Credit Review Office: Discussion

I welcome Mr. John Trethowan, Credit Reviewer, and apologise for the delay in starting; we had to attend to another matter. I draw attention to the fact that, by virtue of section 17(2)(i) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or persons or an entity by name or in such a way as to make him, her or it identifiable. I remind members 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 either by name or in such a way as to make him or her identifiable. I now invite Mr. Trethowan to address the committee.

Mr. John Trethowan

I thank the Chairman and members for inviting me to appear before the joint committee. I also thank the committee for excusing me from participation in the session in July which coincided with presentation of my report to the Minister.

Let me outline the background to the establishment of the Credit Review Office which was announced in the budget in December 2009. Between that date and Easter I worked with Allied Irish Banks and Bank of Ireland to ensure they would be ready for the commencing of operations by the office on 1 April. We had our first cases in June and I made my first quarterly report to the Minister in July. I was asked not to create an empire with the office and have kept to this. Apart from myself, the permanent staff comprise an office manager and a call handler. I have ten credit reviewers who are retired bankers and paid on a case by case basis. As the number of cases increases or decreases, the cost moves with them.

The cases with which we can deal involve lending up to a figure of €250,000, companies with up to 250 employees, a balance sheet value of €43 million and a turnover of €50 million. There is a logic to this in that it meets the EU criteria applying to SME lending and corresponds with the Central Bank reporting requirements.

We deal with banks covered by NAMA. Members will see that in the slides I have highlighted AIB and Bank of Ireland in bold. These are the only two banks which can offer new loans in the SME and farm sectors. Anglo Irish Bank and Irish Nationwide Building Society banks are precluded by the European Union from making new advances at this time. The EBS is, basically, a personal sector bank.

Activity levels to date have been disappointing. Approximately 20 applications have been sent to the office for review, of which we have dealt with about ten, of which five have been upheld.

Members will see that, as well as the appeals process in the office, during the first three months of the year I worked with AIB and Bank of Ireland to approve their formal internal appeals process. Between them they have dealt with about 70 appeals, of which 14 have been upheld and some 52 declined. One can come to the office if one so wishes and about four are works in progress.

In addition to formal requests to the office, on the telephone helpline we have dealt with approximately 400 inquiries from customers. In many cases we have been able to deal with banks on an informal basis and have had some problems solved and issues resolved without the need to resort to the making of a formal appeal.

From the cases we have dealt with and the calls we have taken, there is evidence on the demand and supply sides from SMEs, farms and the banks. The first point we have noted is that SMEs have been weakened by the recession and have low or no capital reserves having sustained losses during the past two years. This is the result of low consumer confidence levels leading to low sales and profits figures. As businesses go through this difficult period and the longer it continues, the more businesses running low will run out of cash.

Some good business decisions were made by good business people to reinvest in their businesses in plant and machinery but they have suffered as a result of unfortunate timing. Just as they needed cash flow from their investments to meet the cost of reinvesting in their businesses, their coffers and turnover collapsed. There should be no finger-pointing in such cases. Some poor decisions were also made by businesses, but they are learning from this. Businesses which made profits tied up their reserves in fixed assets, mainly apartments and investment properties which have fallen in value. When businesses try to access these vital reserves, they cannot get their hands on cash.

There is evidence of poor cashflow forecasting. Banks have been rightly criticised for moving from traditional cashflow lending to asset-based lending in recent years in which they relied on property. Just as banks got used to asset-backed lending, so did borrowers. They moved to a position where they threw the deeds across the counter and obtained the credit they needed as easily as possible. There have been complaints by businesses that they have had to bear the expense of producing a cashflow forecast for the bank. The cashflow forecast should be for the business, not the bank. That businesses can project forward six to nine months and do not have a good idea of what the situation will be in that period does not inspire confidence among lenders. Businesses must become more adept at cashflow forecasting. When we asked the borrowers in some of the cases we have dealt with to tell us the actual sales figures and place them against cashflow projections, they were not able to do so.

We have been speaking to the banks and they have acknowledged that there are weaknesses on the supply side. There is a lack of experience at the front end of banks. That has been recognised and the banks are starting to deal with it. The issue of inexperience has arisen following some retirements and movements through NAMA where more experienced lenders have been brought in to the centre to deal with the more difficult cases. Front-line staff have also been moved around a good deal and the banks are now trying to hold staff in place a little longer to allow them to get to know their customers better. They are also upskilling them through various courses.

Lenders are effective when a clear lending proposition is put to them but they are challenged more when a case is more challenging. It is now quite common — I am sure members are hearing this from their constituents — for banks to restructure overdrafts as term loans. I have been involved in banking for 35 years and across that period it was not uncommon for banks to restructure hard-core borrowings as a structured term loan. The key aspect is that there is enough working capital left for the business on which to trade. Let me give an example. If someone has an overdraft limit of €100,000 and the loan has never fallen below a figure of, say, €60,000 in the past few years, that element is considered to be hard-core and it makes good sense to restructure as term lending. The trick is to leave the remaining €40,000 for the business on which to trade and pay for its working capital. The point has been made to me that when that is done and some of the hard-core element is transferred as a term loan, structured payments are made and that affects one's cash flow also. There is a downside in that regard.

Members will be aware in the past month or so of the emerging issues in terms of the concentration of the market. In the past month we have lost Anglo Irish Bank and Bank of Scotland Ireland. Also, non-Irish lenders have been very quiet, with the exception of Ulster Bank. There is a challenge, therefore, as we emerge from the recession into a growth period when people will need to access working capital and invest. Allied Irish Bank and Bank of Ireland have approximately 60% of the market and are becoming active in lending. We had the announcement by Ulster Bank last week that it was open for business again. It has approximately 10% of the market, but that leaves approximately 30% of borrowers who will face difficulties in accessing new lending in the future. That gives cause for concern.

