I understand Deputy Clare Daly was in possession. Some 17 minutes remain in this slot. I call Deputy Catherine Murphy, who will share time with Deputy Wallace, Deputy Stephen Donnelly and Deputy Maureen O'Sullivan.
Central Bank and Credit Institutions (Resolution) (No. 2) Bill 2011: Second Stage (Resumed)
Question again proposed: "That the Bill be now read a Second Time."
The Bill introduces a framework for the resolution of distressed institutions. While I welcome some of the provisions, which are long overdue and which could help to ease the burden created by the financial crisis or collapse in 2008, what we really need is a change in culture and political orientation that will prevent credit institutions from ever reaching the stage of catastrophic distress again.
We must put several basic questions. How did the banks destroy the economy? How was this allowed to happen? Why were banks allowed to grow to the extent that they posed such a threat to the entire society? The Bill does nothing to answer these questions or to address the fundamental structural problems in a capitalist system that has allowed the banks to grow to the point where they threatened the foundations of our society. The Bill has nothing to say about why we should allow financial institutions to hold such vast power over ordinary people. It says nothing about why the markets in which the banks operate should hold such incredible power. It says nothing about why ordinary people have no say over these money markets. It says nothing about the fact that the money markets, as has been demonstrated to dramatic effect in the past three years, are remarkably fragile and reliant on the most fragile of all human traits, that is, confidence.
The past 30 years have been marked by a belief that the markets should be treated as some type of untouchable authority. At times, this belief resembled a kind of religious fanaticism. The idea that markets could solve all problems and create wealth in a sustainable way from complex, risk-taking behaviours was held in an unquestioning manner. This religious faith, or what masquerades for it in much the same way as the faith of our religious institutions, has been repaid in the most appalling manner and capitalism has been shown to be a failure in this respect.
There is a great difference between money and wealth. We are aware that a great deal of money was sloshing around but that did not deliver wealth that could be shared. Were we to learn one thing from the economic catastrophe, which is a catastrophe at societal level, it is that the money markets are not the rational, efficient mechanisms about which we were told. On the contrary, we are all well aware now that markets are an undemocratic forum for faceless financiers acting out a herd instinct with short-term profit motives.
Money markets are the opposite of a rational mechanism for deciding how society's wealth should be created, distributed and controlled. In the past 30 years we have seen a dramatic increase in the size, power and influence of financial institutions. When historians write about the last decade of the 20th century and the first decade of the 21st century they will surely describe it as the era of the global financial institution, one that is un-elected, undemocratic and supremely powerful. How was this allowed to happen? The issue we are debating today tells us nothing in this regard or about how to address the issue.
Another striking feature of the debate on financial institutions in recent years is the question of banks being too big to fail. What does this really mean? We have two big banks at the moment and I cannot understand why these banks will not be too big to fail in future because it is argued that they will be our systemic banks.
I opposed the Maastricht treaty. I knocked on doors because I was concerned that the convergence criteria would be an impossibility were we to get into difficulties in future. I met those who would pay the price for this because they relied on the State for services and income. I have not had the chance to listen to the radio today but I hope the Minister will give us some positive news from that point of view. I am sick to death of waking up and listening to Moody's and Standard & Poor's in regard to financial products, including sub-prime products and all the rest, which are not actually products at all. The Bill deals with a small area but far more is needed in terms of defining the kind of economic system that can support the creation of real wealth and create wealth in such a way that it can be distributed more equally within our society.
I have had more experience with banks than I wanted to have. I am still dealing with four different banks and have had positive and negative experiences with them. In my 20 years dealing with them, I never found them easy to deal with but they have moved the goalposts a good bit in the past couple of years and it is a very different world. While I admit I took risks and they took risks, the attitude they have taken now is very aggressive and it is as if I was the only one who took risks. The notion that we would work together has very much disappeared because although we worked together for a long time, that is obviously history now and they have taken a different approach.
Once upon a time in this country we saw the banks as utilities that worked hand in hand with the people, the State, small and medium size businesses and large businesses — they were definitely seen as utilities. That came to an end in recent years as the high street bank we knew became partially an investment bank as well. It appeared as if they were not making the decisions any longer, and the markets and the ratings agencies probably had more sway than those making decisions at grassroots level in the banks in any town or city in the country.
There was much talk in 2008 and 2009 about laying down new ground rules for how banks should behave. One of the areas was of course in regard to bonus schemes. It was interesting to read this week in the Financial Times that the British banks paid out Stg£14 billion in bonuses last year. While they make up 14% of the working population of Britain, they paid out 40% of the bonuses, so very little seems to have changed and they seem to have recovered well from the hiccup. Now that the taxpayers of states all over the planet have come to their rescue, it seems as if it will be business as usual again for the banking institutions.
The State must be very strict in how it monitors banking behaviour. We cannot depend on banks to behave in an ethical fashion or expect them to behave as if they are a utility that will serve the people. While I have no problem with banks making money, there must be some ethics involved and some sense of responsibility. When they lend money to people, they cannot just throw them to the wind when it suits them. Unfortunately, that is what is happening at present.
Whether the Government feels it can only do what is being done at an international level, I do not know. However, it would be great if our country adopted a very strict policy on how banks work. We know that some countries, such as Canada, had a much tighter hold on banking behaviour than many others. We can learn something from them. We have certainly learned that we cannot leave the banks to their own devices to work unfettered. If the State is going to come to their rescue when problems arise, surely the State has the power to call the shots at all times with the banks.
