The Economy and the Banking Sector: Discussion (Resumed)

We will continue our overview of the issues facing the Irish economy and the banks. I welcome Mr. David Hodgkinson, the chairman of AIB. Mr. Hodgkinson is accompanied by Mr. Bernard Byrne, director of personal and business banking, Mr. Jim O'Keeffe, head of mortgages, Mr. John Webb, head of propositions in business banking and Mr. Alan Kelly, director of corporate affairs and marketing. Mr. Hodgkinson will make his opening remarks and then we will have a question and answer session from members.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence in respect of a particular matter and continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

Mr. David Hodgkinson

I thank the committee for the invitation to appear before it today. I am the executive chairman of AIB, having been appointed to the role by the Government in October 2010. I have spent my career in banking, specifically with HSBC, holding a range of senior management positions in the Middle East, the Far East and Europe. My last role prior to retirement was group chief operating officer for HSBC Holdings. I am joined today by Mr. Bernard Byrne, executive director of AIB. Mr. Byrne has a wealth of business experience and joined AIB in May 2010 from ESB as a chief financial officer. He recently took on a new role within the bank as director of personal business banking. I am also joined by Messrs. Alan Kelly, John Webb and Jim O'Keeffe who are here as subject matter experts.

The Government has had to put an enormous amount of taxpayers' money into AIB and it is appropriate that we outline to the committee what we are doing to put things right for our customers, taxpayers and the wider economy. Poor lending resulting in very high bad debts has been correctly identified as the major factor in AIB's difficulties. The bank's problems and weaknesses, included operational, structural, HR and behavioural issues that developed over time. It will take time and hard work to correct these issues and while we are making progress, much remains to be done. That must be said yet again by people like me so that we cannot forget that serious mistakes were made by this bank and cannot be allowed to be made again. It is fair and right to level criticism at AIB and other banks for the past and it is fully deserved.

There is a serious job to be done now to rebuild the banking sector in the interests of the economy, taxpayers and customers. It is important that we work in a positive way to achieve this important objective. To begin making progress, AIB is going through an extensive restructuring programme that addresses its overall size and scale, business focus, culture and governance, all of which is designed to prevent a repeat of the disastrous and far-reaching crisis to which we contributed. I do not want to underplay the scale of the challenges ahead not just for the economy and people of Ireland, but for banks in terms of getting the balance right in regard to returns to depositors, cost to borrowers, getting loans repaid and cutting costs.

Current funding conditions also add to the difficulty of getting the balance right. Of the three sources of funding, Irish banks are currently paying elevated costs for wholesale and deposit funding, while the other source, the European Central Bank, is not permanent.

AIB has some important building blocks which will serve as foundations for our recovery: we are strongly capitalised post-recapitalisation at the end of July; our privileged position as a pillar bank will be used by us to reconnect with our customers and communities; and we have developed a new set of behaviours which will form the basis of a brand new culture within the bank. These building blocks will enable us to fulfil a key role in the recovery and development of the economy; restore AIB to a sustainable position of stand-alone strength and stability with the capacity to grow in a measured and prudent manner; redefine our customer approach to meet their needs and expectations; strengthen our controls, governance and approach to risk; deliver our goals with new leadership and a reinvigorated workforce of skilled, engaged and accountable people; and, ultimately, repay Government and taxpayers through a return to private ownership.

Our overall approach will be driven by a determination and commitment to provide our customers with genuine access and assistance to appropriate products and services at a competitive price. The reality today is that our customers feel disconnected and even though there is money to lend, people feel they cannot get access to it. It is also a reality that many business and personal customers who can afford to borrow are nervous and are opting to defer investment and spending in the current economic environment. A great deal of our time and energy has been devoted to tackling and dealing with our risks and the need for organisational change and that has affected our capacity to proactively engage with our customers and work with them. We are now working to focus our people on providing customers with the services and products they need. We are reaching out to our customers to help them in every way possible and have begun paying particular attention to improving our processes in dealing with mortgage arrears and providing support and access to small and medium enterprises.

In regard to mortgage arrears, AIB has now implemented the standards set out by the regulator for ensuring all banks deal with customers in difficulty with their mortgage arrears in a professional and timely manner. These standards are set out as part of the code of conduct on mortgage arrears.

We provide ongoing training to our staff and encourage customers who feel they are already in difficulty with their mortgage or are aware of changes in their circumstances in the short or medium-term that will put them into difficulty to contact us to look at what options are available. We have mortgage specialists now available across our network to help customers.

At a practical level we are committed to building on the standards in place and will be providing enhanced training to all staff supporting customers in difficulty. We recognise and are working to address the need to add capacity and skills so customers can receive the assistance they want and deserve. Our primary focus is on owner occupier mortgage holders and on supporting customers who cannot pay their mortgages.

The standards in place provide a variety of options to support customers and are designed either to give customers some short-term relief to allow them time to resolve immediate financial issues or longer-term solutions that meet the new financial circumstances in which they find themselves in today.

In addition to these standards, we await the outcome of the work currently being done by the Department of Finance to determine other solutions which could support customers where their new financial circumstances will not in the short or medium-term allow them to meet their mortgage repayments. We have worked proactively with the expert group set up to consider other forms of customer supports and AIB will support and implement all practical solutions that emerge from the group.

In regard to SMEs, this is a vital and core part of our business and we have to help customers understand better the information banks need so they can lend to them. The recent report from the Credit Review Office highlighted a lower level of demand for credit from SMEs. I have no doubt that part of the reason for this is the fact that we need to have a deeper engagement with SMEs to help them understand our information needs and for us to understand their position. In pursuit of that vital goal, we are working to simplify processes for customers. We track and follow up on all loan inquiries by businesses and welcome the industry-wide initiatives being taken to survey SMEs to improve all parties' understanding of loan demand. I agree with the Minister For Finance's decision to commission an independent survey on demand for SME credit and his view that it is too crucial an issue to rely on anecdotal evidence. Businesses in difficulty are much more resource intensive for banks. We continue to train staff on how to deal with businesses and deploy them into the places where they are most needed. To date over 1,500 staff are participating in or have been through training programmes.

Our aim is to demonstrate that we want to lend and that we welcome viable business proposals and want to re-establish our role as advisers to our customers. We work with accountancy firms and others to provide help and training on business management and planning. We operate a range of loan funds targeted at the SME sector. Examples include a €100 million environmental loan scheme, of which €70 million has been drawn down, and when fully drawn we will put a further €100 million into it, and also we have put a €100 million into a job creation fund in support of Government job initiatives. However, providing credit must be on commercial terms and that means acting responsibly to ensure that the money we lend can be repaid, to protect the interests of customers and taxpayers as the owners of AIB.

Deposit attraction and retention is a vital issue and is challenging in light of eurozone problems and nervous market sentiment. AIB is now sufficiently strongly capitalised to weather even unexpected adverse situations and must, working together with Government and State authorities, retain and attract back depositors over time.

We must be transparent in our dealings inside and outside the bank and we must be accountable for the decisions we make. We must understand the needs of the communities we serve and we must focus on the future rather than just on short-term concerns.

We have developed a new set of values and behaviours which will form the basis of a brand new culture within the bank. We have also moved to change the structure to put customers at the heart of what we do. The customer facing businesses are being supported centrally by specialist functions and services. We are also centralising control functions and reasserting standards across the businesses. Within the businesses, dedicated units have been established to work with customers in difficulty. Our work is in progress but far from complete and we are continuing to add capacity and deploy more skills to help find solutions for customers while at the same time managing the bank's risk more effectively.

Ireland's economic recovery needs its financial system and its pillar banks to function. As a small open economy, Ireland's economic fortunes are also strongly influenced by global conditions. Concerns about debt levels and the economic outlook continue to dominate sentiment and commentary in all the major global economies and trading blocks. Ireland is taking the right actions to improve its economic performance and restore its status and impressive progress has been made in this regard. Competitiveness has improved through lower unit labour costs and helped drive a strong export sector which will lead Ireland out of recession. International sentiment towards Ireland is also getting better due to the effective measures being taken by the Irish Government to bring order back to the State's finances. The resolute manner in which this is being done in accordance with the EU-IMF requirements has been noted by international markets and demonstrated by better pricing of Irish debt relative to other peripheral EU countries. Despite these positive developments, domestic economic conditions remain very challenging, well illustrated by the fact that 18% of our loan book is impaired.

AIB's new board, the new management team and I are determined to move AIB further down the road to recovery as quickly as possible. It will take time and there is a great deal to do but we are determined to rebuild AIB into a bank which properly supports its customers and the economy.

Thank you for your presentation. I will call Deputy Michael McGrath first. Given the heavy workload this afternoon I ask colleagues in so far as possible to try to adhere to an indicative five minutes and no longer than ten minutes. I will allow some additional leeway to the lead speakers of each of the groups. A number of colleagues are present and we have a good deal of business to get through.

I appreciate the Chairman's sentiments. I will be brief and will stick to a series of questions and hopefully will get some answers to those questions.

I welcome Mr. Hodgkinson and his colleagues. I will start with the stress tests conducted by BlackRock Solutions and published by the Central Bank at the end of March which, it is believed, finally got to the bottom of the losses in the banking system. In respect of AIB and other banks Mr. Hodgkinson used the term "strongly capitalised", in his opening remarks, a term we in this committee heard many times in the previous Oireachtas from various bank chiefs, including his predecessor at AIB. How confident is Mr. Hodgkinson that those stress tests have reached the bottom of the potential loan losses at AIB? How close are we to the adverse scenario assumptions made by BlackRock Solutions in respect of commercial loans, the mortgage book, personal debt and the sub-€20 million non-NAMA loans which are being retained on its books?

Mr. Hodgkinson dedicated some of his opening statement to mortgages and mortgage arrears. Does he have figures for the level of arrears on the mortgage book in AIB and how does it compare to the industrywide figures published by the Central Bank recently, where 7.2% of mortgages are in arrears of 90 days or more? Has the AIB signed up to the deferred interest scheme recommended in the last expert group's report? Can he give the committee a sense of the type of individually tailored solutions it has agreed with borrowers when it has restructured loans? For example, has the AIB completed any debt for equity arrangements? Is it renting houses back to borrowers who have voluntarily surrendered their property? Has it written down the value of any mortgages? Has AIB engaged in any form of debt forgiveness either for people remaining in the property or for those who have surrendered the keys to the property?

In regard to employment at the bank, how many people are currently employed by AIB? What number was employed at the peak and how many further redundancies does Mr. Hodgkinson envisage will take place across the AIB group?

In regard to interest rate policy what are his thoughts on mortgage interest rates? I note from the website this morning, depending on the loan to value ratio, that AIB variable interest rates are between 3.09% and 3.49% which are significantly lower than some of its competitors. Bank of Ireland is raising its standard variable rate to 3.99% on 22 September and EBS has significantly higher rates than AIB. What are AIB's plans and intentions in regard to interest rate policy for mortgage holders because that is a key concern for many people?

Can Mr. Hodgkinson give the committee an up-date on the search for a new CEO and how far and wide AIB has cast its net and what progress has been made? Is the salary cap of €500,000 an issue in attracting the right candidate to become the head of the bank and, if so, has he raised it with the Minister? His views on that issue would be very helpful.

In regard to credit for SMEs, does Mr. Hodgkinson know what percentage of applications are approved by the bank? Does the bank record informal inquiries or does the data reflect only those who fill up an application? Anecdotally, many people making enquiries are told they will not get credit and do not proceed with a full application. When will AIB return to the wholesale funding markets in a meaningful way and reduce its reliance on the ECB emergency liquidity provisions?

Mr. Hodgkinson said one of the objectives is to return to private ownership and give a return to the taxpayer. When is AIB likely to achieve that milestone, given the horrendous amount of money taxpayers had to put into AIB to keep it afloat and ensure it can play some role in economic recovery?

I thank the Deputy for his co-operation. Perhaps Mr. Hodgkinson would deal with the issue of the chief executive at the outset and then address the other matters.

Mr. David Hodgkinson

On the CEO search, which has been under way for some months, we worked with a search firm to look globally for potential CEOs. We started with a long list of more than 250 names by institution, based on their knowledge and mine. We then worked through it to see who was willing to be actively considered. We have a short list which has been interviewed by all members of the board. They have met the regulator at the Central Bank so they have had an interview there. We are at the stage of engaging with the Department of Finance on the final choice to be made from that short list. It has not been an easy process but I believe we have some very good candidates in our selection who are fully aware of the environment in Ireland and the financial conditions that may pertain to the job. I cannot be sure that in every case they will eventually say they will agree to abide within the levels set previously by the Minister for Finance. We have got this far and I guess there will be a debate whether the CIROC recommended cap for a CEO might be a figure to use rather than the subsequent €500,000 but I am confident we will get a CEO for AIB.

Within the recommended salary range.

Mr. David Hodgkinson

Within the CIROC recommended salary range. We are in detailed discussions on this matter and I hope it works. Does the Chairman wish me to deal with the other issues.

Mr. David Hodgkinson

Deputy Michael McGrath asked if the stress tests got to the bottom of the potential capital requirements of the Irish banks. Certainly in the case of AIB I am confident in that regard. We took a conservative approach which was overlaid by a more conservative approach and scenarios from the Central Bank. So far, in terms of our deleveraging of our non-core book and in terms of the performance of the book as a whole, we are at or around the Central Bank's best case scenario and are not slipping below that. However, it is fair to say we cannot predict conditions in the future but we believe the stress test aimed to look at these in a very conservative way.

On the topic of mortgages and arrears I will ask my colleague, Mr. Jim O'Keeffe, to give a more detailed response. We are actively working with customers and so far this year we have reached agreement with more than 5,000 customers on amelioration of terms on their mortgages. We have owner-occupied mortgage holders. We have completed fewer than 20 repossessions, out of Central Bank figures that are in the several hundreds. We are trying to keep people in their homes. I might ask Mr. O'Keeffe to go into some more detail.

Mr. Jim O’ Keeffe

The Deputy refers to a figure from market information of 7.2%. The direct comparison for AIB at that point was 3.3%. This still represents 4,000 customers, so from our perspective, as Mr. Hodgkinson said, we are actively engaging with those customers. We have trained staff across the network to engage with customers at the front end as part of the code of conduct on mortgage arrears. We have 100 staff at the centre who are dealing with applications that come through from customers and staff in our branches, and we are currently rolling out a training programme, based on the fact that customers are often in a distressed state when they are dealing with us, to support staff in dealing with that scenario.

The deferred interest scheme was mentioned. This is part of the code of conduct on mortgage arrears, based on voluntary acceptance. AIB has signed up to the voluntary element and is currently working through it with an intention to have it in place by the end of the year.

The Deputy also mentioned options for working through mortgage arrears with customers. Currently, through the code, the most frequently used forbearance is interest-only mortgage payments. As Mr. Hodgkinson mentioned, this is a temporary forbearance and we are actively engaged with the outcome of the deliberations of the interdepartmental group because we believe there is a set of options that will be required to support customers in the longer term. The Deputy mentioned a number of those options that may be under consideration. The options of debt-for-equity or renting back to the customer are not a feature in our world currently. There are a small number of cases in which we have taken write-offs. At this point, however, we believe that once we move through the temporary forbearance available to us through the code, we will then be applying what we refer to as the longer-term solutions that will come from the Department of Finance and the interdepartmental group.

Have all instances of write-offs been in cases in which properties were repossessed or voluntarily surrendered, or have there been some instances in which people have remained in their homes? What criteria does the bank use in arriving at such decisions?

Mr. Jim O’ Keeffe

As I said, write-offs represent very few cases - we are talking about handfuls. In all cases, the properties have been repossessed. In fact, as Mr. Hodgkinson said, in the case of private dwelling houses it has been by voluntary surrender. This year, we have had only one case of repossession.

I am talking about legacy mortgage debt - outstanding balances. Is it the case that there are situations in which the bank does pursue these, but in some cases it makes a judgment call not to do so?

Mr. Jim O’ Keeffe

At this point, as the Deputy can imagine, we have not been repossessing as we might do in a normal cycle. We have been identifying cases in which customers are in significant difficulty and we are working, both internally and with the Department of Finance, to come up with solutions that we can apply to those customers instead of standard repossession.

But write-down is not an option for people who remain in their properties; is that essentially the message? The witnesses are telling us it has not happened to date in the case of AIB.

Mr. David Hodgkinson

It is something we are keen to see where it is the most appropriate solution for people in certain circumstances.

I think Mr. Hodgkinson had better elaborate on that. What does he mean?

Mr. David Hodgkinson

It is part of the longer-term proposals we are considering. We are primarily trying to keep people in their homes through forbearance means at the moment.

And in the context of write-down?

Mr. David Hodgkinson

Forbearance means one may make a provision, but all one is doing is lessening the debt service burden for the client. One has not reached a final agreement on what the repayment will be in ten years.

So that may be an element of the restructuring of existing mortgages in the future - where people do remain in the property, there may be an element of reducing the overall debt burden?

Mr. David Hodgkinson

We would like to see the Department's proposals and we hope to weave them in as part of an industry-wide approach to solving people's long-term problems with debt they clearly cannot repay in the short to long term.

Chairman, I am not clear at all.

Deputy McGrath was asking whether write-down was currently a feature of what the bank was doing. I understood Mr. Hodgkinson or Mr. O'Keeffe to say that while it is not currently a feature of the bank's procedures, it is contemplating that it might be or would be in the future. Is that what the Deputy was wondering?

(Interruptions).

The witnesses are allowing for it as a possible instrument in the future, but it has not been established yet. Is that the case?

Mr. David Hodgkinson

There is work in progress with the Department and we have certain ideas.

Can I ask some simple questions?

No, not questions plural, but if there is one very tight one on this issue-----

Yes, very tight.

On this issue.

How many cases have been fully provisioned against and how many cases have been written down?

All right.

I am a former banker. I know the questions to ask.

(Interruptions).

I am sorry; I will not take people out of sequence. I ask the witnesses to continue answering the questions. If Deputy McGrath has anything more to add on this aspect, he can speak again briefly, since he asked the question, and then I will move on.

I would like clarity on AIB's policy, as opposed to the policy of the interdepartmental working group. Is AIB developing its own policy? I am not referring to accounting provisions on its books but to the reduction or writing down of borrowers' overall debt burden. Is that a feature of what AIB is doing now or examining for the future?

Mr. David Hodgkinson

Our policy today is strictly in accordance with the code of conduct on mortgage arrears, but we have a sense that we need to have a wider range of options available to the bank and to offer to customers who cannot pay. Rather than going it alone, we have engaged with the authorities and we hope to have an agreement on those policies in the future.

On the code of conduct-----

Sorry, Deputy.

This is a matter of public interest.

Are there any further matters?

A couple of my questions have not yet been answered, including one on interest rate policy.

Just deal with the remaining matters, please.

Mr. David Hodgkinson

On our interest rate policy for mortgages, we are at the competitive end of the market for variable rate mortgages and it is our intention to remain there. We do not deny that we may get closer to the rest of the industry but we aim to be as competitive as possible.

On the issue of credit for small and medium-sized enterprises, reference was made to applications approved and informal inquiries. AIB has started tracking informal inquiries regarding lending to business in the last two months. It is preliminary data, but something like two thirds of inquiries go forward to formal applications. Of the formal applications we receive, we approve on average around 90%. However, this does mean that 30% of inquiries do not progress to formal applications. Because we are now tracking these inquiries, we can go back to the businesses that asked and see if we can help them. However, it is early days, so I cannot give the Deputy more information than that.

On the issue of wholesale funding and when to return to the markets, we are preparing for a possible issue later this year in respect of some covered debt. Clearly, the market environment is pretty volatile at this moment, but we are working on that.

We were asked when we might expect to return to private ownership. We have engaged with potential investors over a number of months since I have been here. My thinking is that we need to complete what we believe is a prudent provisioning process, which creates a fairly clean balance sheet in the core bank, allowing for a potential investor to come in. We are engaging already but, realistically, it is likely to be in the early part of next year that we can move forward. My own view is that it would be useful to get a minority investor in to AIB in the first instance because that would give further confidence to the market. However, the Irish economy and the fortunes of the bank must recover more to ensure that the return for the significant amount of capital invested is appropriately maximised.

Is there interest in potential investment in AIB from the private sector?

Mr. David Hodgkinson

Yes, there is. It is mainly from the private equity sector rather than other banking institutions.

Does Mr. Hodgkinson hope that may lead to something in the relative short term, in months rather than years?

Mr. David Hodgkinson

I hope to get the first foothold of a new investor in AIB next year.

My final question related to current employment levels.

Mr. Bernard Byrne

I do not have the precise number but the peak was probably around the back end of 2008 and it would have been approximately 25,000 employees. That would have included the Polish division which was approximately 10,000. On a like for like basis it was probably approximately 15,000 and the current employment numbers are approximately 13,800. It has come off by approximately 1,500 on a somewhat like for like basis. It is not perfect because some small businesses have been sold on the Irish market, etc., but it has come down.

Where is it heading towards?

Mr. Bernard Byrne

It is heading lower.

How far lower approximately?

Mr. Bernard Byrne

The indication was that there was approximately 2,000 redundancies. That was some months back so it is probably towards the 12,000 figure.

I welcome all to the committee today. I was here in 2008 when were told the problem in the banking system was one of liquidity rather than solvency. Therefore, when we here the words "fully capitalised" mentioned over and over again we have a certain sense of fear that maybe we are being sold another story.

I am going by the figures released by the Central Bank on 29 August which indicated that one in ten residential mortgages is in arrears for more than three months. Of these, the vast majority are in arrears for more than six months. This indicates that these mortgages are in serious trouble. A further one in ten mortgages is restructured. This indicates that one in five mortgages is a significant problem. Let us consider the one in ten that is in significant arrears. That figure alone amounts to more than €10 billion.

I seek a clear indication from AIB that things are under control and that the bank is fully aware of it. We do not know the level of commercial debt or how much of a problem loans to companies represent for the banks but if it mirrors anything going on in the residential mortgage market there is a serious problem there as well. I am keen to know the bank's view on this.

I am also interested in what the bank is saying about dealing with this problem. There is an indication that the bank is suggesting that it will wait for the interdepartmental group to report back and that it has made its submissions to the group. The bank has the commercial mandate to make decisions about whether to write off loans or parts of loans if it so wishes. It has been recapitalised to the point where it can do so. We are talking about getting the banking system back in order again and there is a need for the bank to start to do its job.

A delegation from NAMA was in here some weeks ago. They were still talking about transferring loans from the banks, not only those of the large developers with massive loans of more than €100 million, but loans of less than €20 million to NAMA. Should the bank not be in a position to manage these? Let us suppose Government policy were to change and the Government decided that the €3.5 billion of sub-€20 million connected loans were not to be transferred to NAMA. Could the bank handle that as well? Is the bank fully aware of this? I presume it is because the bank would have carried out the prudential capital assessment review, PCAR, on all of these loans so it should be fully aware of whether it must write down such loans by 50%, 60% or whatever.

