JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM díospóireacht

The Economy and the Banking Sector: Discussion (Resumed)

Chairman

I welcome the Governor of the Central Bank, Professor Patrick Honohan and the deputy governor and head of financial regulation, Mr. Matthew Elderfield. The format of the meeting will be that Professor Honohan in the first instance and then Mr. Elderfield subsequently will make some opening remarks which will then be followed with a question and answer session. When members of the committee have all had an opportunity to question the speakers I will then call upon Members who are not members of the joint committee.

Members are reminded of the long-standing ruling of the Chair 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 Professor Honohan to make his opening remarks.

Professor Patrick Honohan

Thank you, Chairman. We have pooled our comments. I thank the Chairman for the invitation to appear before the committee today. I do not wish to spend too much time on the opening comments so in addition to some brief remarks about the overall macro-economic situation, fiscal and other aspects of policy under the EU-IMF programme we would like to use the opportunity of the opening statement to outline our perspective on the problem of mortgage over-indebtedness about which I am aware the committee is very concerned at the moment.

Aggregate domestic economic demand continues to be affected by the unwinding of the imbalances created in the past and the pressing need to continue with the correction of the country's fiscal, banking and competitiveness problems. On the external side, the economy has performed well with positive growth in exports of goods and services. The point has now been reached where the positive impulse to output growth from the external side is broadly offsetting and even beginning to outweigh the remaining drag on growth from domestic developments.

The nature of the recovery will be moderate and growth will not be very labour intensive especially in the initial stages. Employment has been slow to stabilise and unemployment has only declined due to an increase in outward migration. Nevertheless, the labour market is deteriorating at a much slower pace than previously and modest employment growth could emerge by the latter part of next year. Household incomes remain under downward pressure and the savings rate has risen, keeping domestic consumption subdued. Increased savings partly reflect the desire of households to reduce their debt but are also prompted by high levels of uncertainty about the future. The latter, in turn, reflect the extent of the deterioration in the labour market, as well as concern about the precise impact of the planned fiscal adjustment on household finances.

At this point, it would be beneficial to reduce uncertainty by both deciding on and announcing, in as much detail as possible, the complete set of changes required to Government spending and taxation to bring the Government's finances convincingly back on to a sound footing. There is no benefit to be gained by delay and the sooner the Government can make more detail available of the composition of the full adjustment package, the better. The planned pace of the fiscal adjustment is the minimum required to ensure stability and it is vitally important the targeted reduction of the deficit as a proportion of GDP is achieved on or even before schedule. Progress in this regard, combined with further improvements in the competitiveness of the economy and a restoration of a functioning banking system, are the cornerstones to recovery. Recent developments in financial markets point to increased recognition that Ireland is taking the right steps to achieve a return to sustainable growth and balanced public finances. The task now is to maintain the momentum behind all the necessary adjustments required to move the economy out of its current difficult situation. Progress on these fronts will help to increase the resilience of the economy to change in the external environment and move decisively towards a situation in which households can look forward to modest but steady increases in real incomes and living standards.

In respect of the EU-IMF programme, banking as well as fiscal and other aspects of economic policy are being conducted in the context of the policy package agreed for the programme. However, it would be a mistake to exaggerate the degree to which this package represents a different course from that which Irish policymakers would otherwise have chosen. Consistent programme compliance by Ireland - as has been confirmed in the three reviews by our external partners, namely, the EU Commission, the ECB and the IMF - is thus not only the key to restoring market confidence and ensuring release of programme funding but signals important steps towards rebalancing and strengthening the economy towards a recovery of activity and especially employment. Under all three reviews, Ireland has been deemed to be on track in respect of all the quantitative macro-economic targets and the structural benchmarks. In particular, the banking strategy is proceeding as scheduled.

On mortgage arrears, the vast majority of Irish borrowers will continue to meet their commitments in servicing mortgage and other debt, albeit under more difficult circumstances. It is only on that basis that economic recovery, requiring as it does the progressive restoration of credit and finance generally, can be underpinned. Despite the generally lower interest rates that have prevailed, given what has happened in this steep recession, in particular the sharp increase in unemployment and the heavy debts incurred by many households in previous years, there has been an exceptional increase in the number of households that have missed payments on their mortgages. For some, this will reflect transitory factors and they will be able to resume servicing their mortgages and other debt. For such cases, the most commonly used restructuring and forbearance arrangements already in the market may be sufficient. However, it is entirely foreseeable that some households, the circumstances of which have deteriorated, will not be able to recover fully and that the banks from which they have received the mortgage loans cannot avoid eventually incurring some losses on them. By requiring additional capital for the banks, much of which has been injected by the Government, the Central Bank has ensured the banks have sufficient financial strength to absorb losses of this type in cases in which borrowers genuinely are in serious difficulty. This provides more capacity to address individual mortgage arrears cases.

It is clear that many lenders have been slow to acknowledge the extent of this problem and to put in place sufficient operational infrastructure to deal with it. Nevertheless it is a task from which the lenders should not be relieved. Neither the lender nor the borrower is well served by delay in recognising the existence of an inability to service debt. Despite and because of its severity, this problem can be adequately dealt with only on a case-by-case basis taking account of the borrower's circumstances. Banks must put the framework and resources in place to examine the individual cases of distressed borrowers and the sooner they do so the better.

I emphasise that there already is strong protection for consumers in mortgage arrears. The Central Bank code of conduct on mortgage arrears imposes statutory requirements on banks to deal expeditiously and fairly with distressed mortgages in a manner that takes account of the overall economic conditions of the household. This framework provides protection for these consumers who are in mortgage arrears in their dealings with their banks, including stopping the clock on legal action by the banks, no charges and the requirement that the bank must engage constructively to arrange alternative repayment arrangements with the borrower. It is important to stress that for this code to work well it is essential, as I am sure members of the committee will appreciate, that borrowers in distress approach their lenders as early as possible. When they do so they trigger the statutory protection. I strongly encourage distressed borrowers to approach their lenders quickly.

We, for our part, are vigorously policing this code. We are about to undertake a major thematic review of banks' compliance with the code of conduct on mortgage arrears. We will visit the banks to examine closely how they handle distressed mortgage holders and to check that they have the appropriate framework and adequate resources in place to look after their distressed customers properly and to meet their statutory requirements under the code. We are advising bank chief executives to examine carefully their compliance with the code of conduct on mortgage arrears and to ensure their processes and resources are up to the task.

Banks need to work harder to bring a wider range of options for dealing with affordability to bear on this problem, particularly to take account of individual cases where there is little prospect of servicing the original loan terms. It is a balance. The banks must husband their available capital in a prudent manner. It may be possible to arrange that, even very stressed, owner-occupier borrowers who must surrender ownership could stay in their house on a rental basis, and there could be intermediate shared-equity type solutions. I merely mention these as part of the range of solutions that should be explored. All of this would need to be on a case-by-case basis without imposing avoidable costs on the State, which has, after all, provided the necessary capital. Ideas along these lines are being considered by the banks, and would not require legislative or regulatory action.

In addition, the Central Bank has been working actively with the relevant Departments with a view to making rapid progress on proposed amendments to bankruptcy law and the development of a carefully calibrated non-judicial debt settlement mechanism, building on the report of the Law Reform Commission. While entry into such a mechanism is far from painless - which should dispel any suggestion that borrowers could walk away from their situation - for example, a buy-to-let investment regardless of ability to pay with early clarity on its key elements will help to reduce the anxiety of those who are struggling to manage over-indebtedness.

Society at large would not be well-served, to say the least, by strategic behaviour on the part of any persons who could service their debts but conceive, in the current environment, an opportunity to escape from their obligations, large or small. It is important to ensure that arrangements for dealing with distressed borrowers do not provide such incentives. Already, the State has assumed too great a burden in this crisis as a consequence of adopting a broad-brush or blanket approach, as with the initial bank guarantee. As Mr. Matthew Elderfield has stated, there is no silver bullet or one-size-fits-all approach to resolving the arrears problem. A targeted, case-by-case, approach must be the hallmark of current policy for the resolution of solvency problems. Each of the banks is working up its capacity in this regard, but they need to move faster to build the infrastructure and on an adequate scale in terms of a sufficient cadre of trained household debt work-out experts.

Resolution will be effective only if it is guided by clear principles, including: (i) affordability for the borrower of any modified repayment plan, that is to say, recognising the true scale of the problem based on a sufficiently comprehensive assessment of household financial conditions, and avoiding unrealistic plans likely to result in recidivism; (ii) avoidance of unnecessarily formal legal procedures; (ii) avoidance of perverse incentives for strategic default by those who can truly afford to pay; and (iv) no unavoidable losses to lenders, but banks to absorb unavoidable losses using their increased capital.

Resolving the arrears problem requires case-by-case action by the banks, so the banks must ramp up their effort to a scale sufficient to meet the problem and must do this in a way that treats their customers fairly and prudently manages their capital. The Central Bank is determined to ensure that progress is made here.

Chairman

Thank you, Governor. I understand that the deputy governor would not necessarily intervene at this point but would be prepared to answer questions.

Deputy Michael McGrath

I welcome the Governor and deputy governor and thank the Governor for his opening remarks. I will begin with the issue of mortgage arrears. The Governor strongly advocates individual, case-by-case arrangements between institutions and borrowers. Is he satisfied with the way the banks are dealing with the mortgage arrears crisis? Everybody was shocked and frightened by the statistics published earlier this week for the level of arrears. They only represent mortgage holders who are 90 days or more in arrears. Clearly, those who are only one or two months in arrears face a serious personal crisis and their circumstances are not reflected in the statistics published. In what direction is the trend going? When will arrears peak? They currently account for in excess of 7% of all mortgages but Permanent tsb pointed out earlier this week that 8.5% of its mortgage book was in arrears. Where does the Governor see this heading in line with the current position of the economy?

