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Dáil Éireann díospóireacht -
Thursday, 10 Nov 2016

Vol. 928 No. 2

Other Questions

Credit Union Services

Pearse Doherty

Ceist:

6. Deputy Pearse Doherty asked the Minister for Finance if he supports the proposal that credit union movement should be empowered to offer debit card facilities to its members if it so chooses; and if he will make a statement on the matter. [34029/16]

We are well aware of the standard reply that credit unions are allowed to seek permission to offer debit card services but they need to jump through many hoops to get that permission. Having engaged with the credit union movement I have come to the conclusion that the bar is very purposely set at a height to prevent credit unions from being able to deliver debit card services. I ask the Minister to make a statement on that matter.

My role as Minister for Finance is to ensure that the legal framework for credit unions is appropriate for the effective operation and supervision of credit unions. The Registrar of Credit Unions at the Central Bank of Ireland is the independent regulator for credit unions. Within her independent regulatory discretion, the Registrar acts to support the prudential soundness of individual credit unions, to maintain sector stability and to protect the savings of credit union members.

The  Credit Union Act 1997 Act and related statutory instruments set out the services that a credit union may provide to its members. Where a credit union wishes to provide services to its members in addition to the services that are provided for under the 1997 Act, an application may be made to the Central Bank for approval to provide such additional services in accordance with the provisions set out in sections 48 to 52 of the 1997 Act.

I have been informed by the Central Bank that it is supportive of credit unions developing additional services and it has indicated to credit unions that where they are considering offering debit card services to their members, they should, in the first instance, contact the Registry of Credit Unions to inform it of any such proposals. Furthermore, in respect of debit cards, the Central Bank states that it has been clear in its engagement with credit unions and other stakeholders who are seeking to offer this service that it must be supported by the appropriate payment account service. Consequently, using the additional services framework in sections 48 to 52 of the 1997 Act, the Central Bank has defined and described a Member Personal Current Account Service, MPCAS. This service, which was recently approved for six applicant credit unions, provides for credit unions to offer debit cards, overdrafts and a full range of payment services within an appropriate risk framework.

The Central Bank will publish details of MPCAS and the approval process, along with details of the application requirements and related guidance, over the coming weeks.

Additional information not given on the floor of the House.

The Central Bank expects to hear from eligible credit unions wishing to apply for this additional service over the coming months.  Initially, credit unions that have close to or in excess of €75 million in total assets are eligible to apply.  There are about 65 credit unions in this cohort which collectively have €8 billion in assets. Depending on their success in collaborating to implement a viable business, it is possible to envisage smaller credit unions being able to offer the service in time. This approval provides for debit card provision amongst other key features. 

MPCAS provides for shared service facilities, which approved credit unions will use to develop and implement services in a standardised way from both a technological and operational perspective. This represents a significant and positive development for many credit unions that wish to provide current account services and payment instruments such as debit cards to their members.  The Government recognises the important role of credit unions as a volunteer co-operative movement in this country. However, the Government's priorities remain the protection of members' savings, the financial stability of credit unions and the sector overall and we are determined to support a strengthened and growing credit union movement.

I am a firm believer in the regulation of financial services in an appropriate manner but there is a balance to be struck between our role as legislators, setting the laws and the boundaries for the regulator and as representatives of the industry and consumers. I believe, from the representations I have received from credit unions, that they are capable and ready, with some preparation, to move to a position where they can offer their members debit card services and that we, as Deputies, should support that.

The programme for Government specifically commits to credit unions moving towards electronic and online services, including the roll-out of debit cards and enhanced online banking services. We know that 170 credit unions are already processing Single Euro Payments Area, SEPA, payments on behalf of their members. There is now a demand from members for debit card services. Credit unions need to continue to move with the times.

The crux of the issue is that the Central Bank has taken a negative view and despite two years of engagement with the credit unions, is blocking them from providing this service. What can we do, collectively, to bring this about and to fulfil the commitments in the programme for Government?

I do not agree that the Central Bank is blocking the credit unions or preventing them from providing additional services. There is a procedure laid down in law for the credit unions to apply to offer such services. Already, the Central Bank has given approval to six applicant credit unions for the provision of debit cards, overdrafts and a full range of payment services.

The Central Bank will publish details of the approval process, along with details of the application requirements and related guidance, over the coming weeks. The Bank expects to hear from eligible credit unions wishing to apply for this additional service over the coming months.  Initially, credit unions that have close to or in excess of €75 million in total assets are eligible to apply.  There are about 65 credit unions in this cohort which collectively have €8 billion in assets. Depending on their success in collaborating to implement a viable business, it is possible to envisage smaller credit unions being able to offer the service in time. This approval provides for debit card provision among other key features. 

