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Seanad Éireann debate -
Friday, 23 Mar 2007

Vol. 186 No. 15

Asset Covered Securities (Amendment) Bill 2007: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

The purpose of this Bill is to amend and update the Asset Covered Securities Act 2001, which established the legislative foundations for the launch in 2003 of the Irish asset covered securities market. Ireland has since then moved quickly to confirm its role in this expanding specialist activity and by the end of 2005, we had become the sixth largest market in Europe for this type of security. It has been a particular success of the Irish Financial Services Centre, generating significant employment, incomes and tax revenue for Ireland and enhancing Ireland's reputation as a centre of excellence in international financial service provision. The term "asset covered securities", ACS, is really our brand name for covered bonds issued under the Irish ACS statutory framework. They are bonds which are issued by designated credit institutions — specialist banks — set up under licence issued by the Financial Regulator.

The covered bonds legislative and regulatory framework established under the 2001 Act is widely regarded as a best practice regime and an improvement in certain respects on other long-established jurisdictions in this market. However, competition between covered bonds issuers in the various member states is intense and several states have subsequently introduced innovative refinements to their covered bond regimes. In addition, while covered bonds issuance used to be largely a European banking activity, some American banks have now resorted to this European technique, thus bringing further pressures and opportunities to the market. The amendments proposed in this Bill will maintain and enhance Ireland's competitive position in this area, secure existing employment and create opportunities for further growth.

A number of factors underlie the urgency with which this legislation is being brought. The Bill is needed to effect some necessary technical changes to the 2001 Act to provide more legal clarity and facilitate greater flexibility when operating some provisions of the 2001 Act. Financial services are a highly competitive industry in terms of innovation in the nature of the services and products being offered and the scope allowed by the legislative regimes in the different jurisdictions in which financial centres are located. A competitive opportunity can be gained from being an early mover when a new innovation becomes feasible but, once reforms are announced, they can be followed quickly by similar measures in other centres and the advantage will be lost if proposals are not brought to market as expeditiously as possible. Imitation may well be a supreme form of flattery but in the world of financial services, it is a challenge and a competitive threat.

I wish to outline the background to this important niche sector of the financial services industry. Covered bonds are bonds, or debt instruments, which are issued to investors and backed by, or secured on, a ring-fenced cover pool of eligible assets, currently restricted under Irish legislation to residential mortgage loans or public sector debt. Investors in covered bonds have a preferential claim on the assets in the cover assets pool in the event of a default by the issuing bank. The assets in the pool, which essentially are the loans in the pool, serve as collateral backing for the bonds, and the interest and principal repayments on those loans are used to meet the interest payments due to the bondholders and, eventually, to redeem the bonds. Meanwhile, the funding raised from the bond issue can be used to make further loans.

The process of issuing covered bonds is the most cost efficient form of secured long-term funding available to Irish banks. This activity takes place entirely within the wholesale end of the banking sector and the bonds are not for retail customers. This means that the investors are, for the most part, professional institutional investors such as pension funds, investment funds and banks, including central banks. The investors who buy our covered bonds are located worldwide. Thus, Irish covered bonds are now a global capital markets product. The attraction of these bonds is that they provide investors with access to a security that is supported by high quality assets over which the investors maintain a robust, preferential claim. One of the features of the cover assets pool is its dynamic nature, which means non-performing or redeemed assets must be replaced in the pool by new assets. In this way, the high quality of the cover assets pool can be maintained. This dynamic feature of the cover assets pool, allied to the conservative management of the pool, enables institutions to obtain high credit ratings for such bonds and to issue covered bonds at low interest rates.

There are two distinct types of asset covered security, the first of which is a public credit covered security. These securities are issued by specialist banks associated with credit institutions, the main activity of which is the provision of finance to Governments, municipalities and local authorities. The securities are backed by public sector assets such as sovereign bonds, local authority loans and Government guaranteed loans. The second type of asset covered security is a mortgage covered security. These securities are issued by institutions with significant mortgage loan portfolios. Where a designated credit institution has been authorised as a designated public credit institution and a designated mortgage credit institution, it must keep a separate cover assets pool for each of the different types of securities it issues. The backing cover assets, that is, mortgage loans and public sector debt, cannot be mixed in the same cover assets pool.

