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Seanad Éireann debate -
Thursday, 14 Feb 2002

Vol. 169 No. 5

State Authorities (Public Private Partnership Arrangements) Bill, 2001: Committee and Remaining Stages. - Banking Sector: Statements.

I am glad to be able to participate in the general debate on banking issues requested by the House. This is a broad and topical issue and I expect that Senators will range widely in their contributions. I will cover a number of aspects of current interest and no doubt others in their contributions will touch upon elements not mentioned by me. It is important that at the end of this debate we have a greater and balanced appreciation of this important sector of our economy and of its importance to our everyday life.

Banking and the related sectors of investment, securities and insurance account for a significant part of economic activity and employment both in Ireland and in the wider EU. It has been estimated that the financial sector represents 6% of the EU GDP and about 2.5% of employment. In Ireland, the numbers employed in the banking, insurance and building society sectors are estimated by the Central Statistics Office at 48,900. The banking sector worldwide is going through a major period of change. There are major technological changes which are changing the way and the speed at which banking transactions are carried out. New and sophisticated banking products are coming on stream all the time which raises risk management problems for financial institutions and oversight concerns for their regulators. Banking consolidation at both national and transnational levels is taking place at an increasing pace. The EU itself is busy trying to bring about a single market in financial services. All this has major implications for our own banking sector. Banks operating in Ireland need to ensure that they can provide an efficient and competitive service which meets the needs of their customers and they need to maintain the confidence of their customers throughout the period of change.

The economic benefits of a single financial securities market are considerable. They involve lower cost of capital and a more competitive EU, which leads to greater investment and more growth and jobs. With rapidly evolving financial markets, it is necessary for regulators to keep pace with market developments. This has led to a push by the EU to try to update EU regulatory provisions and to introduce a new legislative framework for fast-track updating thereof, as proposed by the Lamfalussy group of wise men. I am glad to note that the institutional impasse which had been holding up this reform has been overcome and the community can now move forward to a new tier of secondary legislation in this area. Since I have touched upon regulatory issues at EU level, I will now comment on financial regulation at domestic level.

The Central Bank of Ireland is the main financial regulator in this country, covering the bulk of the financial services sector. Its role as regulator has been evaluated on several occasions by several authorities and found to be on a par with its peers overseas. The VFM audit by the Comptroller and Auditor General in December 1999 was comprehensive and found that "current international practice is followed for prudential supervision". The IMF also looked at financial regulation by the Central Bank and found that Ireland had a competent, professional supervisory staff and a satisfactory regulatory framework to supervise banks.

No doubt many Senators will want to express views on the recent events regarding AIB. This has been the subject of debate in the Dáil, but I will touch on some of the issues again today. This issue is the subject of detailed investigations by the bank itself and by a whole range of regulatory authorities. Since Allfirst is licensed in the US, the primary regulators are there. These include the Federal Reserve Bank of Richmond and the Maryland State Regulator.

The Central Bank of Ireland has supervisory oversight on a consolidated basis and it too is carrying out an investigation into the events in question. The Central Bank is independent in the exercise of its regulatory functions and will not be reporting to the Minister for Finance on events in AIB as such. However, it will report to the Minister on whether legislative changes are warranted as a result of these events. Banks, regulators and legislators must be open to learning from events of this kind so as to avoid recurrence.

AIB itself has been very forthcoming to date and no doubt will keep the public informed as to the outcome of its own investigation. This House will be aware that the bank has commissioned an eminent person with appropriate experience to report on what happened at Allfirst. The bank's capital ratio is well within international norms and there is no threat to its viability. Indeed, despite these events, it is still expected to return a substantial profit for 2001.

This leads me to the Government's proposals for a new financial services regulatory authority, or IFSRA as it has been called. When it is launched, the proposed new authority will put in place a new framework for the comprehensive supervision of financial institutions. It will also have responsibility for upholding consumer interests. The events at AIB prove the importance that regulators must attach to prudential regulation. Capital adequacy ratios ensure that banks are sufficiently capitalised to withstand shocks. Their finances must be maintained in a healthy state and their overall financial vulnerabilities must be understood and controlled. The issue of banks' relationships with consumers is also very important.

It is the Government's intention that the role of consumer-director within IFSRA shall ensure that consumer interests are fully represented at the heart of financial regulation. The new legislation to establish IFSRA is currently being drafted by the Office of the Parliamentary Counsel and is expected to be published in this term. Two consultative panels, representing consumers and the industry respectively, will provide an important forum for key issues to be discussed with relevant interests. It is proposed to put in place a statutory ombudsman scheme to deal with issues raised by dissatisfied customers.

To bring some balance into the picture emerging here today, I should point out some of our successes on the financial services front. The IFSC has grown and developed beyond even the most ambitious vision we had at the outset in 1987. In addition to the new projects and direct and back-office employment that the centre has brought to the country, one must also take into account the significant indirect employment that has been generated in areas such as accounting, legal, computer and other general service industries. Substantial renewal of the docklands area has also been achieved. However, the ending of the preferential tax regime for the IFSC and the effective removal of the ring-fence around the centre poses a challenge. This challenge is to build on the substantial foundations that have been put in place and to create a dynamic top quality financial centre which can sustain high quality jobs and business long into the future. In March 1999, in anticipation of these changes, the Government published its strategy for the continued development of the international financial services industry in Ireland post 1999.

