Seanad Éireann debate -
Wednesday, 24 Apr 2013

Vol. 222 No. 12

Financial Stability and Reform Bill 2013: Second Stage [Private Members]

Senator Sean D. Barrett

I move: "That the Bill be now read a Second Time."

I welcome the Minister of State, Deputy Hayes, to the House. Two years ago on Monday the Members of the House were elected and, like the Minister of State who had been elected some weeks before, we knew we had to face the problem of the public finances and the banking sector. These two issues have exercised most of our waking hours since then. We were pleased to use the procedures of the House for a fiscal responsibility Bill dealing with public finances and a mortgage finance Bill dealing with the need to change how we finance housing. Discussions are still ongoing on the latter, while fiscal responsibility legislation has passed through the House.

Today the Financial Stability and Reform Bill comes before the House, which completes the agenda needed by everybody elected to the Houses of the Oireachtas a little over two years ago. The purpose of the Bill is to promote the financial stability of Ireland by improving accountability and transparency in the financial system, to reduce systemic risk, end the concept of "too big to fail", improve capital adequacy and protect the State from non-transparent safety net subsidies and open-ended bailouts of monetary and financial institutions.

The Bill is presented to the House in a spirit of compromise, absence of partisanship and co-operation. This is a matter which we have all found on the doorsteps, even still. The need to regulate Irish banking genuinely annoys many people in the country. I am a member of the Oireachtas Joint Committee on Finance, Public Expenditure and Reform and we have found that one thing which unites people of very disparate views is the need for reform in this area. As the Bill states, it has already cost us €73 billion and it is rumoured another €16 million will be needed for one institution alone. This would bring the entire cost to approximately 57% of GDP. This is a problem which the Oireachtas and those who lead us in government would much prefer had never happened.

Before I go into detail on what we have before us, I thank the Bills Office, Seanad staff, the Minister of State and Dr. Charles Larkin, Nora Ward and Maura Sullivan from Boston who helped to put together what is in the Bill. The Bill has a most distinguished lineage. Parts are taken from financial reform legislation in the United Kingdom, which is now on report stage, and the parts taken from the United States are from chairman Volcker, Senator Dodd, Congressman Frank and Senators Vitter and Brown. We are bringing the most recent proposals we could find from two countries with which we have significant trading links to see what the United Kingdom and the United States did when they encountered this banking problem, albeit to a much lesser degree than the Minister of State, Deputy Hayes, the Ministers, Deputies Noonan and Howlin, and the Taoiseach had to confront, because I am afraid in this particular case our bank collapse was much more serious relative to GDP than anybody else's.

According to what we found, the key is to increase the equity or capital requirements. I am advised that in the Cypriot case as little as 2% of the capital was equity and 98% was borrowed or leveraged. The key element in the Volcker proposals and in Senator Dodd's legislation is to raise this percentage to require banks to have 10% equity and, in exceptional cases, we would give the Governor of the Central Bank the power to raise this to 15%. We must have a less risky conduct by banks and bank managers. We must protect the taxpayer against any recurrence of what happened in September 2008.

The other idea behind the legislation, particularly in the United Kingdom but also in the United States versions which came into operation in July last year, is to restore the type of banks we had. Utility banking would be restored and separated, as it was historically, from merchant banking, or casino banking to give it a more properly deserved title. The supports which governments give to banks in the old model, which is based on the intertemporal non-concurrence of people saving on short and borrowing on long, with the bank as a financial interrogatory between the saver and the borrower, would be restored. The lender of last resort kept liquidity in the system. What happened in Ireland, and the other jurisdictions which we examined for this Bill, was that the lender of last resort was relied upon for solvency. We hope, along with everybody in the House and in the Dáil, that this crisis never recurs. We want to go back to the old bank model which had money in ATMs and protected people's deposits. I mention ATMs deliberately, because the threat held over the Government of the day was that there would be no money in the ATMs. The Bill protects this area.

Once one reaches €1 billion, which is scaled down from the US model, one is required to have 10% capital.

In future bankers will gamble with their own money, not with the taxpayers' money. Those are the two kernels, which are widely accepted in countries with very sophisticated banking systems, and with which we would hope, when all of this is over, to restore parity. There is a reformed system in the United Kingdom which is at Report Stage but before long will receive the royal ascent and there is also a reformed system in the United States. One cannot have the continuation of the so-called zombie bank system here which the Minister and his colleagues have tried to deal with.

The Bill is an important parliamentary initiative. The legislative list of the Minister of State at the Department of Defence includes a betting Bill; legislation on customs and the NTMA and a Central Bank Consolidation Act. Therefore, the Bill is needed and was offered in a spirit of helping. It would fulfil a valuable role for the Seanad, parliamentarians in general and when Ministers meet people whom I find are angry about the role of Irish banks. Yes, we are addressing the too big to fail issue and the gambler issue. We also require banks to be better capitalised. Of course we regret the immense burden that has been placed on so many people. Every day, since we have been elected, we have discussed having to put the best part of €90 billion into recapitalising banks.

Is this light touch regulation? No. It is de-supervision, a word I like. Nobody was supervising. The supervision proposed in the Bill did not happen in our institutions. In section 5, the Governor, our good and mutual friend, Professor Patrick Honohan, will be asked to conduct a study that will apply the Volcker rule to the Irish banking system and to have them supervised again rather than allowing the banks to impose so much costs on the economy. There is even a section on utilities. It means that when we restore a utility the Minister will have the power to restore wages in the banking system to something more appropriate to running a utility. I listened to the Minister of State speak on radio this morning and I am sure that the section will be of interest to him.