Six credit unions have been approved already and a further 65 credit unions have an asset base which the Central Bank believes would make them eligible. Those credit unions will be encouraged to apply in the next few months. The smaller credit unions will be considered on their merits.

The industry has a different view of the position of the Central Bank and the Regulator on this issue. Credit unions have been frustrated over the last number of years. Indeed, the Central Bank stepped in and stopped a particular credit union from providing debit card services to its members.

We can move forward in a number of different ways. First, we can continue with the back and forth between the credit unions and the Regulator on the issue of debit cards but to date, that has not delivered the type of result that was expected. Second, we can look for a political understanding that all sides wish to prioritise this issue, get down to brass tacks and put in place a forum at which both sides could put their case - accepting that the Regulator has a duty to safeguard the sector - and reach an agreement. Third, we can revisit the legislation. There is scope to revisit the legislation to determine whether the right of credit unions to service their members with debit cards should be an exempted provision, as other services are.

There is no problem with the legislation or with the regulatory authorities in the Central Bank. The Regulator of Credit Unions has provided information to the effect that six credit unions have already been approved for debit cards. Furthermore, 65 others are deemed by the Central Bank, on an overview, to have a sufficient asset base to apply in the next few months to provide debit card facilities. Provision will be made for the smaller credit unions in time.

The Regulator has to be prudent at the end of the day. The primary concern must be to protect the deposits of credit union members. There have been a number of unfortunate events, most recently in north Dublin, relating to credit unions over the years with which Deputy Doherty will be very familiar.

Banking Sector

Eamon Ryan

Ceist:

7. Deputy Eamon Ryan asked the Minister for Finance the status of the investigation of the German Sparkassen model for the development of local public banks that operate regionally, as outlined on page 48 of the programme for a partnership Government. [34056/16]

I am aware that the Department of Arts, Heritage, Regional, Rural and Gaeltacht Affairs has the lead responsibility for investigating how a public banking model, the Sparkassen model, might be set out here but am keen to hear if the Department of Finance has played any role in this so far. What will be the Department of Finance's input into the roll-out of such a model? The Sparkassen model concentrates on SME lending, particularly at a regional level, where deposits are kept within a regional area. I am keen to know what, if any, role the Department of Finance will play in this investigation.

I thank the Deputy for his question.

The programme for Government contains a commitment to investigate the German Sparkassen model for the development of local public banks that operate within well-defined regions. The Department of Arts, Heritage, Regional, Rural and Gaeltacht Affairs is the lead Department in respect of this commitment and my Department will support it. Previously in 2015, the Savings Banks Foundation for International Cooperation, SBFIC, with the support of the Public Banking Forum of Ireland, submitted a proposal to the Department of Finance regarding the development of a local public banking system in Ireland. The proposal was considered in detail by officials in my Department and there was engagement with the SBFIC, the Public Banking Forum of Ireland and Irish Rural Link on the issue.

It was not clear, at that time, how the local public banks proposal could create a distinct product offering and avoid replicating the significant regional and national supports that had already been put in place by the Government. Government initiatives to support the financing needs of SMEs include the Strategic Banking Corporation of Ireland, SBCI, the supporting SMEs online tool, the credit guarantee scheme, the microenterprise loan fund scheme, local enterprise offices and the Credit Review Office.  The success of these policies can be seen in increases in new lending from bank and non-bank sources, the number of new credit providers active in the market and the reduction in average interest rates for SMEs.  

Regarding the current programme for Government commitment, I understand that the Department of Arts, Heritage, Regional, Rural and Gaeltacht Affairs has been in contact with relevant stakeholders and has now received details of a proposal on local public banking. I understand that the Department now intends to work with other Departments and stakeholders to examine the feasibility of developing this further. My Department is, of course, available to assist the Department of Arts, Heritage, Regional, Rural and Gaeltacht Affairs as it investigates this matter.

I thank the Minister for his response. Most people in small businesses around the country might dispute the argument that we have enough banking capacity and lending effectiveness in the small and medium-sized business sector. There is a wider strategic issue, namely, that we have contracted our main clearing banks. We do not want to go back and expand their size because one of the difficulties in the banking crisis was the fact that the key banks were over-sized. From the Minister's response, it seems that the Department of Finance thinks that "as is" is a sufficient amount of public banking.

We heard Deputy Pearse Doherty talk about credit unions and how they might fit in. I believe they could have a role working with a regional public banking model because we need banks with real expertise in business lending, which is what this German public banking model brings. The Department of Arts, Heritage, Regional, Rural and Gaeltacht Affairs is going off in one direction but it seems from the Minister's response that the Department of Finance does not see the potential for such a model. Does this investigation have real depth or possibilities or is it being done as an exercise without the potential to become a reality?

