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JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM díospóireacht -
Wednesday, 18 Jul 2012

Mortgage Interest Rates, Bank Restructuring and Related Financial Issues: Discussion with Permanent TSB

This meeting is to deal with Permanent TSB's mortgage interest rates, the restructuring plan submitted to the European Commission and general related financial issues. I welcome Mr. Jeremy Masding, chief executive officer of Permanent TSB, Mr. Niall O'Grady, general manager of marketing, and Mr. Ian Dilley, head of treasury finance and management reporting. Mr. Masding will make some opening remarks, which will be followed by questions and answers.

I remind members, witnesses and those in the Visitors Gallery that all mobile telephones must be switched off. This meeting is being broadcast by UPC on channel 801 and if a mobile telephone is switched on, it will inevitably interfere with the broadcast, sometimes to the extent that it will be seriously disrupted such that those watching will not be able to follow, hear the questions asked or the answers given.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give this committee. If a witness is directed by the committee to cease giving evidence in regard to a particular matter and continues to so do, the witness is entitled thereafter only to a qualified privilege in respect of his or her evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given, and witnesses 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 that they should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable.

I invite Mr. Masding to begin his presentation. We have received his documentation and will deal with it as we proceed.

Mr. Jeremy Masding

In my opening remarks, I will address a number of key issues facing Permanent TSB and, in doing so, give an overview of the challenges facing us and the journey we have begun to respond to those challenges. My colleagues and I appreciate fully the substantial support the Irish taxpayer has given to the group since the financial crisis began. The crisis in Ireland and across the world over the past four years has been unprecedented. Without doubt the behaviour of banks, including my own, in the decade or so before 2008 contributed its part to what subsequently unfolded. The damage which has been caused here in Ireland and in the United Kingdom, Europe and the United States has been profound. Everyone connected with the bank has paid a heavy price over the past four years. Our shareholders have been effectively wiped out and our employees, the majority of whom bear no responsibility whatsoever for any of the mistakes which were made, have suffered significant loss of reputation and respect and many have been obliged to leave their jobs. Most seriously, our customers have suffered financially and in other ways as a consequence of the collapse. Nevertheless, we fully appreciate that were it not for the very strong support of the Government over that time, the damage would have been much greater and the bank would not have been able to continue in operation. Consequently, I again wish to put on record my own appreciation, and that of all my colleagues, for this support.

I took up my new role as chief executive of the bank on 20 February last or approximately 21 weeks ago. The days and weeks since then have been extraordinarily busy as, together with my colleagues, I have worked to address a series of challenges facing the bank. That work has entailed intensive engagement with the Department of Finance, the troika, our regulators, our staff and with our customers, many of whom I have met directly and others who have written to or telephoned me. Most have been exceptionally courteous and have shared their views on their own situations and on the general banking climate with great patience and grace. I will repay that human spirit with an unwavering commitment to rebuild the bank and its reputation. I wish to express my appreciation for the support I have received from each of these stakeholders and in particular from the team in the banking unit in the Department of Finance, which has worked very closely with us over that time. My colleagues and I have had three priorities through the past few months. The first has been to put in place a restructuring plan which would be grounded in clear and objective facts, realistic in its analysis of our current problems clear on the measures we need to take to address them and ambitious in its goal to return the bank to profitability and sustainability without taxpayer support. A second priority has been to begin to tackle the issue of our comparatively high variable rate mortgage products, while a third priority has been to address what we describe generally as the issue of collections, that is, effectively re-engineering and properly resourcing that function to deal with customers in arrears and to work with customers at risk of going into arrears to prevent that from occurring. We have made progress on each of these issues.

First, let me talk about the restructuring plan. To understand what we are trying to achieve with our restructuring plan, and its urgency, one cannot overstate the very perilous position of the bank at the start of this year. As I mentioned earlier, I joined the bank on 20 February and just eight days later, the group issued a profit warning prompted by the need to make provisions for as much as €1.4 billion arising from impairments incurred in 2011. A couple of weeks later, the bank published its results for 2011 and, largely as a result of those impairments, it posted a loss of approximately €424 million or almost half a billion euro. That figure would have been much worse had it not been for a one-off gain of approximately €1 billion, which arose out of a liability management exercise in which the junior bondholders shared some of the burden of our crisis and that, thankfully, has saved the taxpayer about €1 billion. As members know, the starting point for the bank was very grave. We began by reviewing in minute detail every aspect of the bank's operations and its financial performance in order that we could ascertain what areas of the bank were working and what were not and, if we could not save the entire integrated operation, whether there was the essence of a so-called "good" Permanent TSB bank that had a viable future and for which there was a real role in the banking landscape and if so, then in what market segment or segments should this "new" Permanent TSB bank compete.

In April, we had detailed discussions with the troika to discuss what we had found and in particular to ascertain how we could create a viable bank from within the current Permanent TSB business, what the "new" Permanent TSB, for want of a better description, might look like, how we would manage those parts of our business which were not viable and which would not be part of the new bank and the reason we believed creating a "new" Permanent TSB would be worthwhile. Let me be very clear in this regard: we considered all the alternatives, including the outright closure of the bank, an alternative which all agreed could lead to a further, significant destruction of value for the taxpayer. Having reviewed the way forward, the Government, the troika and I believe that creating a viable, customer-focused and competitive bank at Permanent TSB is a worthy goal and one which will benefit consumers in this country. I believe this market will need strong competitors in the years ahead and a viable Permanent TSB bank can be a powerful presence in that context. At the conclusion of these very difficult discussions, the troika encouraged us to flesh out our restructuring plan and submit it to the European Commission at the end of June. We have now done that.

Last week we concluded a second round of discussions with the troika, during which we updated it on the progress made to date and shared the details of the restructuring plan. While the Government and the troika have been very supportive of the group, they also have been clear that their continued support is entirely dependent on our success in implementing the radical change which they, and we, believe is necessary to create a viable institution. They also have emphasised that we must work with the authorities to separate the new Permanent TSB from the asset management unit as there is no viability for the group as an integrated legal entity. Equally importantly, the troika knows, as do I, that there will be no sustainable future as long as we are on the life-support system of ECB funding. To pretend otherwise and to live on the false pretence of deposit and mortgage rates that do not lead to positive returns for the taxpayer, is to subject another generation to taxpayer-funded zombie banks. Rational banking means generating a return on equity based on a positive net interest margin, that is, the difference between the interest received and the interest paid, a cost base that invests in talent, process and controls, as well as normalised impairment rates. The Irish banking market must change.

In respect of my own organisation, the troika has made it very clear that time is of the essence. Our progress will be reviewed and scrutinised when we meet it every quarter, starting in early October. To begin the process of structural change, we will be unveiling within the next week a detailed restructuring plan for the bank. We will set out a new operating model which reflects the focused business which we will become and which resets our operating expenses to reflect that fact. We will run the business through the managerial lens of a new bank and asset management unit, pending a system-driven legal separation. We will significantly reduce the number of branches from 92 at present. That said, we will retain a national presence, ensure the network continues to serve the Irish retail banking market better than our competitors and build out the bank's multichannel distribution capability. We will significantly reconfigure roles and functions in our head office. We will invest significantly in the core functions of banking, such as credit risk, finance and treasury, in order that Permanent TSB is respected for its professionalism and rigour. We will begin to implement the values of performance and accountability so the taxpayer can be confident we are making value-based decisions thus removing, beyond any doubt, any view that we are entitled to the support of the State. We need to earn a place back at the heart of society.

Unfortunately, there will be some job losses through this change programme. However, there also will be some new opportunities; in particular in the area of collections, where we plan to double the number of people working in the coming months. Where jobs are to be lost, we will endeavour to facilitate these through a voluntary severance scheme. When we roll out the details of this plan, we will be stressing to our colleagues that it is not optional. It is the minimum required to secure the future of the bank and the redemption of our profession. Failure to implement it in full and on schedule will jeopardise the future of the bank and the staff within it. This will not be easy for our staff but I believe they understand the context and on that basis they will realise there are no other options.

Our second priority in recent months has been to try to address the issue of the comparatively high interest rates being charged by the bank on variable rate mortgages. It is important to understand that standard variable rate, SVR, mortgages are not our most common mortgage. The average balances of mortgages on SVR - at approximately €70,000 - are much lower than is generally understood. Nevertheless we accept that as a result of decisions taken in 2010 and 2011, Permanent TSB had become an outlier in respect of variable rate mortgages and that is not acceptable.

Here again we have made important progress. At the end of April, within days of receiving positive support from the troika, we announced a unilateral reduction in our variable rates of 50 basis points for home loan mortgages. Last week, when the ECB reduced its rate by 25 basis points, we announced that we would pass on this reduction, plus a further ten basis points, to all variable rate customers, even as many competitors declined to pass on the reduction itself. Combined, these two moves have had the effect of reducing our rates by 85 basis points. It has significantly improved our position compared with our major competitors and we have ended that outlier status.

I understand that some believe our rates are still too high. Based on today's Irish banking market economics - high deposit pricing, high loss rates and high overall funding costs - there is little room to manoeuvre without passing on further burden to the taxpayer. I will not chase down rates to levels that will negatively impact on the already fragile state of the bank and the economy. I am not saying there is no room for further reductions but that, clearly, it is dependent on us working together to create an environment for a rational banking model. Let us develop a normalised market and everybody will benefit.