In the announcement of the setting up of the review office at the end of March the Minister also set the two Irish banks a €3 billion target in each of the next two years and asked me to track progress against these targets. Each month I track new sanctions by Allied Irish Bank and Bank of Ireland — numbers and amounts — and also the sectoral and geographic share of lending by these two banks. I have used as a base month January 2010 and can see the growth in both amounts and percentages for trade sectors and geographic markets across Ireland. This is to ensure no geographical area or sector will suffer adversely. The setting of the target will not result in a balance sheet movement of €3 billion plus at the end of the year because there are too many variables at play on the balances. On the upside, newly sanctioned lending amounts will be drawn down and there will be interest charges but against growth. There will be repayments, write-offs for bad debts and NAMA transfers.

That is a brief overview of the operations of the Credit Review Office. I find that on most occasions people get more in asking questions than from formal presentations. Therefore, I will take any questions members wish to ask.

I thank Mr. Trethowan because this is one of the issues causing great concern among small businesses. To be frank, I am amazed that his office has only received 20 applications. Equally I am amazed that, on average, his office is upholding the bank in the case of more than half of them. In the case of AIB, it is upholding it in the case of 66% of applications. These are the figures the banks quote to us when they say they are open for business and not turning down anything that is reasonable, but then we see the Mazars report on small business credit. If we take out non-performing loans, the number of performing loans to small business has collapsed; it is down by 25%. As regards the National Competitiveness Council, we see that the front-line bankers are saying credit conditions have been tightened dramatically. They have a graph which shows they have tailed off dramatically.

It seems to be a tale of two cities. There are two worlds people are occupying. There are the banks which are saying everything is grand and there is real evidence to the contrary from other sources, some of which are internal to the banks, some anecdotal evidence from bodies such as ISME and the Small Firms Association, as well as from Mazars. The issue is: whom do we believe? Equally, in terms of the figure of €3 billion, let us not forget that in February 2009 we were promised a sum of €3 billion by the very same banks and that, subsequently, matters got far worse.

There is scepticism that the office is being hoodwinked by the banks. To survive, the banks will have to shrink their loan to deposit ratios. Whatever the Government states about there being a pot of €3 billion, they are intent on that objective because this is vital to their long-term survival. They will tick boxes, but they will not change behaviour. That is my question for Mr. Trethowan. Has there been a change of behaviour on the part of the banks where, to quote the SFA, they are saying "We are one of you"? That was the slogan last week. Are the banks now saying to small businesses, "We are one of you,"or are they saying they are still hell-bent on their survival and that, unfortunately, regardless of their good relations in the past, this must take precedence over the needs of small business? I imagine most Deputies are of the same view. We hear more that the banks are not open for business than what Mr. Trethowan presents in his report.

How robust are Mr. Trethowan's benchmarks? There is a sense that he could produce new sanctions — it is an old loan being called by a new name — and it looks to be ticking his box. Does his office have the ability to forensically go behind the global numbers to see that there is additionality, which is what we want to see, as opposed to satisfying the irritating credit office which must be placated? That is the concern.

My final question concerns the proposed credit guarantee which it appears will be modelled on the Chilean model whereby banks will tender for a slice of the guarantee. I take it it will be additional to the €3 billion mentioned. Will Mr. Trethowan's office be able to ring-fence it to ensure we will not find that we, as taxpayers, will be paying on the double for what we thought we had already received?

Mr. John Trethowan

I am not a spokesperson for the banks.

Mr. John Trethowan

I share the Deputy's disappointment — a total of 20 applications, given the level of background noise in the market about the availability of credit, is disappointing. I have done everything I can to ensure that the review office is publicised. I have been around Ireland talking to members of Chambers Ireland, mainly in various centres, making sure that people are aware of what we can do.

I agree with the Deputy in terms of our monitoring of the €3 billion and I have asked the banks to differentiate between what I call "old new money", which is restructured loans, and "new new money". They are working to produce numbers for me on that. There is a danger, as the Deputy said, that if somebody restructures part of an overdraft on to a term loan it would be regarded as new money. I examine the gap between the amount of sanctions and the growth on the balance sheet and that handicap, as I would call it, has to be explained. I do that by asking for a funds full statement on that gap. The numbers are obviously commercially sensitive. I cannot go into much detail about them but I assure the members that we do more than take a superficial look at the numbers each month.

On the decline rates, one of the issues that has confused matters in the past year has been a number of surveys that have come out with different levels of decline rates for bank lending. The Mazars report deals with applications that have hit on to banks' lending systems which have been declined, which number approximately 25% of applications. We should bear in mind that banks never lent 100% on foot of the applications made to them; there has always been a background level of decline. What confuses the issue is that some of the surveys may have reported notional or casual refusals, where the request was a verbal inquiry or declined at the bank counter and such requests did not make it on to the banks' systems.

One of the documents that has been put on the credit review website is a generic loan application form. This is to help borrowers to structure their initial request to a bank to make sure it does not fall at the first hurdle and that it makes it on to the bank's applications system for a formal appraisal. That form can be used for any bank — it is not a strictly limited form.

On the loan guarantee scheme, I have probably been reported as being sceptical of that scheme——

That is correct by all accounts.

Mr. John Trethowan

——the reason being that we have mechanisms now through the review office for people to appeal a decision to decline credit. My view on a loan guarantee scheme is that someone will have to fill out an application form to enter the scheme and then the application form will be assessed for its viability. If such an application is viable, why are the banks not granting credit in the first place, rather than transferring some contingent liability on to the taxpayer again? I accept that there are some industries where banks have a difficulty assessing the cash flow and future profitability. Those are areas that have intellectual capital elements where it is more difficult to assess the cash flow in terms of the product. There may be room to give some comfort to banks with a guarantee scheme. However, the bank recapitalisation for AIB and Bank of Ireland was designed not to save the banks but to put in place financial supply——

With regard to the 20 applications received, the issue seems to have been a lack of collateral. In the case of those 20 applications Mr. Trethowan saw, was lack of collateral a factor?

Mr. John Trethowan

No, it was not. In many cases because the capital has been shot, as it were, in the business, the gearing for the banks is over 100%, but there has not been huge demand for extra security on the loans. If it had been the case that applications were falling on the security request, I could have said, "yes, there is a place for this".

