JOINT COMMITTEE ON ENTERPRISE, TRADE AND EMPLOYMENT díospóireacht

Financing of Irish Business: Discussion.

Chairman

We are meeting to discuss the financing of Irish business with the various organisations invited to address the committee. I welcome the delegation from Chambers Ireland which arrived a few minutes ahead of time, a good sign from a business perspective and something we would expect. We are very appreciative it is here on time or a few minutes early because we have a strict timetable, as its members will appreciate. I thank the delegation which includes Mr. Ian Talbot, chief executive, and Mr. Michael Garland for being facilitative. Mr. Garland is also chief executive of Waterford Chamber of Commerce. All members of the delegation are very welcome.

Before we continue, I draw the delegation's attention to the fact that while members of the committee have absolute privilege, the same privilege does not extend to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses, or an official, by name or in such a way as to make him or her identifiable.

Chambers Ireland has submitted a compact and informative submission. The delegates may wish to summarise it, but we can take the submission as read. I read it last night and it is very useful. The delegates may wish to summarise it first, following which we will have the questions the delegation wishes to address and consider matters from the perspective of information dissemination. I call Mr. Talbot.

Mr. Ian Talbot

I thank the Chairman for giving us the opportunity to speak here today. A good deal of speculative information has appeared in the media in recent months on what exactly has been taking place in the banking market. We agitated for a proper, statistically valid survey to be conducted and recently Mazars was engaged by the Department of Finance to produce such a report. The report gives us some meaningful information with which to work. It points to the fact that SMEs are struggling to secure lending but also to the fact that there are issues concerning the lack of demand, not only in Ireland but throughout Europe. Companies are retrenching and in many cases not seeking extra finance. This is what we have found in our discussions with our members. In many cases people were pulling back and waiting to see what developments transpired and what assistance they might receive from the Government to help enterprise. In the meantime they were not seeking to invest. The European Investment Bank is making €350 million in well flagged funds available through Irish banks for the SME sector. However, most of that financing is for forward-looking development projects and we have found that most of our clients are retrenching and more interested in short-term financing, which is harder to secure.

I refer to other key issues such as NAMA. Uncertainty has been created while the legislation for NAMA is being prepared. Questions about the methodology of valuation by NAMA are becoming something of a barrier to lending in the market. That is a key component of what we are seeing. It is very important that the legislation is produced and we are looking forward to seeing it tomorrow, although we will need to see more information soon on the methodology to be used in making calculations. That is important.

A further issue to which we draw the committee's attention is that there are now two tiers of banks in the market. There are banks which are actively lending to the Irish market and banks which do not seem to be terribly active in lending.

Deputy Mary Alexandra White

I want to put one question to the delegation. I have been in the retail business all my adult life, since before I got into politics; therefore, I understand the particular nuances affecting small and medium-sized enterprises. We all know the cost of business, are aware of the regulatory regime in place and the problem of the Central Statistics Office throwing forms at small retailers who almost need a full-time member of staff to cope with the statistics. I know the Central Statistics Office has to have them, but there may be a better way of doing it.

How does the delegation interpret the real rate of refusals by the banks? Is the pre-screening of applications impacting on specific sectors? In the retail sector, for example, a viable business may present a viable business proposal to its banks for a capital injection, not for anything fancy such as expansion, but to keep going in these very difficult times. How is the assessment of viability by the banks and the pre-screening of applications impacting on specific sectors?

Mr. Ian Talbot

I might respond to that question from a Chambers Ireland perspective and Mr. Garland from a regional perspective. At the top level, if one looks at the rejection rate which varies, I understand, from 18% to 33%, it brings us back to the point that there are banks in the market which are not engaged in much lending and banks which are. We have two tiers of banks. We have banks in respect of which the rejection rate is low and those in respect of which it is quite high. I hesitated to use the word "discrepancy" in the report, but there is a sense that SMEs were reporting a higher number of rejections than the banks. Our only conclusion was that people were informally going to their local bank branch to ask for finance and were being told very early on — possibly verbally — that it would be very difficult to secure it. They saw this as a rejection and moved away from the bank. Banks were not tracking such informal approaches. Unless an approach was made through the application and credit committee stage, it did not qualify as an application for lending. Mr. Garland may have some comments to make on individual cases.

Mr. Michael Garland

We undertook a local analysis of Chamber members and conducted a south-east regional survey. They tend to follow the same trend as the Mazars report, but there is certainly a case in terms of what is justified as a rejection. As Mr. Talbot said, businesses are going to banks to informally ask for loans or a credit extension, as they have done in the past, and being refused. They are counting this as a refusal. The report states exact statistics could not be obtained because the banks did not track them. There is a clear imbalance in what businesses are reporting to us and what is contained in the report. I can make our reports available to the committee. Through dealing with local businesses, we have found some are experiencing good relationships with their banks but others are finding it very difficult. The issue must be tackled at a local level. Banks have an opportunity to conduct banking differently in the future, but they need some support in terms of the level of risk management with which they are currently dealing. There is a great opportunity for banks at a local level and I cannot see why they will not move ahead and do this because it would be a great marketing tool for them. They should tackle this problem now. Somebody in the banks needs to take a slightly bigger risk and they will attract more business. It makes business sense. There is a clear need for banks to work at grassroots level, but for some strange reason this is not being done.

Deputy Arthur Morgan

I thank Chambers Ireland and Mr. Talbot for that business-like presentation. This is where we get the value of the exchange. The main focus of the committee and this project is jobs. Has Chambers Ireland considered job retention? Many of us hold the view that it is much easier to keep an existing job than create a new one. Sometimes there is not enough focus on that point. Does Chambers Ireland think there is room within its membership for significant job retention? Has it, for example, considered how much Government support might be necessary to retain a person or people in a solicitor's or accountant's office which might be about to make staff redundant? A person might be retained to tidy up the filing system, for example. Is there back office activity in which somebody could be engaged? If a person is kept at work, he or she might be able to contribute in other ways to the business, albeit that the business is not paying him or her. Some Government support might assist in that way. I have advocated that the State should pay up to 20% of the person's salary to a maximum of €200 a week to retain staff. They would not then have to go through the welfare process, receiving medical cards and other ancillary benefits.

Mr. Ian Talbot

Almost all of our members are genuinely focused on job retention but particularly sustainability. To take Deputy Morgan's example of solicitors' offices, they have geared themselves up around the property market. In 2006 a total of 95,000 new houses were built and solicitors built up conveyancing departments to deal with them. It will be a long time before 95,000 houses are built again, if ever. Organisations directly exposed to reduced construction realise they have gone too far down and ask what is a sustainable level going up. For example, how many houses will be built and what will the commercial property sector be like in three or five years' time? They are trying to find out what they should have for business as usual rather than in the exceptional circumstances of the past five years.

In respect of people not directly exposed to the property market, our organisation has focused on the fact that businesses need to be sustainable. They need to make some level of return to match the risks they are taking for being in business. Therefore, in many areas we need to get to the bottom in respect of costs, employment levels and so on. I hope we are getting there. We have focused on trying to reduce business costs to make it attractive for organisations to stay in business and ensure that when the upturn starts, which it will, they will be ready to move forward. We are concerned to ensure organisations do not so damage themselves that when the upturn begins, they cannot gear up again. It is critical to examine the cost structure.

Employment costs are one issue, but there are other costs which businesses may or may not be able to control such as rents. If property values were too high, rents were too high and we are seeing market-driven reductions in rents pretty much across the board, although there are exceptions in the retail sector. We have heard stories of people struggling to renegotiate their rents downwards. We also consider rates and local authority charges on businesses. Chambers Ireland has long agitated for an improved methodology for local authority funding to achieve a balance whereby local authorities do not go to business for rates and tax on commercial vehicles every time they want to cover their bills. We continue to have concerns about ensuring local authority funding is based on a balanced, economy-wide, fair and equitable system in which business is not fully exposed to top up the difference.

Mr. Michael Garland

Businesses do not want to get rid of staff. They want to retain them because it is difficult to find good staff. A horrendous amount of money is invested in training them. The proof is in very specific local surveys we have conducted. People are taking pay freezes and accepting reductions in the number of hours worked to try to negate the need to get rid of staff. Businesses are making a huge effort to try to sustain themselves. We are in the summer period and, let us not kid ourselves, with the good weather people will start to spend money. The problem will happen, particularly in the tourism industry and the retail trade, from September onwards because there will be a dip in the number of people around and about spending money. We are looking at a picture that is, perhaps, skewed because we are in the summer period which is traditionally busy and a spending period. At the end of September and the beginning of October we will really see how tough it is for businesses. That is when they will need help to survive through to the start of next year, into March and April.

I do not think the banks are selling themselves. There is an opportunity to fundamentally change the way the banks operate. They should approach all of their business clients before they start to struggle. They know all of their business partners and should ask if they need help; if so, it should be made clear that particular services are available. I do not think that is happening. There is a need for banks to become proactive, whereas in recent years they have been reactive. People have been coming in and the banks have been handing out loans. There is a chance for the banks to turn this around and approach their customers before they get into trouble. They should ask them to present a business plan and perhaps help them in doing so. This approach needs to be encouraged.

Mr. Ian Talbot

The bank head offices are very keen to engage in such programmes. However, several hundred bank branches around the country are not particularly used to this way of doing business and retraining may be required. The committee will get a sense from the banks, as distinct from head offices, that we are trying to push this issue at local level. It is clear from Mr. Garland who comes from a regional town that bank branches are not necessarily pushing this information. That might be something to look at.

On the property side, we are not specifically opposed to having a legislative barrier to upward-only rent reviews. We are concerned more about the consultative process and its unintended consequences. Our feeling was that at the time it was a knee-jerk reaction. Foreign investors looking at Ireland in term of investments in commercial property projects look at a whole range of issues. As regards our stamp duty regime, the rate fell from 9% to 6%, which made us more competitive internationally in attracting funds that typically went to the United Kingdom or other markets where the stamp duty rate was about 4%. Certainly, Ireland was becoming more attractive. One of the attractions in our contracts had been upward-only rent clauses. Investors negotiating facilities with their bankers were able to say they had a long-term contract which provided for upward-only rent reviews which gave an improved likelihood of a nice cashflow stream. Removing that clause would create two things — before and after contracts. There is a contract for a building that will last 25 years. If it is a pre-2009 contract, it will have an upward-only rent clause and if it is made post 2009, it would not have such a clause. That would account for the potential pricing difference. If one is competing with markets that still offer upward-only rent review clauses, those markets may appear more competitive, but it is a soft point. We were not trying to make a big deal out of it and have not made any public statements on the matter, other than the comment that the consultation period, to understand the impact, not just to cut costs permanently by making legislative changes, might have been valuable. My understanding is the clause has not yet been invoked. The key for us is that there should be a consultation period. At the same time we recognise the need for urgency. We are not saying we should take years to do this but rather allow more time for reflection.

While we are not before the committee to discuss the mortgage market, three months ago there was much coverage in the newspapers about people being stuck on fixed rate mortgages and that they could not change without being penalised significantly. At this stage commentators are saying it would be a good time to fix again. Within a three to four month period the story has changed a little. Therefore, we are nervous about knee-jerk reactions creating uncertainty about our tax and legislative framework in attracting foreign direct investment into Ireland.

Deputy Deirdre Clune

I was interested to hear what Deputy Chris Andrews had to say on the need for funding through the European Investment Bank. It is something we will track with the banks.

The TNS survey of small and medium businesses indicated that the most common reasons for decline cited by respondents were a change in bank lending policy and the sector in which the business was operating was no longer one in which the bank did business. I recognise the report established a baseline in the 12 months since June last year, but is it the experience of the organisation's members that there was a change in bank policy? I understand there would be a change in certain sectors related to the construction industry, but from the comments made there seems to have been a decided shift in policy, yet that was not reflected in the report.

There were a number of recommendations made in the report. I presume the delegation would support all of them, but I ask, in particular, about the code of conduct produced by the Financial Regulator in February this year. Has it made a difference? Was there an impact following its publication?

Mr. Ian Talbot

I will deal with the questions in reverse order. On the code of conduct, the feedback from businesses is that there is an improved information flow on the reason their application has been rejected or otherwise. That helps them to understand the reason they have been rejected and potentially gives them the opportunity to try again.

Our overall sense — it may not be the case in every sector — is that the banks are proactively trying to work with companies which indicate they have an issue in that their debtors are not paying as quickly as they were and that, underlying this, there is a problem with their sales. They have adapted their sales and marketing strategies to try to improve their sales and taken some of the pain about which Mr. Garland spoke by introducing pay cuts or benefit claw-backs to accept their share in putting the business back on a sustainable footing. The banks are being more proactive with these companies than those which simply seek cash because their debtors have slowed down; they believe their business is fine and are carrying on regardless.

Two issues arise regarding the rejection rate. First, we must be aware of the fact that some banks are actively lending to the market and some are not. It is difficult to draw from the report if the banks responded by saying they would no longer invest in a sector largely because it was no longer investing in any sector. We are seeing a knock-on effect. If we assume that some banks are not actively lending to the market but are still trying to take deposits in the local market, the knock-on effect is that one is taking some of the pool away from the potential deposit base of banks which are looking to lend. That is a concern also.

The Deputy's other question was about a change in policy. Our sense is that it may be expressed at branch level as a change of policy, but it is probably more the case that the banks have gone back to lending standards that applied ten, 15 or 20 years ago. They are just being more rigorous about applications and business plans and asking more questions.

Deputy Deirdre Clune

That did not come out in the report.

Mr. Ian Talbot

That is our sense.

Mr. Michael Garland

I believe it is accurate.

Deputy Deirdre Clune

It is probably right.

Mr. Michael Garland

It is clear that the person who owns a picture framing shop, for instance, and is passionate about picture framing might not have the business acumen to go into the bank to lay out a business plan for the next six, nine or 12 months, whereas previously he or she would not have needed to do this because the money was constantly coming in. In terms of what the banks have to do, part of the code of conduct is to educate and guide these businesses to report accurate, true figures. They must be helped in doing this because there is no point in telling them they need to do this when they do not have the capacity or the ability to do so. If one is passionate about picture framing or art, one is not necessarily good at putting together a business model. The banks must help such individuals to produce the correct figures in a way that will allow them to assess their business in terms of future funding, but I do not believe that is being done.

Mr. Ian Talbot

I do not fully understand it, but there is a psychological issue, particularly in micro and owner-manager businesses. Many are still afraid to seek assistance from their banks. The moment they feel a sense of rejection, they apologise for bothering the bank official and shuffle out the door. It would be helpful to rebuild people's confidence to enable them to feel proud about what they trying to deliver and to seek their bank's assistance to avail of its analytical skills to get them over the line. People could approach the bank with a great idea and seek some assistance to develop it. It is important for people to regain confidence and to feel banks are not ogres and they can go in and talk to the manager and not be afraid to do so. Many are surprisingly afraid to simply go and talk to the people in their bank.

Deputy Edward O’Keeffe

I welcome the representatives. Mr. Talbot spoke about a two-tier banking system. Will he elaborate on what he means by this? Is he referring to the foreign banks that entered the market and are now pulling back and our domestic banks that have been more than helpful to our people? He referred to the National Asset Management Agency in his presentation. Does he envisage NAMA will assist in generating more liquidity in the banking sector for the businesses to which he referred? I was shocked to read in one of yesterday's newspapers that Wolseley which entered this market and purchased a number of companies loss €21 million in the Irish market last year. It is involved in the retail sector. It bought Brooks Haughton and other operations. The article appeared in one of yesterday's newspapers. It is frightening that such a company in the retail market suffered such a loss. That company supplies plumbing and fitting products.

The banks are struggling as well, as we have read in the newspapers. The Government is trying to assist the banking sector as best it can. Will Mr. Talbot agree that there was no discipline in the banking system during the past seven or eight years? People could get loans without having to provide plans or other support documentation and that has landed us in the crisis in which we are in. Discipline has now been introduced in the sector and there is more order and stress testing to lending. Would Mr. Talbot agree with me?

We are in a recession. It is equivalent to the crisis in 1929 and into the 1930s when world business was turned upside down. We are now trying to put an artificial plan under the current crisis to buy our way out of a recession that will not go away in the short term. We need only look at what is happening in the western world in America and in the United Kingdom. Britain has been subject to a number of recessions, as it is very involved in commercial business and trade.

