I will address the Deputy's question in relation to the progress made on implementing each recommendation of the Banking Inquiry with relevance to my Department by firstly explaining the broader changes that have occurred since the crisis, and then going into detail on the progress on implementing the recommendations of relevance to the Department of Finance. I am pleased to report that the recommendations have either been implemented or otherwise addressed.
Since the financial crisis, there has been a significant number of measures taken to address the failures highlighted in the post-crisis analysis. This includes measures to address the recommendations of the Banking Inquiry. These have been at an institutional, national, and EU level. Both the Department of Finance and the Central Bank of Ireland have undergone significant organisational change in terms of structure, culture and resources.
There has also been a large amount of new legislation introduced at a national and EU level to address the weaknesses that came to light during and after the crisis.
The former Central Bank of Ireland and the Irish Financial Services Regulatory Authority have been re-amalgamated into one body, the Central Bank of Ireland (the Central Bank). The approach to banking supervision has radically changed to one that is more assertive, risk-based, and challenging, and one which is underpinned by new legislation, predominantly the Central Bank Reform Act 2010 and the Central Bank Supervision and Enforcement Act 2013.
The Department of Finance has implemented the recommendations of the ‘Wright Report’; it has restructured its divisions; and it has implemented an open recruitment policy to ensure an optimum skills mix. The Department’s objectives are to ensure a sustainable macroeconomic environment and sound public finances, with a balanced and equitable economy, enabled by a restructured, vibrant, secure, and well-regulated financial sector.
The establishment of the State’s Financial Stability Group has facilitated and strengthened communication and coordination between the State institutions i.e. the Central Bank, the Department of Finance and the National Treasury Management Agency.
National regulatory measures have been complemented by EU-wide reforms and new legislation. In the EU, the Banking Union has been put in place, thus implementing the commitment of the European Council in June 2012 to break the bank/sovereign link.
The EU Banking Union provides for a single prudential supervisor through the Single Supervisory Mechanism (SSM), a single rulebook, and a Single Resolution Mechanism (SRM). This aims to improve coordination and militate against negative spill-over in the future. The European Systemic Risk Board (ESRB) is responsible for the macro-prudential oversight of the EU financial system and the prevention and mitigation of systemic risk. The ESRB monitors and assesses systemic risks and, where appropriate, issues warnings and recommendations.
There have also been economic and fiscal reforms at an EU level. The Stability and Growth Pact (SGP) was strengthened following the adoption of the ‘six pack’ legislative package in 2012. The reformed SGP is now complemented by a new surveillance mechanism which ensures that macroeconomic imbalances, as well as debt and deficit targets, are monitored. This mechanism, the Macroeconomic Imbalance Procedure (MIP) should ensure that emerging imbalances, such as housing bubbles, are detected at an earlier stage and acted upon.
I now refer specifically to the recommendations of the Banking Inquiry that are relevant to my Department. The majority have been implemented or else the recommendations have been otherwise addressed. Some recommendations refer to ongoing or periodic reviews, and these are continuing.
Review of section 33AK of the Central Bank Act 1942:
- A review of section 33 AK is occurring as part of the forthcoming Central Bank (Amendment) Bill. The Central Bank is assisting in this review.
- It is important to consider that the ability to disclose to a judge will depend on the legal mandate of the particular inquiry, the nature of the particular documentation under consideration and the EU law provision (where relevant) applicable. Any proposed amendment to section 33 AK will also require prior consultation with the ECB.
The membership of the Board of the Central Bank, appointed by Government, must include sufficient expertise and relevant direct experience in financial stability and prudential regulation:
- The current members of the Central Bank Commission were all appointed after the financial crisis, and possess the relevant knowledge and experience as is statutorily required.
- Any future members will be appointed from an open competition under the remit of the Public Appointments Service, following the guidelines for appointments to State Boards.
Establish a formal process with clear procedures for situations where there are conflicts between the advice provided by the Department of Finance on matters where exceptional risks are involved and the decision proposed by the Minister:
- While this recommendation is specific to the Department of Finance, the Corporate Governance Standards for the Civil Service, published by the Department of Public Expenditure and Reform in 2015, requires that all Departments and Offices have in place a published Governance Framework that, inter alia, should “set out the formal processes and mechanisms for documenting decisions made within the Department to include Ministerial consideration and filing of same”, (p.13).
- In the Department of Finance, all submissions and advice to the Minister are recorded on an E-submissions system. This allows the Department to fully document its advice on matters where exceptional risks are involved, while respecting the constitutional and existing legislative frameworks, and the ultimate decision proposed by the Minister.
The banking division in the Department of Finance should be periodically subjected to a performance review by an independent third party to ensure fiscal, capital market, and banking expertise is adequate to challenge information and assumptions provided to it by the Central Bank of Ireland:
- The Department, as a whole, is subject to the capability review programme as part of the Civil Service Renewal Plan. The capability review process assesses relevant Department attributes such as the structural capability of the Department, including its strategic HR, learning and development, and culture and values. The review is undertaken by a Review Team based in the Reform and Delivery Office of the Department of Public Expenditure and Reform.
In addition, the Department and the Banking Division are subjected to regular review through:
- Annual Oireachtas oversight and scrutiny of the Department’s resources and outputs;
- IMF periodic reviews of the Department’s role in financial policy and regulatory matters, such as the IMF Financial Sector Assessment Programme conducted in 2016; and
- Periodic performance reviews of the Department, such as the Wright report.
Specifically, the Department has taken actions to improve the fiscal, capital market and banking expertise in the Department and the Banking Division through:
- Professional Diplomas in Financial Services and Government Economics have been developed by the Department in conjunction with the Institute of Banking and the Institute of Public Administration (IPA) respectively.