It is actually greater than that. It is so complicated because some of the loan books are being sold by the banks. They sell them at a discount and somebody else will be experiencing that loss.

Deputy Michael McGrath

So it could be in excess of €10 billion?

Professor Patrick Honohan

Last year we were approached by a number of banks to talk about negative equity mortgages. We had dialogue with them and thought about the matter. Coming after the financial crisis, when mortgages with a loan to value ratio greater than 100% were being provided, we first questioned whether it was a prudent thing to do. Then we thought that in some circumstances, if there was an ability to repay, it was a sensible thing to do but that it would have to be considered on a case-by-case basis. We have concerns that widespread, over-aggressive promotion of negative equity mortgages could lead to borrowers being enticed to move into higher loan to value positions, resulting in more debt. We have said to the banks that, within certain constraints and standards when considering the debt servicing capacity of a borrower, it is acceptable to proceed with negative equity mortgages. Some are doing this. I believe it applies to two banks, although I cannot recall which exactly.

While all the members are very interested in these issues, we should perhaps move to complete Deputy McGrath's questions. These issues can arise again in the course of the morning.

Professor Patrick Honohan

That is fair enough. Perhaps I will rush then to the question of where the economy is going, which ties in, to some extent, to the issue of deposit market funding. We have come through an extraordinary period of pressure on the banks in terms of their deposits so it is not surprising that, from time to time, banks have been offering very attractive rates. The situation has stabilised to a considerable extent. The deposit flows, many of which are foreign deposits, have reduced dramatically. Furthermore, the banks are clearly aware that they have availability of Central Bank funding despite the outflows. At the same time the banks are in the process of restructuring their balance sheets so that their loan to deposit ratios get back into a reasonable position. The pressures exist on a long-term basis. It is natural that there will be that upward pressure on deposits but I think that the determinants of borrower interest rates are many and pressure on deposit rates is only one of them.

Where is the economy going? In summary, obviously different entities have different short-term forecasts. The range is not all that wide for 2011 nor should it be at this stage and it is perhaps less clear for 2012. Our own view in the Central Bank, starting from the position where forecasts were made at the beginning of the year-end of last year for the purposes of the EU-IMF programme, is that the trend in the economy is somewhat weaker but only a little bit weaker than the centre line of those forecasts. That means that the fiscal goals can be achieved with broadly the same size of package of measures that was envisaged to begin with. Is that the best package? This is quite an important question. It has been suggested by the ESRI and others that there might be some merit in moving faster. I certainly think that the Government should be considering the full range of policies so that it has the flexibility to say it might be beneficial for the economy as a whole to move faster, not to do more, and to get to the same end point. That is something that is worth considering but we will take that further into the future. Does Mr. Elderfield wish to speak about the Home Payments company?

Mr. Matthew Elderfield

Chairman

I am anxious to call Deputy Doherty.

Deputy Pearse Doherty

Go raibh maith agat. I welcome Professor Honohan and Mr. Elderfield. I have a series of questions, some of which have already been answered and some of which I would like to elaborate on. I will direct my first questions to Professor Honohan.

In the past few weeks, €16.4 billion worth of taxpayers' money has been injected into the banks. The taxpayer has the right to know how much of that money was injected into the bank for the purpose of projected losses that the stress test identified for domestic mortgages. How much was identified in the PCARs stress test in March for domestic mortgages? I know it became convoluted afterwards because some of them had been sold on. How much did the banks' stress tests identify that mortgage payers would not be able to pay back to the banks over the lifetime of their loans? It shapes some of the policy on how much scope is there within the capital injected into the banks to avail of some of the solutions mentioned by Professor Honohan, some of which I would support. It will give us an idea of the scope that exists for the write-down process.

The Minister spoke yesterday about the cross-departmental working group on recommendations. He said yesterday that it is not so much an expert group, but rather a cross-departmental group. That might be an area of concern. I am not sure who is on that working group. I am not sure if the Central Bank is represented on that working group, or whether Professor Honohan is on the group. Maybe he could inform us of the list of members of the group. He mentioned in his opening statement the types of solution he would like to see from the group, and said that we have already seen debt write-downs and that there are other issues being dealt with by the banks on a one-to-one basis. What additional recommendations must come from the group for actions that are not being taken by the banks at this point? He mentioned debt-for-equity swaps, something my party has proposed, along with the idea of short selling and mortgage-to-rent arrangements. Does he have any idea, if such a scheme were to be put in place, what the cost to the banks would be? I know it would be difficult to estimate a cost, but is there any idea of the ballpark figure we are talking about if such a scheme were to be implemented?

There is another issue about which I am concerned. Anybody working with and meeting people out there knows all too well that this process is not going fast enough. Professor Honohan said in his opening remarks that the banks need to do more. This is not something we just learned about because of press attention in recent weeks; it has been going on for many months, and is not being focused on by the banks or the Government. We need to impose something. It is not good enough for the Governor of the Central Bank to tell the banks they need to go further and faster. We see cases all the time in our constituencies of people who we know, from our limited experience and expertise, will not be in a position either now or in the future to pay back their loans, yet the best the banks are offering, as of last week and the week before, was a two-month interest-only repayment schedule, which is nonsense from banks that are being kept alive by the taxpayer. Would Professor Honohan agree there is a need for a mortgage debt resolution agency that would have the legal capacity to impose settlements on the banks where the banks are not coming up with settlements? In this way we can deal with the issue once and for all, restore confidence to the market and increase the spending power of those who are not spending at the moment because their debt is completely out of control.

There has been much focus on mortgage debt, but my party and I are concerned about the issue of household debt. Has new data been released, or does the Governor have the latest figures on personal and household debt? How does he see those figures rising or decreasing over the coming months, given the austerity budgets being introduced by the Government? Maybe he could shed some light on household debt and its sustainability.

Policy makers need to focus on Anglo Irish Bank and the promissory note. I mentioned this to the Minister, Deputy Noonan, yesterday. The promissory note is a huge drag on the Irish State. It is my view and that of Sinn Féin that we should not pay it. We will park that issue, but to get to that point the Government may need to come up with solutions or ideas. If, for example, we were not to pay the promissory note, it would reduce our debt-to-GDP ratio by about 20%. It would put us in a healthier position, although there would be other things to be done in terms of the Exchequer balance. The cost of that promissory note in full will be about €44 billion when we include the interest payments. Is there a way to reduce the immediate cost of the promissory note? For example, there is a school of thought that the EFSF, in an expanded role, could buy back the emergency lending assistance extended by the Central Bank and the European Central Bank to Anglo Irish Bank and reschedule those payments, thereby dragging out our promissory note over a 50-year period, or a 30-year period as agreed by the EFSF in terms of its new loan restructuring. This would reduce our Exchequer deficit this year by around €2 billion. Are there any ideas or solutions for this issue within the Central Bank, given that the promissory note will pay the emergency loan assistance that was extended by the Central Bank and the European Central Bank? There are one or two major creditors within that bank at this point, so it might be easier to deal with it. We need to come up with some ideas.

Emergency liquidity assistance, ELA, was extended by the Central Bank. It has come to light in recent months that the Central Bank required letters of comfort from the previous Minister for Finance, the late Brian Lenihan. I have seen the letters of comfort and this baffles me. Why were they requested? The e-mails sent refer to the Government's intent and policy and in my view they are not legally standing. If these soft e-mails were required by the Central Bank so that it would extend tens of billions of euro in liquidity to banks that were, in effect, bust at the time, what was the requirement and do these letters of comfort have any legal effect? Is the State now liable as a result of the letters that were sent without the approval or the knowledge of the Dáil? What would happen if that money was not repaid by the State? What would happen to the Central Bank's accounts if the ELA extended to Anglo Irish Bank was not repaid to it? I am keen to tease out the matter and to understand the views of Mr. Honohan.

There has been much talk about lending from the banks to SMEs and they claim that there are no viable business plans coming forward because of a lack of demand. That has been dismissed by those within the industry. It is something that has been discussed as a major issue for a long time. There is a legal requirement on the pillar banks to extend €3 billion in loans to these sectors, a target unlikely to be reached as the Minister said yesterday. The CSO figures in May show that in 2007 some 90% of loans were successful but in 2010 only 50% of loans were successful. Let us consider what percentage of enterprises applied for loans. In 2007 some 37% of all enterprises applied for loans and in 2010 some 31% of all enterprises applied for loans. We saw a drop of 6% of enterprises applying for loans from 2007 to 2010 but the success rate of those loans has dropped from 95% to 55%. Does Mr. Honohan believe this is acceptable? Is it good enough that the banks are refusing in full 45% of all loans that they are receiving from enterprises last year? What can be done to enforce the legal requirement to extend the lending requirements that have been imposed on them by the State as a result of the recapitalisation?

I wish to put a personal question. There is a school of thought which has been well aired and it gives Mr. Honohan an opportunity to raise the matter. We are all dealing with the aftermath of what is a very bad EU-IMF deal. There has been comment that Mr. Honohan's intervention in this debate was unhelpful to say the least. At the time of very intense negotiations by those in the Irish Government, which was trying to hold off going into a bailout - I believe we should have held off going into the bailout - Mr. Honohan made certain comments. I understand he was at the board of the European Central Bank at the time and basically he cut the legs from under them. Is that something Mr. Honohan regrets with hindsight or does he believe that it was right and proper that the people were told the full and honest truth, that a bailout was required in his view and that negotiations were ongoing? Will Mr. Honohan comment on this?

Will Mr. Honohan comment on the European programme and what we are seeing at the minute? I say this in the context that he is a member of the board of the European Central Bank. Some commentators have argued that the European Central Bank's bond buying programme is a stop-gap to the point where the European Financial Stability Facility, EFSF, will start to buy Spanish and Italian bonds. If so, does Mr. Honohan believe that should be the role of the EFSF? Does he believe the current structure or what is being proposed is large enough? What does he believe to be necessary for that to happen? Is it Mr. Honohan's view that the ECB should launch a buying programme and that it should be the body to carry out that function?