The Department of Arts, Heritage, Regional, Rural and Gaeltacht Affairs is taking the lead role in this in accordance with the commitment in the programme for Government. What I was saying was that it is not apparent to the Department of Finance what particular niche is being addressed that is not already covered by one of the other lending initiatives I have described. It has gone from a situation in 2011 and 2012 when it was very difficult for SMEs to get loans or refinancing of any sort to one where there is quite a large choice tailored to meet individual needs for SMEs. The level of contact I have with SMEs recently does not indicate that there is a shortage of credit available on the market but I do accept that certain products must be tailored to meet particular needs and the products for small businesses in rural communities are probably different from those for medium-sized industries in cities. We are open to that but it is the Department of Arts, Heritage, Regional, Rural and Gaeltacht Affairs that is taking the lead role.

Credit unions are very well placed and should be supported in lending small residential, retail and commercial loans while the commercial banks, from my experience, are looking for larger loan facilities in the business sector and are not well tailored or equipped for SME business loans. Yes, we have the strategic investment mechanisms the Minister put in place but they are not working on a local level. The advantage of the public banking model is that it provides a mechanism whereby local deposits are recycled in the local economy which we badly need in rural Ireland so that not all development takes place in our cities. As is the case in Germany, the public banking model brings that real experience in business lending into that gap between what the commercial banks are good at in commercial lending and what the credit unions or other local facilities are not skilled enough to do. There is a gap. Only the study will bring that out but my concern is that at the outset, the Department of Finance, having looked at it, do not see the same gap in the market. That is a concern I have.

I have pretty much the exact same question - Question No. 14 - which is why I wanted to take the opportunity to comment. I do not really understand why the Department of Finance is dragging its feet so much. I know that under the programme for Government, it has been transferred from the Department of Finance to the Department of Arts, Heritage, Regional, Rural and Gaeltacht Affairs. The Sparkasse Institute for International Cooperation and Development has a long record in this respect and Germany in particular, as the Minister referenced, has a large volume of SME development that is very much aided by this kind of local banking. The credit unions have already been referenced. We also have a number of regional development agencies as well as the post offices. In the context of providing a banking service in rural areas where the banks are no longer as visible or plentiful as they once were, I suggest a pilot in an area like the midlands where this could be tested. I know it has been discussed in the meetings I have had with the Minister from time to time. Oversight of the pilot could be carried out by the Minister's officials but, as with the credit unions, there seems to be an extreme reluctance to be involved in banking services in rural or disadvantaged urban areas.

The only reluctance is to protect the assets of depositors in any banking system. We must be prudential. If we are to learn anything from the experience of the past eight years, it is that you do not take risks with other people's money. That is why the Central Bank is so rigorous in its regulator regime. I outlined six different initiatives that have been put in place over the past five years or so. The strongest one is probably the Strategic Banking Corporation of Ireland, which is specifically designed for SMEs. Some of the money provided there is coming from the German bank KfW, which has a lot of experience in funding SMEs. To the end of June 2016, the initiative lent €347 million and has provided funds to 8,619 SMEs, 5% of which are based outside Dublin so it is not true to say it is not reaching into the regions. At the other side of the scale, the microenterprise loan fund is administered by Microfinance Ireland and provides support in the form of loans of up to €25,000 and is available to start ups and newly established or growing micro-enterprises employing fewer than ten people. The point I am making is that I would encourage the Department of Arts, Heritage, Regional, Rural and Gaeltacht Affairs to continue with the good work it is doing. I will pass on the Deputy's suggestion that in order to speed up the initiative, a pilot scheme might be a reasonably good idea in some region of the country and we will see how it goes. However, it must be for a new niche and there has to be a new service being provided. There is no point in replicating what I have spoken about already.

Banking Sector

Paul Murphy

Ceist:

8. Deputy Paul Murphy asked the Minister for Finance if he is reconsidering the planned privatisation of the State's share in the banks in view of the recent fall in their respective share prices and if he will make a statement on the matter. [34039/16]

Is the Minister planning to reconsider the privatisation of the State's share in the banks in view of the significant decline in their share prices? For example, the State's 15% shareholding in Bank of Ireland has halved in value this year so on that basis will the Minister and Government agree to reconsider and not go ahead with privatisation?

As the Deputy is aware, the State has a shareholding of 99.9% in AIB, 14% in Bank of Ireland and just under 75% in Permanent TSB. These are valuable assets to the State and it is this Government's intention that the State will exit these investments in a measured and careful manner. That position has not changed. As I have indicated on a number of occasions, my primary objective in the disposal of these assets will be recovering the maximum amount of money for the Irish taxpayer.

