I wish Seanad Éireann a successful and productive new year. The Minister will soon join the debate. On his behalf, I thank Senators for their time, given the short notice and this late hour. I am eager to hear their views on what is an issue of immense public importance.
The Minister has brought the Bill to both Houses of the Oireachtas today with a view to securing the financial position of Anglo Irish Bank and, by extension, the stability of the Irish banking system. In taking this approach the Government has consulted, as appropriate, the Central Bank, the NTMA, the Financial Regulator and its legal and financial advisers. The Minister also consulted the board of Anglo Irish Bank following the Government decision on the matter. I assure the Seanad that the Government's decision to nationalise Anglo Irish Bank is in the national interest. It has been taken to safeguard the economic future of the country and the continued viability of our financial institutions. The Government is determined to protect the taxpayer's interests by putting clear blue water between the new Anglo Irish Bank and the unacceptable behaviour that has taken place previously.
The Government's approach to the financial crisis, which has resulted in state interventions across Europe and the world, has been to give a considered response to it. The bank guarantee scheme gave it space to assess the further measures needed to best protect the country's financial system in a strategic and thoughtful manner. At all times we have sought to minimise the risk to the State. The bank guarantee scheme has succeeded in securing the funding position of the Irish financial system as a whole. The Government's recapitalisation proposals will strengthen AIB and Bank of Ireland as financial institutions which are central to the economic future of the country. Discussions are continuing on the capital requirements of other financial institutions. While recapitalisation is the appropriate solution for AIB and Bank of Ireland, the Government has concluded that a different response is required in the case of Anglo Irish Bank.
In recent months intensified oversight of Anglo Irish Bank has brought to light unacceptable practices by the former chairman of the bank and some of his former staff. The concealment of loans to directors and the scale of these loans have done serious damage to the reputation of the bank at a difficult time in the markets. Such matters are the subject of a number of investigations being undertaken by the Financial Regulator and the Director of Corporate Enforcement. The investigations must be followed up by the regulatory authorities which have extensive powers and by the bank. As shareholder and the Minister responsible, the Minister for Finance will insist on this. Accordingly, the Government believes recapitalisation is not the most appropriate and effective means of securing the continued viability of Anglo Irish Bank. Therefore, the Government must move to the final and decisive step — public ownership of the bank. I will highlight the salient provisions of the Bill in more detail later.
Senators will be aware of the international context in which this action is being taken. While I do not wish to dwell on old ground, it is important to note that financial institutions throughout the world, particularly banks, have been under unprecedented pressure in the past 18 months. Traditional sources of funding have dried up. While there have been some improvements in recent times, the international financial system remains in a fragile position. Like every other country in Europe, Ireland has moved to ensure the security and stability of its banking system. There has been a significant change in market expectations in respect of the capital banks hold. As a result, banks have had to vigorously compete for deposits and other forms of funding in a weakening economic environment. They have also been forced to seek capital in a market that is unwilling to finance banks. This has resulted in an array of state recapitalisation programmes across the developed world. In this challenging period for the banking sector investors dealing with banks are more risk conscious. In such circumstances the reputation and good standing of a bank, including its board and senior management, become even more important.
The extended financial crisis we are experiencing has reminded everyone of the pivotal role the financial system plays in supporting the economy and influencing the day-to-day lives of ordinary people. It has become clear to everyone that the Government needs to take appropriate action to maintain the stability of the financial system. Throughout this process the Government's approach has been based on two basic principles. First, the State will not let any systemically relevant financial institution fail. Second, any State involvement in the financial institutions will protect taxpayer's interests and have regard to legal and EU implications. Against this background and taking account of the best advice available, the Government acted with purpose and determination in September last year to guarantee the deposits and other liabilities of credit institutions in order that they could maintain the confidence of savers and access funding. This move was essential to allow banks to continue their normal business of providing credit which is the lifeblood of the economy.