I have several questions for Mr. Elderfield if that is okay, some of which have already been dealt with. The issue of negative equity mortgages has been dealt with by the previous speaker. Mr. Elderfield mentioned that it is something he would not like to advertise. There must be clarity and a transparent process for those who wish to avail of negative equity mortgages. Does the regulator plan to publish the guidelines issued to the banks in this regard? The banks' customers, including mortgage holders and others, should have a clear understanding of the rules within which the institutions are operating and the criteria under which it is possible to avail of that type of product.

There is a recognition that write-downs are already happening to some level. Can the delegates indicate how widespread this practice is? For example, is there a figure for the value of domestic mortgage write-downs since the beginning of the year? It is understood write-downs are also taking place in the commercial sector. What is Mr. Honohan's view on the Government's proposal to bring to an end upward-only rent reviews and the impact this might have on the banking sector? Several reports have indicated that the consequences of such a move might result in a surpassing of the most adverse stress tests criteria. In such a scenario would the banks require further capital?

I would like Professor Honohan to put it on the record.

Professor Patrick Honohan

There is a €5.8 billion figure for the base case and a €9.5 billion for the stress case. The amount that we published as much as the amount of capital that was put in was what gave comfort to the markets because they felt that the calculations had been done. It does not come out in a short summary but it is fully there. It is a fair question.

On the question of the expert group and interdepartmental committee and whether the latter is better than the former, in some respects it is better because it tells one that it is getting close, because the interdepartmental committee is reconciling the different perspectives of the agencies that are preparing legislation. The time for the expert group in this matter has passed. The Law Reform Commission did a significant amount of work and much consultation. We are at the interdepartmental committee stage and that is getting close to legislation. I want to see a lot of things come out of that process including the reform of the bankruptcy law and the debt settlement arrangements and the institutional arrangements around that which would involve an agency. Before borrowers think that this is an agency that will let them off everything, it is not. It is a streamlined, more efficient, reasonable and fair approach to dealing with what will continue to be difficult problems for borrowers.

Deputy Pearse Doherty

Can I ask a supplementary question?

Chairman

No, I will not permit the Deputy on this occasion because he has asked many supplementary questions. They have been helpful but we must make progress.

Professor Patrick Honohan

Deputy Doherty then asked an interesting question. I have not had an opportunity to talk to the committee about the famous week when we negotiated with the EU-IMF team and I welcome this opportunity. I am quite satisfied and have no doubts that my decision to go on RTE and tell the Irish people and observers internationally - one cannot speak on Irish radio without it being picked up everywhere; one has to make sure that everybody understands the same thing - was very valuable at that point. That is because there had been, for one reason or another, over the previous number of days - during which there were intensive pre-negotiations involving many people on this - a sense in the market and in political circles in Europe and domestically that something was stalling; that the Irish Government was somehow not going to go ahead with an IMF programme and that there was going to be some huge meltdown. The Financial Times was writing, “Be ready for bank runs”, and so on.

There was a heightened sense of concern in the markets, there was a heightened concern domestically - which the Deputy would know better than I - and there was also a concern in European policy circles, including the ECB. I was telling my colleagues at the ECB, "Don't worry, this is happening. Negotiations are going fine. The team will be here tomorrow". I was thinking "everybody believes something bad will happen and there will be a big meltdown, so I have to say to them that this will not happen." The only person who could tell people that was me: this was my responsibility. I was thinking overnight "I have do this now and I have to do it quickly". The Deputy mentioned a suggestion that it might have harmed negotiations. That is absolutely out of the picture. It had nothing to do with that. The negotiations went straight through.

I was not all that happy with the negotiations, not that I think it was a bad deal. I know the Deputy has that view, but I would not say that. There were a lot of missed opportunities because I think it was put together more quickly that was really strictly necessary - partly because people felt there might be a meltdown. I refer to opportunities such as a realistic construction of interest rates in the EFSF, which was not something we could negotiate. It took time to do it and it is there now. For example, the managing director of the IMF, Christine Lagarde, last week proposed that the EFSF should now be able to inject capital directly into banks, not just lend money to governments. This is not agreed in Europe. To my mind, we could have developed something like this and instead of Irish taxpayers' money being put into the banks, the EFSF's money would be put into them and it would own 99.8% of AIB. This would reduce the indebtedness of the State and lower the risk. I thought there were a number of possibilities. It is not a bad deal; it is the standard deal one would get. However, there were some missed opportunities which can be picked up on - like the lower interest rate. I am perfectly happy with this intervention. I have a personal regret that it wrongfooted the late Brian Lenihan, a man for whom I had great regard. He could have made the announcement on the previous day if he had wanted to but that was not his choice.

Chairman

I call on Deputy Twomey.

Deputy Liam Twomey

I thank the Chairman.

Deputy Pearse Doherty

I believe Mr. Elderfield wishes to speak.

Chairman

I beg Mr. Elderfield's pardon.

Mr. Matthew Elderfield

I wish to respond to approximately six questions and I will do so in rapid-fire in the interests of time. With regard to SMEs, recapitalisation provides the banks with more capacity to restructure SME debt as well as personal debt and we are updating our code on SMEs. On corporate governance and pursuing individuals, for our part the Garda has asked us to hold fire on our enforcement proceedings while it is preparing its cases. We must be very careful and ensure the evidence is assembled. Moving quickly and misfiring on a prosecution and not being able to pursue it would not be sensible for our part. Yesterday, we published our fitness and probity regime. We also have stronger corporate governance and we are conducting a review of the incumbent bank directors. I can speak more about this later if people wish me to.

With regard to bank remuneration, I do not have a view on the exact level of pay and this is the point. It is not for me to state it should be X amount or Y amount; a going rate exists and if one wants good candidates it is higher than the Ciroc arrangements. For example, one could consider the levels of pay in the UK banks which have been rescued. The Government has made a huge investment and as taxpayers we should ensure we have the best candidates for the job.

Upward-only rent reviews were known about when the prudential capital assessment review, PCAR, was done and they were a factor. My job is to be worried about all areas of concern but the approach in the PCAR was to have layers. This means we have BlackRock rather than the banks; we examine portfolios to see whether the data is correct; we have a three year rather than a two year assessment period; and we have an extra €5 billion add-on. There is much conservatism layered into the process. I would like to see banks work harder on writing down loans and data and we are pressing on their provisions. We hope to see through the accounts the write-downs incurred by the banks.

Chairman

I call on Deputy Twomey.

Deputy Joe Higgins

On a point of order, why is the Chairman calling on a Government speaker before completing Opposition speakers? These two gentlemen speak for Government policy.

Chairman

I am quite happy to discuss such matters with the Deputy afterwards. I am in charge of the order of the meeting and I call on Deputy Twomey.

Deputy Liam Twomey

Thank you, Chairman. I welcome Professor Honohan and Mr. Elderfield. It is interesting to see how the pendulum swings. It was a lack of supervision and poor regulation which got us into the crisis in which we find ourselves at present. Yesterday, the Minister for Finance, Deputy Noonan, made it clear that even though he owns most of the Irish banks he has no interest in being their CEO. At the same time, we do not want too much interference. We do not want the organisations represented by the witnesses micromanaging negative equity loans or the number of loans and write-downs. There is an expectation that the banks must get on with their own work and that they should be doing the job for which they are more than well paid. The committee would really like to know that the witnesses are absolutely confident the information they receive from the banks is as accurate as it could possibly be.

Professor Honohan stated there is less denial from the banks. The banks paid out €1.25 billion worth of dividends in the nine months preceding the bank guarantee. Of that €1.25 billion, €250 million was paid out in the four days preceding the bank guarantee. Denial is not much of a road to travel on when one considers what was going on. It was relayed to me two nights ago that a senior banker in one of the covered institutions had replied when asked why there had not been sufficient funds in the bank's accounts to cover loan losses that he had expected the economy to have recovered somewhat by that point. There is no possibility of the economy recovering quickly. That response leaves me with concerns about the banks and in regard to some of the information supplied today. How good is the information on loans that the Central Bank is receiving from the banks?

Professor Honohan has stated money has been put aside and that the Central Bank has an additional €5 billion it can use. However, are the banks writing down loans properly? Professor Honohan has given examples of people reporting that the banks are arranging different terms for borrowers, including interest-only repayments. He has also stated they are providing for write-downs but we do not know by how much. The only loans of which we are aware are those on which people have defaulted. There are huge numbers of poor loans within the banks. Stress tests have been carried out and we should be, as Professor Honohan stated, pushing the banks to get these loans off their books in order that we can have clarity on how sound they are.

We were told during the debate on the banks three years ago that the problem was one of liquidity. I recall that the Minister for Finance, Deputy Noonan, was asked on the first occasion he made a statement on this matter in the Dáil whether the problem was not alone one of liquidity but also insolvency. It transpired that there was a serious insolvency problem. We could possibly say we are past the risk of insolvency, but does a liquidity problem remain? Is it that this is not being brought to the forefront and should be in order to provide the people with confidence that the banks are on the road to recovery and can work in the economy? We are all hearing about loans not being made available to SMEs and overdraft facilities being withdrawn from them and from individuals. If an overdraft facility is withdrawn, one is essentially repaying a loan. The banks can then record them as being repaid loans. This is putting SMEs under pressure. I accept that in times of recession banks do not lend. The extent to which we are trying to shrink Irish banks will also impact on what they will lend which, in turn, will impact on loans to SMEs. I am aware that the Minister is seeking accurate information on this and accept that Professor Honohan may not want to discuss this issue. However, this indicates the thinking within the banks.

