would not be funded. In fact, a local bank manager would know that such an enterprise had the potential to succeed. He would know the calibre of the individual behind the project and his potential to succeed. It is a pity that that personal aspect of banking, which was at the discretion of local managers, is gone.
It is also a pity there is a constant effort to put the average consumer or customer on the fringe of the banking system and to communicate with him through a hole in the wall. The customers of our banking system are the victims of a wide range of charges, often totally unintelligible charges. A point that cannot be often enough reiterated is that retailers sometimes provide a banking service by changing cheques. They pay a shocking level of costs to the banking system to process cheques which they have changed as a goodwill exercise in their own local community. We have tangible evidence in the last couple of years of a banking system here which is totally supportive of the corporate sector, of mega business, but it is not supportive of the small individual. It defies logic. We read in the papers of major speculators in this country who can be found owing many millions of pounds. At the same time we have the harassment of small consumers and small business people throughout this country.
I am in agreement with a view that has been arrived at by many technical experts and which is a view emerging in the Culliton report. A wide range of economists and experts agree that the real method by which job creation can be achieved in this country is through small enterprises, the creation of one job here, three jobs there and five jobs elsewhere. It is only through a supportive banking system that that system can be put in place. The necessary discretion must be given to local bank managers who will have intimate local knowledge.
The point was well made just a moment ago that when the banks talk about bad debts in the case of unsecured loans — a very small minority of cases — they ultimately have to write off the debt. I would totally agree with Senator Lanigan that in that situation banks have already accrued that money over a period of time and then they can write it off as a tax loss.
We will have to have our banking system geared towards supporting small enterprise. They must be willing to enter into far more unsecured lending. They will have to see fit to give unsecured overdrafts with a lot of discretion to small enterprises involved in job creation. The level of bank charges is astronomical. The level of the support system the banks have in the taxation system should be an adequate cushion for them in the event of the occasional bad debt they will experience. Good practitioners of banking will tell you that it does not always follow that what is the secured loan will necessarily be a success for the bank. Somebody may be running a filling station-cum-shop-cum-cafeteria on one of our busy thoroughfares, but if that person is inefficiently running that business and has secured it with a property or a house in Cork city, it does not follow that when the bank eventually comes to possess and sell that house they will necessarily recover their lost income. It would be much better for them to engage in some considered unsecured lending in the case of business enterprises with potential. They should use discretion in that kind of decision-making, using local knowledge rather than having decisions made in a very theoretical, abstract way by people who would not have the local knowledge.
My view is that the banking system is failing in its primary national objective, which is to create jobs for our young people. I am not convinced that our banking institutions are on the side of job creation or are part of that national drive. One could argue that their agenda is profit making. To a degree that is the case. Nobody questions their right to make a profit. But we have a duty as legislators to force our banking system, by whatever devices we decide to use, into a situation where they come on side in the national drive to create jobs. If they do not do that, it is unacceptable. They cannot be allowed not to be involved in job creation at local level while they are engaging in foolhardy investments abroad. Many ordinary consumers resent such investment, which has worked to their detriment in recent times. It is time that there was a reversal of approach.
From personal experience as a practising politician I have no evidence that a credit squeeze is not being implemented by our banks. The banks will argue to the contrary. Despite what any public relations blurb may say to the contrary, it would appear that there is in fact a credit squeeze, a lack of willingness to invest and to provide money for job creation.
This is a most significant debate, but we have to act on it. I genuinely urge the Minister to take on board the valid criticisms of our banking system coming from people who are practising politicians. They are out among people and dealing with them on a day-to-day basis. The Minister should sit down and draw up a set of strategies which would force the banks out of the corner. We simply cannot allow the situation to continue as it is if we are serious about getting our economy right in terms of job creation and preparing our economy for economic and monetary union.
I am sharing my time with Senator Ó Cuív.
I was very interested to hear Senator O'Reilly using the word "foolhardy" in respect of bankers. If there is one adjective I would not use to describe any banker I know it would be "foolhardy". Certainly, I believe the banking system has a considerable role to play in relation to the whole area of job creation. However, when I started doing some research when we realised this debate would eventually take place I was quite surprised to read from notes provided by the banking industry that they employ 20,000 people in the industry who are in very well paid and secure jobs. They employ quite a number of school leavers. Fortunately enough, one of the few areas in which school leavers have found it possible to find employment over the past number of years has actually been in the banking industry and from that point of view they could be said to be doing a considerable amount to create employment per se.
We know that the clearing banks spent almost £900 million in the economy last year. Taxes from the banks or generated activities amounted to more than £300 million to our Exchequer. We have a good banking system here. Like many other Senators, I have had good and bad experiences with the industry because of my involvement in business. One cannot always say that one's involvement with the bank manager is good. There is no doubt there are always considerable constraints when one is a customer of the bank.
We have an efficient banking sector in the country at the moment but bank-bashing is quite popular because, to a degree, people will always describe bankers as being faceless people. To a great extent the build up over the past number of years of the more sophisticated money transmission systems adds to that. Senators here this morning have been critical of the fact that they are now doing business with a hole in the wall rather than on a one-to-one, personal basis. The fact is that we have to have a sophisticated money transmission system and is something we all use very extensively. I use it widely. Being able to go up to the so-called "hole in the wall" at 2 a.m. if that is necessary is something I find very handy, particularly as we are sitting four days a week here at present. I find it very difficult to get in to the banks during their opening hours.
I am particularly critical of the banks' opening hours and I do not know how the bank management is going to sort out that problem. I would like to see an improvement to help people who are working in a 9 a.m. to 5 p.m. job.
I know that the present system is essential to the conduct of the State's financial affairs. It is essential to business. It is essential to all of us in our own various ways. In fairness to the banks, there is no doubt about the sophistication of the system. It has been very expensive to install. There is a huge amount of computerisation, of which we already heard criticism. This has all been done at enormous cost to the banks to provide the type of services we demand from them. Although we consider the charges to be high I suppose, in fairness, we should admit that the costs to us are lower than those in many of the other European countries, and particularly in Britain.
Senator O'Reilly, among others, suggested that the banks by operating the credit squeeze are not doing enough to create jobs. My contention is that it is not really the task of the banks to create jobs and going down that road is a complete cul-de-sac. Their task is to fund business through lending when they have a reasonable prospect of getting their money back. If you deposit your money in the bank, you expect an absolute cast-iron guarantee that you are going to get that money back. The sad fact is that if the banks lend our money we want the same cast-iron guarantees that the level of security they demand is adequate. I concur with a number of the points that have been made, particularly in relation to lending to large business interests under what seems to be practically unsecured circumstances. Some very harsh lessons have been learned in relation to that and I would be very critical of that aspect.
I am involved in a small business. I honestly do not believe that the banks would be doing any favours to anybody if they lowered their lending standards and we ended up with bad debts as a result. We all have hard luck stories. We all know about great business ideas that did not get support and perhaps even businesses which were destroyed because of foreclosure by the banks. In those circumstances there is no doubt that the banks get it wrong. I do not think that professional bankers set out to destroy businesses. I would always describe bankers as being averse to risk taking; unfortunately, that is their job. Therefore, sometimes the relationships between the customers and the banks are very strained. I have experienced that to some degree. In the building up of relationships one can overcome that to a certain extent. It has been my experience that banks have a degree of belief in the small business areas in Ireland but we should realise that small businesses here are over-borrowed in comparison with the European average. They have access to capital. I am told by the banks that this is not a constraint on small business development but I would question that to an extent.
The other factor is that the level of equity and personal investment in Irish companies is quite low. That means that the risk profile for banks is probably considerably higher. Unfortunately, another aspect is that the failure rate of small businesses here is relatively high. One the one hand we are talking about bankers being averse to risk taking and, on the other hand, the truth is that setting up small businesses in particular here is very risky.
Somebody mentioned interest rates. I know from the figures I have here that the adjusted prime lending rate in Ireland at the moment ranges from 7.2 per cent to 7.5 per cent, and that the EC average is 8 per cent. We stand in the middle band of the European Community. The only countries with lower real rates available are Spain, The Netherlands and the UK.