To date, the Government guarantee scheme has succeeded in ensuring Irish banks can continue to do business. Liquidity — the cash that comes in the form of deposits and interbank moneys — provides the basis for lending for banks in all parts of the world. The guarantee scheme has ensured Irish banks can continue to access liquidity. The conditions attached to the scheme have given rise to detailed engagement by the Government with this country's banks. With the Department of Finance, the Central Bank, the Financial Regulator and the National Treasury Management Agency, the Minister for Finance, Deputy Brian Lenihan, has worked with the covered financial institutions since September to examine all options for maintaining the stability and proper functioning of our banking system. This comprehensive and structured process has addressed such issues as the business plans of the banks, any potential private investment, the expectations of the financial market and the role of the banks in supporting the real economy.
Although the Minister has made his intentions clear, it has been speculated that the action the Government is taking in the case of Anglo Irish Bank will change the position of the two other institutions in respect of which recapitalisation plans have been announced. Bank of Ireland and AIB are fundamentally sound and solvent. The Government reiterates that it sees Bank of Ireland and AIB as central to the Irish financial system and the proper functioning of the economy. It wants to ensure both Bank of Ireland and AIB remain as independent banks. It has reaffirmed that it is proceeding with the planned recapitalisation of Bank of Ireland and AIB on this basis. Its firm intention is that both banks will remain in private ownership. In particular, it has reiterated its intention to provide €2 billion for each institution from funds that have already been earmarked by the NTMA for that purpose. As the Minister has previously outlined, this capital will be deemed by the Financial Regulator to be "core tier 1" funding. The finalised terms and conditions that will apply to it will be framed in a manner that will underpin market confidence. The Government has reiterated its commitment to underwrite, or otherwise support, a further €1 billion in core capital to each of the banks. Senators will be aware that the Government is in discussions with other institutions about their future capital needs, if any. We will work on this issue with a view to early decisions.
It was recognised from an early stage that the challenges faced by individual institutions were not the same in each case and that the strategies necessary to stabilise and strengthen them would be different. From the outset of the financial crisis, market sentiment towards Anglo Irish Bank was particularly negative, as evidenced by the dramatic collapse in the bank's share price and the continued pressure on its funding. The bank's business model, which was heavily focused on commercial and real estate lending, was profitable during the recent period of strong economic growth and steady expansion of the property sector. Due to its less diverse business model, it was perceived by investors as being more exposed than other Irish financial institutions to the sharp contraction in the Irish and UK property markets in the last 12 months.
Taking advantage of the space provided by the Government guarantee and with a view to stabilising Irish financial institutions and ensuring the flow of credit to the economy, discussions were held with Anglo Irish Bank with a view to ensuring it had adequate capital levels. The outcome of the engagement with the bank was a proposal by the Government for an initial and immediate capital investment of €1.5 billion in preference shares, with a commitment to provide further capital to support the bank's position, as required. The terms of the proposed €1.5 billion investment took into account the greater degree of risk inherent in the bank's business. A higher rate of return was required from it than from the other two banks. It was planned that the State would hold 75% of the voting rights. Since that course of action was outlined in the week before Christmas, however, it has become necessary to take the ultimate step of nationalisation. I would like to explain why.
At the time of the recapitalisation announcement, the Minister made it clear that the Government's offer to Anglo Irish Bank represented the last step short of nationalisation of the bank. The commitment of Government support to the bank was designed to boost market sentiment by bolstering its capital to a level that would ensure its ability to withstand losses on its loan book that may arise over time. The extent of such losses would depend on the worldwide economic outlook.
The objective was to enable Anglo Irish Bank to trade out of its current difficulties under its existing ownership structure. However, the disclosure of the unacceptable practices which took place at Anglo Irish Bank in relation to loans to its former chairman, and the consequent resignation of the chairman and a number of Anglo Irish Bank's senior management team, including the CEO, compounded the weak position of the bank in the eyes of investors and debt providers. Market confidence in the bank was further eroded and this was reflected in a limited weakening of Anglo Irish Bank's funding base in recent weeks and the increased risk of knock-on effects on its credit ratings.