Yesterday the Taoiseach used the words "dysfunction", "disconnection", "elitism" and "narcissism" about the church. Those words could equally be applied to our banking institutions. We cannot but be struck by the fact that at least apologies are coming from certain quarters in the church but there has been a lack of similar apologies from the banking authorities.
Once again, we are in a situation we should not be in or at least we should not be in it to the extent we are. While I accept outside influences did play a significant role, our banking crisis was essentially self-made through the greed of the bank authorities in that they allowed themselves to become over-exposed to property. There was poor governance, appalling management or mismanagement, not to mention the cosy relationship between the banks and certain individuals. The Financial Regulator's role was extremely inadequate and the relevant people in authority in this House and in the Department of Finance were not up to the mark, regardless of whether they were misinformed, not informed or chose not to see. The solution chosen, namely, save the banks at all costs, led to the extensive blanket bank guarantee.
The point appears to be that if a systematic resolution framework had been in place we would not now be in the dire straits we are in, or at least not to that extent. It was borne out in both the Honohan and Nyberg reports that if a resulting mechanism had been in place, public losses would have been reduced.
I note the various purposes behind the Bill, including an effective and efficient resolution regime for failing or likely to fail credit institutions, and that the Exchequer will be protected. I accept we need to protect the interests of depositors, we need banks and we need financial stability. The Bill will give the Central Bank the necessary powers for these purposes but the Central Bank has not exactly covered itself in glory in the past. Banking authorities must be held accountable for their actions and the action is needed before a bank's balance sheet is insolvent.
I understand choices have to be made and balances struck between the protection of shareholders and the protection of the public and depositors' interests. However, the protection of shareholders should not be paramount.
With regard to the "special manager", in the opinion of the Central Bank, the person chosen will have "the requisite knowledge, expertise and experience of the financial services sector to be the special manager". This will have the effect of suspending the rights and powers of shareholders and members. The special manager has extensive powers to remove people in employment and those in positions, so those people who will be special managers, while they must have those considerable credentials, will also, I hope, be guided by values of honesty and truthfulness in carrying out their work.
I have been contacted by certain credit unions in my constituency. I understand a strategic review is being undertaken and that the report is overdue. It appears the credit union regulator is making decisions on credit union reform before the commission has completed its work. Credit unions have played a very important role in this country and have been the saviour of many individuals and families. There is a strong community base, particularly in disadvantaged areas, and they provided an alternative to the money lenders charging 140% interest and more, who also took social welfare books and pension books from vulnerable people who were desperate for money to pay bills or cover the cost of Christmas.
The credit unions also have a very strong voluntary element which must be acknowledged, as must the fact that the members own the organisation. They are different from banks and I would not like to see the undermining of credit unions. I accept there is a need for good governance but the majority have worked well under the current governance and they play a very important role in providing credit.
It was interesting to read that from June 2009 to June 2010 those credits unions affiliated to the Irish League of Credit Unions provided €2.5 billion in loans to their members. If there are weaknesses, potential or real, they cannot be ignored, but I hope action will not be taken arbitrarily. While I know some credit unions are considering amalgamation, I hope the wishes of the credit unions can be taken into account. We need to have a balance between holding onto the traditional credit union ethos — community focused, member focused and in the best interest of the members — and not allow or facilitate a return to the money lenders, which I hear about at present in Dublin Central.
My final point concerns the need for regulation in all our institutions, including the church, the State and Departments, and the need for regulation regarding the big level operators and the big commercial interests. What appears to be happening is that families, those looking for mortgages and small businesses are being swamped by excessive regulation.
Such swamping is delaying real activity in the real economy, thereby leading to a stagnation in Irish society. Consequently, banks and lobbyists for big business are setting out to convince people that less regulation is required. I recently met representatives from small businesses who have been in business for more than 30 years, have paid all their bills to those who supply them and have paid their workers etc. However, they have been left high and dry by larger developers who had contracted them and who now are in foreign fields making more profit but are not paying their just debts in Ireland. I wonder whether the wrong people are being regulated excessively. It should be senior bankers and not the person on the street who did not trigger the problem in the first place.
This is a rather appropriate day to discuss this Bill. While Members have had economics for ethics, it is time they had ethics for economics. This is a good day in respect of events in Europe. My speech was written two weeks ago but now is as relevant as one written two years ago. While the issues have been tackled on a national basis, more must be done on a European basis. As for the euro's institutional framework, insufficient fiscal disciplines were imposed by the European Union and given an absence of mechanisms to control economic imbalances, we ended up in a position in which our country, as well as several others, could not sustain the level of debt imposed upon them. This was largely due to the banks.
The NTMA produced a report this morning on its function within the banking system and mentions the IMF having a significant function within that. Unfortunately, some of our economic sovereignty has been lost for two reasons, namely, the imprudence of the banks, combined with a lack of foresight on the part of the Government. In common with many previous speakers, I have worked in financial institutions and as a recent speaker mentioned, there was a completely inappropriate culture involving financial recklessness and an inability to perceive what was right for the country.