Total employment in Ireland's international financial services sector now stands at more than 19,000. This is in addition to the 40,000 or so employed in the wider financial services sector at domestic level. Employment in international financial services is highly lucrative for the Exchequer, with the total yield of corporation tax from IFSC companies in 2006 standing at more than €1 billion according to the Revenue Commissioners. That amount represents almost 16% of the total corporation tax yield of €6.7 billion for the State in 2006.

The term "asset backed securities" covers a wide spectrum of financial products but covered bonds are at the low-risk end of that spectrum because the activity is governed by specific and bespoke legislation. The covered bond issuer must be a credit institution and is subject to tight regulatory and prudential supervision. There is regular interaction between the issuer and the Financial Regulator to the extent that it could be described as micro-regulation. The set of eligible cover assets is tightly restricted and set down in the legislation. In Ireland's case, it is currently limited to residential mortgage loans and public sector debt which must also meet certain credit quality requirements. The cover assets pool must contain sufficient cover assets to meet bondholders' claims throughout the entire term of the bonds in issue.

Where the investors are themselves credit institutions, the bonds can be particularly attractive owing to the favourably low level of capital that must be held against that class of investment. To qualify for this concessionary treatment, it is crucial for the bond issuer that the bond issue gain a triple-A rating from the international credit rating agencies. That rating is only awarded after very close vetting by those agencies, which act in the interests of investors, and means that the proposed bond offering is fully and securely collateralised by high quality assets in accordance with the terms of the governing legislation. All of the bonds issued to date under the Irish covered bonds framework have qualified for the triple-A rating.

While this technique is new to Ireland, it is not exactly a recent innovation and has been around in the form of the German Pfandbriefe model for about 150 years. However, it was only in the past decade that other member states with developed financial services industries began facilitating this type of activity. It is believed that the availability of asset covered securities has contributed to stability in continental European markets owing to their long-term primarily fixed rate nature. Their high credit rating enables issuing institutions to raise long-term funds at interest rates only marginally higher than those of a sovereign borrower. This confers a significant competitive advantage on the banks which can access this cheaper form of credit.

With an increasing proportion of savings in Ireland going directly into investment funds and pension schemes rather than being held on deposit with banks, it has become important for our banks to be able to draw on diversified sources of funding in order that the financial system can support economic activity effectively. I trust it will be clear to Senators from what I have outlined thus far that this specialised financial service is operationally important for the domestic side of our banking industry in terms of raising funding as well as strategically vital for the internationally focused side of the industry.

The parent Act, which we are now amending, dates from 2001. It might seem somewhat premature to overhaul a relatively recent Act so quickly. However, the financial sector is particularly conscious of the need to have solid legal backing for its activities. Large sums are at stake in many activities and there must be absolute legal certainty as to the rights and duties of the contracting parties. Certain provisions of the 2001 Act are deemed by the industry to be in urgent need of clarification to ensure greater legal certainty, particularly as regards aspects of complementary activities such as hedging contracts and the associated provision of hedging collateral. Accordingly, it is necessary to make a range of technical changes to provide greater legal certainty and more operational flexibility as regards various elements of our existing regime. At the same time, the opportunity is being taken to modernise the regime in the light of changes made in other jurisdictions and in EU legislation. We now have a "window of opportunity" to exploit reforms introduced under the EU's recent capital requirements directive, or CRD as it is now generally called. It is not only a question of aligning our regime with the provisions of the CRD to gain some competitive advantage over other issuers because if we do not align our ACS framework quickly with the CRD's, then our covered bonds will become less attractive as investment products for foreign banks and other entities which hold these bonds. As a "first mover" in incorporating the CRD's reforms into our ACS regime, we gain a competitive advantage for those who issue those bonds under our legislative and regulatory framework.

I will outline for the House the technical changes needed to meet the operational needs of this specialist sector. First, the industry has been seeking clarification of the term "duration" in the 2001 Act. It relates to the weighted average term to maturity of the mortgages or loans held in the cover asset pool. The proposed revised definition is in line with standard industry usage. Second, derivatives such as swaps are used to hedge various risks such as currency risks, credit risks or interest rate risks. The proposal is that the associated collateral lodged by the hedge counter party would be protected in the event of the bank's insolvency, as with the assets in the cover assets pool, but maintained separately from those "cover assets" in the pool. This will serve to reassure hedge counter parties and further facilitate the collateralisation of hedge pool contracts.