Will the bank give us a real idea of what is going on within the banking system and give us the truth, not in the way we were getting it before? Previously we got piecemeal claims that things were not that bad and there was a genteel facade and a claim that everything was well but behind it all those involved were screaming. It kills off public confidence completely if we do not get straight answers about what is going on.

There is a sense that there is a demand for mortgages but that the banks are not giving them out. People have asked questions about this when discussing write-offs but when those in the bank consider their criteria within the banking system for issuing a mortgage, do they consider what is taking place in other jurisdictions and make comparisons with their criteria to determine whether they are being too strict or not too strict? I realise the Irish economy is going through its own difficulties and in particular the banks are deleveraging. In a recession one tightens up. Are those in the bank looking at what is taking place in other jurisdictions to stop them from swinging the pendulum completely the other way? Perhaps we were too flathúlach four or five years ago but we could easily kill off any potential for recovery by allowing the pendulum to swing too far and by being too restrictive as well. When the bank is examining its policies one of the ways around this is to look at other jurisdictions. Is the bank doing this? We are interested in hearing from the bank on this matter. I will leave it at that.

Mr. David Hodgkinson

Reference was made to the recapitalisation and the messages of the past. The leverage of AIB's balance sheet has fallen from 20 times to just seven times assets. We have already made significant provisions. In terms of the money used in this exercise, the equity providers, that is, the shareholders and the providers of subordinated debt, have between them been burnt to the tune of €20 billion and the Government has injected a further €20 billion. I agree that these are massive figures. At the same time we have sold businesses and slimmed down the bank.

This is a well-capitalised bank. I come from a conservative organisation and I have lived through many economic crises. My mind-set was not to try to be too cute about this and to ensure we provide properly. I genuinely believe we are there but I fully accept that the background in terms of what has been said previously might lead to some hesitation to take me at face value.

Our arrears situation is somewhat better than the norm in terms of mortgages. However, let us suppose 10% of mortgages are in difficulty and must be provided for. There is a value to every home under a mortgage. One is not talking about writing off 100% of the debt. Many loans were taken before the boom and therefore loan to value ratios overall will not be as extreme as those that were booked in 2006. I will ask Mr. O'Keeffe to speak to getting mortgages and the criteria and I will come back in on the NAMA question.

Mr. Jim O’ Keeffe

Deputy Twomey make a point about the mortgage market. The mortgage market today is 5% of where it was at the peak for obvious reasons. Today, AIB is doing 27% of new mortgage business. Our back book or portfolio of mortgages represents approximately 20%. Certainly we are ahead of that. The point about the pendulum having swung too far in one direction is something we have under active consideration. We are engaging with an external group to work with us on what constitutes best practice and policy in the cycle we are in currently and that work is ongoing.

Mr. David Hodgkinson

From my perspective the pendulum did swing too far the other way. There is no doubt the reaction to the excesses of the past was a real drawing back. It has made life more difficult for people to gain access to financing in various ways but we are actively moving to simplify and to try to bring our policies more into a counter-cyclical rather than a pro-cyclical mode. However, we must ensure we do not repeat the mistakes of the past as we do so.

I was asked about the loans to NAMA. We had factored into the PCAR exercise that the sub-€20 million loans would stay with us. They are a part of our overall planning. It is a portfolio that we are working on and provision has been made in respect of that portfolio.

Is it the bank's commercial mandate to make such a decision without the interdepartmental group deciding? Can the bank can write off loans or parts of loans? That seems to be what was part of the discussion with the last speaker. AIB has the commercial mandate to do it.

Mr. David Hodgkinson

Yes. If one were to go further with mortgages, it would involve more than one or two customers and a few bespoke things. It would involve a massive programme. A policy framework would have to be put in place that staff would work within to negotiate individual deals with customers. It is very important that such a framework has broad acceptance from owners and the Central Bank before we begin a major exercise which would go further than the code of conduct on mortgage arrears. That has been a factor behind the time delay. Directionally, I agree with the Deputy.

In terms of how we deal with the commercial and business sector, we have a commercial mandate. A framework needs to be built to deal with mortgages. It is not just about letting every member of staff do his or her own negotiations.

Cuirim fáilte roimh ár gcuairteoirí anseo inniu. I will pick up on some of the themes that have been discussed. When did the penny drop for those at the top table that there was a need for a write-off of some mortgage debt? Why has nothing been done about it? That is genuinely the question people are asking. We hear about it on the radio and in our clinics. We hear from people who have not slept properly in six months and are making choices between heating their houses or paying their mortgages. There is serious distress out there.

AIB said it is just waiting for the Government to make decisions and they will implement them. It has taken billions of euro from us and has not written off the debt of any individual, even though assertions were made today that it is in full knowledge that some people will not be able to pay back their debts in the medium or long-term.

I am frustrated about the fact that senior people within the bank, who said there will be a new culture that will value customers and make sure we get a return on investment, have not done anything about this issue, bar deliver a paper to an interdepartmental group that will come up with recommendations in a number of weeks. This should have been done a long time ago.

As a previous speaker said, the bank has a mandate and money to fulfil it. We gave it the money to fulfil it and the fact it is not being fulfilled is a dereliction of duty and acting against the spirit of the people who want to see those who are genuinely in trouble and cannot afford to pay back their mortgages have some debt reduction. I am being genuine when I say that, but I am also frustrated because we all know the people affected. What is the barrier to putting this in place? Did the penny drop last year that this would be the case? Why did the bank not to do anything at that stage?

On AIB's plans to shed 2,000 jobs, can it outline the basis for this figure? Where will the job cuts happen and over what timescale? What are the criteria for the figure of 2,000? Did the bank decide it wanted to cut to that effect or was a proper analysis done from the ground up of the banking system? Have its plans been outlined to the staff and has it been in talks with the unions? Can the bank outline the impact the job cuts will have on branch numbers and the services people depend on?

It has been widely acknowledged that the culture within the banks in the years preceding the crash incentivised excessive risk taking and aggressive lending. Mr. Hodgkinson referred to the new culture. What steps have been taken within AIB to change the culture? Can he outline how many executive and non-executive board members who were serving board members during the boom times when the bank lent excessively to others are still in place?

I ask Mr. Hodgkinson to outline the number of consultants employed by AIB to assist in its reorganisation, and to provide details about them and the cost to the bank. Is the bank trying to get around some of the blocks it has in terms of remuneration? Is it contracting services to others who are paid more than the €500,000 cap, which means the salary is on their books and not that of the bank?

I would also like Mr. Hodgkinson to discuss some of the golden handshakes which have been paid to people who served on the board of AIB in 2008 and have since departed. There has been a lot of media attention on them, in particular last year, and the Government told us its hands were tied. Will many more cases arise in future?

I cannot believe the approach taken by the bank on mortgages. I would like to see an independent mortgage resolution body with full legal powers to resolve disputes between banks and mortgage holders. Banks or mortgage holders could apply to it and any resolution would be legally binding. It is time a stick was taken out to tell the banks to do more. The Governor of the Central Bank was before the committee last week and he told us he wants the banks to do more. The whole country wants them to do more. Unfortunately, the words of many before have fallen on deaf ears.

I understand Mr. Hodgkinson has committed to remaining in AIB until October. Does he plan to stay beyond that point? If so, have any arrangements been made with the bank to this effect and can he outline the details of any such arrangements?

The chief executive officer recruitment process was mentioned. Can Mr. Hodgkinson tell us whether AIB is offering any incentive package, including share options, to a new CEO? I want to be crystal clear. Does he think the cap of €500,000 will be adhered to? I ask him to confirm that AIB has not yet formally submitted any candidate to the Central Bank's fitness and probity process. When does he expect to do this? Can he discuss the restructuring decisions that are taking place within the bank? Are they being held back until a new CEO is appointed?

Some businesses were offered for sale on the market last year. I refer to First Trust in the North and AIB GB which were on the market this time last year and subsequently withdrawn from sale. What does Mr Hodgkinson envisage the future prospects of these businesses to be? How significant is the appointment of Gerry McGinn, the chief executive of INBS, as managing director of First Trust?

Mr. Hodgkinson said:

We have also moved to change the structure to put customers at the heart of what we do. Customer facing businesses are being supported centrally by specialist functions and services.

I simply do not believe that. It may be the case for some individuals but I have heard it is not the case. I have heard that people who are in business, have built up companies and created employment in the domestic economy are being foreclosed upon by AIB.

I have details of one such company which I will give to Mr Hodgkinson at the end of the meeting. I ask him to respond to me directly. I refer to the case of Cloughvalley Stores in County Monaghan, a very good store which I have frequented many times. A receiver was appointed in January, not on foot of a court order but by AIB. As a preferred creditor, this company paid approximately €250,000 to the Revenue. One final payment remained to be made the week after AIB moved in and took their business from them. They had an agreement to pay AIB back €10,000 per week and that they would repay their loans in full, yet AIB moved a receiver into the premises and operated the business at a loss, something the business had not been doing. I know Mr. Hodgkinson may not know the details of this case, but can he explain how this puts AIB's customers at the heart of the bank's business?

Mr. David Hodgkinson

With regard to the write-off of mortgage debt, may I tell a story about when I was with HSBC? We had a sub-prime crisis and a real mortgage problem in the United States. I went over there in 2007 and listened to customers on the telephone. At that time what the bank was doing was very similar to the code of conduct for mortgage arrears we now have here. There was interest forbearance for one or two years and various things like that. It was obvious to me that the bank would need longer term solutions. The US is still wrestling with that problem four years later. When I came to AIB, and I only came ten months ago, this was one of the early things with which I started to engage with the authorities. First, we were waiting to get the capital we would need to allow this to happen, and for AIB that only happened two months ago.

There is also a moral hazard issue. There are many customers of banks who do repay their debts. We must have a process that is robust enough to ensure that those for whom we find a means of forbearance, or restructuring, genuinely cannot pay. We have had only months working on something. I am hopeful that we will put something into place. However, we did need to engage with other parties. I have great sympathy for the customers who are in difficulty. There are means of alleviating that in the short term while we work out the right longer term solutions.

Deputy Doherty spoke about the 2,000 jobs, how we reached that number and where those employees will go. We have looked at the downsizing of the bank and of the loan book and the pretty tight market conditions we are in, and likely to be in for the future. We have also looked at other countries that have gone through similar financial crises, how much their banking sectors shrank as a proportion of GDP and how well they performed after the recovery. Viability has been the primary factor. Where do we need to get to and how are we going to get there? It has to be through automation and process simplification. Automation will be to the benefit of customers but also to our internal processes. We are not looking to reduce branch numbers. I am not going to make a commitment for the longer term. Clearly, we will have to look at that issue on an ongoing basis. Our intention in these times is to make sure we have the broadest possible network to reach our client base.

Have we been in talks with the unions? Yes, we have. We have also been in talks with our shareholder, because they too are party to this. As AIB goes through a complex restructuring, and not just downsizing, I am keen that we achieve the bulk of our departures on a voluntary basis. That means people will have a choice and will exercise that choice to leave the bank. To do it on a non-voluntary basis in a significant way would make the whole restructuring process that much more difficult to achieve and the service to our customers more difficult to achieve also. We do not need that situation.

May I tease this out? Am I right in saying there is a document within AIB that states where the 2,000 jobs will be lost, with a certain number from branches and a certain number from various departments, or is it the case that management of the bank has looked at the whole issue, decided the bank needs to be viable, chosen the number of 2,000 and will work out where they will fall at a later stage?

Mr. David Hodgkinson

The plans are a work in process. We have asked people to consider how they would achieve the necessary reductions within their parts of the business but we have not yet got to the review stage.

So, the bank took the final figure first and is working down from that.

Mr. David Hodgkinson

We took the viability of the bank as a necessity. If we do not have a viable bank we cannot employ people.

Management did not look at individual branches or departments and decide it could have a viable branch in a particular location with one person fewer or a viable department with 10% less staff. They looked at the overall first, decided to reduce staff by 2,000 and are working that through.

Mr. David Hodgkinson

We know there are certain areas where we can achieve savings while not jeopardising the operations of the bank.

Mr. Bernard Byrne

There are choices that can be made through those processes. Deputy Doherty mentioned a branch issue. One can decide to change the sitescope of activities in branches, with some being carried out more centrally. When we talk about decisions to be made it is in respect of those types of items. For different levels of investment and different levels of decision on service one could have different answers coming out. It is an interactive process. That is why it is not fully determined.

Mr. Hodgkinson, perhaps you could quickly answer the Deputy's other questions.

Mr. David Hodgkinson

No board members, executive directors or members of the group executive committee were in place prior to 2009. In fact, the earliest directors appointed in 2009 were State appointed directors. The directors appointed thereafter, in 2010 and this year, were not State appointed directors. We have seen an almost complete change of management level, that is the top 50 in areas of ultimate responsibility or control. Those changes have been made and communicated through the management renewal plans we were required to submit to the Department.

Have those to 50 now gone from AIB?

Mr. David Hodgkinson

In terms of the executive committee, some have gone into non-core roles. They are doing non-central leadership roles.

With regard to culture change, we have surveyed our staff right across the country to get their input on what behaviour and what sorts of things we need to change. We have done extensive evaluation of our top 200 plus people against those behaviours and assessed their capabilities. We still have many good people in AIB and we have deployed them into senior roles as we undertake the restructuring and reorganisation.

I will ask Bernard Byrne to talk about consultants.

Mr. Bernard Byrne

I will try to answer the Deputy's question as broadly as possible but quickly as well. We have four buckets of activities that use external consultants or advisers. The first is one-off consulting advice to allow us to move from the old type of bank to the new type. We caused that transition to happen. Deputies have asked, for example, how we know what best practice is elsewhere. We used consultants to help us in that process. As a result of that, in a very limited number of positions people are acting on an interim basis and remuneration rules apply to those positions. We do not use a consultancy basis to get around any remuneration issues. Those rules apply to those positions in those circumstances, and they are very limited.

The other three categories are mandated assignments from the Central Bank or the Department of Finance. We have been asked by those bodies to carry out an independent assessment of, for example, board governance or lending practice. For some of this we used BlackRock Solutions. Some of those are mandated assignments for which we must use external parties.

We are going through a significant deleveraging process and, by its nature, those activities will require the use of external consultants, advisers or transactors. In respect of our North American assets, for example, we have local people assisting in that process. To date this year, some €8 billion of deleveraging has taken place - a significant amount - and that will drive the consultancy cost.

On capital-raising activities, the disposal of BZ WBK in Poland, our M&T shareholding and smaller businesses such as Goodbody Stockbrokers and so on all incurred transaction costs which tend to be based on a percentage of the overall fee. As we have gone though the subordinated debt exercise - and the liability-management exercise the Chairman mentioned earlier - €5 billion of capital was generated through the process. We have used advisers on that. Therefore, we are dealing with a significant amount of different activities, different jurisdictions and different specialties. We have used consultants in respect of those four broad categories of activity.

Will Mr. Byrne provide the names and costs to the committee at a later stage?

Mr. Bernard Byrne

We will come back to the committee with information under the broad headings.

Mr. David Hodgkinson

Deputy Doherty asked about my appointment. It is true that I came in on an interim basis at the request of the Government. I had been retired from mainstream management for several years and was engaged in consulting work when I agreed to come on board for a year. I have been asked by the board and by the Department - just orally, at this stage - whether I would be prepared, once the chief executive officer is appointed, to stay on as non-executive chairman for up to a year. In order to assure a smooth transition, I indicated that I was prepared to do so. However, the key issue for us is to get a chief executive officer on board.

On the chief executive officer's pay, we have not offered any sign-on bonuses or talked about that. We have been very transparent about the pay situation. It could end up being a binary situation, that is, a question of whether one gets the right person for the job or else finds one must settle, because of the pay cap issues, for somebody one feels is perhaps less suited for the role. I have not tried to drive that debate in one direction or the other. It is important that we work with the Government to figure out what is the right thing to do. I have certainly not proposed anything above the Covered Institutions Remuneration Oversight Committee, CIROC's, recommendation, which was slightly above what the Minister finally indicated.

What is that figure? It has been mentioned several times.

Mr. David Hodgkinson

The CIROC recommendation is a cap of €690,000.

Is Mr. Hodgkinson recommending that remuneration level for the new chief executive officer?

Mr. David Hodgkinson

I have recommended that we should consider it. I have not been at all prescriptive on this.

That would require the approval of the Minister for Finance.

Mr. David Hodgkinson

It would.

Has the Minister given any indication he would be prepared to sign off on such a recommendation?

Mr. David Hodgkinson

He has not.

I call Deputy Tommy Broughan.

Mr. Hodgkinson has not dealt with some of my questions.

We have spent 25 minutes dealing with Deputy Doherty's questions. Other members wish to contribute. Does the Deputy have a question relating to specific information?

On fitness and probity, has Mr. Hodgkinson submitted any candidate to the Central Bank's fitness and probity committee?

Mr. David Hodgkinson

The Central Bank has interviewed candidates but has not commenced the fitness and probity process with any of them. Initial meetings have taken place.

I regret that I cannot allocate any more time to Deputy Doherty. However, he we will have further opportunities to raise his concerns.

I welcome Mr. Hodgkinson and his staff. Will he outline what is happening in regard to the Educational Building Society? Mr. Hodgkinson told a colleague that no branches will be affected, but will a similar guarantee be given to EBS workers? In regard to the culture at EBS, it was a great mutual society which was owned by 600,000 Irish people at one stage. Excepting the top management, which made disastrous errors, the culture within the workforce was very supportive, positive and community-orientated. Is there some inspiration to be taken from that for the broader organisation? We all remember the famous critique of AIB and Bank of Ireland by Professor Morgan Kelly that their lending policies were driven by not-so-bright former rugby players. While we are all very supportive of rugby in this country, perhaps that was not the right culture for our banks. There is much talk in AIB's half-year report to June 2011 of culture change, customer focus groups and so on. Will Mr. Hodgkinson comment on that?

In regard to lending, is AIB being inhibited, at this stage in our attempts at economic recovery, by the regulator or the Governor of the Central Bank? Colleagues and I often hear from people that overtime pay, even where it is regular and so on, cannot be taken into account for the purposes of a mortgage and that it raises difficulties when the applicant has missed even one credit card payment. In other words, there seems to be a very rigid application of mortgage approval criteria. One might say we have thrown the baby out with the bathwater and gone from one extreme to the other. Will the delegates indicate what percentage of AIB's mortgage book consists of tracker loans? The figures we have heard suggest the percentage for the country as a whole is high.

On the half-year report, operating expenses seem to be still incredibly high. Mr. Byrne mentioned costs associated with asset disposals as the reason for some of these costs, but there seems to have been very little trimming over the period in question. Will Mr. Hodgkinson comment on that?

Does Mr. Hodgkinson consider the Vickers report - a very fundamental report on banking generally - to be applicable to AIB? I accept that the bank's treasury and investment function has been almost entirely wound down or is being wound down. Nevertheless, does that report have application for this country in regard to the critical need to safeguard basic retail, small business and family banking?

Mr. David Hodgkinson

In respect of EBS, we have been very encouraged by what we have seen. There are very good people working in the organisation and it has a good brand. We have determined with EBS management that its brand should be protected. We are still in the planning stage as to how we deal with the integration in terms of back office and so on, but essentially the EBS is a good business. I am interested in the Deputy's comment regarding the inspiration that may be drawn from its culture. It has good people and we have already started exchanging staff and getting EBS people involved within AIB, because they have something to offer.

The Deputy asked about mortgage lending and whether we are being inhibited by the Central Bank. The short answer is I do not think so. Clearly there is a debate on the question of whether the pendulum has swung too far. AIB's own risk committee is debating the question of how far we should go. The maximum loan-to-value ratio we offer in the current environment, subject to the income and debt service capability of the customer, is 92%, which is a reasonably aggressive position to take. However, the key issue with mortgages in this environment is the ability to service debt. The ball rests very much with us in seeking to fine-tune our policies to make them sufficiently accommodating. I invite my colleague, Mr. O'Keeffe, to comment on that.

Mr. Jim O’ Keeffe

As Mr. Hodgkinson said, no restrictions have been imposed on us other than the requirement that our lending be prudent. In regard to overtime and other forms of income, we endeavour to ensure there is a sustainable level of income when we are looking at mortgage applications. We are taking a very pragmatic, individual, case-by-case approach rather than a blanket, across-the-board process. It will be evident when certain incomes are sustainable and, where they are, we will try to write that business.

On tracker mortgages, 54% of our book is a tracker book.

Mr. David Hodgkinson

In regard to operating expenses, our pay costs are down 7% year on year. Our pay costs are down a cumulative 30% since the beginning of 2009 for the ongoing businesses that remain part of AIB. Of course, we acquired the business of Anglo Irish Bank during the course of the first half of the year and we will also be consolidating EBS for the second half of the year. There has been a high level of cost within the bank. We have discussed the areas within which costs have been incurred. Clearly, we have identified that we have got to reduce costs and we will do so. The transformation process and that relating to the introduction of remedial actions will not last for ever.

On the HSBC Vickers report, all I would say from the point of view of AIB is that we have driven absolutely in the direction in which we should be going. We should primarily be a domestic bank focused on personal, commercial and corporate customers. We still have a business in the UK and Northern Ireland and it is our position that this diversification is beneficial for AIB. There is a huge amount of economic interaction between the UK and Ireland. It makes sense, therefore, to have these as part of the core bank going forward. That was the position that we took.

I welcome our guests. I wish to pose some specific questions on mortgages, in the context of value for money for consumers, and on the reform of AIB. On mortgages, will our guests indicate whether criteria are in place in respect of renegotiation? I am not referring to the code of conduct or the process of renegotiation, I am, rather, referring to actual solutions such as debt-for-equity mechanisms, forgiveness and interest-only repayments. Are there criteria in place in this regard? Has the bank issued any guidelines in respect of the minimum quality of life with which it will leave mortgage holders? For example, does it have documentation which states that the bank will extract as much money as it can up to the point where an individual or couple will still be in a position to maintain a car, a telephone, a certain percentage or absolute amount of household income, etc.?

I am aware that Mr. Hodgkinson was appointed in the aftermath of the destruction wrought upon the Irish people by the banking system. However, will he indicate whether the bank accepts partial responsibility for some or all of the mortgages that are in distress? I understand that the bank cannot be held responsible for individuals who took out mortgages, who lost their jobs and who, subsequently, do not have enough income to cover their repayments. Does the bank explicitly accept partial responsibility for the position with regard to distressed mortgages? If it does accept such responsibility, does it correspondingly accept the principle of shared responsibility, that is, that those parties which are responsible for a distressed situation should in some way contribute to the cost of rectifying matters?

Do our guests accept the need for further customer support in order to address the power imbalance that exists in the case of customers who are obliged to deal with the institution that is the bank, with all the resources it has available to it? Do they accept the need for policy guidelines in respect of negotiated solutions? When he came before the committee two weeks ago, the head of financial regulation at the Central Bank, Mr. Matthew Elderfield, outlined his belief that a policy framework would be suitable in the context of negotiations. Again, he was referring to the actual solution rather than the process. Do our guests agree with Mr. Elderfield?