I thank Mr. Trethowan for his presentation. I agree particularly with his presentation that we should get on with the questions and cut to the chase.

The ten people Mr. Trethowan has working for him on a case-by-case basis all come from a banking background. He said they were retired. I assume they have been around the banking industry for a while and there is no evidence they were involved in any of the practices in which some of the more recent banking people engaged. I find it strange that they all come from a banking background. Did Mr. Trethowan try to recruit, for example, a financial controller, a senior accountant, a former CEO of an SME or that type of person who might be more inclined, albeit observing the criteria, to view matters from a business perspective in regard to evaluating such applications?

The citing by Mr. Trethowan of overdraft restructuring to term loans was an excellent example. Is such restructuring categorised as a new loan and is that the box Mr. Trethowan would tick for such an application? I would not consider it to be a new loan. It would be a restructuring exercise. Would Mr. Trethowan define that type of exercise as a new loan? Will he comment on that?

Does Mr. Trethowan believe the small number of referrals — clearly, the number has been small, as Deputy Bruton said — to his office is due to a perception that his office is seen as being part of the bankers or another semi-quango? What is his view on the small number of referrals to his office?

Estimating cash flow and forecasting are very difficult. At one time one could make a stab at such predictions with a fair degree of accuracy but now predictions are more dependent upon one's customers and whether they will be hit by a domino effect which, in turn, will have an impact on the business being reviewed.

Does Mr. Trethowan's office evaluate an application on the strict banking criteria, which perhaps he with his experience would have negotiated, or are any concessions included, given the economic circumstances and that we are dealing with taxpayers' money? Is a little bit more of a liberal approach taken on that account or in terms of the criteria?

The banks are dancing a merry jig around governments, not only our Government but governments across Europe in regard to regulation and all the rest of it. How does Mr. Trethowan find the banks dealing with his office? Deputy Bruton touched on this point but I did not hear as crisp and clean an answer as perhaps Mr. Trethowan might be able to give us. These characters are pretty much a law unto themselves still. What access does he have in this respect? I appreciate that he alluded to this point but his response was not as clear an answer as I would have liked to hear

As Deputy English will have to leave shortly, I will call him next.

As I will have to leave shortly, I will read the Official Report to check Mr. Trethowan's answers to my few questions.

Deputies Morgan and Bruton will have covered many of the issues, but I wish to address the possible introduction of a loan guarantee scheme by the Government some two years later. Is Mr. Trethowan's problem with it that we do not need such a scheme or that its introduction will be too slow because various processes will have been dealt with before it will be introduced by Government? If there was a quick version of it, would Mr. Trethowan be in favour of it? If we do not go down that road, which is his advice, is there a case for the establishment of a national recovery bank, a Government owned bank in which money would be invested to get money flowing? The banks have their own problems to address which they are using the money they have and businesses are suffering because of that.

On the matter of cash flow, I gather the issue is not so much that it is difficult to predict the figures but that Mr. Trethowan is saying that ability is an issue in businesses in terms of cash flows. That is a concern. I have been trying to get the message across to Government for the past two years that businesses need professional help to prepare their business plans and set up their businesses in a proper way to enable them to compete and draw down money. If one prepares a good business plan over which one can stand, the chances are one will get the money requested. We have many new businesses that are brilliant at what they do but not brilliant on the accountancy underpinning their businesses. That is something the Government must address. What are Mr. Trethowan's thoughts on that? The UK has moved quite quickly on this, with health checks and so forth for businesses. We have not done that; we are very slow. We must arm ourselves in that way to be able to compete in the future. What is Mr. Trethowan's opinion? I share Deputy Morgan's concern that all the reviewers are bankers. Not all bankers are qualified in finance. Some are but some are not. Will Mr. Trethowan explain their qualifications further? I presume and hope there are others rather than just bankers giving advice to his group.

With regard to the process, what happens when a decision of a bank is overturned? How quickly is the cheque written? That is the issue. There are many delays with banks. One is strung along for months waiting for an answer. It is too late then because one has missed the opportunity. That must be examined as well. The figures for those coming to the office are terribly low, but Mr. Trethowan said the office received 400 telephone calls and most of those were resolved. Does resolved mean that they are getting their money? Is it a query or what is the issue involved? When the bank subsequently makes the loan after Mr. Trethowan overturns its decision, what generally is the difference between the bank's opinion and his? Why did Mr. Trethowan feel he could overturn it? Did the banks read the application wrongly or did Mr. Trethowan get more information to win the case?

The last question relates to the inexperience of front-line lending staff. We raised this issue with the banking federation. They are also inexperienced in dealing with businesses' debts. I am concerned that many of the small businesses that have lower debts of €30,000 or €40,000 are being hounded by people who do not have a clue what they doing on the telephones. That is causing serious problems. The least businesses expect is properly experienced staff to deal with them and be able to understand their situation.

With regard to overdraft restructuring, Mr. Trethowan said it is okay at a certain level provided some overdraft is left. The speed with which it is done, however, is not okay. Getting a telephone call on Monday to tell one that one's overdraft will be gone on Tuesday is not a way to facilitate business. People cannot do that. An overdraft is a business tool. Without it, one generally cannot continue in business. Ten or 24 hours' notice is unacceptable. The banks are being helped and saved by the taxpayer but they are mistreating people left, right and centre. Mr. Trethowan is in a position to report on that. We need people like him reporting to Government to get the truth out into the public domain.

Mr. John Trethowan

I will answer Deputy English's queries first. With regard to the loan guarantee scheme, it is not the process but the concept. It is transferring the contingent liability to the taxpayer. If the business is shown to be viable under the loan guarantee application, why are the banks not doing it? That is the fundamental question I have on that. On the national recovery bank, absolutely, if capital was more available. We need more competition and there is a danger in the concentration of the market. Perhaps this is something that could be examined.