I think further clarity on the rates issue is very important. Our starting point is that we have a responsibility to re-establish a rational banking model in Permanent TSB. To our mind, a rational banking model starts with the funding side of our balance sheet. Critics say our lending rates are too high, but one does not run a rational bank by setting out one's lending rates and then hoping one can source one's funding and run one's operating cost base to match. One identifies one's costs and they dictate what rates one can set.

As I mentioned previously, we have three components to our costs. First is the high costs we face in raising money to finance our mortgage loans, particularly the high costs of deposits in this country, which are only partially reduced by an amount of relatively cheap money being provided temporarily through the ECB. This is money that is required due to the closure of wholesale markets to the bank but which is not a sustainable source of funding at either price or quantum. Second is the high costs we face in making provisions for those who cannot repay their loans, and that cost is rising as impairments are rising. Third is our operating costs - literally what it costs to operate the bank and, over time, provide a realistic return for our shareholder. I have commented already on the restructuring plan.

I have no desire to run a bank where the rates are dictated by what we believe the market can bear. We have a blended, average cost of funds and that dictates lending product pricing and returns. I hope and think that as we go forward, the costs I have outlined will reduce, particularly the current irrational cost of deposits. If they do, I believe we will be able to reduce our variable rates further, but by the same token, if those costs increase, then we will come under further pressure to raise rates. That is how a rational banking system works and that is the type of system we need to re-establish in this market. Well-regulated competition with this bank playing a core role, will raise standards, drive innovation, reduce taxpayer burden and transfer benefit to the end customer.

The third priority has been in respect of collections and arrears. We are very conscious of the huge toll which the current crisis is exacting on customers who in most cases, through no fault of their own, are struggling or unable to meet their loan repayment commitments. I regard it as a fundamental responsibility of mine and my colleagues to treat any customers in that position with respect, dignity, support and patience. I believe that is the case in our bank.

We are committed to the current MAR process through which we are creating a suite of products to help our customers who have repayment problems, and I believe these can make a very real difference to the challenges facing those customers. We are also committed to doing all in our power to help our customers avoid getting into arrears in the first instance and, where it arises, helping them to correct that situation as quickly as possible.

On the evidence I have seen since joining the bank, I do not believe sufficient priority has been given to this area since the crisis began. Thankfully, that now seems to have come to an end. We are certainly finding that as we engage more deeply with this issue, our customers are responding positively and many are managing to prevent arrears arising or are working with us to minimise the extent of any arrears that are arising. That is, again, very positive.

Permanent TSB faces many challenges. The months ahead will see us having to take difficult decisions. However, the choice facing the people of this country is whether we want to persist with an emasculated banking system which is forever reliant on taxpayer support, lives the lie of artificial pricing and which is incapable of normal business, or whether we want to take the difficult decisions necessary to restore strength and vigour to our banks in order that they can be weaned off taxpayer support and, ultimately, return to their normal business of banking. The latter includes the raising of money from deposits at reasonable rates, supplemented by reasonable levels of wholesale funding, which funds that are then lent to borrowers at reasonable rates.

I began my career in banking as an 18-year-old junior employee in a branch of Barclays in Rugby in Warwickshire. In the years since, I have worked in retail banking at many different levels and in different countries, and I have learnt a lot about different organisations and what they can and cannot do. Everything I have learned since I came to Ireland tells me that, despite our really serious problems, there is something very special at the heart of this bank. In particular, I have been hugely impressed by the dedication and quality of employees across the bank, and their desire to do the right thing by the taxpayer, shareholder and customer. These are good people who want the bank to be seen as an institution known for good products, good service, good prices and good values. Of course, you, Chairman, will be the judge of whether we can regain that trust. All I ask is that we are given a chance to do that.

I firmly believe that if we can get beyond the current crisis, there is the potential to create a new Permanent TSB bank which will be customer focused, efficient, and a force for positive competition in this marketplace. I believe that will be a good thing for this country. That is the singular goal on which everyone working in the bank is concentrated. I look forward to playing my role in helping to bring that about.

I welcome Mr. Masding and his colleagues here today. I thank him for his opening statement and for the questionnaire which he completed and sent to us in advance. I wish Mr. Masding well in his new role, although he is well settled in at this stage. I want him to succeed in the challenge of creating a viable and sustainable bank from the current Permanent TSB structure. It is important for consumers and the Irish banking sector that Mr. Masding's bank has a future.

I am under the clock so I will move through this quite quickly. It would be really helpful if we could have some interaction. Mr. Masding referred to the bank's restructuring plan which was submitted to the European Commission before the end of last month. My understanding is that part of it potentially involved the warehousing of the bank's tracker mortgages and impaired loans through a special purpose vehicle or the Irish Bank Resolution Corporation Limited, IBRC, underpinned by long-term European funding. Is that the framework within which the structuring plan has been prepared and one out of which Mr. Masding hopes will emerge a viable retail bank?

Mr. Jeremy Masding

I thank the Deputy for his kind words and his welcome which I appreciate. Regarding how we have structured the plan, we are essentially running the bank as a good bank and an asset management unit. The system needs to create a way whereby we can take that asset management unit and transfer it into that system solution. I am not party to those discussions, save for the fact I am a contributor. If we are unable to transfer those assets out of the Permanent TSB group, it will be very difficult for us to create a viable bank going forward.

Is it part of the wider negotiations?

Mr. Jeremy Masding

It is not a bilateral negotiation. It is a system-wide negotiation.

Is Mr. Masding saying that for Permanent TSB to have a viable future, the loss-making parts of its business and its impaired loans would need to be moved to another structure?

Mr. Jeremy Masding

That is correct. This would leave us with a good bank.

Mr. Masding said some of the bank's 92 branches will close down. Does he know how many will close as part of the restructuring?

Mr. Jeremy Masding

The direct answer to the Deputy's question is I do know. I have not shared it with my staff, however, so if he will allow me------

When will that be confirmed to the staff?

Mr. Jeremy Masding

That will be confirmed to my staff by this time next week.

How many employees does Permanent TSB have?

Mr. Jeremy Masding

About 1,800.

Will the number of jobs that will be lost be confirmed next week too?

Mr. Jeremy Masding

That is correct. However, to be clear, the restructuring plans look at all the dimensions of the organisation. There will also be job losses across head office as well.

Will those details be confirmed next week?

Mr. Jeremy Masding

The head office restructuring is an ongoing process. Obviously, with the branches we can execute that at speed.

I acknowledge the progress that has been made since Mr. Masding came to his new post on the standard variable rate, SVR. He has reduced the rate by 85 basis points down to 4.34%, a very welcome progress for the bank's customers. It is fair to say, however, SVR customers have been fleeced over the years. If one looks at the bank's SVR trends, in August 2011, the rate went to 6.15% at a time when the European Central Bank, ECB, rate was at 1.5%. Extortion is the only description for it. The bank's SVR is now down to 4.34%. Mr. Masding claims the bank is not an outlier but it still is at the higher end. Ulster Bank is the only competitor charging a higher standard variable rate.

What will be of most interest to the bank's customers is if there is the potential for further reductions. Mr. Masding said in his opening statement that it depends on the cost base and the funding mix. Can Mr. Masding outline in layman's terms for his customers the prospects of further reductions in the SVR? He also made the point in his opening remarks that he could be under pressure to increase the rates. Can he explain that?

Mr. Jeremy Masding

I hope the Deputy will allow me to respond in kind. I have been in the position for 21 weeks. I am having to manage decisions that happened in 2010 and 2011. The 85 basis points reduction is recognition of how we had significant outlier status. We made these rate reductions because we are an organisation that wants to pride itself at being at the forefront of the customer experience.

Regarding further cuts, in my opening remarks I stated underpinning any reduction has to be in a rational banking market. Mortgage rates have got to reflect the blended cost of funds. Deposits are expensive in Ireland. Any further cut in the rate is dependent on me and the competition being able to reduce the cost of funds. The assurance I can give the Deputy is that I have absolutely no desire to be an outlier. I have no desire to put my staff or the brand through what we have been through over the past 24 months. If we find a place where we can manage down our cost of funds, the Deputy can rest assured my goal will be to pass the benefit of that on to my lending customers.

What will essentially drive that? Will it be a reduction in deposit rates?

Mr. Jeremy Masding

Our costs of funds at the higher level are a function of three imports, namely retail deposits, wholesale funding, of which we still have some, and ECB funding. At any point in time if I can manage the blended cost of that mix, then our aspiration will be to help our customers.

The bank is offering new SVR customers a rate of 3.69%. Is that an introductory offer for a fixed period, say 12 months?

Mr. Jeremy Masding

If the Deputy allows me to answer the question on a higher level, then I will come down and answer the question specifically. When I started in the bank 21 weeks ago, I had a certain priority, namely to save the bank. Once that was achieved, my priority was to put in place a restructuring plan with a cost plan that we could deliver. The third priority was to examine the stock of SVR customer rates and bring our prices down to remove the outlier status. It would be fair to say, we are not writing a significant amount of new-flow mortgages. However, the rate differential between new and existing customers is too large. If the Deputy would allow me some time, addressing it is on my to-do list. I have every intention of looking at the price of new-flow mortgages.