The objective of the strategy is to maintain a vibrant and growing international financial services industry in Ireland, building on the success of the IFSC. The strategy envisages the Dublin docklands acting as the hub for the longer-term development of the industry in Ireland, with front-office financial services companies being encouraged to locate within the hub and back-office activity being facilitated elsewhere in Dublin or in the country generally. We must build on the existing success. To do this we need to carefully analyse the opportunities which exist to grow what we have and to attract new business here.

It is important to recognise that the IFSC has a number of advantages outside its tax status which will assist in the further development of international financial services in Ireland. These include the calibre of the workforce; the quality of the telecommunications and support services infrastructure; the English language; the centre's EU base and its relatively low cost base. A further advantage is the brand status and reputation for excellence which the IFSC has achieved, which is a valuable asset in attracting new international clients to this country.

No doubt some Senators will wish to speak on the always controversial issue of bank branch closures. I remind the House that the Minister for Finance has no statutory function with regard to the location or size of bank branch networks. These are the prerogative of credit institutions and their decisions in this area are based on the commercial valuations of their organisational needs.

I accept that banks must react to changing commercial circumstances and the opportunities offered by new technology, such as telephone and Internet banking. However, the way in which certain changes have recently been introduced by some banks is to be regretted. It is imperative that financial institutions have regard to the needs of all their customers, especially vulnerable customers, such as older people and those with disabilities.

The banks have introduced a code of practice on branch restructuring, the key elements of which include a minimum notice period of two months before bank branches close and, in the interests of good customer and community relations, a commitment to give an explanation of the reasons for closing individual branches. Retail banks and building societies have agreed to be bound by the code. The code of practice is a positive step towards alleviating some of the difficulties which arise when local banks close.

The advent of the euro in the tangible form of notes and coins as opposed to its previous virtual status is a new dawn for the European Union. Our banking sector and retailers have ensured a rapid and smooth transition to the new currency. The greater price transparency that will ensue should serve to make us all more conscious of costs across the Union.

At European Union level, the Commission has taken an important initiative to reduce bank charges for cross-border payments in euro in line with charges for similar transactions at national level. This provision comes into effect from 1 July for electronic transactions, such as ATM and credit cards, and from 1 July 2003 for credit transfers. The regulation will initially apply to cross-border payments in euro up to €12,500 but from 1 January 2006, this limit will be increased to €50,000. It does not apply to cross-border payments in euro by cheque.

Cheques are not covered by this arrangement because there is no central cheque clearing system within the euro area. Moreover, these are not a popular method of payment in many euro zone countries. Accordingly, cheques entail higher processing costs. For these reasons a person receiving a cross-border cheque will likely incur greater charges than when undertaking a similar transaction in their own country. I believe I have covered the main areas of topical interest in the banking sphere and I look forward to hearing the views of Senators on these and other aspects of banking.

I thank the Minister of State for attending the House to contribute to this debate. Members asked for the debate following the crisis at two major companies in this country. Last week was bad for the image of Irish business and there could still be serious consequences for the economy arising from the crises at AIB and Elan. These two companies account for approximately one third of the value of the ISEQ index, which comprises Irish listed companies. While this debate is concerned with banking, it is right that I should comment on both companies and the effect the fall in their share value will have on Irish investors and institutions, especially Irish pension funds.

Irish investors and funds that track the performance of the ISEQ index have lost approximately 50% of their investments following the startling fall in value of the shares of AIB and Elan. The value of shares in AIB fell by approximately 13% last week in the wake of the announcement of trading losses amounting to $750 million at Allfirst, its US subsidiary. I am pleased to note they recovered to some extent yesterday. Shares at Elan have fallen by 67% from their closing values two weeks ago because of what analysts term "the Enronitis factor", which punishes companies that do not have crystal clear accounting practices.

Irish Life is one of the biggest index tracking players in the investment market and has a number of highly successful scoop projects to its credit. Unfortunately, as a small investor in one such product, I have witnessed the fall in the share value following the declines at Elan and AIB. More important is the fall in the value of pension funds, which have already declined by 2%. Some financial journals have commented on the likely impact this will have on individual pensions. I am no expert but perhaps other Members may be in a position to comment.

The creative accounting practices at Elan have been known for a long time. It took the publication of a detailed and comprehensive survey of the company's accounting practices in the respected Wall Street Journal at a time when the Enron catastrophe had highlighted awareness of accounting creativity, or accounting engineering as it is sometimes called, to focus attention on the Irish company. The outcome was critical. The management at Elan has strenuously denied it was involved in dodgy accounting. It is now under investigation and we must await the outcome.

AIB employed an official at its US subsidiary, Allfirst Bank, Maryland, whose mandate was to engage in proprietary trading and to make money for the bank. He appeared to work in a small section of the bank and the only other employee working with him was concerned with customers' interests. It appears the trader who caused the problem was betting on the value of the yen against the dollar. From a lay person's point of view, this appears to be no more than glamorised spread betting. If one takes a gamble, one must be prepared to set a limit to one's losses. It appears that $2.5 million was the value at risk assigned to this trader, yet he managed to lose the bank $750 million, or approximately 300 times the amount it was prepared to lose on him, without exciting suspicion until the last minute.