I would like to leave this room confident that the banks have taken their heads out of the sand and are being a little more realistic and that Professor Honohan is, in turn, digging in deep on the macro picture of how sound the banks are at this time. It is to be hoped the potential liquidity problem will not turn into something else in six or eight months' time. Perhaps Professor Honohan will state who is in trouble now. It has been stated some High Court judges do not want to take a cut in their income because they are desperately trying to repay loans on property. Are there dentists, doctors and other professionals who, following further wage cuts and as a result of reduced incomes, will experience difficulties in repaying loans on property, which difficulties will turn into a second wave of defaults in a few months time?

The big players in NAMA are to some degree being paid a salary by NAMA to manage their own debts. A new tranche of individuals are going into NAMA. They have loans of less than €20 million, including some of €3 million or €4 million. A problem may arise when these loans are taken from the banks. NAMA may want to move faster on them. If that is the case, could there be a further rush towards bankruptcy tourism? We have seen a high profile case where people have left this jurisdiction to avail of much easier terms when declaring bankruptcy. It has even occurred in the jurisdiction next to this country. They therefore absolve themselves of a debt burden they carry with their banks. These are issues that will come down the track soon.

What I really want to get from Professor Honohan today is the confidence that he has a macro picture of how solid our banks are and where we will go in the next number of months. Perhaps he would also give us an overall view from the Central Bank on global recovery. We hear talk that there might be a double dip recession, although many people believe that will not happen. However, giving comfort to the markets is not always easy, and the markets certainly do not feel very comfortable with what is happening at present. Perhaps Professor Honohan will comment on that too.

Professor Patrick Honohan

The most important thing is to throw light on the questions Deputy Twomey raised. The exercise we conducted in the spring with BlackRock Solutions is quite interesting. We did not say: "Have a look at what the banks are doing and adjust for pessimism." What BlackRock Solutions did, particularly with the residential mortgages but also to an extent with sub-samples of the rest of the banks' books, such as commercial property lending and so forth, was to take information about the loans themselves, that is, where they were being made and what was known about the loan-to-value ratio. We told the company to forget about what the banks think can be recovered but to look at what could be recovered if these loans pan out in the way similar loans would pan out for example in a US state. Therefore, if the loan-to-value ratio of the mortgage goes up and up, as it has in the United States, there is a great deal of experience there regarding how quickly and how deeply the loan losses arise in respect of such mortgages.

It was by using that information, combined with information about how the loans in Ireland have migrated from zero to 30 days, 30 to 60 days and so forth, and using those bits of information entirely independently of the banks' own assessment of loan losses, that BlackRock Solutions arrived at its projections about how losses would pan out over a large number of years. When the banks saw that they said: "No, they are completely wrong. They do not understand the Irish markets. It will not be that bad." The truth is probably somewhere between the two. I took a lot of comfort from it. This compares with the previous exercise, which we undertook on a different basis. We said in the previous exercise that we would be tough, take what the banks have and tell them that it is not pessimistic enough and that they must make it more pessimistic. We used the banks' analysis as a base and told them to take their heads out of the sand. The exercise this year by BlackRock Solutions allowed us to take a different perspective on it. That is why we feel more comfortable about having provided adequate capital.

I would like the Central Bank to have a better picture about what types of persons are indebted and to what extent. We were going to do this, and I keep asking why we have not done it. Part of the reason is that there is a pan-European initiative and I decided to piggyback on that so we would have a methodology that is comparable across countries, which would be great. However, the European initiative was delayed. It takes time to set these things up and to conduct them on a scientific basis, but I am hoping we will get a great deal more information. We are still in a situation where there is a wide range of uncertainty.

Deputy McGrath and Deputy Doherty asked what the loan losses will be. We do not have a number for that but we have a number for a sufficient amount of capital to cover what they could be. There is still a range, although it is not as wide as it was previously. We want to narrow it further, not by learning which property is involved but by learning what types of people are involved. This will give us more information on their ability to repay, which information can also be used to project economic behaviour.

I do not want to talk about the issues of double dip and global recovery for a particular reason. Every month the ECB takes a policy decision in its first meeting of the month. There is a strong convention that members of the ECB governing council do not speak about global economic matters in the week before a meeting. We are not here at the right moment.

Chairman

Our meeting was badly timed.

Professor Patrick Honohan

From that point of view, yes.

Mr. Matthew Elderfield

In addition to the BlackRock analysis, a prior step was taken to consider the integrity of the data that the banks had provided. There was another layer in the process, that the banks were sending data files on loans and the security and collateral offered, which we did not take on trust. We had accountancy and legal firms carry out spot checks on the details before the calculations were made. That is another level of comfort in the process of assessing whether the data are accurate. Our economics colleagues have been crunching, slicing and dicing the BlackRock data and a paper to be published in four to six weeks will provide more of an insight. The aim will be to have the profile of the borrower aligned with the data for arrears. Over time we will be able to build this up because we now have the standard financial status form that all borrowers under the code of conduct on mortgage arrears must fill in. The banks will thus have better information on the borrower profile on which we can build.

Deputy Liam Twomey

Regarding the mortgage assessment form, there is no timeframe within which the banks have to respond to it. The person with the loan fills in the form, but there is no timeframe within which the banks must respond.

Mr. Matthew Elderfield

I cannot recall if that is included in the code of conduct on mortgage arrears.

Deputy Liam Twomey

Is there an obligation on the banks to respond within 30 days?

Mr. Matthew Elderfield

The Governor has mentioned that we will launch a major thematic review of the banks' compliance with the code of conduct on mortgage arrears. We will check particular matters such as whether they have stopped charging penalty interest to customers and whether they are placing a stay on legal actions. One of the matters we will examine is the efficiency of the process, the speed of the turnaround and the resources deployed. We will examine this closely to ensure cases are being processed quickly.

Deputy Stephen Donnelly

I welcome Mr. Elderfield and Professor Honohan. On the issue of mortgage debt, I am extremely concerned by the language I have heard used this morning and the mindset it suggests. We have heard that the banks should recover as much as they can; the phrase used was that they should ensure people have a sufficient standard of living, but the word "minimal" was also used. It was also suggested the State had no role in telling the banks what to do. That suggests that within the code of conduct and the parameters set out the banks will be allowed to get on with it. They will be trusted to negotiate one-on-one and come up with the best solution. The reality is that they will get away with whatever they can. We know they lied to the State and are under criminal investigation and that they engaged in behaviour so reckless it brought the economy to its knees. There is mounting evidence of intimidation and their not being fully transparent on the rights of mortgage holders. There is a vast power asymmetry between the representatives of a bank who can arrive at a meeting with lawyers, accountants and a range of other suits and the distressed mortgage holder or couple. Anecdotal information I have received in conversations with persons involved in the broker industry suggest strongly such power is being used regularly and to great effect.

I suggest the State has a role in telling the banks what to do; after all, it is our money. If it was theirs, they could do what they want with it, but it is not theirs, it is ours. Therefore, we do have a role to play. We tell them what to do in every other aspect. We tell them to give money to bondholders, to deleverage and to sell a certain amount, but for some reason the suggestion is that we should not provide for direct oversight in the case of the people who are partly responsible for taking on the mortgages, as are the banks for giving them the money and the Government for suggesting at the time that everybody should buy a house. As the banks are partly responsible for distressed mortgages, I suggest they have a clear moral obligation to act accordingly. The anecdotal evidence is that they are not doing so but are getting back as much as they can, even when they are partly responsible for the situation in which borrowers find themselves. We have to put protections in place for citizens within the context of this vast power asymmetry.

Is the Central Bank tracking the amount of the people's money being given to the banks which is actually being passed on? We have talked about this amount at great length, but how much is being passed on? Is the Central Bank tracking the mechanisms being used in passing it on? Is it simply the case that the term of a loan is being extended, resulting in the total cost of borrowing to the borrower being increased, although it may make it affordable?

Is the Central Bank aware of the growing number of allegations of intimidation and what sounds like questionable practices engaged in by at least some of the banks? If so, what is it doing about it and what does it plan to do about the matter in order that the banks will begin to act in a more respectful manner? These cases may be on the margins. I have no idea of the percentage of cases in which the banks may be acting in this way. However, there is mounting anecdotal evidence that at least on the margins they are acting in a way they should not.

For what level of oversight of the negotiations between the banks which essentially have most power in these situations and borrowers is the State providing? Are audits being carried out? What support is being provided for those who have to walk into a room full of bankers, lawyers and accountants? Do they always have to go in on their own? Distressed mortgage holders clearly do not have the money to afford lawyers, senior counsel and their own team. Does Mr. Elderfield have any resources or does any other arm of the State have them that can be deployed to rebalance the power asymmetry?

Are there any consumer representatives in the expert interdepartmental group, or is it purely State groups which are represented? I am aware that within the remit of civil servants there is a broad obligation to protect the people, but are there consumer representatives in the group? Is the broker industry represented?

Do Mr. Elderfield and Professor Honohan consider that they have sufficient resources to do everything required in what is, obviously, an extraordinarily difficult situation for the organisation? There is a large number of staff in the office of regulator who would have been in place from pre-September 2008. Has an evaluation been conducted of the resources needed in terms of competencies and so forth? Has upskilling, retraining and redeployment taken place? What resource in terms of numbers and capabilities have been provided since to ensure everything needed to be done can be done?

I turn to the issue of bondholders. Last year Professor Honohan in an interview with Vincent Browne referred to the fact that the European Central Bank had essentially threatened Ireland on the issue. Obviously, we would all prefer not to pay back any unguaranteed bondholders if we could. I understand that the Government has chosen what it believes to be the lesser of two evils. Since that threat was made, the environment has obviously changed. It seems that the only person now who believes that private sector investors should not bear any of the consequences for their own investment decisions, in the case of senior bondholders, is Jean Claude Trichet. The IMF has clearly stated that they should.

Within the context of what seems to be a very changed environment, we now have heard the Minister say that he is looking to impose on senior unguaranteed bondholders of Anglo Irish Bank, and the principle of debt forgiveness has now been applied to Greece. The environment has changed and it seems to me that the European Central Bank is a very lonely proponent of the idea that the private sector should not deal with its own losses. I would like to hear the witnesses' opinion on whether there is more room for that.