Financial institutions are licensed by the Government because of their significance in society and because of what they can do to society. They are necessary and provide much that is good. For most people, they permit access to a home by enabling one to get started on a property ladder or to get on with daily modern lives through the purchase of a car. However, greed and short-sightedness became the culture, as well as a complete inability to philosophise what it is an institution or a society should be trying to achieve. It was akin to an adolescent period for the country and we have learnt from costly mistakes. However, today probably will be highly significant. Heretofore, we have had a currency that had multiple central banks. I completely disagree with this and am on record as having stated the euro was ill-conceived to begin with. I should clarify I agree with the concept of the euro but not the manner in which it was established. I was lucky to have studied economics in central Europe in 1999 and 2000 and I can recall one of my professors telling me to question Ireland's reasons for entering the euro. The idea that a currency could have multiple central banks without having an overriding fiscal policy meant, for example, that loan to deposit ratios differed. If one put €10 on deposit in a German bank, it might have lent out €12, whereas in Ireland, a bank might have lent out €22 on foot of a €10 deposit. Consequently, using the same currency without having influence over one's interest rates, duration of credit etc., meant we had a completely separate financial outlook on our economy then did the central bank of the currency, which is inappropriate. I believe steps will be made towards addressing this issue in the future.
This Bill entails taking steps locally. I am convinced the regulator here, that is, the Central Bank of Ireland, did not know what was its role for some time. I have worked on reports for institutions that were handed to the Central Bank of Ireland and I assure Members the level of detail contained therein was comprehensive and nothing was missing. However, the philosophy as to what it was trying to achieve was wrong. Moreover, there was a lack of knowledge within the Department of Finance, as well as a culture within the country whereby current income was being used for current expenditure. One does not even run a house like that, let alone a country. It is like winning the lottery and using it on day-to-day spending. The whole property idea was ill-conceived and is what drove the banks off the edge.
However, I refer to today's developments. I am not revealing any information because I do not have it — the Minister will know a great deal more in this regard — but some draft documents on what is happening in Brussels have appeared on the Internet. If they are to be believed, it appears as though Ireland is in a position to get significant interest rate cuts, which the Government stated it would do. Obviously, this was not achieved in isolation and there has been a pan-European strategy in this regard. I have held meetings with many European social democrats and am aware the Christian Democrats have done likewise. There have been meetings with people from Germany, Scandinavia, Britain, France etc. and we have conveyed the message that our country was in real trouble, as was the currency. One only needed to pick up any financial newspaper or magazine to realise that matters were coming to a head. Moreover, we have developed friendships and have developed trust again. We are in a better position than was the case last year or indeed four months ago. In addition, as Deputy Wallace once noted, one must be able to work with one's creditors and institutions and I note the European Central Bank, ironically, is now doing what it is being told by the Commission, the Heads of Government and the IMF. They have realised they needed to protect the people because the European Union is about protecting people and is not about wealth for a small group of people. Today's events will play a significant part in allowing the project to develop because they demonstrate there is a resolve to look after what is important. It also appears as though Ireland's corporation tax will remain intact and if that is the case, it constitutes another great event.
One point I wish to highlight is that I have seen auditors enter a financial institution. However, as for the people who actually arrived at one's desk at 8 a.m. to perform audits on files that could take up six or seven boxes, for all the experience they had, the only thing they lacked was a pair of short pants. They were being paid €17 per hour, while the auditing firms were charging the time out at €200 per hour, and would return to one's desk at 11 a.m. to confirm the aforementioned files were fine. Superman would not have got through those files in three hours, never mind a bunch of trainee accountants. Consequently, the way I would describe it is that culpability lies in many places but among few people. The vast majority of people who work in financial institutions are hard-working honest people who do an honest day's work for an honest day's pay. The culture of greed existed amongst the highest elite, for whom bonuses were on a here and now basis, rather than on how banking is supposed to work. As it must take a long-term view, there should be long-term bonuses. I do not believe Members will again see in their lifetimes the reckless promotion of people who were making short-term gains for a company or institution. The reason this sector is licensed is because it is meant to be prudent at all times.
While the diplomatic offensive appears to be working, an offensive also is needed within Ireland. I note the country may secure interest rate reductions and may end up with the duration of its term loans being doubled. However, it all comes back to the point that the country is running an enormous deficit. As there will be further cuts, it is the job of both the Government and the non-Government parties to find the fairest way to impose those cuts and make Ireland viable again. It will be necessary for Ireland to take two steps back and by so doing, one must consider what one has done heretofore. In Ireland's case, we have created a mess that we will clean up. We will set about creating growth and jobs again because it is all about trying to create a standard of living and a better country for the people.
Today is a great day and the speech I prepared two weeks ago is no longer relevant. I am delighted to see the Minister in the Chamber on the last day of the session. It is not as though the Government orchestrated the last sitting day to fall on a day on which a meeting would be held in Brussels but it appears as though good news is afoot. However, the deficit must be tackled and the many Members who have ideas in this respect always should convey them. I look forward to next Tuesday, when the Taoiseach will attend a meeting of the Joint Committee on Finance, Public Expenditure and Reform, of which I am a member, when it will have an opportunity to ask him questions on what has happened heretofore.
There also are concerns regarding what banks can do to institutions of Government and this will not be allowed to happen again. While both the Central Bank and the Financial Regulator must have roles in this regard, this Bill states the European Central Bank will have a role. It will regulate, watch and have an overriding oversight on what constitutes prudent lending and what is a prudent financial institution. I am delighted by this development, as are many people throughout Europe. I believe it will lead to a better European Union and Ireland will be in a position to achieve real growth, have a correction and drive forward. Today is a highly significant day on which I am delighted the House will break up for the summer. I wish all Members a very pleasant break and I hope we will all return refreshed. I hope some Members might even take a trip to Kerry.