As regards the process on the overturns, it has been well publicised in the press that my opinions are not binding on the banks. I have been assured by the two banks, however, that if I suggest they should make the loan, they will listen very seriously to me. They have upheld all the opinions I have made to them so far.

Did they give the money on Mr. Trethowan's advice?

Mr. John Trethowan

Yes, they did.

Mr. John Trethowan

Yes. With regard to the differences as to why the loans decisions have been overturned by the Credit Review Office to the bank, the Deputy will appreciate that the bank has seen the application twice, once at the counter and once on appeal internally at head office. I will outline in essence what we do in most cases. Take the example of a farm where there is the farm business and it diversified and took on a second business which has got into a bit of bother. We disaggregate the whole thing, both the businesses and the present and the past. It is not unlike NAMA because we take the problem away and see the viability of the future business rather than the legacy. We see if there is enough cash generation coming from the future for the business to sort out not only the ongoing survival of the two businesses but also to deal with the legacy problem in the background over a number of years. It is by disaggregating those loans that we can make some progress. We generally have more time to look at it than the banks.

Not all 400 calls got sorted out. In many cases we were able to take up the telephone and say: "Take a look at this," or "Could you telephone the branch and find out what is happening at the front line there?" In some cases it works, in others it does not.

What about the ability to do cashflows?

Mr. John Trethowan

Perhaps there is a job there for FÁS. Some banks have cashflow forecasts on their websites to help customers do that. One of the businesses we have looked at was booking the sales as they happened but was only receiving the cash over a year. It was probably in worse trouble than it thought, but it was just inexperience on the part of the business. I agree with the Deputy that we have many businesses that are great technically at what they do but they must concentrate on the management side of things as well. Businesses do not manage themselves and it is vital that we increase those skills.

Deputy Morgan asked about the reviewers. They are all retired bankers like myself, with silver hair. They remind one of how a bank manager would have looked in the past when one went into a bank. They have probably been through three recessions and have a feel for what will and will not work in the future. I heard a great phrase from one of them which I have used many times since he said it. He said he can smell cash in an application. He can look at it and say whether it will or will not make it.

I had to restrain myself for a moment. Mr. Seánie FitzPatrick has white hair as well.

Mr. John Trethowan

Fair enough.

I do not mean to hang that around the necks of Mr. Trethowan's colleagues.

Mr. John Trethowan

I can assure the Deputy that he is not one of my assistant reviewers.

That is a relief.

Mr. John Trethowan

I have one ex-Bank of Ireland colleague but he has been retired from that bank for a long time. The rest are ex-Ulster Bank or ex-National Irish Bank. This is to avoid conflicts of interest and to ensure they never look at a case or a bank in which they would have had an interest previously. We always ask them before they look at a case to declare any interest in the customer, in case they knew him or her. I have two agri-bankers and eight general bankers.

I accept the criticism, which I have heard elsewhere, that we are all ex-bankers. Given the forensic work to be done on the lending applications, however, bankers are best suited to do it. They know what they are looking for and what will and will not work with regard to lending applications. I hear the criticism but if I considered it an issue or a problem in the loans we assess, I would take on extra expertise from outside banking.

Will Mr. Trethowan consider that in the future?

Mr. John Trethowan

I will. It has been raised previously. In my trips to Chambers Ireland I said I would perhaps speak to that organisation, even if it is just to get its industry view and let it look at the opinion before it goes out. It could be done.

It would give additional confidence.

Mr. John Trethowan

Yes, and I agree there must be confidence in the system. On restructuring, we must keep an eye on the fact that any new loan that is put on the bank's book is taken as a sanction. I am starting to work with the banks to identify "new new money" as against "old new money". That work is in progress. With regard to the small number of applications that come through, we did some research on the telephone calls we received and why they were not turning into solid applications. My objective is to ensure small and medium enterprises and farms get access to credit, not to review cases. If the telephone lines are producing some results without having to go into the formal process, I am delighted. We asked a number of people why they did not proceed into the process. We received two fundamental answers. The first is that some customers are nervous of going to the Credit Review Office in case the local branch staff will hold it against them. Working with the two banks at head office level, they are both committed to this because they see it as a positive. They see the Credit Review Office is a positive way forward to ensure they can justify their loan decisions. However, it is a factor if one is in a town in Offaly or Donegal and there is only one branch in the town with which one feels one has fallen out and that it will not go well. It would be a very poor career move for a local branch manager to take the attitude that he or she will penalise the customer because the head office of the bank will come down hard on him or her if I have to go back and say this is not on.

The second reason is that businesses have been through hell in the past two years and they are weary about going through another process. We have tried to make the process as simple as possible for the borrower. Most of the work is done by the bank in preparing the appeal papers but, obviously, there is a bit of work to be done. At this stage, many people have had enough of arguing with people and of having things assessed.

On cashflow and the way we look at the applications coming through, our job is to ensure small businesses and farms which have a viable future get access to credit. We are not there to look after the bank's interest because it can look after its own interests. When we look at an application, we look for the future cash generation capability of the business. Can it put a viable case forward that it can produce the cash to service future lending and interest payments? That is what we do.

We have also talked to the banks. Most bankers when they look at an application will look back a couple of years and will ask what the recent past tells them about this business. However, looking at the past couple of years would give one a totally false picture of many businesses because it has been such a horrible time. We do not dwell on the cashflow over the past couple of years and we encourage banks not to do so. We look at what went before and the position of the business going forward.

Many good businesses now have Irish Credit Bureau scores against them, perhaps because they missed one payment or more than one. In the past, if one saw an ICB score on a customer, one would have said it was a bad sign and that one would not give the loan. However, if we see an ICB score, we are not put off by it and we are encouraging the banks to look again at the reasons behind it. Many good businessmen now have an ICB score against them. It is not the black mark it used to be.

The criteria are tilted a little bit——

Mr. John Trethowan

As far as we are concerned, we are not black and white bankers and that it is the end of the road if certain things do not look right. We are always looking forward to see if there is a good business model and good cash generation capabilities in the business. The opinions we do have a strategic overview of the business as well as the basic banking business.