Addressing the current crisis is not easy. I am not taking the side of the banks, but there must be discipline. If the banks begin to shovel out money again, as they did in the past five or seven years, we will never get out of the current crisis. I have many contacts with business people. Many business people have told me that they are not getting paid and they are seeking an extension of credit and further lending from the banks, but the banks are saying "No" to their requests because such lending could go wrong. We are in a very difficult situation here. I sympathise with what Mr. Talbot said because I know the business world and understand it quite well. We must have some discipline and some order because if we do not, we will not have success and we will not get out of the crisis we are in.

Chairman

Those are the comments of Deputy O'Keeffe, who is a businessman of some repute.

Mr. Ian Talbot

Considerable compounding is taking place. For every creditor who does not pay a bill on time, it impacts on somebody else's cash flow. We refer in the report to the velocity of money, the rate at which money circulating in the economy has slowed down. Every time money circulates, the Government traps revenue in the form of VAT and stamp duty and it also creates economic activity. That slow down in the economy is not helping matters. There is even a compounding effect on the economy stemming from people paying slowly and not only the direct impact that has on somebody else having to fund that gap. It slows down all economic activity. We called on the Government to give the lead here by ensuring that its Departments speed up their payment terms. We heard much anecdotal evidence earlier in the year that Government payments had slowed down rather than speeded up. There is a commitment in some sections of Government to make payments within 15 days. However, the process can be slowed down relatively easy. For example, if one wants to query an invoice, one can slow the process by going back to day one and starting the process again. We would encourage Government to ensure Departments and all State bodies pay bills on time to try to help speed things up.

A key component of this is electronic banking. We need to see fewer payments by cheque. Payments by cheque sit in the mail for three or four days and that is money probably sitting on a bank's balance sheet. It is not contributing much to the bank but it is money business is losing. Electronic payments often hit on the same day, or certainly within a day or two. They also take many costs out of the economy.

The Irish Payment Services Organisation stated that if the economy was pretty much fully electronic, we could take out €1.4 billion in costs out of the economy. That is a large figure and one which is hard to quantify but it has come up with it.

I refer to a two-tier banking system. That is backed up by the report. Some banks are approving 82% of loans and others are approving 67%. There are banks which are more active in the market. I am not saying we have a two-tier banking system but Mazars' evidence and, to some extent, our feedback on the ground show that a couple of banks are lending and that plenty of banks are not lending as actively. That is an issue for us.

There is no doubt banks are now much more rigorous about their lending processes. From our perspective, the key is that we get it right going forward, which I believe was the Deputy's main assertion, and that we do not continue to create new bad loans in the economy. However, that also means the risk appetite will be reduced and the fear is that strangles potentially viable sustainable businesses. There is a balance to be struck and I am not sure banks or businesses can do it all on their own which is why we have come up with a couple suggestions on potential guarantee schemes.

I refer to our view on NAMA. There is no perfect formula. This is a new experience globally in terms of how we collectively get ourselves out of where we find ourselves. The issue currently is that the vacuum created by everybody waiting to see for what NAMA provides is causing a pull back on the market. Our sense is that commercial property transactions, for example, which look viable and could go through are being held up until everybody waits to see for what NAMA will provide, what loans go into it and what loans do not and how everything will be valued. I do not believe anybody wants to write a loan now which looks like a good one only to find it somehow gets sucked into the NAMA system and is subject to revaluation or whatever. The important thing for us is that we get on with it and do something.

Senator Paul Coghlan

I do not know about the sunny south east but in the south west things are not sunny at all. It is probably the worst tourism season we have ever had.

Following on from what Deputy Ned O'Keeffe said, one of the problems — I assume the delegates have found this — is that people are up to their credit and overdraft limits in business and nobody is paying anybody until he or she absolutely must do so.

I do not believe what was said about Departments. The evidence is that they are not paying either and are as bad as everybody else in the commercial world. They have standards and so on but they have gone by the board. I heard of a case the other day which I do not wish to recount but the Chairman would be aware of the subject from his other line of business.

Do the delegates find that, despite the criteria being more rigorous, the banks are concentrating on preserving capital rather than being interested in lending? Perhaps it is because of waiting for NAMA. Are the witnesses satisfied they are providing adequate data on credit details to the credit bureau?

Mr. Ian Talbot

I spent my summer holidays in Barley Cove this year. I had beautiful weather and would like to see more people——

Deputy Deirdre Clune

As the Dáil was sitting, we could not——

Mr. Ian Talbot

Some banks are more active in lending than others. In some cases it may just be that the bank with which one's company has typically done business may be in the category of actively lending or else it is in the category of actively trying to pull back. That is an issue through which we need to work. I have no reason to doubt that the banks are providing reasonably accurate figures to the Irish Credit Bureau.

Deputy Cyprian Brady

Has there been any impact at all on businesses in the context of the recent changes in energy costs? What are our guests' views on wages and wage structures?

Mr. Michael Garland

Businesses are considering all angles in respect of saving money and reducing costs. They are actively seeking energy-saving schemes, even to the extent of ensuring that staff switch off their VDUs. They are also examining the position with regard to their telephone and electricity providers, etc. All the good businesses have gone down that road — they have snipped costs and switched off lights. These businesses are saving on costs but what they need to see is a possible reduction in the actual cost of those services. They have gone as far as possible in the context of putting in place energy-saving light bulbs, etc., and what they now need, if possible, is a reduction in the cost of that raw material coming into their premises. It is the latter which is physically costing them money.

That is over to us.

I thank Mr. Talbot and Mr. Garland for assisting us in our deliberations. Their submission has been most interesting. I now excuse them as delegates but should they wish to observe the proceedings from the Visitors Gallery, they are welcome to do so. I thank them for arriving punctually this morning, even ahead of time.

Mr. Ian Talbot

We appreciate all the questions from members.

Mr. Michael Garland

If the Chairman wishes, I will leave copies of the submission.

Chairman

For the second session, I invite Mr. Frank Ryan, chief executive officer of Enterprise Ireland, Mr. Des Doyle, manager of growth capital division and Mr. Tom Hayes, manager of the high potential start-up division to take their places at the table. I am delighted to welcome them to the meeting. It is not their first visit to us.

Before we begin, I draw attention to the fact that members of this committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

I invite Mr. Ryan to summarise his submission for the committee.

Mr. Frank Ryan

Rather than read the statement to the committee I will appraise the committee of the recent results of the performance of indigenous sectors. For the benefit of discussion it would be helpful to define the companies Enterprise Ireland deals with. Enterprise Ireland is mandated to deal with manufacturing companies and services companies operating in the exporting sector. The total is approximately in excess of 12,000 companies. In any one year we deal actively with about 3,500 companies. The total exports by those companies in 2008, as published in June, was €14.27 billion, an increase of 3% in net exports over 2007 which was itself a record year. We are engaged in implementing the enterprise stabilisation fund, which is a special fund of €100 million allocated to Enterprise Ireland to help viable but vulnerable companies. Those are companies that have good technology and are well positioned to benefit from the economic upturn when it takes place. It is essential that we keep those companies trading through this very difficult period in the next 12 months.

We have, however, a number of growth companies and growth sectors. Not all sectors are in recession, and we continue to have strong performances by companies in software, medical devices, life sciences and parts of the engineering sector. The availability of funding is a key issue to start-up companies and scaling companies. For the benefit of clarity, we have a special division that deals with our 50 fastest growing client companies. They are what we refer to as our scaling companies and they are able to deliver extremely strong growth. They are continuing to grow even through this time of recession. It is not all doom and gloom by any means.

We assist a growing number of start-up companies on an annual basis. The quality of the promoters coming forward in 2008 and into 2009 has been of a very high standard. That gives us considerable confidence in the successful establishment of those companies because they are the future lifeblood of our export performance. In overall terms we have established a very close working relationship with the two major banks in particular. I am aware that both of them will appear before the committee this afternoon. Relationships with the two banks have never been stronger. I would be pleased to fill in the committee on the detail in that regard should members wish. I hope that brief overview has been helpful.

Deputy Arthur Morgan

I thank Enterprise Ireland for coming before the committee and presenting such a business-like presentation. I give notice that I am a director of a business which is currently a client of Enterprise Ireland. It is important to make that declaration at the outset. Wearing my enterprise hat gives me an insight into the work carried out by Enterprise Ireland at the coalface. I know it is extremely professional at that level and that it speaks the language entrepreneurs understand and that it operates at a practical level. That is very much appreciated.

When I put on my Oireachtas hat, which is what I am wearing today, and consider Enterprise Ireland's budget, for example, it is evident that in excess of 50% of it goes on administration, which leaves much less for companies. Will Mr. Ryan address that issue and explain why that is the case? It has been raised with me, in particular in recent times, given the stringent market conditions that prevail.

The second matter is one which perhaps I will raise with the delegation later. I received a reply to a parliamentary question and the figures in it do not stack up at all. I assume they were prepared by Enterprise Ireland. It was stated that €143.751 million was spent in direct support to client companies of Enterprise Ireland. I do not wish to delay the committee, but suffice to say a very important matter came up yesterday when I received the reply to a parliamentary question and that the figures relating to expenditure do not stack up. Perhaps I should not have expressed the matter publicly but if the delegation has time to address the matter later I will discuss it then.

Mr. Frank Ryan

Interpreting our accounts takes a little bit of understanding of the range of activities in which Enterprise Ireland is engaged. The overall Exchequer funding in 2008 was €328 million. We will just stick with that figure for the moment and I will give a breakdown of the component parts. I will round up the figures for the sake of speed. In 2008, financial support to industry was €68 million, the county enterprise boards received €33 million, €129 million was allocated for science and technology development, administration accounted for expenditure of €100 million and other Exchequer funding amounted to €8.4 million. These figures add up to €328 million.

Mr. Ryan referred to the enterprise stabilisation fund of €100 million. The joint committee is interested in ensuring that small and medium-sized businesses which are capable of surviving the economic downturn receive support. Mr. Ryan also referred to the availability of funding and the relationship with banks. One hears frequently that banks are not open for business, particularly in the small and medium-sized enterprise sector. I hope the findings of the Mazars report will result in the establishment of a new framework in this area. I ask Mr. Ryan to comment on the enterprise stabilisation fund, the funding available from banks and the relationship between banks and small businesses, especially start-up companies.

Mr. Frank Ryan

I will deal with the enterprise stabilisation fund and the relationship with the banks, while my colleague, Mr. Des Doyle, will discuss the details of the funding side.

On the enterprise stabilisation fund, Enterprise Ireland has €50 million available to it this year and a further €50 million available to it next year, giving €100 million.

Mr. Tom Hayes

Enterprise Ireland supports some 70 high-potential start-ups every year. In the last 12 years, we have supported a little more than 600, 450 of which are still in existence, employing some 10,000 people and with a turnover last year of approximately €1 billion, 75% to 85% of which relates to exports. These companies are somewhat below the radar because they are operating in global and niche markets, but they make a vital contribution. We hope to support a similar number, if not slightly more, this year. There is good news in that area.

In terms of the sectors we support, we are driven to a large extent by the promoters or teams of promoters that come forward. They happen to be within niche sectors, whether risk and compliance, life sciences, telecommunications, biotechnology, clean technology and so on. The specific sector is less important than the team, the promoters, the market opportunity, and the backing and support they have from the marketplace and from other funders. Enterprise Ireland assists these teams with finance and other support. Clean technology is certainly a sector we will target and are targeting. In the last year we have provided support to four or five companies which fit into this category and we hope to build the capability of those companies and strengthen their management teams. We provide support to companies through our network of more than 30 offices throughout the world, helping to get reference sites and identify customers to increase their business. It is an important part of the mix.

In terms of risk and compliance, we would describe that as a niche sector. In recent weeks, we supported a company with a unique offering in this area and which is geared to banks. It has already secured reference sites with bank customers in The Netherlands, Britain and in the Scandinavian states. It is an important sector.

Deputy Cyprian Brady

What is the role for Enterprise Ireland in increasing access to Asia-Pacific markets, particularly in the financial services area?

Mr. Frank Ryan

There is a significant role for Enterprise Ireland in this regard given that we are a key deliverer in terms of the Government's Asia strategy. It is an area that interests us greatly because we recognise that in the past, trade by Irish companies has primarily focused on near western Europe and the United States. However, the world has changed and for the next 20 to 50 years, Asia, Russia, India, Brazil and the Middle East will be as important to us as our two traditional markets.

For several years we have had offices in China, Australia, Indonesia and Japan. We continue to predict growth in these areas, but the Chinese economy is under quite a bit of pressure. The latest figures suggest a GDP growth rate of 7.5%. As a country, it tries for at least 8.5% so as to be able to maintain employment opportunities. Therefore, China is not doing particularly well. Although the figure looks large internationally, it is not what China needs locally.

There are substantial growth opportunities in the international services area, primarily because it involves bright people and modern technology. It is diverse in terms of what we call internationally traded services, such as insurance, financial payments, travel, Web 2.0 applications, business process outsourcing, fund administration and a range of modern niche market opportunities for Irish companies, given their knowledge and the adaptation of modern technology. We expect to maintain our level of exports to Asia — they are strong in Australia — and the four or five other economic zones of importance to us.

Deputy Seán Power

I thank the gentlemen for their contributions, but I am surprised by how positive they have been. Many of the established SMEs with which our guests deal remain on a growth path despite the downturn in the global economy. We expect world trade to decline to the tune of double digit percentages. As a trading nation, one would expect a similar decline to be experienced by many of our SMEs. Why are so many SMEs remaining on the growth path? What is the percentage? Why are our guests so positive about the future?

The impact of the withdrawal of export credit insurance on companies has been referenced. Our guests have expressed concern in this regard. Do they want the insurance to be reintroduced and, if so, what proposals have they made and to whom?

Mr. Frank Ryan

Enterprise Ireland tries to keep its feet on the ground. We are in the greatest international recession in my living memory and technically since the 1930s. We are who we are. From the point of view of indigenous industry, we entered the recession stronger than we ever were. More companies were exporting or engaged in research and development than ever before in the history of the State. More people were capable of transacting business internationally than previously. We in Enterprise Ireland must consider this situation to determine what we can fashion it into in terms of taking it abroad. Some sectors abroad are not in recession. Obviously, the companies targeting those sectors, which include cleaning technology, software, medical devices and lifestyles, are growing. To some extent, the situation is more difficult, but it is somewhat business as usual for those companies.

Another group of companies has been impacted by the reduction in worldwide demand. Those companies have let people go and will not grow for approximately 12 to 18 months or until such time as an international rise causes their fortunes to change. Many of them have sufficient finance to be able to survive that period without State intervention.

We have companies which have been very badly affected and which have taken the brunt of what has happened in the past 12 months. They are primarily in the food and construction sectors. It is important to differentiate between the export and domestic dimensions of their business. The construction industry has been terribly badly hit on the domestic side. It was never a big exporter of services and we have a programme to convert them to take advantage of that opportunity.

Companies in the food sector have been materially very affected by the change in sterling which has had an unofficial devaluation of approximately 25%. Those food companies still managed to increase their euro exports by 1% in 2008; essentially it is a flat performance. Given the hit they have taken credit must be given where it is due, it is a fantastic response by the food companies to what they have had to deal with in the marketplace. They have reduced growth, particularly in the UK where many food products go.

The last thing Enterprise Ireland believes we need is another voice of doom and gloom on what is happening in the economy. We are where we are and we have to structure ourselves to get out of it. Enterprise Ireland is helping companies that are under competitive pressure to improve their productivity, because to be more competitive one must be more productive, and helping companies gain access to marketplace opportunities. Much of this is happening below the radar primarily because not many people outside of the committee take an active interest in it.

The question from Deputy White on cleantech is a good example. We have 100 companies involved in cleantech and last year they had exports of €106 million. It is one of the fastest growing sectors that we have. We have equity positions in a number of them, including Wavebob for ocean technology. We are working with those companies to make practical things happen. We are in a period during which it will be about sweat on the brow. It is about good technology, strong ambition and hard work. That is what we are engaged in.

It is very challenging for the agency and for my colleagues. Our level of business and demand from companies increases by approximately 40% every year. We are dealing with that along with requests from companies to help us to introduce them into overseas markets, particularly in the eurozone away from the United Kingdom in order that they can get away from the sterling challenge in the short term. We hope sterling will come back a bit from its current exchange rate. Much is happening but we must be positive, we can convey either a positive attitude towards our client companies or a doom and gloom attitude and the last thing companies want from us is a litany of doom and gloom.

Chairman

What about export credit?

