I am glad to be back in Seanad Éireann for what has been a very good debate. Obviously, it is dealing with a matter where some of the details and precise answers will be given in legislation but this debate may perhaps help to inform, in some part anyway, the drafting of that legislation. I will seek in the course of my remarks to take up as many of the large number of questions that have been raised by Senators. As a final preliminary remark, it is one of the good features of this House that even in a two-hour debate on Private Members' business, it is possible for up to a quarter of the Senators to participate.
The legislation will be brought forward as soon as possible, either this summer or early in the autumn, by which I mean September.
The recent global financial crisis has resulted in governments around the world having to react with extraordinary measures. Governments have intervened time and again to preserve financial stability and maintain their banking systems, and Ireland has been no exception. Though Irish banks are generally not exposed to complex structured products, concerns about which prompted this financial crisis, they have suffered from the severe tightening in international funding markets. The difficulties faced by Irish banks have been compounded by a sharp fall in domestic and UK property prices.
The Government's actions have been taken on the basis that the health of the economy is inextricably linked to the banking sector and vice versa. The continued flow of credit is vital for our economy. The Government’s objective is to ensure that the banks continue to lend to individuals and businesses in the real economy. The banking sector is the life-blood of the economy. The Government’s approach to the financial crisis has been structured and considered, with the Government demonstrating its commitment to preventing the failure of any systemic institution and to protecting deposit-holders.
The bank guarantee scheme was introduced to ensure that the banks would have sufficient liquidity to operate on a day-to-day basis. In the Minister for Finance's supplementary budget speech, he announced the Government's intention to put a State guarantee in place for the future issuance of debt securities with a maturity of up to five years. Access to longer-term funding in line with the mainstream approach in the EU and consistent with State aid rules will contribute significantly to supporting the funding needs of the banks and to securing their continued stability.
The disclosures relating to loans to directors undermined confidence in and weakened the funding position of Anglo Irish Bank. Furthermore, the due diligence exercise undertaken as part of the planned recapitalisation brought to light further concerns regarding corporate governance in the bank. The Government therefore decided to take Anglo Irish Bank into full public ownership with effect from 21 January 2009 to ensure the stability of the bank and the financial system generally.
Market expectations with regard to the capital that banks hold have altered significantly. As a result, banks have had to compete vigorously for deposits and other forms of funding in a weakening economic environment. Banks have also been forced to seek capital in a market unwilling to finance banks, resulting in an array of state recapitalisation programmes across the developed world. The recapitalisation of Bank of Ireland was approved at its EGM at the end of March 2009 and the National Pensions Reserve Fund has invested €3.5 billion into that financial institution in return for preference shares.
The AIB proposed that recapitalisation of €3.5 billion is to be put to the shareholders at its EGM on 13 May 2009. The Minister for Finance welcomes AIB's statement last Monday that it intends to strengthen its capital position by a further €1.5 billion over and above the State capital injection of €3.5 billion. This move will further boost confidence in AIB's ability to weather the financial storms we have experienced and to emerge in a stronger position when conditions improve. The strengthening of its capital position will improve the bank's balance sheet and better position it to lend to businesses in support of economic recovery. Similar stress tests that applied to Bank of Ireland under its due diligence did not indicate to the Minister a need for further capital beyond the €3.5 billion invested by the Government.
In Ireland, through the bank guarantee scheme, bank recapitalisation and the protection of public ownership, we have provided very substantial support to the banking sector. The bank guarantee scheme and the recapitalisation of AIB and Bank of Ireland were implemented to ensure there is sufficient liquidity in the system and that the banks are adequately capitalised. While this range of measures has gone a long way to supporting the banking sector and ensuring its stability, Ireland, like many developed countries around the world, is finding that this is not enough and there is a need to react with more radical measures. That is why the Minister for Finance announced earlier in the month the Government's decision to bring forward measures to address the issue of asset quality in the banking system. A national asset management agency, NAMA, will be established on a statutory basis under the aegis of the National Treasury Management Agency.