What fixed rate is the bank offering for SVR customers who may want to fix for, say, five years? I have seen figures of over 8%.

Mr. Niall O’Grady

I do not have them to hand but they are in and around 6% and 7% for three and five years.

I have seen rates of over 8% for a five-year term.

Mr. Jeremy Masding

I do not want to fall into the trap of not having information with me and then the Deputy asserting some fact. Will he allow me to revert to the question?

The bank's arrears levels are alarming. Owner-occupier mortgage arrears rates stand at 22% in some level of arrears while 14% are over 90 days in arrears against an industry average of 10.2%. Up to 34% of buy-to-let mortgages are in arrears, 25% of which are over 90 days. These figures are from the end of December 2011. Over the past seven months, how has that trend developed? Is it getting worse? Has it stabilised?

Mr. Jeremy Masding

I am afraid to say the collections function which I inherited was not to a standard which I am used to across my experience. Over the past five months, we have invested heavily in what I would call a collections process. By that I mean training people and increasing the number employed in it. What we have noticed, but again it is too short a period for me to say, is a trend-----

Are the statistics getting better or worse?

Mr. Jeremy Masding

In recent months, the trend is getting better.

Is the bank moving towards more innovative solutions such as split mortgages and debt-for-equity shared ownership?

Mr. Jeremy Masding

That is correct. We have a strategy we call nine plus three plus two. We have nine treatments which we already used. We have three treatments, namely, split mortgages, mortgage-to-rent and equity participation, which will be in the system by the end of September or beginning of October. We will also have the new personal insolvency and bankruptcy legislation. By the end of the year, therefore, we will have 14 treatments.

There is little sympathy for buy-to-let investors but, as we all know, many ordinary people purchased second properties as an investment or a pension fund. They are now tied in to Permanent TSB at high interest rates. Yesterday I received an e-mail from one of Permanent TSB's customers, who asked me to raise this issue and pointed out that he is currently being charged 6.34% variable interest on a 25 year buy-to-let investment mortgage, compared with 3.84% in April 2009, while at the same time the ECB base rate has halved from 1.5% to 0.75%. While some progress has been made on the SVR for owner-occupiers, buy-to-let mortgages are still being charged exorbitant interest rates. Does Mr. Masding intend to consider that issue?

We are not in a normal mortgage market. Customers are trapped and the days are gone when they could simply move to another bank. For those who are deep in arrears and negative equity, a point will be reached when high interest rates become counterproductive. They are only feeding into a higher level of arrears and, with one third of the buy-to-let mortgage book in arrears, surely it is time to reconsider the rates being charged.

Mr. Jeremy Masding

The rate we charge any customer is a function of the blended cost of funds.

I ask Mr. Masding to elaborate on that.

Mr. Jeremy Masding

There is a deposit cost, a cost in the capital market and a cost in the ECB.

What is the blended rate?

Mr. Jeremy Masding

I cannot share it because it is competitive information. It is north of 220 basis points.

It is a long way from 6%.

Mr. Jeremy Masding

Buy-to-let mortgages have a higher risk profile. We charge on the basis of return for risk and our impairments are higher in the buy-to-let sector. In any banking market the price of a loan is subject to risk and the risk of a buy-to-let mortgage is much higher.

Can Mr. Masding offer these people any hope? The big political issue, and rightly so, was the SVR for owner-occupiers. Good progress has been made in this regard but is there any hope of a reduction for buy-to-let investors?

Mr. Jeremy Masding

If I can get the blended cost of funds down, I will consider passing the rates on across all customer sectors, including buy-to-let.

I was contacted by a constituent who is an existing customer of Permanent TSB and was previously paying 3.1% on a two year fixed rate mortgage. She has been informed that she can switch to a current rate of 4.35%, a two year fixed rate of 7.25% or a five year fixed rate of 8.75%. I mean no disrespect but it is not good enough that Mr. Masding does not know the rates. He has appeared before this committee because issues arise in respect of rates. The aforementioned constituent has a loan-to-value ratio of 40%. Other financial institutions would allow her to benefit from that but she gets no benefit from Mr. Masding's institution. A new customer can get a rate of 3.69% but she was quoted 4.35% as an existing customer. There is clearly a divergence.

Mr. Masding stated:

I understand that some believe our rates are still too high. Based on today's Irish banking market economics - high deposit pricing, high loss rates and high overall funding costs - there is little room to manoeuvre without passing on further burden to the taxpayer. I will not chase down rates to levels that will negatively impact on the already fragile state of the bank and the economy.

The rates that Permanent TSB is charging are negatively impacting on the direct economy. It was recapitalised by the Irish taxpayer on the basis of being able to provide additional lending. The three elements of funding are deposits, the ECB and wholesale funding rates. Will Mr. Masding explain what the typical tracker mortgage is paying at present and what Permanent TSB pays on deposits and for wholesale funding, on average? What proportion of its funding comes from the ECB?

Mr. Masding noted that both segments of its mortgage book are loss making. The blended rate is 2.2% but the institution is charging 4.35% on variable rate mortgages. I know of an individual who is paying nearly 6% on an equity release programme through which funding was drawn on an existing buy-to-let property to invest in another property. Tracker loans comprise between 55% and 58% of the overall loan book, which means in excess of 40% of mortgages are on variable or fixed rates.

The devil is always in the detail. We need a better understanding of the blended rate of 2.2%. What percentage of that funding comes from the very low rate offered by the ECB? I accept that Permanent TSB wants to return to a being a viable and sustainable bank but the taxpayer is carrying much of the load. We are in this together. How is it making losses on both loan books? How can it make a loss on variable rate loans which are in excess of 2% above the blended rate?

The rate charged to my constituent is 100 basis points higher than would be charged to a new customer. This differential between new and existing customers was only introduced on 1 January 2012.

Mr. Jeremy Masding

Can I answer the Deputy's questions?

Mr. Jeremy Masding

His first question was on product profitability. I apologise if I misled him but I think I stated that the blended cost of funds was north of 220 basis points. In my simple mind we start with the price we charge the customers and take away the blended funding costs. We then take away the operating expenses and the impairment line. The sum of those three cost buckets is greater than the income we are making on both products. The Deputy's second question was on the funding base. Broadly speaking, 40% of our book is funded by deposits; approximately 25% is funded by wholesale funding; another 25% is from the ECB; and the rest is a function of the capital base.

I wish to ask about the components that make up the charge. Our understanding is that part of the purpose of the recapitalisation of banks was to enable the banks to deal with impairment charges. Is that not correct?

Mr. Jeremy Masding

On the basis of forward planning, we have sufficient capital to absorb any future losses.

Has Permanent TSB built impairment charges into the interest rate it charges customers?

Mr. Jeremy Masding

As with all banks we review our impairment charge on an ongoing basis.

The point I am trying to make is that the customer is paying for the impairment charge as well as the capital that is being provided. The capital the taxpayer put in is there in part to allow banks to soak up impairment charges. The bank is now double-charging the customer for this impairment charge. People see that Permanent TSB is charging significantly more than other institutions. Would the representatives of Permanent TSB not agree that there is double-counting and that the bank is passing on the impairment charge to customers who have already paid as taxpayers?

Mr. Ian Dilley

I do not believe that is entirely accurate. When the bank was recapitalised, that was based on a three-year plan which would have taken into account both the income the bank was going to generate over the term of that three-year plan plus the expenses the bank would incur in running itself. In addition, there were impairments that were considered. All of that was netted down to a figure that equated to an amount of capital the bank was going to require. The Deputy is correct in saying that the capital was put in to cover the impairments, but the income was also being counted, as was the expenditure of running the bank. So there is absolutely no double-count going on.

I ask Mr. Dilley to comment on why the interest rate being charged to existing customers is so high, at 7.25% for two years fixed.

Mr. Ian Dilley

Effectively, that is a function of the fact that in order to guarantee a customer a fixed rate for a certain period there is obviously a cost involved, and the bank at the moment has no natural access to very long-term funding. The only long-term funding it has is access to deposits. As the Deputy will know from the remarks we have made, deposit costs are extremely high at the moment, and these do not represent a reliable source of funding.

I thank the witnesses for giving of their time. I wish to raise three issues. One is the lack of surrender of any debt to mortgage holders. The second is rent-seeking on variable-rate mortgages. The third is the phrase that will become important when the Personal Insolvency Bill is passed, "reasonable standard of living". I welcome Mr. Masding's comments in which he admitted liability. Today I also saw a letter he had sent to every customer of the bank, apologising for the behaviour of the bank. In contrast to the representatives of Bank of Ireland who appeared before the committee, Mr. Masding accepted today that Permanent TSB had a role to play in our finding ourselves in our present situation.

We got this information from the bank for today's meeting. Having seen an admission that the bank had contributed to the situation, I was somewhat shocked at his statement that a borrower continues to be liable for any amount owing following the successful sale of a relevant property. If I am wrong, I would appreciate if Mr. Masding could clarify it. I am taking that to mean that even though many properties may have mortgages in arrears, the bank is not surrendering legal call on any of the money. A property could be sold for €200,000 with €400,000 owing on it and while the individual, the couple or the family loses the house, they still owe the difference, €200,000, to the bank. That is my understanding of it.