Perhaps Deputy Spring might take in the Galway races on the way.
The golf is on in Killarney so we will be unable to go gambling. The Leas-Cheann Comhairle knows where that got us.
The Bill goes some way towards ensuring the required legislative process is in place to enable effective action to be taken if a bank is threatening to fail. However, I do not believe the correct culture is in place. Deputy Spring highlighted in his contribution the culture which led to our banking failures. We still have a way to go before we can ensure that banks are far less likely to fail and that if they fail, the resolution process at the heart of this Bill will produce the best possible outcome for the people.
I welcome the Bill and had this legislation been in place in 2008, we might have avoided some of the horrendous decisions which have to be made. Any resolution process to deal with banks which are about to fail must be timely, transparent, effective and fair. It must allow for reasonable due process. The ECB is broadly happy with the timeliness and effectiveness of the Bill but it has expressed some reservations about fairness, some due process issues and the transparency of the process. Specifically, the ECB cites the lack of time for interested parties to react. If the Minister has to take action and go to the courts to force a resolution process, the ECB is concerned that other interested parties may not have sufficient time to represent themselves in that process. The bank is also concerned that the independence of the Central Bank of Ireland is not explicitly set out in the Bill. I put those points to the Minister for his consideration as to whether they can be included in the Bill.
My concern is how the Bill has been developed and that in-depth parliamentary investigation is not included. The Bill seems to be the product of good practice as viewed by the IMF, the World Bank, the OECD, the Bank for International Settlements and by a collection of other central banks. I agree this is a good start and the Bill is a result of the agreement with the troika.
However, I suggest that the Bill lacks a local context. The US banking resolution regime legislation and the wider financial regulations, were drafted many decades ago and were the product of parliamentary scrutiny of the banking sector. The US congressional hearings in the 1930s probed the bankers and sought to understand the local banking sector. These hearings examined the problems of the US banking sector and also the culture of the banking sector and then drafted legislation which resulted in the Glass Steagall Act. The importance of Congress was seen in the 1980s during the savings and loan crisis when William Black exposed corruption and a culture of deceit and manipulation in the US banking system. I think this would resonate with many Members and with many people in Ireland. This informed the Federal Deposit Insurance Corporation, the FDIC Improvement Act and the Dodd-Frank Act which are key pieces of legislation.
The Oireachtas has not had the ability to build up a sufficiently large base of analysis and to use its understanding of the particular idiosyncrasies of Ireland and of our political, regulatory and banking cultures. I suggest it might help to strengthen the Bill further if this process were put in place in order that the relevant committee would have real investigative power to ensure the Bill not only reflects international best practice but also particular Irish idiosyncrasies. The various reports such as the Honohan, Wright and Nyberg reports have thrown some light on the problems, but only certain aspects of the problems, and these reports were also time restricted. The Nyberg report, in my view, was a grey wash, in that it blamed everyone and therefore no one was to blame. I suggest it cannot be used to deal specifically with what should be changed or safeguarded in legislation.
The famous US Justice Louis Brandeis said that sunshine is the best disinfectant. The power of the FDIC in the United States is the power of the transparency of its actions and its structure. The FDIC website describes in detail the procedures it follows in the winding-up of banks and how depositors are protected. This form of transparency within our process would not only make for a better process, it would give the public and legislators some much needed faith in the process.
There are concerns about the independence of the Central Bank and the ECB commented that it would like to see a specific provision in the Bill. I regard this Bill as a good beginning and some of the comments from the ECB would add to the power of the Bill. Some deeper parliamentary investigation and input to tailor it specifically to Ireland would be very welcome.
Deputy Spring clearly spoke with first-hand experience of some of the problems in the culture of banking regulation. The culture of regulation needs to be improved in five areas which are the political culture, the regulatory culture, the culture of the Central Bank, the culture of the Department of Finance and the culture of the banks.
As regards the political culture, we all know the former Taoiseach played golf with the former chief executive of one of the biggest offenders, Anglo Irish Bank. The chair of the incumbent political party had become the head of the banking federation and there had been an extraordinary capture of the Government by the interested parties. I have no doubt this is something the Minister and his colleagues watched from this side of the House for many years. I hope this will all be put to bed.
As regards the regulatory culture, I refer to Deputy Ross's book, The Bankers, which gives an extraordinary account of a dinner which took place in November 2008. The dinner was hosted by the senior management of the banks for the recently retired regulator and attended by the new regulator. This is a small number of weeks after the banks convinced — I say hoodwinked — the Government into providing a guarantee bigger than our GDP. In a restaurant not far from this Chamber, the bankers were entertaining the regulators. I have worked in the United States and in the United Kingdom and in those countries the regulator would be fired immediately if he or she were to have dinner with senior bankers. This is an extraordinary situation and I hope we will not see this happen again.