There was much criticism here this morning about the role of the Central Bank, because interest rates are primarily a function of the Central Bank. I am not going to get into that argument as I am not qualified to do so but I have a certain sympathy with a number of points Senator Lanigan made about that matter.
With regard to the range of activities of the banks, I do not agree that there is a lack of competition. This was another point that was made. Certainly, to a great extent there is intense competition as there would be between any major businesses in any area. I remember when I bought my first house many years ago — I think the so-called mortgage "famine" was on at the time — that the only place one could get a mortgage was through a building society. That has changed. The level of competition in relation to services offered has changed. I welcome that because you do not now tend to have the long periods of using bridging finance and so on. To a certain extent I believe the competition we have seen between the banks over the last number of years has been quite severe and that has to be good for all of us.
I want to make a point in relation to the profits of the banks. When one sees the investments that banks have made over the years and the position in relation to bad debts, one's first inclination is to say that the profit figures are too high. I believe that in business terms the level of profits they generate is only just about realistic. I would not go any further than that.
The main banks in Ireland have done well in recent years. Unfortunately, the experience they have gained overseas has not always been good and their profits have been depressed by that. That is not something I would like to see repeated. I hope they have learned that lesson. I believe from talking to various bankers, particularly those involved in overseas operations, that they have. One thing very evident is that they must grow in strength in Ireland, particularly within the whole European Community ideal, and they must be able to gain an international foothold because that would encourage international investment into Ireland as a result.
Cuirim fáilte roimh an díospóireacht seo agus molaim an Seanadóir Batt O'Keeffe as ucht an cheist seo a bhrú le fada an lá.
I would like to divide what I am going to say into three parts, first of all to look at the personal banking sector and the problems encountered there, then look at the business banking sector and then say a few words about banking in general.
The first matter I will address myself to is the problem people encounter with the banking system. Whereas the concentration today has been on people who do not get finance, I would like to dwell for a few minutes on people who probably get finance they should not have got from a bank, because they do not have the capacity to repay, and then refer to how the banks deal with them when they run into trouble. I would certainly say from the work I am doing, constituency work particularly, that this is a very common phenomenon, probably one that is much more common than people realise. Certainly the number of people going around now worried about bank debts and money they have borrowed from credit agencies appalls and frightens me. The personal suffering and anguish that this causes has to be a matter of concern.
First, we have to question, particularly in the case of some of the finance agencies — I am not talking about the High Street Banks — the criteria on which they lend money. Some of the assumptions they make in good times presumes that somebody's position is at minimum going to maintain as it is and is more than likely going to get better. Of course the world is an upside down place and many people find that instead of their jobs improving they either lose jobs or, particularly where you have two income families and borrowings based on two incomes, one income either reduces or disappears. The basing of lending on the principle that somebody is in receipt of overtime, for example, is to me a rather foolish basis for lending.
I am really concerned about how people are dealt with when they get into trouble. I accept that people tend to adopt a hedgehog attitude when they get into trouble — it is a natural instinct — the attitude of being afraid to go and talk to the agency. That is something we have to overcome. It is a natural tendency. I am not blaming the banks for that, but it is something that is there. Having talked to the agencies I often find a huge reluctance among them to rejig their loan and reorganise it within the reasonable repayment capacity of the person they are dealing with. Each agency jealously guard their own particular angle on this. The consequence often is that all the banks lose, or perhaps in the situation where you have a building society loan or a bank house loan that is relatively safe and everything else goes down the tubes. Furthermore, in that situation you often also find that the person is at a great loss where if the matter had been dealt with sensitively and effectively it would have been possible to ensure payments to the bank, on the one hand, and to save people a lot of suffering, on the other.
The reason that manoeuvre is possible here with flexibility is because of the different rate of repayment per £1,000 borrowed, due to the type of borrowing involved and also to the length of the borrowing. In these cases I find inevitably that you have people with a mix of loans; some are involved at perhaps £10 per £1,000 per month and other loans are borrowed at a rate of perhaps £40 repayment, including interest, per £1,000 per month. I find that the person who has loaned at the lower rate is reluctant to lend more at the lower repayment rate per month, although this could in many cases be the solution to a problem.
There is a bankers' federation. In my view, in the situation of a problem arising there should be some mechanism to draw the various agencies together, sit them down, bang their heads together and say "Look, in your own interests as bankers and in the interests of the customer come to an arrangement that ensures on the one hand your payment and on the other hand that it is realistic and reduces the repayments over the first three or four years to a reasonable amount per month." I had a case some time ago in which effectively I had to act as the broker. There were seven or eight agencies involved and I spent months running round trying to get agreement between the various agencies to rejig the whole thing. At the end of the day I would say that I did an excellent job for the banks in ensuring on one hand that the customer maintained their property but on the other hand that the banks got paid.
To finalise on the personal thing — there is a lot more I could say — I would also be very critical of the blow hot, blow cold syndrome in banks. When times are good they will give you any money to buy land, but when times get bad they want their money back irrespective of what the reality of the family situation might be over a two or three year period. The other blow hot, blow could syndrome that we come up against very often is where you have a bank manager in a town who is lending but when he has accumulated some problems the engines are totally reversed. They put in a new bank manager whose mandate seemed to be to clamp down on everything, even reasonable borrowing, and not let anybody have an inch. That might be good banking, that might be creating business on one hand and then reducing the loss on the other, but certainly it is very insensitive to the individuals involved.
Finally, on the personal sphere I would like to make one small point. I object totally to the refusual by the banks to give personal loans even to householders on the offshore islands without personal guarantees from people living on the mainland. It is offensive to those people whom I know to be some of the most credit worthy people that exist in this country. It is unreasonable and illogical. If they looked at the risk they take with these people they would find it is negligible. Firstly, the amount of money being borrowed is small; secondly, that they have assets behind them; and, thirdly, they are by tradition very good repayers of any borrowing.
On the business front, I would say that, particularly for new businesses, it is stupid to have an overreliance on security. Security in banking should be the last resort. Repayment capacity, personality and personal records, in my view, are much more important. Personal records should not mean that somebody has to have a 20 year personal record, because how can a 25 year old starting off have a 20 year personal record? Therefore, it should be based on judgment of the person and also on recommendations that could be made available on that person's behalf. I had built up a system as a manager, where I had encouraged many young people into business on their own account and I had recommended them to certain agencies and those agencies, because they know me, were willing to give money on my recommendation. I am very proud to be able to say here that anybody I recommended in such circumstances fully paid to the day on the day the bank stated.
I would, therefore, suggest that there should be a local advisory development committee for small business development and a special fund set aside where the bank would have certain funds they would make available to people without security but whom this local development committee would recommend and the local development committee would know if they recommended "glugars" the price would be that the fund would not be there because the repayments would not be made to continue this as a revolving fund.
Mar a dúirt mé ar dtús tá go leor eile ba mhaith liom a rá faoi seo. Creidim gur díospóireacht an-tábhachtach í agus beidh mé ag súil go dtiocfaimíd ar ais ar an ábhar go luath.
First I am a bit disappointed. We have waited for this debate for a very long time and I thought the initiative from Senator Ó Cuív and some of his colleagues might be more than a personal vendetta against the banks and detailed complaints about some of the practices of which they disapprove and do not like and at the hands of whom their constituents have obviously suffered.
I do not think it is appropriate that the time of this House should be wasted discussing something unless there has been some legislative impact or suggestions from those taking this initiative about how the banking system can be improved by the Government or the Central Bank in a particular way and in a macro-economic way. Today, we have had a list of complaints about detailed bank practices, which really are not our business.
Senator Lanigan was right about one thing, and one thing only, when he said the Central Bank should be the subject of a debate in his House. That is correct, because the Central Bank is the Government's arm which controls the banking system and that is what we should be debating today.
The Central Bank sets the banking regulations, the liquidity ratios, the amount of money it puts into Government stocks and it sets the tone. The Central Bank has an enormous responsibility and all the banks do is accede to those requests. The Central Bank — I have said it before in this House — has a case to answer because it works in a vacuum, apparently answerable to nobody except the Government. Unless there is a disaster it appears to be allowed to operate in a fairly flexible way.