On funding, what is the total amount in euro which AIB has set aside in respect of write-downs against distressed mortgages? How much money has the State given to the bank for the specific purpose of dealing with such mortgages? How much of this money has been passed on, in absolute debt forgiveness, to customers? I am not interested in the amount in respect of which provision has been made in the bank's accounts but rather in the actual amount that has been written off from the perspective of customers.

In the context of value for money, a report compiled by McKinsey a few years ago showed that the Irish banking sector was both the least productive and most profitable in Europe. We had a cosy oligopoly in Ireland for many years. We are now moving, very worryingly, from an oligopoly to a duopoly, which gives rise to serious concerns for customers. What does AIB intend to do to ensure that customers receive real value for money that would be comparable to that which can be obtained in far more competitive markets in the UK, France, Germany or the US? Reference was made to the EBS's variable rate. I received an e-mail from a constituent earlier today which indicates that the EBS variable rate which applies to him has moved two percentage points above the ECB's rate. Essentially, this is rent seeking. It is gouging money from those who must pay it. This money then seems to be funnelled to the bondholders. What is AIB's position with regard to moving above the ECB rate?

On reform, I accept that our guests may be obliged to obtain this information from elsewhere but how many of the top 100 people in the bank in 2008 remain in its employ? Is the bank considering or will it consider in the future non-recourse or limited recourse mortgages? This is the practice in other countries and, effectively, it would force the bank to have more skin in the game and consider its mortgage lending policies more prudently than was the case during the bubble.

My final point relates to the practice relating to lending to SMEs, whereby the banks demand personal guarantees from business people and entrepreneurs, typically in the form of equity in their family homes. I understand that, compared to what happens in other European countries, this is a very unusual practice and that it makes entrepreneurial activity far more risky. Is this a common practice on the part of AIB and, if so, would it consider relaxing its stance in respect of it?

Mr. David Hodgkinson

There was clearly lending activity during the boom times that was certainly outside what I would consider normal, prudent banking practice. I refer, however, to the Nyberg report which considered what happened in Ireland in some depth. While the banks were, if you like, the providers of fuel for the fire, there were lots of parties - including borrowers - engaged in what was going on. The major challenge we face is dealing with the question of where moral hazard rightly sits between someone who chose to borrow - he or she did not have to accept the offer extended to him or her - and the lender. When people cannot repay, the lender takes the hit and it is necessary to undergo a process in order to reach a settlement. All such settlements must take into account, in full, the individual circumstances that may apply. There may be multiple lenders involved and there may be businesses as well as mortgages in play. There was a great deal of responsibility for what happened and our bank played a part in that regard.

On putting in place criteria for renegotiation, we have examined all possible options. For example, we considered the individual voluntary arrangement process in the UK. The Law Reform Commission is clearly doing work in this area. We are trying to weigh up the effectiveness of the various options from different perspectives in the context of what we can place on the menu for our staff to apply. That is a work in progress and we are operating in conjunction with the Department in respect of it. We hope to have it finalised.

In the context of the minimum quality of life, I am not sure I have seen any definitions in this regard. I do not know if Mr. O'Keeffe is aware of any discussions that have taken place.

Mr. Jim O’Keeffe

We had a discussion earlier with regard to the pace of implementation regarding longer-term forbearance or, perhaps, the extension of the entire code. Questions were asked as to whether this matter is being progressed at the right pace. As Mr. Hodgkinson indicated at that point, it is complicated in the context of what is under discussion with the Department of Finance. A range of options is under discussion with the Department in respect of what might be the solutions. The factors to which the Deputy referred all form part of that discussion. We must look at each of the options in terms of how they would operate for the customer and then the guidelines we put in place in terms of the moral situation in which the bank finds itself to ensure customers have an existence once these solutions are put in place and that we are not seen to be unduly austere around it. Part of the proposal we submitted dealt with the need for a personal financial plan for the customer so that this was not enacted on its own. There was a broader perspective taken regarding the customer. The items the Deputy referred to are absolutely accurate in terms of what needs to be in place before we move to the longer-term solutions but they will form part of the output of our work with the Department of Finance and the intergovernmental work. While we debated the pace of implementation - I see good reason as to why the Deputy wonders in the current environment - but the work ongoing with the experts in the Department is relentless to try to ensure we get to have something to implement as quickly as possible. From an AIB perspective, we are gearing up to implement that as soon as we can once the solutions are provided. To answer the Deputy's point, those guidelines will be part of that solution.

Mr. David Hodgkinson

On SMEs, the Deputy asked if from my experience around the world, personal guarantees were common. It depends on the degree of finance and the depth of finance to the SME to what extent it is equity risk and not just working capital finance based on cash flow being taken. In the UK I believe it is quite common to ask business owners to give a mortgage over their property, if it is not mortgaged to the bank as support for facilities, so I would not say it was an unusual practice for personal guarantees to be requested. They are also resisted from my experience. As I say, it all depends on the quantum of facilities relative to the value of the business - the turnover of the business. The more a bank has to advance, the more it would look for other means of ensuring that repayment could be made.

On the top 100 staff, we need to come back to the committee on that. What I can say is that we did a survey of senior managers who were still in the bank after 2008. On average they have taken a pay reduction of approximately 40%. If they are around, they are not getting paid as much as they were during the boom times.

Mr. Bernard Byrne

I think they number eight of the top 55. It is not the top 100, but the top 55, who remain in the institution.

There were three specific numbers with regard to the mortgages. First, what provision has been made by the bank for distressed mortgages? Second, how much has the bank been given by the State? This is part of whatever percentage of the €24 billion went in. How much has AIB been given, specific to distressed mortgages? Third, what euro amount has been passed on to customers in terms of absolute debt forgiveness? In other words has the bank been able to tell customers they no longer owe the bank, for example, €20,000 and that the bank foregoes any call to get that from them at any stage in the future, that it is completely forgiven?

Mr. David Hodgkinson

When the capital is given to the bank, it is not allocated; it is fungible. It is given on the basis of an overall picture of future scenarios for the bank - both its current position and the way things may look up to 2013 as per the PCAR test.

The calculation of the €24 billion was explicitly broken up into constituent parts. I understand that cash is fungible, but in the total quantum AIB got, was there no communication outlining the proportion of the amount that was for mortgages?

Mr. David Hodgkinson

Based on the different scenarios and tests they did, yes there was. I do not have that.

Mr. Alan Kelly

I may be able to help the Deputy with that. In the base case for Irish mortgages it was €3 billion in the PCAR test.

Was that for AIB?

Mr. Alan Kelly

Yes, for AIB. In the stress test it was almost €5 billion. If my memory serves me right it was €4.9 billion. In terms of our own provisions against the mortgage book in Ireland, the figure at June 2011 was just over €860 million. Those were the total provisions against the residential mortgage book in Ireland.

Is that Mr. Kelly's best estimate as to the total amount the bank will need to write down on its mortgage book?

Mr. Alan Kelly

One takes provisions at a point in time - they are the rules. That offers a cover level of 29% of provisions to impaired loans which we believe is reasonable. Obviously the provision requirement in the future will be a factor of features in the economy. Particularly on a mortgage book there is a very close correlation with employment levels.

The third figure is key. What is the euro amount that has been forgiven legally in its entirety?

Mr. Jim O’Keeffe

We will come back to the Deputy on that specific item through the clerk.

We will then distribute that to the members.

There was one answer I did not hear clearly. Did Mr. Byrne say eight of the top 55 managers are remaining?

Mr. Bernard Byrne

It was subject to clarification; that was giving a response based on my best memory of it. I need to clarify it.

It was approximately-----

Mr. Bernard Byrne

Some eight of approximately the 55 board, executive committee and control positions.

Can Mr. Byrne clarify that for us in his further communications?

Mr. Bernard Byrne

Yes.

I appreciate the past is not the responsibility of many of the witnesses present in many cases and they cannot answer for it. However, there are many concerns and these are primarily day-to-day operational matters I wish to raise. This comes from evidence from a number of constituents and from dealing with a number of mortgage brokers in my constituency. I phoned around to ask about their experiences. Those responses are best summed up by one mortgage broker who claimed the experience of dealing with AIB to date was diabolical, which is a very damning reflection on the present as opposed to the past.

I ask Mr. Hodgkinson to comment on people switching to pay interest only. When people apply to pay interest only, punitive rates are being applied and the banks insist on increasing the interest rate. This is true for many SMEs that have idle commercial properties for which they have no tenants.

Has AIB changed its lending criteria in the past five years or is it just enforcing the existing criteria more stringently? Does AIB have a policy actively to get rid of overdrafts and take them from people who have had such a facility for years? I am particularly homing in on SMEs, which are experiencing considerable difficulty with overdrafts.

Is it true that AIB is actively recruiting graduates as we speak even though there are plans to let 2,000 people go? I am informed that the bank is recruiting graduates. I am also informed that it is taking up to six months for people to get seasonal increases in their overdrafts. I am aware of one SME - I can give times, dates and other information - which was on interest only and offered to pay capital as well as interest. The bank insisted on going from 4.25% to 6.275% when the company was also paying capital. These sound extraordinary experiences for people dealing with AIB.

When SMEs are approved for leasing for agricultural equipment or machinery, the rates are 12% or 13%. There seems to be a lack of competition in the leasing area, which is causing problems for businesses. We are all aware of the role SMEs will play in getting the economy back and it is crucial that AIB plays its part to support these businesses.

I will also take Deputy Mitchell's questions at this point and then the witnesses can respond to both Deputies.

The presentation referred to AIB's desire to return to private ownership. I realise this is not the most pressing issue to be discussed today. However, when I see the knockdown prices at which NAMA assets are being sold, it is a matter of concern. Like most taxpayers, I would like to see the bank returned to private ownership, but not at any price. We paid very dearly and I do not want to see it given away in the future. It was in response to Deputy McGrath's question on whether there would be a minority shareholder perhaps next year. What is the attraction of a minority holding in a State-owned bank, a very shrunken AIB, that I presume would be operating domestically for the foreseeable future? Where is AIB looking for investors - domestically or internationally? If such investors are out there what is the attraction for them? Do they see the bank share as something that is being sold off in desperation by a cash-starved State? My worry is that they would see an opportunity for getting something at a snip. What is Mr. Hodgkinson's view on that? Why does he consider investors would be interested in getting involved with AIB at the moment or next year when the losses are clearer?

Mr. David Hodgkinson

AIB is a work in progress. I absolutely accept that we continue to have a number of issues and we have not served customers as well as we need to in the future. The restructuring of the top team in AIB has literally been happening in the past few months. The injection of resources into the areas where it is needed on the customer front has also begun and continues to happen but it is a pretty new phenomenon. I offer my sincere regrets to people who have not been well treated in this process and invite them to come back and talk to us. We are trying to improve our game and we would like to engage with them.

I will invite Mr. O'Keeffe to contribute on the question of interest-only rates, lending criteria and changes in respect of mortgages. I will speak on overdrafts. I will ask our small business expert to talk about the agriculture sector.

Mr. Jim O’Keeffe

Deputy Daly mentioned interest-only loans. Was he referring to SME customers in particular? I am unaware of the issue on the mortgage side.

No, it relates primarily to the SME sector.

Mr. John Webb

In relation to the SME sector, where a customer seeks an interest-only facility, we look at what is a sustainable interest rate for the customer to pay to make sure he or she can pay it in the context of the cashflow going through his or her business.

As a bank the reality facing us is that our cost of funding has increased substantially and we have to look at recovering the cost of funding in order to remain viable.

On the question of overdrafts, it is the case that we did revise our lending policies and processing criteria earlier this year in response to the deficient policies and processes that existed in the past. To some extent, as has been pointed out, the pendulum may have gone too far. We are actively reviewing our lending practices and processes at the moment to make sure we right-size them in the context of ensuring credit is available to businesses while at the same time protecting the taxpayers' interest and investment in the bank.

The agriculture sector is very important to AIB. We account for 36% of the borrowing market in that respect. We have extended more than €1.6 billion in finance to agribusiness. If one takes the EIB facilities which we had earlier this year one will see that of a €250 million tranche, 27% was extended to the farming sector. We believe this is an area of growth for us and given the dynamics facing the economy at the moment and the challenges facing the bank we are keen to capitalise on the opportunities for growth. Therefore, the agriculture sector is one area we are keen to support.

I asked a question specifically about the rates which are in excess of 12% or 13% for leasing.

Mr. John Webb

I will have to go back and look at the leasing side in terms of the rates. We have reorganised our leasing business within the bank. We are carrying out a strategic review of the business to see how we are faced into the market at the moment, whether we are competitive and if we are serving customers appropriately.

Is there an issue with competition? Is the limited competition that exists a reason for the high rates in the area of leasing?

Mr. John Webb

I do not think so. It is not the case that our pricing policy is informed by the lack of competition in the market. We are not increasing rates because we perceive there to be a lack of competition.

We must proceed.

Mr. David Hodgkinson

On the question of potential ownership of AIB, there are investors out there. They cover the full spectrum from the vulture operators to people who have liquidity. There is liquidity in a lot of markets and investors are looking at the potential turnaround story for this country and AIB. They are talking in terms of long-term investment. They say they are prepared to make a ten year commitment because they understand that this is what is needed. I accept they are looking for attractive returns. The value of having them coming in is that once someone has come in then others suddenly start to get more interested, so it would be a useful signal to the market and for this country if we could get a minority investor in place. The minority piece is my preference in that there is a lot of potential value in AIB as this country recovers and we would not want to give it all away to a new investor at such an early stage.

Does Mr. Hodgkinson think that next year would be too soon?

Mr. David Hodgkinson

I am hopeful. I would rather not make a commitment that is not for me to deliver. I am hopeful that we will do something in the course of next year.

We are recruiting graduates specifically to support the work-out and commercial banking area which needs higher level skills than we have within the organisation. I will be honest: although AIB has to shrink it needs to get back to being a normal organisation. If one gets no recruitment one will have a gap in one's population. We do need a certain amount of turnover as well. We are losing people anyway as we speak. We tend to lose people with skills that are very marketable so they need to be replaced.

By way of observation, an eight-page presentation was given. Given that the taxpayer has put €20 billion into AIB I would have liked to get some figures but there was no mention of them in the presentation. That is two thirds of our annual tax take. I brought the banks in before the Joint Committee on Finance and the Public Service on 2 July 2008. The then deputy CEO of AIB said there were no problems. In reply to a question on lending policy he said they had not changed their mortgage lending criteria, that they did not relax them during the boom years and they had not tightened them in the past 12 months. Clearly, they were relaxed.

In terms of restoring public trust in the banking system it is important that we have clarity in a couple of areas. First, reference was made to the SME sector and that informal inquiries are now coming in. Will Mr. Hodgkinson define what is meant by informal as many people are being told in their local branches not to bother applying for loans? It is extremely important that we can get credit.

Is it expected that AIB will reach its target of €3 billion for lending into the SME sector? What type of policies is the bank putting in place to do so? What has been done within the bank in a proactive way to get the specialist skills in place and lend to the SME sector?

The sum of €690,000 is obscene. It is 21 times the average industrial wage. Ordinary people are coming to us asking how we can justify paying someone nearly €700,000? That must be explained. Why does anyone need more than €500,000 to live on? It is an enormous amount of money. I ask the witnesses to address that.

Has AIB written off any debt for residential mortgage holders? I do not want a figure. Has the bank written off debt for mortgage holders in any specific instances?

Am I correct in stating that AIB expects that 3% of its mortgage loan book is in arrears? The witnesses might explain that because in 2008 they stated that the mortgage arrears they were providing for was half of 1%. They stated at the time that as a result, unsurprisingly, mortgage arrears in AIB were very low. They stated that the portion of arrears in AIB is about one third of 1%. That was in July 2008. The witnesses might expand on that and indicate whether AIB has made the provision. Those are relatively direct questions.

I ask the witnesses to take the point about the €20 billion. It is an horrendous amount of money. Following on from the question put by Deputy Mitchell, when do the witnesses expect the Irish taxpayer will get a return?

I take that as the conclusion of the Deputy's questions. A vote has been called in the Dáil and therefore we will have to adjourn the meeting. It could take 15 or 20 minutes so I must ask the witnesses to wait. We will resume following the vote. Thank you.

Sitting suspended at 3.55 p.m. and resumed at 4.10 p.m.

We may resume our deliberations. I call Deputy Mathews.

Some of our colleagues are absent.

I ask the Deputy to proceed.

I thank Mr. Hodgkinson and his colleagues for attending.

Allied Irish Banks was once perhaps the largest bank in Ireland based on its balance sheet and, by market capitalisation, the largest company in Ireland. Three years since the bust, almost to the end of this month, it is a tragedy that €20 billion has been required to recapitalise the bank, as pointed out by Deputy O'Donnell. The first prudential capital assessment review, in March 2010, assured us the figures were right and unassailable based on the calculation and judgments contained therein. The second prudential capital assessment review, headed by BlackRock Solutions, Barclays Capital and Boston Consulting and tidied up, trimmed and presented by the Governor of the Central Bank and the regulator, assured us, on the basis of new figures, that the calculation was right. Professionally, I would be a little hesitant about saying it is right. With regard to the first prudential capital assessment review, what I call an overview calculation would have shown that, in respect of the NAMA-type losses pertaining to development loans, commercial property, etc., at least €65 billion was required to be written off. I have a lot of experience of this over 20 years because I headed this area of lending in ICC Bank over 20 years and was involved in recoveries during the 1980s. Accounting for the mortgage loans across the Irish banks, one would conclude that perhaps another €30 billion to €35 billion would be needed, implying the overall figure would top out at between €90 billion and €100 billion. Nothing has been presented to me to convince me these are not the parameters.

Three years later, I am surprised that we have not heard from the bank that there have been write-offs in the various categories. While I realise there are write-offs concerning the NAMA loan transfers, I refer to the mortgage book. Two hours into this discussion, I get the feeling that it is a matter of words, words and more words, in addition to circular thinking or conversation.

AIB had approximately 25,000 employees before the sale of the 70% interest in the Polish bank. The Polish bank operated in an economy that is less exposed than others to the damage associated with the burst in Europe and the rest of the world. It was a self-financing investment and has further to go in terms of its profitability and growth. Perhaps because it was self-financing, it was not a great idea to sell the interest. However, because it produced cash flow, the sale was tempting. It tempted the board to reduce the leverage.

All the phrases with which the citizens of Ireland are not familiar, including "over-leveraged", are unhelpful because a bank such as AIB has essentially ten items on its balance sheet. Those who know the business and all the board members should know that, on the asset side, it is essentially a question of loan assets or two or three categories encompassing mortgage loans, commercial loans and sectoral commercial loans. There are also other assets, investments, cash and securities. The other side of the balance sheet includes share capital and reserves, if any, customers' deposits, ECB-ICB emergency liquidity, inter-bank deposits, if there are any at this stage, and other liabilities. It is so easy. It tests one's nerves and patience to hear we must look beyond Ireland for consultants and ring banks in other parts of the world, such as HSBC, to determine whether there is anybody interested in taking over as chief executive of the bank, attracting a salary of €500,000, or €690,000 on the recommendation of the Covered Institutions Remuneration Oversight Committee.

Has the Deputy concluded?

I have not finished and I like people to think about what I am saying.

I am sure people are thinking but this is an opportunity for questions also.

I know that.

The main transactions in the bank in the past two years involved the transfer of the commercial development loans into NAMA, yet there are still divisions in the bank doing the operating work for NAMA, that is, the hewing of wood and drawing of water. That has been the biggest operational activity of the bank in the past two years. We have heard nothing about it. We did not hear about the ten categories on the balance sheet, nor did we hear the total value of the loan assets, for instance. We did not hear what proportion of the total assets is represented by the shareholders' funds, as replenished by the recent injections. We did not hear about any sample write-offs or provisioning against categories of the loan book. We did hear that there are infusions of new, astute students and graduates, probably qualified in mathematics, to take on modelling, recoveries work and other tasks. This surprises me because anybody who really knows this business should be able to identify the pluses and minuses very easily, even on the back of a postage stamp.

Deputy Mitchell referred to an investment in a minority shareholding in the bank. This bank has to be really rehabilitated. The sister bank, the other pillar bank, Bank of Ireland, should have been nationalised fully. I am sure there are people with banking experience who agree that to have a residual 15% on a large balance sheet that has not been fully rehabilitated or retoned in respect of assets and liabilities while the State is exposed and provides a safety net of underwriting pretty well all the liabilities is unbelievable. Where in the banking industry is the spirit of rolling up one's sleeves to restructure and re-engineer the country financially for the sake of business? There is enough ability in terms of qualifications but there is a dearth of character and competence.

Moreover, during the bonus-fuelled years up to 2008, the weeds were growing and there was a veneer of success. However, the weeds are still there, which is what is causing the impediment to correcting matters. Three years later, the bank still has not been organised into suitable and appropriate fighting divisions to look after the customers, be they corporate, SMEs or mortgageholders, which should be categorised in their various stages of weakness. Divisions should be motivated with targets that acknowledge some amounts must be written off because of work done on a sample basis. One cannot do it all at once, as it is like doctors when it comes to an epidemic in that they must see each patient individually but this still does not get away from the fact there is an epidemic. Three years ago, although all the signs of a financial SARS epidemic existed, nothing was done.

All the top people in the banks merely protected their own fiefdoms as they did not wish to have State majority control. This is the reason the first PCAR fell short because if one looks at the sums, €7.4 billion for Mr. Hodgkinson's organisation would have just about kept it out of State control. Similarly, €3.65 billion for Bank of Ireland would have had the same effect. It does not matter a damn who owns a bank. In France 25 years ago, they all were owned by the State. One requires competent, reliable and trustworthy boards and management, as well as competent and reliable men and women of character who understand the principles of banking. I note Mr. Hodgkinson came from HSBC, which was the only bank in Britain in 2008 that had a loans-to-deposit ratio of under 100%. The rest of them had ratios of 120% and over and in the case of Northern Rock, it was up to 300%. In Ireland, all banks had loans to deposit ratios of way over 150%. Irish Life & Permanent had a ratio of 300%, that of AIB was approximately 165% and Bank of Ireland's ratio was roughly the same. The EBS was mentioned and I know the people in that institution. I know Mr. Pat O'Reilly, who headed it up until the penultimate chief executive.

Deputy Mathews-----

This is important.

I do not doubt it.

Members should look at the figures.

The Deputy knows the rules when the Chair speaks. I do not doubt the importance of what he is saying but I simply point out to him that-----

This is a committee-----

Excuse me, Deputy, when I am speaking, please. No one doubts the importance of anything the Deputy says and members value his views but this is a session involving questions of the speakers. Everyone knows how to deftly get in some observations in the course of questioning and all members do this but this is an opportunity to question. I ask the Deputy to direct questions to the delegates. If in the course of asking questions the Deputy wishes to make observations, he may, but it largely should be questions in line with what everyone else is doing.