Anglo Irish Bank is a major financial institution with a balance sheet in excess of €100 billion. There is no doubt that the viability of an institution of this scale is of systemic importance to Ireland. Contrary to the impression being put about, the bank lends to a wide range of customers, providing funds for investment and employment in areas such as retail, office, leisure, health care, tourism and other services. It is also a very significant lender to construction and development, which is a very important part of its balance sheet. Thousands of customers rely on Anglo Irish Bank for credit, while hundreds of thousands of depositors are involved.
To give precise figures, the total number of customers with loans in Anglo Irish Bank is approximately 7,000. The Irish customers who owe money to the bank number approximately 5,000. The total number of retail depositors is approximately 300,000, of whom 72,000 are Irish customers. The total number of corporate deposits held is approximately 12,000, of whom approximately 3,500 are Irish customers.
All the advice to the Minister is that letting Anglo Irish Bank fail would lead to very serious disruption of our financial system. It is not a question of saving a few developers from going to the wall, it is a matter of underpinning deposit and wholesale funding throughout the financial system.
The nationalisation of a financial institution is not a step which can be taken lightly or as a first solution because it results in a significant degree of State intervention in normal market processes. In recent months the Government has provided the support required to stabilise Anglo Irish Bank in the shape of the Government guarantee. While the recapitalisation proposal in respect of Anglo Irish Bank would have helped underpin the bank, even greater certainty could be provided through taking the bank into public ownership.
There has been some recent media debate regarding the effect of this measure on Government accounts. Taking Anglo Irish Bank into State ownership should have no immediate impact on either the general Government debt or the current deficit as Anglo Irish Bank is a going concern and will continue to operate as a commercial bank. As with other commercial State companies, its debts and assets will remain on its own books.
The Government's actions have been made on the basis that the health of the economy is inextricably linked to the banking sector and vice versa. The Government is committed to protecting our sovereign rating through restoring order to the public finances. Immediate action is required and the Government has agreed that expenditure savings of €2 billion will be made in 2009, in addition to the measures contained in the October budget. Other important work is continuing, including a root and branch review of public service numbers and expenditure levels and a report on the taxation system by the Commission on Taxation.
I would like to say a few words on the impact of this decision on various stakeholders. The immediate impact of the Government's action is to provide certainty to all Anglo Irish Bank's depositors and other customers across all the bank's operations in Ireland and internationally that the bank is secure and stable and will continue to conduct its business on normal terms.
Depositors and other creditors of Anglo Irish Bank continue to be protected by the Government's guarantee on all bank liabilities until September 2010 and creditors of Anglo Irish Bank, including bond holders, can be assured that it is in a position to continue to fulfil its obligations and repay its debts at maturity. Added to this, all customers of Anglo Irish Bank now have the assurance of stability that full State ownership of a financial institution brings.
It is important to be clear that the day-to-day running of the bank will continue as normal and all Anglo Irish Bank employees will remain employed by the company. Anglo Irish Bank will be managed on a commercial basis at arm's length from the Government allowing the full potential of the bank's business to be realised. The legislation we have put before the Seanad provides for a relationship framework. The Government will be appointing a new board to oversee the running of the bank and to prepare a comprehensive business plan to enable it to continue as a going concern. This business plan will be required to demonstrate how the board will oversee the continued commercial operation of the bank in the best interests of the bank, the financial sector and the taxpayer.
I welcome the decision of Mr. Donal O'Connor to stay on as chairman. As the Minister stated when Mr. O'Connor was appointed, he has a substantial and impressive commercial track record and is a natural choice to lead this financial institution in what is a challenging period for all financial institutions. Like the Minister, I am also pleased to acknowledge Mr. Maurice Keane's agreement to be appointed to the board and to thank Mr. Alan Dukes and Mr. Frank Daly for their continued valuable contribution to the board. The Minister will announce further appointments in the near future.