The issues to do with the Central Bank include the tradition whereby the Secretary General of the Department of Finance subsequently became the Governor of the Central Bank. Being Secretary General of the Department of Finance does not equip someone to become Governor of the Central Bank and it was an extraordinary and ultimately damaging tradition. A second issue for the Central Bank is one of expertise. The Wright report stated that 39 of 542 staff of the bank were trained to masters degree or higher in economics, which is 7%. In Canada it is 60% and in the Netherlands it is 40%. While I do not know whether it is within the remit of the Minister, this issue needs to be addressed urgently. It would be great to see some serious up-skilling in order that we can at least get on par with places like Canada, which, of course, avoided the banking collapse in which we find ourselves.
Another issue is the culture of the Department of Finance itself. On this there is an issue of expertise. The late Dr. Garret FitzGerald cited that in 2009 the Department of Finance had only three members of staff with PhD qualifications and only one of these was working in macroeconomics. I have worked with public servants, as have most if not all Deputies in the House. My singular experience here and abroad is of people who want to do the very best and have a genuinely patriotic outlook. However, they also need the education and training. That may be a combination of providing programmes where people in the Department can be trained up and deployed accordingly, and hiring in more capability. Having one person with a PhD working on macroeconomics in 2009, if Dr. FitzGerald's assertion is correct, is extraordinary and deeply worrying. I hope something can be done about that.
Obviously the culture within the banks largely led to the situation in which we find ourselves. It has been spoken about and rehearsed many times. I am concerned that many of the senior teams are still in place. I know the Minister has told the House that it is his intention to rectify that. I reiterate my concern that much of the cultural legacy will remain until the senior teams are refreshed.
Most of them have been removed.
I encourage the Minister to continue with that process. I welcome the Bill and hope the Minister will take on the various suggestions I have made.
I wish to share time with Deputy Seán Kenny.
Is that agreed? Agreed.
I welcome the Bill. As Members will be aware, the Bill replaces the much criticised Credit Institutions (Stabilisation) Act passed in December. It is worth noting the amount of time the Government has spent undoing much of the emergency work and non-work of the previous Government. I commend the Minister for Finance on the work he has done in such a short period of time.
Clearly these proposals will allow the Central Bank to deal with lenders who fail or are likely to fail. The history lessons are there for all of us and it is important we continue to work towards putting in place a banking structure that will give confidence back to our people. The Governor of the Central Bank rather than the Minister will trigger this new regime. It is very important we allow the Central Bank to deal quickly and effectively when problems arise because this clearly has not happened in the past.
The Bill included measures in line with evolving EU principles on crisis resolution and in the light of discussions that will take place with external partners. We must continue to work very hard to co-ordinate our efforts with our European partners. As Deputy Spring correctly said, it is most opportune that we are here working on this Bill at this time when the Taoiseach is discussing our interest rate and other issues pertaining to the country. We all wish him the very best.
In addition to banks, the powers of the Bill will apply to building societies and credit unions. It is important to acknowledge that the credit union commission has been established. The credit unions are doing remarkable work and have done so throughout the banking crisis. The Bill provides for the establishment of a bridge bank to temporarily hold some of the institutions' assets and liabilities. The credit institutions resolution fund is to be established to provide a source of funding for the resolution of financial instability or to prevent the imminent threat of financial instability of an authorised credit institution.
It is crucial we continue to work towards a fairer sharing of the cost of restructuring Irish banks. We must work towards a more transparent assessment of the capital needs of Irish banks, and Irish bankers need to continue to shrink their balance sheets to reduce their excessive dependence on volatile non-deposit funding sources which has been the case to date. Most importantly we must continue to work to restore confidence in the Irish banking sector to get our banks lending to businesses, which we hope will flourish and consequently employ people who will pay taxes and thereby get the country back up and running. It is a rather simple economic model but it is a very clear path towards the country's recovery.
We need to rebuild a competitive, well-managed but also privately owned banking system. In that regard it is very welcome that for the first time in many years we are putting the Government back in charge of how our banking system is structured. We need to work to promote new leadership and management in our banks. As has been said, we have many good people working within the banking sector but the leadership they received has let down many people in the State, both those working for the banks and people who deal with the banks in many key areas. Banks should squeeze their costs before their customers. Even of late we have seen far too many examples of senior people in the banking sector continue to take perks that should be discontinued in the current climate. Once they are made stronger, we must work as a matter of urgency to return the viable banks into private ownership which will foster greater competition in the marketplace. Great work is already being done in shutting down dead banks.
I commend the Minister on the legislation and wish him the best of luck in the future. As has been said on many occasions, the Government is at the start of a journey. In its first term since its election a few months ago it has done some very good work. I join Deputy Spring in wishing everyone a good summer. I do not need to sell my county of Cork as hard as the Kerry people have to sell theirs, but they are of course all welcome and we might see Deputy Spring and others from his county in September again in Croke Park.
We will sort them out then.
I welcome today's indications of very good news which will provide greater sustainability for the Irish economy. The Central Bank and Credit Institutions (Resolution) Bill 2011 is one of the requirements of the EU and IMF programme of financial support for Ireland. The measures in the Bill include what is commonly known as a special resolution regime, SRR. This new legislation originates under the EU and IMF bailout that was negotiated under the previous Fianna Fáil and Green Party Government. While in some ways it is a case of locking the stable door after the horse has bolted, a special resolution regime is an important part of any modern economy's financial regulation. That is one reason the Government is proceeding with it. It is telling that in its 14 years of government, Fianna Fáil never legislated for one. Another reason is that, under the memorandum of understanding agreed by the Fianna Fáil-led Government with the EU-IMF, we must proceed with legislation.