In respect of the BlackRock stress test, how close are we to the adverse scenario?

Professor Patrick Honohan

Deputy Donnelly will have noticed that he picked some of the phrases from the statement. There are other phrases, such as "recognising affordability of the borrower", "reduce the anxiety of those who are struggling", and so on. I would not like to be put in a particular box on that. There is a balance to be taken into account. When we refer to the State, people often refer to the taxpayer, but it is also the user of public services who can suffer when banks and the State do not recover as much as can reasonably be recovered. The language concerning a sufficient standard of living and so on was used by the likes of the Law Reform Commission, which took a widely accepted approach to the situation and to which we would broadly sign up.

Deputy Kieran O’Donnell

I welcome the Governor, Professor Honohan, and Mr. Elderfield. Professor Honohan referred to the IMF-EU deal. I seek clarity on it and his interview on "Morning Ireland". What does Professor Honohan wish was done differently during the IMF-EU negotiations? Was the then Minister for Finance, the late Brian Lenihan, aware that Professor Honohan was coming out on "Morning Ireland"? Were there discussions about Professor Honohan's views on how the IMF deal should go through? Will Professor Honohan give us his thoughts from around that time because it is a critical period for the Irish economy?

I have a fundamental view with regard to the banks and their reckless lending on the mortgage base. Regulation was a key element as well, especially in the area of the residential mortgage book. Does Professor Honohan believe the recapitalisation of the banks that has taken place is sufficient to cover any restructuring or rescheduling of the mortgage loan book that will be necessary? How does Professor Honohan view the buy-to-let market? The consistency among the banks has always been an issue and the consistency of treatment is an issue, especially in dealing with home owners. Whether they are going to one bank or another the customer is entitled to consistency of treatment. That has not been the way with the banks. That is the role of the regulator. Does the Central Bank regulate all mortgage providers in Ireland? Does it regulate the sub-prime mortgage holders? Is there anyone the Central Bank does not regulate?

The incoming president of the ECB, Mario Draghi, has stated that the debt crisis in Europe is entering a new phase. Will Professor Honohan expand on that and where he envisages the whole issue of the debt crisis going? Thankfully, the bond yields of Ireland are coming down. At what rate does Professor Honohan believe we could start to enter the bond markets as a sovereign State in our own right again?

The SME sector has not been dealt with much today. We are all dealing with constituents who are in difficulties with their mortgages. I spoke to a couple recently who are under severe pressure to meet their repayments after one of them became unemployed. This story had a happy ending because the person in question managed to secure new employment, but many others are not so lucky. A particular difficulty is that one qualifies for jobseeker's benefit for a period, after which one is means tested. The one area of the economy that is currently stagnant is the domestic sector, which comes back to the issue of credit. I disagree with Professor Honohan's remark earlier that there is not a demand for credit. My experience, and that of all Members, is that there is a great demand for credit from the small business sector. The demand in individual cases is not on a grand scale. People are seeking, for example, to have their overdraft extended by €5,000 or to have their overdraft facility restored rather than converted into a term loan. In such cases, the restoration of an overdraft facility might allow a business owner to save one job and thus allow an employee to continue to meet his or her mortgage repayments.

What action do the delegates propose to take in this regard? The devil is in the detail. We have had broad, abstract statements about the banks not seeing a demand for credit. In reality, the owners of small businesses whose overdraft is to the floor and who are under severe pressure are worried about approaching their bank manager for fear their credit line will be curtailed further. If they approach the manager, who may be a local person who is familiar with their business, they are told that the application must go to head office and advised there is little point in submitting it. In many cases, the people who are in trouble with their mortgages are the self-employed owners of small businesses, the lifeblood of the economy.

What measures do the delegates propose to deal with this issue? I acknowledge their intention to introduce a code of practice on SME lending; that must be done without delay. There must be consistency across all institutions in terms of how they evaluate loans and the risk-avoidance measures they operate. We have to encourage entrepreneurial activity and facilitate those with entrepreneurial flair to take risks. The banks are being urged to lend to the small business sector while at the same time being told to sweat their balance sheets. The reality is that they have become completely risk averse in regard to the SME sector.

The realistic restructuring of loan relationships is key for the banks. We stressed it when talking about mortgages, but it extends to small business loans tied-in with buy-to-let mortgages.

Yes. That is not the problem.

Senator Sean D. Barrett

I welcome the joint committee's visitors, one of whom is a long-standing associate of mine. We were in the economics department of Trinity College together before Ireland called for us to move in different directions to deal with this serious problem.

On the doorsteps in my constituency I found one was writing references for students who had emigrated to Australia, Canada and New Zealand. While their parents were extremely annoyed about this, they stated the position of the guy who was ten years older was worse, as he was paying off a mortgage that was approximately four times the actual value of the house. This has been a disaster for the real economy and although members have heard from two highly personable people who are very nice firemen and, while I appreciate what they are doing, the house has burned down. People have lost their jobs and been obliged to emigrate and the Central Bank stands indicted. An appalling banking system was hopelessly regulated by some of the highest paid central bankers in the world. This has been documented in respect of Professor Honohan's predecessors and he has addressed the issue. It was an appalling performance by the Central Bank and the Department of Finance. Moreover, as Mr. Colm McCarthy has noted, three years later we still do not know what some of those people thought they were doing. Mr. Elderfield has stated his regulators try not to be rude, but they may be obliged to do so or it may take a further two years. It would then have taken five years to figure out what on earth the Central Bank thought it was doing between 2000 and 2007 and what the banks thought they were doing. This point must be established.

Reference was made at yesterday's meeting to the Wright report that, as the delegates are aware, notes the Department of Finance gave the right advice but its officials did not write anything down. Does the Central Bank possess records in this regard? Did alarm bells go off when the price of a house in Dublin rose from €100,000 to €500,000 between 1997 and 2006? Did anyone in the Central Bank notice that there was a massive increase in lending when we joined the euro, approximately 2% of which went into agriculture and industry, while the rest went into financial intermediation, property speculation and personal lending? Did the Central Bank notice that The Economist monthly series was showing that Irish property prices were rising by multiples of any other country? Incidentally, I agree with the Governor that we still have not returned to the point at which prices should be if one takes into account the traditional ratio of house prices of two and a half to three times average income. Before being inherited by these gentlemen, the Central Bank was simply not fit for purpose. It must be highlighted that the blame for what happened in this country rests on the shoulders of the predecessors of the joint committee’s highly welcome guests. In the current edition of the National Institute Economic Review John Fitzgerald and company note appropriate regulation of the financial sector could have prevented financial collapse. This definitely is a case in which the banking sector ruled a country and one is entitled to be annoyed.

If one considers the change of membership of the Dáil, 77% of those who supported the outgoing Government lost their seats. As 99% of the value of bank shares was wiped out, I must ask again the reason that, broadly speaking, the same regulators and bankers are in place. The clear-out has not gone far enough. While Mr. Elderfield is preparing codes of conduct for the appointment of bankers which I understand will be ready this month, again, this is happening three years later. In a normal bankruptcy all those boards of directors and managers would have been swept away. As several of the members of the committee have asked, are we out of it yet? Are we in any position to meet the Basel III requirements? Do these banks really know anything about banking?

What is the concept of pillar banks? The worry we had was that our banks were too big to fail. We should not have rescued them on 29/30 September 2008. I want to inquire from the Governor if the Central Bank had involvement in that. Would it matter to any of us if the banks in the high street were run by Canadians, or people from the Gulf or India? They might be better at banking than Irish people. Was this the last throes of a daft form of protectionism, to rescue obviously incompetent banks once we guaranteed the deposits?

The Governor referred to the Europeanisation of this. My reading of the memorandum of understanding to which the Central Bank was a party on 1 June 2008, three months before the collapse, is that it applied. We could have put all those bankers on the plane to Frankfurt stating that it was its problem. It was not an Irish problem. The nationalisation of the problem by the then Government caused us serious problems in Europe. What is the point in pillar banks if the problem is that they were too big to fail?

Why are we not aiming for utility banks or Captain Mainwaring banks? Most people just want a place to hold their bank account and to keep their savings. The casino must be separated out of this. I am not so sure that there would not be another branch of casino people. The Central Bank seemed to be unaware of casino bankers. In fact, in the latest edition of the Irish bank officials' staff journal there is reference to two senior bankers joining Paddy Power - banking to gambling. We must distinguish between them and I am not so sure we are protected against casino people. Let us have banks which are not regulated by the Central Bank. They might pay 2% more but they will not be rescued ever again by the taxpayer. As the Governor wrote in his letter, with the then Minister, to the IMF, we tried to rescue a banking system which was five times the size of the economy. That was an impossible task and it has done serious damage to this country.

I must ask about regulatory capture. It is has been a serious problem that the Central Bank was far too chummy. Some of the journalists have written that central bankers who were supposed to be regulating the sector played golf with bankers and won prizes, and so on.

I worry when I hear Mr. Elderfield state that a €0.5 million salary is too low for bankers. Persons who are destroying 98% or 99% of a business should lose 98% or 99% of their pay. The kind of utility banks we now need in this economy are completely different and we do not want the gamblers. One could recruit the staff, particularly in the present unemployment situation, for €100,000 rather than €500,000. Mr. Elderfield is trying to get to grips with this problem, but siding with higher pay for bankers, when they got us into so much trouble and he is supposed to be regulating the sector, sends the wrong signal and it is not the one that either of those present intends. These people need to be reined in, not financed any more.

We must ask about corporate governance. What is the role of bank directors? Could they merely send the bill to the taxpayer? The Governor, in speaking about the mortgage problem, stated, "Society at large would not be well-served, to say the least, by strategic behaviour on the part of any persons who could service their debts but conceive, in the current environment, an opportunity to escape from their obligations, large or small." Precisely what those bankers escaped from is, "obligations, large". Those pose the real moral hazard problem. There must be control over the managers and directors of banks.

