I am pleased to present the Bill to the Seanad. While the views expressed by Members of the Oireachtas over the last few months have differed in many respects, we are all agreed that the National Asset Management Agency is an important item of legislation in the history of our country. For that reason I look forward to hearing the views of Members of the Seanad during the course of this debate, which I expect will be both constructive and informed. I have just been briefed as regards the amendment to the motion on Second Stage tabled by the Fine Gael Senators. I hope it does not set the tone for the debate, because I believe Seanad Éireann can do very constructive work on this Bill.
It is impossible to overstate the fundamental importance of the resolution of the banking crisis to economic recovery. That is why this Government, like governments and central banks across the globe, has provided substantial support to the financial sector and the broad economy in its management of this global crisis. Normally I would not wish to cover old ground, but it is important to consider what has happened in the last year because it sets a context for the Bill.
Just over a year ago the banks in this country were on the brink of financial collapse. The flow of credit, the lifeblood of any economy, was under threat. It was crucial that the Government acted decisively, and we did, as indeed did this House. With the introduction of the bank guarantee scheme we ensured our banks and financial institutions continued to have access to vital funding from the international markets. This funding is vital to ensure that all customers can go about their daily business in the knowledge that their deposits are secure.
Other countries followed our example and introduced various forms of guarantees. This resulted in challenging funding conditions once more for Irish financial institutions. The Irish banks did not have large exposures to complex toxic papers like some other institutions in the world. However, high levels of speculative property lending in which the banks had engaged left them heavily exposed to a falling property market. With the international money markets being squeezed, there was a heightened awareness of banks' capital ratios. This new focus on high capital ratios caused banks to hoard capital in order to protect their balance sheets. This had a damaging impact on the availability of credit to both business and residential customers.
In addition to the nationalisation of Anglo Irish Bank to prevent it from destabilising the rest of the banking system and the economy, the Government moved to recapitalise AIB and Bank of Ireland. This support was not unconditional, in return for the investment the State received preference shares with a fixed dividend of 8%. Furthermore, warrants attached to the shares provide an option to purchase up to 25% of the ordinary share capital of each bank. These have gained significant value since the investment. Operational and pay restrictions were also part of the recapitalisation package as was a credit package which imposed new obligations on the banks in their dealings with small and medium sized enterprises and mortgage holders.
Having stabilised the funding situation of the financial institutions, we then had to turn our attention to dealing with the risk to their balance sheets. The Bill that we will debate in the Seanad over the course of the next few days will give effect to this crucial next step. I have always accepted the importance of debate on this topic. That is why I published the draft NAMA legislation for consultation on 30 July this year. I wanted to facilitate an informed debate and learn from constructive suggestions. Since then many useful suggestions have been put forward and I have taken the best of them on board.
While there has been much debate on the subject of alternatives to NAMA, it is my firm belief that the asset management approach is the best option for ensuring a properly functioning banking sector that can carry out its role. The Government's decision to establish NAMA was taken following expert advice. Before any decision was made we listened in detail to the advice of the NTMA, the Financial Regulator, the Central Bank and our financial and legal advisers.
The asset management approach has a proven track record internationally. Our proposal has received the backing of the IMF, the ECB and, in recent days, the OECD. Furthermore, despite the disappointing downgrading of our credit rating by Fitch last week, that particular agency nevertheless expressed its belief that NAMA would be successful in rehabilitating the banking sector. This is an especially encouraging development with regard to the whole NAMA initiative.
Of course, much of the debate has centred on the risk involved in NAMA. I accept that resolution of the banks' difficulties involves risk and that it is a risk that the private sector cannot take. That is why the Government, just like governments all over the world, has had to step in. However, another risk that needs to be given prominence is the risk to the economy of not acting decisively and promptly. Doing nothing is not an option. No sensible person believes that it is. To protect jobs we need an economy that is growing. An economy cannot grow without a properly working banking system. If we do not act now to free our banks of their higher risk loans, we will not be in a position to benefit from the economic recovery that appears to be emerging in the United States and Europe.
The reasoned amendment speaks of the Bacon report. An edited version of the Bacon report was published but a vast amount of information on banks and their customers contained in the report cannot be put into the public domain. That report was one of economic analysis and in doing that analysis and a review of international literature Bacon identified only two options to address this problem, one to insure the loans and the other to buy them which is the option we have taken. There was no reference whatsoever in the report to the kind of approach elaborated by Fine Gael and no serious economic commentator has at any stage endorsed Fine Gael's proposed alternative. I regret to have to say this because it has persisted with its proposal throughout these debates. The Lower House has democratically approved the Bill and the Seanad could do a major service to the public by examining the detail of the legislation rather than reheating an argument about a bank whose only systemic importance appears to be to Fine Gael. This national recovery bank cannot be set up within any reasonable period to promote the extension of credit in the country. As a former leader of Fine Gael, Dr. Garret FitzGerald, has pointed out, defaulting on senior debt is not an option for this country.
In respect of the Labour Party's proposed alternative that public ownership is an important issue in this context, we have already been required to take a substantial part of our banking and building society structure under public control. The assets we are taking over from the institutions covered by the agency amount to approximately 55% of public ownership or control, as a proportion of the total assets which it is envisaged the agency will take over. The Labour Party, given its political tradition, has raised important issues about public ownership and I have no difficulty with that. There is, however, a question of balance. The issue is not whether we should have public ownership or control but whether we should have 100% public ownership and control. I believe that some residual presence on the markets and in private ownership is essential for the well-being of our financial institutions. I am sorry to have to go back over the Second Stage debate that has been taking place since last August but I do so because it is very important that here in the Seanad we focus on the actual provisions of the legislation. They are important and deserve extensive scrutiny and I am more than willing to accept constructive amendments and add to the Bill and improve the operation of this legislation.