Mr. Des Doyle

It is important to put export credit into perspective. Our surveys and the Mazars survey show this is important for approximately 8% or 9% of companies. When we explore why this is the case companies mention the cost, administrative difficulties, doubts about and difficulties with collecting from insurance companies and established trade relationships enable credit to be given. The first point is that this is not something affecting 90% of companies, it affects approximately 9% of companies.

Having said that, it is very important for certain companies and markets. The State left this area quite a number of years ago because of certain difficulties. Detailed discussions are taking place with our parent Department on how the problem might be best addressed. We cannot say more than that this morning because no firm decisions have been made. It is a segment of our customer base selling into certain markets for whom this is an important issue.

Deputy Seán Power

I thought Mr. Doyle might like to share his thoughts with the committee.

Mr. Des Doyle

We seek to facilitate trade. This is as much an issue for people getting supplies of raw materials because export credit cannot be arranged for key raw materials so there is a difficulty with supply. When one peels this onion, it gets more complicated. It is not quite a simple matter involving someone who wants an insurance policy to sell something to China. We are seeking solutions but the ultimate decisions will be outside the ambit of Enterprise Ireland and made by our parent Department.

Deputy Edward O’Keeffe

I welcome the delegation. I agree with Mr. Ryan that we are in strange and difficult times in terms of the world economy. Survival is the name of the game and tomorrow is another day. We are reaching figures of 15% and 18% unemployment. What does Enterprise Ireland see as the future for job creation and will this come from indigenous sectors or from abroad?

I agree with Deputy Seán Power regarding export credit insurance, which is a problem for the food sector. I thought it had been solved in the past eight or nine months but I understand it has become an obstacle to exports to certain countries.

County enterprise boards have been put within Enterprise Ireland's remit. How effective are they? I do not want to make the delegates enter the area of the McCarthy report but I have read that it proposes the amalgamation of and radical change to enterprise boards. I do not know whether such changes would be good or bad. The boards have been in existence for 20 years or more but while they were innovative in their time, I believe they have become tired and are in need of radical reform. We will face high unemployment and we need to consider new ideas. As enterprise boards were particularly important to rural areas, I would like to hear the delegates' views on them.

Mr. Frank Ryan

In regard to jobs, this is a developed economy and, therefore, one would expect employment to come primarily from technology rich companies, internationally traded services and innovative start-ups. Demand has to increase in order to create jobs and it is essential that we revert to being an export-led economy. We are an exporting nation in that we export 90% of everything we make.

Food companies have been very badly hit, particularly over the past nine months. I do not think any other sector has had to face the same problems. In conjunction with these problems, the price of certain ingredients, such as dairy products, has decreased globally. Demand has decreased as people have started to spend less by, for example, purchasing cheaper cuts of meat. Exporters have also had to face the sterling challenge in the United Kingdom, to which a significant proportion of our exports go. We are working with them to alleviate these problems in any way we can.

In respect of city and county enterprise boards, I am very conscious of the recommendations of an bord snip nua. Enterprise Ireland is an arm of government and we implement whatever decisions the Government makes. Personally, I believe the county and city enterprise boards do a good job. In terms of corporate governance, they are responsible to their own boards, of which there are 36, and they are private limited companies. Their funding is channelled from their parent Department through Enterprise Ireland and the co-ordination unit is located in our new offices in Shannon and is staffed by 12 colleagues. We are seeing the benefits of this. We have agreed targets with the county enterprise boards for the number of companies growing and in transition from being county enterprise board clients to being Enterprise Ireland clients on an annual basis and so on. That closer working relationship has been ongoing for at least 18 months.

Chairman

I thank Mr. Ryan, Mr. Doyle and Mr. Hayes for assisting us in our deliberations. Their submissions are interesting, particularly in the context of the current economic climate. They are excused, but, if they wish, they may observe the remaining proceedings from the Visitors Gallery. I know they have other things to do.

Sitting suspended at 11.20 a.m. and resumed at 11.50 a.m.

Chairman

I welcome Mr. Tom O'Connell, assistant director general, and Mr. John Flynn, head of economic analysis and research, from the Central Bank and Financial Services Authority of Ireland.

Mr. O'Connell's opening statement is fairly substantial, but as we would like to have more time for questions, I ask him to summarise. The committee thanks him for his submission.

Mr. Tom O’Connell

As we all know, we are in a difficult economic climate. When the Governor of the Central Bank launched the annual report last week, he indicated that we could expect a fall in gross domestic product this year of some 8.3%, with a cumulative fall for last year, this year and next year of between 13% and 14%. In conjunction with this, employment is falling away and unemployment is rising and we expect the figure to peak at beyond 15% in 2010.

As the Governor of the Central Bank and the Minister for Finance said recently, we need to look at three big areas of economic and financial policy. We need to stabilise the banking system, get our fiscal position back into balance and restore the competitiveness of the economy which has been eroded in recent times. Various measures are in the course of being implemented to enable us to make progress in these three areas.

Since the primary interest of this meeting is in credit developments and the flow of credit to businesses, I will spend some time on that subject. Prior to joining the euro area, our interest rates had been historically high but, after joining, they came down. Both the household and business sectors were, arguably, underborrowed at the time; therefore, there was scope for borrowing to increase. In addition, affordability had improved, given the falling interest rates. In the event, there were rapid increases in credit of the order of 20% or 25% for several years, which most would now accept represented an unsustainable rate of growth. More recently, in the first half of this year, household borrowings, for example, from the banks have declined slightly. The very large increase in credit and indebtedness of both households and the corporate sector suggested, coming into this more difficult period, we could expect some de-leveraging or running down of borrowings. However, a balance must be struck because if it is overdone, it will impinge on demand in the economy which will give rise to further contractions in output that will reverberate on the banks. The bad loan experience could get worse which, in turn, could inhibit the banks from lending. Thus, we want to avoid getting into such a negative downward spiral.

With regard to the current position, over the first five or six months of the year credit outstanding to the household sector has fallen slightly, mostly as a result of a fall in consumer credit. In fact, if one considers non-mortgage borrowing by households, one can see there has been a fair element of net repayment. People are tightening their belts and repaying. With regard to the companies sector, we are talking about broad stability or a modest decline in lending.

With regard to sectoral developments, most of the increase in private credit in recent times, as we know, has gone to the property sector — too much of it, in retrospect. That has been split roughly evenly between residential mortgages and other forms of property lending, that is, construction activity in the commercial, industrial and office sector. While the outstanding amount of total corporate lending has declined in more recent months, the proportion accounted for by property-related lending has remained fairly static.

If we are concerned about the credit situation, we must recognise there are two factors at work, representing both demand and supply. The financial market turmoil we have experienced for some time has impinged on the banks which, as we all know, has led to a challenging funding position for banks across the globe, as well as in Ireland. This has been exacerbated, as members know, by what happened with Lehman Brothers last September. Together with the pressure on their capital positions, this has acted to inhibit banks' capacity to supply credit. As members may know, every quarter the European Central Bank and the national central banks of eurozone members conduct a bank lending survey. In the survey of Irish banks in recent times the banks have reported some tightening of credit standards on their part but also a falling demand for loans from businesses, which is no surprise in the current economic climate.

On the issue of funding, as members may know, total bank deposits have been volatile since Lehman Brothers went bankrupt last autumn. Total deposits with Irish banks in the first five months of the year were down about 8% relative to the same period last year, which reflects the difficult funding position they are facing. Domestic deposits have held up better than non-resident deposits which have been substantially drained from banks based here. There has been an even bigger drain by depositors at overseas branches of Irish banks, which mostly means branches of Irish banks in the United Kingdom, due to the lack of confidence in the Irish banking system. A compensating factor in this regard has been that with the drain in liquidity the banks have had to have greater recourse to the European Central Bank; as members will see from the balance sheet of the Central Bank and commentary in the press, there has been extensive recourse by Irish banks to the Central Bank. The most recent figure showed about €130 billion outstanding. Much of this is in connection with IFSC banks; we are not talking only about Irish banks. However, it shows the scale of the pressure on funding.

The impact of supply and demand factors on outstanding credit growth has been highlighted in the Mazars report commissioned recently by the Department of Finance. The results of that study accord with the picture we have gathered from the statistics for lending reported to us by the banks. The main messages are summarised in the opening statement and I will reiterate them. Total SME, small and medium-sized enterprise, lending has remained static for the past year. The data also indicate that to some extent there has been renegotiation of credit facilities and that, in fact, banks have been pushing out the terms of repayments for some borrowers. We are aware this is taking place in the mortgage sector too and that there are some concessions to be made in this area.

Most SME loan applications are for working capital. It is no surprise but the bank lending surveys reported to us indicate there is very little demand for investment. Businesses are not in expansionary mode and seek credit for working capital purposes or, in some cases, because business revenues are falling away.

The rejection rate of loan applications quoted by SMEs in the Mazars survey is somewhat higher than that reported by the banks. A 24% rejection rate was reported, whereas the banks have indicated they are rejecting only 14% of applications. The Mazars experts explain the difference in terms of the banks' view that some applications are not regarded as full scale, serious applications but rather tentative applications. Let us consider the obverse: the banks report that they approve 86% of applications, but businesses maintain 76% of applications are being accepted. Not surprisingly, the quality of the SME loan book of the banks is declining somewhat and we are all aware of the property aspect.

In broad terms the two main Irish banks conform to the terms of the Government recapitalisation programme on lending to SMEs and first-time borrowers. The committee may recollect the recapitalisation deal was agreed only three or four months ago in February. As part of it the banks agreed to increase their lending to SMEs by 10% a year and stated they would increase mortgage lending to first-time borrowers by approximately 30% a year. These facilities are in place and proceeding and broadly compatible with what they have signed up to.

The final part of the opening statement refers to the interest rate pass-through from the market rates or the official ECB interest rates. Since the first cut or reduction in the ECB interest rates last October the cumulative fall has been 325 basis points or 3.25 percentage points. The actual fall in lending rates to businesses has been more than this. For smaller loans which would include SME type loans, we have ascertained the fall has been approximately 3.4 %. There has been a fall in the case of larger loans to larger businesses of approximately 3.7%. The difference may be put down to a differential degree of risk attaching to SME loans as opposed to large company loans. Initially, the cuts in interest rates on deposits were not pushed back and the perception was the banks, given the liquidity or funding problems, were reluctant to do so. Since January deposit rates have been pushed back somewhat. On the other hand, banks have been constrained in reducing deposit rates further because rates are already quite low. That is a fact.

Let us consider the longer perspective. Over five or six years the net interest margins of the banks have been in secular decline. The real reason is that over time they have become more reliant on wholesale or market-type funding, whereas ten or 15 years ago there was a large number of non-interest bearing current accounts or very low interest retail deposit accounts. A more recent vulnerability of the banks has been due to the fact that during the period in which they expanded loans greatly they were financing this expansion by recourse to market or wholesale funding for which they had to pay more money. As a result, net interest margins have been declining.

In summary, credit flows to businesses and households are broadly flat. New loans are being extended but are more or less offsetting the repayments; therefore, there is no massive change in outstanding loans. Supply and demand factors are at play. The banks are slightly reluctant to increase their lending, given the funding difficulties they have and the increased riskiness of the environment. On the other hand, demand is in no way buoyant, as one would expect. With that summary, we are available to try to answer any questions the committee might have.

Deputy Deirdre Clune

Today we are trying to establish the flow of funding to SMEs because we see them as being essential to the future of this economy. From the contributions we have had this morning, there is a lot of focus in that area. We have heard comments this morning that not all banks are open for business to lend and some are more concerned with taking deposits than being out there working actively with SMEs and supporting businesses. Can the delegation comment on this? Has it noticed it?

There are a number of recommendations in the Mazars report, particularly on codes of conduct relating to lending to small businesses or businesses in general. I have the codes here and will go through them all. Does the delegation see these recommendations being implemented? There are calls from the Small Firms Association to implement the recommendations. One rider will be a cost for the banks to implement.

Mr. Tom O’Connell

The Deputy asked if all banks are open for lending. The answer is not really. It is fairly clear — this is an international phenomenon — if governments are supporting banks in different countries, their primary focus is to ensure credit flows in their own country. For example, in our case, in terms of the recapitalisation or measures taken to support the banks here, our top priority would not be to facilitate lending by the Irish banks who have significant presence in the United Kingdom or Poland. They cannot close up shop entirely in such cases but foreign banks operating here are facing the same pressures. Their parent banks in Britain, Denmark or wherever are being supported, arguably with a view to primarily promoting credit flows in their own countries. One is seeing that in the data.

The foreign banks are not in the business of expanding. One sees this in the press, where some of them want loans to be repaid, etc. The main driver of credit flows in the Irish situation are the two main banks.

Deputy Deirdre Clune

Are they the banks which have been recapitalised?

Mr. Tom O’Connell

Yes. There is not a whole lot of business going on across the rest of the banking system, particularly where banks are foreign-owned.

Deputy Deirdre Clune

Does the delegation think there is an imbalance in the marketplace?

Mr. Tom O’Connell

That is a risk. If people who had traditionally borrowed from some of the other banks, apart from the two main banks, are finding it more difficult to access credit they are going back to the two main banks. If that goes too far, it would not be helpful. We have four clearing banks here and a number of others would have been significant providers of credit to business. If they fall out of the scene, it will not be helpful.

Deputy Mary Alexandra White

My point is somewhat on the same theme. I do not know if Mr. O'Connell really appreciates the anger that we as public representatives are getting in our constituency offices from people who have lost everything. Grown men and women who weep their eyes out tell us how they have lost their pensions, dividends and jobs and how their children have lost the prospects of a pension. Perhaps the parents were going to leave them the bank shares which they bought in good times as an inheritance and now they are looking in the abyss. Mr. O'Connell is well aware of the anger.

The Deputy spoke about malpractice and so on. As she will be aware, various investigations are ongoing——

(Interruptions).

Mr. Tom O’Connell

Deputy Chris Andrews

It was included in press releases. That was the problem.

Mr. Tom O’Connell

No. It was included in financial stability reports and he came to committees to point it out. When many saw commercial and houses prices rise by 20% a year, they brushed it aside and said they were at the party and enjoying themselves. If one goes back, many of these risks were flagged. As the Governor said recently, it did not carry over into actions taken by the banks, borrowers or even the Government. Tax incentives and so on helped to promote the property boom. Many parties did not pay adequate attention to the matter.

The European Investment Bank has made funds available to banks in different countries as part of the process of trying to get economic activity going in Europe again. As was said, the Irish banks are involved in this. I am not familiar with the innovation fund, but we can look into it. The Irish banks would welcome all of these schemes because they have been under pressure for a long time on the funding side. In terms of facilities made available to them, one can take it as read that they will latch on to an EIB funding facility to be passed on to their customers.

Deputy Chris Andrews

I suspect, although I am not sure it is the case, that EIB funding is not yet coming through to small and medium-sized enterprise. It is directed at expansion, innovation and development. However, if the criteria for accessing this funding were changed, it would allow businesses to avail of it for working capital purposes to get them over the next 12 months.

Mr. Tom O’Connell

One could argue about whether the criteria are right. Some of this is coming from the European Investment Bank.

Deputy Chris Andrews

Does the Central Bank not have a role in forming——

Mr. Tom O’Connell

Once the facility is made available, we do not. When the EIB facility was being discussed in Brussels, the Department of Finance would have had a role. As the Deputy probably knows, there is no Irish representative on the board of the EIB because it rotates between Greece, Denmark and Ireland. There is a Greek man currently on the board and he liaises with the Minister from time to time. Ireland Inc. would have an input in trying to clarify what the best criteria would be. Once they were set out by the EIB, it would be difficult to go back to have them modified.

Deputy Chris Andrews

Is there no scope to have the criteria for the EIB fund changed?

Mr. Tom O’Connell

I suspect representations could be made, but it would be quite difficult to do so because the 27 countries would have to agree. If they are pragmatic——

Chairman

We must move on.

Deputy Seán Power

I wish to make a couple of points and ask a number of questions. I was a little surprised by the contributions made by the two gentlemen. We face a serious financial crisis and they have given the impression that they are almost observers, that they had no real role and that they are able to point fingers at banks and others for their inactivity. They have complained about the lack of regulatory instruments and not shouting loudly enough. It is a little rich to tell us that today.