The more risks bankers took the more the more they were guaranteed by the Government through its "put option", an amazing phrase. When I studied economics it was called subsidies. Such a provision led to moral hazard and reckless behaviour by banks. The more bankers did the more bonuses they got. This legislation will attempt to put an end to that. If one wants to do that in the future please use somebody else's money and not ours. The bankers should use their own money. In future banks should be funded from profits reinvested in the business and not paid out in bonuses of the kind that led to the problems that the Minister and the Taoiseach have had to deal with. Reckless banking merited the rate of pay that is four times the sum paid to the Taoiseach and multiples of what Ministers receive. We want capital requirements to be met by equity, not borrowing. We want the shareholders to take the risk. We want utility banking and merchant banking separated.

The Minister may be interested to hear the interview by Bill Moyers with Mr. Paul Volcker which was published in Forbes magazine and described how the Volcker rule would operate in the United States. In the television programme Bill Moyers said:

Forbes magazine has a good word for you. There was an article last month and I'll quote it: "While the Volcker Rule will surely put a damper on bank trading profits, it will force many firms to go back to the basic blocking and tackling of the financial services business - acting as intermediaries for their clients. It may also help the Fed, shareholders and taxpayers sleep better at night. How about that?"

Mr. Paul Volcker replied: "God bless Mr. Forbes or whoever wrote that". My group offers this legislation in that spirit. We need to tackle the problem but the matter is not on the list of things to do by the Minister of State, Deputy Kehoe.

It has been clear at any committee that I have attended in the House that we must tackle banking. In a cross-party, cosmopolitan and broad encompassing spirit I offer the Bill to the House. We all need to accept it in order to restore the credibility of parliament and redress all of the dreadful things that have happened to us between 2008 and 2010. Therefore, it is my duty, and I am proud to do so, to commend the Bill to the House.

Senator Feargal Quinn

I welcome the words spoken by the Senator and his objective or what he hopes to achieve. That is, not just to have rules for banking but supervision to ensure rules are adhered to. I wholeheartedly agree with his efforts to highlight the need to set the conditions for financial stability in order to avoid a repeat of what happened. The Bill also states: "The principal aim of these items of legislation is to reduce the probability of the State being forced to actively support the banking community with public funds." As he said, let the banks use their own money rather than the State's money.

Sometimes I get the impression that the Government is not that worried about addressing failings in our financial system that were highlighted in the past number of years. Instead, the Government is concentrating on getting by. I hope that my words are not too strong. That is the wrong attitude. In business one must learn from mistakes and the Government should do the same. It would demonstrate that the Government is serious about reform thus it might inject confidence into the economy which is our objective.

I welcome the principle of ending the "too big to fail" institutions. The Bill, in Part 2, section 3(1)(a) requires that: "The Governor of the Central Bank of Ireland shall ... establish capital requirements for the ratio of equity capital to total consolidated assets for all [financial institutions]". That is a change. As Senator Barrett has said, we are not just talking about banks but hedge funds and other organisations that may not be around in a couple of years' time. There will be new ones around in a couple of years' time. Given that we seek to overcome the risk to the wider economy should the requirements be linked to GDP? Is that a sensible way to go?

In the United Stated in 2010, as mentioned by Senator Barrett, a failed amendment to the Dodd-Frank Bill called the Brown-Kaufman amendment tried to put limits on the size of financial institutions. It was based on the idea by Alan Greenspan who said, "If they’re too big to fail, they’re too big". The Bill intended to cap the amount that a bank borrows, in various ways, to finance its operations at an amount equal to 2% of the United State's GDP. Could such a proposal be a way forward for Ireland? It would limit the possible negative effect on the taxpayer.

I support the Bill but we cannot get away from the fundamental fact that such stabilisation measures need to be implemented in a pan-European manner. It would be hard for us to do this on our own. However, it is great to see such an ambitious initiative by the Seanad. We must value the Seanad in the coming years, and certainly in the next few months. Initiative needs to be recognised.

It is interesting that some wealthy bankers are coming around to support the idea that risky benefits that do not benefit the majority of a bank's customers should be separated from a bank's day-to-day activities. Last year, Mr. Sandy Weill, former chief executive and chairman of the City Group, a major financial institution in the United States, spoke in favour of the argument. He said that we should let commercial banks takes deposits and make commercial loans and real estate loans in such a way that they are not going to risk the taxpayer dollar. If they want to hedge what they're doing with their investments, let them do it in a way that's going to be mark-to-market on a daily basis. Senator Barrett made the same argument. Mr. Weill argues that by separating the two elements innovation will prosper on the investment side of banking while not imposing a risk on the taxpayer. I think he has reached the conclusion that banks will inevitably be more regulated and that is the best solution. Some of our bankers need to stop fighting financial reform and the Government. At the very least, the Government needs to implement elements of the Bill tabled by Senator Barrett. In effect, it should introduce a type of Volcker rule to separate risk and everyday banking activities, as argued by the Senator.

It will be similar to the US Banking Act of 1933. This is very interesting legislation, which I studied yesterday. It was enacted after the 1929 Wall Street crash. The restrictions imposed by the Act kept bank deposits and banks themselves separated from the markets. It resulted in 50 years free of any banking crisis. The Financial Times, among others, has argued for a new banking Act in Britain, similar to the 1933 one in America, to put limits on banks to better avoid a future crisis.

It is welcome that the Bill before us contains provisions to separate the banking activities on which households and SMEs depend, from wholesale or investment banking activities that may involve a greater deal of risk and expose an institution to financial problems arising elsewhere in the global financial system.

Pensions will also be afforded protection through this Bill. The provision to ensure that the funding and support of SMEs is not linked to speculations or the wider financial system is both welcome and sensible. Wider shocks related to risky investment should not mean that an SME is denied a loan.

As a side issue, if we break up banks into their constituent parts, could this be of economic benefit? Could parts of the banks increase in value if they were split into their separate parts? Mr. Alan Greenspan has pointed to this possible positive effect. He said that in the United States in 1911 they broke up Standard Oil, which was the largest oil refiner in the world and had a monopoly. What happened was that the 33 individual parts became more valuable than the whole. Maybe that is what we need.