While a €1.5 billion preference share purchase is not now immediately required, the Government is committed to providing the support to ensure Anglo Irish Bank's continued commercial viability. There is no question of moving the bank into a wind-up scenario which would create the potential for an under-priced realisation of the loans and other assets held by the bank. All borrowers from the bank remain subject to the same terms and the new board will place a particular focus on ensuring that all debts are fully pursued by the bank in a commercial way, as would any other bank.
While the Act provides for the transfer of Anglo Irish Bank into State ownership, shareholder rights are protected under Irish law and, accordingly, the Minister has provided for the role of an independent assessor under the Act to assess what would be fair and reasonable compensation for shareholders. The assessor will consider a wide range of factors before making a recommendation on the level of compensation due, if any. The process of the independent assessment will serve to maintain the integrity and good reputation of the Irish market as a whole.
There has been a great deal of commentary about the bad debt position in Anglo Irish Bank. Senators will be aware that the Minister received from the Central Bank and Financial Regulator a report undertaken by PricewaterhouseCoopers, PwC, on the financial position of the institutions participating in the Government's guarantee scheme. This work has been supplemented by independent valuers, Jones Lang LaSalle, which generally confirmed the conclusions reached by PwC with regard to Anglo Irish Bank.
The bank is large in Irish terms and its assets include approximately €70 billion in loans and advances to customers. These are not bad debts as some people try to suggest. As with any bank, there is a mixture of mostly good loans and some that are distressed. Many people have asked what the implications will be for the State if there are very significant losses on loans in Anglo Irish Bank, and it is clear that there will be losses on some of the loans. It is important therefore that I clarify to the Seanad that, in the first instance, there are significant moneys within Anglo Irish Bank to take the strain of loan losses arising over the next three or four years, before State support is engaged. There is approximately €7 billion of shareholder funds and other capital available to offset any losses on the loan book, in addition to ongoing pre-loan loss profits which have been very significant in Anglo Irish Bank's case. Anglo Irish Bank's position is secured by the nationalisation and the Government can work with the new chairman and board to extract the optimal value from Anglo Irish Bank's loan book and to minimise the taxpayers' exposure.
The Government has estimated that, for the Irish banking system as a whole and allowing for a large degree of stress, it would be appropriate to allow for capital injections into the main banks in the order of €10 billion in total. Within this €10 billion, the Minister would have allowed for a capital injection into Anglo Irish Bank to offset potential loan losses, maintain its capital base on a sound footing and leave a prudent margin for error in current circumstances. As Anglo Irish Bank is now a nationalised entity with the State behind it, rather than make an immediate up-front capital injection, we can provide appropriate funds, as necessary, over time to complement Anglo Irish Bank's own resources.
Looking beyond Anglo Irish Bank, the Minister would like to address what the Government sees as the future of the banking system in Ireland. The Government is committed to providing a platform for a well regulated, profitable banking industry of high repute in Ireland that operates in a national and international financial services environment. Our vision for the banking sector is that the banks will serve borrowers, small and medium-sized enterprises and all stakeholders in an honest way and ensure that customers and consumers in particular are treated in a reputable and respectable way. Our vision for the banking sector is that the banks will serve borrowers, small and medium sized enterprises and all stakeholders in an honest way, and ensure that customers and consumers in particular are treated in a reputable and respectable way. The bank guarantee scheme, recapitalisation and the credit package announced by the Minister in December, go some way towards addressing these objectives. The Minister can assure the Seanad that the intensified scrutiny and oversight of financial institutions which has been put in place since the onset of the current turmoil will be maintained.
The nature and thrust of Ireland's regulatory regime must adjust to the new realities. Lessons must be learned from mistakes made and from the international experience of the recent period of worldwide financial disruption. We need a regulatory regime which fosters probity. We welcome the review now being undertaken by the regulatory authority to that end. We are not alone in this process. Work has begun on forging a new model to govern the conduct and behaviour of the financial sector both here and internationally. The Minister can assure the Seanad that Ireland will play its part internationally, and especially at EU level, in seeking to ensure that the re-design of the financial system and, in particular, of financial regulation is consistent with the objectives that underlie a strong, stable and functioning national banking system.