I welcome, as always, my former colleague coming here but there should also be a procedure whereby the directors of the Central Bank appear here. We must find out if they knew anything about banking. What were the directors of the Central Bank doing throughout this period? Was it a kind of a badge that one got for service in a political cause or other?

We must look at the accountancy problem. We are entitled, as a State, to sue accountants who prepared books for banks ignoring the warehouse money moved in at five to midnight and moved out again. There are cases in the private sector where people bought companies and found that the accounts were not a true and accurate statement of the affairs. Two accountancy firms, in particular, need to be investigated and I am worried that we are three years into this and no accountants have been made accountable.

While it is not the direct responsibility of the Regulator, I also worry that NAMA is in GNP terms the biggest bad bank in the world. It should be abolished as quickly as possible in order that the floor price is found and property prices are reduced. That is how the economy will move on. Having such a large agency, much larger than the Swedish one on which it was supposed to be modelled, has become a disadvantage.

With regard to SMEs, Bloxham stockbrokers conducted an analysis of the banks and the figures show they were never interested in SMEs. The bulk of lending to this sector was done by foreign banks. The Irish banks lent to property developers and, in particular, to two dozen people, which the Minister mentioned yesterday. The banks were rescued to save 24 people who were major borrowers. I do not know how that never appeared on any warning system in the Central Bank.

The banking system is being shrunk. Was the Central Bank asked to approve the purchase of Northern Rock? One of the advantages we have with foreign banks is when they go broke, foreign governments rescue them. We rescued a bank in Ireland and this week it bought a failed UK bank, yet the Government is trying to shrink the sector. Was there any regulation of that decision?

Professor Patrick Honohan

I draw the attention of members to the report I prepared in May 2010, which lays out in considerable detail, though perhaps in not in headline grabbing language, the regulatory experience and the policy on regulation and financial stability in the Central Bank and the Financial Regulator's office in the years running up to the crisis and the night of the guarantee. It lays out what the people thought, what preparatory work they had done, the way in which the banks were supervised, the style and approach adopted then and the quality of the information. Information was not of high quality, which led to the situation in September 2008 when neither the Central Bank nor the Regulator had anything like enough information about the condition of the banks and, furthermore, to a large extent, they did not realise the degree to which they did not have the information. They did not realise, therefore, the risks that were involved and the huge risks being presented by the policy action.

The Senator has put his finger on an important point. The decision taken at that time was to say "We are a triple A rated country; we can take this on our books no problem with everything guaranteed". The decision could have been to say, "This is quite a big and unknown risk; it may be too big to take on our books. We need to get the European tie in", which would not have been easy. We know that the message from Europe at that time was that everybody had to solve their own banking issues because each country had problems. However, our problems were much larger proportionately than those in any other eurozone state. If that had been brought to the European table with an acknowledgement and a sharing of the risks involved, we would not be in the position we are today. The information was not there and the decisions taken by the Government at the time were based on a quality of information that should have been better.

We have been encouraging foreign ownership of banks. The Senator mentioned the concept of pillar banks and so forth. Whatever about pillar banks, we at the Central Bank certainly regard the foreign-owned banks participating in the economy as equally valuable and full participants. It is not a matter of pillar and non-pillar; that is a concept for the Government guaranteed banks. There is too much in the points made by Senator Barrett to cover them in detail. I have no doubt Mr. Elderfield will make points on several of the aspects.

Extensive changes have been made to the staff, management and governance of the Central Bank. There is a new structure for the directors of the bank under new legislation and new people were appointed. Of course I continue as Governor, and Mr. Elderfield and the Secretary General of the Department of Finance continue in their roles. We have an entirely new set of staff directors working on supervision and financial regulation. None of them was in his or her position prior to my arrival. Some of them were members of staff of the bank but in lower and different positions. There has been a complete reshuffling and reassignment and many new people are in the bank. This is not to imply anything about the other staff who continue in their roles. I do not want the committee to have the impression that the management and staff of the Central Bank are static. A new deputy governor took up his position yesterday. He sat in the gallery earlier during this meeting to understand the parliamentary process.

Mr. Elderfield will speak to the question on the directors of the banks and the need for change. Much change has occurred but it has not moved as quickly as some would have expected.

Senator Sean D. Barrett

Will Mr. Elderfield speak about Northern Rock?

Professor Patrick Honohan

Yes.

Mr. Matthew Elderfield

With regard to Northern Rock, I recall the deposit book was purchased as a way to improve the loan to deposit ratio rather than all the activities.

Professor Patrick Honohan

If that is all Mr. Elderfield will say on it I will add the peculiar point that in the encouragement of the banks and the requirement to reduce their loan to deposit ratio, there is an incentive for the banks to do deals whereby they acquire more deposits so as to reduce their loan to deposit ratio. (That metric was designated by the troika and not by us; we would have used the Basel III metric to be forward-looking.) This is the type of thing that happens on the side accidentally. This is a business decision by the directors of the bank.

Mr. Matthew Elderfield

I will comment on reforming the approach to supervision, which is at the heart of the Senator's critique of the past which I share. As I mentioned to a previous committee, when I came into the job I saw problems with the powers, processes, resources and philosophy of supervision. It is a big task to try to change all of these. We are close to where we need to be with regard to resources. We need more investment in training so we are more savvy in understanding the business models of firms. With regard to processes, we are trying to build a best practice risk model with a more forensic way of unpacking risk in a firm, looking at it systematically and scoring it, and examining the 14,000 firms on a portfolio basis.

With regard to philosophy, Professor Honohan's report stated there was too deferential an approach to supervision in the past. Regulators need to be more assertive and this is something many regulators are dealing with. Perhaps in the previous approach there was a deference to senior management in that people were saying we will point out the risk to senior management and they can deal with it or not as they see fit. That is an important change in terms of being more assertive. As a supervisor one must be willing to point out risks to the firm and if they have not mitigated them one must insist they do so or be willing to substitute one's judgment for theirs. This will require engaging for a while in a bit of dialogue with the firm. However, at some point one must lower the boom on the discussion and state that despite two attempts one has not been convinced and must insist that capital be raised and that lending cease. Getting that mindset change is also an important element.

On powers, a legislative framework will shortly be brought before the Dáil. However, I would like to share with the joint committee a couple of important regulatory initiatives in respect of which we reached an important milestone yesterday. We have brought in a tough corporate governance framework and standards for banks and insurers which limit the number of directorships that bank board members can hold. We are trying to break open and broaden the gene pool in order to bring more talent into the banks. Similarly, we reached an important milestone yesterday for a fitness and probity framework. We were given powers last year by the Dáil to do this. We have completed the consultation exercise and we have brought out regulations which state that anyone who wants to come into the system must pass through a rigorous check for pre-approved control functions.

We now have a broader ability to exit people as well. This rule means that anyone in situ is grandfathered into their old posts. We have decided to provide for a review of incumbent bank directors. Earlier in the year we wrote to all sitting executive and non-executive bank directors asking if they planned to remain in post after the beginning of next year. We have received all responses now. We have done a cut off of how many of those people in place pre-guarantee wish to remain in post afterwards. The number involved is quite small. We will, between now and formal commencement of the powers on 1 December, have to decide if we want to commence statutory investigations in respect of any of those individuals to establish whether they should be prohibited because actions they took in the lead up to the crisis means they are no longer fit for purpose. This is part of a broader agenda of trying to refresh the banks’ boardrooms and executive suites. It is important to change the culture of the banks and to bring in some outside talent. It is important there is more challenge within boardrooms and that skill sets are improved. This links into the pay issue in terms of bringing outside people in also. I believe the new fitness and probity regime gives us the ability to have checks and balances. If someone formerly from the banks wants to re-enter the system we have the ability to ask them to account for their actions. We also have a process which it is hoped will by next spring allow us to come back to the joint committee and state that anyone in the banks, formerly there during the pre-crisis period, has been judged in terms of their being fit and proper.

Deputy Arthur Spring

I thank Professor Honohan and Mr. Elderfield for attending and for being so transparent today. My first questions are to Mr. Elderfield. We have had a hyper-extension of credit over the past ten years since the euro came about. However, there was no fiscal policy from Europe in regard to what was the correct terms of credit and what were the correct loan to deposit ratios that should be achieved in financial institutions. I would like to know if parameters have been set out in regard to loan to deposit times earnings and durations of loans, in particular for mortgages? Also, is information in regard to lending for SMEs being collated? Is there sectoral analysis? The Q3 report from the Central Bank does not provide much information in terms of sectoral analysis. I know a little about what level of information would be provided by the banks to the Central Bank. It is not apparent from the report what is happening with the €19 billion. The taxpayer gave the money to the banks, entrusting them to do the right thing with it. If it is going into bailing out bigger individuals rather than helping the daily lives of people, we are getting it wrong again and I will not stand for that. I would like more information on the sectoral elements and on what is happening with the €19 billion that is recapitalising the banks.

Also, on the issue of mortgages, could we have a little more information as to where the Central Bank believes the banks are providing assistance, be it a write down or whatever one wishes to call it? Ultimately we are writing down some money. We have put in between €5.8 billion and €9.6 billion of taxpayers' money to help people who are distressed. I am from that generation and I am well aware of how things are at present. There are people who cannot pay their mortgages but there are also people in one and two bedroom apartments in Dublin and other parts of the country who wish to get on with life, have a family and move on. The idea of negative equity mortgages is preposterous. There has to be something more than that to let people get on with their lives.