As part of wider financial stability, the Government should also be looking at giving more support to smaller financial lenders. There is actually a big worldwide movement back to credit unions and so-called community banking. Even the former US President, Bill Clinton, thinks this is the way forward. Asked about the Occupy Wall Street movement around the world to shift billions from big banks to smaller credit unions, Mr. Clinton said he believed it was a good thing, especially because bigger banks are now reluctant to lend.

There are various other ways, including billing finance which operates in crowd funding. That is an example of what can happen to encourage investment, particularly for SMEs.

This Bill is worthy of support and I hope the Government accepts it.

Senator Tom Sheahan

I congratulate Senator Barrett on his initiative. I always admire the way he goes about doing these things. Unlike other economists who use gobbledygook language, Senator Barrett presents matters in simple language which is easy to understand. We have to be careful, however. SMEs are suffering greatly. I have spoken to people in that sector and, to be honest, many SMEs are not worthy of credit. I recently met some people whose biggest problem was collecting money for their business, but that was their fault because they did not collect. They have now engaged the help of a debt collector, because they could not do it themselves. Their structure was wrong in that respect.

Will we ever really know what happened on that night in September 2008? From what we do know of it, I do not believe it could happen again. At that time, there was such an intrinsic link between the Government, its policies and the banks. The CSO's figures for 2006 showed 260,000 unoccupied houses in the country, yet the Government's policy was to build 90,000 units per annum.

Senator Darragh O'Brien

That is not true. The Senator should check those figures again.

An Cathaoirleach

Senator Sheahan to continue, without interruption.

Senator Darragh O'Brien

Tá brón orm.

Senator Tom Sheahan

The Senator is correct. When one takes out the second homes, there were about 150,000 unoccupied houses. The Government policy was to build 90,000 units per annum. Young people considering mortgages were told to hurry up or they would never get on the property ladder. While the banks played their part, Government policy also played a big part. One has to assume that there is no great confidence in the banks, but we do have public interest directors in banks. I hope they are doing the job they were appointed to do.

Senator David Norris

Fat chance of that.

Senator Tom Sheahan

One has to have confidence but if they are not, then that is an opinion. Are we going too far? Could what happened that September night recur? We all lived through the Celtic tiger but when speaking privately with family and friends we said it could not last. It was a regular subject of conversation that it would not and could not last. One way or another, however, we all bought into the property bubble and there was crazy lending. It was possible to draw down unsecured, non-recourse loans in millions of euro but it was crazy banking.

We need to tread carefully now, however. I compliment Senator Barrett on his initiative but I will wait and see before passing judgment. Nonetheless, I applaud his initiative.

Senator Darragh O'Brien

I thank Senator Barrett for bringing forward another piece of legislation on improving the financial stability of the banking sector. It is good to see the Minister of State here again. It is particularly relevant, given the day that is in it.

I have read Senator Barrett's presentation which is well thought out. It is a genuine attempt, as part of a solution, to prevent a repeat of the banking crisis. I disagree fundamentally with Senator Sheahan that this cannot happen again. Unfortunately, it could recur in the future. History has a way of showing that societies tend to repeat their mistakes in cycles. That is why we have to place some controls on the banking sector, despite the presence of the Financial Regulator and the Central Bank's Governor. The way to do so is to put greater constraints on the activities that banks can undertake.

This Bill should be looked at in tandem with measures to progress full European banking union. We could argue the toss about fiscal or political union but European banking union, as proposed by the EU, is an absolute necessity. We should therefore have a proper European-wide regulation of the banking system in line with that aim.

The threat we are under concerns the issue that the pillar banks are too big to fail. However, should an Irish bank operate incorrectly and recklessly in another jurisdiction, as things stand, Irish taxpayers would have to pony up again and carry that burden. We had the apparent agreement of 29 June 2012 with the seismic shift in breaking the link between banking and sovereign debt but, bar the wording, we have not seen any movement to formally achieve this.

I refer to current events in Spain and the difficulties being experienced there at present. That country is conducting an in-depth analysis of its banking sector and it now is feasible to envisage the Spanish banks being recapitalised directly through the European monetary system. However, Ireland is still left holding the baby. In his one and only appearance here last July, the Taoiseach admitted in this Chamber, probably for the first time, that on that famous night Ireland had no option available to it. Ireland did not have access to another mechanism in Europe to recapitalise its banks further, as there was none. However, we must now work towards a system in which direct recapitalisation of banks can take place through the Eurosystem, using a European mechanism rather than by the host country's taxpayers. Senators Barrett's Bill would reduce the risk of and need for this to happen again.

If one considers the issue of an institution being too big to fail, one reason I argued vociferously against the EBS in particular being subsumed into AIB was there was then an opportunity for a bank from the United States to take over the EBS. The deal was pretty much done, whereby the EBS would have become a proper retail high street bank that would have given to the small and medium-sized enterprise sector the competition about which Senator Sheahan spoke. The present position effectively is there are two large Irish banks. However, when those banks are fully cleaned up - an outcome sought by all and which will happen - they will be bigger than the economy. Consequently, there is a risk in the future of both AIB and Bank of Ireland again becoming a systemic risk to the Irish economy and the Irish taxpayer because the Government has made a conscious decision to the effect that the approach of having two pillar banks is the way forward. I disagreed with it then and disagree with it now. However, when considering potential solutions, Senator Barrett's Bill certainly goes a long way towards doing that. He has been obliged to park other items of financial legislation he had brought forward in the Seanad. Once again-----

Acting Chairman (Senator Pat O'Neill)

One minute remains to the Senator.

Senator Darragh O'Brien

How much time did I get?

Acting Chairman (Senator Pat O'Neill)

Six minutes.

Senator Darragh O'Brien

Fair enough. I believe this Bill would go some way in this regard.