Very well. Here is my question. Do the gentlemen before the committee agree with what I have said and what I will say? This is the reason I invite them to listen to the rest of what I will say, which will not be that much. This is my question because this is a conversation with the bank in which the State - that is us - has invested €20 billion, which members want to have rehabilitated. I have friends, as do my children, who work in that bank and I want them to be motivated and encouraged to do the best they can in the damage limitation. That is what I used to call it to my own team back in the 1980s in ICC Bank when a heap of rotten loans that originated elsewhere were transferred into our division to be sorted. We were obliged to face the reality and measure the damage. We called it damage limitation and we co-operated to perform that damage limitation.

It is a matter of organisation and leadership. I do not believe it is necessary to be obliged to look abroad for people. If, for instance, a banking system in Korea had gone bust, would they necessarily need people from outside to mend it if they have the requisite skills and competencies within? Such skills and competencies were available here but they were overruled because of the bad behaviour. I note Mr. Hodgkinson used the word "behaviour". People need to be qualified, competent and of character. If one takes in deposits, minds them carefully for people and only lends out 90% of them, that is good. If one lends that 90% carefully to businesses one understands and one's staff understands, that is good. However, when one changes the word "funding" in what was the treasury or funding division of the bank and calls it capital markets, one then is tempted to do all sorts of funny things, creating all sorts of products and become involved in all sorts of gambling and so on that is far away from protecting savings or providing the conduits towards successful investment and lending.

I thank the Deputy but must move on to some of the other members.

I thank the Chairman and welcome the witnesses. My first question to the representatives from AIB is whether they can supply their notes of the meetings on 29 and 30 September 2008 when the Government most unwisely was cajoled by the banks into the rescue. We must ascertain what went on. An article by Mr. Colm McCarthy in the Sunday Independent published on 14 August 2011 had the headline, “Ruinous banks won’t apologise or even explain”. I do not know what they were trying to do but certainly some apology is needed for people for whom the banks appearing before the committee over these two days have destroyed approximately €100 billion of equity. Moreover, according to Mr. Cliff Taylor’s estimate, it was necessary to put in another €60 billion. This is horrendous because relative to GDP, no country has had so much damage done to it as has been done to this country by the joint committee’s visitors over these two days. In this context, perhaps they could explain belatedly. In the aforementioned article, Mr. Colm McCarthy stated that he presumes that on legal advice, the banks have never told the story. As for AIB, he stated “AIB has taken down the entire edifice [of the State] and helped put the state ... into receivership, but no report has issued”.

I put it to the witnesses that what members have had this afternoon is a failed gambler, recklessly back from the casino, who now is trying to pose as a sort of genial uncle. The bank has done massive damage to this country and while there was a sort of apology from Mr. Hodgkinson, we need a full apology. AIB should apologise and supply the report sought by Mr. McCarthy. Although Mr. Hodgkinson mentioned the Nyberg report, it did not go that far, which is the reason we are obliged to have a referendum to find out what the banks in Ireland thought they were doing. In this context, I refer to the comment in Mr. Hodgkinson's opening statement, "Ireland is taking the right actions to improve its economic performance and restore its status and impressive progress has been made in this regard." Please do not patronise the rest of society. We are trying to undo the harm that banks did and this actually is damaging to those who must face shortages of special needs assistants, the cutting of carer's allowance and so on. Apologies, sackcloth and ashes are what are required from the Irish banking system. I do not know what they thought they were at, but it was reckless. I do not know how they managed to persuade the previous Government into all the problems we now face.

How many staff in AIB work in NAMA? Is it 500, which is the number that has been reported? Another question is whether AIB ever learns. The State rescued it from ICI, it was a leading practitioner in illegal offshore accounts, it had a pension fund for its executives located somewhere in the Caribbean and now this. If one speaks of moral hazard, the leading exhibit on moral hazard and getting away with things is AIB and I seek an explanation in this regard. The bank's representatives claim the corporate culture has changed but I seek the details. Are there any corporate boxes in Croke Park or Lansdowne Road, are the expense accounts being cut back and has executive dining been cut back? While Mr. Hodgkinson noted the bank is working with accountancy firms, such firms prepared accounts for his bank and others that misleadingly stated those banks were solvent. Who were the accountants now and who were the accountants then? Can these Houses rely on what accountants have told us in the past?

On corporate culture, there has been a withdrawal of deposits and I wish to ascertain how much has been withdrawn. The conduct of the officers of AIB and the other pillar bank in the treatment of their shareholders at general meetings is scandalous. The officers have destroyed 98% or 99% of their shareholding value, but it is not necessary to insult them as well. I am not advocating that people should throw eggs but the conduct of the executives - and I realise that Mr. Hodgkinson was not there at the time - did the bank untold image problems. As I understand corporate governance, the theory is that the people in the room re-elect those at the top table. In practice, however, those at the top table treated the owners of the bank with utter contempt. Perhaps some course in manners might be advisable for AIB and the other banks.

I noted that within about 40 minutes the €500,000 became €690,000. It grew by about 40% in 40 minutes. I have to tell our banking visitors that we heard yesterday that the Taoiseach and every senior public servant, including people in the Central Bank itself, have gone back to annual salaries of €200,000. I am opposed to the figure of €500,000 and I am utterly opposed to the sum of €690,000. What we need from AIB is a simple utility bank to mind savings and run current accounts. I never want to go back to the casino, yet the €690,000 seems geared to getting AIB back to a casino scenario, which would be appalling.

According to Mr. Simon Carswell's book, in 2007-08, the chief executive is recorded as receiving €2.1 million. That was under a regime which destroyed 98% or more of the bank's value. I would like to know what the pay was in 2008 and 2009. I am disappointed that there seems to be no speed of reaction. We are into the third year of this, yet we are still just ambling along because the State has rescued this bank.

Mr. Carswell also recorded - and we want clarification of it - that at the end of 2007 directors and senior executives borrowed €18 million. I want to know the current figure in AIB. To my mind, it borders on being scandalous that a body which was about to be rescued by the State had directors and senior management borrowing as much as €18 million. I do not see that the bank is yet willing to acknowledge the appalling way in which it conducted itself and the appalling damage it has done to this country. I doubt whether it is worth saving as a pillar bank. If it was too big to fail and we therefore saved it, why was AIB not broken up into its four or five components that existed when banks were solvent?

As an economist it is my experience that AIB and the other banks in Ireland used economists for PR purposes and never for analysis. Given what happened in the bank, I presume they might have been well advised to turn their attention internally. We need less advice from Irish banks on how to run the macro economy and more performance, but we have not been getting that. I would like far more urgency and data from the banks on what they are doing. In particular, I would like to know how in about 40 minutes what we thought was €500,000 became €690,000. The half a million was unacceptable and the €690,000 is utterly unacceptable, especially as what the consumer and taxpayer want is to get back to a utility bank. In Bank of Ireland's case it made a little bit of money every year from 1783 until the mid-2000s. That is what we wanted, we did not want the casino. We do not want it back either and certainly not run by people on €690,000.

I welcome our banking colleagues. I revert to the mortgage issue and an aspect of the mortgage market that was not dealt with in the presentation. Mr. Hodgkinson said the primary focus is on owner-occupation mortgage holders. I refer him to his own half-year results to the end of June where he says that one in five of the 44,000 buy-to-let mortgages is in arrears or restructured. That compares to one in 12 of the 126,000 home loans.

In 2006, 19% of all property transactions in the State were buy-to-let. On the basis of the level of impairment of the buy-to-let loans in comparison to the home loans, when I did the maths, in AIB's case one third of its lending appears to have been buy-to-let and seems to be seriously non-performing. What consideration has Mr. Hodgkinson given to the sustainability of AIB's buy-to-let loan book, given that its exposure seems to be considerably higher than the average of lending in that sector.

If the bank has a significant number of buy-to-let difficulties, given that we do not have a non-recourse lending system - as we know and Deputy Donnelly has pointed out - those impaired loans will clearly impact on the overall level of indebtedness of those borrowers.

It has been the practice, and I understand it is the practice in AIB, that when it repossesses or has surrendered to it a buy-to-let property, it insists on vacant possession. That has left tenants who have paid their rents up to date literally without a home. What numbers of buy-to-let properties have been repossessed or taken surrender of? In those situations, has the bank in any case left tenants of those buy-to-let properties in their homes? What is the bank's current strategy or is it evolving in relation to the treatment of tenants of buy-to-let properties?

Mr. Hodgkinson mentioned forbearance and cited 20 repossessions, but in reality, this is simply a holding position. It bears no connection to the reality of what people are facing. Rather than citing the number of repossessions, can Mr. Hodgkinson tell us what number of those mortgages that are in difficulty in AIB will never perform? I want to know the proportion of those mortgages that are unsustainable.

Mr. Hodgkinson said he was engaging actively with the interdepartmental expert group. He indicated, though he did not state, that he is actively discussing issues such as debt-to-share equity or debt-to-rental. Can he elaborate on that and outline AIB's position on the examination of schemes that will permit people not only to remain in their own homes but to have a sustainable longer-term situation?

The difficulty is as much in the questioning as in the time there will be for answers. We are really up against it.

I will wrap up very quickly.

If there is another vote, I am afraid I will have to bring this meeting to an end. We have another meeting about 45 minutes later.

I wanted to express these views because I have contacts with other organisations that deal with distressed home-owners. I have a genuine concern, as do other groups, that there is no independent advocacy for borrowers dealing with AIB and other banks. I have dealt with such people individually. I take Mr. Hodgkinson's point that we need quantitative research but I can tell him, and I am sure other colleagues can also, that people have been shabbily treated and have ended up making commitments to repayment schedules that they do not have a hope of sticking to. Has Mr. Hodgkinson considered independent advocacy for people dealing with AIB in terms of reaching genuinely equal settlement arrangements?

Mr. David Hodgkinson

In respect of the €20 billion injected into AIB, we truly appreciate what has been done. It was the right decision. On behalf of my colleagues and former colleagues, I sincerely regret what AIB has done. I have said this before publicly and I am happy to repeat it.

On the issue of pay for a chief executive, I apologise for setting hares running. I was not angling for a particular position. I was merely saying we were in a position with candidates in which there would be a real debate as to whether they would accept the offer. If we are restrained to the €500,000 pay offer, that is what will happen. We have not put anything on the table and have been very open about the position. As they are still in the game, I am hopeful.

Will Mr. Hodgkinson explain to the ordinary person-----

We do not have the time to ask more questions. Will Mr. Hodgkinson continue?

Mr. David Hodgkinson

On credit inquiries and small and medium-sized enterprise targets, by July we had sanctioned loans to a value of €1.7 billion to this sector. We are determined to reach our €3 billion target for the year. The credit inquiries process is robust. If anyone inquires about borrowing for a business at any branch, the branch is required to record it.

Does this include telephone calls?

Mr. David Hodgkinson

Yes. We have data that can be followed up.

Mr. John Webb

If there is an informal inquiry for borrowing, our officials are obliged to go back to the client to formalise the arrangement and indicate the information they need to progress it to a formal application. The application is then registered. A tracking process is in place to see where and how many applications are moving from informal inquiry to final decision.

For an application to be tagged, does the applicant have to sign it?

Mr. John Webb

We sign it and give it to the client, stating there is a discussion about credit facilities and a wish to progress it to a formal application.

Mr. David Hodgkinson

To reply to Deputy Mathews's question about mortgages, the total provision made by all banks in Ireland, including foreign banks, between 2008 and 2011 is €92 billion. While there may be a bit more to do, the bulk of the work has been done. We have a simpler business model now, but we had a massive amount of work to do to change an organisation which has to deal effectively with 2 million clients. That is where resources will be focused.

We have been told it is a mandatory requirement of the EU-IMF deal that the State's shareholding in AIB be sold as quickly as possible. We have been responding to this and have been in dialogue with the Department of Finance.

Mr. Hodgkinson, professionally, will agree, however, that this is a bad idea. The patient needs to be rehabilitated before it will be ready to run in the race again.

Mr. David Hodgkinson

On the State's bank guarantee, I must confess I came here to sort matters out in AIB. If there are historical questions, we can collate them and come back to the committee. Nobody present was in top management in the bank at the time of the guarantee. I know there were several Central Bank studies into the workings of the bank's board.

It might be helpful if Mr. Hodgkinson published the minutes of the bank's board meetings at the time of the guarantee.

While we are not in a position to do that, there may well be future opportunities for this or other committees to pursue that line of inquiry.

While I respect Mr. Hodgkinson's general answer to Senator Barrett's question, he is not precluded from expressing a view on the Senator's point about the bank prior to his stewardship. I invite Mr. Hodgkinson to indicate what he thinks about the bank then.

Mr. David Hodgkinson

I was very surprised at what I found in terms of credit concentration and operational weakness. The risk appetite was way beyond anything I had experienced. It was not what I had been used to.

Was Mr. Hodgkinson shocked?

Will he elaborate on this?

Mr. David Hodgkinson

AIB's mortgage finance was generally somewhat better than the market. However, in many of the countries in which I have worked, the quantum of property finance lending, excluding mortgage financing, relative to the overall balance sheet, is kept at 10% to a maximum of 20%.

Did the loan-to-deposit ratio shock Mr. Hodgkinson?

Mr. David Hodgkinson

Given that there had already been somewhat of a run on the system, Ireland's challenge now is that the quantum of domestic deposits is significantly less than the quantum of loans in the domestic economy. Ireland will be dependent on cross-border deposits for some time.

Prior to the burst, the loan-to-deposit ratio was mad.

I would love to continue this discussion.

I am sorry, Deputy O'Donnell, but I want Mr. Hodgkinson to address Senator Hayden's question because we are now five minutes over time.

I do not often interject. Is all of the funding to AIB coming from the European Central Bank? Can it raise funding on the interbank market?

Mr. David Hodgkinson

We are able to get a certain amount of corporate funding. However, there is little funding from the interbank market. The European Central Bank has provided €28 billion.

It would be good if Mr. Hodgkinson addressed Senator Hayden's question because we are running out of time.

Mr. David Hodgkinson

I will ask Mr. Jim O'Keeffe to address that question.

Okay. I will call Deputies Spring and Sean Fleming then.

If I seem indignant, I am not. However, there is much frustration about the banks. The licensing of the banks heretofore allowed them to provide banking facilities. Now they are providing them under a different ideology. The culture, accordingly, does not need to change but the mindset. It is about giving the common man a better standard of living. It is up to the banks to kick-start the economy.

Some good questions have been asked on mortgages. However, it is frustrating that I am left with such a short time to ask my questions. AIB has received €28 billion from the European Central Bank. Today, loans provided by the European Financial Stability Facility will move from 295 basis points to zero. Is any of this funding going to AIB? Will it have a knock-on effect for the customer? Can it be explained in layman's terms?

I have a couple of questions for Mr. O'Keeffe on mortgages. According to the Central Bank, in the last quarter some €830 million was paid down on mortgages while there only €350 million was given out in mortgages. One need not be a rocket scientist to work out that there is not even close to parity of what would be necessary to help the property market. Why is that so and what needs to be done in order to get it going again?

For the bank's mortgages, at what rate is the bank borrowing the money? We know the rate at which the bank is leaving it out. Mr. O'Keeffe stated it is 20% of the bank's business. Historically, what percentage of the bank's profits was it? Also, what percentage of the loans are securitised and have been passed on, and what margin on average would the bank be left with in securitised loans?

Some 54% of the bank's mortgages are tracker mortgages. How much is that costing the bank and when does Mr. O'Keeffe foresee a mechanism will be put in place so that it will be cost neutral? Also, how come there were not hedging mechanisms in place to safeguard against that?

Mr. Hodgkinson made a point to Deputy Mitchell a while ago that the reason there is interest in the bank going forward is because there is inherent potential in the bank. Potential is profit. I do not want to see a situation whereby we have an equity house coming in here and taking a chunk of the bank before we deal with the people in the country who are feeling the stress. It is tangible. We are probably at the coalface at present and there is stress everywhere. Between 2005 and 2008, there were 125,000 first-time mortgages given out and one in five of those was given out at loan-to-value ratios of over 100%. That is a generation I call "generation jinxed". The bank needs to deal with those as much as it possibly can. One is talking about €3 billion to an outside figure of €5.9 billion. The bank should deal with them on a sliding scale, going back along historically, and with LTVs.

I like that the witnesses are being as honest as they can be today. "Politician" was the dirty word of the country for the past ten years and it has only been surpassed by "bankers", and I am both. I was a banker in a previous life. In order to put trust back into both politics and banking, there must be transparency at all times. Senator Barrett, when he asked what happened with the bank guarantee, made an important point.

How many of the 2,000 staff reductions they see are natural attrition and how many will the bank recruit? I realise there are many questions, but we all put our tuppence in and have a fraction of the time here.

I thank the delegation for coming here today. I am very disappointed with the opening presentation. Representing a bank to the Oireachtas Joint Committee on Finance, Public Expenditure and Reform, a leaving certificate student would have presented that paper. I must be a little disparaging about what I see here today.

I want to focus on two points only. The first is the mortgage arrears about which we have been talking all day. Mr. Hodgkinson stated earlier that in regard to mortgage arrears, AIB has now implemented the standards set out by the Regulator as set out in the code of conduct on mortgage arrears. He later stated that in addition to these standards, the bank is awaiting the outcome of the work being carried out by the Department of Finance and when that is done, AIB will support and implement all practical solutions that emerge from the group. Mr. Hodgkinson also mentioned today the bank's proposals to the Law Reform Commission. The bank is owned by the State but I have never seen such a move by the representative of a commercial financial institution to be pure civil servant in his speech. He stated the bank has done nothing other than what it was told to do in the code of conduct. He states he will do nothing unless it is in the proposals the Department of Finance is looking at. There is no initiative coming from the bank to be proactive. Mr. Hodgkinson is telling us that unless these are put in place by the Department of Finance, the bank will react in a practical way at that point. AIB, as a bank, should be ahead of the curve. The bank is waiting behind the curve. In fact, the civil servants of this country would be proud of the level of inertia the bank itself is showing in sitting back waiting for the Department to state how it should run a financial business. We all know that AIB will have difficulties with some of these loans. From what I am hearing here today, every second answer is that the bank is waiting on the Department of Finance and is in consultation. In my opinion, they are more akin to civil servants now than to staff in a commercial organisation.

Everything that they do is governed, by Mr. Hodgkinson's own admission, by the Department of Finance. I believe the new CEO's salary should be capped at the level of the senior civil servants, which is €200,000. If I felt AIB was operating as a commercial organisation, maybe there would be some justification for the proposed salary of €690,000. Essentially, he will be a civil servant operating under remits from the Department of Finance because the bank is State owned. I do not see how he can justify the CEO of an organisation being on a salary three to four times the scale of that of the Secretary General of the Department to which he reports. I just do not get it. I believe the bank does not get it either. Banks still think they are privileged. AIB is merely another business in this country that brought shame on itself and on the country. Mr. Hodgkinson should be looking at the figure of €200,000 as a salary. I do not expect my view will carry weight. There is no basis for what is proposed for whoever is coming in to do a public service job. It is not a private commercial financial organisation operating in the open market. AIB is no different from any other commercial semi-State company such as An Post. If the chief executive were running the big complex bank that AIB was years ago, maybe there would be some justification. However, AIB is now merely an offshoot of the Department of Finance and there is no justification for anybody in that offshoot of the Department of Finance to be on a salary above the Minister for Finance.

I must be straight on it. I am disappointed with the tone of the presentation. It is no help. Any official in the Department of Finance would have been proud of the script provided today. I hope Mr. Hodgkinson takes the tone. I was looking to see a vibrant financial organisation and I do not see it in the presentation today.

Mr. O'Keeffe will probably deal with the mortgage questions that Senator Hayden had and that Deputy Spring had, at least in part. Rather than going back and forth, I suggest that either Mr. Hodgkinson wrap up now and then hand over to Mr. O'Keeffe or else that Mr. O'Keeffe start and then Mr. Hodgkinson can wrap up.

Mr. David Hodgkinson

Generally, we are trying to take the initiative. We are taking initiatives but we have had to engage with the officials. This is Government money that has gone into the bank and it is absolutely right that there is a conversation around proposals we and others have made about how the situation can be managed effectively.

I probably share the impatience at the pace of change and the impact that we have on the market. We are making rapid progress. Only ten months ago, I came in. This was a bank that was in complete paralysis. I had to get in and understand it. We had to redesign the organisation. We had to evaluate staff. We had, and still have, a massive amount of work to do. I fully acknowledge that our service and our propositions to customers have been deficient in certain areas and we are working very hard to sort them out.

We genuinely are trying to take the lead on the question of dealing with customers in difficulty but we are not the only party in this game. It is important we have that engagement. Where the Central Bank Governor and the Minister have made clear statements on this topic, I would not want to find ourselves in conflict with both our owners and our regulators. We are honestly trying to make a difference, and we will if we are given the time to demonstrate it.

There were many detailed questions. I would just finish by saying that we recognise the importance of this topic. Our people are experienced in dealing with customers every day and I admire the fortitude they show. I have sympathy with the people who are in difficulty. We will do our best to help them but this is not a simple or quick process. I hope the committee will give us support as well as justifiable criticism in future.

Mr. Jim O’ Keeffe

Senator Hayden's observations on the buy-to-let book are accurate in regard to volumes and arrears and I do not intend to debate the numbers. She is also aware of the buy-to-let position and the interest only profile that was applied to buy-to-let properties at a particular time. She referred to the volume we have taken into our position, which she described as small in the overall context.

I asked for a figure on the number of buy-to-let properties the bank has either repossessed or taken on foot of voluntary surrender.

Mr. Jim O’ Keeffe

We have 21 cases at present.

Is that the figure for overall repossessions through the courts or does it only include buy-to-let properties?

Mr. Jim O’ Keeffe

That is just buy-to-let. There are 17 private residences and 21 buy-to-let properties.

What is the figure for voluntary surrenders?

Mr. Jim O’ Keeffe

They are included in the aforementioned figure. The Senator suggested that we are in a holding position. While that may appear to be the case at a customer and portfolio level, we are actively engaging on a case-by-case basis. Mr. Hodgkinson referred to the fact that we are recruiting staff to work with customers because we want to exhaust all possibilities for working out a solution in view of the current situation in the property market.

The Senator also asked about debt-to-equity and mortgage-to-rent. At the risk of once again mentioning the interdepartmental body, AIB has done extensive research on these options in terms of how they would operate and we feel it is appropriate to bring this work to the attention of the Department of Finance and the interdepartmental Government authority. These options are being considered in that context.

Reading between the lines, Mr. O'Keeffe is saying he favours investigating these options. I am not asking him to clap at a particular answer; I simply want to know whether AIB is behind these types of solutions.

Mr. David Hodgkinson

The short answer is "Yes". Some are better than others.

Mr. Jim O’ Keeffe

We are evaluating the options across a range of headings. While I acknowledge the frustrations expressed about the speed of implementation, the dimensions of the problem are complex. On one level it is a moral hazard issue because if 3.2% of our mortgages are in arrears of 90 days or more, this means almost 97% of our customers continue to make payments on a monthly basis and in many cases they are repaying their mortgages under stressful conditions. We have a moral obligation to ensure that whatever solutions we put in place are also appropriate to the latter group of customers.