The Central Bank has had some very notable failures, notably ICI, the collapse of the Gallagher bank, for which it must take responsibility. The Central Bank is also in charge of exchange controls. It is the body which regulates the Stock Exchange and has a heavy responsibility in the financial area, in fact, a disproportionate responsibility which should not rest in the hands of any one body in this State. The Central Bank regulates the banks. In that sense we should be discussing the Central Bank, the Government's relationship with the Central Bank, the way the Central Bank has behaved and possibly its role in deciding interest rates — but probably not because it does not have as big a role as has been described here today. Instead, unfortunately, we have been subjected to complaints from Senator O'Keeffe about the interest rates on Visa cards, and the nonsense from Senator Lanigan about the banks not been open at lunch time. That is their business. It really is not the business of legislators whether the banks open half an hour a day or two hours a day. The banks can make their own hours. The banks are in a competitive business and if they choose not to open at certain hours that is up to them. If they make less money or more money, that is very much a business decision, it is their decision; it certainly is not our decision.
The basis of this debate was wrong, I was suspicious about the reasons for calling for this debate. There appears to be a misconception on all sides that the banks are charities. They are not. They have one simple criterion like every other business, that is to make money for their shareholders. If the banks give money to charities as they do, or promote certain activities, it is almost certain to be a public relations exercise. They do not do it for the good of their souls because banks have no souls. It is time that people in this House realised that.
Everybody understands that people want to let off steam about what the banks have done when they have an opportunity to do so but that is not the banks' role. Their role is to lend money to people who can pay it back and make money for the banks and the shareholders. Those who have said today that the banks should be playing a social role and creating employment are wrong. That is not the banks' function.
If Fianna Fáil Senators or others who said this want to nationalise the banks — as was fashionable many years ago — fair enough. That is a legitimate ideological position to take, but let us have an honest position. Let us say they should be creating employment. Let us say they should be taking the direction of the State and be an arm of the State. As long as they are not that they have to be allowed to fulfil their role, which is that they are answerable to their shareholders and they make decisions on the basis of commerce. Full stop.
There are, as the Minister and everyone in this House will know, State banks, State institutions for creating jobs and all sorts of institutions specifically set up to do some of the things Senators talked about today. The State has set up a number of bodies to create employment and a number of bodies to create seed capital and help small businesses. That is what the IDA is about, that was what NADCORP was about and that is what the Youth Employment Agency was about — and most of them have failed.
Despite the fact that the emphasis for those bodies was more on the employment than on moneymaking, is there any reason to believe that the banks will be more successful? The misconception is that the banks are big and there is a lot of money out there which the State could be using to create jobs and to solve our problems. That is utterly wrong, corwardly and escapist because it does not recognise the unfortunate and unpalatable fact that the banks are there simply to get a return on their money for their shareholders. I do not like that any more than anyone else; nobody likes the facts. They spend millions of pounds on public relations each year — and have done so for years — but they are unsuccessful because we still hate the banks. It is quite simple. We have taken the opportunity today——
(Interruptions.)
The Senator does not listen to me very often, it would be difficult for you to do so.
I would be wasting my time.
Senator Ross without interruption.
We have taken the opportunity today to complain about the banks, that is our right, but it is misconceived and a waste of parliamentary time. We have to recognise that the banks——
(Interruptions.)
Acting Chairman
Senator Ross without interruption, please.
Thank you very much.
Mind him, protect him, he needs it.
The Senator should listen; she might learn something. The banks here operate in a free market. That is what they are meant to be doing and that is what Senator Honan did not understand in her speech. I thought her contribution was very predictable and it was very welcome.
The most extraordinary claim in the debate has come mostly from Fianna Fáil, but not exclusively, who make mistakes in common with people from other parties about the way the banks have expanded overseas and who say this is somehow costing the Irish customer money. That is not the case. First, nearly all the activities of the banks overseas are now funded overseas. They are correct that some of the decisions of the banks, notably by the Bank of Ireland, to go overseas have been disastrous. Undoubtedly, the Bank of Ireland paid far too much money for the bank they purchased in New Hampshire and they have had to particularly difficult time trying to sort out that problem. AIB had a more successful venture in First Maryland.
Are we suggesting that somehow, at this time, when we are entering the Internal Market, when the European Community will allow the free movement of capital, that we should curtail the operations of our own banks here? Are we suggesting that because our banks have made mistakes overseas we should say, "you cannot expand overseas, you have made a mistake over there, no more of this"? It is not feasible not only in trading terms but in terms of the European Community and the spirit and rules of the European Community.
Of course, mistakes have been made in expanding but they have been made by many other Irish companies in expanding overseas. That is what the market is all about. It is to be able to go overseas, make your mistakes and come back and learn. That is the only way the Irish banks will be able to expand. I do not think it is realistic to suggest for one moment that they should not have done this or that it is costing the Irish consumer money.
Once again, we have heard the banks at the moment are in the business of imposing a credit squeeze on small businesses. That is true and all the speakers who mentioned that were correct. There is a credit squeeze going on and the banks, because of their public relations, are probably less than upfront about the extent of the credit squeeze. Those who are involved in small businesses will tell you quite correctly that they are feeling the squeeze and that they are not being lent money by the banks. That is correct but the reason is that the banks are fearful of the future of small businesses in this country. They are fearful of the record of small businesses and were they to lend money recklessly to that sector, which has a bad record in this country, they would be rightly blamed by the shareholders and by the Government. It would be a far worse criticism if they were blamed for lending too much money recklessly. That accusation is regularly thrown at the banks when operations for which they have been responsible fail.
I think particularly of the situation which we faced in this House barely two summers ago when we had to come back in the middle of the summer to change the Companies Act specifically because of Goodman International. Much of the fault for the collapse of Goodman International lies not with the Government but with the banks for lending such an extraordinary amount of money to that group unsecured. I have no sympathy for them just as I think we should have little sympathy for the customers who suffer as well when they are not lent money. In the Goodman situation, the banks went on throwing money, unsecured in a lot of cases, at Goodman International and they got their answer when Goodman International collapsed. They made a bad commercial decision and they had to carry the can. That is where I criticise them, but that is their problem, their shareholders' problem, it is the business they are in. They are not charities.
I would like to say a final word about interest rates and the sort of complaints we have heard here today about interest rates, the sort of banal statements we heard from Senator O'Keeffe about the 4.5 per cent differential being too wide, the complaints he made about Visa cards charging between 27-33 per cent. There are two answers to that complaint by Senator O'Keeffe. The first is that the banks themselves are competitive in terms of interest rates. You can go somewhere else. Just as you can in any business, you can go get another product from another person. In addition to that, the interest rate structure which is set to a limited extent by the Central Bank is really dictated from overseas. Our interest rate structure, the rate that we pay on our house mortgage, bank lending, the variable rate which we get on our bank statements, are not decided by the Government, the consumer, or even by the Central Bank. The Central Bank simply alters the rate in accordance with international interest rate flows and ebbs. To complain about it here is wasting the time of the House, and not to recognise that this is something way beyond the power of this House——
What a lecture, pontificating again. We do not need lectures from the Senator.
I was particularly interested to hear my colleague Senator Ross, whom I respect as a guru in the financial world. I have, on occasion, enlisted his expertise in the equity market. I do not always accept his advice. I have often asked for it. I would like to very briefly remind the House of the background to this debate which is a timely one. It is so timely that we have been looking for it for the last nine months and eventually it has arrived. I hope the people in the banking sector, apart altogether from the Minister, will learn something from it. I would like to welcome the Minister to the House for this debate considering his extremely busy schedule. The presence of Ministers for a long period of time, as on this occasion, is not always acknowledged fully.
The question of interest rates has been mentioned. I have to agree to some extent with Senator Ross, that bewailing and bemoaning in this House fluctuations in interest rates probably does not achieve much but I think at least it will impress on those in the financial sector that we are concerned because of the impact on the economy generally. I believe what is of main concern to people and to Members of this House is a perceived view that the banking system is draining away money from people who are least able to afford it and that the banks are amassing huge profits which are not being recycled into the economy.