As the Deputy notes, there have been substantial reductions in the value of European banking equities during the course of 2016. The weakness and volatility we have seen reflect market concerns around Brexit and a prolonged period of low and negative interest rates as well as uncertainty around the strength of global economic growth. Clearly, in order for us to proceed with the sale of any of our banking assets, we would need to be satisfied that the market is prepared to put a fair and reasonable value on the business bearing in mind its current performance, its future prospects and the outlook for the Irish economy. Officials in my Department continue to monitor market conditions and the performance of banking equities on an ongoing basis. When I deem conditions conducive to recovering value for the Irish taxpayer, I will move to continue the disposal of these assets in a manner consistent with the plan set out in our programme for a partnership Government.

I have indicated in the past that an IPO is likely to be the optimal route to recouping value from our investment in AIB. At the beginning of this year, officials in my Department appointed an independent financial adviser to assist with analysis and exit planning and much of the initial preparation has now been completed. The reorganisation of the bank's capital at the end of 2015 which allowed for the return of €1.7 billion to the Exchequer and the maturing of the so-called "CoCo instrument" in July of this year, which returned a further €1.6 billion, has now given AIB a simplified, market-facing balance sheet.

The bank's CEO also indicated recently that much of the internal preparation that would be required in advance of launching an IPO process has now been completed.

Additional information not given on the floor of the House

I welcome the bank's continued strong performance, demonstrating sustainable profitability and strong capital generation over a number of consecutive reporting periods. I would also note comments made recently by the bank's chairman, indicating that AIB may be approaching a time when the board will be in a position to consider the payment of a prudent dividend, in consultation with the regulator, which would contribute to the bank's strong investment case.

Bank of Ireland returned to profitability in 2014 and has built on this in both 2015 and 2016. The bank has made significant progress in reducing NPLs and growing new business. PTSB has also significantly de-risked its balance sheet under the intensive oversight of various authorities since 2011 through deleveraging, an improved funding profile and increased capital levels. It has made good progress in reducing arrears and returned to underlying profitability in 2015 for the first time since 2007. Financial results in 2016 to date demonstrate that it is both profitable and capital-generative.

Given the improved state of the national accounts, progress made in reducing our national debt and positive market sentiment towards Ireland, we are not under any pressure to monetise our banking investments. As a result we have some flexibility around when we time our disposals in the market. With market conditions being weak at this juncture, we continue to monitor developments and make preparations with the aim of being ready to take advantage of suitable opportunities or market windows when they arise.

That answer basically confirms that we still plan to privatise and will do it at the right time. Obviously, I am against the privatisation and sell-off of these enormously important assets given the potential lever, if under public democratic control, they give in terms of the economy and people's living standards.

When does the Minister believe it will be the right time? Will it be soon or is it now being delayed? The Sunday Independent reported that the State valued its holding in AIB at €13.3 billion at the end of 2014, which has been reduced to €9 billion in June of this year. Is that accurate? Are the reports by Focus Ireland that AIB is planning to sell off €1.9 billion worth of buy-to-let properties that are in arrears to vulture funds in order to prepare for privatisation accurate? That would have the potential for thousands of tenants to be turfed out.

A message was being passed to me and I missed the middle part of the Deputy's intervention. He said something about €9 million or €9 billion.

The Sunday Independent reported that the State valued its holding in AIB at €13.3 billion at the end of 2014 and just €9 billion in June of this year. I also asked about the €1.9 billion worth of buy-to-let properties.

In common with equity holdings in banks across Europe and in most parts of the world, the value of the State's holdings in the three banks I mentioned is less valuable than it was this time last year. That is just the way the market moved. What are we going to do? We will not do anything with Bank of Ireland at present. I have no plans for PTSB at present. I am asking AIB to continue the preparatory work. There will be no IPO in 2016, but I am holding open the possibility of an IPO some time in 2017, but that will depend on the advice I receive and on market conditions.

It is very difficult to put a value on AIB at the moment because with the State owning 99.9% there is not a real market in AIB shares. Anybody doing an independent valuation of AIB now would find it is worth less than it was worth some time ago, as is every other bank across Europe.

One consequence of this drive to privatisation could be the sell-off of buy-to-let property loans to vulture funds. Is it accurate that AIB is planning to sell off close to €2 billion worth of those? Could that result in thousands of tenants in buy-to-let properties being evicted as the vulture funds seek to take vacant possession for sale? While I want an answer to that question, the more fundamental point is that instead of privatising these banks - for example selling off AIB in the early part of 2017 at significantly less than what it would have been valued at a year or 18 months ago - we could have these banks in democratic public ownership. They could be used as a lever in the economy. They could be used to have write-downs for those who cannot pay their mortgages, and as a mechanism of developing a productive, green, socialist economy.