It has been mentioned that the rejection rates of loan applications quoted by small and medium-sized enterprises are somewhat higher than those reported by the banks, especially for very small businesses. Some of this may be due to different perceptions of what constitutes a substantive loan application. Will the delegates clarify this a little more and not try to give us the two sides of the story? What is the position? We have been led to believe by businesses that many applications have been rejected. From the information Mr. O'Connell has provided, it appears someone is trying to ride two horses in the same race. What do the facts at his disposal reveal?

Mr. O'Connell referred to the banks engaging in excessive lending. When did this become obvious to him? Is it not the case that National Irish Bank cornered what appeared to be an extremely lucrative market, that the two major banks felt excluded from this and that they decided to set aside their standards and rules in order to obtain a slice of the action?

Mr. O'Connell has also stated banks make mistakes and that they should pay a penalty for this. Does he accept that the Central Bank and Financial Services Authority of Ireland made mistakes and, throughout the entire process, was negligent in a number of respects? What penalties is he suggesting should be imposed in this instance? Has the Central Bank and Financial Services Authority of Ireland paid any price? Mr. O'Connell referred to people in other organisations losing their jobs. Perhaps these individuals may have felt they were forced out or embarrassed with regard to the position in which they found themselves. Will Mr. O'Connell comment further in respect of this matter?

I do not know if Mr. O'Connell is in a position to or wishes to comment on the share prices of the two main banks. However, will he indicate if he is of the view that these prices represent a fair balance between the challenges the banks face and the potential for growth in the future?

Deputy Edward O’Keeffe

The country is in the greatest economic mess in its history. As a result of the banking crisis, our position is probably the worst in the world. I am not interested in blaming anyone for what has happened, I merely wish to express my concerns.

The first problem that arose in the context of the current crisis was that hedge funds in the United States of America began to go downhill. Then the difficulties with Northern Rock, Bear Stearns — a US bank established in the 1850s — and Lehman Brothers emerged. However, it appears that these issues did not give rise to concerns or ring any warning bells. Ireland has an extremely open economy and depends to a large extent on trade with the outside world. In that context, an issue did arise which was not addressed by the Central Bank and Financial Services Authority of Ireland.

Did the 2003 Act affect the Central Bank and Financial Services Authority of Ireland's ability to regulate? Did the Act weaken its systems and did it represent too soft an approach? When I was growing up, the Central Bank and Financial Services Authority of Ireland always issued real warnings, was critical of and closely monitored our financial system. Did we change our system of regulation too much?

The level of personal borrowings has reached its highest point ever. I understand that much of this debt will never be paid back. This is giving rise to another crisis. Some 90,000 new houses were built in 2007 and many more were built in preceding years. Large numbers of shopping centres and business parks were also constructed during the same period. These were all built on borrowed money and borrowed time. An economist from the Bank of Ireland made a statement to the effect that the economy was like an aeroplane which was continually rising until one of its wings was torn off.

I do not know where we go from here. Money is available at European rates of 1% and the banks take the margin on this. Mr. O'Connell referred to shareholders. The latter are the weakest link in the chain. The people concerned invest their money and buy shares through the stock market. Auditors have a real role to play in this regard. However, it appears many auditors have fallen asleep and that there has been a major failure in internal auditing systems. I am of the view that additional investigation and legislation are required in this regard.

In the context of the banks, the boards of directors, chairmen, chief executives, auditors and internal auditors failed in their jobs. They should have blown the whistle at an early stage but did not do so. There is a weakness in the system in this regard.

In recent days Permanent TSB increased its interest rate by 0.5%. I hold the view that this is a result of the fact that foreign banks are clamping down on lending and removing the money they have on deposit here. As I understand it, these banks are paying more for deposits than can be obtained from market returns in this country. There is quite a problem in this regard. The Central Bank and Financial Services Authority of Ireland is not addressing that issue. No one informed Permanent TSB that it should withdraw its rate rise. Alistair Darling, the British Chancellor of the Exchequer, is closely monitoring the activities of banks in the United Kingdom and on Monday stated he was going to keep an even closer eye on their lending practices and charges. No one in this country has made any such statement. The Central Bank and Financial Services Authority of Ireland has a role to play in this regard. That half of one per cent is tough on people who have mortgages, considering the times we are in, and they may have no jobs in many cases. The other banks are standing by waiting for the cat to jump somewhere else and put up their rates again.

Why cannot deposits be controlled? For example, Anglo Irish Bank can pay out 3.5% interest on the day and allow for a withdrawal the next day. There is something seriously wrong in this whole area of banking when this goes on. This is a huge problem. There is nothing being done in these areas. I am not a person to advocate over-regulation but there has to be discipline. There is no discipline and it is even worse than it was 12 months ago. I do not want to apologise to the delegation but its delegates have come in here in a very weak situation and with few answers and this does not give the committee confidence. There is a jobs crisis in the country, we are unable to create jobs and a large segment of the population will be unemployed. We depend on banks to give us the wherewithal and the capital and I cannot see any confidence there. There are thousands of shareholders but at any bank annual general meeting, one can see who controls the voting and they are the institutional shareholders and not me or anyone else, even though I have a few shares.

Mr. Tom O’Connell

We seem to be like observers. The Central Bank deals with the banks at arm's length in terms of lending money to them and so on. We are not actively involved. If they have a liquidity deficiency the interest rates we charge on those — in the euro area they are set in Frankfurt — the facilities we charge are based on the Frankfurt rates and we do it from here; therefore, we are dealing with the banks at arm's length, so to speak.

On the regulatory side, as the committee will know, the regulatory system here was based on the rules and regulations that emanated from Brussels and Basel and up to now it was principles-based which is not a very detailed set of minute regulations as it would be in the United States, although even there it did not work very well. Both the Governor of the Central Bank and the chairman of the Financial Regulator fully acknowledge that this philosophy of principles-based regulation has not worked so we will need to go into a much more detailed rules-based set-up and maybe with no guarantee that this will work either because we have seen the result in the United States. Both the Governor and the chairman of the Financial Regulator have acknowledged that we will need to consider a different system.

The Deputy asked about when the excessive lending appeared. There was excessive lending, arguably in the Irish financial system going back to 2001 to 2002 when there were rates of increase in lending at that point of 25% to 30%. Some warnings were being flagged at that point. This is a market economy and it is not like a communist system where one can allocate credit or decide sector X will be given a certain amount of credit and sector Y will not. Our market economy relies on prospective borrowers and lenders coming to an agreement and presenting viable propositions to one another and agreeing them. We are not in a system where one can direct these things and, unfortunately, some of that lending will go wrong sometimes and people will not be in a position to repay or whatever. Banks can make wrong decisions and also borrowers can make wrong decisions. This is the natural order of things. One would hope there would not be too many wrong decisions made either by borrowers or lenders. No regulator or central bank is involved in a micro sense; that could not be the case unless one goes back to the Communist system and that has not been too successful either.

Deputy Seán Power

That was not suggested.

Mr. Tom O’Connell

It is in the commercial banks' own interests to ensure that reasonable amounts of credit flow out to the economy as that is how they make their money with interest rates on loans and less on deposits. It is in their interests to have a vibrant economy. People talk a lot about the negative feedback loop and by that they mean if the economy goes into a tailspin, that is bad for the banks. In turn, if the banks are suffering, they will not be able to lend, which further contracts the economy. Everyone — the banks, borrowers, the Government, taxpayers and those on social welfare — has an interest and we all want the economy to improve.

Unfortunately, we have taken a big hit because we engaged in too many excesses over a period of time, particularly in our obsession with property. I recall a wise statement by Professor Joe Lee of University College Cork that Ireland was driven by a philosophy of possession rather than performance. We want to acquire land and houses but are not too worried about the return from them. Perhaps this obsession with property or land without regard to return owes something to our history. The return from property and assets is what constitutes the flow of income and output in a country. It is this that matters.

The Deputy asked whether the Central Bank had paid a penalty. In terms of reputation, members are throwing darts at us. As the Deputy will be aware, the chief executive officer of the Financial Regulator believed it wise to resign given the problems that had occurred. All those involved in the financial sector, whether in the commercial banks, the Central Bank, the Financial Regulator and perhaps those in government, are not held in great esteem. We fully appreciate that, as many have stated, there is a great deal of anger for various reasons. We are not top of the pops in terms of popularity, although like all the participants——

Sitting suspended at 1 p.m. and resumed at 2.05 p.m.

Chairman

Mr. Roland O'Connell is vice president and Mr. Aidan O'Hogan is past president of the Irish Auctioneers and Valuers Institute. Before we begin, I draw the delegation's attention to the fact that while members of the committee have absolute privilege, the same privilege does not extend to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses, or an official, by name or in such a way as to make him or her identifiable.

With that usual caveat I invite Mr. O'Connell to commence his presentation, which we are thankful to him for making available. We would welcome a summary of the presentation and we will then take questions, which will be of more benefit to both sides.

Mr. Roland O’Connell

That is where I got my idea.

Deputy Cyprian Brady

The delegates spoke in the presentation about the uncertainty that this will create. Is it not true that such uncertainty has been there already in the last 18 months, and that something had to be done about it? I understand from a business point of view that some kind of abatement might be desirable, but is there not a role for an open market rent in the industry?

Mr. Aidan O’Hogan

There is an open market rent. This applies to all new lettings and these are in the market. It is a tenants' market. Tenants are dictating the terms entirely, and in many cases they are getting away with no refusal, they are getting turnover based rents only, and they are getting inducements to go in. This legislation does not apply to any old lettings, and that is where the problem exists. It has no impact, except a negative impact. It will also make the leases those tenants hold less attractive compared to leases which have upwards reviews, so they are compounding their own problems.

Deputy Mary Alexandra White

It is good to see the delegates here today, as we have been discussing the upward only rent reviews for some time. Having spent most of my working life in the retail sector negotiating with faceless bureaucrats on terms for the pension companies, I feel pretty strong about this. I certainly feel strong about the old lettings. There might be some room for manoeuvre with the new Bill, but we must do something for the old lettings. Senator Cassidy says that the retailers are on oxygen, but I think that many retailers are on life support.

I was interested to hear Mr. O'Hogan say that there has been a bit of manoeuvring around new lettings. He also spoke about leases being renegotiated on turnover, and that he has good evidence of this. It is something that I have not come across, and I represent many retailers who have been crippled by upward only rent reviews, the service charge, the lack of footfall going through the shopping malls and the unwillingness of banks to lend to viable businesses. We need a reasonable bit of ground being given from the pension companies, the land owners and so on. We need to do this quickly, because we cannot see more and more shops boarded up in these shopping centres.

It is like getting blood out of a stone with some of these pension companies. Some of them are reasonable, but others will be forced to become reasonable, because there are groups of retailers coming together in shopping centres who insist that they will not pay the rent. They want to bring the companies to their knees, rather than allow the companies bring them to their knees. We do not want that confrontational approach, because the retailer will suffer in the short and in the long term. Are there any other measures that the delegates would like to see in place for the commercial or the retail property market, in conjunction with current legislative proposals?

Mr. Aidan O’Hogan

Unfortunately, I do not think there is any easy solution. A form of dialogue is the most important thing. Many of these faceless bureaucrats are effectively trustees of pensions, and they often do not mind things happening which cannot be blamed on them afterwards. That has been the situation for the last 20 years, although it has never been as extreme as this. I am of the view that the trustees of the pension funds would be willing to engage in a form of national dialogue which envisaged some form of temporary abatement rather than the solution now proposed. I expect that would be a far more acceptable and manageable solution for them.

Mr. Roland O’Connell

It is understandable that members' concerns currently relate chiefly to retail tenants and the retail market generally. That is of great importance to us all. However, we must bear in mind that any changes to landlord and tenant law are not restricted to retail tenants but also affect office tenants, industrial tenants and so on. Therefore, it is important when considering any such changes that account is taken of the effect they may have on the office and industrial markets in order to ensure there are no unforeseen consequences. An issue that has been noticeable in the market in the last 15 years is that office leases have generally been more flexible than retail leases. The same can be said of the industrial market. Some of the legislative changes introduced may be seen to be beneficial for retail tenants, particularly the abolishment of upward-only rent reviews, but may have a very negative impact for office tenants.

Members may well wonder how this change could be detrimental to office tenants. One of the major issues for any business considering a change of office is the cost of fitting out a new premises. It is not unusual for that cost to be the equivalent of two, three or even four times the annual rent. It is quite common in the office market for tenants to negotiate an extended rent-free period, as long as two years or more in some cases. This allows the tenant scope to fit out the premises and get up and running. Landlords are willing to offer these extended rent-free periods because they have certainty of income, knowing that for a ten-year period, for example, the lowest rent they will receive is the rent negotiated with the tenant on day one. However, if a rent review is imposed on them in the fifth year, with no option to circumvent it, landlords may no longer be in a position to grant extended rent-free periods. This means office tenants will be unable to afford the initial up-front costs of fit-out and so on of a new premises, and we will end up in a stalemate position that is detrimental to both landlords and tenants. That is one example of where good ideas can have an unanticipated negative impact on the market as a whole.

Deputy Chris Andrews

Mr. O'Connell stated that asset managers and banks are engaging, but one need only look at the number of shops closing in the St. Stephen's Green Shopping Centre to see the evidence. It would appear that, if the current closure rate continues, the entire centre will close shortly. Canada Life and its parent, Great-West Lifeco, on Grafton Street, which exacts the fourth highest rents in Europe, have refused to negotiate. Some of the banks, including the Bank of Ireland, are also refusing on the grounds that, if they hide behind a faceless group of people, the arrow will never be pointed at them. They believe that brass neck will see them through and that they can ignore the realities facing small retailers around the city and elsewhere.

Mr. Aidan O’Hogan

On the retail side, I have been involved in some negotiations regarding Grafton Street where we gave the tenant concessions. I can speak from first-hand experience, although we cannot speak for everyone. In many retail failures, rent is only one of the factors. The level of business has fallen and, almost irrespective of rent, there will be failures. We have too much retail space. So many shopping centres were built that the market is oversupplied.

Something else that must be borne in mind is that many retail tenants renewed their leases in the past 15 years. I am not referring to rent reviews. Rather, their leases had expired. They had an entitlement under the Landlord and Tenant (Amendment) Act 1980 to have upward or downward reviews. Few of them chose to exercise this option primarily because landlords gave them soft deals in return for not seeking downward reviews. Under legislation passed by the Houses, there is no provision to require upward-only reviews when a lease expires. The legislation is very specific that it is the market rent at that date. People have chosen to ignore this and tenants seem to have forgotten about that right and do not exercise it. To some extent, it is a request to produce a provision which is already embodied in the existing landlord and tenant legislation but people did not bother to exercise it.

Deputy Arthur Morgan

This is a very good presentation but I would like to see a submission and that suggestion is laudable. The IAVI is at the coalface and has vast experience and I would love to see how it would be captured in a submission. It would be very useful and if one was sent in we would be happy to consider it.

Senator Ivor Callely

I thank the delegates and note their submission. There has been a focus on commercial letting. Is there anything that needs attention for people involved in the residential area?

Mr. Roland O’Connell

I have to confess that neither Mr. O'Hogan nor I would be experts in the residential area, although we have knowledge of it. Obviously, the organisation represents many people involved in the letting and sale of residential property. I do not think there is any major outstanding issue in the conveyancing of property or in residential letting which is an impediment in the market. There are perennial issues such as the level of stamp duty and the fair basis of property tax on which we have views but that is not what Senator Callely is asking about.

Mr. Aidan O’Hogan

If I may add to that, what has happened in the residential market points to some very good solutions for the commercial market; residential leases are short and therefore at their end market forces apply and we have seen that happen in the current situation where rents are falling dramatically. The constraints in the commercial market have been the 35 year and 21 year long-term leases which result in relatively little or restricted movement in the market. The predominant reason landlords went for them was to stay out of the original landlord and tenant legislation for as long a period as possible. Many members will remember that prior to 1981 leases were for 21 years at a fixed rent. This was ludicrous in times of inflation and therefore landlords went for the longest possible lease to avoid the terms of the landlord and tenant legislation for as long as possible.

We have very little movement in the market; tenants are locked in and understandably landlords want to keep them locked in. Until recently there was no possibility of contracting out of the landlord and tenant legislation except in limited circumstances in offices and in the IFSC. That has been changed with regard to the entire market and to some extent what we are seeing is a reflection of the existence of that legislation. In the European models leases tend to be for three years and for nine years in France. This leads to a much greater turnover and much greater open market dialogue between both parties. Frankly, that is what we should be achieving.