He also states: "we do not believe that debt forgiveness can play a role in such strategies without causing further massive losses for the taxpayer." Deputy O'Donnell made the point that massive losses have already been incurred by the taxpayer in recapitalising the banks. My first question is as follows. How is it not deeply hypocritical of the bank to say that although it accepts partial liability for the situation, including the over-borrowing, it will not surrender its call on any of the money it lent to customers? Have I got it right that that is the bank's position? I would be delighted if I were reading this incorrectly. If it is the position, how was it not deeply hypocritical of it to accept partial liability but not share any of the cost?

Should we ask Mr Masding to respond to that?

Mr. Jeremy Masding

It is important that I state right from the outset the bank's position. There is not and there will not be any general policy of debt forgiveness. To do otherwise would be to invite further catastrophe on the taxpayer. We will continue to seek debt repayment to the greatest extent possible, which I hope answers the Deputy's question. However, we will go through a dialogue with the customer and work together to try to find the best solution through the MAR process. If at the end of that, as per a rational banking market, we must write down some debt, I have the right to write off that debt.

Is it the explicit policy of the bank not to do so?

Mr. Jeremy Masding

That is correct. There is a huge difference between the mental concept of debt forgiveness, whereby I overtly set out to forgive what is owed, and going through the collections and arrears process, following which, having worked with the customer and found that the debt is not sustainable, we then write off the debt.

Does that represent a full legal surrender of the debt on behalf of the bank?

Mr. Jeremy Masding

If, having gone through that process - let me stress this is on a case-by-case basis - I perceive that over time I may obtain repayment of some of that debt based on an analysis of the customer, then I will continue to pursue that debt. In summary, the point I would like to make is as follows. First, we have no policy of debt forgiveness. Second, having gone through a collections and arrears management process with the customer, if on a case-by-case basis we need to write off the debt, then of course we will write off the debt. Third, if at the end of that write-off there is in our opinion little or no chance of obtaining further repayment, of course it is absolutely correct that we treat the customer fairly. If at the end of it we believe we have a likelihood of obtaining some of that over time then we will not release the customer from his or her obligations.

We want clarification on this point, Chairman.

No, excuse me, Deputy Mathews, you can press the witness on this point later as it is an important point. Deputy Donnelly has the floor at the moment.

It is a crucial point.

On this point, having heard what Mr. Masding has said and knowing the explicit policy of the bank, as a public representative I would say to him that it is hypocritical of his bank to admit partial liability for what has happened but to say that the bank's explicit policy is not to engage in any debt forgiveness. The second issue is to do with the variable rates. Mr. Masding and his team kindly provided the committee with some figures on how the bank's variable rate moved along with the ECB rate. I am sure it was not the intention of whoever collated these figures on behalf of the bank to mislead this committee although I must confess that had I not carried out my own deeper analysis, as a former analyst, I would read these figures as stating that there were about eight changes and in each case, these were passed on to Permanent TSB borrowers. What the table does not show is that between September 2008 and February 2009, the ECB reduced its rate by 2.5%-----

I ask the Deputy to indicate which table.

Page three, question two. In the same period Permanent TSB reduced its rate by 1.8%. The table does not show the period between June 2009 and March 2011, when the ECB rate did not change but the Permanent TSB rate went up by 2.5%. In total, between September 2008 and July 2012, the ECB rate fell by 3.5% whereas the Permanent TSB rate fell by 1.3% and by comparison the AIB rate fell by 2.5%. I appreciate this did not happen under Mr. Masding's stewardship but Permanent TSB has passed on approximately one third of what the ECB did in lowering its rate. At the same time, AIB has passed on twice that amount. These are both State-owned banks. My analysis is that this is straightforward rent seeking and rent gouging by the bank on one of the groups of people who had no choice but to pay the higher rates. I ask Mr. Masding if he can explain whether he agrees with that analysis, whether he disputes those numbers or whether he accepts that the bank has passed on one third of what the ECB has passed on and one half of the amount passed on by AIB.

Mr. Jeremy Masding

I started in my job 21 weeks ago. I am not prepared to comment on the decisions made in the past. When I started my job it was absolutely clear to me and as I have stated in my opening comments, that we had an unreasonable level of outlier status. Over the 21 weeks I have tried very hard to bring our rate back into a place where, based on the cost of funds, I consider it to be a rate which is where it needs to be. It would be wholly inappropriate for me to comment on the pricing policies of our competitors.

Deputy Donnelly is not asking Mr. Masding to comment on their policies as such rather he is asking about a factual comparison, whether Mr. Masding agrees with the figures he is canvassing. He is not asking Mr. Masding to make a value judgment one way or the other but simply to state whether the figures are accurate.

Does Mr. Masding accept those figures? The figures are correct. I appreciate we are sitting several metres apart but a graph shows a blue line at the top which is the Permanent TSB rate, the green line at the bottom is the ECB rate and the line in between is AIB's rate. Permanent TSB has been engaged in rent gouging and it has caused extraordinary distress for individuals, couples and families all over the country. I accept that Mr. Masding was not at the bank during this period but figures from today show that the AIB rate is 3% and the Permanent TSB rate is still significantly higher. It is now within Mr. Masding's control yet it is not moving to the AIB rate. I believe the bank's July 2012 figure is 4.69% versus AIB's 3%.

Mr. Jeremy Masding

I absolutely acknowledge the Deputy's calculations. He is a former analyst I have no doubt the calculations are correct so I will not engage in a debate about them. I refer to his comparison with the other State-owned bank. It is not for me to comment on its pricing. However, on the basis of all things being equal, it has a similar funding mix as my bank, as the chief executive said. It is right that he is reviewing mortgage rates. That is all I can say.

As a public representative and as a member of this committee, I urge Mr. Masding as the chief executive of a State institution, to take a much harder look at both his current rates and at the history of the actions of the bank he now runs with regard to borrowers. In his statement and in his letter to customers he has admitted partial responsibility for what happened. The actions do not reflect an institution which admits partial responsibility.

Mr. Jeremy Masding

I wish to respond. I am a veteran of 30 years in retail banking. I have absolutely no interest in running an institution which neither has the respect of the public nor of its customers. The Deputy may rest assured that I am looking at rates, day in, day out. Where I have the opportunity to revise those rates, the Deputy may rest assured that I will do so.

My final question is about the phrase, "reasonable standard of living", a phrase which will be important when the Personal Insolvency Bill is enacted. I believe Second Stage will be passed at midnight. This legislation will leave borrowers with a reasonable standard of living in debt settlement arrangements.

I thank Mr. Masding for the data provided which has been very helpful. I refer to page ten, question No. 22. In response to the question of how the institution determines a reasonable standard of living, the response states that a customer's financial position is understood using a standard financial statement which includes information about a customer's assets, income, household expenses and debt repayments. Household expenses are assessed through comparison with the average spend of other customers, based on 17,000 completed forms.

When the bank is determining with the borrower what is a reasonable standard of living in cases of debt settlement or renegotiation of a mortgage, does this mean that the bank will leave the borrower or the borrowers with the average or is the average amount lowered?

Mr. Jeremy Masding

The average is used as a reference point.

How is the amount arrived at, from the reference point down to what the bank will allow the borrower?

Mr. Jeremy Masding

It is done verbally, by means of a conversation. For instance, if I am in a dialogue with a customer, I am trying to find out the disposable income. I will engage in a conversation with the customer and I will go through each of those lines. Where there is a variance, a material variance, from an average, then that tells my collector or myself, to probe a bit more on why there is a variance from the average. In an arrears situation, it is a customer of one model not a portfolio model, meaning that we treat every customer as an individual.

Is it the case then that if a borrower or borrowers are at the average expenditure level on the various factors which are measured, the bank will be satisfied to leave them at that or would it try to push them below the average expenditure for the various line items?

Mr. Jeremy Masding

The starting point is that I have absolutely no interest in getting down to a position where I am repossessing a home. Therefore, I endeavour to create a situation where I can keep the customer in the home and create a win-win situation whereby I am achieving a reasonable amount of repayment. In other words, customers will be asked, where it is right and reasonable to do so, to amend their lifestyle so that an agreement can be reached.

That does not really answer my question. I asked whether the bank will seek to push customers below the average expenditure level. Or will it typically be satisfied, where borrowers are at the average, not to seek to extract more from them?

Mr. Jeremy Masding

My apologies; I misunderstood the Deputy's question. If the data are given to us in good faith, we will allow them to be used going forward.

Again, that does not answer the question. To repeat, if the bank is satisfied that borrowers are, in accordance with the various indicators, spending the average amount, as per Mr. Masding's reference to financial statements, will it be satisfied to leave them with that amount of income?

Mr. Jeremy Masding

Yes, we will be happy to do so. I apologise again for misunderstanding the question.

Thank you, Mr. Masding.

I am grateful to Mr. Masding and his colleagues for accepting the committee's invitation to attend the meeting today. It is an engagement for which Deputy Stephen Donnelly and I have called on many occasions. Mr. Masding has provided us with a substantial amount of information this morning. Will he accept further questions by e-mail after the meeting? Much of the information came quite late and requires further examination.