- These measures help ensure Departmental staff possess the necessary skills and knowledge to perform their duties effectively.
- Increased recruitment of economists, and financial and capital market experts into the Department to assist in the analysis and challenge of financial and economic data.
- The Shareholding and Financial Advisory Division (SFAD) is comprised of circa 18 civil servants and secondees from the National Treasury Management Agency with extensive private sector expertise and professional qualifications in: capital markets (debt and equity), corporate finance/investment banking, accounting and auditing, and law.
- The Department has regular interaction with investment bankers, analysts, lawyers, accountants, tax advisers, investment funds, private equity funds, stockbrokers etc. so as to ensure that the Department has access to up to date market information and intelligence across a wide range of subjects.
Acceptable bands should be agreed with regard to the proportion of total State taxation revenue accounted for by defined cyclical, transaction-based taxes, including triggers for follow-up action when these limits are breached:
- The objective of ensuring that cyclical or windfall revenue is not used to fund permanent increases in public expenditure has already been addressed through reforms introduced in the Stability and Growth Pact and the Treaty on Stability, Coordination and Governance. In particular, the issue is addressed by the expenditure benchmark, which limits the growth in general government expenditure to the trend growth rate of the economy unless discretionary revenue measures are introduced to fund higher increases.
- Also, in line with Government policy, and subsequent to the SGP reforms mentioned above, the Irish Fiscal Advisory Council was established and given the function of monitoring compliance with the fiscal rules, assessing the official forecasts and whether the fiscal stance is conducive to prudent economic and budgetary management, including by reference to the Stability and Growth Pact.
- The introduction of the Rainy Day Fund will allow for cyclical revenues to be paid into the Fund to ensure such revenues are not used towards current expenditure.
Legislation governing the powers of the Minister for Finance relating to directions to the NTMA should be reviewed:
- The issue of Ministerial directions to the National Treasury Management Agency, as provided for under Section 4 (4) of the NTMA Act 1990 and elsewhere in the NTMA’s legislation, was reviewed since the period dealt with by the Inquiry’s report. The preparation of the NTMA (Amendment) Act 2014 involved a thorough review of Ministerial powers including directions to the NTMA. The issue was also discussed at length as part of the Committee Stage and following reflection the Department, the Minister and the Oireachtas were satisfied that the existing provisions were measured and appropriate.
- It is important to note that the NTMA’s treasury functions, such as borrowing on behalf of the State and managing the national debt, are delegated to the Agency by the Minister for Finance under the NTMA Act 1990, as amended, so these remain primarily responsibilities of the Minister for which he/she is accountable.
The operation and effectiveness of NAMA should continue to be reviewed, in particular when medium term property price movements can be taken into account. When NAMA completes its work, it should be the subject of a further comprehensive and final review:
- In line with the recommendation, NAMA is kept under review. The C&AG carries out ongoing and ex-post reports on NAMA’s performance. Both the Department and the C&AG continue to review NAMA during its lifetime and would envisage carrying out such a report once NAMA has completed its work.
- Carrying on from the 2014 Section 227 report, the Department of Finance continues to develop its views regarding NAMA’s strategy and continues to monitor NAMA’s performance relative to the market and expectations. One key element of this ongoing analysis is the comparison of NAMA’s outturn to changes in the value in asset classes and geographies in which NAMA holds assets. These ongoing analyses will continue to assist in the Department’s evaluation of NAMA’s strategy regarding its remaining portfolio, including the future strategic direction around the Dublin Docklands SDZ development and the strategy around the Residential Funding Programme.
- In addition to ongoing work, the Department fully intends to perform a comprehensive review of NAMA once its work is complete. Section 227 of the NAMA Act requires that, as soon as may be after 31 December 2012, and every 5 years after that while NAMA continues to be in existence, the Minister assess whether NAMA has made progress towards achieving its overall objectives, and decides whether continuation of NAMA is necessary, having regard to the purposes of this Act. In addition, the Minister may also, at any time, have NAMA report to him or her regarding progress on the achievement of NAMA’s purposes.
- Similar to Section 227, Section 226 of the NAMA Act required as soon as may be after 31 December 2012, and every 3 years thereafter while NAMA continues to be in existence, that the C&AG shall assess the extent to which NAMA has made progress toward achieving its overall objectives.
- The next Section 227 Report is due in 2019. Under Section 227, the Minister also has the power to effect an off-schedule Section 227 report at a time that coincides with the achievement of NAMA’s purposes under the Act. It is envisaged that the final report conducted under this section of the Act will make final conclusions regarding NAMA’s achievement of its overall objectives - essentially a comprehensive review which will be performed at or very close to such time as NAMA has completed its work.
The European Commission’s recommendations on audit changes for banking should be implemented:
- Legislation signed into law on 17th June 2016 giving effect to the new EU regulatory framework on statutory audit (Statutory Instrument 312/2016, entitled European Union (Statutory Audits) (Directive 2006/42/EC, as amended by Directive 2014/56/EU, and Regulation (EU) No 537/2014) Regulations, 2016) aims to achieve a high level of harmonisation of statutory audit requirements and a common regulatory approach across the EU.
- The legislation widens the remit of the Irish Auditing and Accountancy Supervisory Authority (IAASA). IAASA will now be directly responsible for the inspection of the audits of Public Interest Entities (PIEs), such as credit institutions, insurance companies and entities listed on regulated stock exchanges. The new measures address this recommendation and also include notable changes to the regulatory regime for auditors, particularly for the audits of PIEs.