We are now informed that foreign exchange traders became suspicious of this rogue trader well before his superiors. The Financial Times reported an unidentified trader at the New York base of Goldman Sachs group as saying the group was not comfortable with the trader and was so concerned that it refused to conduct business with him. For a trader to lose $750 million, he would have had to consistently post losses of approximately $3 million per day, or approximately $6,000 for every hour he worked last year. If he hid such a black hole, it was a major achievement.

Whatever emphasis AIB may now put on fraud there is no doubt there were no controls at its US subsidiary, Allfirst Bank. Questions will have to be asked throughout the bank, including at senior management level in its headquarters at Ballsbridge. Where was the risk management? Over the weekend a risk manager of an Irish institution told me that if this practice happened in his institution, it would be discovered within a month. There was no audit on the bank's treasury for the last 16 months and one of the most simplistic checks, introduced after the Barings crisis, which monitors the taking of holidays, was not enforced. If a trader is involved in a fraud he can never afford to take holidays and it appears this trader did not take any holidays. The most simplistic of all the rules introduced after the Barings crisis was not taken into account.

There are many questions which the bank has to answer. It has said it will issue a statement in 30 days' time and take whatever action is necessary. This debate is premature given that we have not heard the statement from AIB. There is a crisis in the banking system. I hope the bank statement in 30 days' time will help to renew confidence. It is useful to have this debate. Many questions have to be asked and there are few answers. I await the statement from AIB which I hope will clarify many of the outstanding issues.

I welcome the Minister of State, Deputy Cullen, and thank him for his informative contribution. Unfortunately, we are not as well prepared as he is in the banking area. This debate was called primarily due to the disaster that befell Allied Irish Banks last week but it was expanded to deal with other banking issues. I ask to be forgiven if we concentrate on AIB.

Allied Irish Banks was built up over many years from the amalgamation of smaller banks. Having been in an accountancy practice, I have dealt with many of these banks. For a long time I have not been happy with the way in which certain aspects of the banks are being run. I agree all corporations exist for the benefit of their shareholders and management are there to produce profits for shareholders. I have not been happy with some of the practices which have taken place in banks in recent years. I shall expand on a few of those later. The bigger the banks become the more contact they lose with the customers.

I was shocked that AIB could invest in a bank 3,000 miles away and yet appear to have such lax controls in place to deal with the disaster that befell it last week. I read in the newspaper that the trader in question was called Mr. Nice Guy and was involved in all kinds of local activities. So far, we are told, he does not appear to have made any personal gain. For such a small bank in Baltimore to lose such a large amount of money, it must have meant, with the margins involved, he was dealing in millions or billions. It has been reported he was on a salary of US$85,000, which is low by American standards. He was called the solid performer.

In the past few days we have read that this man was on bonuses of up to $200,000 per annum. One of the reasons he partook in these activities was possibly to raise his return, based on performance. It has also been suggested that AIB was not happy with the level of return from the foreign exchange transactions of US$7 million or US$8 million per annum and that pressure was put on these traders. That is typical of the way the banks have been operating here. The whole idea is to make a profit, let the customer suffer and have no respect for anyone other than the bank and the shareholders who produce the profits.

Senator Doyle referred to the process involved. I wonder whether that man is the only person involved. There must have been collusion and certainly there was concealment from his bosses. There also had to be collusion with others involved in the bank. The losses have only come to light on paper recently, having been concealed for the best part of a year. The yen fell 10% in November-December, and that was when he hit the crunch. Senator Doyle mentioned the issue of holidays. We do not know the full facts at this stage. Given that the story blew up only in the past couple of weeks, it must only have been in the past year that he did not take his holidays.

What surprised me about the whole issue was that it was only last Monday or the previous Friday that the group chief executive became aware of it. I find that difficult to believe. Given the Barings collapse and the issue of Nick Leeson a few years ago, it appears the same idea was involved this time. Has the bank not learned anything about proper procedures or standards to prevent these cases? One of the issues it raised at the back office was that support staff should be completely separate from traders. That was one of the issues recommended after the Leeson affair. What happened here? Where were Allied Irish Banks's procedures? Where was the internal auditing that should have been in place? I read in some article – Senator Doyle referred to it – that the internal audit took place only every 18 months. Surely it should take place at least every six months. We have been told there was no personal gain but that the trader was trying to cover up mistakes. If that is the case it is even worse than if there was deliberate fraud for personal gain.

The ultimate responsibility, even though the bank is 3,000 miles away, lies with the Central Bank because Allied Irish Banks, the parent company, is an Irish bank. The Central Bank supervisors are finding it more difficult to keep up with the global financial systems where dealings are even more complex than dealings in Ireland. Ireland is in a new position with the International Financial Services Centre and with over €100 billion flowing through it, there is added pressure on the staff of only 200 supervisors in the Central Bank. That issue needs to be looked at again.

Mr. Buckley was quick to indicate on Tuesday of last week that the losses were written off in the accounts for 2001. In the next breath he said the bank became aware of this in the previous days. I presume what he means is that the losses will be written off in the 2001 accounts. In some instances we are told that at least we are not faced with the debacle in which AIB was involved in the mid-1980s in relation to the ICI takeover and that taxpayers will not have to carry the can. Will we have to carry some aspects of the can? We have read much from the tribunals about what went on here and how the taxpayer and the ordinary people suffered. How will the loss of $750 million be treated in AIB's accounts? How will it reflect the taxes? Banks have always been treated favourably as far as tax, including corporation tax, is concerned. How will that affect what it contributes to the State? Will it be treated as an ordinary loss? Obviously it will reduce the corporation tax or the tax liability. Therefore, ultimately the taxpayer will carry the can.