Mr. Jeremy Masding

Of course.

I appreciate that.

Mr. Jeremy Masding

I recognise the importance of our engagement with the committee. I cannot rebuild this franchise if society, including taxpayers and customers, believes that we are trying to do things behind closed doors. I can only rebuild the franchise by regaining trust. If that means sharing further information with the committee, I am very willing to do so.

I thank Mr. Masding. In the course of his excellent presentation, the chief executive officer pointed out that the majority of his staff bear no responsibility for the banking crisis. I accept that this is so and further recognise that his staff will pay a very high price in the form of job losses and branch closures. As a customer of the bank, I am aware that it has many excellent staff members. In the recent referendum campaign, however, a question that came up regularly on the doorsteps was why senior figures in the banking sector remain in their positions despite the disaster they oversaw. Can Mr. Masding offer a guarantee that those at the top end, where the responsibility lies, have been or will be rooted out? The bank's staff and customers are paying a very high price for the reckless banking practices that took place on the watch of these senior people. I accept that Mr. Masding has been in post only a very short time, but I hope he will give a commitment to root out those at the top end of management who are responsible for placing the bank in the position in which it finds itself, including the liabilities that have arisen for taxpayers, customers and staff. Is he actively progressing that matter?

Mr. Jeremy Masding

Part of my role is to rebuild the team, and I am starting from the top and working down in that regard. I assure the Deputy that for each of the roles which report directly to me, a selection process will be followed which includes external candidates. I assure the committee that I am involved in selecting and recruiting and, having gone through that process, will pick the best person for the job in each case. One of the areas I will consider is track record, but I do not intend to conduct a witch hunt because I do not consider that the right thing to do. I will, however, ensure that the process I go through is done to the best of my ability and that I am in a position to assure the board that I have chosen the best team to lead the bank into the future.

Those who developed the loan book and were responsible for the reckless lending that took place certainly should pay a high price, considering the cost to taxpayers, customers and staff.

Will the delegates confirm that the bank is facing a loss of some €400 million per year on its 18,000 outstanding buy-to-let tracker mortgages?

Mr. Ian Dilley

That is a reasonable estimate of the provision charge for this year.

Is Mr. Dilley saying that the estimation of €400 million is correct?

To clarify for members' benefit, provisions in banking are fed into balance sheets over a period of years. It is a decision the banks make whereby they estimate what losses they will bear on an asset over the period until ultimate collection. That is fed in by way of provision.

Thank you, Deputy. Mr. Dilley made the point about provisioning. Is there a distinction to be drawn here, as Deputy Peter Mathews is suggesting?

An estimate was made that buy-to-let tracker mortgages are costing Permanent TSB some €400 million per year. My understanding is that this figure is roughly correct.

Mr. Masding is shaking his head. Will he indicate why it is incorrect?

Mr. Jeremy Masding

When we talk about loss, we are referring to the profit and loss account. Within a year, where a particular portfolio of products makes a loss, the issues we look at are how much interest income they make, what is the cost of that funding, what sort of operating expenses we put against them and so on. The provisions in the balance sheet are for future losses against the stock of buy-to-let or investment properties-----

My question is quite straightforward. What loss was recorded on the balance sheet last year in respect of the bank's 18,000 buy-to-let tracker mortgages?

Mr. Jeremy Masding

There is no loss. There is provision for future losses in our balance sheet for buy-to-let properties. I am looking through my documentation for that figure.

My understanding is that the figure of €400 million is approximately correct.

Mr. Jeremy Masding

I will get back to the committee with an exact data point on the provisions in our balance sheet for future losses against the Irish buy-to-let book.

That is fine.

Mr. Jeremy Masding

I am conscious of not looking in control of my data. It might be helpful to members to explain the language. When we talk about the commercial book, I am referring to commercial real estate and commercial lending. I understand the Deputy is referring to investment properties.

Buy-to-let properties are investment properties.

Mr. Jeremy Masding

Apologies - when we talk about commercial, I have in mind a different portfolio. The reference on page 11 of the document refers not to residential buy-to-let properties but to commercial lending.

Mr. Masding indicated in his presentation that the bank does very little commercial lending.

Mr. Jeremy Masding

Yes. We do not do any commercial lending. This is provision-----

The buy-to-let figure is the crucial figure.

Mr. Jeremy Masding

The buy-to-let figure is included within the figure given on page 11. I will come back to the Deputy with the exact provision in this regard.

On page 4, in question 3, there is a reference to the 0.5% interest rate reduction. In terms of overall costs, I understand that amounts to some €30 million for Permanent TSB. Mr. Masding indicated that it has no substantial impact on arrears. I would argue that point, because higher interest rates can push people who are in difficulty into arrears. We are talking about €30 million, which also has an impact on taxpayers given that the Department of Social Protection is subsidising interest payments for mortgage holders who are in difficulty. Mr. Masding indicated that Permanent TSB is going to re-examine the position with regard to the SVR as a matter of priority. Will the bank do so within the next couple of weeks? The initial reduction of 0.5%, while small, would be of major assistance to people who are currently in arrears and those who are getting into difficulties. Will the bank consider this matter in the immediate future?

Mr. Jeremy Masding

I am afraid that I must revert to my original answer. I regularly monitor the prices of lending products. At present and due to the cost of funds, I have no room for manoeuvre in terms of reducing the SVR. I reiterate that we are working hard to optimise our position with regard the cost of funds. When we do that, we have every intention of passing on the reduction to the SVR customers.

On the Deputy's comment in respect of arrears, in my experience the biggest influence in this regard is unemployment. Based on our modelling and experience, interest rate changes within a reasonably narrow band do not have a material impact on the level of arrears.

It is not just unemployment, it is actually reduced earnings. That comes back to bad decisions the bank made in the context of its loan book. In his letter, Mr. Masding referred to taking responsibility. The bank has a responsibility in respect of putting people into certain positions as a result of the way in which it calculated their ability to repay on the basis of their earnings and also in the context of the rates it approved. Mr. Masding has stated that he is going to give consideration to this matter. In both his letter and his presentation, he stated that the bank has a responsibility in respect of this matter. A reduction of 0.5% would be significant. I do not like that fact being run down because it would make a major difference for people who are in real trouble.

What is Mr. Masding's exact position on the 0.5% reduction?

Mr. Jeremy Masding

We look at our rates all the time. They are wholly dependent on our functioning in a rational banking market.

I understand all the background argumentation. However, Deputy Kevin Humphreys has made a specific appeal in respect of a 0.5% reduction which he-----

Mr. Jeremy Masding

We will reduce our rates when I can get the blended cost of funds down.

So that is the same answer as earlier.

Mr. Jeremy Masding

Yes. In terms of the other point that was made in respect of new lending, I fully accept that this is an area to which we must give consideration. I wish to give the committee a commitment that we will do so.

When Mr. Masding refers to new lending, he is talking about balancing. I have been approached by people - established customers - who are extremely annoyed that they are paying higher interest rates than those which apply in respect of new lending.

There were many people - myself included - who, when they went into their local bank branch in the past, were offered additional credit. I did not take the advice offered which was to the effect that my mortgage was almost repaid and that I should take out a further loan and buy an apartment because I would get my money back on the investment. I am glad I did not take the advice offered to me by several banks in this regard. In Mr. Masding's opinion, are customers with interest-only buy-to-let tracker mortgages protected by the Consumer Credit Act from having their terms and conditions changed? After all, these loans were offered on an interest-only basis. As I understand it, in the case of many of the bank's tracker mortgages the principal was payable at end of term. Has the Permanent TSB begun exerting pressure on the people to whom I refer to start making repayments in respect of the principal? The documentation I have seen indicates that the principal is payable at end of term. I wish to ensure that Mr. Masding is of the same view as me with regard to these people being covered by the provisions of the Consumer Credit Act.

Mr. Jeremy Masding

It would be wholly remiss of me to claim that I am an expert in Irish consumer finance law after only 21 weeks in the job. If it is acceptable to the Deputy, I will revert to him with a detailed response in respect of that question.

I would be very grateful for that. This is important for the bank but it is also important to the taxpayer that the bank should not waste money in challenging the Consumer Credit Act. I put that, in very strong, terms to Mr. Masding, knowing what is going on in the background within Permanent TSB.

Mr. Jeremy Masding

I will revert back to the Deputy on that matter in a transparent way. I am sorry that I do not know the answer to his question.

That is perfectly reasonable.

I take this opportunity to wish Mr. Masding good luck. He has been in the job for 21 weeks and, as he indicated, when he came on board he had a profit warning of €1.4 billion in provisions and loan write-offs, leading to a reported loss of €500 million. The latter means that the bank was losing a great deal of money instead of making a 3% net margin as an institution such as Permanent TSB should be making after all expenses have been taken into account. The risk costs, or loan write-offs and provisions, should normally be approximately 0.3%. At €1.4 billion they are 15 times the normal rate. Mr. Masding has, therefore, been obliged to deal with what is an amazing balance sheet. As he stated in his opening remarks, the strategies and policies pursued by the bank - which was chaired by a travel agent, Ms Gillian Bowler, for many years - has resulted in the mess he has been obliged to clean up.