The long-term impact of adding more complexity to the landlord and tenant legislation will be to create a more artificial market. If we return to a situation where leases could be typically for five or ten years — as they predominantly are in the office market but not in the retail market — and everybody takes their chances at the end of that period it would solve our problems to a significant extent because we would have a much higher level of vacancy for landlords to deal with and they would be forced into dealing with it at a much greater rate.

Senator Ivor Callely

I was prompted to ask the question because I note the submission refers to landlords and tenants and the IAVI has vast experience on both sides of the fence. People are involved in rental leasing on both residential and commercial property and I understand there are difficulties on a number of fronts with landlords and tenants. The PRTB exists for the residential sector; do the delegates want to make comment on its operation, the period of time matters are in process and the shortcomings, if any?

I understand the private residential area is similar to that of office and retail in that there are bad apples on both sides of the equation. Is there any way of identifying such individuals, whether they jump from one premises to another without paying rent or do not co-operate as landlords? Would the delegates support the establishment of a register of bad apples?

Mr. Roland O’Connell

We would love to see the bad apples being identified. However, my initial reaction to a register is not enthusiastic because anything that adds further unnecessary administrative work is probably a retrograde step. If the benefits outweigh the negative aspects, we would support the proposal.

The PTRB has experienced significant delays in deciding cases since it was established. We would love to see a solution to this problem because the market, landlords and tenants would thereby benefit. I am not sure how this can be achieved other than by employing additional staff or simplifying the process. There are numerous options for such simplifications and we would be happy to make a submission in that regard if the committee considered it useful for us to do so.

Senator Ivor Callely

I understand other countries do not experience the same level of over holding as Ireland. Do the delegates wish to comment on the current situation in Ireland and how best to address it?

Mr. Aidan O’Hogan

These matters are a function of our legislative structure and the delays in the legislative process, which encourages people to over hold. The only solution to this is overall reform of landlord and tenant law.

Chairman

Is the IAVI's message to the Government that the amendment introduced by the Land and Conveyancing Law Reform Act 2009 should be set aside in order to allow further consultation? The delegates appear to be advising that in current market conditions the relevant section should not be invoked.

Mr. Roland O’Connell

We are recommending that it not be brought into effect. We also recommend that it be altered for the future. Rather than have it hang over the market like the sword of Damocles, we should introduce opt-out features for well advised landlords and tenants or else abolish it altogether.

Chairman

I thank Mr. O'Connell and Mr. Hogan for assisting us in our deliberations. Perhaps we should have considered their submission two or three months ago. They are now excused as witnesses but they may observe our proceedings from the Visitors Gallery should they wish to do so.

Our next delegates are Mr. Robbie Henneberry, managing director for AIB Republic of Ireland, and Mr. Denis O'Callaghan, general manager of retail banking east. I draw the delegate's attention to the fact that while members of the committee have absolute privilege, the same privilege does not extend to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses, or an official, by name or in such a way as to make him or her identifiable.

Mr. Henneberry has submitted a succinct presentation to the committee and I ask him to summarise it in order that members can have opportunities to put questions.

Mr. Robbie Henneberry

I thank the Chairman for providing us with the opportunity to update the committee on AIB's continuing support for the SME sector. Before I do so, I will deal with the Chairman's request for details on our position in the property lettings market. We are primarily a tenant in our properties. We have 487 properties in the Republic of Ireland, 335 of which we hold as tenant. We act as landlord on a very small scale. Small businesses occupy just five of our property portfolios.

In other involvement in the property letting sector, a subsidiary, AIB Investment Managers Limited, manages assets on behalf of its customers such as pension funds and private clients. These assets include property. The pension funds and private clients and, by extension, their underlying members are the beneficial owners of these assets. Therefore, the property assets managed by AIB Investment Managers Limited are not shown on our balance sheet, as is normal practice, and we have no operational role in the management process of these property portfolios. We understand the importance of the commercial property market to the economy and the part played by lettings. Our research shows the letting market is working and rents are coming down.

I will deal with the primary purpose of our attendance here today, our support for the SME sector. AIB is the bank of choice for more than 170,000 SMEs in Ireland. Business banking is very important to us and we have an approximate 40% share of this market. We understand very clearly how our support for new and established businesses will be critical for the recovery of the economy. Access to credit has been the subject of intense scrutiny in recent times, including a number of important surveys. In respect of the demand for loans and other credit facilities, eight out of ten inquiries to AIB for credit are successful. Where a formal application for credit facilities is made, the success rate is even higher, at nine out of ten.

It is not in our interests or those of our customers to support propositions that are not viable in the long term. In a recent extensive, independent survey of SME credit, Mazars found that AIB's decisions to decline were reasonable in the context of normal commercial and business criteria. AIB is committed to striking the right balance between our continuing support for the SME sector and making proper, prudent business decisions. Last year our overall level of support to the sector amounted to more than €15 billion — €12 billion in capital financing and €3 billion in working capital. Despite a 12% reduction in gross national product year on year, we intend to maintain this level of support. We have made available €3 billion in working capital, which includes overdraft facilities to business customers. This is an important source of working capital facilities for businesses at a time when cash flows are tight. Some 44% of this, €1.3 billion, has yet to be used by the customers to which it has been made available. We are pleased the recent publication of the independent report confirmed our in-house research and data which show AIB continues to lend to SMEs to the extent outlined. Notwithstanding this, we are aware of our responsibilities to the SME sector during this critical time and intend to do more.

Reflecting the fact that some of our customers are experiencing difficulties, we are increasingly taking the initiative to contact them to discuss the problems they are having and find solutions with them. We are extending and strengthening our support to the SME sector. We are in the process of opening the last of 15 dedicated centres across the country. This is in addition to our 270 branches. Our central credit unit has SME help desks, which will improve communication between us and our customers.

One of the services for which we are finding an increasing demand is invoice discounting. Recognising this demand, we are working on making the service more widely available. AIB has significantly reduced the length of time it takes to process and pay invoices it receives from its suppliers. More than 90% of these invoices are paid in less than 30 days. We have expanded and restructured our credit function and are reviewing our credit processes to be more responsive to our customers. AIB is opening 1,000 new business accounts a month, many for personal customers who are starting their own business.

I will talk about the further support we provide for the SME sector. We have created a €30 million seed capital fund in conjunction with Enterprise Ireland and have plans to boost it later this year with a further €23 million. We have provided over €2 million in support for incubation centres in University College Dublin, Dublin City University, Galway University and other locations. These centres will nurture a new wave of enterpreneurs in emerging sectors. We also continue to sponsor initiatives that enhance community activism and self-help and are a major contributor to the social finance foundation fund. We recently committed to participate in a €72 million revolving credit facility to the foundation over the next 12 years to support the development of other microfinance and community-based projects. Our contribution will comprise almost 25% of the ultimate total.

As the country's largest clearing bank, we have also invested heavily in our banking infrastructure to provide SMEs with a comprehensive banking service. This includes a very wide range of banking services provided by over 7,000 staff in the Ireland division, supported by numerous on-line and self-service options, including the provision of a first class clearing service. This provides immediate value for funds lodged across our 270 outlets, a wide range of cash and foreign exchange facilities, an extensive ATM network of almost 800 machines, an internet banking service which provides a day and night banking service for personal and business customers, a wide range of self-service options within our branches and a banking relationship with 2,000 banks worldwide which facilitates international trade and payments on behalf of our SME customers.

The business environment remains very difficult, but we know that a successful SME sector is vital to our economic recovery and take our reponsibilities to that sector very seriously. The committee has my commitment and that of AIB's 7,000 staff in the Ireland division that we will work as hard as we possibly can to support and serve our customers. I will finish by thanking our staff for their efforts in this regard to date.

Deputy Arthur Morgan

We are faced with something of a conflict in the presentations. We are told by AIB that eight out of every ten inquiries for credit are successful and that, where formal applications for credit facilities are made, the rate is even higher, at nine out of ten. ISME challenges that figure and believes the refusal rate is in excess of 50%. AIB is relying on the Mazars survey which seems to prove otherwise but states that, as consultants, they were unable to secure any meaningful analysis of credit inquiries because the banks did not have a system in place to measure them or did not reveal them to Mazars. That leaves me with a choice of which side to believe. When there is a serious disparity such as this, I have to take into consideration the track record of the banks, in which they rip off customers by overcharging them and give advice on tax evasion and blatant fraud, depriving the State of its finances. We know about the scandalous way in which they behaved which led us into this economic mess.

Can the delegates from AIB give me one reason to believe one word that comes out of their mouths? Look at the record of the scandals in this country. In America people were led off to jail in handcuffs after the Enron case, but that, unfortunately, did not happen in this country. The delegates' banking colleagues who should be in jail are still walking around with the benefit of massive pensions and bonuses. Why should we believe the bankers when they say they have an allegiance to the SME sector?

Mr. Robbie Henneberry

There were two aspects to the Mazars survey. One was a demand-led survey and the other, a supply-led survey. It is true the banking sector, AIB in particular, does not measure the level of inquiries. To make the survey relevant, Mazars conducted two elements: a supply element and a demand element. When it considered the supply side — what actually happens within AIB — it went through our files and all our documentation and confirmed, as we have said before, that we approved nine out of ten formal applications. When people reach the formal application process, their loans are sanctioned nine times out of ten.

The other part of the survey which was to compensate for the fact that there were no——

Deputy Arthur Morgan

On what is that result based?

Mr. Robbie Henneberry

It is based on a full examination of all the documentation requested on behalf of Mazars, going through it file by file, if necessary.

Deputy Arthur Morgan

The bank gave Mazars access to the files?

Mr. Robbie Henneberry

We gave access to the files to which it had requested access.

The other part was the demand survey which was by far the largest survey to be undertaken in the private sector for a number of years and which investigated private sector credit with regard to SMEs. Mazars hired an outside agency to source a database of more than 100,000 which it whittled down and more than 1,000 replies were received. The report states specifically that it is appropriate from a statistical point of view to draw conclusions from it. Based on the survey, eight out of ten inquiries to AIB are actually sanctioned. That is indisputable. Thus, the supply side survey corroborates the evidence we brought forward, while the demand-side survey gives an indication that we have approval rates of eight out of ten inquiries.

The survey covers product-specific areas. Of most importance to SMEs are overdraft facilities and loans, while commercial and asset finance are less important. When one gets into overdrafts and loans, one can see there is actually a 92% approval rate. We have been working with our customers through this cycle and what we have been telling our staff is that we want them to make an assessment of a business and try to obtain an economic value, looking through the economic cycle, to see whether the business is viable and worth supporting. In that regard, the level of approval is 92%. Much of the time the SMEs have taken action themselves; they have managed themselves to the extent that they are reducing their stock levels and overheads. They are trying to reduce their own dependence on bank borrowing in these times.

We must remember that in the period of this survey the annual rate of decline in gross national product in Ireland was 12%. Members must bear in mind that we have €15 billion in facilities to that sector and have maintained that level of financing for it, notwithstanding the fact that the economy has contracted by 12%. In addition, as I said in our submission, we are opening 1,000 accounts a month for businesses, 40% of which do not borrow, but a significant portion of which do.

I have in front of me a sectoral analysis of the lending that has taken place through the Central Bank and I am looking at the figures for June 2008 and May 2009. They are fully available through the Central Bank. Members can see that with regard to the Irish division, our commitment in total lending to Irish residents was €74.8 billion in 2008, while in May 2009 the figure was €78.5 billion. As a percentage of total private sector credit to Irish residents, we have increased our market share over the period from 19% to 20%. However, if we consider a smaller grouping — that is, the retail clearing banks — we have increased our market share from 37% to 40% over that period. There is absolutely no doubt that we have been supporting the SME sector. There is indisputable evidence for this from the demand-related and supply-related inquiries of the Mazars report and also in the Central Bank figures.

Deputy Arthur Morgan

I refer to the €100 million loan which the bank received from the European Investment Bank. On how many approved projects has AIB signed off from that €100 million allocation?

The other issue we wish to address is that we initially thought there would be a lot of demand for the fund and we tried to have a cap of €250,000 per application. It is something we are reviewing and we may increase the cap to approximately €1 million.

Chairman

A number of members wish to contribute. Can we take it that the delegation will not engage in a pre-emptive strike, strike out on its own and impose a 0.5% rate increase on hard-pressed customers, as it received €3.5 billion in recapitalisation funding? Surely nobody has the neck to give taxpayers, who are funding it, a kick in the teeth? What good is it to say there is an 8% return on the one hand and, on the other, lobbing 0.5% increase onto two million customers?

I accept what the delegation said and have no reason to doubt it — it is on the record and the delegation made a wholesome presentation. Can we take it that we will not wake up on 7 or 8 August and read a headline in the national newspapers that states there has been a 0.5% increase in rates for customers to struggle with? Does the delegation agree that is self-defeating? An increase of 0.5% could be the straw that breaks the camel's back. There could be a rush to the courts for examinerships, liquidations and receiverships. It defeats the purpose.

One gets a couple of cent in the euro instead of trying to help businesses and not look for additional profits. The 0.5% increase might generate some profit but may well break the back of the business community. I cannot understand the logic of this but I am not a banker. I ask the delegation to give the representatives of people who invested €7 billion in recapitalisation programmes, with an awful lot more to come, some sort of an assurance.

I am not long back from the United Kingdom and the Irish market is one of the most competitive that I have come across for interest rates. It was reported in the newspaper that Alistair Darling was summoning the UK banks yesterday or the day before, and that one third of all SMEs in the United Kingdom pay, approximately, a 9% margin. That is way in excess of what Irish customers are paying. If one goes back to the time prior to the review which I think started last September one will see that in absolute terms there is no difference in what customers are paying now. Our average margin is approximately 1.88%; therefore, our average margin in the SME sector is less than 2%.

I will give an example of how the cost of raw material has changed for us. Shortly after we got the Government guarantee we issued a bond and raised €1 billion or €2 billion at 55 basis points. That was a two year bond. Last April we issued another bond in the market and the price was 184 basis points for 17 months. Last week we issued a further bond and that cost us 155 basis points for one year. We were relying solely on the wholesale cost of funding. The cost of raw material from a bank point of view has gone up in an extraordinary fashion. We have been bearing the brunt of those costs and have not attempted to pass on those in any significant way to our customers.

On top of this, there are other costs involved in providing credit. There is the capital cost we referred to, which includes the Government capital, but also the capital as provided by other providers and ordinary shareholders. From a regulatory point of view we must put aside a certain amount of capital for every loan facility we provide. We have also got our own operational overheads and while we are an efficient operation, we still have to provide a certain level of return to pay for those operational overheads.

On the other part, which is the risk premium, if we were to assess the risk premium based on the current economic cycle, we could not price credit. We take an economic view of the price of the risk premium from credit. We look at a minimum of five years from a default point of view to ascertain the risk premium but if I were to take the liquidity I referred to earlier, the funding cost, the AIB cost and the Euribor cost, we would want to be getting a return of approximately 4.5% for one year money if we were solely reliant on that source. As I said, our average margin is approximately 1.88% or 1.89%, plus the Euribor of 1% or 1.25%.

Members will see that in that period we have not been opportunistic. We have not attempted to create a situation where we are trying to pass on the full burden of what is happening in the wholesale markets to our customers. That is primarily because we have other sources of funding available to us.

Chairman

I call Senator Callely. We will have to be sharper in terms of our questions.

Senator Ivor Callely

I thank Mr. Henneberry and Mr. O'Callaghan for their honesty in the responses they have given so far on mortgages, in particular.

Many of us are bogged down with a great deal of paperwork that has been supplied to us, and one might say that drowning problems in an ocean of information is not the same as solving them. We heard reference to 170,000 SMEs, that eight out of ten inquiries to AIB are successful, that there is a nine out of ten success rate, there has been an overall level of support of €15 billion, with €12 billion for capital financing and €3 billion for working capital, a €30 million seed capital fund and a €72 million revolving credit facility, which sounds brilliant. I must declare that I am an AIB customer and I would not agree with everything the representatives have said.

I have some questions. I have spoken to people in the SME sector who have been dealing with a branch manager or a regional manager. Does AIB disclose the identity of its credit committee members? It is interesting to note that when a mortgage letter is sent out the customer is advised to contact MABS to ensure the bank will get its money. When a banking commercial letter is sent out, however, the customer is not referred to anybody. There is a demand and the bank wants full repayment. Would the representatives consider putting somebody in place to assist people who have found themselves in difficulties in the commercial banking sector side? I raised this issue on the Order of Business in the Seanad. MABS is an excellent service and it helps the mortgage customers. Would the representatives agree there is a need for some agency to assist people on the commercial banking side? Am I right in saying there is a vacuum currently in that respect? Bankers and politicians are in the same boat in terms of how the public view us but it appears a faceless credit committee in bank centre is making decisions, yet the customers cannot meet them.