Deputy Spring raised a number of technical questions on funding. I will revert to the clerk to the committee with answers on several of these but I am aware he is particularly interested in finding out the current volume of lending to the mortgage market. The mortgage market is depressed, having returned to 5% of where it was at the height of the boom. We are doing 27% of the lending to the market but the Deputy is correct that the pay downs on our books indicate we are not lending at a rate that would replenish it.

Is that a conscious decision? The evidence I hear from people is that they are trying to get on to the ladder.

Mr. Jim O’ Keeffe

It is not a conscious decision. We have restructured our mortgage functions and have appointed a senior manager to ensure that we are feeding into new business and to examine our policies in this regard. Brokers were mentioned earlier. We are working on that side of the house to ensure we provide the turnaround times brokers require. There is no impediment from the point of view of policy, board or senior executives.

When does AIB expect the mortgage market to return to profitability?

Mr. David Hodgkinson

Our net interest margin was 130 basis points, which is low. The interest margin is the gap between the overall cost of funding, including ECB funds and deposits, and what we are able to earn from our lending. Clearly, trackers bring the figure down because of their low levels. Overall, the net interest margin could usefully be higher from the point of view of ultimate viability.

Does AIB have an opinion on the principle of independent advocacy for people dealing with financial institutions?

Mr. Jim O’ Keeffe

I will answer the question in a general way. The way we will engage with customers should give us no fear of independent advocacy. We will be dealing with volumes of customers and will need to ensure their cases are processed in a timely manner. The Credit Review Office provides an appeals process which brings transparency for small and medium enterprises. It would probably offer the sense of governance we seek but it should not impede us in processing our volume of cases at the pace we all know is required.

I thank Mr. Hodgkinson and his colleagues for participating in this discussion. I hope we will meet some, if not all, of them on a future occasion to continue the discussion, which has been very helpful.

Sitting suspended at 5.08 p.m. and resumed at 5.15 p.m.

I welcome from Bank of Ireland Mr. Richie Boucher, the group chief executive officer; Mr. Michael Lauhoff, the head of small business and agriculture; and Ms Lynda Carragher, the head of mortgage credit. Mr. Boucher will make opening remarks followed by a question and answer session. When full members of the committee have all had an opportunity to question Mr. Boucher and his colleagues, I will call on Members who are not members of the joint committee to ask questions should they wish to do so.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence in respect of a particular matter and continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I ask Mr. Boucher to make his opening remarks.

Mr. Richie Boucher

I am chief executive of Bank of Ireland Group and I am joined here by my colleagues Ms Lynda Carragher, head of mortgage and consumer credit for Ireland and the UK; and Mr. Michael Lauhoff, head of small business and agriculture. We are pleased to have accepted the committee's invitation to appear before it to discuss challenges facing Bank of Ireland and the banking sector. I will now give a short presentation regarding Bank of Ireland in the context of the committee's invitation.

Since the beginning of 2009, Bank of Ireland has been focused on restructuring and repositioning itself to enable it focus on the core businesses. Our core businesses are as follows. In the Republic of Ireland we employ more than 10,000 people and hold market share positions of number one or number two in all of our activities. We are number one in consumer and corporate banking; number two in business banking; and number two in life, pensions and investment products. We serve our customers through more than 250 branches and have a very significant investment in branch premises, infrastructure and payment systems. We are continuing to invest in our Irish business particularly in payment systems and e-banking.

In Northern Ireland we operate a full services consumer, business and corporate bank with 44 branches and hold number three or four market share positions. In the UK we also are the financial services partner to the UK Post Office in a joint venture which provides us with access to the post office's 11,500 branches. Internationally we are also retaining certain very profitable niche corporate banking activities whose income streams are very important to us as we restructure and reposition our business.

Our key strategic goals are: to be the leading Irish retail and commercial bank; to be well positioned in our core markets with strong customer franchises and market positions capable of supporting future economic recovery; to be strongly capitalised without reliance on exceptional monetary authority support and Government guarantees; to have a sustainable funding base with our core loan portfolios substantially funded by customer deposits and term wholesale funding; to be operationally efficient with sustainable, lower cost structures; to achieve appropriate returns on services and products to ensure that costs are covered, risk is appropriately priced and capital is remunerated; to reduce the risk to the taxpayer from any support for Bank of Ireland, to reward any taxpayer investments in Bank of Ireland, to repay any taxpayer investments in Bank of Ireland; and to achieve attractive returns for stockholders through strong operational performance and the return of surplus capital.

We have a number of focussed priorities and a comprehensive integrated set of plans have been implemented and continue to be implemented against these priorities. While we see these times as challenging, we also see this as an opportunity for Bank of Ireland to strengthen our core businesses with a very significant focus on supporting existing customers, strengthening our relationships with those existing customers and recruiting new customers.

We must continue to reduce the size of our balance sheet in our non-core businesses while supporting our core businesses particularly in Ireland. We have made good progress through closing certain of our international lending activities to new business, accepting repayment and redemptions, and through selective sale of certain businesses and assets.

We have had a strong focus on increasing the proportion of our balance sheet which is funded from retail deposits and terming out our wholesale funding. We have made good progress on those priorities including having recently issued €2.9 billion in unguaranteed term funding in very difficult markets.

Our capital base has been very considerably strengthened and in the year to date we have raised €4 billion in equity capital of which €3.7 billion has come from the private sector.

Our income continues to be impacted by the high cost of money to us including the costs of the ELG guarantee. Our deleveraging initiatives and those of our competitors should give us some alleviation from this. We anticipate some margin recovery as interest rates increase and we will progressively disengage from the ELG scheme.

While the macroeconomic scenario continues to be difficult, we are carefully managing our credit risks and expect that loan losses will continue to reduce. We have reduced our costs by 19% since September 2008, and we are making good progress to reduce costs further and embed a lower cost base in the group. Since March 2009, we have generated a net circa €9.85 billion in equity capital, of which a net €8.3 billion has come from the private sector. The State has invested €1.8 billion in preference shares in the bank, paying a coupon of 10.25% per annum, and €1 billion in a contingent capital instrument, paying a coupon of 10% per annum. In the past three years the bank has paid to the State guarantee and other fees and preference share coupons of €1 billion. The bank is now strongly capitalised with a pro forma core tier 1 ratio of circa 15% at June 30 2011.

The bank has continued to restructure itself with considerable support from the taxpayer. All staff in Bank of Ireland are and must continue to be conscious of that support and the responsibilities that arise from having received it. We also recognise our responsibilities to our customers and these are aligned with our strategic objective to further strengthen and develop our core businesses. We have a set of financial targets for the next three years and these are set out in the presentation.

On 10 August, we announced our results for the six months to 30 June. Although our losses remain high, they are reducing and our financial plans remain on target to achieve our financial objectives. Since September 2008, we have reduced the size of our balance sheet by €49 billion and we expect to bring our customer loans outside Ireland down by a further net €16 billion over the next two and a half years. Despite turbulent market conditions, our customer deposits have stabilised in Ireland and we are seeing growth in our UK retail deposits. We remain well on track to achieve a loan-to-deposit ratio of less than 120% by the end of 2014.

We have continued to reduce our costs and our cost reduction targets remain on track. A significant component was the reduction of a significant liability on our balance sheet through a pension deficit, which reduced from €1.6 billion at the end of 2009 to €0.2 billion at the end of June, primarily through staff agreeing to material reductions in future pension benefits. While reducing our costs, we have also continued to make sensible investments in our businesses to improve our infrastructure, deliver efficiencies and enhance our customers' experiences in their dealings with us.

The bank, independent advisers Oliver Wyman, the investors who were given access to the bank's information base and BlackRock on behalf of the Central Bank have all reviewed the bank's loan books in considerable detail. Based on these indepth analyses, and as reaffirmed by the bank on 10 August, we believe that loan losses peaked in 2009 and will progressively reduce to a more normalised level by 2013. The recovery in our income will be significantly influenced by the cost of money to us, which in turn will be impacted by interest rates, increased demand for new loans in our core portfolios, our efforts to reduce our reliance on wholesale funding, and moving off ELG support.

The operating environment in 2011 has been challenging. Nevertheless, we have issued more than €2.9 billion in unguaranteed secured term funding to date and we anticipate doing more by the year end. Our income remains under pressure and our loan losses remain high, but they are lower than in 2010 and remain within our expectations. The outlook for the rest of 2011 remains challenging, particularly in terms of funding costs, including Government guarantee fees, and continuing issues in international sovereign and capital markets that may impact on the pace and outlook for global growth. We have strengthened our capital base considerably and our deleveraging plan includes specific initiatives that will deliver a more conservative funding structure and enable the repayment of monetary authority and Central Bank funding. We are well positioned to support corporate, business and personal customers and contribute positively to the recovery of the Irish economy. We have a clear strategic plan and financial targets that we are focused on achieving. Our clear goal is to be the pre-eminent corporate, business and consumer bank in Ireland. For the taxpayer, we would emphasise that we must continue to reduce the taxpayer's risk, reward the taxpayer's investment in the bank, eliminate the need for support for Bank of Ireland and repay any taxpayer investment in the bank in a timely manner.

I know that members of the committee have a particular interest in the mortgage and SME markets in Ireland. These are markets of particular focus for Bank of Ireland. We have the largest market share of the mortgage market through Bank of Ireland and our subsidiary, ICS. While elements of our Irish mortgage book are undoubtedly facing some stress, we believe it is performing relatively better than the sector as a whole. While arrears are continuing to increase, this is broadly in line with our expectations. We have a significant infrastructure and processes to support customers in arrears who wish to work with us and this support is generally working for our customers. We are making credit available to people who wish to purchase their homes, and while demand is muted, Bank of Ireland accounted for well over 40% of first-time buyer mortgages drawn down in the first six months of 2011. It is also interesting to note that the draw-down rate of mortgage approvals in the first quarter of 2011 was only 30%, which shows that, even if customers have been approved for mortgages, they may be reluctant to draw down the funds and proceed with the purchase.

The SME market is of critical strategic importance to the bank. We hold the number two position in the market and we want to be number one. We will achieve that position by working hard to meet the needs of existing customers, further deepening their relationships with us, and by actively recruiting new customers.

At the half-year reporting stage, we were on target to meet our lending commitments for 2011. We have a substantial customer base and in the seven months to the end of July we dealt with more than 30,000 credit applications for SME and agri customers, with an 80% approval rate. We are seeing good demand for certain of our specialist funds and the demand for the agri fund we launched earlier in 2011 has exceeded our expectations. It will now be increased. We are devoting significant resources to customer support, staff training, recruitment and redeployment, product development and marketing to underpin our strategic objective of being the number one business bank in Ireland.

My colleagues and I will be pleased to take questions from committee members and other Deputies and Senators.

Thank you, Mr. Boucher. I repeat what I said earlier. We are trying to stick to an indicative period of between five and ten minutes for each member, although I will give the initial speakers for each group some latitude.

I will be brief because it is late. I thank Mr. Boucher for his presentation. I acknowledge upfront that it was far more uplifting than what we heard in the past couple of hours from what people call the other pillar bank, AIB. It is good that Bank of Ireland is making substantial progress. I am not usually in the habit of praising banks, but it is the best of what we have. I think that is generally understood.

I have a few straightforward questions about the business plan. What are the profit projections for this year and next? Mr. Boucher said that the income stream is returning and the cost base is coming under control. How does he see the bank's profitability by 2014, to which his documents are geared? Will he give us a pen picture of where he sees the bank's activity between Ireland, the UK and the rest of the world at that time? I presume most of it will be concentrated at home.

On capital, I understand that the Irish taxpayer has invested approximately €9.85 billion in Bank of Ireland and that, in the past couple of years, the bank has paid about €1 billion back to the State through the guarantee and the ELG. When do the witnesses envisage the bank will be in a position to make further payments to the State or repay some of the capital that was put into it? Over what timeframe will that happen between now and 2014? Will some of the net investment from the Irish taxpayer be returned in that period?

I will leave it there because I want to keep my questions broad. There are many other questions on mortgage arrears and other topics, but I will give other members a chance to raise those.

I hope others will follow Deputy Fleming's lead and take a succinct approach to questioning.

Mr. Richie Boucher

Unfortunately, as a public company, I am not permitted to make a profit forecast. We have tried to set out the balance sheet and income ratios. I think the market is anticipating that we will return to profit in 2013 and we have not sought to give the market other guidance than that.

With regard to our activities, we are continuing to run down and deleverage our loan books. All the deleveraging activity is taking place outside Ireland. Specifically, we are selling commercial real estate in the United States and an acquisition finance business in the UK. We are also selling project financed loans and a range of other corporate loans in those markets. We are making good progress in this regard, of which I advised the market on 10 August. A member asked whether the current market turmoil has had an impact on our progress, but it has not. In each of the situations where we are selling assets, we have at least two bidders with whom we are actively engaged.

Our balance sheet is approximately 55% outside of Ireland and 45% inside. This ratio will change naturally to approximately 60:40 with a progression towards a further concentration in Ireland. We consider Northern Ireland to be an important part of our business and run an island of Ireland operation. From a reporting point of view, however, it is sterling and we must count that business as overseas assets. Our relationship with the UK Post Office is important, as it is a significant provider of retail deposits, which get us to a more appropriate funding ratio.

We have generated a total of €9.85 billion in capital. These are approximate figures, but some €3 billion is to cover losses the bank has incurred to date and some €6 billion is to strengthen our capital ratios in particular. The taxpayer has also invested preference shares in the bank of €1.8 billion. Our financial targets are to have these shares repaid by March 2014, when there will be a step up or a redemption penalty if we have not repaid them. I understand from the negotiations that took place at the time of our recapitalisation that the State had a specific desire to maintain a 15% shareholding in the bank. This was to reflect the State's view that it would like to participate. I cannot comment on how long the State wishes to retain this shareholding.

Of the other cash contributions that are made on an ongoing basis, the primary one is what we pay for the eligible liabilities guarantee, ELG, support. We have a duty to continue reducing our reliance on exceptional Government guarantees. As we reduce our reliance, what we pay in fees to the Government will also reduce. We pay a coupon of 10.25% on the Government's preference shares of €1.8 billion.

I hope I have covered the questions asked. I apologise, as I am not permitted to give a specific profit forecast.

AIB attended this meeting. Bank of Ireland will get away lightly, as AIB was asked most of the questions I would have liked to ask.

The banking system has a significant problem with arrears. Even some restructured loans that make reduced payments of less than the interest have gone into arrears. Arrears capitalisation accounts for €3.5 billion. I do not know how much of this is Bank of Ireland's problem, but how is the bank affected by it? Did Bank of Ireland make a submission to the interdepartmental group examining the mortgage crisis? What proposals did it put to the group, as the bank is well aware of the issue's seriousness?

AIB referred to how it will increase rates on restructured commercial loans to commercial entities because of the increased risk. Has Bank of Ireland made submissions to the Government on the latter's proposed change to upward-only rent and how it might affect the quality of the bank's commercial loans? Has the bank expressed other concerns about its commercial loans?

Changes to the bankruptcy laws are under discussion. For example, one significant proposal is to reduce the period of bankruptcy from 12 years to five years. If it was decreased to one or two years, though, would this have a significant impact on the bank's business? Has it encountered cases of bankruptcy tourism, whereby people leave this jurisdiction for others where the periods of bankruptcy are shorter and, therefore, they can discharge their liabilities to the banks sooner?

Regarding NAMA, how many sub-€20 million loans does Bank of Ireland have? Given Government policy, what losses will the bank allow on these loans if they are not transferred to NAMA?

The witnesses may not be able to comment on my next point. We have discussed how much responsibility the banks should take for their reckless lending of recent years. Some believe the banks should take a certain amount of responsibility for a proportion of mortgagors' loans. It has been suggested outside the Houses that the Civil Liabilities Act could be used. Have the witnesses experience of this legislation? Has the bank been involved in agreements or court cases in which the Act was used?

Mr. Richie Boucher

I will invite Mr. Lauhoff and Ms Carragher to take some questions, but I can address some of the general ones. It is not our policy to capitalise mortgage arrears. When we report the arrears, those are the arrears on a continuous basis. Ms Carragher will discuss our modification process. At our results presentation for the half year on 10 August, I specifically discussed our modifications where we work with customers. In excess of 90% of our customers in a modification process with us are paying at least the full interest on their mortgages. Ms Carragher will discuss this point further.

The Department and the Central Bank have asked for our opinions on mortgage-related issues. We continue to engage with them. Each customer has an individual set of circumstances and we must engage with customers on an individual basis. In the course of dialogue, we have been asked for our opinions on upward-only rent reviews. Such legislation would need to be carefully thought through and targeted at certain types of tenant as opposed to multinationals that are tenants, etc. A change to upward-only rent reviews will depend on the proportion of that change and the impact on the bank's potential loan losses or capitalisation situation.

We have made loan loss assessments based on different changes in bankruptcy laws. There is a specific difference. Ms Carragher will touch on this point, but an issue we have encountered when dealing with customers with mortgage arrears is that they possess a wide range of other personal debts, for example, credit cards, motor finance, store cards and so on. These factors must be taken into account when forming an opinion. We work with the Money Advice and Budgeting Service, MABS, an independent advocate for customers. The opinion of MABS is that mortgage debt should always be prioritised, as it relates to the protection of the family home.

We will take the bankruptcy law changes that we understand are envisaged into consideration in our assessment of potential loan losses. If the law is changed or in a different way, it may or may not have an impact, but we cannot make a judgment on that.

Regarding NAMA, our land and development loans amount to less than €4 billion and approximately 50% of them are in the Republic of Ireland. In this respect, our coverage ratio on impaired loans is in excess of 50%. We will examine our provision against these loans on an ongoing basis.

I am not familiar with the issues that arise around the Civil Liability Act. Ms Carragher will respond to some of the broader questions on mortgages.

Ms Lynda Carragher

In terms of assisting customers who anticipate mortgage difficulty or who are in difficulty with their mortgage, Bank of Ireland has invested heavily in being proactive in identifying such customers and working with them. Our entire branch network - we have 254 branches - is the first port of call for customers anticipating difficulty. We have in place supporting processes to evaluate the best options for customers in respect of their mortgage payments, how to organise their finances and budgeting relative to, as mentioned, the prioritisation of the mortgage payment over other debt in order to assist them in protecting the family home. That is the context setting of what Bank of Ireland has done. We have been proactive in reaching out to customers to encourage them to come to the bank and deal in a comprehensive way with addressing their financial position. Members of the joint committee will be aware that this process has been greatly aided by standardisation of various aspects and the codifying of, for example, the standard financial statement required under the code of conduct in respect of mortgage arrears. We are continually examining ways by which we can improve processes and make it easier for customers to come to and deal with the bank and rearrange payments on their mortgage, should the need arise.

On the customers who have come to the bank, in the first half of this year approximately 3,900 owner-occupier customers had their mortgage payments modified. In other words, the bank has agreed to an alternative payment arrangement in these cases. As mentioned, 95% of these customers are at least making interest only payments. Some 90% of customers who have had their mortgage arrangements modified have returned to full payment arrangements, while only 10% remain in arrears. We continue to work with these customers to identify appropriate solutions and measures by which they can address their arrears.

At all times we will have customers who move into and out of an arrears position and towards modification. The bank keeps in touch with its customers and arrangements under review. The review cycle is typically six months. Obviously, if a customer returns to full payment, he or she will be out of the review process. It is important for the bank and the customer that we remain in close contact, as circumstances do change. While they improve for some customers, they disimprove for others. Remaining in close contact with the customer means we are all in a better position to address the situation. The primary objective is to assist customers to organise their finances in order that they can address their mortgage position and thus remain in their family home.

I hope I have provided an insight into what the bank is doing.

I have a brief supplementary question on that issue, one which we also put to the delegation from Allied Irish Banks. Does Bank of Ireland have its own policy on the writing-off of debt on mortgages? AIB has stated it is waiting for the Government to report on the interdepartmental group before it institutes some arrangement. It is awaiting a global response on this issue. Does Bank of Ireland have its own policy on the writing-off of loans or discounting or reducing their overall term?

Ms Lynda Carragher

Yes. Bank of Ireland deals with each customer in difficulty with his or her mortgage on a case by case basis. No two customers are the same in respect of their circumstances. In terms of generalisation or standard policies for customers, we do not believe that would be appropriate. It is more appropriate to have tailored solutions for our customers, depending on their circumstances.

Is the Bank of Ireland discounting or writing off debt?

Ms Lynda Carragher

No, we deal with every mortgage case on an individual basis, taking account of the customer's personal and financial circumstances in arriving at a decision.

Does that include the option of a write-off?

Ms Lynda Carragher

Each case is dealt with individually.

We understand that, but in a given situation, could a case conceivably involve a write-off? Has this happened?

Ms Lynda Carragher

It depends on the customer's circumstances. It is difficult for me to give any-----

We are not pressing Ms Carragher on individual cases. The Deputy is wondering if the bank has done or would consider doing this.

Ms Lynda Carragher

On a case by case basis, there is a range of options the bank would consider.

Does it include the option flagged by the Deputy?

Ms Lynda Carragher

No, not at this time. Customers' circumstances will differ and the bank would be understanding. While many of our customers are in arrears because of macro conditions, others are in arrears because of personal circumstances. Customers' circumstances influence our approach.

I welcome the delegation to the joint committee.

Does Mr. Boucher believe all of the money extended by the bank of which he is change will be recouped by it? I am speaking in this context about residential mortgages. If that is the case, does he believe there is a need for a write-down of some of the debt? If the bank continues to pursue the policy outlined by Ms Carragher, namely, that there is no write-down of mortgage debt, will it incur losses on its domestic mortgage portfolio? If he does believe this, when will the bank change its attitude and write down the debt on some of these loans? It is pretending that it is going to get all of the money back. The results of the stress tests undertaken in March pointed to massive losses within the bank in the mortgage division. In giving money to the banks the Government is fixing them, but it is not fixing the problem for those who have mortgages. Is a write-down of debt one of the options the bank will consider anytime soon? I am not speaking in this context about a figure of 20% of mortgages across the board or tailored individual cases but about a rationale of how to assess cases in which there should be a write-down of debt.

Is there any other option apart from the writing down of debt that could alleviate the pressure on mortgage holders? Is debt for equity something the bank would support? AIB has indicated it would support such an option and has made recommendations to the Department in that regard.

Has Mr. Boucher or any of his officials received correspondence from the Minister for Finance asking the bank to bring forth a plan to absorb the interest rate hike by the ECB? If so, how far along is he in putting together that plan?

What will be the volume of job losses within the bank and what will be their impact on services? Particularly in the rural areas I represent, what will be the impact in terms of branches? Are there numbers and do criteria exist? Will criteria be based on finance, savings and numbers which must be reduced or will regard be had to the position of isolated rural communities that have been loyal customers of the bank in the past and who need a service? Withdrawing a service could leave a major void in that area.