A special resolution regime, SRR, is intended to allow for a more orderly resolution of failing banks and other financial institutions, including building societies and credit unions. In particular, credit unions have been hamstrung by the bailout regulations. The normal winding up procedures available to companies under the Companies Acts are inadequate when it comes to institutions of this kind. In the US where more than 140 banks have failed in the past year or so, the equivalent legislation has been much utilised. Britain hurriedly enacted measures in 2009 in the wake of the Northern Rock failure. Similar regimes are also being created at EU level.
The Bill is intended to come into effect when the interim measures in the Credit Institutions (Stabilisation) Act 2010, the CIS Act, lapse at the end of 2012. When enacted, it will give the Central Bank powers to deal with financial institutions that are failing or likely to fail. The main powers are, first, to establish so-called bridge banks to hold the assets and liabilities of failing institutions temporarily pending transfer to a third party; second, to make a transfer order to a third party in respect of a failing institution, subject to prior notice to the institution concerned and approval of the order by the High Court. If there is an imminent threat to the financial stability of the institution or of the financial system in the State, there is no obligation to notify the institution in advance. The third power is to make a special management order whereby the Central Bank would take over the effective management of an institution that is failing. Subject to an imminent threat to financial stability, any such order would be on prior notice to the financial institution concerned and subject to the approval of the High Court.
Under the legislation, the Minister for Finance has powers to make financial incentives, such as loans or guarantees, available to any proposed acquirer of a financial institution. The Minister will also have powers in respect of the winding up of a financial institution, for example, the requirement that nobody can appoint a liquidator without the Central Bank's approval. The Minister will have the power to direct a financial institution to prepare and implement a recovery plan, together with powers to prepare a resolution plan for that institution.
This legislation serves to reinforce Ireland's commitment to resolve and restore the confidence of the public and greater transparency in the financial services sector. This is to be achieved through the process of open and transparent regulation, an effective and efficient resolution regime for failing institutions and the active process of deleveraging and downsizing some of the existing institutions in an orderly and transparent manner. The proposed changes and the commitment of the Central Bank and the Government to implement them will assist in remedying some of the disparities in the system and, with renewed confidence, lead the institutions into the next decade.
I have criticised the Fianna Fáil-Green Party Government previously and will do so again, because it must be repeated that the former Government left the Irish people an awful legacy. The current Administration is determined to leave Ireland and her people a better legacy by getting on with fulfilling the EU-IMF obligations, such as the legislation before the House, to which the former Administration signed up the State.
I thank the Deputies who participated in this Second Stage debate for their thoughtful contributions on what is undoubtedly an important piece of legislation. Many expressed a welcome for the provisions of the Bill, recognising the importance of the State having available to it a comprehensive toolkit to address financial institutions that are in distress.
Turning to some of the specific issues raised, many Deputies referred to the situation in Greece and drew comparisons with Ireland. There are significant differences between the positions in Ireland and in other peripheral economies. Ireland is a dynamic economy with a strong medium-term growth potential. Irish goods, services and Irish labour and capital markets are flexible, a fact borne out by various OECD studies. As one of the most open economies in the world, Ireland is well positioned to achieve export-led growth even when domestic demand is contracting. The current account of the balance of payments in Ireland moved into surplus last year. This means that Ireland as a whole is no longer increasing its external liabilities and is in surplus.
The roots of our problems are also different. Ireland's loss of market access is mainly related to the fiscal costs associated with supporting the banking sector. Other peripheral economies' difficulties are more of a structural nature, such as inbuilt rigidities and weak competitiveness, that will take longer to rectify. Like Ireland, however, these countries are taking and continue to take determined steps to resolve the difficulties they face. We have the features of a north European-type economy and not a Mediterranean one. Our model is entirely different from that found in the other countries experiencing difficulties.
A number of Deputies raised the related issues of the Government's proposed approach to burden sharing with senior bondholders in the banks and the fact that the Bill does not provide for powers to impose losses on senior bondholders. The Government's position on imposing losses on senior bondholders has not changed from the position I set out in my statement on banking on 31 March. All senior bondholders in the pillar banks of AIB-EBS and Bank of Ireland and in Irish Life & Permanent, whether guaranteed or unguaranteed, will be repaid in full. As I stated in March and a number of times since, this is essential to maintain the market reputation of these institutions and to ensure their return to market funding in due course.
However, I also indicated that the position regarding the bondholders in Anglo Irish Bank and Irish Nationwide Building Society, INBS, institutions in different circumstances from the remainder of the banking system, would be considered following the completion of the independent review of the capital requirements of both banks last month. While the Central Bank has concluded that no additional capital is required for them, this does not remove the onus on the Government to consider all options to reduce the cost to the taxpayer of resolving these institutions. Therefore, in the autumn I will raise the issue of burden sharing to allow for the imposition of losses on unguaranteed and unsecured senior bondholders in Anglo Irish Bank and INBS with the IMF and EU authorities.
A number of Deputies pointed out that the Bill does not contain any provision for burden sharing with holders of subordinated debt, as is the case in the CIS Act enacted at the end of last year. It is important to understand that the Bill is intended to put a mainstream conventional resolution regime in place consistent with international good practice where it exists. The covered or guaranteed banks that are being restructured are not within the scope of the Bill at this time. Rather, the Bill will apply to credit institutions that have not been the beneficiaries of major public support during the past two and half years or so.