I presume Mr. Henneberry and Mr. O'Callaghan do not work in an AIB public office but it is interesting to note that when one goes into an AIB public office one can see invitations for bank loans and car loans displayed. I have not seen the code of practice on display in any of the bank offices and when I ask bank personnel about the code of practice, including high level officials, they are not familiar with it, which surprises me. I would accept a junior clerk at the desk not knowing the code of practice.

We have an educated, determined group of entrepreneurs in Ireland and they need to be empowered. It is not the size of the dog in the fight that is important but the size of the fight in the dog. That fight is still going on but they need empowerment, support and cash and it is not forthcoming, regardless of what the representatives would tell us. I am hearing it is not happening.

Will the representatives clarify the difference between inquiries and formal applications? The code of practice for business lending requires that the banks record inquiries and formal requests. What is the AIB's procedure in this regard? As a regulated entity, I understand the bank must have an appropriate procedure in place for loan applications. Is the detail of this procedure easily available to enable a person who applies for a loan to know to whom the application has been passed and the parties to the decision making process on the application? Will the bank reach its target of an additional 10% capacity for lending to small and medium-sized enterprises in 2009, as agreed under the terms of the recapitalisation of the bank?

I will be brief as I am aware of the time constraints. My priority is the protection of jobs, which is also the priority of committee under the Chairman's stewardship. I refer to the 780,000 jobs in small and medium-sized enterprises. I commend Bank of Ireland, AIB and the other banks who have been doing their utmost in this respect. However, we need a guaranteed commitment from the representatives of AIB that anything that can be done will be done to assist small and medium-sized businesses and family businesses particularly in the next three to four months. The banks have done a good deal to sustain businesses but it is crucial in the national interest, as probably never before in our lifetimes, that the banks provide support for the small and medium-sized enterprises.

The banks have provided financial support of €2 million to Enterprise Ireland to develop incubator centres in the colleges. Can such support be extended to develop such centres in the institutes of technology such as the institutes in Letterkenny, Sligo, Athlone and Carlow, which are attended by children from middle and low income families to provide them with opportunities in this area? I have seen such centres operating in Canada and elsewhere in the world through the work of Enterprise Ireland, which is doing a terrific job, as is the IDA.

Deputy Edward O’Keeffe

I welcome the delegation from AIB. I was very impressed with its statement. I take it that it is accurate in terms of what it is doing for small businesses. It is beyond what I expected because I was led to believe from the newspapers that the situation was much worse and that banks were closing the doors on people. Mr. Henneberry's statement reflects well on AIB.

A person on the radio the other day said we should fix rates again. A few months ago, there was a hullabaloo that rates should no longer be fixed, which would result in a huge cost to the banking sector. Currently, deposits are all over the place. This is costing money and it is leading to some banks having to raise the rates of lending to their clients.

There was an influx of foreign banks into this country in recent years which created some of the problem. It created huge competition for existing banks which has caused much of the problem we face in the banking sector. It is now paying huge money for deposits above the cost of lending. I am convinced that is creating some difficulty as well. I would like to hear Mr. Henneberry's view on this because he gave a fair résumé of the interest rates AIB is charging and the payments. What is it paying for deposits and how is that affecting the bank? With the buoyancy in the economy over the past ten years, we took our eye off the ball and many things happened which should not have.

I wish AIB's chairman, Mr. Gleeson, who appeared before the Joint Oireachtas Committee on Finance and the Public Service on a few occasions, well on his retirement. That committee was hung up on bank charges and forgot about the bigger picture. It was all about bank charges and we were chasing 2 cent or 3 cent and the bigger picture was not addressed.

The famous Mr. Duffy from the Bank of Scotland appeared before the Oireachtas Joint Committee on Finance and the Public Service and wanted to get clearing facilities audited. I fought hard with him on behalf of the sector. We were taken down a cul-de-sac by competition and that has led to the problem.

I pay tribute to AIB, a bank about which I know much. It is a rural bank and it has done much good for society and for large and small customers. Coming from County Cork, I knew it as the small man's bank. It was known in the old days as the Munster and Leinster Bank. It was a very strong bank. It has done much good for small business and small investment.

I was very impressed with Mr. Henneberry's statement because it highlights what the bank is doing. I say well done to AIB. I am known to be tough, critical and to talk out of turn but I wish AIB well and hope it continues the good work.

Mr. Robbie Henneberry

In regard to the approval process in AIB, within the SME sector, 75% of all applications are approved at the branch. Some 90% of all applications are generally for less than €1 million. We have regional offices which can easily handle that and well above it. A very small number of applications come to the centre for approval.

We have recognised where we are in the economic recovery and the economic situation overall. We have restructured our credit processes to recognise the fact one needs specialised access for those in distress to enable them to talk to people who can appropriately manage and help them. We have set up separate teams which look at new business and increased facilities for clients, who will pass through very quickly. Where there are applications and decisions to be made and where the rigour of the inquiry needs to be more vigorous, there are specific teams set up which are well equipped to deal with that. That is how we manage it, that is, by differentiating and creating a demarcation between easily determinable viable solutions and prospects as opposed to one's which are tougher and more difficult calls.

A question was asked about invoice discounting. Invoice discounting in this climate is a valuable product. We have a 14% share of the invoice discounting market and we are of the view that we are underweight in respect of the facility we offer in this regard. It is an area into which we are going to invest considerable resources in order to make our facility more freely available. We are changing the terms under which we make that facility available. Normally, the facility to which I refer is generally aimed at businesses that have turnover in excess of €1 million. We will be reducing the ceiling in this regard and making the facility more accessible to people whose average utilisation from their debtor book will have decreased on the basis that sales in general are down.

The aspect of invoice discounting which must be considered is the fact that because, in a general sense, people in the SME sector are slower to pay, a number of the debts — because they have gone out beyond 90 days — become disqualified. We are examining the possibility of making these amendments in order to make the facility more amenable to a wider audience. We hope to relaunch our invoice discounting proposition, which would be quite suitable for this market.

The Deputy also referred to the deposit market. Again, deposit business is a core product for the bank and we are committed to it. We are competing in the market in order to maintain our funding base. As already stated, it is part of the funding mix for our business, which is made up of an extensive deposit portfolio in the Republic, obviously part of our capital and then our contingency funding — of which we can avail from time to time — from the ECB. When an institution can rely on its customer deposits, this assists with liquidity within the banking infrastructure. It is helpful if banks such as ours which are accessing the deposit market continue to lend and recycle that liquidity back into the economy.

Members can see from the statistics produced by the Central Bank and Financial Services Authority of Ireland that we are doing that. I cannot speak for the other banks or the banks that are mentioned. However, we are competing in the deposit market in Ireland and we are certainly recycling that liquidity into the economy.

Mr. Denis O’Callaghan

Sitting suspended at 3.30 p.m. and resumed at 3.50 p.m.

Chairman

I welcome from Bank of Ireland, Mr. Des Crowley, CEO retail Ireland and UK, and Mr. Denis McArdle, head of business banking; from the Irish Credit Bureau, Mr. Séamus Ó Tighearnaigh, CEO, and Mr. Gerard O'Neill, executive director; and from the Irish Association of Pension Funds, Mr. Jerry Moriarty, director of Policy, and Ms Paula McGuaran, IAPF investment committee.

Before we proceed, I draw attention to the fact that while members of the committee have absolute privilege, the same privilege does not apply to witnesses. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

Bank of Ireland has made a succinct and comprehensive submission on the issues it was asked to address. I ask Mr. Crowley to provide a summary of the document, after which we will take questions.

Mr. Des Crowley

Bank of Ireland welcomes the opportunity to update the joint committee on the activities it is undertaking in the business banking and small business marketplace. Bank of Ireland is firmly committed to the small business sector. It is vital for the bank's business and the economy that this sector is vibrant and sustainable. We have prioritised our available lending capacity to the Republic of Ireland in the areas of consumer franchises, mortgages, small and medium enterprises and corporate banking. This means we have de-prioritised lending outside of Ireland. As members will be aware, Bank of Ireland has closed some businesses outside the country to effect this decision.

A significant decline in demand for credit continues to adversely affect lending volumes. Bank of Ireland remains very much open for business. While the Mazars report indicated that lending has declined by 42%, I hope we will be able to demonstrate that Bank of Ireland remains active in supplying substantial credit to the business community.

All stakeholders were fully involved in the independent review conducted by Mazars on behalf of the Department of Finance. Bank of Ireland committed extensive information to Mazars as part of the review and gave the company unrestricted access to our front line business and branch bankers to enable it to understand what is taking place on the front line and how customers feel about interactions.

I draw two main points to the attention of the joint committee. First, Mazars found that there had not been any material change in credit policy or terms and conditions on lending to small business customers and that this finding clearly applied to Bank of Ireland. Second, Mazars reviewed 1,000 applications which had been declined by various banks in the marketplace. We gave the company full access to the relevant files and the business bankers who made the relevant decisions. Mazars concluded that the decisions were "reasonable in the context of normal business and commercial criteria".

In terms of capital financing, that is, financing for business, despite a slowdown in demand for investment capital lending, Bank of Ireland has none the less continued to provide new and renewed facilities for small and medium enterprise customers, with more than €1 billion lent in the past six months. We have also increased our commitment to the sector because we have observed that customers were having difficulty securing lines of credit from other banks. As a core bank in the market, Bank of Ireland recognises that it must step up to the plate in this regard.

In addition to the €1 billion Bank of Ireland has lent in the marketplace, our submission outlines a range of special funds we have put in place to encourage and stimulate economic activity. While I do not propose to detail each of them, total funding under these funds amounts to approximately €600 million. The European Investment Bank fund has been the focus of much attention. A sum of €100 million has been allocated to Bank of Ireland under the fund and projects valued at €36 million have been approved and are in the pipeline waiting to be drawn down.

A range of activity is taking place as regards the other funds and further funds will come on stream. For example, in the next couple of weeks Bank of Ireland, in conjunction with Enterprise Ireland, will announce a €25 million seed capital fund. The bank is working closely with all areas of Government to ascertain what else it needs to do to stimulate investment. We are working very closely with all areas of government to see what else we need to do to stimulate investment.

Moving on to day-to-day financing and working capital, which is really where most of the activity is at this stage for businesses, we have opened more than 8,000 new business current accounts in Bank of Ireland since the end of March, that is, within one quarter. That has stimulated an increased demand for working capital facilities with our existing customers. As one can see from the submission, for the core SME sector, that is non-property related, in the trading sector and the services sector we have increased our total overdraft commitments from €1.6 billion to €1.9 billion, which is an increase of 18% over 2008. Utilisation on those commitments varies according to the type of business and season. The average is somewhere between 35% and 50%.

It is important to stress that we do not have any policy of withdrawing overdraft facilities to our existing customer base without sitting down with customers and engaging with them in terms of how their businesses are running. In some cases we have converted some overdrafts to term lending, invoice discounting or considered better ways to satisfy their needs, but we have been very active in the area of overdrafts and working capital. In addition, our corporate banking division has seen significant increases in existing facilities for our mid-corporate and other areas. There is a lot going on in the area of day to day financing.

Another point which I would like to bring to the attention of the committee is at the top of page 6. We have been actively involved in communicating very clearly with our customer base and with staff. We supplied the brochure to the Chairman on how we finance businesses. We have implemented the business lending code and trained all our staff in it. We conducted an enterprise week across the country which 4,000 customers attended to hear how they could stimulate their business. We did that with the help of our 275 branches and 500 business bankers. We continue to engage with local business. This is all about local markets and local and individual businesses. Our extensive national reach is fully mobilised from this.

In summary, it is vital for the Bank of Ireland, the Irish economy and the health of this country that we continue to support the SME sector. From our point of view that is not negotiable. We are fully committed to that and our staff are similarly committed. We do have a duty of care to our customers to carefully assess with them the viability of their businesses today and through the cycle. We do that every day of the week. We are working hard to ensure that we can keep as many businesses on board as possible.

While the level of demand for investment is down, the level of demand for working capital based on our bank is increasing. As other banks withdraw from the market, we are clearly stepping into the breach to facilitate customers and ensure that those SMEs continue to thrive and operate in the economy. We are acutely aware of our obligations and we are doing the best we can to support the economy and the SME sector.

Deputy Cyprian Brady

I thank Mr. Crowley for his succinct analysis of his presentation. The whole thrust of the meeting is to consider lending to SMEs specifically, and in that context the possible protection and expansion of jobs.

A number of members have given anecdotal evidence of people involved in SMEs, be they employing three or four people or 30 or 40 people, going to their banks and not being in a position to renegotiate their overdrafts or to secure seed capital. All of the banks are telling us that is not the case. We need to establish the facts. Numbers were supplied by Mr. Crowley on the percentage of refusals. Does that include people who have been pre-screened or informal approaches such as to renegotiate an overdraft? Are there concrete figures on the number of overdrafts that have been withdrawn or changed? We are trying to get to the bottom of this issue, as we are being told one thing and the banks are telling us something else. We need to find out what is the middle ground.

Mr. Des Crowley

I will respond then I will ask Mr. McArdle to cover the activity, as he sees it, in the market. Overall, we see situations where four out of five customers are accepted either for increased term lending facilities or increased overdrafts. In our view, under a duty of care some companies are not viable for the future and we do not have facilities to grant them. I am not surprised by some of the stories. Bank of Ireland has increased facilities by 18%; we have increased our commitment to overdrafts by €300 million, though there are cases where it is not possible to do this. The bank has only withdrawn overdraft facilities from businesses that are either not viable or are closing down. In some cases customers switch banks, there is no activity in their accounts and so we withdraw overdraft facilities. Mr. McArdle will elaborate on what he sees in the market.

Mr. Denis McArdle

We are not withdrawing overdraft facilities, though in certain cases we must take a legal route at the end of a long process. In such a scenario overdraft facilities and other facilities are withdrawn. Also, customers are increasingly diverting business elsewhere — but such situations are exceptional. We have geared our front line to deal with customers because we are acutely conscious of the difficulties they face on the other side of the counter. I have been in the SME sector for over three decades and have experienced various recessions so I appreciate the difficulties.

Around September or October of last year we recognised the difficulties in the marketplace and realised we were not going through ordinary times. We realigned our front line; therefore, there is now a team that deals specifically with difficult cases — we call them challenge cases. There is also a team to deal with business as usual. We are blessed because across our regions those teams are led by three senior staff members with over 100 years of experience. They have been through much and they set the tone and direction regarding how we position ourselves. It is critically important that we understand what customers experience. As head of business banking I would regard it as a failure if a person left one of our branches without receiving all the help we can give. This is the approach we instil in people.

We hear comments such as those made today everywhere but the Mazars review has drawn a line under this to an extent. The review gave a good insight, though it is not the end of the story; it is only the start. Such a review was not conducted before; our files were examined without restriction, though customer confidentiality was protected. Mazars conducted a very large survey and its facts were independently determined. We were anxious that details should go on the record because there was much confusion, particularly in the last quarter of last year and the first quarter of this year. We co-operated fully and willingly with Mazars and the review has provided much clarity on our position of support for SMEs.

Mr. Des Crowley

The question that Deputy Cyprian Brady asked about formal and informal applications relates to a demand-side study by Mazars that involved contact with 1,076 customers. Bank of Ireland has many conversations with customers and we know exactly what happens with regard to formal proposals — this goes for Mr. McArdle and I and also the various regional managers. There was a small discrepancy between the concept of formal and informal applications. We want Ireland's SMEs to come and talk to us; such customers who feel they may face problems should do this as early as possible in order that we can work something out. The same message goes out to consumers, mortgage holders and SME customers. We can work out problems because it is in the interest of Bank of Ireland to keep customers going. We have 120,000 customers and hope to have them still at the end of this difficult period — indeed, we would like to have more.

If we take the business support fund and the green business loan fund we have put in place, those are really to try and stimulate those parts of the economy where there are growth prospects, for example renewable energy, etc. We have been very proactive on that and it is an area we hope to see job creation stimulated from because, inevitably, there will be contraction in other areas.

Mr. Des Crowley

That would be our normal practice.