Section 2(n) inserts a new definition of the term “include” in the 2001 Act. This definition is needed to make it clear that the insertion of an asset or hedge collateral into the cover assets pool does not mean the continued maintenance of that asset in that pool because it is necessary to actively manage the assets in the pool on an ongoing basis. This new definition has, in turn, triggered a raft of consequential amendments throughout the Act whereby the word “included” is replaced by the term “comprised”. Timely modernisations are also included, in line with trends in other jurisdictions. For instance, the 2001 Act requires that the asset covered securities be fully, that is, 100%, collateralised. It is proposed to strengthen investors’ rights by introducing mandatory overcollateralisation of 3% in the case of residential mortgage loan and public sector loan pools. Several major reforms now proposed arise from the coming into effect on 1 January last of the EU’s CRD. The CRD was designed to give effect across the Community to the new Basel II capital accord.

However, the directive also opened up new opportunities as regards the regulatory treatment of covered bonds. Perhaps the most significant innovation being advanced is a new type of designated credit institution — a designated commercial mortgage credit institution — which will be enabled to issue covered bonds secured on commercial mortgage loans. The Bill includes a provision for commencement orders and the sections relevant to commercial mortgages may be commenced at a later date to allow time for the details of the regulatory regime to be set out by the Financial Regulator in consultation with the industry. The mandatory overcollateralisation in the case of a commercial mortgage cover assets pool will be 10%.

Among other innovations in our ACS regime following on from the CRD are the following: the definition of "public credit" is being modified to bring it into line with the directive definition and New Zealand and Australia are being added to the existing list of non-EEA countries — currently comprising of Canada, Japan, the Swiss Confederation and the USA — whose assets may be included in a cover assets pool; to reflect the developing nature of the ACS business, it is proposed to provide for the use of loans to highly rated multilateral development banks such as the IBRD, the EBRD the EIB, the Asian Development Bank and so on. It will also cover loans to international organisations such as the IMF and BIS; the pool eligibility criteria for so-called "substitution assets" — essentially temporarily surplus cash from the "cover assets pool" held on short-term deposit with highly-rated banks — are being brought into line with the CRD. This involves, inter alia, reducing the Irish limit for substitution assets of 20% on a pool asset basis to 15% on a covered bonds outstanding basis; the amendments also provide for the inclusion of residential and commercial mortgage backed securities, that is, units of mortgage securitisation issues, in the respective cover assets pools and also meet the requirements of the CRD in this regard; and the current provisions that restrict the level of public credit covered securities to 50 times the designated credit institution’s own funds level are being modified as a result of the changing risk weighting of public sector loans under theCRD.

Senators will be aware this is quite technical and complex legislation but I assure them the reforms I have outlined have been carefully drafted in consultation with industry legal experts, the Financial Regulator and the Parliamentary Counsel. The proposals have also been formally vetted and cleared by the ECB, which confirmed that it had no problems with them. While the Financial Regulator was consulted about these proposals, it was also a partner from the outset in the drafting of these provisions. The regulator attended round table meetings with the Department and industry representatives and even held separate bilateral meetings with industry representatives when they wanted technical issues clarified. The regulator suggested many adjustments, which the Department was glad to take on board, and some of the amendments were even proposed by the regulator on his own initiative.

I trust that it will be clear to the House that it is essential that we update the provisions of the 2001 Act for legal, operational and strategic reasons and that we move expeditiously in this regard to protect the competitiveness of ACS issuers who operate under our legislative and regulatory framework. Failure to fast-track these reforms could see some ACS issuance relocate out of Ireland. On the other hand, quick action on our part will serve to safeguard this activity here, with all the benefits associated with that in terms of high-quality employment and revenue for the Exchequer. It may encourage other issuers to locate here, with all the associated benefits that would bring in terms of more high quality jobs and tax revenues. I commend the Bill to the House.

I welcome the Minister of State and his officials to the House. I thank him for attending earlier than scheduled to accommodate the House and the smooth passage of business. Fine Gael supports the legislation. The Minister of State said he hoped he made clear to the House the need for the changes. In a previous incarnation I worked in financial services having studied finance in college. Everybody I am friendly with from my college years works in financial services and I pride myself on being up to date with developments in this area but asset covered securities is an area in which I do not have significant expertise. As my colleague in the Lower House said, we must take the word of the Minister of State at face value but I have no reason to doubt his word in this regard.