The innovations introduced by the banks in the area of technology over the past few years are welcome. I will certainly not spend all my time criticising the banking system or the banking service. The banks make a significant impact on the economy and on the lives of practically every Irish citizen. They bear a certain responsibility therefore and it is in that spirit that this debate is taking place here today, not to lecture them but to make them aware, as they move faster and ever further into the international world of finance, that this small open economy with few natural resources relies perhaps to a greater extent than other European economies on the expertise of the financial sector in order to provide employment.
Despite the protestations of the banks I find it difficult to justify the schedule of charges introduced over the last couple of years. If a retailer cashes a cheque such as a wages cheque for a customer and most do in order to facilitate a customer, the retailer when he lodges those cheques to the bank is charged for that transaction. Banks must accept that trading conditions have been difficult over the last few years. At present, if a trader exceeds an overdraft agreement by one pound or one penny all subsequent transactions are charged at an exorbitant rate. Reference was made here to fluctuations in interest charges and we all welcome a downward trend in interest charges. It is sometimes forgotten, however, that when a loan agreement is reached between a trader and his or her local bank a fixed system of charges is implemented in order to discharge the loans or the overdraft and interest rates charges do not affect that. If the trader fails in any way to honour to the letter the agreement made with the bank, hidden charges come into effect so that instead of, for example, being required to pay back £100 per month or per week a trader may find perhaps £120 or £130 or £140. While the level of interest charges is important, it is the interest banks charge that exacerbates repayment problems for small to medium size traders. This apparent flexibility on the part of the banking system here, and more recently in Britain where it became a cause célèbre, has caused enormous difficulties, so much so that the British Government were asked to intervene to protect medium to small size traders who are the backbone of any trading economy, and are undoubtedly so in Ireland.
I am also curious to know why banks and building societies refuse to accept cash in a foreign currency from someone opening a bank account. Within the last two weeks a friend of mine who is an emigrant working in the United States legally returned to this country with $5,000 in cash, which he had earned by the sweat of his brow, in order to place the money in a non-resident account here. He was anxious that his money should stay in this country and intended to continue to service that account from America. He approached a building society with his $5,000. First they said they would not take it at all and then, when pressed, they agreed to take it as long as the depositor paid the charges required for converting the dollars into draft or cheque form and to compensate the building society for any future risk arising from the conversion of dollars into Irish pounds. The sum came to £98 in this instance. My friend walked out of the building society in utter disgust and contacted me to know if this was the way banks and building societies were going to treat emigrants who wished to lodge their money in Ireland.
When I contacted the building society concerned they explained to me that the decision was based on a business practice operated not only by their building society but by all of the big five and by all Irish banks. They refused to take the risk inherent in accepting cash in a foreign denomination which they had to convert into Irish pounds. Surely there should be some flexibility in the bank's approach here. The bank may say "Why did the emigrant not convert the money in America and get a draft before he came over here?" But nobody knows how banks and building societies conduct their business. This was a simple straightforward transaction as far as my friend was concerned. He had earned money abroad, was bringing it home to put into a bank or a building society here and was prevented from doing so. I am glad to say that ultimately one of commercial banks accepted the money as a result of my intervention and has made arrangements for the subsequent transfer of money from America to the account. That incident damages the image of Irish banking. Reports of excessive bureaucracy and seeming indifference give banks and building societies a bad press.
I have no solution to the justification put forward by the banks that they have to operate as a business and that their charges therefore are justified on the basis of increased staff and operating costs. Customers, however, are aware of the monopoly money that the banks accumulate in profits. Banks' trading turnovers are published and stories abound in the financial press of lucrative overseas operations involving Irish banks. There is still however a charge of £2.50 for each transaction, be it a credit or a debit transaction. If one happens to be on overdraft that is a significant regular charge to a small or medium size trader who may be encountering business or trading difficulties. I would ask the banks within their own parameters to exercise responsibility towards their shareholders and their staff, to be more flexible and to allow branch managers, on the basis of personal knowledge of an applicant, the autonomy to make certain decisions without having to refer them upwards. It is my understanding now that local branch managers do not have authority to decide on the smallest overdraft or credit facility.
Another area of concern to me which involves the banks but the Minister more directly — I know he has taken some flak on this already but I must mention it again — is the provision in this year's Finance Bill where by a levy was imposed on holders of ATM cards. The justification given by the Minister in his budget speech was that it brought ATMs into line with the credit card sector but I suggest to the Minister that an ATM cashcard, while part of the same family as the credit card, is not an equivalent. My understanding of the legislation is that the levy was applied not on the usage of the card but on its ownership.
The banking system is moving ever faster into the modern world of technology. Technology is advancing so quickly that we all catch our breath at its rate of development. An increasing number of Irish people are opening bank or building society accounts and acquiring ATM cards. The Minister will remember the furore over the imposition of a £5 levy air tickets out of this country and that may have to disappear under the Single European Act although it has not been referred to yet.
Justifiable criticism of charges is levelled at the banking sector by decent, hard working people. Despite the budgetary contraints within which the Minister has to operate because of economic difficulties, he might turn that levy around and get the banks rather than the ordinary customer to pay it. I remember — I was not in this House at the time — legislation being rushed through the Oireachtas to help a leading Irish bank who found itself in severe financial difficulties in the early part of the eighties. A capital grant was given to that bank by the Irish taxpayer and I do not believe it was ever suggested that it should be repaid. I suggest that the Minister might look at this imposition on holders of ATM cards and when he has drafted his Estimates and his budget speech, which I have no doubt he will deliver with his usual flair and panache next January, he might consider imposing that charge on the banking sector rather than on the paying customer.
Finally, could I reiterate the theme of my entire contribution? Would the banks consent to be more flexibile in the serious trading conditions faced by many small and medium sized traders in this country at present? The philosophy of this Government is based on the requirements for job creation. Its objective is to make this economy more open and prosperous. That is why we are getting involved in the European Monetary System and committing ourselves to further European integration. The banks have a responsibility and indeed an obligation to assist the Government in their efforts at greater prosperity for all.
I welcome the Minister to the House. I could not start my remarks without complimenting Senator O'Keeffe for his terrier like tenacity over several months and for getting this item on the agenda. It recalls the spirit of Cork against Tipperary last Sunday and their success on the playing field.
The banks have been getting a bad press in recent times, and deservedly so. It is not long since their tussle with the IBOA — the Irish Banks Officials' Association — over employment and wages and in the strike that ensued they came across as bad employers. They have likewise come across as bad professionals in that their major investments, particularly overseas, have run into serious trouble and doubts have been raised about their ability to invest in substantial ventures with a sufficient degree of credibility. Larger corporate bodies have experienced this trouble as well; many Senators have mentioned Goodman and that is a prime example.
The banks have also come across as bad servants of the public. They provide minimum opening hours and make maximum charge demands. An old adage suggested that the banks have a licence to print money; one wonders if that is not the case. They are adhering to their historical proclivity to demand their pound of flesh; Shylock is as relevant today as he was in the 16th century when created by Shakespeare.
Senator Ross referred to the banks as a business proposition and I agree that banks are established to do business. There are State financial institutions but we are talking largely here about private sector banking where there is a responsibility to investors and shareholders to make a profit for those. They are not obliged to exercise a social responsibility. However, I disagree with Senator Ross's major statement. The foregoing remarks would refer to banks only if they could be taken in isolation from the rest of the economy. But we cannot today consider the banks in isolation.
The Government last year negotiated through our present Minister for Finance, who was then Minister for Labour, a deal — a Programme for Economic and Social Progress— establishing a partnership between the private and public sector. The trade union movement came together with the farmers and the Government came together with the employers. All four interests are represented in an economic and social partnership on the understanding that sacrifices would be made by all and benefits accrue to all in the national interest. All signed on the dotted line and consequently we have reduced wage levels this year. The figure was 4 per cent last year, 3 per cent this year and 3.75 per cent next year. The overhead and salary costs to the banks for their 20,000 employees are going to come down. The banks consequently are expected to participate in Government economic strategy.