I do not have the specific information the Deputy references as having come from a newspaper report about the sale of a loan book involving buy-to-let properties. However, if the Deputy tables a question for written answer, I will get him the information. I do not have it in my brief today and I do not want to speak from memory on it.

Tax Code

Mick Wallace

Ceist:

9. Deputy Mick Wallace asked the Minister for Finance his views on the considerable tax exemptions that can be availed of by non-resident investors regarding dividend withholding tax; if this will minimise the effects of the tax following the introduction in the Finance Bill 2016 of a dividend withholding tax for non-resident investors in certain property investment funds; and if he will make a statement on the matter. [34049/16]

I ask the Minister to outline his views on the considerable tax exemptions that can be availed of by non-resident investors regarding dividend withholding tax. Given that he introduced a 20% withholding tax on dividends paid to foreign investors in certain property investment funds as a way to catch investors who pay no other tax in Ireland, surely this has been on the mind when they are able to avail of relief on the very same tax.

The primary purpose of dividend withholding tax, DWT, is to collect tax at source when Irish resident companies make taxable distributions to Irish residents. Some non-resident persons are exempt from DWT, including non-resident individuals who are resident in a country with which Ireland has a tax treaty and companies which are not resident in Ireland and which are resident in a country with which Ireland has a tax treaty, subject to certain other conditions.

The exemptions are not automatic and must be established by means of an appropriate declaration of entitlement to exemption completed by the applicant. It should be noted that if the exemptions from DWT were not available, any DWT deducted would have to be refunded. Deducting DWT in cases where there is no liability to Irish tax on the dividend income would result in an additional administrative burden for the recipient of the dividend and for Revenue and, ultimately, no net additional yield to the Exchequer.

The legislation in the Finance Bill provides for a new tax regime for Irish real estate funds, IREFs. Irish real estate funds are certain investment undertakings where 25% of the value of that undertaking is made up of Irish real estate assets. IREFs must deduct a 20% withholding tax on certain property distributions. This IREF withholding tax is not a dividend withholding tax and the tax exemptions which non-resident investors can rely on in relation to dividend withholding tax do not apply to IREF withholding tax. Details are contained in section 22 of the Finance Bill as published and will be subject to Committee Stage amendments this week, on Tuesday and Wednesday. My proposed Committee Stage amendment clarifies that, in respect of unit holders who hold more than 10% of the units in an IREF, income received from an IREF will be income from immovable property and, under Ireland's double-taxation agreements, Ireland retains primary taxing rights over that income.

The IREF withholding tax does not fall within the DWT regime which is set out in Part 6 of the Taxes Consolidation Act. The details on the new IREF tax regime will form part of a new stand-alone Chapter in Part 27 of the Taxes Consolidation Act. There is no overlap or interaction between the two regimes.

I struggled to hear all of the Minister's answer.

It has been confirmed to me that non-resident investors may seek relief from the newly enacted 20% withholding tax if they are resident in a county with which Ireland has a double-taxation agreement through section 172D of the Taxes Consolidation Act 1997. We have double-taxation agreements with 72 countries at the moment. I think the Minister went through the details of how it works with countries such as the US.

I may have misunderstood the Minister; has he tabled an amendment to the Finance Bill on the matter or is he saying it is not worth the Department's bother trying to do it differently? I would have thought it would be a good idea to completely remove the exemptions from dividend withholding tax for non-resident investors. Has the Minister addressed that in the Bill?

We are familiar with the conversation that has taken place in recent months about property investment funds. A section of the Finance Bill dealing with the issue is being debated in Committee this week and next week to deal with the issue. We published legislation back in September and people had a chance to use that as a consultation document and make comments on it. In addition, where section 110 was used for the legitimate reason for which it was introduced in the first place for securitisation purposes, if the securitisation fund has more than 25% of a property's valuation, then a withholding tax will apply to a distribution. However, there is no crossover between that provision and the dividend withholding tax. Therefore the exemptions available under the dividend withholding tax do not apply. However, we are speaking in a bit of a vacuum because I have filed a new section incorporating a significant number of amendments to the Finance Bill on Committee Stage and it has not yet been discussed. Where it lands is a matter for the House and for the committee in the first instance.

I have tabled a few amendments on the section and I will attend the committee when section 22 comes up for discussion.