There is an issue regarding the culture within the bank. Although I am unsure the culture has changed, there is significant fear that a frenzy will emerge again and bankers will get loose again. Deputy Ross has articulated the view for a while that once the scrutiny is off the banking sector, it will return to its old ways. What measures has the bank taken to ensure the past culture, which incentivised reckless lending, no longer exists?

Will the witness detail the consultants hired by the bank with regard to restructuring? Has any kind of avoidance measure been used by the bank to get away from the €500,000 cap on remuneration? Have share options been provided, for example, and are people within the banking sector still getting perks that we see outlined in newspapers from time to time? Are we seconding people from different agencies, such as consultants, with fees being paid? Perhaps the witness will put my mind at ease as to whether that is happening.

I asked the representatives of AIB a question regarding board members. How many people on the board of Bank of Ireland were there during the time when the bank lent recklessly and had a major part in destroying the economy? How many people remain on the board who were there during the boom time from 2002 up to the implementation of the bank guarantee? Will the witness give their names and explain why they should still be in that position, given the damage they collectively did to the economy?

There is much talk about what is happening in Greece and Europe as a whole. There is intense speculation that Greece is about to default on some of its debts. My party, Sinn Féin, and I have continually argued that we should not default on sovereign debt but we should default on the banking debt, which was never issued to the State but to private institutions. It was never on the shoulders of the State.

In the context of the possibility that Greece may default, which may bring benefit to this State as our Minister might then have the guts to place the issue of private sector default on the table, what impact would that have for banks? I am conscious that next week, €805 million will be paid out by Bank of Ireland to a bondholder and four days later, €1.465 billion will be paid out to another unsecured bondholder. Within ten days or so, some €2.2 billion will be paid out by the bank to gamblers, or investors in the bank. They messed up, unfortunately, and the gamble should not have come off, but they will be paid in full with the required interest rate. Who are the mugs only the Irish people who have given the banks money to pay off these people?

Many of us believe this is wrong, immoral and should not happen. There are unsecured and unguaranteed bondholders within the bank who are getting paid off. We hope that as default is now becoming a real position within Europe, we could see a default not on sovereign debt, but on these investors in a bank which went belly up and should not be demanding that the people bail it out. What would happen if the Minister knocked on the bank's door next week and told Mr. Boucher that he has good news for the people because he had secured agreement with European partners and the ECB that some of the senior unsecured and unguaranteed bondholders in the bank will take a haircut? That could be negotiated but what impact would that have?

Mr. Richie Boucher

With regard to debt issuance, we are repaying debt but as I mentioned earlier, we are issuing debt in the marketplace. We are funding ourselves in the marketplace; our deposits position has stabilised and is increasing, particularly with sterling deposits in our UK market. I mentioned that we have issued €2.9 billion of unguaranteed debt in the past two months and I anticipate that we will issue more unguaranteed debt. There is a specific objective that we bring down the level of wholesale funding that we have and that requires us to have access to the markets. We either term it out or get retail and customer deposits to do so. That is very important to us.

With regard to sub-debt in the bank, a very significant component of the €9.85 billion of equity capital generated by the bank - approximately 50% - has come through liability management or conversion of sub-debt into equity in the bank. The sub-debt holders have participated in the recapitalisation of the bank.

With regard to the board, four members were in place in September 2008. Our chairman has said there will be an ongoing process of renewal of the board. The members of the board are set out in our annual report on an ongoing basis and board members stand for annual election by shareholders. The most recent annual election by shareholders was at our extraordinary general meeting in June this year.

To be clear, there are four members on the current board at Bank of Ireland who have been there over the past decade.

Mr. Richie Boucher

Nobody has been there for a decade.

They have served at any time over the past decade.

Mr. Richie Boucher

The specific figure I related referred to people on the board in September 2008.

I brought this up with AIB as it is a false argument. All the damage did not happen in September 2008. I will repeat the question. How many current board members in Bank of Ireland served on the board during the boom time, in which I believe the bank lent recklessly? What are their names?

If the Deputy gives a year, the question might be easier to answer.

I mentioned 2002 so we can take it from that period.

Mr. Richie Boucher

I do not have the information but I will revert with it. From memory I cannot think of anybody who was on the board in 2002.

Will the witness give the names of the four board members who were there in 2008?

Mr. Richie Boucher

They are me, John O'Donovan, Jerome Kennedy and Rose Hynes. That has been set out in our annual report. All members of the board put themselves forward for annual election by the shareholders, with the most recent election in June.

Who was there in the few years up to the end of 2008?

Does the witness have a view with regard to the reaction of some other shareholders - the Irish people - that people who were on the board of the bank during the time when it lent recklessly should not continue on the board? Does Mr. Boucher have anything to say to those people who share my view?

Mr. Richie Boucher

I will speak to my position. I must do a job, which is to continue to restructure and reposition the bank to ensure an appropriate level of capital. We must get the maximum amount of that capital from private markets and continue to reduce the risk to the taxpayer. We must sensibly bring down the size of the balance sheet and lend to the economy while restructuring costs. I must focus on that job.

The Deputy asked a couple of questions about costs which I will take together. There are approximately 250 branches in the Republic of Ireland. I envisage we will have at least that number of branches in the Republic over the life of our financial plan. We consider the branch to be an extremely important part of our business strategy, while at the same time we are also investing heavily in payment systems and e-banking. Customers will choose the channels through which they wish to engage with the bank.

Where we are bringing in process efficiencies in terms of branches we are taking out work from branches but we are not centralising all of that work in Dublin. We have a very specific strategy of moving work to regional hubs because many of our people have very good skills and we want to ensure we are on a regional hub basis. Whereas on paper it might look efficient to bring them all into one place, sometimes one can have scale inefficiencies arising. We see our presence in the local communities as extremely important. However, we have to make the bank more efficient.

We are employing approximately 3,000 fewer people than in 2008. Approximately 50% of those job reductions have taken place in the Republic of Ireland and 50% of them were outside Ireland. Of that 3,000, there have also been business sales. In the Republic of Ireland we have sold certain asset management businesses. Clearly, we will continue to manage our costs down again. We have a process. We engage with our trade unions and staff on an ongoing basis. To the extent that we have a specific need to reduce jobs in a particular area, the most appropriate people we engage with first are the impacted people and the trade unions where they are represented. We are redeploying people as well. We are moving people from certain functions, retraining them and trying to retain their skills as best we can.

Our accounts for the half year to June disclosed an impairment provision of €718 million against our entire Irish mortgage book, which was €28 billion in June 2011. Approximately €7 billion was a buy to let book and the balance was an owner occupier book. We recognise accounting provisions as they occur and we report them in our accounts on that basis.

With regard to the culture of the bank-----

On the mortgage issue, I asked if Mr. Boucher believes there is a need for the bank to write down some of those debts and use some of the other instruments that are available, such as debt for equity swaps, which the bank is not using at present.

Mr. Richie Boucher

Where we do not recover money we take a provision; we take a loss where money is not recovered. We recognise in our mortgage books, as was assessed and independently assessed by BlackRock, that we will lose about €1.4 billion in our mortgages over a three year period. That includes incurred provisions, so we have provisions against our books.

The bank will therefore not write it off at this point. It will not sit down with somebody who is-----

Deputy, we need to proceed. I know it is an important issue but perhaps we can come back to it. Perhaps Mr. Boucher would answer the remaining questions from Deputy Doherty.

Mr. Richie Boucher

On culture related issues, we brought people in to look independently at some of the things that went wrong. It is also important that ours is the only Irish bank that has had an EU restructuring plan agreed. We identified some of the errors and mistakes we made and the rectification we have made. In the future all banks will have to set out, first, their risk appetite and risk framework and put hard numbers on the types of asset classes they will be in, rather than rely on a proportion of hard numbers on their balance sheet. All of our risk appetite is set in with that, as well as how we can run our business within that risk appetite. That, in particular, includes very specific limits on exposures to specific asset classes.

The other issue is that we set out in our investment case to our investors the kind of risk parameters, as a balance sheet, that we should have, what profits they can expect and what investors should expect that the bank should do - in other words, a loan to deposit ratio and the level of capital we had. Clearly, one of the things we had was a too high proportional reliance on wholesale funding, so we have set out for ourselves, and been very transparent to the markets, how we have to bring down the wholesale funding. We were running on a too thin capital ratio. As I mentioned, of the approximately €9.85 billion in equity capital generated since the beginning of 2009, approximately €6 billion has been to strengthen the balance sheet and make it much more robust.

I believe that in the future all banks, be they in Ireland or elsewhere, will have to set out for depositors, customers, shareholders and all investors what the bank's risk appetite is, the type of bank they are investing in and the returns they can expect. Those are very important parts of it. We have had independent people on behalf of the Central Bank and on our behalf looking at how we are embedding those new risk appetite statements throughout the group and how we stick with them and deliver them.

Any further questions?

Mr. Richie Boucher

I think I might have missed one.

There was one about whether the Minister, Deputy Noonan, has corresponded with the bank to absorb the 0.5% interest rate hike from the ECB and whether the bank is developing a plan if there was such correspondence.

Mr. Richie Boucher

As part of our engagement with the Minister for Finance and the Department, we have presented our five year financial plan to the Government. That five year plan shows where we are lending money, how we are reducing costs and how we will fund ourselves. The Minister, as an investor in the bank, would have had access to our five year plan, which is our EU plan. In the case of what we are doing in areas such as reducing costs, the Government asked us to see how we could further reduce costs and absorb that. That is part of the financial plan we have with the Minister.

This is very specific. The Minister for Finance appeared before this committee last week and said he had corresponded with both AIB and Bank of Ireland to follow up on the commitment in the programme for Government to forgo an ECB interest rate hike. He said the banks were to develop a plan. Can Mr. Boucher confirm there was such correspondence from the Minister for Finance? The five year business plan is a separate matter. This is a specific request by the Minister for Finance about forgoing an ECB interest rate hike. Did it happen? Did such correspondence go to Mr. Boucher or any other official within the organisation?

Mr. Richie Boucher

I am not aware of a specific letter but there was engagement on how we can fund ourselves and what costs we can and cannot absorb in the ongoing process of the review of our financial plan.

Was there nothing specific about forgoing the ECB interest rate hike?

He is not aware of a specific letter in those terms.

Mr. Richie Boucher

There was a wide ranging engagement on a wide range of issues which looked through our financial plan, including support for the SME sector. All the commitments we had to make to the Government were specifically in our detailed financial plan, including our ability to absorb interest rate hikes and cost reductions and other mitigations we could take.

Is the bank aware that the Minister for Finance wants it to absorb the ECB interest rate hike?

Mr. Richie Boucher

The bank is aware of the Minister's objectives regarding our ability to fund the economy, to absorb interest rate-----

I am asking specifically about the ECB interest rate hike.

Deputy, I will let you have a supplementary question. Mr. Boucher was answering but you interrupted him.

Mr. Richie Boucher

There is a wide range of issues that were part of our financial plan with the Minister. They include how we are funding ourselves, our ability to absorb funding costs, how we can come off the Government guarantee and how we meet our SME commitments. There is a very wide range of engagement on all those issues.

The question was about the absorption of the rate. It was a specific question. I will not ask the Deputy to phrase the question again because Mr. Boucher knows what the question was. It was about the specific issue of whether he is aware of the Minister's view. You said you were not aware of a particular letter but is the Minister's view in this regard known to the banks?

Mr. Richie Boucher

Yes. I am sorry, I was trying to answer the question and to cover all the other questions the Minister would have asked as part of his financial plan. That also covers remuneration in the bank, to refer to one of the Deputy's other questions. There are very specific commitments regarding that.

Therefore, the bank is aware that it must forego the ECB interest rate hike.

Mr. Richie Boucher

The bank is aware of the Minister's objectives in that regard, whether we can or cannot do that and the implications for us.

When will this plan to forego that be presented?

Mr. Richie Boucher

The bank continues to absorb funding costs which are over and above what we can do. It is also part of the bank's strategy to ensure we grow our market share in Ireland and that we get more customers so, therefore, we can look at our funding on the basis of what we can and cannot do.

To be fair to colleagues, I must move on.

I will be very brief because I know other colleagues wish to speak. In regard to the College Green branch, will the bank make that site available to the people and the Government as part of the social dividend? In regard to Mr. Boucher's position as chief executive, when preparing for this meeting, I noticed he was head of the Bank of Ireland retail division from January 2006 and oversaw its land bank and the development loans, which grew to €7.1 billion. I came across an article from The Sunday Tribune . The headline was “Bank of Ireland chief advised Sean Dunne on Ballsbridge”. At the time, Mr. Boucher wrote to the Dublin City Council supporting the development. The reason I raise this is in the context of Bank of Ireland’s role in funding the property bubble.

Poor lending results and bad debt were mentioned. Bank of Ireland has been involved in poor lending over a long period of time. Mr. Boucher, in a senior position, was involved in that reckless lending. Should Mr. Boucher remain as chief executive or should he tender his resignation?

Mr. Richie Boucher

I have been appointed to do a job, and I am doing that job. That is what I will do. We cannot comment on individual or specific customer circumstances and newspaper articles are not necessarily always representative of the facts.

With regard to College Green, it is our main branch in Dublin. We have closed other branches in Dublin city centre; they have been amalgamated. College Green has more than 30,000 customers. It is our main Trinity branch as well. It is our cash centre for Leinster, so it is a very important commercial branch for customers. We cannot give something which belongs to all of our stakeholders but which also has very important commercial viability. We are always willing to engage and discuss any of our assets with any interested party but any discussion must take into account the commercial context of why we hold certain assets.

Would Mr. Boucher accept he was in a senior position during the reckless lending period by Bank of Ireland?

Mr. Richie Boucher

It is a matter of record that I held a senior position at Bank of Ireland.

Does Mr. Boucher think it inspires confidence not only among taxpayers, but among shareholders for him to remain as chief executive?

Mr. Richie Boucher

I stood before the shareholders on three separate occasions as to whether I should stay as a director. On each occasion, the shareholders voted - in excess of 90% - for my position.

I would not have any great confidence in Mr. Boucher's stewardship in the past and possibly in the future.

Does Mr. Boucher want to add anything to that?

Mr. Richie Boucher

Not really, no.

I have a few questions. Mr. Boucher will have to bear with me as I am not a financial expert but that puts me in the same position as most people in the country in term of trying to grapple with this debacle in which we find ourselves. If I understood Mr. Boucher correctly, Bank of Ireland has €60 billion worth of mortgages. Is that right? Its provision against losses on that are €1.4 billion. Will Mr. Boucher confirm that?

Mr. Richie Boucher

In Ireland, we have €28 billion - at June 2011 - and in the UK, it is €27 billion.

It is €28 billion and the provision against losses on that is €718 million. Is that right?

Mr. Richie Boucher

The provision as at June 2011 against the Irish mortgage book was €718 million.

I am really trying to figure that one out because we were told in the Central Bank report on mortgage arrears that of the approximately 777,000 mortgages, 95,158 are either in arrears or have had mortgages restructured. I note from its figures that even this year, we have gone from a situation where in March, there were 49,600 mortgages in arrears and as of now, there are 55,763 in arrears. There has been an acceleration in mortgage accounts going into arrears.

If one looks at the total, 95,158 of the 777,000, approximately 12% or 13% of mortgages are in trouble and the situation is accelerating. However, the proportion Bank of Ireland has set aside for losses is €718 million against €28 billion. That is a hell of a lot less than 12%, although I do not know what the fraction is. Perhaps somebody could help me with the arithmetic but I suspect-----

It is just less than 3%.

It is less than 3% when we are told approximately 12% of mortgages are in trouble and that situation is worsening. Are we looking at a time bomb? Are Bank of Ireland's stress tests even remotely close to being accurate, because they do not tally? Unless Bank of Ireland is doing so much better or its mortgage book is in much better shape than everybody else's, it strikes me that there is something amiss. Perhaps Mr. Boucher will clarify that because it does not really add up.

I refer to the more general macro-economic picture. What is Mr. Boucher's opinion on the likely impact of further austerity measures which will hit the incomes of ordinary people who hold mortgages with his bank or other banks? Bank of Ireland used to produce reports on the economy and what we should do; perhaps it still produces such reports. If the situation is already deteriorating in terms of people falling into arrears, being unable to service their mortgages and so on and there is the likelihood of further austerity measures which will further cut into the incomes of people who hold these mortgages, is the situation not destined to get worse?

In that context, is it not time the banks or somebody said stop taking money out of the pockets of ordinary people because if we keep doing so, they will not be able to pay their mortgages and we will have more defaults on mortgages, more people will lose their homes and so on? I am just trying to square that circle because it seems fairly obvious from the facts that is what we should be saying.

I refer to an issue discussed earlier. Unfortunately, I had to zip in and out to attend the Dáil. What is the attitude of Bank of Ireland towards debt forgiveness for people in trouble? Is it a priority for the bank to keep people in their homes? Earlier, Mr. David Hodgkinson said it was AIB's priority, although he said that at this stage, it had not actually engaged in debt forgiveness or write-downs but that it was restructuring and so on. He said it was considering it. What is the attitude of Bank of Ireland to debt forgiveness and write-downs?

The Deputy has broken through the five minute indicative barrier.

I will be very brief. The country's future has been mortgaged on recapitalising the banks, which caused this mess. Will there at least be some payback in terms of write-downs, forgiveness, forbearance and so on in terms of mortgage holders who are in trouble and guarantees that banks, which are effectively being financed by the public, will keep people in their homes?

On the question of the banking culture and the delegates' role in it, does Mr. Boucher feel he has any responsibility for the fact that he was head of the retail division from January 2006, when the value of land and development loans grew by €7.1 billion, and, if reporting is correct, he specifically backed Mr. Seán Dunne's proposal for the Jury's site, the borrowings for which were €275 million? That site is symbolic of everything that went wrong. If Mr. Boucher supported that proposal - I understand he did support it - is that not an example of someone being directly responsible for the reckless lending on a massive scale that crashed the economy? If that is the case, how can it be appropriate that he is heading up the key pillar bank being funded by the public?

Let me ask about the salaries of workers in the banks. The salary cap of €500,000, more than ten times the average industrial wage, has been breached by Mr. Boucher, with wages of €675,000. Does he not agree with most people in the country who think it is obscene that bankers who were involved in causing the economic crash are earning up to 14 times what the average industrial worker earns while being slaughtered as a result of the policies pursued by the banks? What will happen to bank workers? Will these workers, as well as society generally, pay the price? How many of them will lose their jobs as a result of the reckless lending by executives? Is it right that ordinary bank workers who had no responsibility for bank policy will lose their jobs as a result of the mess made by the bankers.

Mr. Richie Boucher

With regard to arrears on our mortgage books, we set out in our presentation the position at the end of June and the Central Bank statistics for the sector as a whole. In our results announcement on 10 August - nothing has changed since to cause us to make a different market announcement - we said the arrears continued to be in line with our expectations. We have said we continue to anticipate arrears and that our book is relatively better than for the sector as a whole and that we will continue to take provisions on that book. We use consensus economic forecasts and also look at outlying economic forecasts. As I mentioned in the presentation, our loan books have been stressed in different economic scenarios - a best case economic scenario and a future economic scenario. Our expectation is that arrears will continue. Therefore, we must continue to work closely with our customers.

How does Mr. Boucher explain the massive disparity in the overall picture for mortgages? Even if Bank of Ireland's mortgage book is in better shape than the rest, there is a massive gap between the overall picture and the situation in Bank of Ireland.

Mr. Richie Boucher

I cannot speak for the rest of the sector. The book with which I am most familiar is that of the Bank of Ireland and that book has been assessed by independent parties in terms of its likely performance in a set of economic circumstances - the best case and a stressed case scenario. In our three year financial plan we anticipate there will be extremely modest GDP growth in the current year, but that it will pick up in 2012 and 2013. We anticipate unemployment will peak at 14.5% in the current year and move down gradually in 2012 and 2013 but not by dramatic numbers. We anticipate the peak to trough figure in house price deflation is 55% in assessing our best case scenarios for mortgages. These figures have been taken into consideration, bearing in mind the make-up of our book, the origination of the mortgages and the performance of the book subsequently. We believe our loan loss expectations are within our guidelines.

We do not comment on individual customer circumstances, but I do not agree with some of the Deputy's suppositions.

Mr. Richie Boucher

Some of them.

Mr. Richie Boucher

The Deputy made quite a lot, but regarding my particular influence on one or two particular loans, we never comment on individual customer circumstances.

I asked considerably more questions than those.

Mr. Richie Boucher

The Deputy asked some questions that had already been asked. Deputy Doherty asked about our cost reduction plans and employment in the bank. I have advised him that where we have redundancy programmes in place, we deal with the specific individuals and their trade unions.

Therefore, Mr. Boucher cannot give us a figure for how many jobs may be lost?

Mr. Richie Boucher

In the first instance, we talk with the people involved.

Therefore, we cannot get a straight answer.

On the Jury's site, Mr. Boucher says he cannot comment on individual accounts. Would he consider the lending of money for a hypothetical site like the Jury's site an example of the absolutely reckless lending that took place and that anyone who thought lending for such a development at that point in the market was engaging in reckless lending? Surely, there must be a definition of "reckless lending" and some examples of it. It strikes me that that is one of the biggest possible examples. It is inappropriate that people who would be enthusiastic about such lending for such a project should still be running the banks, given the impact it has had on the economy and the banking system.

Mr. Richie Boucher

I cannot comment on individual customer circumstances, either by implication or directly. The bank has clearly acknowledged it made a number of mistakes and errors. Our exposure to the property market was too big, whereas it was in proportion to our balance sheet. We have since looked at how we govern risk, with hard limits for absolute exposure to individual sectors. The bank tried to ensure individual customer exposures were less than for other banks. We have brought these back further since. The transfer of absolute exposure to land and development loans was much less than for our competitors and the performance of our loans, relatively speaking, in transferring to NAMA has been less than for our competitors. The bank has absolutely acknowledged that we lent too much to the property market, that we ran too thin a capital ratio and that our reliance on wholesale funding to fund mortgages in Britain, in particular, was inappropriate. We are taking steps to rectify this and reduce it to what are now the required standards.

I do not want to personalise this, but what about the salaries paid and the salary cap?

Mr. Richie Boucher

I cannot discuss my salary; it is set out in the annual report of the bank.

Does Mr. Boucher think it is appropriate that a €500,000 salary limit, more than ten times the average industrial wage and generous by any standards, should be breached in the case of the CEO of Bank of Ireland, given what the bank has done to the economy?

Mr. Richie Boucher

I am not going to comment on my own salary.

That is extraordinary.

The Vice Chairman, Senator Liam Twomey, took the Chair.

I have a few brief questions. What level of funding is the bank receiving from the ECB? When does Mr. Boucher believe the bank will be in a position to disengage from the ELG scheme? Are there cases where the bank has written off debt for specific mortgages?