We have had the opportunity to speak to the other banks and at best, the answers being provided in respect of our questions are hesitant. That is understandable. If we take it up a notch, the answers provided are evasive. The overall description I might give would include the term "wooly". I am of the view that the insolvency legislation currently under consideration by the Dáil could be sharpened up and made much more focused in nature. I am tempted to say that the term for bankruptcy should be one year rather than the three proposed in the Bill. Mr. Masding stated that Permanent TSB is going to double the numbers in the collections, recoveries and restructings divisions. My gut feeling informs me that Permanent TSB and the other banks need to quadruple the numbers in this regard. As all the banks have indicated - and as my experience in this area tends to indicate - it is all bespoke restructuring and resolution.

As Deputy Donnelly stated, Permanent TSB has accepted - as have the other banks, without exception - responsibility for contributing to the mess created over ten years. Therefore, it has a counter-party obligation to the people on the other end of the bad professional conduct engaged in with regard to the business of lending. It must be remembered that the duties of a bank relate to the fact that deposits are taken in, that they are guarded by it on a custodial or prudential basis and that they are then lent out to trusted and capable people. Banks should, however, always keep 10% of deposits in reserve. In the case of Permanent TSB, the loan-to-deposit ratio was way over 200% at one stage. This means that the bank owes a debt to its customers.

Every week I am approached by at least five individuals - not just in respect of mortgages but also business loans, etc. - who are in impossible positions. The impossibility to which I refer should not be deferred because, as Mr. Masding indicated, if a house is repossessed by the bank and then sold on and there is a residual of, say, €150,000, that is still a debt. Such debts are pursued vigorously until literally every drop of blood has been counted and measured. At that point, there is no termination horizon with regard to when the pain stops. It is somewhat ironic that the bank, which has been the cause of everything that has occurred, remains on as the torturer. Even when people make a full presentation in respect of their assets, liabilities and earnings, the bank still reserves the right to continue to chase them. That is wrong and it is in this area that the insolvency legislation must be tightened up. There must be a reasonable period set down, particularly as the banks contributed to getting us into the position in which we now find ourselves. Commercially, morally and in every other way, providing a reasonable period is what is right. Politicians, institutions, professionals, bankers, etc., should recognise this truth and reality and get down to resolving matters, rather than using phrases such as "We have engaged the customer". The engagement took place when the loan was advanced and the document was signed. We need less talk and more action, and a quadrupling of the staff in the banks.

The Deputy is asking too many questions.

Does Mr. Masding agree with me that the banks are still under-capitalised, even after the assessments carried out by Barclays, BlackRock Solutions and the other company involved in that process? That is the reason the work of using capital to put teams in place to get the resolutions on a case-by-case basis is not happening. That is the truth of it. I have some questions.

Does Mr. Masding think the banks are still under-capitalised?

With regard to the margins-----

Does Mr. Masding want to address that issue?

There are questions coming at me from all sides.

No. As Mr. Masding may have noticed, I am simply repeating the questions my colleagues have asked for his benefit in order that you can deal with them. Deputy Mathews has asked a question on banks and their capitalisation. Does Mr. Masding want to address that?

There is nothing wrong with being under-capitalised.

I just asked Mr. Masding the Deputy's question. Will the Deputy give Mr. Masding a chance to see if he wants to answer it?

Mr. Jeremy Masding

Chairman and Deputy, your question was around capitalisation.

Deputy Mathews's question.

Mr. Jeremy Masding

The translation of the question was via the Chairman.

Would Mr. Masding prefer it to be asked in Irish?

Mr. Jeremy Masding

I am 21 weeks here and I am trying to understand the culture, so forgive me.

Mr. Masding is doing very well and we appreciate his time and efforts.

Mr. Jeremy Masding

I will come here as often as the committee would like.

The committee recognises Mr. Masding's efforts.

Mr. Jeremy Masding

I want to be part of a group of people who fix this. In answer to the Deputy's question on capital, we went through a rigorous process as part of strategy development tools that we used in terms of building a restructuring plan. That plan was stress-tested by the Central Bank of Ireland. We shared the numbers with the Department of Finance and then we were obliged to send in our submission in advance to the troika. All of them agreed that the capital assumptions we had made were reasonable and, on that basis, we have sufficient capital over the planning period.

Can I respond to that? I do not believe that to be the case, the reason being that the first PCAR in March 2010 was 100% wrong and I believe the second one is 50% wrong. The experience is that the mortgage books across all the banks are showing that to be the case. Question No. 24, which is one I posed, states: For loans in arrears, has an up to date estimate or formal valuation of the house-apartment been carried out in each case in order to determine the level of security cover or shortfall for the loan? The answer to that was along the lines Mr. Masding suggested that he has a processing method of looking at information over the geographies, the original prices and how prices, in general terms, have dropped. My experience is that this is not good enough. One needs to look at each case. That is the reason the bank needs to quadruple the number of people who are examining the arrears cases. It needs to do the training very fast, and it can be done fast, with experienced people who have a good communications ability. In five or six weeks they can train intelligent young people to look at information comprehensively and to do simple algebra to arrive at correct provisioning, not processing, modelling and stuff that is in grey boxes and voodoo. It is simple.

Mr. Jeremy Masding

I will answer the Deputy's question because one thing I do not ever want to be accused of is being evasive. I do not come from that school.

That is obvious.

Mr. Jeremy Masding

If I may answer the Deputy's question, I will do it to the best of my ability. I will deal with the Deputy's second question first. I have a considerable experience in arrears management and collections. I can assure the Deputy that in the first 25 minutes of being in my job, it was obvious to me that our collections capability was not fit for the banking crisis in which we find ourselves. I instantly telephoned a number of my ex-colleagues from across the industry. These are people who are experienced in training, call listening and technology. We have been working flat out since March to build what we call the asset management unit. I had a group of people who were demoralised and we have re-engaged them. We are bringing more people on apace. My capacity model shows that we need to double that and we are doing that. I want to be clear in saying that if the Deputy is right, the next time I am here I will put my hands up and say that he was right. We are training these people and on the basis of what I have seen, the initial data is good. That is the first thing I would say.

Second, I am sure that if the Deputy was in my shoes, one of the first things he would have done when he hit the ground, would have been to get some external assurance of his provisions model. I wanted to be sure that inputs into that model that we were using were the right ones. I can advise the Deputy that I received independent assurance of my provisions model and, broadly speaking, we were in the right place.

In terms of the valuations, it is very difficult when one has a stock of loans numbering in the hundreds of thousands, as we have, to value each one individually. Therefore, for the foreseeable future, we will have to use a portfolio model with all its risks.

Can I respond to that? I have very great confidence in Mr. Masding. I like the tone and content of what he is saying. In 21 weeks of being in the job, I say "Well done" to him. I encourage him not to be afraid - to extend the punch rather than pull it.

In regard to the blended cost of funds, that is the dough with which one bakes the bread, no pun intended. What is the cost of two-year money, three-year money and five-year money in the market at present?

Mr. Jeremy Masding

In the wholesale market or what I go out to my customers with?

Both. There will be some people who might be mad enough to put money on deposit for two years. What would they get for it? What would those who put money on deposit for three years or five years get? What does it cost on the wholesale market at present?

Mr. Jeremy Masding

I will ask Mr. Ian Dilley to deal with the wholesale market and I will ask Mr. Niall O'Grady to deal with the deposit rates, if he has them and, if not, we will-----

I will park that question for the moment.

There will be no parking of questions. A question has been asked and either it will be answered now or perhaps Mr. Masding could revert to us with the answer in due course. I want to move on now as we are up on the allotted time for the meeting. There is no point in asking questions and then parking them.

The margins is where the banks earn their money.

Deputy, there is one Chair here. The Deputy has asked a question, which presumably is directed towards obtaining an answer.

Mr. Jeremy Masding

I think we are able to answer it.

We will have the answer now.

Mr. Ian Dilley

On the wholesale side?

Mr. Ian Dilley

Given the banks' rating and implicitly the rating of the State and given the fact that currently the State is unable to access the longer-term wholesale markets, there is no ability for the organisation to access those markets, certainly not in an unsecured nature. We did two transactions last year in the UK on our UK mortgage book where we were able to raise money at about 275 basis points over the benchmark in the UK for two-year money.

Mr. Ian Dilley

Yes.

Over what base?

Mr. Ian Dilley

The libor.

What is libor's rate for two-year money?

Mr. Ian Dilley

About 1%.

(Interruptions).

Libor's six month rate is 0.928%.

Mr. Ian Dilley

Yes.

It is cheaper than the ECB rate?

Mr. Ian Dilley

No.

The ECB is-----

Mr. Ian Dilley

Libor is 1% plus 2.75%, which together make 3.5%. That was for very highly collateralised lending.

On the other side-----

Mr. Niall O’Grady

On the retail side, the rates we publish are for one year and for 26 months, which would be the longer-term retail rates. The rate we pay for one-year money this week is 3.8% but next week we plan to reduce those and the rates will fall to 3.5%. The rate we pay for money over 26 months will fall from 7.8% to 7.3% next week. There are two reasons for those reductions. The first is the ECB reduction that took place recently, and the second, as Mr. Masding mentioned earlier, is the fact that we are trying to get our deposit rates to a more functional level to facilitate a potential reduction on the lending side.