We are not talking about carte blanche but about assisting the Government to tackle our inordinate level of unemployment, a monstrous 21 per cent. The banks are expected to assist in providing loans to business enterprises and the Government have targeted smaller to medium sized industry for expansion. These are the areas that the banks shy away from and where they refuse preferential rates of interest. Larger businesses will get preferential rates. The triple A rate is available to three quarters of all large business operations but only to one quarter of small to medium size operations. The small entrepreneur will find it much more difficult to get on his or her feet than a larger well established concern. That is contrary to Government policy and the banks have a role to play there which they are neglecting. When they consent to lend money they are quick to put the squeeze on for repayment irrespective of an enterprise's circumstances. Rather than take a longterm view, they take a short-term view, not in the interests of the customer but in order to safeguard their money and maximise profits.
The banks have a social responsibility cause they are part of the Programme for Economic and Social Progress and have a responsibility for economic growth. It is in their interest that there should be growth because growth and increasing wealth will bring more money into circulation. More transactions will be done and greater profits will accrue for the banks. Certain tightening up opportunities are available to legislators. We can tighten up in relation to personal guarantees where loans are given to small businesses. There is much small print on loan agreements that can leave a personal guarantor liable for further borrowings of which they may be ignorant and about which the bank does not inform them. It means that collateral or lateral borrowing can take place and may become a burden on the initial loan guarantor. That should be tightened up legislatively.
Bank charges are so unintelligible now that it is very difficult for customers to know what they are paying for. Persons with an unauthorised overdraft immediately lose all entitlement to free financial transactions and an interest penalty is imposed. Should a cheque bounce the cost is £5 in the Allied Irish Bank and the equivalent in most other banks. Should one's flexible friend be over-used and the bill not paid, then one is subject to a charge from the date of purchase, not from the date of billing. One may be charged for weeks and weeks at an inordinate rate. These hidden charges are not revealed to the public. Banks will say that everybody is informed but the totality of charges should be made more easily available and intelligible to the borrower or customer.
Banks should reveal the criteria used for lending money, one of the greatest secrets in the world. The public should know who will be considered for loans and why. Banks do not reveal their criteria for granting credit to customers. It is impossible to find out why one is refused a loan. Their secret criteria do not appear consistent in all cases and reasons for refusal are not given to the customer.
It should be written down in law that customers have rights and are entitled to be shown that they are not being discriminated against. This can be proven only if criteria and reasons are disclosed.
There is a great need for banks to undertake their employment responsibilities. The banks must, as their information service says, provide a social service. The Irish Banks Information Service claims that banks provide a wonderful service, that they employ 20,000 people and that employment there has gone up by 6 per cent in the last five years. They may be concerned for their customers and not as Senator Ross said strictly a private operation concerned with profit, but they must become more user friendly.
Competition is coming now from building societies where the deposit rate is 2½ per cent higher. Banks will find themselves at a future loss if they are not more careful to attract deposits. The Trustee Savings Bank has shown the way. They operate on a 10 a.m. to 4 p.m. basis every day and open until 7 p.m. on Thursdays. Major banks must do that as well and must become more competitive in the context of the Single European Market opening up at present.
I was very unhappy with the manner in which the recent banks' dispute was conducted. Industrial relations were not enhanced by banks' representatives during the dispute. Banks came across as heavy handed; a line was drawn and could not be crossed.
There is a growing trend in the banks towards casualisation of workers, towards what we call the yellow pack worker. The number of standard pensionable and well paid jobs has been reduced. A new category of employees has been introduced while older seasoned veterans have been put out to grass through voluntary redundancy. That is an incorrect approach.
It is amazing that banks on one hand can incur enormous debts as they did in New Hampshire where £60 million was lost last year and in Britain where £50 million was lost last year by Allied Irish Bank. At the same time they return enormous profits which seem to be based domestically suggesting that the Irish customer is being charged to repay debts incurred through bad investment elsewhere. I would like the Minister to comment on the International Financial Services Centre in the Custom House Docks area. To what extent have the banks transferred operations and personnel in from other institutions outside the docks to avail of the financial and tax incentives available there? The intention behind the centre was to set up new operations. We must establish if real employment has been created there.
Banks play a major part in our society and like other employers are tied to the Programme for Economic and Social Progress, the function of which is to provide a better living for all nationally. The banks are not fulfilling their duty in that context and I ask them to be more diligent in honouring their commitment under the Programme for Economic and Social Progress.
I would like to refer to the service provide in recent years by the credit unions. They are an innovation for money-lending and receiving deposits. By many the credit union is regarded as the poor man's bank. That is not so. Credit Unions advance loans of £20,000 and £30,000 and have on deposit amounts of £70,000 and upwards.
Credit unions deserve our help. At this moment they do not for whatever reason have cheque book facilities and if they did they would become an important force in Irish banking. Their social and economic contribution is enormous and they are entitled to greater recognition and help than they are getting at present.
In common with other speakers I decry the present rate of bank charges which are excessive and often inappropriate. Banks are not entitled to charge for items that were not charged for in the past. If an overdraft facility for £4,000 or £5,000 were exceeded by £40 before the advent of computers bank managers did not question the excess but now the computer will automatically refer it back so that a transaction may cost an overdrawn individual a £3.50 referral charge. I know the commercial banks are very reasonable about very severe and chronic cases of borrowing. On a professional basis I have acted on behalf of people with banks and they are very reasonable in arriving at full and final settlements. For this they are to be commended and I would like to pay tribute to them for it.
In regard to the recent strike, I believe such strikes in banking should not take place. There should be some mechanism for avoiding bank strikes. People looking for money for worthwhile projects still have problems. We know the old criterion of collaterial security no longer applies and the banks now rely exclusively and totally on the concept of repayment capacity. I would suggest to the Minister that repayment capacity can be difficult for banks to establish. They have their own ways of assessing this, but frankly it can be a difficult thing to establish at times and certain persons who should get loans do not get them.
There are several other issues which I could raise but I know the Minister has a further engagement and wants to have this debate concluded as quickly as possible. Before I finish, however, I wish to say that the bank charges should be looked at very critically and seriously. For example, a consultation with a bank manager is now a chargeable matter. There are various other charges that one could list and enumerate at great length.
The whole question of assessing the suitability or otherwise of persons for loans must be examined more thoroughly. Such assessment needs much more investigation and professional involvement than it gets at present.
The contribution made by the credit unions in this country should be recognised. The credit unions throughout the country all work separately as units. There is a great element of voluntary contribution in their operation and they are entitled to greater recognition and help.
I would like to thank Senator Hourigan for cutting short his contribution.
I propose to make some general remarks on this debate and, as far as I am answerable for the issue raised, to comment on them.
I am very glad to have the opportunity to reply to this debate on the banking and credit sector. I have listened carefully to the points put by Senators in their contributions and my Department will reflect on what has been said by all Senators who took part.
I hope to be able to respond satisfactorily to the points raised. I do not want to pretend, however, that the Minister for Finance has the answer to every problem in the financial sphere, but I would certainly hope that the House would acknowledge that we are trying to address these issues.
To put this reply into context, it might be worth while setting out a few statistics concerning the banking and financial sector generally. The banking system, as Senator Honan said, currently employs over 22,000 people in the State. Employment in the sector increased by 6 per cent between 1988 and 1991 and over £450 million is spent annually on wages and wage related payments. Total deposits and current accounts for all credit institutions as of 31 March 1992 amounted to £16 billion and the total assets of the banking system were £21.5 billion.
These figures underline the importance of the sector to the economy. The Government recognise this important contribution and the potential for growth. I outlined to the House on previous occasions the success which we had in establishing the International Financial Services Centre. I know there are mixed views on how to evaluate this success, but the fact is that the centre is there in bricks and mortar and substantial new employment has been created. This employment, I believe, would not exist if the IFSC had not been established. To date some 200 projects have been approved with minimum job commitments of 3,000 new jobs. So far over 1,000 of these jobs are on the ground on the Custom House Docks site. Of the 200 projects, the majority, 76 per cent, are foreign owned with the main overseas contributors being the US, UK, Germany, other European countries and Japan.
A strategy for the financial sector cannot, of course, be based on one-off initiatives. It has to be comprehensive and forward looking. The first element in such a strategy is to get the supervisory system right, to steramline it, and to ensure protection for investors. The second element is to empower the financial players to compete effectively both domestically and abroad in anticipation of the completion of the EC internal market.