While I acknowledge the Minister of State personally will consider the Bill, I hope Members do not get the usual response. The Minister of State has set aside his script during previous visits to the Seanad. Perhaps he might be willing to accept the Bill on Second Stage to consider any Government amendments that might be required, if the Government believes it cannot accept it. Moreover, rejection should not be solely on the basis that the Government will not accept a Bill that does not emanate from the Government. There are measures that must be taken that will be helped by this Bill. The role of the ECB as the lender of last resort must be formalised. In addition, consideration must be given to sharing the risk associated with emergency lending among all member states and not just the state in which the problems occur. In addition, the quality of the borrowers must be examined. Senator Barrett's Bill would decouple some of the bad practices and would remove some of the potential for such bad practices to happen again. I refer to practices such as leveraging of 45 times current deposits, to which some banks still hold. Consequently, normal depositors and mortgageholders in any bank are at risk from the larger corporate bodies and the executives of those banks again carrying on with reckless lending.

Acting Chairman (Senator Pat O'Neill)

I am sorry, Senator-----

Senator Darragh O'Brien

I have almost concluded. Unfortunately however, unlike Senator Sheahan I do not believe there is no risk of this happening again. There is such a risk, whether it be in five, ten or 30 years time. Legislation such as the Bill before Members, taken in tandem with other measures that are slow to emerge from Europe, certainly would help. I await the Minister of State's response to Senator Barrett's Bill with interest. I apologise for the slight delay and thank the Acting Chairman for his indulgence.

Senator Tom Sheahan

It might depend on who is in government.

Minister of State at the Department of Finance (Deputy Brian Hayes)

I thank the Acting Chairman for the opportunity to contribute to this debate. I thank Senator Barrett for his publication and tabling of this Bill, as well as for the previous Private Members' Bills on which he has worked assiduously in this House. In the Department of Finance, we genuinely appreciate this because a parallel process is being worked on regarding many of the issues Senator Barrett has put forward in this Bill. I should also thank those who helped the Senator in working with this legislation. We are working on and are nearing completion of many of these issues. As other colleagues, including Senator Quinn have noted, these are issues on which we must find agreement at a pan-European level, as is the case across ECOFIN and the G20. I reiterate that in the Department of Finance, we very much appreciate the work the Senator has put into this Bill. Moreover, the Department considers that there is nothing to prevent a teasing out of the issues he has raised by way of a parallel process with the Government as it works its way through these issues.

In preparation for the debate on this Bill, I counted seven or eight separate legislative items at a European level that are dealing with this issue of regulation. Senator Barrett is absolutely right that if one is to create confidence within the banking sector, one must ensure the regulatory environment, domestically, internationally and across the Eurosystem, is absolutely spot on. Second, the lessons that have been learned from this enormous crash must be learned by everyone. Moreover, this must lead, as I have noted previously in this Chamber, to an entire culture change within the banking sector in which it recognises prudential risk, the necessity for capital reserve ratios and what are the ingredients behind a good borrowing strategy, either commercially or within the broader society. Unfortunately, what happened throughout the past decade and a half was an appalling lack of risk assessment, whereby people put faith in this enormous bubble, which was created by a deficient policy-making arm of government and the Oireachtas I hasten to add - I include everyone in that - but also by the failure to put in place a proper regulatory authority and environment. These are lessons from which we must learn and we must ensure the architecture is right in respect of the future of Irish and European-wide banking policy.

I wish to deal with the issue of Basel III, which really is at the heart of a new banking environment because this has not happened in the past. The capital reserves banks are required to have are absolutely crucial. I know something about this as when we entered government, as Senator Barrett would be aware, probably the first big decision we took as a Government pertained to bank capitalisation in March 2011. At the time, the issue really was how to make the banks look safe because the capital reserve ratios within them had been dramatically changed. I have regularly made the point that Irish banks now are better capitalised than are Swiss banks. There is no difficulty regarding the level of cash within the banks now and this point was made recently by the Irish Fiscal Advisory Council. I note also the council referred to this today before a committee of the House. What is required is a very strong capital reserve ratio within the banks, in order that they can then lend to the economy and get it working again through business lending, mortgage lending and everything else that is needed. All of this really is summed up by two initiatives that have been taken across Europe and which currently are live issues for the Irish Presidency. One is the capital requirements directive, CRD IV, and the second is the capital requirements regulation. This really is the European answer to the international problem of a lack of capital within the banks. This is a matter that is before the European Parliament and there is growing confidence that it will be over the line before the end of the Irish Presidency. Given the size of Ireland's diplomatic staff and the number of people who work within its Government when compared with larger Governments, it will be a very good achievement for the Irish Presidency if and when this issue is over the line.

This is an issue that has been raised by Senator Barrett in terms of capital ratios in sections 3 and 6. It is being dealt with and resolved. The way in which this will be transposed into Irish law as a result of the directive being in place will be significant in terms of how we address the issue.

Shadow banking arises, in effect, if one has a bank and products are being advanced through it using financial intermediaries. We must recognise that levels of risk attach to them which are not ordinarily attached to the banking sector. This is an issue Senator Barrett has raised in sections 4 and 21. It is essential that there is a co-ordinated approach to monitoring the activities of shadow banking entities. That was agreed by the G20 and at a European level. It is something that we are working on at a global level. Other speakers have outlined that the Irish banking sector will be greatly enhanced by having in place an EU-wide agreement on these matters because of the close connectivity within the banking sector. It is an international operation and therefore it is not just appropriate to have domestic law, one must have a pan-European approach. That is something that is being examined. Recent information from the European Commission leads us to believe that the legislative proposals on shadow banking will be published before the end of the Irish Presidency. We will have some role in terms of advancing the EU-wide legislative response to shadow banking, which is important also.