It was a very interesting presentation. As previous speakers said, it is amazing that only 20 people have gone through the Credit Reviewer's hands. Mr. Trethowan mentioned that he spoke to Chambers Ireland. ISME has surveys which state that 55% of companies which applied for funding in the past three months were refused credit by their banks compared with 42% last October and 20% in May 2008. Mr. Trethowan touched on it but it is hard to understand how there is such a huge gap.

He mentioned many businesses would be nervous about affecting their relationship with their banks, difficult as it may be. They feel that if they report the bank, it will just come down heavily on them. That is what I hear. Perhaps a message needs to be articulated, or reinforced that it will not go against the customer. The customer, the retailer or the business person, has much more protection now than he or she once had. That is an important message to get across.

Mr. Trethowan said there were ten credit reviewers. The idea of taking on board somebody from the retail sector would certainly be helpful and I would support that. As with many things, it is about perception and with all due respect, bankers are not flavour of the month at the moment. That would help the Credit Reviewer and all of us in our jobs.

Typically, what sort of work does a credit reviewer do? How long does it take? What rates are they paid? Mr. Trethowan also mentioned inexperience in frontline lending staff. Obviously, the banks need to deal with that. Does he have any input into that to ensure more experienced people are on the frontline and that their training is more comprehensive?

A number of people mentioned the following to me last week. If someone has an overdraft of €50,000 and looks to restructure or extend it, the bank will give them a €25,000 overdraft and a €25,000 term loan. Can somebody in that predicament go to the Credit Reviewer to say it is not on? Can Mr. Trethowan deal with that? Is that within his remit? What would he say to somebody who finds himself or herself in that position?

I welcome Mr. Trethowan and wish him well in his job as Credit Reviewer. I listened with interest to my colleagues' questions. For the public reading some of the contributions, Mr. Trethowan might be the man with the magic wand. Deputy English referred to a bank telephoning a businessman to say his overdraft facility was being withdrawn. If Mr. Trethowan can change the bank's mind, he will get a lot more than 20 telephone calls. I am not sure my colleagues fully understand his role and where we are at.

We have been through the most difficult economic and financial turbulence this country has ever witnessed. The banks are in serious crisis. Will Mr. Trethowan repeat the purpose of the recapitalisation of the banks? Will he confirm that he is only dealing with Bank of Ireland and AIB? Will he indicate what role he has, if any, in regard to bank policy, although I know the answer to that question? What role does he have, if any, in regard to the role of the credit committees of the two banks I mentioned?

These types of issues need to be fully understood by people to know the role of the Credit Reviewer and how we can deal with some of the very serious difficulties people face. Those of us who understand have a feeling the banks are in serious difficulty. Front-line staff have been moved for a variety of reasons. As was mentioned, the silver haired manager who had a friendly smile and accommodated requests in years gone by is no longer there. Matters are referred up the line. There are regional managers and credit committees.

We need to address the people who face serious difficulties and the young entrepreneur who has no baggage or record and who has a good product or idea but who is unable to tap into the required funding, mainly because banks' policies have changed and they are not prepared to take risks anymore. My understanding is that bank policy has changed from a loan to equity ratio of approximately 80:20 to a 60:40 ratio now. It is only when we have full understanding of these issues and the manner in which bank policy of the two banks, with which Mr. Trethowan is dealing at the moment, is being applied that we will be able to address some of the other issues. One bank made a presentation stating that it offered one mortgage per day for every working day. While this sounded good the draw-down was another issue.

Mr. Trethowan mentioned his telephone calls. What kinds of issues were raised on the telephone calls? Was a stock issue being raised? He mentioned Bank of Ireland and AIB lending of 60%, with 10% Ulster and 10% for the rest of the market. Was the 60% in any particular area? He mentioned he was looking at the sectoral share? How will the EU investment money be monitored? Will it be part of the €3 billion? Some of those questions will lead to other questions on which I might communicate directly with Mr. Trethowan by way of letter.

Mr. John Trethowan

While Deputy Andrews has left, I am sure the answers will get to him. Customers have several lines of protection. First, there is the Financial Regulator code of practice for lending to SMEs. The second is the Financial Services Ombudsman and the third is ourselves. There are three external bodies that can help customers. I recommend that any small business having difficulty should read the code which contains considerable protection for small business. The Ombudsman can look after areas where contractual terms are being challenged by the bank. Many banks are moving to change terms and conditions in the middle of contracts. Anybody with a contract or a facility letter with the bank — a written agreement which contains protections — should read that. There are protections there through the ombudsman.

I will look at the inclusion of non-bankers and see how we can do that. The Deputy asked me about the work undertaken and how it all works. The challenge will be to do that. We have a panel and one of the assistant reviewers will examine the case initially. The presenter, another assistant reviewer and I then review the case. We spend a couple of hours discussing it to see if we can find a solution. If we need to introduce an external person it would increase the panel again, but we will have to consider it.

At the end of the credit committee I take the work away and because the number of cases is reasonably low at the moment I have been able to write all the opinions myself. If it balloons I will need to get some of the reviewers to write some of the opinions, but I will always oversee them because it is my name that goes against them. We do this as quickly as possible because the customer obviously wants to know the answer as soon as possible. We sent the opinion to the bank for its response. It has five working days to come back to us and advise what it intends to do with the opinion. If we uphold the bank's position it will generally come back advising that it agrees with the opinion. If we give the opinion to the bank that the lending should be done, we need to give the bank our rationale for doing so. We look for the bank's response, outlining that it will meet the customer and organise the loan.

The Deputy asked about the front-line experience and training of the staff. The two banks with which I deal were very aware that there was a swirl in their staff as a result of the turmoil of recent years. They are trying to keep staff in place for longer now to help them to get to know the customers. Both banks are also trying to upskill front-line staff.