No matter how one looks at it, the record of the Legislature in passing comprehensive financial legislation over the past few years has been impressive. The Oireachtas has passed a major Central Bank Act, an equally major Building Societies Act, legislation on insurance, unit trusts, TSB Bank and the ACC Bank. There has also been a Competition Act passed to encapsulate in Irish law the basic approach of the EC Treaty itself. The financial legislation has provided for the streamlining of supervision by moving progressively towards a single supervisory authority, that is, the Central Bank. It also extended supervision to new areas, including money-brokers and financial futures and option exchanges. The legislation has opened up opportunities for the non-bank financial sector of building societies, TSB Bank and the ACC Bank. It also provided for a deposit protection scheme for small savers with banks and building societies and this scheme can be extended to all credit institutions when the need arises.
Regulation also extends to certain financial intermediaries. Insurance broking is already supervised under the Insurance Act, 1989, but there are other investment intermediaries not yet brought under the scope of regulation. My Department are at present considering the best approach for dealing with this lacuna in the regulatory structure.
At present my Department are drawing up legislation on the Stock Exchange to bring up to date the rather old and limited body of legislation in that field and to place the Central Bank in charge of supervision. This legislation is essential if we are to implement the EC Investment Services Directive when it is adopted and enable our firms to use that directive to provide services throughout the Community.
The EC programme for the completion of the Internal Market will also lead to further regulatory requirements. I expect later this year to make regulations implementing EC Directives on the published accounts of banks and credit institutions. I will also be implementing the EC Second Banking Directive and a recently adopted directive on the consolidated supervision of banks. The latter two directives lay the basis for a harmonised regulatory regime for the EC and introduce the concept of a single banking licence throughout the Community. This single banking licence approach has also been extended to the insurance sector and will be used in the Investment Services Directive.
One vital sector in all these developments is the consumer. The EC single banking market will not mean much unless we see tangible benefits for the purchaser of financial services. I think we have seen the first real benefit of the Single Market manifested in the extended opening hours in retail banking. the emphasis in banking will have to be on the quality of service and on price. One universal source of complaint is the level of bank charges. The Central Bank advise me that bank charges here only cover half the costs of providing the services concerned and that in comparison to charges in the UK, USA, Germany and several other countries the level of charges here compares quite well. That is fair enough in so far as it goes, but I would always be concerned that banks make every effort to control their costs and not seek to recover from Irish consumers the losses they may have made in other areas. The fact is that both main banks have had to rely heavily on the profits on their Irish business in recent years. Now that they seem to be turning the corner on their foreign operations, we here should expect some dividend from that.
I am not against the banks expanding abroad. Quite the contrary, it is necessary for them to do so. They obviously have to plan and act as international organisations but in doing so they must not lose sight of their domestic base.
One clear indication of a re-think in favour of consumers was the establishment in 1990 of the Ombudsman for the credit institutions. The scheme deals with complaints from the public and covers banks, building societies, TSB Bank and the ACC Bank and ICC. It is a voluntary scheme, although there is provision in both the Building Societies Act, 1989, and the Central Bank Act, 1989, for a statutory scheme if such a scheme were needed. In his first year the Ombudsman dealt with over 400 complaints, three-quarters of which related to banks. In the majority of cases the complaints were handled through the banks' or building societies' own internal procedures. Twenty-seven detailed investigations were, however, carried out. The highest amount of compensation awarded was £7,500. The maximum compensation which can be awarded is £25,000.
The Ombudsman's operations are not carried out behind closed doors and the details of how he does his job can be read in a published report. I have no doubt that the initiative of setting up the office of Ombudsman will have an enduring benefit in the future for the customers of both banks and building societies.
Another enduring benefit which credit institutions can bestow on us is to contribute to all aspects of economic development. The role of banking in this field is a topical subject. I am glad to see so many financial players, in the context of changes in the DIRT tax, currently pointing out their importance in providing funds for equity and venture capital. I will have more to say on this later.
Each form of commercial funding, whether capital or credit, has its own individual part to play in the financing of business. Equity capital and loan finance should be seen as having a complementary role. Given the size of Irish equity markets and the underdeveloped nature of the equity finance here, bank lending will continue to be the primary source of finance for new and existing firms.
For that reason the maintenance of interest rates which are as low as possible, consistent with the maintenance of a firm exchange rate within the EMS, and creating conditions for assuring an adequate supply of credit are appropriate policy goals for the Government and the Central Bank to pursue. In recent years the progress made by Government in correcting the fiscal imbalance, in moderating wage rises, in creating stable economic conditions and the maintenance of the firm exchange rate policy have contributed greatly to an erosion of the premium of Irish interest rates over those in other EMS countries. Irish wholesale interest rates are now down very close to equivalent German levels. The corresponding differential in March 1987 was over 9 percentage points.
I have been pleased to see that domestic market conditions have justified cuts of 0.5 per cent in retail interest rates in recent weeks. However, certain financial institutions have not yet followed the lead of the main banks and certain building societies in this regard. It is time now that these institutions gave their borrowers the benefits of the lower rates.
However, real rates of interest remain high. This is an international phenomenon and substantial reductions in the short term are unlikely. In the European context the dominant currency is the Deutsche Mark and the German authorities for domestic reasons are maintaining interest rates at a high level. This, however, is a temporary situation linked to the costs of unification and the general expectation is that we can look to a gradual downward trend. Further down the line the evolution towards Economic and Monetary Union in the European Community will have a definite downward impact on interest rates.
As for the supply of credit, there has been concern over the possible existence of a "credit crunch". The Central Bank, which has the primary responsibility in this area, has investigated the matter at my Department's request. Bank lending is not constrained by capital requirements or liquidity conditions. However, both borrowers and lenders appear to have become more cautious in assessing cash flow and investment requirements in the fact of weak domestic demand and uncertain future prospects. A recent report published by James Capel, the London stockbroking firm, concludes that fears about a supply side credit crunch worldwide have been overdone. In the domestic situation licensed banks' private sector credit fell by 1 per cent in 1991. The Central Bank assure me, however, that there is no evidence that the banks are operating a credit squeeze. On the contrary, the low levels of credit growth are due essentially to weak demand. It is important to look not just at licensed bank credit but also at overall credit growth of all the credit institutions. This was somewhat stronger in 1991 than bank credit alone at 2.5 per cent. If one looks at the supply of credit by economic sector, there is no evidence that the commercial sector is being denied credit.
Funding of new enterprises is a significant element of economic growth. The licensed banks have reacted positively to Government initiatives to make loan finance available to new businesses. Under the loans to young enterpreneurs scheme, introduced in 1988 and extended at the end of last year, nearly £10m has been provided by the banks to over 200 projects at favourable rates of interest and terms of repayment. These are new business projects which it is doubtful could have proceeded otherwise.
In order for banks to lend to business they must be able to fund their operations through a stable deposit base. A loss of deposits and capital outflow can have a detrimental affect on our economic performance. In a market with free movement of capital no one State can impose taxes or levies on financial products which are disproportionate to those prevailing generally in other financial markets.
The new DIRT rate of 10 per cent will play an important part in securing a stable deposit base within the State and I have no doubt, through its effect on our external reserves, will have a beneficial affect on domestic interest rates. This new initiative has prompted a reaction from the life assurance and stockbroking sectors on the argument that it acts unfairly against life assurance and risk capital generally. First of all, let me say that this change in the DIRT tax arrangements is absolutely necessary in consequence of the removal of exchange controls. Any change in arrangements will lead to charges that the so-called level playing field is being disturbed. On the other hand it has been argued in the past that the life assurance sector has enjoyed substantial advantages. I am ready to have further discussions with these sectors and I am ready to consider carefully any proposals they may have which would be of obvious benefit to the development of enterprise here.
The Government are concerned to see that banks, building societies and all financial sectors focus on the goal of economic development. We have a major task ahead of us in tackling our economic problems and in using the undoubted benefits Economic and Monetary Union will bring. The completion of the internal market and greater economic and monetary integration in the European Community should be seen as ways of making the most of overseas opportunities to create growth at home. All the signs are that the banking sector can and will respond. As Minister for Finance I will play a full role in creating the conditions for credit institutions to do so. I am grateful to the House for giving me this opportunity to reply.