I will now deal with the main provisions of the Bill.
Section 2 sets out the Minister's functions in the public interest under the Bill. These functions are granted on the basis that, following consultations with the directors of the bank, the governor and the authority, the Minister has formed the opinion there are concerns about the viability of Anglo Irish Bank and that the exercise of these functions is necessary to preserve the capacity of Anglo Irish Bank to continue as a going concern, and to prevent potential damage to the financial system.
Section 3 provides that the Minister may specify a relationship framework to govern the relationship with the bank, recognising the separation of Anglo Irish Bank from the Minister for Finance, and limiting the Minister's intervention in the conduct of the bank's business to that necessary to protect the public interest. Section 3 also gives the Minister a power to issue general directions to Anglo Irish Bank where it is necessary or expedient in the public interest subject to regulatory requirements.
Section 4 provides that the provisions of this Bill will have effect, regardless of any provision in the Companies Acts, any other enactment or any provision in Anglo Irish Bank's memorandum and articles of association. Section 5 is one of the key provisions in the legislation, the effect of which is to transfer all of the shares in Anglo Irish Bank to the Minister on the commencement of this Act. Section 6 provides that, on enactment, Anglo Irish Bank will convert from being a public limited company to being a private company limited by shares.
Section 8 provides that the Minister may transfer some or all of his shares in Anglo Irish Bank to a nominee at any time on such terms as the Minister specifies, having regard to the public interest and regulatory requirements. Section 9 deals with instruments to which Anglo Irish Bank or its subsidiaries are a party. Commercial instruments may provide for their termination or other consequences — for example, to accelerate payment not otherwise due to be paid until some future time — where the ownership in, or control of, one of the contracting parties changes. This section provides that specified consequences shall not arise solely as a result of the enactment of this Bill, or any matter arising by virtue of this Bill, unless the Minister provides by Order that they shall. It is important to stress that Anglo Irish Bank will remain fully liable to all of its creditors. However, it is important that creditors do not suddenly become entitled to the early repayment of moneys or the termination of contracts because of the State's necessary intervention. Steps have been taken already to guard against such an action but this section provides an appropriate backstop. There is a hardship provision whereby the Minister may reduce the effect of the restriction by order where otherwise the section might be unduly onerous.
Section 10 extinguishes certain rights, largely enjoyed by directors, senior managers and employees in Anglo Irish Bank to subscribe for shares in the bank. Section 11 deals with situations where someone has an equitable interest or security interest and any sum paid as compensation will be held in trust for the party who holds an equitable interest in that share, where applicable. Section 12 provides for the discontinuation of any listing of shares in Anglo Irish Bank on the commencement of this Bill.
Sections 13, 14 and 15 provide that specified provisions of the Central Bank Acts, companies Acts and competition legislation shall not apply. Section 16 disapplies a number of legislative provisions which would impose procedural, notification and approval requirements. Section 17 facilitates timely and expeditious decision-making by the Minister or his nominee when acting as shareholders in Anglo Irish Bank.
Sections 18 to 20 provide powers that facilitate swift action by the Minister to make necessary changes in the administration of Anglo Irish Bank. They provide for change of the financial year, removal and appointment of directors, officers and employees from their positions with Anglo Irish Bank and its subsidiaries, and appointment of their replacements. These powers, which are exercisable only in the public interest, are subject to regulatory requirements. Section 21 provides that specified persons, including the Minister and the governor, shall not be regarded as de facto or shadow directors of Anglo Irish Bank or any of its subsidiaries or subsidiary undertakings.