In response to Senator Callely, we have moved away from the position that held in my day in the branches. For example a customer seeking to extend a supermarket might have gone in to meet the branch manager who knew him well because he had been there for years. The manager would have said: "Okay, I'll write the business this afternoon." He had the authority to approve such a loan at the counter. That was a relationship manager. Everybody knew each other well enough to be able to do the business on the spot. We are now in what I call process management not relationship management where the person the customer meets is not the person who will take the decision on the loan. His or her job is to write down the case and send it to someone in Dublin, who will probably never meet or know the customer, to take the decision on the credit. The experience needed at the front end is for the person writing the business down for the bank to process in head office, to have the ability to read the situation correctly and put the case forward properly. Customers should also ensure they are happy with that before it leaves the branch because there is no point in complaining about it afterwards. The banks are working to try to upskill their staff at the front end to do that better. In most cases where the loan is fairly straightforward this is not a problem. It only becomes an issue when there is a challenging situation.

I was asked about people having their overdraft facility summarily reduced without much notice which puts them in difficulty. Such people can come to the Credit Review Office. We would be very happy to hear from a customer.

In many cases a bank will advise a customer with a €50,000 overdraft that it will change this to a €25,000 overdraft and a €25,000 term loan. This means there is no extra cash when the business needs it. The term loan is not as useful to the customer as an overdraft. Can customers bring such issues to the Credit Review Office?

Mr. John Trethowan

Yes. The first thing a customer should do is advise the bank that he or she is not happy and wants to appeal it. He or she should write an appeal outlining why it is unfair.

Has that happened at all?

Mr. John Trethowan

People should go through the bank in the first place. The customer should say: "I needed €40,000. I don't mind you restructuring €25,000 on to a term loan, but I need the working capital for my business to continue. I can make a viable case for why you should give it to me." If the bank still refuses the customer can come to us and we will review it. Our job is to try to ensure the borrowers have access to credit if they can demonstrate that they are viable.

While they vary slightly, what is the time scale from the first call to the decision? Businesses need to be reassured that if they make an application, they will not be bullied into anything by the banks.

Mr. John Trethowan

The code of practice for lending to small and medium-sized enterprise does not set a specific time limit on applications, but they should process the initial loan application and the appeal as quickly as possible. When completing forms for the Credit Review Office we ask banks to advise us of the date when the initial loan application was made and the date on which the bank declined it to ensure it is not taking months. In some cases it is weeks. We ask bank customers to advise us when they lodge their appeal and when the reply was received. We are looking for a turn-around of approximately five days in that case. We will turn it around as quickly as we get the information. As soon as we receive an application, the clock is running. We know customers want to have their applications dealt with as soon as possible. The only thing which causes delays in the process is if the information we require is slow coming through. The period between the start of the process and the issuing of an opinion is generally no longer than three weeks. It can take longer if we are waiting for a customer to supply information.

What rates apply in respect of the ten reviewers?

Mr. John Trethowan

That information is somewhat commercially sensitive. However, the rates are not excessive

The phrase "magic wand", which terrifies me, was used. There are no magic wands. I inform people that in the context of dealing with the banking situation anywhere in the world, there are no silver bullets. It is hoped that the work of the Credit Review Office and aspects of the policies and practices adopted by the Government and the banks will make things better. It is important to note, however, that there are no magic wands or silver bullets.

The Deputy asked me to reiterate the purpose of the recapitalisation. The Department of Finance is of the view that the recapitalisation was not to save the banks, per se, but rather to ensure that there would be a banking system in place in this country going forward. That is the key reason for it.

Is Mr. Trethowan satisfied that is happening?

Mr. John Trethowan

Yes. We are in a transition period. We are moving away from a position where the banks were either slow to lend or were not lending at all to one where they are beginning to be open for business again. Various banks are at different stages in the recovery cycle. Bank of Ireland is pretty much there. The perception is that it is open for business. AIB is almost there and will get there in the next two to three months. AIB managers are out on the road indicating that the bank is open for business. I have been speaking to staff from the bank's head office and I have also spoken people who have attended their roadshows and meetings hosted by the chambers of commerce. I am aware that the bank is declaring itself to be open for business.

Ulster Bank indicated last week that it is open for business. I am continually stating that it would be great if the foreign banks, Rabobank, NIB, etc., also indicated that they are open for business. I hope they will respond to my comments at some point. To date, however, such a response has not been forthcoming.

We have probably reached a positive turning point whereby banks will be more open for business than has been the case in the past year. It will hopefully change the public's perception in this regard. I encourage anyone who is experiencing trouble obtaining credit from a bank to contact the Credit Review Office. If what the banks are telling us is the position is not being reflected on the front line, then we will be obliged to challenge them again in respect of this matter.

I wish to be clear about this matter. I referred to the role of banks, managers, credit committees and bank policy. Mr. Trethowan also mentioned viability. Will he outline the position in this regard in order that people's concerns might be allayed?

Mr. John Trethowan

That is a very good question. Part of the role the Minister bestowed upon me involves going into the banks and examining their credit policies. To that end, I visited both AIB and Bank of Ireland in May and examined their policies. Both institutions have a raft of policies but I did not find any which stated that they were closed for business. Nothing was excluded from examination. The provisos are that businesses must be — and must be shown to be — viable and that whereas in the past the banks waived or varied elements of their policies on occasion, these are now much more closely observed. In the past, there would have been exclusions to policy which might have been put through, on a nod and a wink, at regional level. Now, if something is going to proceed at all it must be submitted to head office.

Is that ratio-wise?

Mr. John Trethowan

Yes. In the past, however, there would have been exclusions to policy which might have been put through, on a nod and a wink, at regional level. Now, if something is going to proceed at all it must be submitted to head office.

I have spoken previously with Mr. Trethowan but not at this particular forum. Even during the best of times, banks have never been helpful. No one has more experience of borrowing or lending than I. The position is no different now than it was in the past, except for the fact that times have become far tougher. In the past four to five years, the banks just shovelled out money, particularly to those in the construction industry. However, if one submitted a good proposal to the banks in respect of another area of industry or business, it was not that easy to obtain what one was seeking. Those seeking money to purchase 40 loads of Readymix in order to build four houses did not encounter any problems. The banks did not even seek to see the deeds of title relating to development lands. However, those who sought money for other purposes were almost obliged to hand over their wives and all in order to get what they were after.