On the application of capital ratios to the insurance sector, in section 5 Senator Barrett makes proposals in respect of non-bank financial entities. The Bill proposes to apply bank capital requirements to insurance firms engaged in high-risk activities. However, the regulation of insurance firms is already being discussed at European level under the Solvency II legislation which seeks to establish a risk-sensitive solvency regime that is more appropriate for the true risks of insurers. That is another element in the armoury of legislation that is being prepared.

On the prohibition of affiliate transactions proposed in section 7, an additional proposal in the Bill covers transactions such as the extension of loans to affiliates, including branches or subsidiaries, investments in securities, derivatives transactions and repurchase agreements. The intention is to prohibit credit institutions from engaging in these transactions with affiliates and subsidiaries. Transactions of this nature are interbank transactions typically completed on a cross-border level and regulated as such. Basel III, and now CRD 1V/CRR, provide for the regulation of these transactions. For that reason a domestic legislative initiative is unnecessary because it is already contained in the European-wide proposals. I fully appreciate the point made by Senator Barrett. However, it is already contained within the proposed armoury of legislation.

On the prohibition on Exchequer assistance in sections 8 and 9, Senator Barrett also sought to restrict the opportunities for the State to become involved in a crisis in a bank or in the banking system. Sections 8 and 9 in particular attempt to make provisions restricting this potential for banking crises to cost the State money. I do not need to tell Senator Barrett or other Senators that the way we recapitalise banks that have become bankrupt is a live issue in the context of the Heads of Government agreement across the European Union. Senator O’Brien made a point in that regard. We are examining how we separate out the clear intention of the sovereign debt from the banking debt. The policy instrument was not available to the Government at the time, and legacy issues prevail in respect of the issue and how it was handled.

Colleagues will be aware that by the middle of next year it is the intention of European authorities that the European Stability Mechanism, ESM, will be in place. That will be a crucially important part of the architecture in terms of standing behind the European banking system. Mr. Rehn describes this as the “big bazooka”. The “big bazooka” was not there for poor old Ireland in 2007 and 2008 but we very much hope that it will be able to help us deal with a number of issues that remain in terms of the banking sector. Again, there is a firm intention on the part of the European authorities to put in place the architecture which will help limit the amounts the sovereign will have to put into banks that get into difficulties in that regard.

Senator Barrett has referred throughout his proposals to the role the Central Bank would play in implementing and supervising the rules and regulations laid out in the provisions of the Bill. However, in that context it is important to consider the steps that have already been taken to ensure that the Central Bank can deal with the requirements. Colleagues will be aware that in 2010 the Central Bank Reform Act created a new single unitary body, which was not the case prior to that. It is accepted that the initiative has helped to provide an overarching supervisory role within the financial system. We have learned from that. There are more people employed in the Central Bank now. One of the old chestnuts to which Senator Barrett regularly refers is the quality and quantum of qualified people within the Central Bank who have the expertise in dealing with these matters. The situation now is entirely different to the one that pertained even five years ago. That is largely due to the legislation that was passed at the time and the significant supports provided to make sure the fitness and probity regime is being rolled out across the system.

The Central Bank (Supervision and Enforcement) Bill is currently going through the Houses. The Minister for Finance, Deputy Noonan, is taking Committee Stage today and I will take it tomorrow. Many of the objectives Senator Barrett has set out in the Bill in the area of Central Bank reform are either in place or will soon be in place when existing legislation is amended. The role of the Central Bank in assisting in the resolution of the financial crisis in Ireland as well as fulfilling its other statutory obligations led to significant change in the organisation. That has been reflected in recent years in terms of the change in culture, attitude and the significant bumping up of the regulatory and supervisory controls the Central Bank had to put in place to ensure people were clearly aware of the new environment.

We welcome the publication of the Bill. It has set out a number of key issues on which the Government is working with other colleagues across Europe. Those issues must be resolved in a pan-European way to ensure that we have confidence in the new architecture behind the banking system. I very much hope that this might be a parallel process and that we would keep in contact with Senator Barrett and work with him on the legislative initiatives we propose or that will be transposed in Irish law as a result of the directives that will shortly be agreed at EU-wide level.

I am a long-standing believer in the principle that the Government is not the only fount of wisdom. I have learned that over many years in opposition.

Senator Darragh O'Brien

The Minister of State should tell the Minister for Justice and Equality, Deputy Shatter.

Deputy Brian Hayes

That is why I am conscious of positive initiatives taken by colleagues on all sides of the House. We must learn from the Bill. We need contrary people with contrary views to challenge what the Government is doing. We even need them in government. I am not putting Senator Barrett in that category - on the contrary. We must change the culture given the scale of the crisis and the culture that existed where people did not question, decisions went through on the hoof and Parliament’s role was abdicated in many respects. We must do so in a parliamentary sense and within the regulatory system that underpins the financial system.

We very much hope that Senators will work with us to develop and bring forward our proposals, ensuring these do what they are supposed to do and that the confidence the people will glean therefrom will help ultimately to underpin confidence within the financial system.

That is what I wish to say on the matter. I am not sure it is of any great assistance. We can work together on a piece of legislation which the Government can bring before this and the other House, one that will set the standard for the new banking environment we all need to see, one that will be the engine of growth within the economy.

Senator David Norris

I agree with the Minister of State that this House is immensely in debt to Senator Barrett. This clearly shows the value of the Seanad because we are tackling this matter in a way that displays the intellectual strength of the House.

I would not start from here, not being in that position, but I would like to analyse this Bill because it is my firm belief that the entire financial system, Europewide and probably globally, is irretrievably compromised. The capitalist market system has had its day and will have to find a new way. It simply does not work, certainly not in the interests of the people. The intention of the Bill is splendid, from the first phrase: "An Act to promote the financial stability of Ireland by improving accountability". Who could possibly quarrel with that? It is splendid. It is what we need and have not had. When the Senator states in the preamble that: "The principal aim of these items of legislation is to reduce the probability of the State being forced to actively support the banking community from public funds", I say, "Hear, hear," in spite of the split infinitive. The Senator refers to Professor Edward Kane and the Government put option which is not a Government put option, rather a taxpayer put-upon option, the taxpayer forced once again to pick up the bills for lazy banking practices and sheer dishonesty.