Over the past ten years, the number of companies operating in the financial services sector in Ireland and the number of jobs created has expanded significantly. The IFSC is thriving and numerous other organisations operate throughout the State in this industry. I would welcome wholeheartedly any legislation that secures those jobs and investment going forward and attracts additional investment. Fine Gael is supportive of any development of our legislation, which has a sound, prudential basis but which also allows new products to develop. Ireland has developed a well earned reputation for being effective in regard to regulation by using a light touch that is not excessively bureaucratic. That reputation must be maintained to attract new entrants into the sector and to retain current investment. Fine Gael believes the success of the IFSC, in particular, is a source of immense national pride but that cannot be taken for granted into the future. We recognise the challenges outlined in the document, Building on Success, including the integration of EU markets and the emulation of the Irish corporate fiscal environment by other jurisdictions.

We also believe the next Government has the potential to overcome these challenges by maintaining the solid foundations on which the IFSC's success is built and developing them for a changed world. Fine Gael will strengthen the three pillars on which that success rests — tax certainty, responsive regulation and a developing skills base — and ensure the IFSC not only remains a powerful force in the economy but grows and develops.

Under Fine Gael and our colleagues in the Labour Party, tax certainty will be maintained and strengthened. For several years, Fine Gael's policy on taxation has been crystal clear. We believe this country does not need higher taxes. That means no increase in income tax rates, corporation tax rates, capital gains tax rates and capital acquisitions tax rates.

In the area of regulation, we must be vigilant to ensure the factors which have made the IFSC a success are maintained. Our agenda will focus on ensuring that the clearing house groups continue to work efficiently, that IFSRA consumer and corporate governance related regulation does not become too onerous and that the EU financial services action plan is implemented domestically in a smooth manner.

There is evidence that new regulation driven domestically or from the EU could impact negatively on the IFSC. The recent report of the National Competitiveness Council indicated that Ireland's ranking on the impact of regulation had fallen to seventh out of 16 countries benchmarked. It is essential that Departments devote greater resources to reviewing the impact of major regulatory change on competitiveness — effectively, business proofing new legislation — and that their assessment be independently tested. This is especially important in regard to the IFSC because of the very mobile nature of the business conducted in the centre and the vigorous international competition for this investment now and in the future.

On a national level, Fine Gael believes our system of economic regulation has become too complicated and is characterised by too many small, sector-specific regulatory bodies that have not proved effective in opening up regulated markets to new entrants in a way that benefits consumers. A smaller number of larger, cross-sectoral regulators would have pro-consumer advantages, in particular, by lessening the dangers of regulatory capture by incumbent monopolists and by providing opportunities to share the scarce legal and economic expertise used in economic regulation and, in the process, generating administrative efficiencies and lower costs for regulated companies.

In the area of skills and skills upgrading into the future, more than 570,000 individuals, or more than one quarter of the current workforce, have not obtained a leaving certificate or equivalent qualification. The long-term solution must be to raise the second level completion rate towards 100%, as has been achieved in a number of European countries, especially in the Scandinavian countries, and to raise further the proportion of school leavers entering third level education. However, in the interim, our social cohesion and economic competitiveness also require greater policy attention on upskilling those already in the workforce through life-long learning.

This skills challenge facing the economy must be addressed by the next Government. Fine Gael and the Labour Party will, when elected to power, commit to increasing the number of people in employment that formally progress by at least one level under the national qualifications framework by 100,000 over a five-year timeframe. For the IFSC, this means producing graduates with more advanced mathematical and financial skills as well as developing Ireland's reputation as a location for cutting edge applied research in financial product development and in risk management.

In the context of the Bill, Fine Gael does not question the need for these changes but I wish to make some other points. There is an ongoing problem in regard to the level of personal indebtedness among people in this country. Senators have raised this issue on different occasions over recent years. Debt levels have risen at an alarming rate in the past two years but the Government is only adding to the problem by ramping up its own spending plans. The Central Bank's monthly statistics for last December have revealed that in the past two years alone, Irish residents have increased their indebtedness by €118.2 billion. This represents an extra spend equivalent to 80% of gross national product. Most has gone on a huge expansion in term loans and overdrafts. Poor planning policy is pushing many young families into debt. Too often they are buying into housing schemes for which public services have not been provided. They are spending large sums of money on travel and child care. Bad policy is putting them on a financial treadmill.

This credit boom has fed into huge increases in Government revenues. The current Government has expanded its spending at a rate 50% faster than GNP growth on the back of those revenues. That results in significant vulnerability for this country. Spending programmes must be built on solid long-term foundations. A property and credit boom are an uneasy basis for the expansion we have seen in recent years.