Deputy Arthur Morgan

According to the presentation, Bank of Ireland "provides extensive volumes of information and unrestricted access to business banking customer relations managers in the front line, as part of the independent Mazars review". However, Mazars informed us that they were "unable to secure any meaningful analysis of credit inquiries". Where does that leave us?

The conundrum that we have is that the business sector is on its knees. Do the witnesses accept that? The bank got €3.5 billion of taxpayers' money to save its skin, otherwise it would have gone under. The impact of that on public services is very substantial. When will that money show any life in terms of adequate funding for SMEs? Must we wait until the crime of the century occurs, which is the NAMA bailout that shifts the toxic loans away from the bankers, following all the corruption that was going on? Can the witnesses address any of this? How long do they think it will take before the banks are in a position to put on a proper funding stream to SMEs? Are they aware that there is a perception out there that bankers are just one step short of a reputation equivalent to the black and tans?

Mr. Des Crowley

I will respond to those questions, but not in that order. There is no restriction on lending capacity from the Bank of Ireland to the SME sector in Ireland. There is a restriction outside Ireland, as we have closed businesses in the UK and withdrawn credit facilities there, because that is not our home market. In recognition of the fact that we did get recapitalisation and support to get us through this very difficult cycle, we have prioritised lending to consumers, small businesses and corporate customers in Ireland.

I acknowledge that the business sector is struggling. Turnover is significantly down from most businesses. The sector has grappled hard with its costs. I am sure we will discuss property letting and other costs presently. Income is down, demand is down and retail sales are down. We have acknowledged this. Our approach is to work with businesses to ensure as many as possible of them come through this cycle. We are committed to working with both existing customers of the Bank of Ireland and customers who are sent to us from other banks which are not willing to lend to them.

It is nice to hear senior bank officials acknowledging that they have not got everything right. This is a step forward from where we were a number of months ago when officials would not admit anything.

Regarding the European Investment Bank our guests' presentation indicates €100 million in approved and pipeline projects. What is the breakdown of EIB SME loans for approved projects?

Mr. James McGing of the European Commission was on Pearse Street on 16 June to discuss the European Investment Fund which is a competitiveness and innovation framework programme that guarantees loans to SMEs. People were directed towards its website. AIB states that it has been in touch, but are our guests aware of the scheme? The blockage is clearly at the European level, but how can it be cleared? The fund is an important support for SMEs.

As we are running out of time, I ask that all questions be brief.

Senator Ivor Callely

I thank the bank officials for coming before the committee today. I have listened to a number of questions and comments including those of my colleague from Sinn Féin on bankers' corruption and public perception. There is a line that one should not look back but one should try harder in future but I think in Leinster House we make a stick to beat ourselves with. I was somewhat upset to see some of my learned colleagues criticising the appointment of Bank of Ireland's chief executive, whom I happen to know, as if he were unqualified for the job. My understanding is that he is a well-educated man, a Trinity College graduate and a career banker who would meet the criteria required for chief executive. However, my learned colleagues, some of whom as I mentioned previously write for the Sunday newspapers, thought he was not fit for shining shoes.

I will take this opportunity to wish Mr. Crowley well in his new role. I know Mr. McArdle and his approach to business. I have the height of respect and admiration for many bankers, particular those in AIB and Bank of Ireland, for the work they have done in fuelling the economy, as I mentioned when the delegation from AIB was before the committee. I wish them continued success and I thank them and salute them for the work they have done in that regard.

Whether it is people in the Houses or others outside who use the media, there is a view that politicians and bankers have made many mistakes, that they are all in the same boat, that they are all doing the same thing and that politicians are now protecting the banks, the developers and the builders — one can throw a few more in there also. Like Mr. Crowley I would state that politicians have made many mistakes and more of us need to put our hands up, particularly those who asked questions and about whose past there might be a public perception of corruption.

It was noted that NAMA would create additional funding. It is important that people understand how that funding will be created. I know the answer to the question but I would like it to be spelled out.

In regard to the recapitalisation money, when will the taxpayer benefit? I held a business forum meeting in Clontarf Castle in my constituency at which the issues I raised today were discussed. I intentionally did not invite financial institutions to attend the meeting because I was afraid it would have turned into a banker bashing exercise which would not have benefitted anybody. I hope to invite the banks to future meetings, however.

Issues arise in regard to the target of 10% additional capacity for lending. I understand MABS is being used for mortgage advice and acknowledge that the delegates wish to further tease out the commercial side. How will that be promoted? Surely computerisation and banking systems allow trends to be recognised as they develop. What type of proactive approach is being taken?

I will leave my comments at that because the representatives will be aware of the questions I raised earlier. I again ask Bank of Ireland to work with us and make itself available to attend future meetings.

Deputy Edward O’Keeffe

This is the greatest recession the world has seen in the past 80 years or more. The banks lent a lot of money in the past decade but now is the time for stocktaking. People are seeking loans or extensions to their terms but if we continue to lend as we were doing we will be in a similar crisis in three or four years' time.

I admit that I am a shareholder and customer of Bank of Ireland and a shareholder of AIB. The rules of the Dáil require Members to declare their positions.

Chairman

Did the Deputy lose some money?

Deputy Edward O’Keeffe

I did but I will not lose sleep over it. I lost the devil, which is worse. Both the Bank of Ireland and AIB have given similar responses to the committee regarding what they are doing on behalf of their customers. I accept their views and that they are experiencing difficulties with certain clients.

In regard to mortgage interest, what kind of mortgage rates are being charged and how large is Bank of Ireland's mortgage book? I asked other delegates to comment on fixed rate mortgages, which were apparently going to destroy the entire country if people were not released from their contracts. I take it that someone who seeks to switch back to the Bank of Ireland will be asked where he or she previously banked. It is important that a client's history is known. Is the switching being done mainly in respect of banks which entered the market five or six years ago and put competitive pressure on the system? Many such banks are being advised by the UK Government to prioritise lending in that country. The ISN Royal Bank of Scotland, about which I have strong views, is about to pack its bags and leave. Are its customers receiving a fair trial?

I understand Bank of Ireland is planning a rights issue. This is a policy matter for the chief executive and the board. The idea is to repay the capital invested by the Government in the rescue package rather than pay 8% interest on it. Does Bank of Ireland see itself having a successful rights issue? Is there sufficient money in the economy in Ireland and abroad to give it the rights issue? The right issue is the way forward because coming from the private sector, it should not be dependent on the State. I hope the people support it if it comes about and it is very encouraging that they are talking about it.

Chairman

That seems to be a vote of confidence from Deputy O'Keeffe.

Senator Donie Cassidy

I do business with Bank of Ireland and AIB. I welcome the confirmation from Bank of Ireland as well as AIB that they are fully committed to SMEs, particularly those that are viable, with a good track record and a decent order book. There should be no cutbacks and if anything there should be additional overdraft facilities, or whatever is needed, for the next six months. That is crucial.

I presume the capital financing and green energy funding includes wind energy. Perhaps Mr. McArdle can elaborate on this. It is very relevant to rural Ireland and the challenge of reducing our energy costs because, as we know, energy costs are the second highest expenditure item on the balance sheet. It used to be insurance but this committee did a great job over the last five years in tackling the insurance inquiry. In the autumn we will examine energy costs in depth. It is unsustainable.

As Senator Callely said, when NAMA is in operation, I presume Mr. Crowley means at Christmas time, there will be no restriction on funds after that date. That is a serious announcement at this committee. We have much of the responsible media here and it is wonderful to see them here. It is wonderful to see all the Fianna Fáil and Government side here, but where is Fine Gael when the banks are here? It has amazed me. They must have all gone on holiday for the day. We are taking a serious business——

Senator Ivor Callely

We are bigger than that.

Senator Donie Cassidy

I must make that comment because this is a very important meeting where the banks are coming to address the people of Ireland, under the Chairman's chairmanship, and every employer and employee has been looking towards this for the last 48 hours, in particular.

Chairman

I have a couple of questions. Many people are reluctant to contact banks when they are getting into trouble. In other countries such as France and Belgium government-appointed mediators are in place to facilitate that. Is there any role for those here? The delegates heard my comments on interest rates to the other bank, AIB. What do they see as the short-term future on interest rates? Do they anticipate that interest rates will remain at the current level for a period of time in the shorter term? As the economy recovers interest rates will increase, but in the short term as we try to claw our way back is it likely interest rates will remain low?

Do the delegates see themselves pre-empting any ECB action on interest rates? Any institution that thinks it will fly off on a solo run and thinks the people will accept it are in for a rude shock. There will be a revolution on the streets, and I advocate that. If I were a customer of PTSB I would not pay its 0.5% and I would let it see what it could do. It was the greatest slap in the mouth and a Harvey Smith sign to customers. I was never so enraged. I have been a customer of Bank of Ireland for the last 33 years and it stuck with me when many probably would not have. I must be honest about that, and I deal with business ventures. There is some straight talking from Bank of Ireland and we do not like to hear some of it, but that is part of business, however I was well treated by the witnesses' colleagues in Mullingar long before I became a Deputy.

Senator Donie Cassidy

Was that in the Hibernian?

Chairman

It was back at that time. The interest rate issue has annoyed people. Banks have to be competitive but we got some degree of assurance from AIB that in the short term people can have some degree of comfort and that it will not be a race to the headland. I hope the delegation will not engage in a pre-emptive strike regarding rate increases.

Mr. Des Crowley

Perhaps I should respond at this stage as a wide range of points have been made, two or three of which are critical, including the point that we do not envisage interest rates changing in the short term. We believe they will be sustainably low over a period of time and that is required to stimulate the economy.

Senator Donie Cassidy

Hear, hear.

Chairman

That is the point.

Mr. Des Crowley

In terms of small and medium-sized enterprises, Bank of Ireland has passed on interest rate reductions because it is vital for us that businesses have lower costs of funds. There is always a worry that this market or the world will not stabilise but better signs are beginning to emerge and it is about sticking in and holding our position and that is our plan at this stage. The committee has our full commitment to the 10% capacity of lending in the mortgage and SME market and we hope to exceed this. Deputy O'Keeffe raised the point about other banks not being in such a position for whatever reason. The job of Bank of Ireland is to be there for customers of Ireland, to understand their business propositions and personal circumstances and Mr. McArdle and his team are very active in that regard.

We will report back in several months and we realise this is only the start of a journey of recovery for the economy. It is important that we can be up-front with the committee and do what is right. I refer to some of the suggestions on mediation and working with people. We have active advisers in every local market — I will finish on this point. We have many people working day and night with our customers. They work with local market specialists, professional advisers, mediators etc. and this remains an active part of our proposition and Mr. McArdle will continue to do this.

Mr. Denis McArdle

Absolutely. The only way forward is open dialogue. There are no quick fixes to anything in this market. My experience and that of the people in this room is that quick fixes do not work. We are in this and we are blessed to have a base of customers, many of whom have been with us for 30 or 40 years or with whom we have had connections for longer. We see it as our absolute responsibility to support them now in any way we can. The customer experience was referred to some minutes ago and this is critically important to me. We do not wish for someone to leave our counter and wonder if we could have done something differently. That is a high ideal; sometimes we get there and sometimes we do not but we will not stop trying at any time.

I refer to the query on renewables, which has been the shining light in the past six months. At this stage we have four projects approved totalling €127 million. It is quite an involved area and thankfully we have built up an expertise now in handling those deals. Some €16.5 million of these have been drawn and the deals will go through. They are on-site and the committee is aware of where they are based, including throughout Cork. More important, we have five projects in the pipeline amounting to just less than €60 million, a shining light in every respect. We will go back to top up that fund in the short term. From our point of view it is very good news and it has the absolute spin off benefits mentioned on the cost front. We also launched the green business loan which supports businesses in the smaller scale initiatives they take in controlling costs. These initiatives are complementary.

Chairman

I thank Mr. Crowley and Mr. McArdle for being very forthright and comprehensive in addressing a significant array of questions. The question and process elicits some information and may, I hope, put some ideas into the heads of the delegation which they might carry forward or utilise. I thank the delegation for attending and helping us with its submission. The delegation is excused but if they wish to observe the remaining two areas of discussion from the Visitors Gallery they are very welcome to do so. We are running a little late and we must continue straight into session 7.

I welcome Mr. Séamus Ó Tighearnaigh, CEO, and Mr. Gerard O'Neill, executive director of the Irish Credit Bureau. I thank them for their forbearance as we have run a little late. I apologise in advance for any further lateness. Before we begin, I draw attention to the fact that members of the committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. With that caveat which I must give to everybody, I ask Mr. Ó Tighearnaigh to give us the initial overview. The delegates know the format. I thank them for the membership listing which I will make available.

Mr. Séamus Ó Tighearnaigh

I will give a quick synopsis of the document previously circulated.

The Irish Credit Bureau was formed as a credit reference agency back in 1965 and has grown substantially, particularly in the last two decades. Its growth rate at the moment is higher than hitherto and if it continues, I imagine that by the middle of 2010 or 2011 the ICB will have virtually all regulated entities in Ireland as members, including credit unions, for example.

It is important to stress that the bureau is a credit reference agency and not a credit rating agency. Around six months ago I made a presentation to the Joint Committee on Economic and Regulatory Affairs and there was some opening confusion about the difference between a credit rating agency and a credit referencing agency. We are not a body similar to Standard & Poor's or Moody's; we are simply electronic librarians. We do not tell institutions to lend or not to lend money. We simply hold their records objectively, honestly and fairly in respect of people's transactions and present them upon request.

Our objectives are to assist in lowering the cost of credit; enabling faster decisions in providing credit and giving customers more mobility by allowing them to use their credit reports almost as a passport at times; avoiding over-indebtedness — it is clearly in the interests of neither the customer nor the bank, if a person has five or six loans and is robbing Peter to pay Paul, simply to throw more money at him or her in circumstances in which indebtedness cannot be managed; and preventing fraud. We comply with the various EU and Irish laws in respect of data protection.

I have mentioned that we are an electronic library and we hold information on the progress of individual credit agreements between borrowers and financial institutions. The information in ICB is entirely registered by its members. We do not derive information from outside sources. The types of agreements registered are comprehensive and include mortgages, car loans and credit cards. The information we hold on the account holder consists of surname, forename, date of birth and address data — that is the coat hanger to which we attach the borrowing information — and in respect of each loan we have the data for account opening date; coded member details — MBNA, for example; the amount of the loan or advance; the currency — typically euro; the loan term in months; the type of loan; the account association, such as joint account or guarantor account; the latest balance state and amount; the repayment frequency, such as fortnightly, quarterly or monthly; and the repayment history indicators. These are best summarised as follows: zero means that last month was paid on time; one means the loan is one period in arrears; and it is developed from there.

The databases are quantified in numbers. There are now well over 100 members and at the latest count we have close to 70 credit unions either actively or as good as in membership and another 60 or so in the pipeline awaiting IT developments to become members. I suspect a lot more will follow.

There are approximately 5.5 million account records and we hold all positive or full, and not just negative, information. We used to process 10,000 or 11,000 inquiries in the best of times. Today we are down to about 6,500 inquires a day. Some 37,000 on average come to us each year and get their credit records in full. To us, they are the canaries in the mine in terms of accuracy. If our data was not accurate we would have serious problems and it is of comfort to us that 37,000 people examine us on that every year. It is totally automated and retained for five years, good, bad or indifferent, from the time the agreement is completed. I again stress we do not make any lending decisions; we are purely librarians.

A sample credit report is included in the presentation, but it is too much to go through now. If the committee looks at the second yellow page, it will see a box halfway up on the right hand side which runs from the bottom right across, from one to 12 and then 13 to 24. That is what everyone wants to see. The tick means that one has paid off one's monthly agreement. We are not saying a person is a good or a bad borrower.

In less volatile times when things were good, some lending institutions from the sub-prime area, as the committee knows, specialised in lending to people who had poor credit histories, while others only wished to deal with those who had very good credit histories. I have handed out some additional information which was downloaded from our website. The committee can log onto the website to get much more additional information.

Chairman

I must leave for one moment. Deputy Brady will take the Chair.

Deputy Cyprian Brady took the Chair.

Deputy Edward O’Keeffe

Deputy Edward O’Keeffe

Does that mean if the customer consents?

Mr. Séamus Ó Tighearnaigh

Yes.

Deputy Edward O’Keeffe

I was not aware of that.

Mr. Séamus Ó Tighearnaigh

There is a consent clause in every loan application. One credit union recently highlighted the sincerity of the consent clause. It mentioned that it still extends facilities to people of senior years who are more cautious in giving such consents, where there is a reasonable basis for the individual to withhold that consent.