Will the bank meet the targeted allocation of €3 billion for the SME sector this year? What level of credit has the bank extended to date this year? What mechanisms has the bank put in place to track the level of demand for credit from SMEs in terms of people making inquiries? There were deficiencies shown in this respect in the Credit Review Office's review. In some cases credit inquiries by people to banks were not registered as an SME credit inquiry. What procedures has the bank put in place in that respect?

Mr. Richie Boucher

As of June 2011 our monetary authority funding was appropriately €22 billion and that includes NAMA bonds from the ECB and approximately €7 billion from ELA funding. On 10 August we made a statement to the market that we were reducing our reliance on ECB and ELA funding. Some of the measures we are taking, in particular the shrinkage of our balance sheet which is taking place and the issuing of unsecured term funding, have particular relevance to our reducing our reliance on ELA funding. We are on track with our targets there. The market conditions are difficult but our UK mortgage books in particular, which while shrinking and while we are selling components on them, provide repo collateral which enables us to reduce our reliance on ELA funding.

What are the bank's targets in terms of ECB funding?

Mr. Richie Boucher

Our targets are that we will have completely ceased our reliance on ECB funding well within the life of our 2014 plan. We set out our financial targets in terms of the reliance on the absolute size of our balance sheet. The size of our balance sheet will reduce from €106 billion to €90 billion over the life of the plan, which should contribute a very significant element. The size of it will come down over the life of the plan.

We are a public company so I cannot give specific financial targets other than the guidance we provided to the market. However, we have also said that we are front-ending the sale of assets as much as possible. We have identified €10 billion of assets we will specifically sell and that is on top of redemptions and repayments we are taking in our overseas businesses. I told the market on 10 August that we are front-ending that as much as possible. I also told it that we are on track to achieve those goals. Taking that into consideration, one can get the picture. I know the Deputy is an accountant.

I am, for my sins.

Mr. Richie Boucher

I am getting a little hoarse so I will hand over to my colleague, Michael Lauhoff, to deal with the SME side, if that is in order.

Mr. Michael Lauhoff

On the Deputy's question on the lending target, at half year we had €1.5 billion approved online.

At the end of June.

Mr. Michael Lauhoff

Yes. We are confident we will hit the €3 billion target by year end. We have a number of programmes in place to support us on that, one of which is a calling programme to existing customers and, it is hoped, future customers. We counted more than 2,000 SMEs on a weekly basis.

What are the procedures the bank has in place for recording inquiries when a customer telephones or visits his or her local branch? In the case of the Credit Review Office, I gathered it was only formal applications that were considered. We have heard from people that they do not even get to the point of making an application because they have been told by their local branch manager not to bother applying. Has the bank put mechanisms in place to show that inquiries are recorded?

Mr. Michael Lauhoff

We would expect our local branch managers to have a conversation with a customer to explain what mainly needs to be addressed in an application. We have taken on board the feedback we hear from politicians, our customers and representative bodies about the challenges businesses face. From my experience of dealing with business customers, I find they are very passionate about their business and do all they can to secure the funding they require. One of the steps we took, and we were the first bank to do this, was to invest in an online application form. We have taken a number of steps to make it easier for businesses that have a requirement to get their application dealt with properly. That is one of the elements.

We try to understand from businesses the challenges they face, one of which is the type of information that is requested of them. Not all businesses have financial advisers to support them. Predicting future requirements to prepare for cashflows is a challenge for many businesses.

I know that but this is practical. AIB informed us today that it has put in place a tagging system whereby a record is kept of all inquiries made by a person who telephones or contacts a local branch and that information has been fed into its system for the past two months. Is Bank of Ireland doing something similar? There is a general view among the SME sector that the banks are tight about giving credit.

Mr. Richie Boucher

Mr. Michael Lauhoff is charged with growing the business but that sounds like a good idea. We do not have any shame in copying what looks like a good idea. Mr. Michael Lauhoff, myself and other colleagues will talk about introducing a system like that. It sounds like a good idea and we will roll that out. Given Mr. Michael Lauhoff's responsibility, he is very keen to ensure that any application, either formal or informal, is followed up. We have an absolute objective to-----

To lend €3 billion.

Mr. Richie Boucher

We want to be the number one bank. We would be letting ourselves down if we did not follow up on every inquiry. A more systematised approach to that, like the one the Deputy mentioned, would be good.

I have two further brief questions. Has the bank written off mortgages? Does Mr. Boucher believe that a salary of €500,000 is an adequate one for the chief executive officer of an Irish bank?

Mr. Richie Boucher

My salary is set out in our annual report. That is what I get paid. I really cannot comment on my salary. That is determined by the board. I heard the debate with the CEO of AIB and I do not think it is appropriate for me to get involved in that.

It is a big issue with the public at the moment.

Mr. Richie Boucher

I understand that but it is difficult for me to comment on that from a personal point of view, and also AIB is our biggest competitor.

Mr. Boucher is working for that salary. The salary limit that has been established by Government is €500,000. Mr. Boucher is working for that figure and obviously he is doing his daily work. The public are amazed that salaries of the order of €500,000 or up to €700,000 for the CEOs of banks are regarded as routine. An inadequate explanation has been given as to why that is the case.

The mortgage issue is a big one for ordinary people. Does Bank of Ireland have its own policy on dealing with mortgages? In a case where an individual cannot repay his or her mortgage does that policy involve the bank entertaining the debt write-off of a particular mortgage?

Mr. Richie Boucher

We work with each customer on an individual basis and their circumstances change. Debt write-off is not a policy that we have. I can only speak of what our policies are.

I welcome Mr. Boucher and his colleagues. I asked a question earlier, to which I did not get a satisfactory answer, and I will now direct it to Mr. Boucher as he is probably the most senior banking official in the State. The issue involved irks me and I have come across it on numerous occasions. The point at issue is that when many small to medium sized businesses have gone to their banks seeking an interest only arrangement, the banks have insisted on raising their interest rate. When the banks were proactively challenged in a number of these cases, they backed down and accepted that there are no new funds involved. I am referring in particular to businesses with commercial properties where the tenants have left and the properties are vacant and these businesses are now in difficulty. I would like to hear Mr. Boucher's opinion on that. Does he think it is right that the banks are trying to take advantage of such people when they are experiencing such difficult times? That is how it appears to me and I cannot put any other sheen on it.

Given that the most senior bank official in the State is present, I would like to hear his views on and the outlook for the property market as we are all watching to see where it will floor out. I would like to hear Bank of Ireland's take on it and Mr. Boucher's personal views if he would be willing to share them with the committee. Is much of the time and energy of the Bank of Ireland going into creating debt recovery elements? Is the bank focusing on that area and on staff training? Are resources being directed into debt recovery? Is there a new emphasis on it and is that where the bank will spend much of its resources in the future?

In respect of Mr. Boucher's salary, which I do not question, there is an ongoing debate on where the Minister has proposed to cap the salary of the chief executive officer of any bank - I am not speaking about the competitor bank - in the State at €500,000. It is a debate that has caught the imagination of all. Obviously there are two sides to the debate. It is difficult to attract the best talent on that salary. I regret Mr. Boucher did not take the opportunity to address the issue in the broader context or with the future CEO of AIB. There is a broader debate taking place and his views would be worthwhile to bring balance to the debate.

Mr. Richie Boucher

I will give a general commitment on business banking pricing but I will hand over to Mr. Michael Lauhoff. It is a fact of matter that money is continuing to cost us more. I tried to demonstrate in my presentation to the committee the cost of wholesale funding, the cost of the guarantee and what we have to pay in the extremely competitive market is impacting on our cost of funding. It costs us more to fund the market than the ECB rates. We issued covered bonds. The term funding is costing us approximately 310 basis points of a swap rate for that period. That is costing us money in the marketplace. We have to seek to recover that. In every customer situation we are in a negotiation process with that customer. We try to do it at an arm's length basis and try to ensure we have an amortisation schedule with the customer on repaying debt. Perhaps Mr. Michael Lauhoff will come back to that issue and I will take the Deputy's other points, if that is acceptable.

Just before Mr. Boucher responds, I do not know why the cost of funds is being introduced to the question I am asking about the interest only arrangements where people are paying capital and interest. They have an agreement with the bank for 20 years to pay off a mortgage. The rate has been set as part of that agreement but five years into it they are in difficulty and are seeking an interest only period for two or three years. A new fund is being introduced but the funds have already been given out by the bank. Given that the cost of those funds has been covered by the bank and the rate has been agreed, I do not understand why that has an effect.

Mr. Richie Boucher

We must price for risk. If the risk is increasing we must see if we can cover the cost of that increased risk. If a loan starts to slip through our credit rates, we must put more capital against that loan. There is an economic cost to us as the risk deteriorates and we must try to recover that.

Can Mr. Boucher appreciate how it appears to the service user where the bank is seen to be taking advantage of their misfortune and difficulty? I have seen a number of cases where the bank was challenged on it by the customers and where the bank backed down.

Mr. Richie Boucher

As I said, every commercial discussion is a negotiated process. What we are trying to balance is pricing for our risk. I have customers, depositors and other providers of funding on one side of our balance sheet who want to get paid the maximum price and I have customers on the other side of the balance sheet who are the borrowers and they want to pay the least amount. Our job is to try to balance those two on an ongoing basis.

Mr. Jim Daly

There are an awful lot more on one side than the other.

Mr. Richie Boucher

We are paying a significant amount in the deposit market to fund ourselves. That is having a significant impact on our income. With regard to the property markets, there are a couple of factors which are overhanging the market. The upward only rents discussion is an overhang on the overall property market. The people in NAMA have devoted their energies to gathering in the loans, restructuring them and looking at them, and as price discovery comes into that market, we note that rental levels in the commercial property market and yields seem to have stabilised but some transactions need to take place in the market to see how that is. It could be misleading because the property market is a function of a number of different markets. Our view is that the commercial market in Dublin will recover before other areas of the country. That is the same with the housing market.

Deputy Richard Boyd Barrett asked about the peak and trough in house prices. We see that in terms of the mortgage books and lenders. House prices have probably stabilised in Dublin and in some of the main urban areas but in some of the rural areas they probably have not because there has not been a sufficient volume of transactions to see that price recovery.

Interest rates are likely to remain low for a period and obviously that will have a bearing on yields. In our own case we see many people who have a potential interest in purchasing property in Ireland. A number of the people who invested in our bank were also looking at other investment opportunities in Ireland. We are not anticipating in our financial focus or loan book system a significant bounce back in the property market for the next 12 months, but we do not see it deteriorating significantly either, on our best guess.

On the salary issue.

Mr. Richie Boucher

That is not something on which I can comment. I am sorry.

I would like to ask a few questions on mortgages. Specific to the ongoing negotiation with the growing number of distressed mortgages, does the bank have codified criteria for potential solutions? I understand it is dealt with case by case. Are there any codified guidelines given to the people within the bank who are conducting these negotiations? Does Mr. Boucher have any guidelines with regard to a minimum quality of life which he deems as an outcome for customers out of these negotiations? Is anything codified within the bank as to what is acceptable? I put the same question to the team from AIB. Is there anything codified in terms of it, such as, for example, that it is reasonable to leave people with a mobile phone or a car under the following circumstances or with a certain percentage of income or absolute amount of income and so forth?

In his presentation Mr. Boucher said: "We also recognise our responsibilities to our customers". After asking the question six times, we found out that in fact he is not passing on any real debt forgiveness or burden sharing to customers. He has confirmed that it is not a policy of the bank. Does Mr. Boucher, as chief executive of the bank, accept on behalf of the bank, responsibility in certain cases for people with distressed mortgages? Is the bank at fault in any way? Has it contributed substantively in any way to the situation that these customers find themselves in? Does he accept the principle of shared responsibility, that is, if there is a cost to be incurred due to an unfortunate situation of a distressed mortgage, all responsible parties are obliged to share in that cost to some degree? If substantive debt write-off for the customer is not one of his policies but rather longer terms and interest only periods, the net present value to the bank increases. It may make it possible for the customer to pay that mortgage off but it in no way reduces the liability. In fact, it increases the liability of the customer. I would like Mr. Boucher's thoughts on that.

Mr. Boucher said the bank's provision against distressed mortgages was €718 million for the Irish property market and that none of that is being passed on, as a matter of policy, to customers. Of Bank of Ireland's percentage of the €24 billion under the PCAR exercise, what absolute amount was given to the bank specifically as provision against distressed mortgages?

Does Mr. Boucher think the unguaranteed senior bondholders at Bank of Ireland deserve to be repaid in full? I am not talking about the economic realities of things that may happen in Europe should they not be paid. That is all conjecture. I would like his opinion on whether they deserve to be repaid in full, not whether it is economically prudent to do so.

Mr. Richie Boucher

On the latter point, we have commitments to creditors of all classes. We are a viable bank and we are restructuring and repositioning our business. We have a reliance on international deposit markets and bond markets, although we are bringing down the balance sheet and terming out. We are meeting our commitments.

That is not the question I asked. I understand-----

Mr. Richie Boucher

I am a businessman.

I understand the economics. Mr. Boucher is a businessman. This is the presentation of a hard-nosed banker or capitalist, which is fine. However, that is not what I am asking.

Please let Mr. Boucher answer the questions.

Mr. Richie Boucher

These are obligations of the bank and we must do everything we can to meet all obligations. Among our other obligations are those to the taxpayer. The taxpayer has a 15% investment in the bank and also in preference shares. Our objective is to pay the coupons on that and repay it. Another objective is to get off the guarantee support the bank has received as quickly as we prudently can. While we have that, we are repaying the taxpayer. We have obligations to a wide range of investors in the bank. I touched earlier on subordinated bondholders who have made a significant contribution to the recapitalisation of the bank either through liability management or the conversion of bonds for equity. That is the attitude that the bank, as a commercial organisation that is restructuring itself and wants to reposition itself in the market, must adopt.

So Mr. Boucher is in favour of paying the unguaranteed senior bondholders in full?

Mr. Richie Boucher

We have an obligation to repay senior debt. We are issuing senior debt, as I mentioned, so we are both repaying and issuing at the same time. The quantums we issue will reduce in line with the reductions in our balance sheet. Our job is to continue to ensure the bank is safely funded. As a commercial person, that is what I must focus on.

With regard to obligations to customers and vice versa, we enter into commercial contracts with customers for consumer loans, mortgage loans, business loans, property loans, acquisition finance and a wide range of other loans. Where we do not recover that debt due to the customer not repaying it, we take the hit through our capital. That happens on an ongoing basis. When we have made a loan that has not worked out in a wide range of circumstances - we may have made a mistake when underwriting, the customer’s individual circumstances may have changed, the circumstances in his or her sector may have changed or a macro situation may have occurred - we take the loss if the customer does not repay us and that loss is borne through our capital. The capital is provided by the private sector - and, in our case, partly by the taxpayer - and we have an obligation to ensure we repay that capital.

We work with our customers. Our experience on the modification programme, as Ms Carragher has mentioned, is that we try to identify issues early and proactively encourage customers to talk to us. We set them into a modification programme that is tailored to the circumstances of individual customers. As Ms Carragher also noted, of the customers who have gone into the modification programme, more than 90% have moved back to a normal repayment programme. I cannot comment on the sector as a whole but only on our own particular situation. As it evolves, we will have to consider a wide range of different options. It is difficult to codify how we would address each individual customer's situation. However, we have a standardised form to assist the customer in budgeting. I do not think it is up to us to dictate what a customer's individual lifestyle must be. By definition, a customer cannot be in a repayment situation with us if he or she is unable to repay. For example, if he or she needs to travel to work from an isolated area, what does that require? We must take those issues into consideration and, from a commercial point of view, we must ensure a customer has the ability to meet the repayments.

In certain circumstances - Ms Carragher has talked to me about this - we concede that customers might over-promise on their repayment patterns. We go back to those customers and say that we think they will not be able to pay, or they have not taken certain considerations into account. Very often, customers going through a budgeting process with us forget things such as house insurance, which are in the nature of a lump sum. We discuss with customers the option of moving away from lump sum payments and spreading the cost. We remind customers sometimes during the repayment budgeting process that there are certain things they may not have taken into consideration. It is not in our interest to enter into a repayment arrangement with a customer who cannot meet the repayments. Certainly, if a customer needs transport to travel to work, for example, that must be taken into consideration if we are to assess correctly the repayment capacity of that customer.

Deputy Alex White resumed the Chair.

Ms Lynda Carragher

I endorse the point that prioritisation of the mortgage payment forms part of the conversation we have with customers. As has been pointed out already, their circumstances will vary. Bank of Ireland does not stipulate a standard of living. However, we do give budget advice to customers if we can see areas in which they could make savings in their own expenditure. The customer can take that on board. We also encourage customers to go to MABS, as we mentioned earlier, or seek independent advice with regard to the overall assessment of their situation. Prioritisation of the mortgage is important in the context of that conversation, but we do not get into telling the customer how to organise the rest of his or her expenditure in a stipulated way.

Mr. Richie Boucher

We actively encourage customers to go to MABS. One of the things we notice is that unsecured debt that customers may have on store cards and so on is a real issue.

I asked whether Mr. Boucher accepts partial responsibility for the situation, based on all the things we know about such as 100% mortgages, and whether he accepts the principle of shared responsibility with regard to negotiations on these mortgages.

Mr. Richie Boucher

What I said was that if a loan is not repaid, our capital takes the hit.

Maybe I am not making myself clear. That is a truism. I know that if the bank does not get paid, Mr. Boucher does not get paid. That is not what I am asking. I am asking Mr. Boucher whether he accepts, at a moral level - I do not mean in an accounting way - that the bank shares responsibility in many of these cases because, for example, of overlending. In addition, within that context, does he accept the principle of shared responsibility?

Mr. Richie Boucher

We accept responsibility with each of our customers to work out the best way they can meet their obligations to us.

I am sorry, that is not the question I asked.

Mr. Richie Boucher

But that is the answer I am giving. It is-----

Is Mr. Boucher refusing to answer the question of whether the bank is partly responsible?

Mr. Richie Boucher

I am answering the question in terms of running a commercial organisation. We have responsibility to work with our customers whatever the circumstances they encounter.

Mr. Boucher is refusing to answer the question.

Mr. Richie Boucher

I cannot make a moral judgment on particular issues.

Can Mr. Boucher not do so?

Mr. Richie Boucher

We are a commercial organisation that works with our customers.

Let us leave aside morality. The question is: do you accept that the bank is in any sense culpable in respect of the state of affairs in which these people find themselves?

Mr. Richie Boucher

Each customer enters into it. Especially with a mortgage we always encourage any customer to go through-----

It is a question about the bank not about the customer.

Mr. Richie Boucher

I beg your pardon. What I was going to say was that we encourage a customer taking out a mortgage to get as much advice as they can. We work with our customers-----

(Interruptions).

A question has been asked by Deputy Donnelly. I am not going to permit this. Deputy Donnelly asked a question and I am simply trying to see if we can get an answer for Deputy Donnelly. As I understood it, he asked you whether you believed there was any culpability attaching to the bank for what happened. You have said that you work with customers to try to resolve it which is not unreasonable. That is understood and clear. However, the question Deputy Donnelly asked was: given that there is a state of affairs that must be resolved and that something went wrong, do you think the bank is in any way culpable for that state of affairs?

Mr. Richie Boucher

The bank has clearly acknowledged that we made mistakes in terms of some of our lending and funding policies. We are trying to rectify those and ensure in particular that the risks of any taxpayer support for us are reduced and that it is repaid. Clearly we made mistakes. Those mistakes have been borne by the providers of capital. If we make mistakes in future those mistakes will be by the providers of our capital. We must work with the customers. We acknowledge that customers have different circumstances and we will work with them.

We have that point.

Mr. Richie Boucher

I emphasise that we are not exiting this country. We see this as our absolute home market. We want to ensure we are the number one bank in this country. How we work with our customers in this period is crucial. The customers which we work with and support and the new customers we win will be absolutely crucial to our strategy.

I thank Mr. Boucher, Ms Carragher and Mr. Lauhoff for coming here. It is not easy in a forum like this to do the root canal work necessary to find out where we are now, how we arrived here and what we must do about it.

The bank has presented information here. It is informative and presented in a way that conveys the message the bank wishes to relate but it is not necessarily the information we need to know. Page nine of the presentation shows the balance sheet size reduction. In the period from September 2008 to June 2011, some two and a half years, the balance sheets reduced by 27%. In the four years up to 2008 the balance sheet rose by 25% per year. The quality of the assets created in that four year period touches back to what Deputy Donnelly said, that is, there was a responsibility in the creation of those assets, some of which were mortgages, some business loans and some commercial loans.

In the period after the burst from the end of September 2008 to date under a previous chief executive and chairman of the bank there was a slow, reluctant, foggy and unclear admission of where the bank was on an ongoing basis. We were mislead. And I use those words carefully. We were even mislead on 16 September 2009 when Dáil Éireann was presented with the list of loans to be transferred from the six Irish institutions to NAMA. In that list Bank of Ireland had €12 billion of assets. By the time of the publication of the end of year accounts the figure had reduced through reclassification to €9 billion. When the list was produced on 16 September the indicative write-down for NAMA loans across the board was an average of 30%. That was not revealed by the accounting firm involved, PricewaterhouseCoopers, which was misleading. This meant Bank of Ireland's write-down of €12 billion would be maximally approximately €3.6 billion and such a write-down would keep it from the requirement to have an injection of funds that would take it into majority State control. The same applied to the other institution. I was unhappy with that because we are all trying to get out of an enormous, costly mess across the board involving some €100 billion of loan losses.

As a result of the total spaghetti junction of admission it was only in September 2010 that the late Brian Lenihan declared that loan losses would top out at €50 billion. That was wrong again. After the first PCAR in March 2010 we were informed the Bank of Ireland needed to raise approximately €3.65 billion before the year end with a mixture of rights issues and asset disposals. AIB was informed it could do it with a €7.4 billion requirement before the year end. The fog and the blur continued and that sort of stuff is all wrong. Let us get down to the individual level of the assets behind the balance sheet, such as mortgages, the €28 billion here and the €27 billion in Ireland. Has there been any write-down of the loan principal balance in the case of any mortgage as a result of distressed circumstances in any individual case? We did not get an answer to that question. I will tell the committee the answer: of course there has been a write-down.

Mr. Boucher stated that loan losses hit the bank's balance sheets eventually. We all know that. Let us be honest. I banked for 20 years. Of course there must be resolution on an ongoing basis. That is what it is all about. One lends money to a customer and hopes his business or income will be able to service and repay over the agreed period. If the information at the outset is racy and stupid, as was the case, then one will come a cropper and that is what has happened. There is pretending through euphemisms and using woolly language such as "basis points". Let us call them what everyone understands: percentages. Another page in the presentation refers to arrears greater than 90 days from December 2009 to June 2010 and from December 2010 to June 2011 and reference is made to 276 basis points. The figure is going up and there is an increasing trend. The balance sheets show customer deposits, wholesale funding, capital and other items. Let us be honest: where is the ECB or Irish Central Bank funding? That is the important funding and it is equivalent to Santa Claus funding the bank.