The figures underline the urgent need for the Government to curb its inflationary policies. The inflation figures for this month are marginally down on last month's but the projections by most of those looking at inflation figures over the next six to 12 months are that they will return to an upward trend very soon. We need to focus more on value for money, particularly from this extra spend in public services. This needs to be based on an agenda of public service reform which has not happened. We also need strategic planning of public services into the future. I am not convinced the Government has grasped the nettle in this regard.

The financial services sector of the economy has grown rapidly. We have gained significant market share in this area in the past ten years. We have been very effective in developing a good niche in the financial services sector. I would not pretend to comprehend the intricacies of this Bill, despite the Minister of State's explanation, but it is a step in the right direction. We need to do everything to promote the financial services sector because it has been a major success story for the economy and country. At a time when employment in manufacturing, construction and other sectors is under threat, there is a real opportunity for further development of the financial services sector into the future. That is what this Bill is based on and, as such, I wholeheartedly support it.

I welcome the Minister and the Bill which is quite a technical and complex one. Like the previous speaker, I believe we must, to a large extent, trust the work done by experts. It is very clear this Bill is based on very detailed, expert discussions between the officials and interests in the industry and that it is designed to maintain the balance between reasonably light regulation while, at the same time, preventing abuses or scandals which could affect the reputation of the centre.

The previous speaker was quite right in saying that the International Financial Services Centre — indeed, it is no longer confined to one area — has been an enormous success. April 2007 will be the 20th anniversary of the International Financial Services Centre. I was privileged to be at the discussions in December 1986 when it was mooted and Dermot Desmond, economists from the ESRI and Michael Buckley, who subsequently became chairman of AIB, met Charles J. Haughey and one or two of his colleagues. They had three proposals at that time. The country was on the floor in that confidence was low, the number unemployed stood at 250,000 and emigration was high. Borrowings came to more than 12% of GNP and there had been a near run on the currency in October of that year. Three proposals were made, only one of which was adopted. The first was for another devaluation and was not adopted. The second was for serious cuts in social welfare payments. One of those present claimed to be an expert in social welfare but the proposal was not adopted. The third was the establishment of the financial services centre. It is a great tribute to the genius of a much criticised, not to say reviled man, namely, Charles J. Haughey, that he adopted this proposal, ran with it and fast-tracked it. The process of its establishment began within one month of his taking office and was driven initially from the Department of the Taoiseach and subsequently the Department of Finance. At the time the most optimistic scenario was that after a period of years it might employ 5,000 or 7,000 people. A niche market was envisaged. There may have been a difficulty in believing Ireland would be able to compete with major financial centres but 20 years later 19,000 are employed there.

A sum of €1 billion in revenue is attributable to the financial service centre, which constitutes the cost of many schools and hospitals. However, I recall the debates of the 1980s that demonstrated the contrast between what one might call theoretical and practical socialism. In the 1980s there were great complaints to the effect that one could not get revenue from business or capital. If memory serves, total revenue from both sources in 1986 was approximately £290 million. I checked the returns from last year and they came to more than €10 billion, which represented 22.3% of Government revenue. The comparable sum of £290 million constituted approximately 3.7% of revenue. This was not achieved by raising corporation tax or capital gains tax but by doing the precise opposite. The rate of corporation tax was reduced to a general level of 12.5%, while capital gains tax was halved. This was highly controversial for our Labour Party and trade union friends, some of whom are still not really happy with it and cannot believe it has created far more activity and revenue.

In a backhanded manner Gordon Brown's budget this week paid a compliment to the competition because he reduced corporation tax by 28%. Admittedly, he also raised the tax on small businesses. Amazingly, however, when one considers the history of the British Labour Party, his highest priority these days is the protection of the City of London. In its budget supplement the Financial Times stated that several companies had relocated headquarters to countries such as Ireland and Luxembourg recently, citing tax as a factor. While one hears much doom and gloom in this House about competitiveness, the financial services centre has been competitive beyond our wildest dreams.

On the subject of Gordon Brown's tax policy in respect of business, it is interesting to note that both on corporation tax and income tax, he gave with one hand and took back with the other. Consequently, there was virtually no net cost to the Exchequer. For example, although he cut the standard rate of income tax from 22% to 20%, he abolished a special low introductory rate of10%. In Ireland I suspect the Labour Party's promise to reduce the tax rate from 20% to 18% could be accompanied by a similar sleight of hand, whereby a concession would be given with one hand and clawed back with the other. One of the great merits of the budgets of the past two or three years is that this has not happened. Any tax reliefs given have not been taken back by other means.