Sections 22 to 32 address the issue of the amount of compensation, if any, that may be payable to persons whose shares were transferred to the Minister for Finance or whose rights were extinguished, and the administrative issues surrounding how such compensation should be calculated, and how it should be paid. Section 22 provides for the appointment by the Minister of an independent assessor who will determine the fair and reasonable aggregate value of the transferred shares and extinguished rights and the consequent amount of compensation, if any, that may be payable.
Section 23 provides that the Minister shall pay or reimburse such remuneration or expenses of the assessor as the Minister determines. Section 24 sets out who may make submissions in respect of the aggregate amount of compensation to the assessor. Section 25 lays out the criteria which the assessor will use in determining the aggregate value of the transferred shares and the extinguished rights for the purpose of calculating fair and reasonable compensation. As a starting point the assessor will consider the true financial state of Anglo Irish Bank, taking into account the underlying market value of Anglo Irish Bank's assets and the extent of its actual, contingent and prospective liabilities assuming that no new financial assistance, investment or guarantee, other than the guarantee already provided under the Credit Institutions (Financial Support) Act 2008, would in future be provided by the State to Anglo Irish Bank.
Section 26 provides that before making a report to the Minister the assessor will circulate a draft of his or her report. Section 27 provides that the assessor will report to the Minister on his or her determination of fair and reasonable compensation, the value, if any, attributable to each class of share, and any appropriate interest payable. If compensation is to be paid, the Minister will then make such arrangements as are necessary for sufficient funds to be made available out of the central fund to enable payments of compensation to be made in accordance with the assessor's report.
Sections 28, 29 and 30 address the practicalities if the assessor determines that compensation is in fact payable. Section 31 provides that the assessor's determination can be appealed to the Irish Financial Services Appeals Tribunal. Section 32 provides that leave will not be granted for judicial review of the assessor's determination under section 26 unless the application for review raises a substantial issue, and the time limits for such application.
Section 33 provides that expenses and expenditure incurred by the Minister in the administration of this Bill will be paid out of moneys provided by the Oireachtas, and will be repaid to the Minister from the funds of Anglo Irish Bank. The expenses incurred in respect of the assessor by the Minister, and any other expenses incurred under this Act, shall be paid from the funds of Anglo Irish Bank.
Section 34 provides that the Minister may create and issue securities for the purposes of this Bill. Section 36 provides that the Minister may make regulations for the purpose of facilitating the exercise by the assessor, or the Minister or the Minister's nominee, of their functions. Any regulations under this section will be laid before both Houses of the Oireachtas.
Section 37 provides that the Minister may make regulations to do anything that appears necessary or expedient for bringing the Act into operation, but any regulation under this section will be laid in draft form before the Houses of the Oireachtas and will not be made until each House passes a resolution approving the draft.
Section 38 amends the Finance Act 1970, the National Treasury Management Act 1990, and the Central Bank Act 1942 in order to facilitate the achievement of the purposes of this Bill by enabling the Minister to delegate the borrowing powers in section 34 to the NTMA.
In conclusion, the purpose of this Bill is to address a major systemic threat within the banking sector. Anglo Irish Bank presents a particular problem. Increasing uncertainty and concerns about corporate governance have threatened its ability to access necessary funding and the concentration of its lending to the building sector exposed considerable risk to its loan book. The regrettable and unacceptable corporate governance issues surrounding the bank further damaged its reputation and had the effect of neutralising any positive boost which the proposed recapitalisation would have generated.
The Central Bank, the Financial Regulator, the NTMA and the Government's legal and financial advisers were unanimous in their advice to Government that strong and clear decisive action in the form of the nationalisation of Anglo Irish Bank was needed to maintain its commercial viability, and that a failure to support the bank in this way would damage our financial system generally.
The decision to nationalise is a clear indication that the Government is fully prepared to stand behind the Irish banking system and to demand and ensure proper governance and, importantly, it sends one clear message to customers, investors and the markets generally that Ireland is a safe, secure place to do banking business.
I commend the Bill for the approval of Seanad Éireann.