The biggest loss is the credibility of the Irish nation, the economy and the financial institutions. Rogue traders are the sixth biggest misfortune for banks. AIB is now in the top six in that league in the world. What controls will be put in place? It appears that people on the financial scene throughout the world knew what was going wrong in this bank, but AIB did not appear to know anything except in the past few weeks.

Why was this small bank trading in hundreds of millions of dollars when its customers requirements were smaller? AIB started in this country, grew into a retail bank and spread to America, but few of us knew it was partaking in this kind of activity which resulted in it landing with a huge bang. Where was the policing? Audit checks took place only once every 18 months. Why had the bank not learned from the Barings case? What will happen now?

What annoyed me most was a comment I heard on the radio while travelling from the airport in Belfast last Tuesday morning. The chief executive of AIB stated that the position was not disastrous because the bank had lost only 10% of its capital and had €400 million profit available to it from last year. These are colossal profits. Perhaps he was trying to mollify shareholders by stating things were not as bad as they appeared. I reflected on his statement as an AIB customer, not as a shareholder, and I am concerned that the bank will try to recoup losses by introducing additional charges for customers. What will happen to AIB? Will large international banks attempt a takeover? Will it decide to sell its subsidiaries in America and return to a more manageable position in this country? These questions require answers.

One positive aspect of the chief executive's appearance on radio was the reasonably good case he made from the shareholders' perspective. There has been no run on the bank's deposits by customers. In my early years as an accountant I believed that the deposits of our main banks were guaranteed. I later learned this is not the case and that, in the event of the collapse of one of the banks, there is only a small Central Bank fund which would protect customers' deposits up to a maximum sum of €20,000.

Many of the issues at stake here affect ordinary customers. I will address them briefly. This is not the first time the House has dealt with banking issues and fears and doubts about the Irish banking system. When I was growing up, the small banks which eventually amalgamated to become AIB always had bank managers. While most of these men probably had only a basic education, they had considerable common sense and responsibilities. In recent years, however, every bank manager of around 50 years of age and above was paid off and put out to grass. The reason for this was to cut costs. The banks now have officers in charge of branches who probably – although I am not certain of this – earn much smaller salaries. Everything is controlled from head office and must be cleared by legal people in Dublin. There is no common sense exercised at local level, despite the fact that managers know their customers and how good they are.

Recently, I spent nearly two months sorting out security for a club with which I am involved. As its property is vested in trustees, the bank sought to make the trustees personally liable for its assets. While I was pushing and fighting the case, the manager did no more than relay everything to the legal people in Dublin. This is totally off the wall, particularly as the trustees are honourable men and pillars of the local community of long standing. To open a new loan account, those of them who were not customers of the bank had to produce their passports and public utility bills. I am aware that these requirements were introduced to deal with money laundering, but where is the common sense approach in local banks nowadays?

I have discussed credit cards many times. An abnormal interest rate is charged on credit card transactions. I deliberately do not pay the minimum payment sought by credit card companies on time, but wait instead for telephone calls from the girls working in the banks. As some of them are based in England, they have no idea to whom they are speaking. Recently I received a telephone call from one of these call girl representatives—

The Senator may wish to rephrase that remark.

Senator Bonner without interruption, please.

I am helping the Senator.

I received a call from a girl in a call centre, whose first question was whether I was E. Bonner and, if so, if I was the only E. Bonner in my home. I played along by telling her there were three E. Bonners in the house. She then sought to verify my identity using my date of birth. As the date of birth on her records was incorrect, I told her that no one in my home had this date of birth. She then decided to hang up and seek advice from her supervisor, but I eventually told her I was pulling her leg.

I cannot understand how, in such circumstances, someone would not examine my account and find that regularly, when I have time, I write a substantial cheque to reduce my liability to the company. Nobody follows up small customers who cannot afford to pay their credit accounts. They use these accounts as an overdraft facility and pay the minimum charge of £70 or £100 every so often to keep the bank off their back.

I recently raised the fact that my bank refused to issue me with another deposit book because it was switching completely to bank statements. The only record many elderly people have of their bank balance is the deposit book. Now they must wait six months to get a bank statement. I became awkward in my bank by telling staff I did not know my account number each time I went in, which meant they had to spend ten minutes looking it up on the computer. This led the bank to give me a new deposit book in euro recently, which, it said, would be the last one. Nevertheless, at least I made progress by dragging out the process. This is the type of silliness which is taking place.

In an article by Senator Ross, to which I am sure he will refer, he asked if other people had problems with banks. Coming from a Border area, I have huge problems. In Lifford, for example, which is just five minutes walk from Strabane, if a person who receives a sterling cheque in a trade transaction wants a bank branch in Lifford to pay it in a sterling traveller's cheque rather than cash, it must be converted into punts first and then bought back in sterling. If the same person crosses the Border to Strabane, he or she will receive a traveller's cheque immediately.