I noticed some of Senator John Paul Phelan's comments regarding tax and budgetary policy. Although he accused the Government of ramping up spending, it has been highly responsible. However, if one considers the auction politics developing on the Opposition side, I do not know how——

They have also been developing on the Government side. The Senator is outnumbered.

Perhaps the spending commitments made by Fine Gael and the Labour Party, in particular, are not to be taken seriously. However, if they do not involve a ramping up of expenditure, I am unsure what is involved. It may be that they propose some hidden countervailing cuts. I have stated at local level that the decentralisation programme which comes under a barrage of attack at national level is at risk. I will ensure the people in my constituency understand this well before they come to vote.

"Mansergh country".

Senator Phelan mentioned inflationary tendencies in the property market. One good consequence of the discussion on stamp duty is that it has contributed to a cooling-off in the housing market. I refer to the discussion rather than the action. This is thoroughly positive because housing has reached the limits of affordability.

It has passed the limits of affordability.

In many parts of Ireland the stamp duty debate is utterly irrelevant. I visited a leading estate agent in my home town of Tipperary yesterday where the average price of good three bedroom houses is approximately €220,000. Obviously, this is far below the threshold and any changes in stamp duty policy would relate in the main to the greater Dublin area, as well as to one or two other city areas. I am uncertain whether the Fine Gael Party has thought through the possible inflationary consequences of its proposals on stamp duty, the campaign on which has been run by the Sunday Independent, in particular.

It has been run by the Progressive Democrats.

As a representative of the auctioneers noted, the person who pays stamp duty is often the seller rather than the buyer. I fear the Sunday Independent represents some very well-heeled people. Property price inflation means that, on paper, many of us who have owned houses for 20 years have become enormously wealthy, were we to move out. Some wish to keep such inflation going and attacking stamp duty is a way to do so. While they pretend their concern is for the first-time buyer——

The Senator said the opposite earlier. He has completely contradicted himself.

I do not believe that to be their motive.

I have been told by an independent financial journalist who does not work for the Sunday Independent that it is well-to-do property owners who wish to keep the carousel going. Members should be under no illusion as to the origins of this campaign. I have stated previously that I am not against moderate and well considered reform of stamp duty. However, I have little sympathy for some of the agitation about the matter.

I will revert to the legislation which is welcome. Governments which held office during the past 20 years are to be congratulated for being exceptionally responsive to market challenges and opportunities which helped to maintain Ireland's competitiveness and put it on the world map of financial centres. It is a tremendous achievement.

I welcome the Minster of State, Deputy Parlon, and support the Bill. I wish to comment on points made by Senator Mansergh with regard to the International Financial Services Centre. Given the economic background of the country at the time, it was remarkable to have had the vision to go ahead with the initiative which has been extremely successful. The Minister of State and Senator Mansergh gave us the figures for the enormous revenues from taxes and the large numbers employed in the sector. The centre has done our international standing a lot of good, not alone from a financial point of view but also in general.

I recall that when the Progressive Democrats were founded, we discussed reducing rates of capital and personal taxes and taxes on business. The general reaction was one of universal horror and fear that services such as hospitals and social services would collapse. When we argued it would increase revenues available to the State, people stated it would not happen but it did. Senator Mansergh is correct to state the British Chancellor seems to have converted to a similar philosophy.

The Bill pertains to an area which involves extremely large sums of money. It is important to strike a balance between regulation and securing moneys, a point on which Senators Phelan and Mansergh touched. There is a tendency to overregulate in these areas. In this circumstance, given the enormous sums involved, we must have due regard to the potential for disaster. It would be disastrous if these instruments went wrong.

We must also consider the degree to which the financial industry changes. It is creative in coming up with new and wonderful products within retail banking services and elsewhere. We must keep an eye on these matters. We saw in the US mortgage market the inherent dangers if one does not exercise proper control or have proper financial prudence. Even extremely large financial institutions can be open to collapse. One saw the influence Nick Leeson had on a particular bank.

The Minister of State mentioned actively managing the assets in the pool on an ongoing basis. Active management is a recipe for people to lose the run of themselves, unless there are adequate safeguards. An important distinction must be made between public asset covered securities and mortgage covered securities. There is a greater degree of confidence that public credit covered securities bonds are secure. The area of mortgage covered securities is more problematic, particularly residential mortgage loans.