I raised in this House a question about one of the major banks in the financial services centre which flagrantly and repeatedly broke the liquidity ratios. The matter was eventually picked up by the Frankfurter Algemeine Zeitung, following which The Irish Times had a piece. It never mentioned the Seanad, of course, but repeated the debate that took place here, word for word. The Central Bank did sweet damn all about it even though it was aware of the matter. It covered it up and the whistleblower lost his job, which was an absolute disgrace.

I was present in the House when all of this was going on. I remember the Lehman collapse and people saying that bank was too big to fail. It was a big and complex issue and we were all under pressure. I remember a reporter telephoning to say that he could not quite make out what I was saying, and asking if I would clarify. I clarified it in a way that made it appear I was saying something I did not at all mean, which just shows how complex the issue is. However, I maintained consistently that nothing should be too big to fail. Senator Barrett is absolutely right that the problem was not deregulation on its own; it was "de-supervision". Many safeguards were in place but were not acted upon, a situation that continued, at least until some years ago when I raised this significant problem.

This is history repeating itself, about which there is no question or doubt. The depression of the 1920s was followed by the Roosevelt administration and the introduction of the Glass-Steagall Act in 1933 which managed to separate what I would call main street, over the counter banking from casino banking, the gambling, investment banking of Wall Street. Main street and Wall Street were separated until 1998 when the idiots in the American Parliament reversed the situation. From that sprang many if not all the woes of the present situation. They then tried to repair it with the Dodd-Frank Act. Thank God for Barney Frank, a man of wide intelligence and decency. Then there was the Brown-Vitter Bill and, in the United Kingdom, the Financial Services (Banking Reform) Bill 2012-2013.

I am concerned about some of items in the Minister of State's extended script, which I assume will either be read or just plonked down into it. He answered a number of points made in the debate but there was much more in his script. He referred to various measures which were similar to those being implemented in France and Germany but these are not necessary in this country as we do not have the same banking system. I point out to the Minister of State that in this Bill we - or rather Senator Barrett, because I can take no ownership of it and simply attended a very interesting briefing yesterday - are trying to prevent this course happening in the future. I do not accept for one minute that we should not foresee circumstances and try to anticipate them. The notion of raising equity to 10% is a good one. I do not believe the ratio is too high. As I understood it, from skimming through the Minister of State's typed speech that we have just received, he spoke of a rate of 4.5%. The people of Ireland need firewalls and must be protected against stupid Government decisions made under immense pressure from the banks which should never be allowed into that position again. The rate could go to 15%, in certain circumstances and in extremis.

We have too many machines in the banks. The ordinary people are picking up the tab all the time. Our pension reserves are gone. The ECB and the troika, those dictators from Europe, told us we could not touch the senior bondholders but then they went to Cyprus and said it had to be done. There is complete inconsistency and there is no European solution. They are picking us off, one by one, the weakest people, using us as an experimental laboratory. The situation is changing so dramatically because of technology. One of the illustrations in Senator Barrett's magnificent brief, using the doctoral work of his splendid friends from Trinity College, showed how banks have changed. They are nothing like the banks of 40 years ago; they are completely interconnected. It is like the butterfly that flutters its wings in South America and somebody in Chicago gets a cold. That is the way it is. No bank is an island, unfortunately. I wish to God it was.

Acting Chairman (Senator Pat O'Neill)

I am sorry, Senator-----

Senator David Norris

I will end on this point. Last night Senator Barrett and his colleagues drew our attention to the research of Carmen Reinhart and Kenneth Rogoff from Harvard, who make three points. Financial crises are very expensive for national governments. They result in longer and deeper recessions. They cause long-term increases in unemployment and they encourage governments to engage in bail-ins by citizens via stealth taxes and all the rest of it - outright surcharges, taxes and appropriations. I am sure the Minister of State will remember the advertisement highlighting insurance fraud where somebody puts a hand into another person's pocket and says, "Thanks". That is what governments do. This Bill is intended to prevent that. We do not want governments saying "Thanks" any more. This Bill is a brilliant attempt to stem this.

Acting Chairman (Senator Pat O'Neill)

That last point was a long-range one.

Senator David Norris

It was but I hope an effective one.

Senator Aideen Hayden

I welcome the Minister of State to the House again. It is appreciated that he attends here as regularly as he does. I congratulate Senator Barrett on the Bill he has introduced, which made very interesting reading. There are particular aspects I found fascinating and wish to dwell upon. I take the Minister of State's point. Effectively there are two perspectives here, which can run on parallel tracks. One relates to EU regulation, or international regulation of the banking sector and one deals with the specific national needs that we in this country have. The crux for me is the provision in the Bill to separate the banking activities which relate to households and small and medium enterprises, what Senator Barrett terms "core activities", away from wholesale or investment banking activities which by their nature carry a greater degree of risk and exposure, ultimately for the individual taxpayer. I am very interested in Senator Barrett's analysis of what he terms the Government-put option. His analysis of the situation is most persuasive. Ironically, Senator Barrett and I would be inclined to disagree on a number of issues. He would broadly be what I would call a monetarist in terms of his approach to the economy while I would support a Keynesian perspective. I believe we agree on one point, however, namely, the current banking system has completely failed us.

As a member of the Oireachtas joint committee on finance, I am permanently at a complete and total loss as to why, when members of individual banks come before that committee, they do not give anything that remotely approximates to a straight answer on anything. I do not make that comment lightly. As Members of this House know, I am particularly concerned about the issues of housing and mortgage arrears but I have yet to get one single straight answer from any of the pillar banks as to how they treat individual borrowers who are in arrears. There is absolutely no certainty or transparency. Unless there is a complete change in the banking culture of this country we will never have a banking system that remotely approximates to what we need.