My officials have taken note of Senators' questions. A number of Senators asked me to raise matters with the banks and to look at them ourselves. I want to assure the House that we will do that.
On personal collateral, obviously the banks have to satisfy themselves on the risk of the loan and the collective collateral available. Sometimes this is onerous, but in the scheme for loans for young enterpreneurs it is stipulated that personal collateral is not requested.
Pressure on customers to take certain products was mentioned. Senator Batt O'Keeffe's advice not to put all one's eggs in one basket and to act prudently in deciding on financial products would be correct. The Central Bank Act of 1989 allows for the laying down of codes of practice by the Central Bank on dealings with customers. I can assure the Senator that I will raise with the Central Bank the points he has made on information to customers and on products available in the banking services.
I will look at the point made by Senator O'Keeffe on Aer Rianta. I have no first hand knowledge of this, but I would be concerned if what the Senator says is correct. Perhaps we can have further data on that so as to establish the facts.
On the rates charged to small firms, we must allow the banks the freedom to determine the range of interest rates they apply. On the other hand, I agree they should not penalise certain businesses such as small businesses. The small firms association have been negotiating a package with the banks. This seems to be the right way to proceed. I have no doubt that increased competition will lead to pressure on interest rate margins.
Senator O'Keeffe criticised banks for the quality of their service, prices and so on. I agree that the banks should take note of public concern. That is the kernel of what the Deputy is saying. We have empowered the Central Bank to supervise bank charges and encouraged the banks to set up an ombudsman scheme, as I mentioned in my reply. I cannot direct banks on how to apply their charges but any complaints will be investigated by the Central Bank. I will be glad to ask them to look at any of the points that were raised today or any other points which Senators may bring to my notice.
The Central Bank requires the banks to make information available, and has the statutory power to do so. I agree that the information should be broad and useful. I will consult with the bank in these matters.
Senator Doyle mentioned that, last summer, the Central Bank brought into effect EC directives which laid down specific capital requirements and solvency ratios for credit institutions. These measures strengthen and reinforce the regulations already operated by the Central Bank. The regulations necessary to implement the second banking directive, which will make the Internal Market a reality, are being drawn up in consultation with the Central Bank. It is expected that they will be adopted before the end of this year. Regulations to implement the 1986 directive on the published accounts of banks and other credit institutions are being finalised. These regulations will apply to the banks all the EC publications and auditing requirements which have applied to companies generally for the last five years. Further draft EC directives on large exposures and on the harmonisation of deposit guarantee schemes in the Community will add to the supervisory régime in the Community. The directive on money laundering is the responsibility of the Minister for Justice who has the necessary legislation in preparation. I will pass on the Senator's comments.
Senator Doyle also mentioned small businesses in Wexford and their difficulties with bank loans; I am sure this applies elsewhere. There are a number of schemes to help new and existing businesses. In 1989, in response to a Ministerial initiative, the commercial banks agreed to provide up to £10 million in loan finance to young entrepreneurs on certain terms. I have mentioned these already. The main features of these terms is that the loans are at reduced rates of interest. The banks, in addition, do not demand personal security on such loans and the scheme is administered by the individual banks.
In December last in the context of the Programme for Economic and Social Progress the four associated banks agreed to provide a further £15 million in loans, at favourable rates, for the creation or development of small and medium sized businesses with employment potential. The assessment of individual loan applications, of course, is a matter for the banks. To date, in excess of £10 million has been lent by the participating banks to more than 200 projects. I got the impression, perhaps wrongly, that those schemes were not known to many Members of the House. If I can get a note on this I will circulate it to Senators, or certainly to the Leader. The scheme is being used and is useful for people with good ideas who, naturally have to fulfil the criteria. There is a sum of £25 million involved in the scheme, it was £10 million but an extra £15 million was added last year.
Senator O'Keeffe asked about banks quoting nominal as opposed to the effective interest rates. Under the 1989 consumer order all lenders must show the annual percentage rate of charge, the APR, when advertising credit to the public. That is the actuarial calculation which takes account of interest and other charge to determine the true cost of credit. The Minister of State at the Department of Industry and Commerce intends to proceed with the preparation of comprehensive legislation updating Irish consumer law, to bring it into line with the EC directive in the consumer credit area. The scope will be to cover price advertising and the overhaul of the provisions regarding information on interest rates, and to assist the consumer. It is also intended to ensure the fairness of contracts so that they will not be unduly weighted in favour of the lender in a strong economic position.
Senator Conroy mentioned that a balanced approach should be taken in viewing bank profits as these profits provide the capital on which further lending will be based. Banks must maintain EC capital adequacy ratios, and these ratios must be funded. These are sensible and realistic points. Banks worldwide are under pressure to meet these ratios — 8 per cent of risk assets. I would prefer to see these ratios met by profits and not, as in some other countries, by unrealised capital gains on stocks and shares. That is the point the Senator was making.
Senator Doyle asked about the examinership section of the Companies Act. This is a matter for the Minister for Industry and Commerce. I understood that the banks were seeking to redress the balance of operation of certain examinerships. As with all legislation that deals with the rights of certain creditors, there will be some creditors who will cry foul. I will communicate the Senator's concern to my colleague, the Minister for Industry and Commerce.
Local authority bank charges were mentioned by some Senators. Following the Government's consideration, it was agreed that the local authorities would negotiate the best deal with the banks. Agreement was reached earlier this year to introduce full charges over a four year period, starting in 1993 at a 30 per cent rate and going to full rates by 1997.
Why did you back off?
I ask the Senator to allow the Minister to reply without interruption.
The matter was discussed in detail and it was agreed that it should come in on a phased basis and that we would start in 1993.
This Minister promised it would not, so did Minister O'Hanlon.
It is in, starting at 30 per cent in 1993.
Senator Conroy mentioned the very important aspect of training and development of staff and organisational control and devolution in decision making. It is interesting to note that the private sector report on financial service firms — The Financial Services Renaissance, Managing Change in the 1990s — found that chief executives and senior executives in financial institutions recognised the importance of these parameters in coping, in a dynamic way, with the fast changing financial services sector.
Senator Upton referred to the provision of information to customers and the listing of bank charges. The Central Bank requires that information on charges be available at branches in leaflet form so that a customer can study them without having to seek this information by visiting the branch. The Central Bank considers that this is the best method of providing information. I have no doubt, however, that the Central Bank will study the Consumer Association's report to which Senator Upton referred. I am not aware that the banks are as secretive as the Senator contends, but I believe the banks ombudsman system will at least provide redress for complainants.
With regard to the question of Eurocrats I can assure Senator Honan that banking supervision will remain a matter for the Central Bank. Monetary policy will be the responsibility of the European Central Bank but the Treaty provides for the appropriate interaction with the Council of Ministers and the European Parliament, if I remember correctly from negotiations in the autumn.
Senator O'Reilly referred to the bank seeking to deal with retail customers via plastic cards and ATMs and discouraging them from coming into the branch. The best way to ensure that the customer gets what he or she wants is by competition between the banks and other financial institutions. No bank can now afford to ignore the competition or regard certain customers as not being wanted. If they do that it is at their own peril.
No doubt the banking institutions will be aware of today's debate and we will make them aware of the points raised. If I correctly interpret the points made, a number of Senators said the old system of the bank manager having the major say and imposing limits was a good idea, but I have my doubts about that nowadays. Being a Government Minister for a number of years leads me to believe that often the centralised approached is used to say no. When one has access to files and reports and people come asking favours in delegations they will be told that the local office is very supportive. Then a check is made on what the local office reported to central office. This is a good way of not giving a straight answer and dodging responsibility. There is a general view in Irish society that that is what happens a lot at the time.
I agree with Senators that giving power to the bank manager was a good idea. Computers are used a lot in business now. It is not as easy as it used to be for the bank manager to talk to everybody. That is the reality. People would like to maintain a customer friendly basis as far as possible.
They say they still are customer friendly.
They should also listen to the views from all sides of the House.