I have very little confidence in bank structures. They operate totally against the consumer for whom retail banks were primarily established. We are not bashing the banks, but explaining difficulties and expressing our dislike of the way in which Irish banks are behaving. I look forward to the contributions of my colleagues on the Opposition benches.

With the Chair's permission, I will share my time with Senator O'Toole. I thank the Minister of State for giving us the benefit of his brief and an address on what he referred to as a broad and topical issue. While his contribution was broad, it was not topical. It is indicative of the power held by the banks here that the Minister of State failed to tackle the issue which prompted this debate, for which I do not blame him, or to tell us what are the Government's views and if it intends to do anything about it. It is obvious from his contribution that the Government intends to do nothing whatsoever and will leave the banks to go on their merry way, as has been the habit of Governments because the most powerful institutions in the State are concerned.

I have a couple of simple questions. Who will pay for the debacle in Baltimore ten days ago? The suggestion, taken up so eloquently by Senator Bonner, is that the people who pay will be the customers and small shareholders. The small shareholders will pay personally because of the knock in the share price and customers will pay because charges will increase one way or another to recoup the $750 million loss made in Baltimore last week. The reality is that Irish customers will pay for what was lost by a trader in Baltimore. When the report comes out in the next few weeks, there will be a rethink in AIB. I do not know whether it will withdraw from Baltimore, but it is a possibility. What it will have to do, however, is to get this money back one way or another. It will not trade its way out of the problem; that is now unacceptable. It will have to get it back from the small customer and that is what Senator Bonner was hinting at.

We know who will not pay, however, and this is the lesson we always learn in the history of Irish banks. The board will not pay. It will still be intact when the report comes out next month. The top executives are unlikely to pay and the big investors will not pay. Their funds may pay, but the big investors will not pay personally. That sums up the problem with banks in this country. Banks are the symbol of big bullies robbing small people. That is what happens. Nobody says the banks should not make profits. They must make profits. They must be solvent and they must be strong financially, but their attitude and culture is the problem.

Let us consider what happened with AIB. This bank, along with other banks here, is suffering from hubris and arrogance. This case is not the only instance of it. This was an appalling instance of negligence, hubris and people not bothering to keep their eye on the ball because they did not believe they needed to do so. We had another example of it only two years ago when the banks not only colluded, but institutionally encouraged people to break the law. What happened at that time? Nobody paid any price. Can the Minister of State or anybody else in the House tell me of a resignation at the top as a result of that? It is extraordinary that in that case, as far as we know, not a single person within the bank was held accountable for an extraordinary fraud on the taxpayer. I suggest that will happen again.

However, what will happen this time will be a little different because the guys in America will pay the price. Already, extraordinary media briefing by the banks has gone on. This was professionally done. They were distancing themselves all week from the responsibility which they patently hold. Everywhere in the media there was talk of whose heads would roll. We were being softened up for the American heads to roll, that this case had happened thousands of miles away and it was nothing to do with AIB. It was, and if it was not, why is the Central Bank sending out people to investigate it? That is the evidence. It is an Irish responsibility, but no one in Ireland will ultimately take responsibility for it. That responsibility will be passed on to the United States.

The banks are too powerful. They have an uneven relationship with their customers. That is one of the problems. They confuse their customers. Let nobody tell me there is not a cartel in the banks. There is a tacit agreement between the banks to fool the public over interest rates and the charges they pay. That has always been the case and, as they get rumbled on this, they think of new ways to fool the public.

As Senator Bonner said, how can the banks charge such extraordinarily high rates on credit cards here? In America, one starts off with a rate of about 4%. That is all they can do because there is some competition among the banks there. Here, I pay 17% or 18%. I do not have the same problem as Senator Bonner; I always pay my bill on time because I resent paying any interest. The reason we pay 17% or 18% is because nobody has come into Ireland and offered an introductory rate of 3%, 4% or 5% as they do in America. This is because they all have a nice little agreement that they will screw the customer, and they do it with the connivance of the Government. That is why it is a Government issue. The Government allows this to happen and that is evidence of a cartel.

More evidence of a cartel came forward when the European Central Bank cut its rates recently and none of the banks passed it on to their customers. If they had been involved in competition, some or all of them would have passed it on but none of them passed it on in one instance because the cuts came very quickly and the punter could not see through the two cuts. The banks cut it once instead of twice and it confused the public into believing it had been cut in line with the European Central Bank. It was not, but none of them did it so there is a conspiracy between them to fool the public.

The other major problem, and Allied Irish Banks has it as well, is that the banks here have been allowed to get much too big in terms of their expansion. There are no Chinese walls in Ireland. Let us be honest about that. We go through a pretence that there is some division among the investment banking arm, the stock broking arm, the insurance arm, the banking arm, the corporate investment arm and everything else. The big banks all own stockbrokers, insurance arms, corporate investment arms, banking arms and retail arms. That is real power, but the problem is that if these are all vested in one particular owner, which is what happens, and controlled ultimately by one or two powerful executives, there are clear conflicts of interest where people are not acting in the interests of their shareholders but in the interests of protecting individuals.

One of the aspects that has always staggered me is that the two big banks here invest more in each other than they do anywhere else. In other words, the investment arm of the Bank of Ireland, which is meant to be objective, has much more invested in AIB shares than the AIB and vice versa. Why is that? It is extraordinary. Managers employed by AIB and Bank of Ireland to manage their investments do not dare to put more money into Bank of Ireland or AIB because their bosses would be down their throats. That is incest and they are not acting in the interests of their shareholders or customers.