With regard to REITs, there is also a withholding tax of 20% on dividends paid to foreign investors and, again, the relief is available. I see that the Minister informed the European Parliament committee hearing on Tuesday that he had been informed by the EU Commissioner for Competition that there were no further pending State aid cases against Ireland. I find this confusing because I wrote to the EU Commissioner for Competition regarding the exemptions for non-resident investors in Irish REITs and whether they breach EU state aid rules. The Commissioner for Competition confirmed to me, on 21 October, that the Irish tax regime for REITs is under assessment by the services of the Directorate General for Competition. Perhaps the Minister for Finance will clarify if I am right in thinking that the builders and developers' challenge to NAMA being allowed to build 20,000 houses is because it might amount to State aid, or has that gone off the radar?

I am aware that there is some challenge, initiated by developers, against the proposal and the policy of the Government that NAMA would build 20,000 houses to help with the supply shortages of residences, particularly in Dublin. I do not have any idea how that case is proceeding.

With regard to Deputy Wallace's query on REITs, where relevant payments are made to non-resident investors, the non-resident investors may also be able to seek relief from the dividend withholding tax if they are resident in a country with which Ireland has a double taxation agreement. That is a standard feature of double tax treaties and is based on the OECD model tax convention. I am sure Deputy Wallace is familiar with the notion that one does not pay tax twice in different jurisdictions on the same profit. It is paid once and where there are double taxation agreements it is paid in the country in which the person is tax resident. If people pay in the other country then they get a credit against their tax liability in their country of residence.

Has the Minister looked at the Dutch assessment of the OECD-----

Maybe the Deputy could have that conversation afterwards as we have to move on.

Fiscal Policy

Pearse Doherty

Ceist:

10. Deputy Pearse Doherty asked the Minister for Finance his plans to review the fiscal space for the coming years in view of currency exchange rate changes and the economic impact of Brexit. [34032/16]

My question is about the Minister's plans to review the fiscal space for the coming years in view of the currency exchange rate that was used in the budget documents and also given the economic impact of Brexit. We have seen in the tables on budget day that there was €1 billion of cumulative fiscal space wiped off between 2017 and 2021. We also hear that quite a large portion of the net fiscal space for next year, €1.2 billion, has already been used up, leaving only €530 million net of fiscal space available. Perhaps the Minister could indicate when this is subject to a further review.

As the Deputy is aware, fiscal space estimates are calculated using a set of complex and continually evolving macroeconomic and fiscal projections. These estimates are reviewed and published bi-annually in the summer economic statement in the second quarter and the budget in October of each year.

Budget 2017, which I presented last month, included, along with the 2017 budget figures, indicative estimates for the fiscal space for the years 2018 to 2021. These are consistent with the fiscal and economic outlook published with the budget, which incorporated the impact of near-term uncertainty arising from the UK decision.   This outlook noted that risks are firmly tilted to the downside. Prominent among the risks outlined were a further depreciation of sterling beyond what was considered, and the possibility of a "hard" Brexit.  

At this stage it remains unclear what arrangements will be agreed between the EU and the UK regarding its departure. As the Deputy is aware, a joint ESRI-Department of Finance paper published on Monday sets out the potential macroeconomic and fiscal impacts of the UK's departure under three scenarios and finds that the impact on Ireland's macro-fiscal headline aggregates will be undoubtedly negative over the medium to long-term. By extension, to the extent that growth is weaker than the central budget scenario, this is likely to have a negative impact on available fiscal space from the time of the UK's departure which now looks likely to be 2019 at the earliest.

Once the timing and exact nature of the UK's departure arrangements and their likely impacts on the Irish economy and public finances become clearer, the detailed components necessary to update these calculations will also be clearer. However, this will not be for some time yet.  I do not view it as either reasonable or prudent to provide amended estimates of the fiscal space on the basis of each new publication. It is therefore my intention to continue to update the fiscal space estimates twice a year with the summer economic statement and the budget.

The figures we were working on were predicated on a net fiscal space of €1.2 billion next year. We now know that €172 million of that has already been used up as a result of the tax carryover and €0.5 billion has been used up as a result of the expenditure carryover. This leaves a net fiscal space for next years' budget of €530 million, before there is any downward revision with regard to net fiscal space. We already see - it has been referred to by me and Deputy Michael McGrath on a number of occasions - that the starting exchange rate used in the calculations was 81 cent to one pound sterling in 2016 and 85 cent for the years 2017-21. The exchange rate today is at 88 cent. It is likely to stay at late 80 cent to 90 cent right through. It seems that this is now a structural change rather than a cyclical fluctuation by the British. There appears to be downward pressures. If Ireland has a fiscal space of only €530 million available next year, and that figure could be revised downwards, then the State is in for a serious shock. We have public sector unions threatening to go on strike for fair wages, we have-----

-----crises in our hospitals and in our housing sector with the homeless situation. We have a serious, serious problem if these rules are not dismantled, as Sinn Féin had called for in the first instance.