What interest rates are the banks charging and what repayment terms are being imposed? These are an important aspects because it is such things that catch business people out. It is easy to obtain a loan but it is what comes after that gives rise to problems. I am aware of companies that are paying either very low or very high interest rates. I am also aware that the repayment periods, etc., being imposed are becoming shorter. I have pursued a number of cases with particular banks. Let us be realistic. The global economy is experiencing difficulties and the economy in this country is not performing well. Most SMEs, particularly those in the restaurant sector, do not have the necessary repayment capacity and are in ferocious goddamn trouble. I do not question Mr. Trethowan's figures in this regard.

In the past, competition never really came into it but people did at least have a choice when it came to banks. Let us be straight about it: the foreign banks are not helpful. Mr. Trethowan should not try to tell me that he is awaiting news from them. I am of the view that these institutions want to make their exit from this country. They are reviewing all applications, even the good ones. These banks were welcomed into the country with open arms. The Opposition, as much as anyone else, extended a welcome to them.

The British banks are performing quite well at present. I follow what happens in the British banking sector and I am aware that it is not experiencing the same difficulties as those which have beset its counterpart in this country. The Irish banking sector is, for some reason or another, in a horrendous mess. I blame the Department of Finance for that. I bought into NAMA but it is a pig in a poke. When I contributed to the debate on the legislation relating to its establishment, I praised what was being done. Deputy Bruton, who was then his party's spokesperson on finance, may also have a few reservations about that body.

We were led to believe — during a debate in the Dáil which lasted until midnight on the relevant date — that when NAMA was established, the money would roll in immediately. That was far from true. Such an idea would be more appropriate to South America or the Third World. Reference has been made in some quarters to the Chilean model coming into play. The establishment of NAMA has caused the destruction of the banking system. I reiterate that I bought a pig in a poke. The Minister for Finance was poorly advised in respect of this matter.

That is a change in the Deputy's stance.

It is a change. I am being honest. I do not hide things.

I accept that. I welcome what the Deputy said.

We are in deep trouble, particularly as there is no market for property at present. The absence of such a market means that the banks' cashflow has diminished. I have no intention of praising Anglo Irish Bank. However, many of its loans were not bad. The bank had a great deal of good business but all we hear about is that which went bad. I am not an accountant but I do know that if €81 billion is removed from one's balance sheet, it will leave a great big hole. I understand that only between €16 billion and €20 billion of the loans that comprise the €81 billion to which I refer are toxic. This means that there is some €60 billion of good loans out there.

I accept that this is not really relevant to Mr. Trethowan's remit. However, I wish to use this platform in order to tell my story. The Chairman, who possesses good business sense, is granting me latitude in this regard. If, as already stated, the €81 billion were written off over five years, the banks would be restored to health and their balance sheets would be restored.

Ireland is going to wind up being like Haiti. The Haitians bought their country back from the French and never recovered. If we do not watch what is happening with the banking system, Ireland will become the Haiti of the north Atlantic. If a country does not have a banking system it has nothing. In the context of a large number of the policies that have been pursued, it is sad the way matters have developed. I ask the Minister to change both his stance and his policy in respect of this matter. If this is not done, we will be washed up and the country will be destroyed. That is the bottomline. We all hear petty stories about one person not receiving €5,000 and another receiving €40,000. I have not seen the information Mr. Trethowan has on the cases he has highlighted. Perhaps he could supply it to the joint committee. If he wishes, the names of the persons concerned could be deleted. They are all passionate stories and I, too, have heard such stories.

There is a crisis which must be dealt with. It commenced when the Government of the day put in place regulations and we had a low capital gains tax rate of 20%. In some cases a house changed hands three times and no stamp duty was paid. Developers have failed in their duty. What the country needs, therefore, is a State bank. I say this as someone who invests in the private sector. We must have choice, not in terms of the private sector, as stated by Mr. Trethowan, but in terms of having more banks. Previously we had the ACC and the ICC. Why were they put in place? The ACC was put in place in 1956 by the father of the late John Kelly, while Seán Lemass put the ICC in place in the 1930s. We must now return to basics.

While I admire the good job Mr. Trethowan is doing for small business people, the issue with which we are confronted in banking is big. We should look at what is happening in banking in England, including at the Royal Bank of Scotland and Lloyds Bank, both of which are doing well. The banks here are in a mess because of bad advice from the Department of Finance which needs to get a grip on the banking system and cannot run its own show. When Dr. Somers criticised it at a meeting some time ago, he was questioned for so doing. The situation we faced in the 1980s was far worse. At the time 20% of the population were unemployed; we had a workforce of only 800,000 and our borrowings per capita were much higher than they were last year. The issue can be resolved. However, if we continue as we are, it will not be. A change of direction is needed. My party is the dominant party in power.

I am glad to hear Deputy O'Keeffe's comments which reflect much of what the Labour Party has to say on the matter. I do not see any way out of this. The Labour Party has proposed the establishment of a strategic investment bank, as we need competition. We will end up with a duopoly. To be fair, Ulster Bank has been positive all along. We should take a few billion euro from the National Pensions Reserve Fund and use it for this purpose, otherwise all of the money will go down the Swanee. I accept this is not Mr. Trethowan's area of expertise. If through leverage one can get €2 billion, one can get €20 billion.

Deputy O'Keeffe is correct that, regardless of the work being done by Mr. Trethowan, we need to get people back to work and sort out the banks. One wonders if the banks are prepared to consider putting some of their money in as venture capital. Should we change the rules to allow them to participate as equity holders in some of the businesses under consideration by Mr. Trethowan, a banker of long experience? As stated by him, they have come through a difficult two years. Senator Callely referred to the turbulence experienced by them. If we are to turn the corner, the banks will need to play a positive role. I am speaking of those banks which may continue to be viable in 12 months' time but which may need assistance in getting over the hump in the next 12 months. As suggested by the financier involved in the purchase of the EBS, the banks could also face up to reality and write-off some of their capital debts which will not be recovered. All they are going to do is engage in an artificial valuation of their books.