I appeal to the Minister of State, in the interests of consumers and pensioners, to examine the banks and act in the interests of these people because this event in America affects us all. We are all investing in AIB one way or another. Most people in the House have jobs which have investments in pension funds. AIB would be part of the particular pension fund in which we are investing. AIB and Elan between them knocked 2% off most pension funds last week. That is material to a large number of citizens of this country. If the banking system is threatened, it is material to a large number of people in Ireland.

I wish to discuss the core issue of recent events in Baltimore. It is important that people realise that what happened in the dealing room was not rocket science; it was not as complicated as teaching, for example. Mr. Rusnak had an ordinary easy job, like being a bookmaker's clerk. Many people, including Senator Bonner, should realise that what happened in the dealing house was not a failure of the audit function, an easy judgment that was made by many commentators last week. Senator Bonner knows that auditing does not take place until after the event and it cannot spot problems as they happen. I do not believe that the crisis was caused by a problem with the internal audit function, which is still dealing with various documents. We cannot say that this was a failure of the audit committee.

We are talking about a failure of line management and we should ask how far up the line the problems go. Events in the dealing room in Baltimore need to be examined. John Rusnak, the bookmaker's clerk, decided one morning that the yen would outpace the dollar over the course of that day and he placed his money accordingly. He continued to back the yen over many months, but the dollar performed better than the yen over that time. It is not complicated; I have outlined what happened in basic horseracing terms. When things started to go wrong, Mr. Rusnak began to compensate by pretending to place opposite bets on the dollar against the yen. Consequently, he was able to produce documents to demonstrate that he had taken a position on the yen, which was losing millions of pounds, and further documents to show that he had taken a position on the dollar, which was gaining millions of pounds. Unfortunately, however, the dollar trades were fictional and never took place.

All businesses, whether selling chips or taking bets on the racecourse, have to determine what they owe and what is owed to them at the end of each day. Debtors and creditors are examined. In the jargon of the dealing house, the mark taken is compared to the market as it stands. In other words, the market in which one bought or sold is compared to the current price of the market. A company can then tell what it owes or what is owed to it. No matter what type of business one owns, no matter what one's shop sells, one has to act if one notices that certain figures are starting to increase, as was the case with Senator Bonner's credit card. In such circumstances, a businessman should lift the telephone to ask who owes hundreds of millions of pounds and whether they can afford to pay it back.

Allfirst would only have needed to make one telephone call to discover that the trades never existed, that the people named had never made a trade and did not owe money and that the bank was hundreds of millions of pounds in debt. Line management at Allfirst should have noticed what was happening within a day, certainly within a week and without a doubt within a month. The losses at Allfirst were caused by a failure of line management and in such circumstances we have to go up the line to find out who is responsible. When we have that information, we will know who got it wrong. It should not take 30 days, as the levels of management at which certain functions did not take place should be clearly identifiable.

As Senator Bonner said, other issues arise from this affair, such as the pressure faced by those working in banks, who are often asked to achieve unreasonable targets. Many companies arrive at targets simply by increasing those achieved the previous month. Difficulties arise when decisions are made in such a senseless and illogical manner.

We also need to ask whose heads should roll as a result the problems at Allfirst, or, in language of the market, whose assistant heads should roll. It is my strongly held view that the AIB group chief executive, Michael Buckley, is doing a superb job and that the confidence of the bank would be further undermined if his position were threatened. I believe the matter has been well handled in the last week. If we examine where blame lies, we will know where action should be taken and should be seen to be taken.

While a drop of 2% in the value of Irish pension funds is disappointing, it is not greater than the blips that are often experienced in the life of a pension. It should also be pointed out that the AIB share is trading just below its 12 month peak at present, so the Allfirst affair has not had a huge impact in that respect. I suspect that if we subtracted the decrease in pensions fund value arising from the problems at Elan from the equation, which Senator Ross would not like us to do, we would see that the problems at AIB have led to a very small blip, of about 0.3% or 0.4%.

We need to learn from recent developments. Why did we not learn from the collapse of Barings Bank, which was also partly attributable to a lack of communication between the front and back rooms? We should examine what should be done to deal with future problems in this sector. I will support Senator Bonner's profession by stating once more that auditors were not to blame and that the problems did not arise as a result of problems with the audit function.

I did not mention auditors.

As legislators, we should admit that legislation will not stop murders, rape or, indeed, fraud. This has been the case since Adam coveted the apple in the Garden of Eden. We should not forget what happened with Shanahan's Stamp Auctions, Barings Bank and now Allied Irish Bank.

I do not wish to discuss recent developments in Baltimore, as we all know what happened to the poor young man who was trying to run his business and to meet targets. I am sure he took similar gambles on many other occasions, as do many other bankers. It is unfortunate that his horse fell at this jump and that he now finds himself in trouble.