The principles of NAMA are clear. Certain assets will be transferred from bank balance sheets to NAMA at a significant discount. This process will bring certainty for international markets on the position of the banks enabling them to raise funds to maintain the flow of credit to the economy. By definition, detailed work will be required to determine the discount to be applied to transferred assets, but the overarching principle and rationale are clear. The objective of NAMA is to strengthen the banks' balance sheets, to considerably reduce uncertainty over bad debts and as a consequence ensure the flow of credit on a commercial basis to the real economy, to protect and increase employment, while also maximising and protecting the interest of taxpayers.
The potential book value of loans that will be transferred to NAMA is in the region of €80 billion to €90 billion, although the amount paid by the agency will be considerably less than that. The State will not take all the risk in the acquisition of such assets. In the first instance, the price of the assets will have regard to current and expected market value of the relevant assets, and what is sustainable for the taxpayer. In the longer term, if the agency were to fall short of recouping all the costs, the Government intends that a levy should be applied to recoup any shortfall incurred. The levy serves as a safeguard for taxpayers in the future on the assets taken on by NAMA in the short term. This does not conflict with the objective of giving certainty on the position of the banks because the levy would be applied in the future and over time. This is no more of an uncertainty for banks than, for example, changing tax rates or changes in the regulatory environment. The possibility of a levy ensures that two key objectives of NAMA are met — certainty on the position of the banks and protection for taxpayers.
Significant further detailed work and extensive due diligence on the loan books will be needed to ensure that the appropriate categories or portfolio of loans are transferred and that the banks are cleared of the identified riskiest loans by NAMA. The riskiest identified loan category for banks in Ireland is that of land and development and the largest aggregate exposures across the institutions. Entire portfolios of loans will be transferred to the agency, which will provide the banks with stronger balance sheets and considerably reduced uncertainty over bad debts.
The Government has received expert financial, economic, legal and valuation advice at every step of its measured response to the recent turbulence in the banking sector. Likewise, specialist expertise will be procured by NAMA in all relevant areas to ensure that NAMA is established in the most efficient manner so as to safeguard taxpayer interests. The Government has been clear that a significant discount will be applied to assets transferred from the banks to NAMA. Detailed work will be required to determine the exact discount to be applied, but it goes without saying that the Government's objective will be to set a fair economic price and ensure protection for taxpayers. NAMA will manage the overall process, including valuations. Necessary expertise whether relating to determination of land values, asset quality or any legal issues arising will be sourced to ensure that the valuation process is thorough and accurate. There are important legal issues to be considered and these can be considered in full in the process of legislating for NAMA. There will be more debate on this matter.
The Government is prioritising the setting up of NAMA. While the full process of transferring assets to NAMA will take time, this is not unexpected. International markets will have confidence in an asset management process that is well executed and well managed rather than rushed and hastily assembled.
With a question of legal challenge it is important to be clear that this is not a bail out for developers. Their debts, whether held by the banks or NAMA, will remain unchanged. The only discount in question is that for the State in taking on the management of certain assets. While it cannot be anticipated whether certain legal challenges will be erased, these could be thought to be akin to the normal legal issues encountered in the proper and efficient management of property debts in banks.
I must stress, in this context, that developers will continue to be required to repay their loans in full. Where borrowers have made losses, they will be required to recognise and take such losses. It will certainly not be the function of NAMA to go easy on them. NAMA will operate on a full commercial basis and will be determined to recover moneys owed to it to the fullest extent possible.
No decision has yet been taken on whether NAMA should directly manage or supervise the management of smaller development loans. As has been noted, there will be staffing and resource implications as well as questions on how to best extract maximum value from the assets to consider in working out the details of NAMA's operation.
NAMA will not be a toxic bank. It will not be a bank in that it will not take deposits and it will not have a banking licence. NAMA will have loans on its books based on real physical assets and while some of these will undoubtedly be of better quality than others, they will be a mix of good or performing loans and bad or non-performing loans. The stream of income from the assets and the proceeds from the eventual sale of the underlying asset or the repayment of the loan will accrue to NAMA. This will be used to pay interest on the bonds issued to pay for the assets and eventually to repay these bonds.
NAMA will be developed and implemented within the common EU framework detailed in the European Commission guidance on the treatment of impaired assets, working closely with the European Commission to obtain prior state aid approval. By drawing on the best advice and experience available internationally, we are committed to ensuring that this very significant measure will be an example of best practice and meets all the objectives that the Government has set for it.