The over-arching bridge here is trust. We are custodians of the Irish people's trust in banks. Frankly, there is none. As people see it, the banks have nothing to do with the banks of previous times. We perceive them as having been negligent on many fronts and we are removing the boards slowly but surely. NAMA is one of those closeted institutions. Activities are happening there and investigations undertaken by RTE have shown that people are carrying on regardless. That is not good enough. Those who made the biggest mistakes should take on the biggest burden in this. It is not about having millionaires' lifestyles but paring things back to becoming a fair and equitable society. That is what we are about here today.

When does Professor Honohan foresee the banks returning to profitability? People have spoken about SMEs. What is his opinion on that issue? I have first-hand experience of people making credit applications for fantastic businesses but they have been shot down. I have some knowledge about this. Their loans would stack up and they merit credit.

Finally, the issue of mortgages is populist but it affects daily lives and people are concerned about them. In 2006 and 2007, an average of approximately 65,000 mortgages were issued per year. I mentioned this to the Minister yesterday. More than 85% of those mortgages were given for periods of between 35 and 40 years. People like me will be paying off our houses in our seventies. There will be a margin built into that and in the medium to long term the cash flows and profitability of the banks will be enormously backed by that. I am aware there is securitisation and that products have sold chunks of those mortgages but I do not wish to see any bank profiting in the medium to long term on the backs of ordinary individuals, given that the banks lent negligently and were bailed out before setting off into the sunset again.

Yes. I refer to what the Governor, Professor Honohan called a famous week, but which I would call a week of infamy, when he solidified the policy essentially of making the Irish people vassals to major European banks and short-circuited the process by which the EU-IMF and ECB were the agency for those banks. I asked this of previous establishment figures but they never answered; some did with abuse. What is the moral justification and why does Professor Honohan support the fact that the Irish people should have been saddled with tens of billions of euro of private debts by private institutions in private deals between private speculators of private profit? How does he justify that finishing up on the shoulders of the Irish people?

Does the Governor agree that this policy which has savagely impacted on the living standards on our people and drastically reduced a demand is having a catastrophic economic effect? He will be aware of the unemployment figures of recent days which have increased again to almost 500,000. He said that the nature of the recovery would be moderate and growth would not be very labour intensive. He was trumpeting, like the Minister yesterday, the exports growth but the domestic based economy is the key to jobs but his policy is killing the economy. He has come in here today to again say that our people are condemned to mass unemployment well into the future and our youth to emigration.

In regard to mortgages, Professor Honohan said that society at large would not be well-served, to say the least, by strategic behaviour on the part of any persons who could service their debts but conceive, in the current environment, an opportunity to escape from their obligations, large or small. It is important to ensure the ways of dealing with distressed borrowers do not provide such incentives. He goes on to speak about perverse incentives. The Minister was speaking the same language yesterday.

I am curious about these hordes of mortgage payers waiting for an opportunity to assault the banking system so they cheat it. It is time the witnesses came into the real world. Even Deputy Arthur Spring, a member of the Government, recognised the position that these are young working people, the majority of them in this trouble, who were forced to buy in their 20s and 30s to put roofs over their heads and were caught in this blackmail property market system. They are the victims. I am glad the Governor did not use the words "debt forgiveness", which is a loaded term, on the one hand, to try to portray that everybody wants all their debts gone. That is not the issue. "Forgiveness" also implies sins and sinners, as if the young people who were forced to buy were somehow responsible. They are the victims of the position in which they were put.

I recall a sharp conflict with a former Taoiseach on the floor of the House in 2006 concerning a young worker who paid €375,000 for what was a new average home at the time and a bank manager worked out for me that on a 40-year mortgage at 4%, he would pay €750,000 in his lifetime and if the interest rate increased to 6% he would pay €1 million. That is the situation we are facing. In those days when every second house was pure profit for the speculators and the bankers the answer was to recalibrate the value of those mortgages down to a real value and recalibrate the monthly income down to real value. This would then be affordable for the majority. The other upside will be that those people will have money to spend on goods and services in the domestic economy and generate jobs. Is that not the obvious solution to the problem?

How much has been paid to unsecured bondholders and by whom since the guarantee was introduced in September 2008? How much of the funds paid to bondholders were replaced by the ECB funds?

Deputy Peter Mathews

It is at least €70 billion.

Deputy Joe Higgins

Yes. As I said to the Minister yesterday, we are getting many different aspects of this and many different reviews. It is time to bring it all together so that we have a full picture.

What is Professor Honohan's projection for the total public debt - Government, NAMA and bank recapitalisation - for 2012, 2013, 2014 and 2015? What is the total annual interest to be paid in each year?

Professor Honohan stated that recent developments in financial markets point to an increased recognition that Ireland is taking the right steps to achieve a return to sustainable growth and balanced public finances. In his answer to some Deputies, he spoke about giving comfort to the markets. I know that Professor Honohan and the deputy governor are creatures of the international banking system. That is where they come from. Has Professor Honohan anything to say about the activities of these markets? A Swedish finance minister referred to them as "ravenous wolf packs" in the way they have operated in Europe in recent years. These markets, consisting of bondholders, hedge fund operators, bankers and so on, are not accountable, they have not been elected and they are faceless, yet they can wield enormous power over society; literally the fate of tens of millions of workers are in their hands. Politicians and the Governor, who represent the Irish people, are kowtowing to them and meeting their every wish, rather than using the banking and financial system on a European level for the benefit of the people of Europe and investing in social solidarity, which would crash this crazy system.

Mr. Elderfield spoke about "refreshing the banking system". His appeal for people to do that is to appeal again to the greed of individuals, which is the same greed that brought us to where we are at the moment. Would he not envisage the idea that refreshing the banking system would involve throwing it open to the democratic accountability and involvement of ordinary people, including the customers and those who are victims of this system? Would he not envisage that we should use our banking for society, and not replicate the private profiteering of those who have brought us to where we are?

Professor Patrick Honohan

Deputy Higgins would be surprised at the extent to which I share his objectives, and much of his analysis as well. However, I have a different perspective on what can be done within the constraints of what he says are very powerful institutions. The task of the officers of the State is to achieve the best result for the people of Ireland within the realistic constraints. My perspective on the recourse to the EU-IMF loan is not as he perceives at all, but as a recourse to a step which was made inevitable by actions taken earlier, which I will talk about in a moment. It was a question of the Government's ability to continue to provide the public services that are so essential and that were being constrained. It was at that moment the best and only way of continuing to provide those public services. It was not a good position to be in but it was the best course of action, and there was no disagreement on that by any of the experts or Government persons involved. I was actually quite taken aback at the extent of the adverse public reaction to the arrangement. I know that people, particularly in the Government, feel it is, in a sense, a defeat to call on such assistance, but I was taken aback at the extent to which commentators felt that this was pushing a policy that was not in any way being driven by the wider situation that existed. Of course the interest rate was unsatisfactory - that was not something we could do anything about, but something has been done about it now. That was probably the focus of many of the criticisms; everybody thought the interest rate was very high. I do not agree with the Deputy's view that stepping up for assistance from the EU and IMF was a worsening of the position. It represented the best course of action given the worsening of the position that had already occurred.

The Deputy asked whether it was terrible for the State to be saddled with the tens of billions of euro in debt that had arisen because of private contracts. In the event, that was indeed a bad situation. It was a consequence of a policy that was undertaken in good faith but that has been extremely costly.

I am not in any way trumpeting the progress of the recovery. Members will accept that in the language I have used here I am not in any way trying to make light of situations such as the persistence of unemployment. It is of crucial importance to reduce unemployment and increase the level of employment for the common good.

Let me turn to the question raised by the Deputy about strategic behaviour and so on. I think I made it clear in the discussion that there are two sides to this issue. The largest portion of borrowers can and will pay. The next largest group are in difficulties and will not all be able to fully pay. The Deputy would be the last person to want to see any abuse of an approach by people who can pay but want to abuse the system. He would want to make sure that people who can pay do pay so that the State has enough resources to keep those public services going. That is the perspective we have at the Central Bank in our discussions with other Departments to move this forward. If the Deputy looks holistically at our approach he will find it sympathetic, even though he might want to go beyond it.

With regard to bondholders, we will work out the figures in whatever way the Deputy wants. Depositors and bondholders have been repaid tens of billions of euro over the past two and a half years by the banks out of their own resources and by additional borrowing from the Central Bank of Ireland and the euro system. In a sense, the debt of the banking system has been shifted from those in the private sector - they have been repaid - to the European public sector, and it is substantial. There have been private losses; shareholders were mentioned earlier. If we include the shareholders of Irish banks, who have been more or less wiped out, and the shareholders of foreign-owned banks, who have made significant capital injections - although I do not expect to hear much sympathy for them - the fact of the matter is that a substantial part of the loss allocation has gone to shareholders. A not insignificant part has gone to subordinated bondholders. There was not much hesitation or opposition from international partners in dealing aggressively with them and they have been dealt with. The numbers shift around, but the total losses in Irish banking, including in the foreign owned banks, amount to half and half. One half has been borne by the private sector and the other by the public sector. That is a rough calculation.

We can provide projections for total Government debt. Mr. Elderfield can speak for himself, but neither he nor I is a creature of the international banking system. I have been a student of the international banking system, a commentator on it and, in some respects, a critic of it, but I hope I am not a creature of it. Although I recognise when there is power in one's way, one must find ways of dealing with power, meeting every wish of the international banking system is not something we do.

Deputy Heather Humphreys

I wish to speak to the issue of credit unions. What is Professor Honohan's opinion on the state of credit unions generally? What does he believe their role to be? What impact does he expect the enhanced minimum competency code and the new fitness probity regime to have on a largely voluntary movement such as the credit unions?

We have spoken at length about the need to provide credit for businesses. I wish to comment on the issue of lending restrictions in credit unions which are impeding their growth. The credit unions could be used as a vehicle with which to inject credit into local communities. There is a real concern among credit unions that current lending restrictions imposed by the Registrar of Credit Unions coupled with reduced loan demand are seriously reducing credit union income. This will further increase problems in them. Does the regulator carry out an impact analysis of a credit union on which it has imposed lending restrictions? On what basis is an individual credit union restriction arrived at? It concerns me that credit unions are being put at a market disadvantage. I am unaware of any lending restrictions imposed on the banks for similar types of personal lending.