When one goes to one's local bank, one realises that banking has become very impersonal. How many people know their bank manager and can go to talk to him? I do not go to banks very much any more, but they were good to me when I needed money in the past. In the 1960s and 1970s, one felt comfortable visiting the bank manager because one knew him. He was familiar with one's records and if one asked for a loan of £400 or £500 over a short period of time, he would say, "That is okay, pay what you can of it back." Banks were interested in the personal touch at that time and they would not leave a straight and honest customer in the lurch. If one goes to a bank now, however, one will be told that the manager is unavailable. When I travelled from Dublin to meet my bank manager about a matter that did not concern me too much, I was amazed that I could not meet the bank manager. The same thing happened when I rang another bank with which I deal.

The new style of banking is comparable to many things that are going wrong with this country, such as increased levels of crime. Many people do not know their next door neighbours. The type of community in which everyone knew everyone else, all watching out for each other, has ceased to exist. Bank managers looked after their customers in years gone by and they were respected. The banking system is run by computers nowadays and a cheque bounces or is honoured depending on the advice of a computer. It is a serious situation, as fraud can happen when people transfer money via a computer system without real money crossing the counter. It is time we addressed this matter.

If one goes into a bank today to look for a few pounds, one is told that one's credit must be evaluated, that a feasibility study is needed, that cash flow needs to be studied or that figures must be projected. This costs more and more money without solving the problem. We need to reach the stage where we can do away with targets. Bank managers and officials have a stressful life; if they make a profit of £100 one month, they are expected to make a profit of £120 the following month. The time must come when profits even out. One cannot keep going all the time. Staff are being pressurised as a result of which dishonesty creeps in. The system has also become impersonal.

Reference was made to credit cards. I deal with MBNA which offers reduced credit terms. However, I use a standing order and do not pay interest. People who depend on credit cards to run their businesses should go to a bank and try to obtain an overdraft or a loan. They should not let their credit card bills run up. Such cards can be useful, but they can also be dangerous if one does not know how to manage them. Credit cards can lead people into serious trouble.

We need to bring to the notice of banks and bank officials that we are not going to continue the rat race of projected figures, analyses, feasibility studies and so on. A customer should be recognised for what he or she is, whether he or she has a track record and is worthy of getting a few hundred or a few thousand pounds. The current system is costing too much.

It is often the case that, having provided all the necessary information, young entrepreneurs are refused. Their projections can be out by £5,000, £6,000 or £7,000 as a result of which they get nothing. A serious situation has developed in banks and business. The system has become too impersonal. I appeal for an end to computerisation in banks. We must get back to the previous system whereby one knew one's bank manager and he or she knew the individual.

My distinguished colleague, Senator Ross, has a wider and more professional range of knowledge is this area than I, but like almost all citizens I am a customer of the banks. Unfortunately, for the first time in my life I recently inherited a golden bag full of shares in AIB, Bank of Ireland and Elan. I had shares in virtually all the companies which went down in value. However, it was money I did not have before and those who manage the fund are very good.

I was interested in the statement by the Minister of State. He referred to the centrality of the banking industry and the large number of people it employs. I think he mentioned about 48,000 employees in the banking sector and the remarkable success of the International Financial Services Centre in Dublin docklands, which I appreciate. However, the banks are ruthless and they are downsizing. Everything they are doing in terms of automation and new technology is geared to slimming down their operations. I do not think many bank employees are happy.

Some time ago I came across in a skip confidential reports from various branches of one of the major banks which had conducted an internal survey of its employees. One of the questions asked was whether the employees felt the operation was geared to the best interests of the cus tomer. A total of 90% of the employees answered that they did not think so. Neither did they seem too happy about their own employment and the manner in which they were treated, so something is wrong.

The Minister of State said that banks operating in Ireland need to ensure that they can provide an efficient and competitive service which meets the needs of their customers and that they need to maintain the confidence of their customers throughout this period of change. However, he knows perfectly well that banks have lost that confidence. Every customer complains. If one goes into any bank one will find long queues. Nine service hatches may be available, but only two are open. I came across such a situation at lunchtime last week. When I complained I was told that it was lunchtime, but that is when people who work have the opportunity to visit their banks. If banks were interested in their customers they would stagger their lunchtimes so they could cope with this demand.

I regularly complain about the service and usually receive some small amelioration. However, many people do not feel confident enough to complain. The Minister of State indicated some sense of unease. It is unusual for a Minister to be so forthright in criticising banks. He stated that the way in which certain changes have recently been introduced by some banks is to be regretted. In the discreet, diplomatic language of banking circles that is a strong comment from a Minister, for which I thank him, as that is the case.

Some years ago in his review of salaries, Mr. Buckley thought that Members of this House were not worthy of an increase. At that time he received about 20 times the salary of a Senator, yet he thought we were not worth one twentieth of his income. Senator Ross stated that Mr. Buckley is doing a good job, and perhaps he is, but the buck stops with him as chief executive. On "Morning Ireland" he said how glad AIB was that all its eggs were not in the basket of currency gambling and that it still had its cherished individual customers. I did not feel very cherished, as was the case with many people. However, I would be happy if he has woken up to the fact that ordinary individual customers in this State are the backbone of banking. I hope banks are sufficiently humbled to pay these ordinary, decent customers their due respect.

The Minister of State referred to a new framework for the comprehensive supervision of financial institutions. When reading his speech I wondered whether there would be mention of an ombudsman for banks. The Minister of State has done well as he referred to it on the next page. However, the reference is rather vague. He said that two consultative panels representing consumers and the industry will provide an important forum for key issues to be discussed with relevant interests. To deal with dissatisfied customers, he stated that it is proposed to put in place a statu tory ombudsman scheme. I would like to know more about this. I would like to think this does not just refer to large institutional customers whereby one financial arm helps out another, but that ordinary individual customers' rights will be looked at. I am glad the Minister of State is nodding and I would like some concrete information and a timescale because we need an ombudsman.