The Deputy needs to have regard to the time allowed.

The rules are working against the State now.

The calculation of fiscal space is complex and there are many moving parts. Sometimes they move positively and sometimes they move negatively. We have put in place a reasoned calculation of fiscal space which was published at the time of the summer economic statement and revision was published again at budget time. We will continue with the practice. It is not possible to have a recalculation of the fiscal space because the British have had a referendum. It is not possible to recalculate fiscal space because Mr. Trump has been elected President. It is not possible to have a recalculation of fiscal space every time the exchange rate with sterling varies up or down. Deputy Doherty is right in his assumption that the risk is currently downwards, but it is not possible for anybody at the present time to do the calculation by means of simple arithmetic because there are too many moving parts. Sinn Féin has the solution in its own draft budget for increasing the fiscal space, which is to increase taxes.

Yes and there is only so much we can do in that regard. Nobody is suggesting that we review the fiscal space every time there is an international election or changing economy or whatever. I want the Government to confirm that the net fiscal space, as it currently stands for next year, is €530 million as opposed to what we had believed was there, which was €1.2 billion. This is so we know on what basis we can start from. We then need to see if that will be revised downwards or upwards. That sets the context with regard to everything else. It sets the context with regard to the pressures our society is facing; the wage claims from public sector unions, how we deal with health, how we deal with the finance Bills and the issues that have been raised earlier by Deputy Wallace and other Members. We need to know what we are looking at in to the future. One month ago the view was that there was €1.2 billion of fiscal space which could accommodate quite a bit of growth. Ireland's economy is growing-----

I thank the Deputy.

-----although we cannot rely on the official figures. The economy is growing at a rate of 3.5% to 4% but we could be very close to an austerity budget next year if the wind is working against us and if fiscal space is revised downwards. The rules are broken. They never made any sense in the first place but now they need to be shattered because they could cause serious damage to the State at a time when it is very vulnerable.

I have nothing to add to what I said already. It is not possible to recalculate fiscal space on a weekly basis on the back of the most recent international events. As I have said, it looks as if the risks are on the down side towards a reduction of fiscal space available but things can change very rapidly. When we are recalculating in the springtime we will see where we are at. That is time enough to make that calculation.

European Banking Sector

Paul Murphy

Ceist:

11. Deputy Paul Murphy asked the Minister for Finance if he has made provisions for instability in the European banking sector in view of reported difficulties in German and Italian banks in particular; and the discussions he has had with his counterparts on this matter. [34038/16]

What are the Minister's views on the possibility of a significant second wave of a European banking crisis with an epicentre perhaps in Germany with Deutsche Bank or in Italy and the suffering banking system there? Has the Minister made any preparations for the impact of such a crisis in Ireland in terms of the banking system and the economy?

As I have said previously, it would not be appropriate for me to comment on media speculation about foreign-owned banks. However, what I can say is that both I and my European counterparts have been working steadfastly since the financial crisis to bring about strengthened oversight and resolution regimes to address any emerging vulnerabilities or instabilities in the European banking sector.

The entire landscape has changed utterly, characterised by the presence of new European institutions, strengthened regulations, a more intrusive supervisory approach and a new focus on macroprudential requirements.

New European regulations have strengthened controls over the banking system and have resulted in an overhaul of regulation, supervision and resolution regimes. The capital requirements regulation and directive, which came into force in 2014, brought about significant enhancements in the quality and quantity of capital that banks are required to hold and the setting of minimum liquidity requirements.

The banking recovery and resolution directive and the single resolution mechanism have transformed the framework for dealing with failed banks and are designed to provide a financial safety net and a means of recovery and resolution with minimum disruption to the sovereign.

The single supervisory mechanism, SSM, is now responsible for the prudential supervision framework for euro area banks. The central piece of the SSM supervisory process is the supervisory review and evaluation process, under which the ECB-led joint supervisory teams inspect business models, internal governance, profitability and banking risks.

All these new regulations and institutional arrangements have been designed to address the challenges of banking oversight and resolution at a European level and provide for a proactive approach towards systemic and emergent risks at European level.

Besides the introduction of new European and national regulations, the Central Bank too has increased its resources and has become more proactive in addressing systemic risk. Of course cross-border bank linkages warrant ongoing attention by the new EU supervisory structures and by the Central Bank. I assure the Deputy that the Department and the Central Bank are continually monitoring international developments in collaboration with our European colleagues.