The burden sharing powers under the CIS Act provide the legal basis for actions under way for these institutions as part of the restructuring of the banking system. As Deputies are aware, the CIS Act already provides for the making of subordinated liabilities orders to allow for burden sharing with subordinated bondholders and I have already used this power in respect of AIB. The banks being restructured have already received significant State support in advance of any contribution from bondholders and the Government is seeking to reduce further the cost of recapitalisation of these banks through imposing appropriate losses on subordinated bondholders.
As Deputies will be aware, liability management exercises, LMEs, are under way in Bank of Ireland and Irish Life & Permanent. Ensuring that holders of junior debt in the banks make a significant contribution to the overall cost of recapitalising the banks following the results of the prudential capital assessment review, PCAR, exercise is a key policy objective supported by the external authorities. Once the LMEs are complete, the authorities will examine the further steps required to support this objective, including by utilising the legal powers available to the Minister under the CIS Act.
The resolution Bill is forward looking with a wider scope than the stabilisation Act. It provides the Central Bank with tools for the resolution of institutions and is focussed on ensuring that the resolution, rather than stabilisation, of an institution does not impact of the stability of the financial system.
The issue of burden sharing with senior creditors, or "bail-in mechanisms" as they are generally referred to, remains under discussion internationally but as yet no clear consensus has emerged. Any pre-emptive action on our part by including such tools in our "steady-state" special resolution regime in advance of agreement at EU and international level could have significant negative consequences in particular for the international banks within the scope of this Bill; for example, it could lead to ratings downgrades for these banks. It also would be expected to generate negative sentiment among market participants towards Ireland owing to the perceived uncertainty regarding our commitment to an agreed international methodology on bail-in mechanisms.
A number of Deputies mentioned the resolution fund to be established under the Bill. A clear lesson from the crisis has been the importance of ensuring that there are mechanisms in place to ensure the financial sector makes an appropriate contribution to the cost of resolving institutions in difficulties. The introduction of a bank levy is one of the objectives set out in the programme for Government and this Bill will provide for the introduction of such a levy, through the establishment of a resolution fund, based on contributions from authorised credit institutions. However, it is important that the timing of the imposition of this cost on the financial sector, and its potential impact on the financial position of authorised credit institutions is considered carefully and not rushed into, particularly given the difficulties still facing the sector overall. For that reason, and to allow for an appropriate flexibility in the level of contributions individual institutions are required to make to the fund, the Bill provides that this detail be set out in regulations.
I will be requesting the Central Bank of Ireland to undertake an analysis of the appropriate calibration of the banks' contribution in relation to base and rate and for its possible phased introduction having regard to the financial position of the Irish domestic banks in particular and the plans outlined in my statement of 31 March on the future structure of the sector.
The fund may be used to finance the cost of the resolution tools provided for in the Bill including providing capital for a bridge bank and reimbursing the Minister for any financial incentives provided for the transfer of assets and liabilities. Of course it will take time to develop a fund which holds a significant level of funds while ensuring that the level of contribution for the banks is commercially sustainable and in line with international norms. To take account of this lag, the legislation provides that the Minister may also make contributions to the fund; this would allow the fund to be used even if industry contributions do not meet the requirements of a particular resolution. However, the legislation provides that the Minister will be reimbursed for any such contributions to the fund. It is very important to stress that ultimately it will be the industry rather than taxpayers that will bear the cost of resolutions in the future.
Deputy Pringle had concerns regarding the intervention conditions. The intervention conditions are a cornerstone of the approach to resolution set out in this Bill; transfer orders and special management orders can be made only where certain conditions are met. These conditions include a requirement that the Central Bank is satisfied that the institution is failing or is likely to fail to meet a regulatory requirement or a requirement or condition of its licence or authorisation. The intervention conditions in the Bill take into account work underway in the EU and the resolution regimes that have been put in place in other member states. In particular it is generally recognised that there is a balance to be struck between "hard triggers" which require action to be taken and "soft triggers" which allow for some flexibility.
The intervention conditions in the Bill look to achieve this balance while allowing action to be taken by the Central Bank at a sufficiently early stage. It is a major priority to ensure the Governor is persuaded that the use of the resolution powers is in the public interest rather than winding up of an institution.
I have noted the concerns of a number of Deputies regarding the need to take into account the special role of credit unions within the community and the difference between them and the commercial banks. The Programme for Government 2011-2016 recognises the importance of credit unions as a volunteer movement and that strong credit unions with a community focus and volunteer ethos should remain a central part of the Irish financial landscape.
The Government has established a commission on credit unions which has begun its work. Having regard to the particular nature of the credit union sector, the commission will review the future of the credit union movement and make recommendations to Government on the most effective regulatory structure for credit unions, taking into account their traditional role. This is to be achieved while paying due regard to the need to fully protect depositors' savings and financial stability.
The Government has also included in the terms of reference for the commission a requirement to make recommendations in respect of any immediate policy proposals on foot of our work under the EU-IMF programme of support for Ireland. Ireland's commitments under the programme include undertaking stress tests on credit unions and carrying out a review of credit union loan books. This exercise has been completed by the Central Bank of Ireland. Under the programme, I have also prepared a strategy to underpin the solvency and viability of any undercapitalised credit unions and my officials are in further discussions on the detailed aspects of implementing this strategy.