They are doing so already.

Correct.

In fairness, Mr. Trethowan is before us as Credit Reviewer.

Yes. I am chairing the meeting and making my contribution.

I would like to comment on what Mr. Trethowan said. The Chairman and Deputy O'Keeffe are correct in making whatever party political suggestions they wish to make.

I am not being party political. I am articulating, on behalf of the many people who have raised the issue with me, the point that, notwithstanding the good work done by Mr. Trethowan who outlined his role with relish, in providing opportunities what we need is another bank for the sake of competition, one which would view matters from a different perspective. That is all I am saying. Deputy O'Keeffe is correct that during the bad times of the 1980s — at the time I was involved in the agriculture sector — the ACC and other banks adopted a reasonable approach. The ICC was available to the business sector, while the ACC was available to the agriculture sector. Next Tuesday the joint committee will produce a report on the importance of agribusiness and the agricultural processing sector. There has been a drop in the number of farmers under the age of 35 years to below 7%. This is the first time in four decades there has been such a drop.

Mr. Trethowan is doing good work and providing people with hope. Without him, the banks would have continued what they were doing willy nilly. When I raised one or two issues about the banks in the Dáil, they were quick to have their PR people contact me to find out what I was at. I do not hold any brief for them. I hold the strong view that the only way to get them back into line — I acknowledge the role played by Mr. Trethowan's office in this regard — is to introduce competition by way of the establishment of a State bank. This has been done elsewhere and it has worked. I say this notwithstanding the ideological view of some that the State should have no role to play in the banking sector.

The Chairman may have picked up what I said incorrectly. I respect his position and acknowledge that he was making his contribution. I also respect the right of Deputy O'Keeffe to make his contribution. The Chairman and Deputy O'Keeffe made suggestions in regard to the need for investment banks. I recall that in years gone people welcomed foreign banks to Ireland to provide competition. We need to look back and consider what happened as a result.

Does the Senator remember Mr. Mark Duffy of Bank of Scotland? He is gone now.

Mr. Trethowan and others will be in a position to tell the joint committee that Anglo Irish Bank and other financial institutions which I do not wish to identify entered and led the market, leaving others to fall into line. We now find ourselves in terrible difficulty as a result.

There is one message we should take from what Mr. Trethowan has said. He is operating in respect of two banks, Bank of Ireland and Allied Irish Bank. The world and its mother know that their doors have been closed for some time. However, it is good news to hear Mr. Trethowan say Bank of Ireland has resumed lending and is in a strong position to do so. It is back in business. Mr. Trethowan has also stated he believes Allied Irish Bank is three quarters of the way there. That is a good news story, for which I thank him.

Mr. Trethowan has stated 30% of the small and medium-sized enterprise market has been orphaned, which is worrying. How does this stack up in terms of the amount they might need in new borrowings against the sum of €3 billion that will come through from the other two banks during the next 12 months?

Mr. John Trethowan

That is an excellent question. There is concern about the 30% of the market and its securities being tied up by Bank of Scotland Ireland and Anglo Irish Bank. A hotelier whose capital finance has been obtained through Bank of Scotland Ireland will not be able to get working capital from it. They will not provide working capital and it is a case of where one should go to, perhaps to three banks, to ask for funds.

Can Mr.Trethowan put a number on their needs?

Mr. John Trethowan

No, I cannot.

Can he say what is the value of the loans outstanding?

Mr. John Trethowan

No, I cannot because I do not have the numbers with me. However, I know it is a sizeable challenge and one that concerns me.

I have a question about the interest rate charged and the repayments.

I have to agree with Senator Callely that the rest were major policy issues outside the Deputy's area.

We have enough private banks in the high street. We want a State bank to compete with them on development loans.

I do not expect——

The private banks in the high street will all sneeze on the one day and cough the following day.

I ask Mr. Trethowan to briefly address the remaining issues within his competence.

Mr. John Trethowan

Diplomatically, I would welcome greater competition; perhaps that is the best way of putting it.

With regard to interest rates, I am aware of a number of cases in which banks are starting to pass on the cost of funds which they have had to bear because the cost has increased since the collapse of Lehman Brothers, whereby wholesale funding has become much more expensive. I would be looking to the banks to at least try to shield the increase for a period. The shock of moving from a low rate to a more commercially realistic rate is affecting a lot of businesses. Perhaps banks could look at extending the term of a loan by one year or so to try to cushion the actual amount being repaid if they have to increase the rate. As the banks have to cover their funding costs, it is not unfair for them to try to pass on the cost. However, it is a shock for some businesses to see a doubling of the rates. That is the problem.

Many banks are borrowing money from the ECB at a rate of 1%. Are they cross-subsidising?

Mr. John Trethowan

Traditionally, the banks in Ireland have had to go to the markets for wholesale funding and the cost of that element of their funding has gone through the roof, especially since Lehman Brothers went down. It was bad before then but the collapse of Lehman Brothers was the final straw with regard to wholesale funding costs.

Only for Lehman Brothers we would have no problem.

It is obvious that the office of Mr. Trethowan is an important lubricant in the process of getting Irish businesses up and running again. I note from the expertise and insight exhibited by Mr. Trethowan that his contribution is regarded as crucial. I urge him to continue, to the best of his ability and within the confines of good decisions, to do all he can to assist those small enterprises and business people who are trying to keep their businesses going through thick and thin and their employees and the local economy ticking over in these difficult times. I thank him for assisting the committee in its deliberations and his work on behalf of Irish employers and employees. We will probably invite him back to the committee in six months' time to see how things are going. We hope that at that stage what Senator Callely referred to as "the first turn in the cycle" will have gathered momentum across the economy.

The joint committee adjourned at 2.05 p.m. until 2 p.m on Tuesday, 28 September 2010.