I have highlighted the 37,000 people. We are not faceless. We see 37,000 people who come in to test the veracity and accuracy of that information every year. The World Bank has said that it is not possible to have a properly functioning economy without a properly functioning credit reference agency. In every western state or country that I am aware of there is an equivalent to the Irish Credit Bureau. One of the eye-opening issues that could not have been conceived of ten years ago is that non-nationals who leave for economic reasons and want to bring their passports back to their home countries, Poland or wherever, criticise us because all the information is not in their credit reports. That marks a big change in perception over time.

Deputy Edward O’Keeffe

I borrow lots of money from several institutions but I have never been aware of signing a form that gave anyone permission to look into my accounts. I always thought that the bank, credit union or hire purchase agency registered one. I thought it was their safeguard rather than mine. I accept that all are registered, the good and the bad. I am concerned about the ones on the middle ground who get into difficulty in the short term, fail to make repayments for five or six months and the bank or the hire purchase company get excited. In many cases now it is the credit unions that get more excited than most because they are under real pressure. Such people will have a blemish on their records for five years and beyond because the financial institutions will be aware that they defaulted at some stage. There is a necessity for a better safeguard.

Mr. Séamus Ó Tighearnaigh

What we are seeing at present is a considerable increase in the registration of the code "M", meaning moratorium. I will not take up the committee's time with it. That is because individuals in difficulty are going to their banks to reschedule their agreements to get a moratorium or holiday from making repayments. Our system reflects those agreements and changes accordingly. When we reach calmer waters, an individual who has an "M" for moratorium is clearly going to be in the sight of a rational thinking potential lender as a responsible individual who took it upon himself or herself to go to the institution and ask for rescheduling, and I will want that rescheduling effected in my ICB report. We are noticing that happening increasingly.

Yes.

Deputy Wilie Penrose took the Chair.

Chairman

Has it ever happened, given that many financial institutions resort to the Irish Credit Bureau for advice, that it has made an error in respect of Deputy Willie Penrose's name appearing, resulting in a black mark against it? That was not actually the case. Has there ever been an error made? Before the witnesses answer that question, I will call Senator Callely.

Senator Ivor Callely

I noted with interest the comment about sub-prime lending. My view is that the root of the financial crisis lies in sub-prime lending in the United States where corrective measures are now being taken by the financial institutions and the authorities. Some of the corrective measures are required because there were clubs and blatant liberalisation. Clearly, in the sub-prime market, the credit rating did not play much of a role because people were dabbling in the market in the knowledge that the money being given was deemed to be high risk.

In looking at the Irish Credit Bureau and what we have witnessed in recent times, where one might be seen to be part of a club in so far as the bureau is funded by the financial institutions, I note Mr. Ó Tighearnaigh did not give the actual cost of running the organisation on an annual basis. As the Chairman said in regard to errors, many members of the committee would come across this issue on a regular basis. In fact, the temporary Chairman and I know about one of the high profile cases that have been through the courts in recent months in which a high award was made against the financial institution to the individual concerned. It involved ACC-Rabobank, which might indicate to Mr. Ó Tighearnaigh the case to which I refer. I accept it is a small number of cases compared to the hundreds of thousands that go through the courts on an annual basis. In the light of the question the Chairman asked about the people who are put into the system and may be in it for a considerable period, we all know that financial institutions bringing people through the courts is not a short-term measure. It is as a last resort and the process probably spans a number of years. I am concerned, in the light of the knowledge public representatives possess, about the manner in which certain financial institutions operate and the tactics they employ. I do not know if Mr. Ó Tighearnaigh was present when I said suicidal tactics, so to speak, were being used by certain financial institutions. I do not know if they know they are doing it but the end result is that they are pushing people over the limit and including them in categories that are unfair, not right or helpful.

Mr. Séamus Ó Tighearnaigh

The one thing that would cause me concern when I open my post in the morning is evidence of an error because that would cause me and the data subject many problems. If an issue arises about the accuracy of the information, it is set out in our reports. Obviously, if an individual identifies this as an error, he or she is advised to contact the financial institution. If it is not put right, the matter can be referred to the Office of the Data Protection Commissioner who will investigate it. We make this clear; there is always the remedy of law. Fortunately, we have been in the courts fewer than ten times in the past ten years and in those circumstances we would usually be a co-defendant.

An issue I should address, however, is disputes that are not black and white; one would need to be King Solomon to resolve them. We try to deal with this issue also. Typically, it arises in the context of marital conflict or break-up. One of the cases that recurs involves a financial agreement that the house will go to one spouse and that the repayments will be kept up but they are not and because it is a joint mortgage an innocent spouse is attracting arrears ratings. To cater for this, we have a facility whereby the individual can make a declaration regarding the circumstances. This allows the person concerned to declare that the arrears are not theirs or outline the background. That is added to the record and the declaration made by the individual in question will be contained in the reports we issue. We try to identify areas where error is as good as eliminated. We would be complacent if we said there are no errors. In the real world that is not the way of things.

Deputy Edward O’Keeffe

When a client makes an application to a financial institution for a loan or mortgage, it will query the record of that client. That is unfair, which is the reason I mentioned legislation. A bank operating here has a note on its statement — a constituent showed it to me — to the effect that if there are arrears, it will notify Mr. Ó Tighearnaigh's organisation of that client's difficulty. That is intimidation. I am not making a personal remark about Mr. Ó Tighearnaigh, but I am concerned about the way the operation is working. The consumer needs protection in this area.

Mr. Ó Tighearnaigh also mentioned some new legislation. Is it not the case that the Dáil will have to legislate?

Mr. Séamus Ó Tighearnaigh

Yes, by 10 June 2010.

Deputy Edward O’Keeffe

Unless we obtain an exemption or a moratorium.

Mr. Séamus Ó Tighearnaigh

Or unless we do a transposition. I would like to emphasise that the bank or mortgage provider cannot simply write to us and request a report on a customer. The customer's consent must be obtained. I would like to stress that point.

I remember a case that we discussed with a former data protection commissioner many years ago. He was of the view that it was better to tell the customer that if he did not pay the moneys owing, the matter would be reflected in the Irish Credit Bureau rather than ignoring it and not telling the customer

Senator Ivor Callely

On the issue of obtaining the customer's consent, during a debate that took place in these Houses a view was expressed that a director of a public limited liability company was protected against financial exposure. I am sure the representatives realise that when people are put under pressure by a financial institution, they will put forward personal guarantees, regardless of their limited liability protection, as it is demanded of them. I did not make this point when the representatives of the banks were before us, but people are now being pressed to cash in their pension plans, for which they will not derive true values at present. They will do that to keep the show on the road. If they are asked to sign a consent form, they will easily agree to do so to get over the line, so to speak.

One must be mindful of the spirit in which consent may have been given. I am not sure a person would read all the documentation when he or she signs a form for a simple matter of giving consent for the Irish Credit Bureau to carry out a check on one's record. I am not sure if people know the consequences of agreeing to that or that they know what we now know about Irish Credit Bureau, how it is set up and who funds it. There is considerable pressure on people today.

Chairman

That is a fair point. I thank An t'Usail Ó Tighearnaigh and Mr. O'Neill for assisting us in our deliberations and for their observations and forthright answers to our questions which were interesting. They are now excused as delegates. They have been in the Visitors Gallery for most of the afternoon. I thank them for observing the proceedings and they are welcome to do so for the final session.

I welcome Mr. Jerry Moriarty, director of policy, and Ms Paula McGuaran from the investment committee of the Irish Association Pension Funds. I thank them for their attendance. They have been here for a considerable time and I thank them for their patience. They are the final group to come before the committee on what has been a long meeting but I assure them that will not make this discussion any less interesting.

Before we begin, I draw the delegation's attention to the fact that while members of the committee have absolute privilege, the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses, or an official, by name or in such a way as to make him or her identifiable.

We have a copy of the association's submission and, therefore, I invite Mr. Moriarty to give a brief résumé of it. Unfortunately, I may have to leave the meeting as I have to take part in a radio programme, but by doing so I am not being in any way disrespectful to the representatives. The Vice Chairman will take over.

Senator Ivor Callely

The Chairman does not have to do the radio programme as Senator Cassidy has offered to do it for him.

Chairman

The representatives should take no notice of that comment. That is simply a personal cut that I have to take every now and again. I invite Mr. Moriarty to proceed.

Mr. Jerry Moriarty

I thank the committee for the invitation to attend this meeting. I am the director of policy at the Irish Association of Pension Funds. I am joined by Ms Paula McGuaran who is a member of our investment committee and she works as the investment manager for the An Post pension schemes.

The IAPF is a non-commercial and non-profit organisation, which exists to represent the interest of pension funds that have been set up by employers to provide retirement benefits for their employees and which are operated on a non-profit basis. Therefore, that is who we represent.

As members have a copy of our statement, I will focus on some of the key issues, of which the members are probably aware, in terms of pension provision in Ireland. Currently, approximately half of the working population have supplementary pension provision and, therefore, they are saving in excess of the State pension. The Government is trying to increase it to at least 70% of the working population but the figures have, to a large extent, been stalled at 50% for some years.

In recent years we went through a process where a number of reports were done by the Pensions Board. There was also a Green Paper and a consultation process. We are awaiting the outcome of that which looked at how we increase the number of people who have pension provision and the amounts people are saving.

Pension funds are assisted by the Government in terms of tax relief. The contributions which are made are made before tax is applied. Any investment returns are exempt from any tax but the pension, on retirement, is taxed. That system operates pretty much throughout the European Union.

As members are probably aware, there has been a fair bit of publicity about the Commission on Taxation which is looking at the whole issue of tax relief. That is a concern for us and for employers who operate pension funds because pension funds have suffered quite a lot in recent years in terms of poor investment returns and anything else which could be seen to be detrimental to pension provision might cause employers to rethink.

We have been doing much work on trying to highlight who benefits from tax relief because there has been much focus on high earners whereas 90% of people who are members of pension funds operated by our members earn less than €70,000 a year. A large section of the working population benefits from tax relief. I am quite happy to take any questions. I am not sure on what members wish to focus.

Chairman

With politicians, one would not know what might be asked. However, they are fairly focused today.

Senator Donie Cassidy

Having been a Member of the Houses for a long time and seen the way the economy has gone up and down several times, pension funds are certainly very important. However, an index linked pension fund is the only one I could recommend to a young person in the future given what has happened with pension funds.

In regard to someone looking for a pension in the future, this committee should recommend that an index linked pension fund must always be offered with all other products in the pensions fund area. That is the only way one will shelter the person taking out the pension fund.

For someone retiring now at 65 or 66 years of age and after paying into a pension fund for 30 or 40 years, it is not a pleasant thought, it is horrific. The word "insurance" means certainty. Until quite recently, to me a pension fund pretty much meant certainty. Now I realise that it is not the case because it is linked to investment. I am trying to do something to encourage members of the public to take out pensions but at the same, safeguard them from the experience over the past difficult two years of trading in every line of product, whether property, bonds or otherwise. The only guarantee is if is one is offered an index linked product.

Mr. Jerry Moriarty

That is a fair point and it is obviously important. Where people are retiring and are likely to live for a considerable period of time, if their pension is not index linked——

Senator Donie Cassidy

It is longer now.

Mr. Jerry Moriarty

Exactly. What happens when people are given the choice — very often they are coming out of defined contribution plans — is that because one gets a higher flat amount initially, rather than an index linked fund which starts off a lot lower, people always choose the higher amount.

Many understand that people live longer but they worry about what happens if they do not live longer. A worry people have, in particular when purchasing an annuity, is that it is almost like a game one plays with the insurance company as to who lives longest. People do not like the idea that they might die within a short of time and that the insurance company effectively gets their savings. We have been advocating the possible extension of approved retirement funds which some, but not all, members of defined contribution schemes are in a position to access. Under these funds, there is no date by which an annuity must be purchased. As a result, one is less dependent on what has happened in the stock market on that particular date. People can continue to manage their funds and draw them down as they need them over time.

Senator Donie Cassidy

I was referring to an index-linked pension fund on both investment and retirement. On the investment side, everyone is aware that this is crucial, particularly in the light of what has happened in the past two years. Is there a product available on which people might obtain an additional and guaranteed 2% or 3% each year in respect of their investment in their pension funds? Would such a product come with the proviso that when a person reached pension age, his or her pension fund would not fall below that guaranteed annual increase? If such a product is available, would it be the case that, on retirement, a person's pension would be index-linked to the tune of two or three percentage points for the 15 years immediately following that pension first being drawn down? Such a product would be hugely successful.

Mr. Jerry Moriarty

I have just corrected a statement I made in response to the Deputy's question on current yields from bonds. The figure of 3.5% to which I referred relates to German bonds. Irish bonds are yielding about 1.8% in excess of German bonds. This spread is due to the perceived additional riskiness of Irish bonds.

Deputy Edward O’Keeffe

Do the figures cited by Ms McGauran refer to the top and bottom of the market?

Ms Paula McGauran

Yes, within the eurozone, although Greek bonds probably have a similar spread to Irish bonds.

To return to the question on property investment, property by its nature is a very illiquid investment and investors know this when making an allocation to property. For this reason, one never sees large investments by occupational schemes in property. The illiquid nature of the property market makes it difficult to exit. Given the collapse of values in property investments for pension schemes in the past two to three years, even if one had wanted to exit from a number of pooled property vehicles, it would have been difficult to do so and the spread — the price one pays to enter and at which one sells to exit such a vehicle — has widened considerably. I hope that answers the Vice Chairman's question.

Vice Chairman

That is fine.

Senator Ivor Callely

On the current economic and financial pressures we face, as I stated, our colleagues in the Lower House sometimes send the wrong signals on the economy which are then reported in the media. For example, they will argue that NAMA is the wrong tool or that unemployment is increasing and everyone fears losing his or her job. The figure cited for the return on bonds is interesting. If the yield from German bonds is 3.5% and the return on Irish bonds is 5.3%, it strikes me that there is considerable confidence in the Irish market. I do not hear or read about this often enough. What role could the IAPF play in helping to send that message? I am tired of people talking down and bashing Ireland, as they do all the time. It is in everyone's interests to have confidence in ourselves and send a clear and positive message. Messages on such issues as the difference in yields from Irish and German bonds are important indicators and the more we can get that message out, the better it will be. Perhaps Ms McGauran might comment.

Ms Paula McGauran

The Senator is correct to comment on it as being an indication of the attitude of investors towards investing in Ireland Inc. I mentioned that at its widest the spread was 280 basis points, or 2.8%; therefore, it has come back quite a lot, which reflects a more positive view of investing in Ireland Inc. on the part of overseas investors.

Senator Ivor Callely

Will Ms McGauran provide me with a note to that effect?

Ms Paula McGauran

Yes.

Vice Chairman

I thank Mr. Moriarty and Ms McGauran for their assistance in our deliberations today. Their submission was most interesting. They are now excused. That brings our day of deliberations to an end. It has been a long one.

The joint committee adjourned at 5.45 p.m. sine die.

JOINT COMMITTEE ON ENTERPRISE, TRADE AND EMPLOYMENT díospóireacht - Wednesday, 29 Jul 2009

Financing of Irish Business: Discussion.

Mr. Ian Talbot

Mr. Ian Talbot

Mr. Michael Garland

Mr. Ian Talbot

Mr. Michael Garland

Mr. Michael Garland

Mr. Michael Garland

Mr. Ian Talbot

Mr. Ian Talbot

Mr. Michael Garland

Mr. Ian Talbot

Mr. Michael Garland

Mr. Ian Talbot

Mr. Ian Talbot

Mr. Ian Talbot

Mr. Michael Garland

Mr. Michael Garland

Mr. Ian Talbot

Mr. Ian Talbot

Mr. Ian Talbot

Mr. Ian Talbot

Mr. Michael Garland

Mr. Ian Talbot

Mr. Michael Garland

Mr. Ian Talbot

Mr. Michael Garland

Mr. Michael Garland

Mr. Ian Talbot

Mr. Michael Garland

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Des Doyle

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Tom Hayes

Mr. Frank Ryan

Mr. Frank Ryan

Mr. Des Doyle

Mr. Des Doyle

Mr. Frank Ryan

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

Mr. Tom O’Connell

JOINT COMMITTEE ON ENTERPRISE, TRADE AND EMPLOYMENT díospóireacht -
Wednesday, 29 Jul 2009