The fundamental thing is that it is eight years since the outbreak of the major financial and banking crisis, which had a particular European dimension, and the policies implemented in response to it did not deal with the fundamentals and did not fundamentally deal with the unsustainable debts which exist. The bailout funds which have been set up are not substantial enough to deal with the debts that can be exposed here. To take the example of Italy, which is clearly unstable, it is reported the Italian banking sector as a whole has €360 billion of problematic loans, equivalent to one fifth of GDP. It has a particular name for them in Italy, which is la sofferenza, the suffering. When we look at political events around the world, there is a constitutional referendum coming up in Italy, and one would have to place relatively good money on Renzi's Government losing the referendum and therefore a political crisis in Italy, which could detonate the banking crisis there, or similarly the points regarding Deutsche Bank.

I find it hard enough to assess risk in Ireland without assessing risk in Italy also. Certainly from newspaper reports on its banking system, it would be helpful to everyone in Europe if it were stronger. Since banking union has been put in place, there is a separation of the banking industry from the sovereign, so we get away from the too big to fail mandate that was there eight years ago. It is a matter for the European Central Bank in Frankfurt and the banking regulatory regime to deal with any inadequacies there are in the European banking system. They are doing so and moving towards full banking union with the establishment of a resolution fund which will be fully neutralised.

The problem will be when the money runs out in the common European banking funds and the resolution funds, because the money can run out when we speak about amounts of €360 billion. Who will pay for it then? Take the example of Deutsche Bank, which was being described as a potential Lehman Brothers 2.0. Obviously, it subsequently returned profits and things have calmed down slightly, but it is a systematic bank in terms of the entire European banking system and it is acting like the Irish banks pre-crisis, just selling off whatever it can in Las Vegas, China and Britain to try to get a cash for itself. The point comes back to here. A renewed European banking crisis would have a major impact on the Irish banks. In the most recent stress test by the ECB, the Irish banks emerged among the weakest. How would the Irish banks and the Irish economy react to such a significant banking crisis?

The Irish banks emerged as weak principally because the data on which the assessment was made was historic. The Irish banks had moved on significantly to a much stronger position by the day the stress test was published from the day the data on which the stress test was based was collected. There are still difficulties with the Irish banks. The Deputy will notice that while Bank of Ireland pays a dividend AIB has not done so yet. Of course, it would require supervisory permission to pay a dividend. It is a work in progress. There is no immediate threat to any bank in this jurisdiction, and there is no crossover from any of the banking problems the Deputy mentioned in continental Europe, which are the responsibility of the European Central Bank and the European supervisory authority.

Question No. 12 replied to with Written Answers.

European Central Bank

Thomas P. Broughan

Ceist:

13. Deputy Thomas P. Broughan asked the Minister for Finance the status of the quantitative easing project; his expectations for the future of the quantitative easing project; and if he will make a statement on the matter. [33977/16]

I have asked a few questions over the past two years about quantitative easing. We now hear the programme is to be continued until at least March 2017 at a rate of €80 billion per month. The Minister gave me information on the impact he thought it was having on the country in the past, with regard to growth, taxation, liquidity and inflation. How long does the Minister expect the programme to last? Has our Central Bank or the Department any information on a tapering process and how it might impact on the economy?

The primary objective of the European Central Bank is to maintain price stability within the euro area by implementing monetary policy which is consistent with an inflation rate of below, but close to, 2% over the medium term. Sustained weak inflation rates of less than 1%, despite extremely accommodative monetary policy and forward guidance on interest rates, led the ECB to implement asset purchase programmes beginning in June 2014 in an easing of monetary policy aimed at achieving this price stability mandate.

The ECB's expanded asset purchase programme, which covers sovereign and supranational debt, often referred to as quantitative easing, began on 9 March 2015 when the public sector purchase programme was added to the existing asset-backed securities and third covered bond purchase programmes. A corporate sector bond purchase programme was introduced on 8 June 2016 to further strengthen the pass through of the monetary policy stance to the real economy.

Under quantitative easing, the euro system, comprising the ECB and the national central banks of the euro area, has been purchasing €80 billion of public and private assets per month and plans to do so until at least March 2017 or until inflation returns to levels consistent with price stability.

Quantitative easing is designed to impact the real economy through a number of transmission mechanisms. These include increases in the value of securities and decreases in the cost of borrowing, increase lending by banks, and by providing a signal to consumers that the ECB is committed to meeting its inflation targets, giving an overall increase in consumer confidence.

In December this year, ECB policymakers will decide on the future shape and duration of their €80 billion monthly quantitative easing scheme based on new growth and inflation forecasts.

Written Answers are published on the Oireachtas website.
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