For the benefit of the public, that shows that the risk profile of having any liquidity beyond about 12 months is considered massive. Only a few short years ago the spread between 12-month money and five-year money was much tighter than that.

Perhaps we could start with question No. 12. One of the issues with lenders generally - not just Permanent TSB - has been their failure to engage with distressed borrowers. In response to question No. 12, Mr. Masding said the bank had accepted – I note the word "accepted" – a small number of voluntary surrenders, approximately 200 over the previous five years. We do not know the number of distressed mortgages, but they have a combined value of €36.2 billion. Permanent TSB accepted 200 offers, which is extremely low given the number of distressed borrowers. How many of the borrowers sought voluntary surrenders?

Mr. Jeremy Masding

I do not have that data with me. The data I have is that we have had 312 repossessions since 2005 and circa 70% of those were voluntary surrenders.

On that point-----

Mr. Jeremy Masding

I will provide the data for the Senator.

On that point, I am not interested in the 312 repossessions because I am familiar with the method, the courts system and repossessions generally. What I am concerned about is the number of borrowers who have sought to make voluntary surrenders. I would be interested if Mr. Masding could furnish data on the number of clients who attempted to make voluntary surrenders.

Mr. Jeremy Masding

I will respond to the Senator with the data.

Any additional information should be relayed to the clerk and then it will be passed on to members. This is preferable to responding to the individuals who have asked the questions. I will mention that again at the end. The response can be made centrally.

Mr. Jeremy Masding

Yes.

On the same question, as has been noted by one of my colleagues, Mr. Masding indicated that borrowers continue to be liable for any amount owing following the successful sale of the relevant property. For example, if the shortfall on a sale is €200,000, is the amount parked or does it continue to rack up costs?

Mr. Jeremy Masding

What I said verbally was that we go through a process and if there is a shortfall at the end of it, I and my chief credit officer make the decision as to whether we will write that off in total or write it off, not charge interest any more but retain the possibility of a future dialogue with the customer whereby we could return some of the capital to the taxpayer.

What concerns me is this kind of muddy-water syndrome whereby there is absolutely no clarity for borrowers, not just in Permanent TSB but in institutions generally, on how they will be treated by financial institutions. I note that later in the document Mr. Masding is asked the methods he has for dealing with arrears. I think it is question No. 21. He stated that he had developed a wide range of initiatives to assist customers facing challenges in respect of repayments. He outlined a number of categories. Could he provide me with the number of borrowers in arrears who have been offered and have accepted solutions and the breakdown under the various categories? In other words, how many of the distressed borrowers have been offered reduced payments, interest-only payments, long-term extensions, split mortgages and equity participation? Could he break the numbers down by category?

Mr. Jeremy Masding

Yes, of course I will do that. Senator Hayden made a comment to the effect that she felt customers were unclear as to how to deal with their financial institutions. I have been in the job for 21 weeks. I cannot comment on the culture that was pervasive-----

Could I stop Mr. Masding? I agree with my colleagues that he has been open and forthright with the committee, but if he is not able to answer the questions, could the head of mortgage lending not provide those answers? Do the colleagues on either side of Mr. Masding not have the information? The questions were submitted in advance.

With which question is Senator Hayden unhappy?

A number of questions have come up-----

I am trying to ascertain whether there is a specific question. We have adopted a new practice on this occasion, which has been most helpful, in which a list of questions is sent in advance to the witnesses. I do not say one way or the other whether everyone is happy with the answers given, but responses have been made to each of the questions. The witnesses can be asked supplementary questions during the meeting. If they are not in a position to answer them, we will invite a further response. We will send the witnesses a transcript of today's proceedings, which will make it easier, and they can give us further information by way of response. If there is a question that has not been answered satisfactorily it is open to members to pursue that now, and if an answer is given one of two things could happen. The witnesses can say they will give us the answers subsequently, which is fine, or that they either cannot or will not answer a question, which is another category of response.

Mr. Jeremy Masding

We do not wish to say anything that might not be correct.

I have noticed that Mr. Masding has tried to avoid that, which is recognised by the committee.

I fully understand that Mr. Masding does not wish to give us erroneous information and that he is still reading himself into his job. We appreciate that he has offered to come back to the committee on another occasion but I am concerned, particularly in the context of the personal insolvency legislation that the Houses will face shortly, that there is a complete and total lack of clarity for borrowers from financial institutions, including Permanent TSB. I am familiar with this area. A number of clients have said this to me about Permanent TSB. There is an absolute lack of clarity as to what they will be offered and what they are entitled to seek. Doing things on a case-by-case basis is all very fine but from the point of view of the customers the water is incredibly muddy and they cannot see their way through it.

I note, on that point, that Mr. Masding was asked to provide to the committee a copy of the written guidelines used by the institution. No answer was given to the question. Perhaps Mr. Masding could answer the question of whether there are written guidelines.

Mr. Jeremy Masding

Senator Hayden has asked two questions. If my customers, through her as their representative, are saying that we are not being clear in the ways that we can help them then I take that on the chin as a criticism. I can only give Senator Hayden my word that I will go back to the office and look at the way we are engaging with our customers and I will try to raise the standard. That is the best answer I can give her.

With regard to the second question, I am not prepared to provide those procedures because they are commercially sensitive.

Again, we are back to the issue of clarity. If one does not have written guidelines as to how the institution deals with people in distress-----

Mr. Jeremy Masding

We-----

Mr. Masding did not say he did not have them; he said he was not prepared to provide them to the committee.

Mr. Jeremy Masding

We have written guidelines. We are building out what I perceive, based on my own international standards, to be an excellent collections function. We have written standards but I put them in the category of being commercially sensitive.

I accept the answer but I again return to my point: the waters are muddy. We have upcoming legislation dealing with personal insolvency. People will be required to go through the mortgage arrears and resolution, MAR, process before they get that far and if institutions such as Permanent TSB are not prepared to be clear and transparent, borrowers will not know where they stand and will not be able to work their way out of the dilemmas they are in. We have all accepted-----

Mr. Jeremy Masding

Let me repeat myself. There is the issue of external communication with customers, on which I take Senator Hayden's criticism on the chin, because my customers are using her as a voice. I assure her that I take that seriously and I will go back and look at the way we are communicating. Let us differentiate between that and the internal processes we use to go through the arrears management process. I put those in the commercially sensitive category.

I accept Mr. Masding's point. To reiterate, the darkness, muddiness and lack of clarity are not helping borrowers deal with their debt.

Mr. Masding mentioned the personal insolvency legislation when making his statement. Does he have any particular views on the way the personal insolvency legislation will impact on Permanent TSB's capacity to deal with further mortgage arrears?

Mr. Jeremy Masding

I thought the Senator might ask me that question and prepared some notes on it. I am an advocate of protecting those who are truly in distress and, therefore, the Senator will hear nothing but advocacy from myself and my colleagues regarding the Personal Insolvency Bill. I have three issues with it which I would like to work through. I am a guest in her country. I have some experience of doing this and therefore I hope I can contribute.

The first issue is that as far as I can understand the treatment of negative equity is unclear for the purpose of personal insolvency arrangements, PIA, voting. The second arises from my personal experience. The role of the personal insolvency practitioners, PIPs, must be carefully monitored by us as a group. My experience of the individual voluntary arrangements, IVA, market in the United Kingdom is that one has to delineate and be very clear that PIPs should not be allowed advertise to borrowers and should rely on intermediaries for introduction. The role of a PIP must be independent and unless I have misunderstood it, that is not clear.

At the risk of causing controversy, I still think the €3 million cap is too high because it brings in an element of customer who is not personally insolvent. It moves into a different place.

I will conclude by making two brief comments, the first of which is on the question of a reasonable standard of living. I bring to Mr. Masding's attention, if he is not familiar with them, guidelines issued by the Vincentian Partnership for Social Justice as to what constituents a reasonable standard of living. One of the major criticisms made against lending institutions is the manner in which they treat customers in determining their payment capacity, and Mr. Masding's institution has not been without criticism on that front.

Mr. Jeremy Masding

I note the Senator's point.

Second, Deputy McGrath raised the issue of the buy-to-let market, about which I have significant concern, and I note the high level of impaired mortgages on Permanent TSB's loan book. We have a legal system which does not allow stand-alone buy-to-let mortgages, and I take Mr. Masding's point about the higher risk profile, but the reality is that buy-to-let failures impact on domestic residential property. As one of the largest lenders in the country in both the buy-to-let and the domestic mortgage market, surely Mr. Masding is conscious of the cross-over between buy-to-let distress and the impact on the domestic loan book.

Mr. Jeremy Masding

Yes, I am conscious of that.

In the context of what Mr. Masding said about passing on reductions in interest rates to buy-to-let mortgage holders who have variable mortgages, a point made clear on a number of occasions by interested parties such as the Irish Property Owners Association and so forth, there is a tipping point at which buy-to-let mortgages will not be viable. It is a comment more than a question.

I do not think Mr. Masding is disagreeing with it particularly.

I am just making that point.