On the issue of the current banking system, I believe what I would loosely call Senator Barrett's two-tier system has much to offer. Loans to Irish households decreased by over 4% in the year to January 2013. Lending for house purchases is down and lending to non-financial corporations is also down. If domestic demand is to recover, we need a banking sector that is capable of dealing with the domestic economy, which it is currently not doing. I acknowledge recent Government initiatives to encourage banks to engage but I remain very sceptical about the ability of the existing banking system to deal with the category of borrower who is in the first tier, as defined by Senator Barrett, namely, households and those with small and medium-sized banking requirements.

I do not agree with Senator Barrett's analysis that the influence of international governments on the current situation was benign. I actually believe that there was a fair degree of collusion by governments internationally, in terms of the light-touch regulatory regimes that were put in place, stemming from the collapse of the welfare state at the end of the 20th century. The belief that housing assets could be utilised by individuals to provide for their own welfare gained popularity, particularly in western economies dealing with ageing populations, for example. There was a belief that it would be possible for the property bubble, which led to the development of the sub-prime market and the eventual collapse of the banking system, to continue. I do not believe that governments had a benign influence on all of this. We must face up to this fact when discussing international attempts to change banking regimes.

I appreciate the Minister of State confirming that he is prepared to take on board some of Senator Barrett's proposals and to engage with him on the issue. The Minister of State said in his speech that we do not require a two-tier system because we do not have a sufficiently diverse banking system here. However, if we do not engage with what is being proposed by Senator Barrett, we will end up having to intervene and, in effect, create our own third banking force to deal with the needs that exist in the economy. I do not believe the difficulties we have are going to go away. I do not share the Minister's confidence that we do not have a banking system that requires a two-tier approach.

I thank Senator Barrett for drafting this very interesting legislation. I also thank the Minister for State for committing to an ongoing engagement with Senator Barrett on this matter.

Senator Thomas Byrne

I pay tribute to Senator Barrett who continues to bring forward important legislation, based on his own expertise and experience and that of his students and colleagues in Trinity College. It is very important that such expertise is brought to our national Parliament. It is a great pity, however, with the way that this Parliament works, that such expertise stops when the speeches are made, the discussion is over and the Government says, "Great job, thanks very much, goodbye." It will be a tragedy if Senator Barrett is not deeply involved in the talks that are going on regarding various legislative proposals being discussed at European level or awaiting publication by the European Commission. He deserves that and the country needs people like Senator Barrett, who is willing to spend considerable time drafting legislation. A Bill like the one before us does not just magically appear on a Monday morning but takes a considerable amount of time and effort. We should be grateful for the effort Senator Barrett has put into what is a very workable Bill.

It is a pity the Government is opposing this Bill. Its reason for doing so does not appear to have anything to do with the substance of the Bill. The Minister of State has said that he agrees with much of the substance of the legislation. He also said that there are measures emanating from Europe that will deal with many of the issues involved but Europe does not have exclusive competence on many of these issues. We can legislate ourselves for our own situation and perhaps we should, to show that we have learned lessons from the crisis. We seem to be going back to the old ways in some respects.

Sections 8 and 9 of the Bill should be required reading for all Irish citizens. Thoese sections would receive unanimous support if they were put to the people in a referendum. They are very important sections and possibly deserve a Bill in their own right. They state, very simply, the criteria under which credit institutions may receive assistance from the Exchequer. This is such a critical part of the recent history of this country, as Senator Barrett has outlined, and the public deserves some reassurance as to how such matters might be dealt with in the future.

The shadow banking that was discussed here today referred to institutions providing credit while not being fully subject to normal banking rules. There is another type of shadow banking going on at the moment by banks which operate in Ireland but are not regulated here. Those banks are not subject to Central Bank rules on mortgage arrears, for example. Even Anglo Irish Bank and the Irish Nationwide Building Society are not subject to those Central Bank rules. That is a type of shadow banking that must be addressed legislatively and not just through Central Bank regulation which, in any case, does not apply. We should examine the possibility of applying Central Bank rules to all banks operating in this country. Indeed, banks can decide not to be regulated by the Central Bank simply by moving jurisdiction. There is a particular problem with Bank of Scotland, Ireland, which has outsourced the management of its loan book to an Irish company. That company, Certus, is doing very well but following a recent court case, its staff are prohibited from offering affidavits in court on loans because they are not sufficiently familiar with them. Certus is an agency of Bank of Scotland, Ireland, collecting money on behalf of that bank in Ireland and is not subject to regulation. Bank of Scotland, Ireland, has been hauled back onto the scene by the courts, which is a welcome development. This shadow banking system, currently operating in Ireland, must be examined seriously. We need legislation and not just statutory codes of conduct from the Central Bank. Statutory codes do not refer to actual statutes but simply refer to the statutory powers of the Central Bank to regulate banks that are within its remit. This issue must be addressed because people who have borrowed from sub-prime lenders or from banks that are regulated elsewhere do not know where they stand.

Senator Barrett has not just dreamed up his proposals for reform but has applied his own expertise and that of his colleagues to the drafting of this legislation. He has also examined what is happening in the United States of America and the United Kingdom, which is very useful. I thank him for that but yet again, the Government is just saying "No". This has happened with previous Administrations which rejected legislation simply because it was proposed by the Opposition. I do not think the Minister of State said that the Bill was unconstitutional, which is often the argument used against Bills proposed by members of the Opposition. I would be surprised if constitutional issues are not raised at some point. The response is disappointing and makes one wonder about the purpose of this Parliament. It seems to be just for rubber stamping decisions. If we admit that, we may be in a better place. If we are not willing to accept really well-thought-out legislation then I wonder what we are here for at all.