Let us put that question directly to Mr. Boucher.

I am trying to paint a picture.

Mr. Richie Boucher

On the ECB funding-----

Mr. Boucher answered that earlier on and I heard him.

Mr. Richie Boucher

It is clearly set out in the accounts.

I know. This is what is wrong. I am suggesting that for a period of two and a half years this story has been unfolding on a fudge along basis. Only recently on 31 July the final plug-in funding for the Irish banks materialised because the troika insisted it must be done before the end of July so the €85 billion package would have all the boxes ticked.

There is a quintet of investors headed by Wilbur Ross, Fidelity, Fairfax and Kennedy Wilson circling like a vulture over a carcass in the desert. Let us recognise the colour of this quintet for what it is.

Mr. Richie Boucher

These are high quality investors.

I know, Mr. Boucher. I read about them.

Mr. Richie Boucher

Our rights issue was followed up extensively and the bondholders converted for equity.

Yes, but the Government was underwriting it.

Mr. Richie Boucher

Exactly, but we paid a market price for that as the Deputy is aware.

Let me continue please. They get 35% of the bank for approximately €1 billion. The State went in with €1.55 billion for 16% in earlier rights issues. There is something funny there.

I also refer to the statements that the bank is stronger now than it was when the State invested in it and that investors can get the rest of the bank off the market quite cheaply depending on the view of the world taken by speculators-----

Mr. Richie Boucher

I have commented that we would not be able to attract private capital.

This is important because the State and all our families have been underwriting this. The underwriting and liabilities guarantee is still in place. The bank needs the guarantees it has. The incumbent directors, management and shareholders of the bank prior to 31 July have done a superb job and we have been mesmerised by them. It is like the snake in the Jungle Book saying to man-cub, "Trust in me". It is not right, fair, open or transparent. I am not being personal-----

Mr. Richie Boucher

I am sure the Deputy understands that underwriting means the person doing it wants to know the risk.

These guys got 35% of the banks. They are the incumbents. The State has 15%. They control the board and the salaries, points which were raised earlier.

Mr. Richie Boucher

As we pointed out at our EGM on Friday, we gave specific explanations of the intentions of the shareholders which have been disclosed to the market.

Intentions, with respect, are just that. They are not solemn undertakings.

Mr. Richie Boucher

The Deputy has made certain assertions.

The customers of the bank have made solemn undertakings to repay 25 year loans of a particular value and at a particular interest rate. As Mr. Boucher said, it is a commercial decision which stands up, and lawyers and other resources will be brought in to make sure it happens on the bank's terms.

That is the point

It is the point. Ireland needs to clear its head at all levels. To have four incumbents who were in place prior to 2008 is not smart. The election count finished on 29 March. No people from the previous Government were carried over to the new. The desks were cleared. This place was in turmoil, files were in plastic boxes and everybody had to get out. That is what should happen when something fails.

I am not being personal; I am referring to the responsibilities that go with duties. The same happens in the Army and anywhere else. We can discuss words and go around in circles. The same happened in the earlier discussion with representatives from AIB. We need to open the windows, let the air through and have clarity and focus.

Mr. Richie Boucher

Is there a particular area to which the Deputy-----

I think the State was diddled in the past two and a half years.

I would not normally facilitate the witness in interrupting the questioner but it has worked. The debate is over and back. Given what you have said-----

It is wonderful. The over and back approach is great.

-----are there specific questions or queries in the documentation the witness has today that you want to put to the witness? I understand the tenor of your remarks.

No, there are one or two little typos but I will not hold it against him. The bank is all about a balance sheet, directories, management, competencies and capital. That is why it needs to get capital ratios right, loan to deposit rates right, spreads of assets into loans and to shrink balance sheets to a suitable size.

On the question of NAMA loans, operationally NAMA divisions are in banks doing great work. A value of €12 billion on 16 September 2009 was reclassified to €9 billion, a substantial drop of €3 billion or a 25% reclassification. There was no explanation or discussion.

On classification, I would have expected------

Do you want Mr. Boucher to answer that question?

Yes, after I have made a brief comment. I would have expected a value of €12 billion to increase to approximately €18 billion.

Mr. Richie Boucher

In the first instance, we would always have referred to potential transfers. In terms of the legislation, our connected loans are not actually connected. One would always bear in mind that over a period of time one would have had repayments and re-financing of loans. Between September-----

Mr. Richie Boucher

The figure is €10 billion, comprising €9 billion and €1 billion which we have held for sale at year end. That refers to what was transferred during the course of this year. There were also currency movements during that time.

The period involved was three months, from 16 September to 31 December 2009.

Mr. Richie Boucher

I am not familiar with 16 September.

I was and I wrote to newspapers about it.

Mr. Richie Boucher

On an ongoing basis, our assets for transfer to NAMA have been recorded in our attempt. At the request of the Central Bank an independent firm assessed our processes for NAMA, which was satisfactory as far as the Central Bank was concerned.

As I have said publicly, I am not impressed with the people who did the first PCAR and I would hold reserved judgment about the triumvirate of firms in the second PCAR. They do not know the locations of developments, the investment properties or the management or otherwise of the people looking after them. They run a model which they adjust for economic growth at three levels, stress, non-stress or extreme stress. Mr. Boucher knows from experience that one has to examine a portfolio and judge it site by site.

Mr. Richie Boucher

With regard specifically to the PCAR requirement of the Bank of Ireland, a ratio in excess of 8% of core tier 1 capital on 31 March 2010 was required and at the end of December 2010 we achieved that ratio. What has happened since is that the required capital ratio for the banks has been considerably increased, as it has for all banks throughout the world, and we are required to generate more capital to do that. That has been a specific part of what has been happening in the world at the current time.

I am aware of that but if we take the buzzwords out of the equation, what it means is that we look at the assets that were created over a period of time, how collectable they are and what sort of write-downs are needed for the collectable amounts. One does not need complicated models to do that.

I thank the Chairman and welcome our visitors. I am glad Mr. Boucher was listening to the problems we have discussed previously. They are present in Bank of Ireland, probably in a smaller amount. I understand it ranks fourth out of sixth in the order of dishonour in terms of the burdens the banking sector has imposed on this economy.

When comments are made such as "We expect unemployment to peak at 14.5%", we should remember that the rate was 4% before the banks brought the country to ruin. That is the difficulty we face. Colm McCarthy wrote an article entitled "Ruinous banks won't apologise or even explain". He said:

Both have been observing a weird (and presumably lawyer-inspired) radio silence these last three years, as they limp along in denial about the enormity of what has happened. Neither has produced even a report to their own shareholders explaining why and how these two traditionally conservative banks, older than the state itself, bet the ranch on a property bubble and lost.

We are faced with reducing the number of special need assistants and cutting expenditure. The last two classes I had at Trinity College emigrated in large numbers. Banks will have to explain and apologise for what has happened. I realise that is less true of our current visitors, but the banks have given an appalling performance.

I submit to Mr. Boucher that entrepreneurship ended with the guarantee. Brian Goggin is recorded in Simon Carswell's book as having a salary of €4 million in the year to March 2008. Within six months he was in Government Buildings begging for a bailout. It is an outrageous way for a bank to conduct itself. I do not know what kind of forecasting or conduct it had in place.

I want to know what the chief executive's pay has been since then. Once the bank had been rescued any possibility of €4 million or anything above what the Taoiseach earns, which I believe is currently €200,000, went out the window. I ask, as we asked AIB, can Bank of Ireland supply the committee with the minutes of the meeting attended by the bank's governor and chief executive in Government Buildings. We are still trying to figure out how those decisions were made on 29 and 30 September 2008. I also ask for directors' loans. At that stage there were €11 million of loans to directors and senior executives. It seems to me to be incompatible with being rescued by the State that there should be any loans outstanding to directors and senior executives.

Mr. Boucher mentioned that he realised - we would say too late - that too much money was going into property and that the bank had the wrong capital ratios. Did the Financial Regulator have anything to do with this, or was there any regulation of this sector? We are trying to deal with the consequences of this disaster. The regulation regime is described as light touch. It seems to me to be nothing. Mr. Boucher himself realised that the thing had gone awry and tried to correct it.

Compared to when banks were solvent, as Bank of Ireland was every year from 1783 until two or three years ago, the local bank manager counted for somebody. Was it a mistake of managerial style to remove all powers from local bank managers, who knew what was happening in their towns? Will that be reversed? It seems to me that the level of incompetence, as I said to the AIB people, is unparalleled in the world. No banking system has imposed so much cost, relative to GNP, as the Irish one.

I must ask about the covered institutions remuneration oversight committee, CIROC, review. Bank of Ireland is not a private company where people cannot discuss their own pay. This is a request to the taxpayer to preside over a debacle. I do not know where the figure of €690,000 came from. If we leave this and can get our €4.7 billion back, which Cliff Taylor estimated on 4 September is what we have put into recapitalising Bank of Ireland, the bank can have its entrepreneurship after that, but there will be a sign in the window saying, "This bank will never again be rescued by Irish taxpayers" because it has been a disaster. Bank of Ireland is working on Government guarantee, irresponsible lending and huge salaries for those involved. Costs such as raising unemployment from 4% to 14% and mass emigration of young people rest at the doors of Irish banks.

I see that Bank of Ireland has cut non-pay costs. I hope expenses have been cut. AIB did not answer this point correctly. We cannot sustain the lifestyle of people going free to corporate boxes in Lansdowne Road or Croke Park, joining golf clubs or having expense accounts. Can Mr. Boucher give evidences that there has been a sincere and actual number of cost cuts, now that the bank has had to be rescued by the taxpayer? I would like details of the 19% cost reduction. How many Bank of Ireland staff earn more than €200,000? The committee would appreciate being supplied with that information.

The old rules for home loans were two and a half times the first income and one and a half times the second. Applied to average incomes that means mortgages should be between €130,000 and €140,000. This means the decline in house prices has further to go. Irish banks, including Bank of Ireland, have a terrible record of talking up house prices. They have yet to get some realism. In all of this Morgan Kelly has been a far more reliable guide than the financial institutions. I suppose they have to talk up the prices of houses but they must come back to a reasonable level. Economists still estimate that they are overpriced. If we do not object to downward rent reviews the price of property will fall and that will be the quickest way for the Irish economy to recover. Banks that have been rescued should not play a role in talking up, or trying to keep up, property prices. It was a massive mistake. The quickest way to remedy this is to go right down to the bottom of the market where we can start the economy again.

We will bank the three final questioners-----

Can we rely on that?

I will ask witnesses to deal with Senator Barrett's questions first. We will keep them in order.

I thank the witnesses for attending. One of the statements made this evening was that the bank clearly made mistakes. The logical conclusion in the capitalist market is that if one makes mistakes one suffers the consequences and takes the losses. Between 2005 and 2008, 125,000 first-time mortgages were done in Ireland. Of those, 20% were for over 100% of loan to value. If there was negligent lending during that period a fair share of the burden must be taken by banks for what they did to generation jinxed. People have been jinxed by the longevity of their mortgages and the inflated prices they paid for property. If average mortgages are to go down to €130,000 an awful lot of jingle mail will be coming in the doors of banks.

Ireland has three times the personal debt of the United States, where there is calamitous chaos. A Deutsche Bank report says Ireland is worse than any place in Europe. I am not trying to probe and get the witnesses to admit negligence on behalf of the bank. However, Mr. Boucher said the bank made mistakes. Can he tell us if the bank made mistakes in providing large mortgages in that period? People will invest in banks if they see a potential for profit. In the long term banks will make huge profits. I am a former employee and current mortgage holder of Bank of Ireland. No one was telling anyone, including me, to go out and get more advice when taking out a mortgage. Banks provided mortgages under licence from the Government. Bank of Ireland should be humbly grateful for the award of its licence. Licences were granted because banks were trusted to do the right thing. If banks got things so wrong it is incredible that they are not bearing the long-term burden. The profit margin on mortgages should be forgone for a period of time. When will the mortgage section of Bank of Ireland return to profitability? What are the projections as to the percentage of mortgage rates that can be attributed to clear profit, having factored in securitisation and the blend of the cost of funds?

Bank of Ireland needs to be more humble. It would not exist but for the Government guarantee. We hope the bank succeeds and returns to the private market and that the country gets going again, but not until the bank has addressed its mistakes, what it will do to rectify them and how it will help the people who were punished most as a result of those mistakes.

We hear anecdotal information that small and medium enterprises are asking for loans but that their requests are not being formally recorded and they are unable to access funds. Deputy Mathews and I agree that a State bureau or State appointed person should sit on bank credit committees - as the State is a director and underwriter of the bank as well as the grantor of licences - to make sure the banks are doing what the people of Ireland expect of them.

I also welcome the chief executive and his team. I apologise for missing some of the debate. I was attending another meeting. Mr. Boucher is the great survivor of this crisis in that he is the paramount person from the previous era who is still sitting in front of us. He is answerable to his shareholders, including us, in that regard. Does he consider it appropriate that somebody who was involved in lending during the period in question should still be heading up one of the banks? Or is it his view that he has brought value to the position from his experience of the horrendous nightmare we have endured since autumn 2008?

Bank of Ireland has a unique place in Irish life given that it functioned for a considerable period as a central bank and has a particular historic resonance going back to the 18th century. However, there are aspects of the bank's management structure, for example, titles such as court and governor, that seem a little old world. Does Mr. Boucher agree that the bank needs to move on at this stage and to be more crisp in addressing the various challenges it faces?

The half-year report to the end of June refers to an accounting company, which is one of the big four. Has this company worked for the bank for a long time or is it a new relationship? We all find it extraordinary that these companies have not only endured but in some cases prospered, with some still giving advice to the Government on important matters. An ordinary company director would be horrified if these types of incredible mistakes were made in a single year or no warnings were given.

In regard to mortgages given out in the 2003-08 period, there was a type of triumvirate at work comprising the mortgage applicant, the bank - in this case Bank of Ireland which was frantically competing with AIB, Anglo Irish Bank and so on - and finally the Government which played its part through the retention of a hopelessly dysfunctional regulator or, more accurately, non-regulator. Young people in my constituency often point out to me that we had a situation where mortgage applicants were encouraged to take out loans in excess of 100% of the property price. It was an incredible situation and there is no question that people have a personal responsibility as does the then Government through the incompetence of the regulatory system it oversaw. However, the banks, as the third element in that triumvirate, also played a significant part and thus have a responsibility to address this issue in a proactive way. Will Mr. Boucher comment on that?

I invite Mr. Boucher to make his closing remarks.

Mr. Richie Boucher: If I do not cover all the questions in my reply, I will be more than happy, subject to the Chairman’s agreement, for people to come back. However, I will try to cover as many of them as possible.

Deputy Boyd Barrett asked what went wrong. As I mentioned earlier, our viability plan has been approved by the EU. Any institution which has received State aid must, as part of this plan, set out the reasons the aid was required and the mitigants it has put in place to avoid having to do the same again. Our viability plan was endorsed by the Government and the Financial Regulator and approved by the EU. I do not have the web link but I will come back to the committee on that. The plan clearly sets out the bank's view, noted by the EU, as to what went wrong and the mitigants we have put in place.

All loans to directors are subject to independent credit review and any loan over a certain level is also subject to oversight by the Central Bank. We are a very large bank in this economy and we have non-executive directors who are independent business people with their own financial affairs. It would be difficult for us to attract people if we were to tell them they must change all their banking relationships. The most important issue is that such loans must be provided on the same basis as they are to any other customer. There must be absolute transparency in respect of these transactions.

With regard to our costs and cost reduction programmes, there is a balance to be struck. We continue to work to reduce our costs, but we also believe in the recovery of the bank and of this country. Therefore, as well as cutting our costs we are also investing quite heavily in new payment systems, new information technology systems and new e-banking facilities.

I agree with Deputy Broughan that certain of our organisational monikers are very old-fashioned. This arises from our status as a royal charter. We expect that when the new company law legislation is introduced we will be able to change to a more normal plc status. We do not use these monikers internally, but they are required under the royal charter.

Deputy Boyd Barrett asked about salaries. My salary is set out in the annual report on a yearly basis. The directors remuneration report, which includes my salary, is voted on by the shareholders on an ongoing basis.

Deputy Spring said that we must continue to acknowledge the support we have received from the taxpayer. I absolutely agree and have continually reminded colleagues of that significant support. I like to employ a mantra of the three Rs, that is, reduce the risk to the taxpayer, give a return to the taxpayer and repay the taxpayer.

The banks must also show compassion towards taxpayers. The generation which took out mortgages between 2005 and 2008 is jinxed by the mistakes that were made in that period. That is why I asked Mr. Boucher's view on the practice of giving out 100% mortgages. What does the bank propose to do about that?

e customers. We do not necessarily believe there can be a blanket solution. Rather, we treat each customer as an individual. It is important that we have a positive relationship with our customers because it is a vital aspect of our future strategy. I spent a long time in banking and lending and was always interested to know why a customer chose a particular bank. In the case of family-owned businesses, I would generally discover that somebody in the bank had in the past supported either that particular customer or his or her parents. We are firmly of the view that if we support our customers in this very difficult period, we will facilitate long-term, enduring relationships. That is appropriate and makes practical business sense.

Deputies Spring and Boyd Barrett asked about mistakes that were made in terms of regulation of capital ratios and so on. There is a new regulatory regime and a new self-regulatory regime in the banks. As I said earlier, it is my view that the most important step the bank must take in future is set out its risk appetite and then frame its strategy within that. In the past it tended to be done the other way around, with banks first setting out their strategy and only then assessing the risk associated with it. Instead, the risk appetite must be the framework within which strategy is formulated. We have clearly set out to our investors and to the market on an ongoing basis not only our profits - as Deputies will know one can generate significant profits by running high levels of gearing - but also our capital ratios and loan-to-deposit ratios. It is about having the balance sheet gearing and funding gearing within those parameters.

ator sets a capital ratio of, for example, 10%, it would be very dangerous for us to be running on that. We must run over that the entire time. Our regulatory and oversight regimes have been significantly enhanced.

Deputy Spring inquired with regard to a presence at credit committees. The regulator attends some of our credit committee meetings and he does so unannounced.

With regard to our adherence to commitments and the provision of lending capacity, we provide a 90-page report to the authorities on a quarterly basis. This deals not only with what we are doing in respect of the SME sector but also with funds we are launching and what we intend to do in the future.

A number of questions referred to me and to what I have learned. Clearly, I have been obliged to learn a great deal. As a bank, we are applying our understanding of what went wrong and what we need to fix. We believe that the bank has continued to change and will continue to change, that we are fixing it and that we are reducing the taxpayer's risk. We want to attract more customers and that is my job. Any human being must learn from experience and I absolutely agree with the Deputy that it is inappropriate for the taxpayer to have a moral hazard with regard to the banking system. We note the Vickers report in the UK. We believe that in this country we have to move more quickly towards what is required in terms of the capital and funding ratios relating to the banks and risk parameters which have been forced upon us at tremendous cost to taxpayers. We agree that, from our point of view, it is our responsibility to repay the taxpayer.

In the context of the Vickers report, which is extremely important, will Bank of Ireland be moved firmly into the realm of being a utility rather than a casino bank? That is the key point. What the bank did from 1783 onward - in the context of aristocratic titles or whatever - worked and local bank managers were respected members of communities. All of that seems to have changed in recent years. Hardly any of the additional lending that was available within the banking system as a whole after the year 2000 was made available to industry or agriculture. I estimate that only 4% of this money was made available in these areas. The banks became property speculators and the public must be reassured that the Bank of Ireland will reinvent itself by putting in place proper banking managers rather than relying on recorded messages to convey information to customers or engaging in irresponsible lending in respect of property in, for example, an area such as Ballsbridge. The Bank of Ireland we want to see in place must be similar to that which worked from 1783 to 2005 or thereabouts. In my view, the Vickers report makes that point.

Mr. Richie Boucher

That is our vision.

Mr. Richie Boucher

We will continue to inform the market, on an utterly transparent basis, with regard to where our risks lie and the asset classes we possess. We have a very significant involvement with the SME market. We are investing - through the work of Mr. Lauhoff and his colleagues - very heavily in assessing SME credit. One of the specific matters with which we have been obliged to assist our colleagues is encouraging them not to rely solely on past performance. I refer, for example, to a situation where we might be dealing with an SME that might produce accounts for the past two years which show losses. We must look to ourselves in this regard and consider how the losses arose and what has been done to mitigate them going forward. In particular, we must assist people in the assessment of cashflow. That assessment is quite different from, for example, assessing a balance sheet and a profit and loss account. Within the next two weeks we will be launching an application which we hope will make it easier for SME customers to carry out cashflow forecasting, which is extremely difficult.

We are learning all the time. We will be always learning. I took a specific question from Deputy O'Donnell on this matter. The more we engage with people, the more we will discover things. Suggestions will be made which we will feel will not work. However, we are learning all the time. Bank of Ireland has clearly set out that it will be a retail and commercial bank. I would like to claim that it was certain investment banking activities which caused our difficulties but we were never really involved in the investment banking or proprietary trading environments. This was not the reason we encountered problems.

I welcome what Mr. Boucher has said. I recall attending meetings hosted by ISME where the Revenue Commissioners have proven to be more popular than the banks. If the latter are going to engage in new relationships with small and medium enterprise, they will be starting from a really low base. The banks have, to our great cost, acted as property developers. That was not a suitable model. It was interesting to witness the Revenue Commissioners being more popular at meetings of ISME than were representatives of the banks. However, that is the reality.

Mr. Richie Boucher

We acknowledge that we have a great deal of ground to make up. Deputy Doherty inquired about our branch network. We are of the view that this network is an extremely important part of our engagement with the communities and understanding what is happening within them and it forms our presence within those communities. We are very committed to our branch network.

That might be a good note-----

One of my questions was not answered. When does Ms Carragher expect the mortgage section of the bank to become profitable again?

We will direct that question to Mr. Boucher and he can decide who should answer it.

Mr. Richie Boucher

In view of our funding costs, particularly in the context of the fact that approximately 60% of our mortgages are tracker mortgages, our Irish mortgage book is unprofitable at present. As we reduce our requirement in respect of wholesale funding, normalise the cost of our funding and reduce the overall balance sheet, we will then move to profitability in that area. As already stated, our mortgage business is unprofitable at present.

Is Mr. Boucher in a position to provide a timeframe?

Mr. Richie Boucher

I have probably strayed beyond what our lawyers would allow me to say in respect of future profit forecasts.

Mr. Boucher can tell me outside.

Mr. Richie Boucher

I would have to kill the Deputy afterwards or get a taxman to-----

That would be one way to get rid of my mortgage.

Mr. Richie Boucher

I hope the Deputy has a life policy.

We have been in session for almost six hours and it is time to wrap up proceedings. I thank Mr. Boucher and his colleagues, who were present for over two and a half hours, for their attendance, their presentation and their willingness to answer questions.

The joint committee adjourned at 7.50 p.m. until 2 p.m. on Thursday, 15 September 2011.