Credit unions are not being allowed to serve their local communities, of which they have been so much a part, because of these restrictions. To give an example, students are going back to college and credit unions have always been well placed to assist them and their parents in financing their education. However, owing to these lending restrictions in many credit unions and the connected borrower rule being applied, they are being turned away by their local credit unions, not because they are unwilling to lend to them but because they are unable to lend to them and their parents because of the restrictions. Unfortunately, because of these restrictions on the credit unions many people are being driven into the hands of the moneylenders who are alive and well. What regulations are in place to oversee and monitor the actions and lending practices of moneylenders?

Professor Patrick Honohan

The questions are mainly for Mr. Elderfield, but we have been devoting a great deal of attention in the Central Bank to credit unions. We regard them as an important part of the financial landscape, catering for a particular segment, as Deputy Humphreys said. Naturally, like all businesses and associations, the credit unions have come under some pressure in this downturn. We have examined the matter closely and engaged in a great deal of analysis and taken actions.

There are 27 committee members. We have been meeting for three and a half hours.

Senator Tom Sheahan

I have three questions and I will keep it to that. My first question is directed to Professor Honohan. While I was Chairman of the Oireachtas Joint Committee on European Scrutiny we scrutinised all European regulation. A paper came before us regarding the stipulation that €2.7 billion must be set aside in the Central Bank by the banks in the country by 2020. At the time approximately six banks operated here. Now we have two banks, pillar banks as they are called. Will the €2.7 billion be paid by AIB and Bank of Ireland? Who will pay it and how will it be paid? Where will the banks get €2.7 billion by 2020? It is a contingency fund for the bank guarantee scheme.

I have anecdotal evidence from a constituent about restructuring. He had a capital loan of €521,000 on interest only paying €1,840 per month for the past five years. The family income has halved. A new contract was received for four months from September to December from the bank whereby the repayment was increased to €2,685 per month. That was after the family income had halved. That is the kind of restructuring that is going on.

Mr. Elderfield personified a type of naivety regarding the credit union movement. I do not believe that is genuine because he has dealt with the credit union movement in other countries prior to coming here.

Chairman

I ask the Senator to conclude with a question.

Senator Tom Sheahan

I will finish with this point because I noticed the Financial Regulator was looking at me when I mentioned the figure of €2.7 billion. I raise the issue of the Central Treasury Managed Fund, which the Financial Regulator approved in 2006. The credit union movement took and followed all the guidance notes issued by the regulator. The credit unions took the advice from Davy Stockbrokers and invested in this product, mainly in floating rate notes, FRNs. The Financial Regulator is coming down with a sledgehammer on the credit unions that are now broke because they took the advice given on the instruction of the Central Bank and by the Financial Regulator and invested in FRNs.

Senator Aideen Hayden

I also welcome the witnesses and wish to raise three issues. I welcome the Governor's reference to consideration of debt-to-shared-equity and debt-to-rental solutions and wish to raise one concern in this regard. I have had several dealings with the banks over several years and have found in their approach to institutional investment in the rental sector or more recently in discussions with them in respect of buy-to-let repossessions and their role in dealing with repossessed homes, that they do not wish to engage with shared equity or in any other scheme they perceive to involve active property management. Therefore, I ask the witnesses whether they are confident the banks have the capacity to engage in such broad-based solutions to mortgage debt. If not, do the witnesses favour removing capital from the banks and putting it into a separate agency that would have such capacity? I do not believe the banking sector in Ireland has a genuine understanding of the buy-to-let market. Has stress testing been carried out on the impact of significant rent supplements cuts on the buy-to-let sector and subsequent repossessions?

I echo some comments made by other members on an issue to which Professor Honohan also referred, namely, the taking of a case by case approach by lenders. I was approached as recently as last night by a lady who, having not made a mortgage payment in one month, was telephoned every single day by her lending institution, which is one of the pillar banks. I do not believe such harassment leads to the type of scenario in which realistic debt resolution can take place. Have the witnesses considered putting in place an independent advocacy system in which people who are dealing with banks have the type of independent representation they require?

The issue of MABS came up at yesterday's meeting and I will repeat to the witnesses the point I then made to the Minister. MABS accepts that it does not have the resources, legal or financial, to conduct the type of role envisaged for it by the Central Bank.

Deputy Shane Ross

I wish to raise an issue with both witnesses. A definite power struggle is taking place at present within the banks in which they are regrouping and are trying successfully to regain the amount of power they held in 2008 when there was such a crisis in which they got their way. To some extent, both witnesses are perceived to be tribunes of the people. They are perceived by the people to be guardians of their interests against these extraordinarily powerful groups and people who now seek to retain that power. I suggest they are doing this highly successfully. While I do not believe the witnesses quite perceive themselves to be in that role, people so perceive them and they are well suited to it.

The evidence for this power struggle is perfectly clear and while I will not name names, as Senator Barrett has noted, many of those who were in positions of power in 2008 remain in place. It is extraordinary and unforgivable that this is the case. At the recent Bank of Ireland annual general meeting, five of the six directors who were put forward for re-election had been there since before the crucial date of September 2008. This is not acceptable and moreover, the chief executive of that bank was made a member of the board in 2005. In addition, in a move of which Houdini would be proud, that bank removed two executive directors from the board but they remain in positions which are termed core parts of the bank's management. In other words, they are still in charge. There is a great deal going on which is not what it seems, with the major banks fighting for their positions and the same personnel fighting for and successfully holding on to power. What we have witnessed is a successful toppling of approximately two people in every bank, which is window dressing, because below the top level the same people with the same culture are playing games with the Central Bank and the Government and successfully perpetrating the same policies as before. The people cannot have confidence unless Professor Honohan says he will not tolerate this any longer and that he will move immediately, not today or tomorrow, to see to it that the boards and management are cleaned out. The solutions to the mortgage problem, to which many members have referred, will be implemented by the people mentioned and in that case we cannot have confidence.

Yes, that is a separate issue. That is one of the potential pressures in the buy-to-let market, but it is not the only one. People who buy to let do not rely wholly on those benefit payments. It is only one part of the full calculation on the likely loan losses on buy-to-let mortgages, which are material. In the BlackRock calculations the potential losses on them are almost as high in the base case as for owner-occupier mortgages, even though they comprise a much smaller proportion of the market. It is not as if buy-to-let is regarded as an unimportant section. Essentially, the Government has taken the decision not to move all of the loan renegotiations into a separate agency but to try to improve the functioning of the banks. That is the way the decision has been taken. It is the right decision because for all we may complain about the way banks have performed in the past and their shortcomings even today, they are large and embedded institutions that are hard to replace in total. One cannot say that all their customers and loan accounts should be transferred. Members have seen how complicated it has been to transfer a relatively small number of loan accounts to NAMA and the long time it has taken the agency to determine-----

Deputy Peter Mathews

The banks are still working those ledgers and this is causing the clog up. That is why they are not operational.

Professor Patrick Honohan

This brings us to the question raised by Senator Ross, who is looking at the top of the banks. Mr. Elderfield will come back to this point specifically but sitting where we are in the Central Bank, if we were to rerun history in a number of directions, we probably would have moved faster than we have. We do not regret the direction of our movement but we probably would like to have done things faster. One of the things we are doing now, which maybe we should have done earlier - there are reasons for not moving fast; one has to bring many constituencies along and convince them the problem is serious enough - is the question of governance.

Mr. Matthew Elderfield

With regard to the ability to change the boards and making sure the executive and non-executive members of the board are fit and proper, the refreshment that has occurred means the new management and the new board can drive forward the change. The Deputy is right that it will take a long time. Layer by layer, we will have to go through the organisations and make changes. It is important in approaching the exercise that we have our powers fully in place and we are careful because there will be legal challenges. I said when I introduced this topic that there would be difficult legal challenges but we have written to all the executive and non-executive board members of the covered institutions. They have written ten back and have identified those who were there prior to the guarantee and who plan to remain there. Almost all of them have gone or are going. A small number have indicated their intention to be in place after 1 January next year. I will not talk about individuals and we have to have a careful, impartial process. We need to make a decision on whether we are going to have a statutory decision.

Deputy Shane Ross

Can the regulator say how many?

Mr. Matthew Elderfield

I will not do that now because there will be huge speculation as to the names, but it is a relatively small number. We will work through that process carefully and, we hope we will be in a position next spring to say the process is done and the people there have passed.

Harassment worries me. That is prohibited under the code of conduct on mortgage arrears. There is a limit of three calls. If the Senator is prepared to send me on an anonymous basis the name of the bank and the branch, we will follow that up. If I see a pattern of abuse of the code of the conduct, we will take enforcement action. If members hear about that harassment, that is absolutely prohibited from 1 January. There is a limit of three calls per month and, as we build up our review of the implementation, information from members would be welcome.

The joint committee adjourned at 1.40 p.m. until 10 a.m. on Friday, 9 September 2011.

JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM díospóireacht - Friday, 2 Sep 2011

The Economy and the Banking Sector: Discussion (Resumed)

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Mr. Matthew Elderfield

Professor Patrick Honohan

Professor Patrick Honohan

Mr. Matthew Elderfield

Professor Patrick Honohan

Mr. Matthew Elderfield

Professor Patrick Honohan

Professor Patrick Honohan

Mr. Matthew Elderfield

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Professor Patrick Honohan

Professor Patrick Honohan

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Professor Patrick Honohan

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Mr. Matthew Elderfield

Professor Patrick Honohan

Professor Patrick Honohan

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Professor Patrick Honohan

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Mr. Matthew Elderfield

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

Professor Patrick Honohan

JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM díospóireacht -
Friday, 2 Sep 2011