Senator Colm Burke

I welcome the Minister of State to the House. I also welcome the Bill put forward by Senator Barrett. As someone who has also published a Private Members' Bill, I know the amount of work involved.

This area is extremely complex and this is a very well researched and drafted document, on which I compliment him. He raises the very important issue of whether we learnt lessons from what has occurred, for example, with the banking crisis.

In the past 30 years the Government has had to step in on a number of occasions, with ICI, PMPA and Goodman. If the banking crisis had not arisen, would the Government also have needed to step in in the case of Quinn Insurance? The evidence is that approximately €350 million that should have been set aside to deal with ongoing claims was used for other activity. If the banking crisis had not arisen the Government might have needed to step in, as it did with PMPA a number of years ago. It begs the question as to whether we actually learned from the PMPA debacle. I believe we did not. Based on what Senator Barrett has proposed, it shows that while we may learn some lessons, we do not necessarily take all the precautions we should in order to protect the economy and the overall financial situation.

This is an important issue to raise. When the euro was created everyone presumed the regulation was in place at European level. I have often given the example of the German building company that came to Ireland. On one project it spent more than €1 million without any contract signed. I had to become involved and bail it out of a very difficult situation. It was a €10 million project with no contract signed and €1 million worth of work done. I remember eventually getting the contract signed and collecting €1 million on Christmas Eve in order to get it back to Germany for the new year. I asked them when they came back after Christmas how this had arisen and the response was: "When you came to Ireland, we understood you took everyone at their word." It shows that when we were drawing down the moneys available to us from Europe, Europe appeared to have been taking us at our word and we appeared as a country to believe there were sufficient regulations in place.

It is important that we learn lessons and put in place the necessary guidelines and controls. Based on the sequence of events in the past 30 years, I suggest in the next eight to ten years we will come across crises when the State may well have to step in again and perhaps we should even start planning for that at this stage. While some people will disagree with me raising that issue and being negative, that is the record over the past 30 or 40 years. Just because we are now dealing with and have more EU regulation and a more co-ordinated approach from a European level, it does not rule out the possibility of an issue arising in this economy for which we have not planned. That is why Government and Departments need to be even more observant than previously.

During the good times a number of banks gave money to their customers to buy their own shares. Do we now have legislation in place preventing that practice? I am not satisfied that we have. We know of one company doing that and I have come across a number of small investors affected. One investor drew down €4.5 million to complete a property transaction to refurbish and rebuild properties, and €1.5 million of that went towards the purchase of AIB shares. He remortgaged every property he had in order to draw down that €1.5 million. I know we are saying we have all sorts of regulation, but is it actually in place? I did not hear of the legislation going through in that area and I am not sure if we have put it in place.

What Senator Barrett has raised this evening is extremely important. We need to ensure we continually review existing legislation and also consider introducing new legislation as the need arises. We need to keep it under review.

Senator Sean D. Barrett

I sincerely thank the Members of this House. I am so proud to be with them as we address these really serious problems. I welcome the Minister of State, Deputy Perry, who has responsibility for small and medium-sized enterprises. The Bill attempts to right-size, as it were, the banking sector, which had got too big; remove hidden subsidy to the banks - I am sure the Minister of State will have many other ideas in this regard; protect taxpayers and jobs; and show the importance of the Seanad by restoring faith in Parliament and protecting the public interest, not just the banking interest.

I believe that national legislation is needed and welcome the assurances the Minister of State, Deputy Brian Hayes, gave. I also welcome that he did not read into the record the last sentence of his prepared script, which stated that he opposed the Bill - in fact he said the exact opposite. We will abide by the oral tradition rather than the speech written for him. Following what Senator Hayden said and what the Minister of State, Deputy Brian Hayes, said, the Bill remains very much alive and I will curtail my response to ensure it remains on the Order Paper.

The Minister of State, Deputy Brian Hayes, said the European directive specifies that the capital requirement is set to increase from 2% to 4.5%. We are proposing 10% and 15%. Nobel Prize winners believe it should be 30% to 60%. We cannot return to the debt-fuelled banking that caused the country so many problems. We took the models from the United Kingdom and United States. As Senator Colm Burke said, this is a matter for a national parliament. We cannot simply say this will be done in Brussels. There is nothing on the A, B or C list of proposed Government legislation to address this issue. The Seanad took the initiative and we are doing it here. Senator Colm Burke, as a former Member of the European Parliament, said there would be flaws in relying on Europe to save us the next time.

I do not believe the culture of Irish banking has changed. It still annoys as many Oireachtas Members as it ever did and it still owes us the best part of €90 billion. I do not believe the Basel III accord is sufficiently radical, a view shared in the United States and United Kingdom, which is why they prepared their own legislation.

The Minister of State said that whenever possible, we have led with our own legislation and will continue to do so where appropriate. I do not believe we have led with our own legislation. I certainly will help and I am delighted at the Minister of State's invitation that we prepare our own legislation.

Senator Sheahan referred to the concerns people have as to whether the problem has gone away. People want us as a Parliament to react and get risk out of it.

Let them take as many risks as they want with their own money. That is the purpose of the Brown-Vitter Bill to which reference was made and it is definitely where the emphasis is being placed in the United States and the United Kingdom. Let us not sleepwalk into any belief that the European Union will do the job for us.

I thank Senator Byrne for his encouragement, as always. I acknowledge the final sentence which the Senator read into the record but which was not actually uttered in the Parliament. I also thank Senator Hayden for her contribution. I thank the Acting Chairman for seconding the Bill. It is most important that we, on behalf of the citizens of the country, get a grip on the banking sector. This Bill is an initiative, designed on an all-party basis, to do precisely that.

Debate adjourned.

Acting Chairman (Senator Feargal Quinn)

When is it proposed to sit again?

Senator Colm Burke

At 10.30 a.m. tomorrow.