I do not want to get into a debate on the Central Bank. We have had such a debate in the past few years. The Central Bank is charged by law since 1942 and re-enacted on numbers of times with responsibility for monetary policy. It is independent. The Central Bank Act, 1942 requires the bank to safeguard the integrity of the currency and ensure the control of credits and states that the constant and predominant aim shall be the welfare of the people as a whole.
Naturally as Minister for Finance, I have no doubt that the bank takes full cognisance of what is written in legislation.
It protects the Minister but it does not protect us.
The Senator referred to the taxation of banks. The banks would regard themselves as subject to many tax difficulties, such as the DIRT tax and the bank tax. It has been the aim to get a fair tax take from all financial sectors and that is still the aim. There has been a lot of movement in that area over the last number of years. However, I will pass on some of the other points the Deputy made.
With regard to small firms and interest rates, I do not have any powers to set the rates of interest charged by banks to their personal business customers. The level of interest rates is primarily for the Central Bank. The first thing that should be said is that under the terms of the matrix system, under which the major banks operate by arrangement with the Central Bank, the personal borrowers' lending rates are set by reference to the inter-bank rates. In effect, rates for the AA borrowers, the small business borrowers and the A borrowers, the personal borrowers, cannot be more than 5.5 percentage points above the relevant inter-bank reference rate at the time of the change in lending rates. Moreover, the AA and the A rates quoted by the banks are, in effect, maximum rates. There appears to be a growing trend for good quality AA borrowers to negotiate rates below the quoted matrix rates. I understand that 10 per cent of AA borrowing at present is carried at below those rates. I also understand that the differential between the inter-bank rate and the personal borrowers rate is among the lowest in the Community. For instance, the relevant differential in the United Kingdom is in the range of six to eight percentage points.
The point there is that if you say nothing the bank charges the highest rates, if you query it they are inclined to drop it.
The Minister, without interruption.
As Senator Keogh rightly pointed out, the banks are averse to risk taking. There are potential limits on what they can do. I recognise this, and I think every Senator recognises that. I hope anything I say does not appear to be encouraging imprudent lending. I do not see any reason the banks should not take account of the need for economic developments; I hope they do. After all, such developments will contribute to the future demand for banking services.
The points made here today will be taken into account by the banks. There are other areas of competition that will have to come into play when looking at that broader argument. That is a matter for another day, and one that I addressed in the Dáil recently. I will be addressing it here very shortly, with the help of the Leader of the House, before the summer recess.
Senator O'Keeffe referred to the problems people have when they cannot repay and the way they are dealt with. These problems must be sorted out between the borrower and the lender. I cannot see any direct Government action being taken on that. However, there is legislation on customer credit being introduced by my colleague, the Minister of State at the Department of Industry and Commerce, Deputy O'Rourke. Discussion of that Bill will provide the opportunity to explore the practical aspects of what can be done in this area. It is important to protect the consumer but no legislation can substitute for good judgment when taking financial decisions in the first place. That is how people manage to stay in business.
Senator Ross said the Central Bank has a case to answer. The Central Bank has powers to regulate the banks, the Stock Exchange and other financial institutions. All such powers are laid down in law. The role of the bank in discharging these powers can be surveyed when such legislation is debated; it was debated in recent times in this House and it was discussed with other legislation. We have had six or seven Bills in the financial area in recent times.
Senator Mooney referred to the banks and building societies refusing to accept foreign currency in opening an account. That is news to me, but I will pass it on to the banks. I do not know whether it was an off day for the bank or a mistake.
Senator Costello spoke about the effects for small businesses and young entrepreneurs of giving personal guarantees for loans. That is a point that comes up time and time again. It is something we must continue to look at.
Senator Hourigan mentioned credit union legislation which is the responsibility of the Minister for Industry and Commerce. The 1966 legislation is being reviewed by a special working group and updated to meet modern requirements. I take the points the Senator made and will pass them on.
When the Seanad met the day before Christmas Eve, and none of us was particularly happy to be here, but either at a good moment or a bad moment I promised the Leader of the House that day that after the Budget and the Finance Bill I would take this debate. I have kept to that, even if it took six months to do so. It is not that I have not been visiting the Seanad since then. I almost feel I have been here every week. I am almost beginning to feel part of it.
Senators Doyle, Honan and Ross, and a number of other Senators, spoke about the Internal Market, the EMU and the importance of the week that is in it.
The point was already made here this morning that we have paid a price for moving towards economic and monetary union in terms of achieving low inflation, low Government borrowing and interest rates close to those of Germany. Much has been said in this debate and in the debate in the other House on another issue — Deputy Bruton's motion on Structural Funds. I was not in the House for the debate on the European Union Treaty.
We must remember that everything we are doing with regard to regulation control is done in our own interest to try to correct our financial difficulties and to make sure that this country continues to grow and prosper. All the things we should now do, which are in the Maastricht Treaty and in the European Union Treaty, are the prizes for us. It continues to baffle me how outside commentators continue to confuse us.
The prize, and that is what Maastricht and the European Treaty are about, is a follow on to the Single European Act. The main issue is a single currency for Europe. That is, what the debate is about, and not the other issues. The prize of a single currency for Europe will mean for us — lower interest rates, reduced mortgage charges, reduced costs for industry for all borrowers, and lower debt service costs. A 1 per cent reduction would provide £40 or £50 million each year for the Exchequer which could be used for worthwhile expenditure products or tax reductions. It will mean the elimination of foreign exchange costs, lowering the cost of everything from charges for foreign currency when travelling abroad to the cost of doing business with other member countries, and benefiting not only business but customers, which is more important for us than any other country. Senator Doyle and Senator O'Keeffe made the point today.
The comparisons in some of the analysis in today's papers are wrong. To say that the elimination of foreign exchange costs for us might not mean much is wrong. That is grand if you are in America where, perhaps, the cost of foreign exchange business might be 7 or 8 per cent of GNP; it is about 120 per cent of GNP in this country. The costs are phenomenal. EMU would give us all these advantages. This is the central part of what the whole debate is about. I know that all sides in the Seanad, from what has been said in this debate today, would appreciate that point.
As Minister for Finance, I have to say the contrary will happen if we are silly enough to have a "No" vote. If the costs are coming down, if we keep our currency strong and our money within the system, if we keep our reserves strong and liquidity in the market there will be advantages. Naturally, the reverse is the case if we vote "No". People should not try to confuse what is a very straightforward financial argument. If our reserves remain strong, lower interest will mean that mortgages remain low. The risk goes the other way if we make a silly mistake. These are arguments which people should not try to confuse.
If they want to argue about what might happen in the autumn and what might happen next year, and what might happen in common security policies 1996, I can debate those issues. They should not confuse what are factual arguments. EMU is primarily about ensuring that there is a single currency and that the benefits for a single currency for this country are lower interest rates with reduced mortgage charges, reduced costs for industry, lower debt service costs — every 1 per cent of which means £40 or £50 million — and the elimination of foreign exchange rates. These issues are of absolute significance and nobody outside this House should try to misinterpret them.
This is my last occasion on the floor of the Oireachtas to say anything on this debate, because the House does no meet next week. I will leave the debate at that. I thank all Senators for what has been an excellent five or six hour debate. I thank them for the points they made, and assure them that they will be followed up.
I am prompted to say, Minister, that I read that one of the essays in the English honours leaving certificate papers was "Neither a borrower nor a lender be". I would love to know the views of our young English students. Thank you, Minister for a very comprehensive reply.
May I ask the Leader of the House when it is proposed to sit again?
First, may I comment on today's statements? It is part of the reform of this House to have topical debate and today's suggestions will go a long way towards this reform. The idea was that this House would stimulate debate in society. The banking system, as outlined today, is a most important part of our economy. I thank the Minister for coming here today. The idea was to devote two hours to making statements on the banking system but since 11.30 this morning we have been discussing this issue. I speak on behalf of all Members of the House when I say that not alone has the Minister dealt with the issue extensively, but he stayed to hear all the contributions. As the Minister has done, I would like to knock on the head the suggestion that he was reluctant to have this subject dealt with. As he rightly said, the budget, the Finance Act and Maastricht debates have been debated first. It was always intended to take this debate in the House as soon as possible.
The House will meet at 10.30 a.m. tomorrow.
Sitting suspended at 3.20 p.m. and resumed at 4 p.m.