By the end of 2011, and in line with the EU-IMF programme of support for Ireland, the Government will submit legislation to the Houses of the Oireachtas to assist the credit unions with a strengthened regulatory framework including more effective governance and regulatory requirements. The commission on credit unions will provide me with an interim report at the end of September which will contain proposals in this regard. The Government has requested the commission to submit a final report by the end of March 2012.
Deputy McGrath made reference to businesses being forced to convert an overdraft facility into a term loan and Deputy Halligan referred to the pillar banks not meeting businesses' need for credit. These issues can both be referred to the Credit Review Office. Under their review regime, "refusal" includes a decision by a participating institution to reduce or withdraw an existing credit facility as well as an outright refusal. The Credit Review Office will, on application from the borrower, carry out an independent and impartial review of a bank's decision to refuse or reduce credit. I would strongly advise anyone who has unsuccessfully appealed through the bank's own internal appeals process to seek a review by the Credit Review Office.
Deputy Ross raised issues about a lack of change in the prevailing culture and board renewal at the covered institutions. The figures quoted by the Deputy on the number of pre-crisis directors remaining at Bank of Ireland are not wholly accurate. Following its recent AGM, where the resignation of several directors took place, four pre-crisis directors are still in post, although higher figures were mentioned by the Deputy. These, along with all other directors, at all of the remaining covered institutions, irrespective of date of appointment who intend to be in office on 1 January 2012, will be subject, as announced by the Central Bank of Ireland, to assessment against the new fitness and probity standards for such appointments which the CBI envisages being implemented by 1 September 2011.
Subsequent to the July AGM of AIB and consequent on the recent mergers involving EBS and INBS only ten pre-crisis directors will still be in post — a reduction of almost 90%. The Government has sought board renewal plans from the institutions and has committed to establishing a pool of qualified candidates who would be suitable for appointments to bank boards subject to appropriate regulatory approval. Work is ongoing in this matter and the Deputy can expect new and fresh appointments in coming months to ensure the boards are fit for purpose to play their vital role in the necessary restructuring of the banking sector.
The Government programme commits the Government to introducing a comprehensive special resolution regime for dealing with bank insolvencies and a bank levy. The Central Bank and Credit Institutions (Resolution) (No.2) Bill provides a basis for achieving these important commitments in the Government's programme on a SRR and bank levy to ensure that the financial industry contributes to the cost of any resolution measures in the future.
I propose to bring forward a number of amendments to the Bill on Committee Stage to enhance the Bill's provisions in the light of further deliberations since its publication, including discussion with the EU and IMF authorities. I look forward to a detailed engagement with Deputies on Committee Stage and thank Deputies again for their contributions to the debate on Second Stage. I have heard with interest the contributions of Deputies. Deputy Maureen O'Sullivan and Deputy Dara Murphy spoke about the importance of credit unions, and I dealt with that subject in my reply. Deputy O'Sullivan also mentioned the difficulties that small and medium-sized enterprises are having in accessing credit. As I pointed out, the Credit Review Office takes appeals. Just some days ago, I raised the limit for its consideration from €250,000 to €500,000 because it was brought to my attention that many of the small firms in difficulty found themselves above the ceiling of €250,000. The main difficulty arises for firms with working capital requirements of between €250,000 and €500,000 so that is now within the remit of the Credit Review Office and appeals can be made there.
There is a lot of anecdotal evidence about credit, but some of it does not seem to be accurate. In the period of office of the credit review officer, only 83 appeals were made to that office by persons with credit requirements under €250,000. We will see where it goes when the new limit is put in place. Frequently, worse cases come to our attention as public representatives. There seem to be as many problems with the lack of demand for credit as with the lack of credit supply in the economy at the moment.
Deputy Arthur Spring made a good analysis of the situation, as did Deputy Seán Kenny, in referring to events in Brussels today. I hope everything works out well, but such negotiations are always difficult. Unanimity is required, so what is put forward in the first proposal is not necessarily what comes out at the end. I hope everything will go well. We have brought about a situation where the main policy instruments we require are up for discussion but, as I said, it requires unanimity to get things over the line. We will know the situation later tonight, I presume.
Deputy Stephen Donnelly had a strong analytical approach to the Bill as well and I agree with many of the points he made. I will be open to considering amendments to improve the Bill. It is the kind of legislation that should be constructed by Members on all sides of the House before Final Stage is reached. It is an evolving debate and Committee Stage will take place in the next session. I intend bringing forward some amendments on the basis of the debate that has already taken place. We will look on their merits at any amendments Deputies may wish to table.
I thank all the Deputies who contributed to the debate. As Deputy Spring already said, I hope Deputies will have a good break. It has been a long year for anyone who started campaigning well before the election, worked their way through the election and then on to the first session of the new Dáil. I think a break will be welcomed by everybody.
It is now time to put the question: "That the Bill be now read a Second Time." Is that agreed?
Not agreed.
Will the Deputies claiming a division please rise?
Deputies Richard Boyd Barrett, Joan Collins, Clare Daly, Joe Higgins, Catherine Murphy, Finian McGrath and Mick Wallace rose.
As fewer than ten Members have risen I declare the question carried. The names of the Deputies dissenting will be recorded in the Journal of the Proceedings of the Dáil.
Question declared carried.