I am aware the collateral figures amount to more than 100%. I believe the figure is 3% on residential mortgage loans and public sector loans and increases to 10% on the commercial mortgage covered securities pool. It is important that within the securities there is more than enough to ensure the moneys will be secured in the event of something going wrong. We also have the matter of ring-fencing. In the event that an enormous financial institution crashes we must have a way of isolating these instruments from the general pool which would become amenable to the creditors of the company.

Certain key and important matters relevant to the Bill require a great deal of consideration and careful management. I was a member of the Joint Committee on Finance and the Public Service at a time when the Governor of the Central Bank had more fiscal powers than he does now. The matter of confidence in the banking system always arose and seemed to be used as a cloak. If anybody asked difficult questions, he or she was told confidence in the banking system was very important and such questions might have an effect on confidence in the system. This is a load of rubbish. We must ask those critical and important questions; otherwise people have the capacity to run away with themselves and we do not have the degree of public accountability we should.

This legislation is important and must be renewed on an ongoing basis because of the creative capacity of the sector to introduce new, improved and novel instruments and perhaps circumvent the important regulations imposed to ensure assets are secured and nothing untoward can happen. One has confidence that nothing untoward will happen one's money in extremely large, secure and government-backed bodies such as the International Bank for Reconstruction and Development, the European Investment Bank and the European Bank for Reconstruction and Development, of which the former Deputy, Mr. Des O'Malley, was a director, and the International Monetary Fund. Even there, perhaps there is the capacity for somebody who is mischievous, creative or bad enough to put funds at risk.

We must strike a balance between regulation to ensure funds are secure and not over-regulating to the point where the instruments become so unwieldy that the ordinary business required to underpin the success of the International Financial Services Centre is not jeopardised. The Bill must be welcomed and I will support it.

I thank the Senators who participated in the debate for their appreciation of why it is necessary to expedite progression of the Bill at this busy time for the House. I well understand the task of making a constructive contribution to a debate on extremely complex legislation such as this and its parent Act which it amends could represent a serious challenge. I was concerned that Senator Phelan was going to state his specialised subject was asset covered securities, of which he showed a substantial grasp, as did Senators Mansergh and Dardis. I appreciate this.

Asset covered securities or covered bonds play an increasingly prominent role in international capital markets. Ireland's entry into the covered bonds sector on foot of the 2001 Act was a major success, as other speakers and I stated. The international financial services area is not one in which we can rest on our laurels. With greater integration of financial services throughout the European Union more and more member states are getting involved in this activity. This means increasing competition between financial centres throughout the Union to serve as locations for the issuance of this type of bond.

As I made clear in my opening address, the major reforms following on from implementation of the capital requirements directive in so far as they relate to the covered bonds sector will be carried into our legislation by the Bill. We are one of the early movers in this regard. This gives us an opportunity to enhance Ireland's attractiveness as a centre for the issuance of these highly regarded bonds. As legislators, we must move quickly in this regard. While this type of covered bond is mainly a European banking product, the merits of this type of financing technique are now becoming more widely appreciated and large US banks are beginning to become involved in issuance.

I would regard this latter development as being very positive, as it should mean that American banks in general will become more familiar with this product and will be more likely to invest in these types of bonds. This will help grow the market overall, and if some of these US banks decide to channel some of their issuance activities through European financial centres, Ireland will be glad to welcome them. For the present and near term, our most likely source of new bond issuance to locate or relocate here is from the EU.

I will briefly deal with some of the issues raised. With regard to US difficulties in the mortgage market, I assure Senators that the downturn in that country's property market should not affect Irish asset-covered securities. The ACS legislation has asset quality requirements that ensure the quality of the cover pool. The assets of the pool are very conservatively valued, and non-performing loans and loans that do not meet the loan-to-value requirements are replaced. In this way the high quality of the covered asset pool can be maintained.

Senator John Paul Phelan raised the matter of the high level of credit in the country. The growth in credit is a matter for the Central Bank through its participation in the ECB, where interest rates are set. That issue would not arise here. Senator Dardis made the important point that the Bill is largely about getting a balance between regulation and continuing to attract the very substantial business we are getting.

Question put and agreed to.

When is it proposed to take Committee Stage?

Now.

Agreed to take remaining Stages today.

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