It is universally accepted that bank regulation on a global scale is in need of reform. Ireland is no exception in this regard. A well regulated financial system is essential for a proper functioning banking system that will stimulate economic recovery. The actions of those who have tarnished the reputation of Ireland will be dealt with through the appropriate processes. As the Minister for Finance announced in his Budget Statement, the role of the Central Bank of Ireland will be reformed to place it at the centre of financial supervision and financial stability oversight, providing for full integration and co-ordination of the prudential supervision and stability of individual financial institutions with that of the financial system as a whole. The Central Bank of Ireland will in the future be headed by a commission, chaired by the governor.
The Minister for Finance has asked the former deputy governor of the Bank of England and former member of the UK monetary policy committee, Sir Andrew Large, to advise on the process to select a new head of financial regulation within the new institutional structure. This search will be wide-ranging and the person chosen will be of the calibre, reputation, experience and expertise to lead the reforms of financial regulation that the Minister has outlined.
There is much media debate proposing the nationalisation of Irish banks, particularly AIB and Bank of Ireland. The Government's strategy is to ensure that the lending needs of the real economy are met. A commercially focused banking system, which includes banks having a market presence, operating within market disciplines and constraints, is best equipped to achieve this aim. The Minister for Finance considers that where banks are of systemic importance, viable and sustainable, they should, where possible, be maintained as market listed public limited companies open to private investment. Internationally the prospect of wholesale nationalisation would be very damaging to Ireland's reputation and attractiveness to international investors. No country is currently adopting a policy of wholesale bank nationalisation and there is no reason for Ireland to adopt such a policy. Nationalising a small institution, as has been suggested in the course of this debate, would not provide for the country's credit needs. NAMA is a system wide approach which will enable all participating institutions to provide credit to the economy.
There has been much talk about creating a "good bank" system. This is based on a concept which proposes separating the "good bank" aspects from within each bank. The proposal does not, however, identify what is to happen to the "bad" parts of the banks. NAMA, on the other hand, is a solution whereby the banks will have a stronger balance sheet and considerably reduced uncertainty over bad debts and, as a consequence, will underpin the flow of credit on a commercial basis to individuals and businesses in the real economy.
On the question of costs to the taxpayer, the key point is that NAMA will manage assets over time. The assets will not need to be written down and losses realised up-front, as would be the case for banks and for the various loss projections that exist currently. As economic conditions improve, and as the property market reopens, NAMA will be able to maximise the economic return on the assets it holds. This feature, contained within the substantial framework to be applied to transferred assets, and the safeguards of a levy in the future will protect taxpayers while ensuring the health of our tax system.
On the question of how the board of NAMA will be nominated, that must be decided under the legislation that implements NAMA. It is unlikely, however, that this information will be released under freedom of information requests as it will include much commercially sensitive information that is not normally released under the Act.
Senator Cannon raised an issue referred to in an earlier debate about fixed interest mortgages being converted to variable ones. This was asked in almost the same breath as extolling a business approach to issues. Inevitably, if the Government was to take an attitude on that issue, that would further burden the banks which we are trying to get back up on their feet. That is not a realistic approach. People entered these arrangements. There were pros and cons to the arrangements at the time and it is not possible for the Government to convert them, however desirable that might be from the social and environmental point of view.
I am reminded in much of this debate of one of the founding theses of the school of economics or economists in the 18th century, that land is the source of all wealth. In those days they meant territorial land or agricultural land. Nowadays, and listening to this debate, one would think development land was the source of all wealth. However, we are trying to get away from that situation and to not return to it in the future. It would be lovely if, as Senator Donohoe recommended, we could get to a situation where, in future, even systemically important banks would be allowed to go bankrupt by the State. I am sceptical as to when and whether we will reach that Utopia.
The creation of the national asset management agency is part of a range of considered measures introduced by the Government to stabilise and revitalise the banking system. The Irish economy needs a functioning banking system that enjoys the trust of depositors, international markets and the community at large to withstand the current economic and financial position. The strategy pursued is the best way to secure the position of the financial services sector while keeping in mind the requirements of the EU and the interests of the State. I commend this counter motion to Seanad Éireann.