Some weeks ago I suggested that we start a bank users' association and perhaps even invade the old House of Commons in College Green, where I have my account, and take it over as a headquarters. However, an ombudsman would be a better idea and I would welcome such a development.

I wish to refer to the service one receives from banks. Banks are closing branches all over the country. Some communities, particularly in deprived areas such as Ballymun, have no bank, and that is a scandal. Banks have no sense of social obligation. One might argue that this is not a financial criterion, but it is in the interest of banks which spend much on public relations so surely they could spend a little on looking after the neglected areas of society.

Banks also put their customers out in the rain. Let us have the new technology. I do not agree with Senator Farrell that one can turn one's back on computers. These developments are inevitable and we have to go with them. However, we should have a parallel system so elderly people, or those like me who are useless at these kinds of things, are not disadvantaged. Let us deal with customers in a human manner. Customers should not be driven out into the rain where they are unprotected. In certain areas of the city elderly people are exposed to the weather and the risk of theft as they are taking cash out of machines where an addict can bang them on the back of the head. Simultaneously, taxpayers are paying for the security measures to protect the banks' money. That tells one where the banks' priorities lie. They are more concerned with the welfare of their money than the welfare and interest of their customers.

Banks are refusing to give statements over the counter. If one wishes to know whether one can draw a cheque one is told that a statement cannot be issued over the counter. The information is at the officials' fingertips and it is one's money. However, they refuse to give one information about one's account.

One can no longer get a cheque book over the counter. If, for example, one returns from abroad and finishes one's cheque book paying bills, one has to wait a week for another cheque book which can only be triggered automatically by the arrival of the critical cheque in the clearing system. What kind of service is that for individual customers?

There is also the situation faced by elderly people. I recently heard of a case involving an elderly man with defective eyesight who could not read the display on the screen of the ATM on the street and had to wait until he saw someone whom he thought looked respectable. He had to give that person his credit card and his PIN number. That is a risk and a shocking thing to do to a customer.

There is also the rapaciousness of banks such as the manner in which the Bank of Ireland closed Rowans Seeds. The bank just moved into the shop because it wanted the premises next door. That is the Bank of Ireland.

Mr. Rusnak at Allfirst in Baltimore was in middle management. He was not on a huge income. He survived on bonuses – that was the carrot. He was encouraged to gamble on the currency market. I question the morality of that. This country was badly stung when the international currency gamblers went into operation against our own currency. We all complained that it was shocking, disgusting and immoral, yet we find one of our own banks at it as hard as it can in America. The sums were vast at four times the gross annual profit of the bank, yet it did not notice what was happening. I am almost innumerate, but even I could have detected the passage of those enormous sums of money through the bank and I would start to wonder.

The man was gambling. I do not know very much about gambling, but I was once on a cruise with a terrific gambler who told me about it. I did not do any gambling but I watched him. He said that one should gamble on a winning streak until the first time one loses and then cut. The only other way to approach it is to bet continuously on black, although the wiser thing is to cut one's losses totally because statistically it will have to come up. However, to do this one must have infinite resources, because it could take a hell of a long time. Mr. Rusnak was betting on black and the resources ran out. He was caught. This is a terrible thing.

What about the members of the boards? People are placed on boards because of a crony network and they make £20,000 for turning up to two meetings. It is a pension slush fund for the lads. I would like to know about the responsibilities of these people in terms of supervising what goes on. The information is very confusing. George Lee, for example, suggested that some had broken bank rules by not attending 75% of the meetings and apparently that was normal.

I would like to end with an instructive story. This is not new. I have a friend who was a bank manager and even he did not like the banks. I apologise for its slight vulgarity but it is a true story and it is reported speech. In the 1950s there was a farmer in the midlands who wanted a loan of £100 to build a bathroom extension to his farmhouse. He went to the bank and the bank manager said that he would put the proposal to the group which vetted those loans but he would have to ask the farmer some questions first. The farmer said that was fine. The bank manager asked the farmer whether he owned his house. He said yes. Did he have a mortgage on it? A small mortgage. Did he have family? Yes, a daughter and two sons. Did he have any kind of indoor sanitation? No. The grilling went on, until the farmer turned to the bank manager and said: "You have asked me some fairly personal detailed questions. Do you mind if I ask you some in return?" The bank manager said that this was very unusual but told the farmer to go ahead.

The farmer asked the bank manager whether he owned a house. He did. Did he have a mortgage? No. Did he have family? Yes, three daughters and two sons. Did he have a bathroom? He had two bathrooms. The farmer then asked him how often he took a bath. The bank manager said that was a very personal question. The farmer replied, "Well, it may be, but if you are expecting me to lick your arse for £100 I am entitled to know what condition you keep it in."

Acting Chairman

The Senator's contribution was certainly different from that of Senator Ross but I have no doubt it was equal to it. When is it proposed to sit again?

Next Wednesday at 2.30 p.m.

The Seanad adjourned at 12.25 p.m. until 2.30 p.m. on Wednesday, 20 February 2002.

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