I thank the witnesses for attending. It has been a frank exchange. I have a number of questions to ask and observations to make on which Mr. Masding or his colleagues might comment.

I do not have the same professional background in this area as some of my colleagues but it is abundantly clear we are dealing with a very sick bank in terms of its state of financial health. I base that on a number of observations. The total loan book is €38 billion of which 58% of the domestic mortgages and 85% of the investment mortgages are tracker. I presume it is the case that with all tracker mortgages Permanent TSB is losing money. Mr. Masding did not give us the percentage of arrears in trackers but does he have that figure?

Mr. Jeremy Masding

If I can go back to my original remarks, what we are trying to achieve is a viable good bank that can participate in a rejuvenated Irish banking system. Within that good bank's balance sheet, as and when that legal separation happens, there will be a mix of trackers, variable rate mortgages and others in the good bank.

My question was whether the bank had the level of arrears on its tracker book on domestic mortgages and buy-to-let mortgages. Mr. Masding gave us the figure of 58% of domestic mortgages-----

Mr. Jeremy Masding

I will see if I have that information.

Is Deputy Creed's question on the numbered list of questions?

What is the number?

That question is on the percentage of the institution's loan book that is mortgage related. No. 17 is on the percentage of mortgages by interest type and maturity.

I might have taken the figure from Mr. Masding's speech. It is that 58% of the domestic mortgages are tracker mortgages. In the context of engineering a good bank, I am anxious to know the element of tracker mortgages the bank will be left with given that tracker mortgages are a substantial negative on its balance sheet. The taxpayer has recapitalised the bank. The standard variable rate loan payer is being bled to make up the bank's current unsustainable model. Mr. Masding is trying to re-engineer a good bank that he says will leave his institution with some tracker, standard variable rate mortgages. In terms of Mr. Masding's engagement with the Department of Finance and with the troika and his proposals which were lodged with the Commission in June, what percentage of his bank's tracker loan book is he seeking to divest his institution of, what will it be left with, and of that loan book, what arrears are on the tracker side?

It is difficult to concentrate if Deputies speak while Deputy Creed is asking a question.

Mr. Jeremy Masding

Obviously, the conversations are ongoing.

Mr. Masding has submitted that proposal to the Commission and therefore I take it he knows what the proposal contains.

Mr. Jeremy Masding

No. I submitted a strategic proposal to split it. When the actual legal transfer happens, we will decide at that time how much goes either way. The total size of the good bank's balance sheet, as I approximate it, will be between €14 billion and €16 billion of assets.

And the impaired loans.

Mr. Jeremy Masding

I am sorry. I do not have that data with me. I know the size of it.

What is the estimated margin on that tracker?

Mr. Jeremy Masding

Today or the tracker that is going over?

Both. The margin on the trackers.

Mr. Ian Dilley

Today, the average margin on a home loan tracker is about 100 to 110 basis points.

Mr. Ian Dilley

Yes. To be clear in terms of the selection process, it is probably inaccurate to assume that all tracker mortgages would be moved into this special purpose vehicle because the bank has some tracker mortgages that are performing and that have a higher-----

Performing but loss-making. The customers are paying but the tracker is still a loss-making venture for the bank.

Does Mr. Dilley have any matched trackers on EIB funds?

Deputy Mathews, will you allow Deputy Creed ask questions for the moment?

Mr. Jeremy Masding

Let us start at a principal level and I will work my way down. In the good bank, assuming the system can help me find a solution, there will be a mix of trackers and standard variable rate, SVR, mortgages. The Deputy can assume from that that within our existing pool of tracker mortgages, we have some trackers whose margin and performance would mean they are appropriate to continue into the good bank. Does that answer the Deputy's question?

Not to the extent I desire. Mr. Masding's definition of a mortgagor with a performing tracker is somebody who is making his monthly repayments. However, with regard to the loan to the bank, there is no profit but a loss.

Mr. Jeremy Masding

There are some tracker mortgage holders whose risk margin over and above the ECB rate is such that the particular loan is profitable.

That is the question I wanted to ask. What are the lowest margins?

Deputy Creed has the floor.

Will a mix of trackers be taken into the new entity? Is this the proposal with regard to performing and non-performing loans or is the bank seeking to make a quantum leap into the new entity with performing-only profitable tracker loans? The graph in respect of question No. 1 shows the overwhelming majority of the loans seem to be tracker loans. I am concerned that the new entity will still be dependent on bleeding the standard variable rate mortgage holders to subsidise the loss-making entity. The current position is unacceptable. The taxpayer has made recapitalisation payments and this cannot be run down on the basis of continuously subventing the loan book. What are the survival prospects of the new entity on the basis of the standard variable rate mortgage holder carrying the can for everything? It seems to be based on a very small number of standard variable rate mortgage holders. The new entity must be substantially smaller than what the current loan book would indicate.

Mr. Jeremy Masding

There are three points to which I would like to respond. I will comment on the Deputy's statement that there is subsidisation, on the process by which we split the assets and on the size of the bank, but perhaps in reverse order. We went through a strategy process and I can assure the committee that we considered all the alternatives for the bank, including closing it down. We came to an agreement having examined the criteria by which we would split assets between a good and bad bank. I would rather not comment on the criteria; suffice it to say that there was a yield hurdle and a performance hurdle. Having applied the science to every single loan, we ended up, in the good bank, with a balance sheet that has some trackers and some standard variable rate mortgages. Regarding the trackers, the margin above the ECB rate meant that the loans were appropriate to be put in the good bank.

I reject the Deputy's point on subsidisation. Both books are loss making at present. I have nowhere to go with the trackers because I have a contractual obligation with my customers. Regarding the standard variable rate mortgages, the price is a function of the blended cost of funds. As I have mentioned many times this afternoon, as and when we can manage that blended cost of funds, I will have every intention of ensuring our customers benefit therefrom.

Assuming the proposal to the Commission gains approval and the bank divests itself of a substantial part of its tracker book, thus regaining a functioning loan book, what will be the immediate benefit to the standard variable rate mortgage holder? Mr. Masding stated it costs €30 million to make a reduction of 0.5 percentage points. If the desired loan book is achieved, through the approval of the Commission, what will be the net benefit for the standard variable rate mortgage holder?

Mr. Jeremy Masding

As of today, the benefit would be non-existent because, in parallel, I need to try to ensure the blended cost of funds for the variable rate book is managed out. Once I get the balance sheet, I will still be trying to manage down the blended cost of funds. On the assumption I can do so, I can pass the benefit to the variable rate customers.

Mr. Ian Dilley

It is worth bearing in mind that the access the bank currently has to ECB funding in the plan would no longer obtain. The system funding would effectively go towards funding the winding down, or the assets going into the entity. Effectively, the subsidy the bank is getting today from the ECB funding would disappear.

Mr. Jeremy Masding

It is important to say that we are a long way from that happening. I do not want to speculate on behalf of the system. I run Permanent TSB and know we have a strategy and a future for a good bank. This partly involves working with the system associated with the split. Until that happens, I would prefer not to speculate further.

Regarding branch networks, staffing, etc., what is the timeframe for the rolling out and completion? Is the deadline the end of 2012?

Mr. Jeremy Masding

More likely by the end of quarter 1 of 2013.

I thank the delegates for attending and for their frankness.

The crux of the matter is the cost of funds for the organisation. In light of this, the ESM has a great deal to offer all the Irish institutions if we could get it to provide funding at a rate close to that of the ECB, 75 basis points. If this could be increased to over 50% of the bank's tiered capital, Permanent TSB would then be in a position to start reducing its standard variable costs and, possibly, make some profits on its tracker mortgages. I know the bank is in discussions with the troika. I insist that what I propose be pursued as much as possible. When giving relief, it is worthwhile bearing in mind that there is a generation who have taken out mortgages, particularly after 2002, in what can only be described as a negligent lending environment. Institutions are fully culpable for what they have done to that generation. There needs to be a moratorium on profit making on those loans. The bank is not going to offset the cost of those loans but it should ask whether profits should be made on the loans of the most vulnerable, who have distressed mortgages, the most extended terms of credit and the longest loan repayment periods. As with every other area of the law, negligence has consequences. For me, the consequence of bad banking is the need for a moratorium or for the negation of some of the profits to be gained on the backs of the younger generation. I convey this message as an elected representative.

It appears that Permanent TSB's wholesale funding must be exceptionally expensive. The deputation is not giving away too much detail in this regard. If 25% comes from wholesale funding, 25% from the ECB and 40% from deposits, the rate must be higher than 6%, or the operating costs are exceptionally high.

Question No. 3 indicates that on a like-for-like basis, a change in the standard variable rate for residential domestic mortgages would change the bank's interest income by approximately €30 million per annum out of an interest income from standard variable rate mortgages of €260 million. Is there an income of €260 million from standard variable rate mortgages at present?

Mr. Ian Dilley

That is approximately correct.

Consider question No. 10, on the extent to which standard variable rate mortgages are subsidising the loss-making tracker book. The answer was that both segments of the mortgage book are loss making at present. Is there not an inaccuracy if the bank is stating it is making a profit of €260 million while-----

Mr. Ian Dilley

The difference between top-line income and profit comes into play. The operating costs, impairments and funding costs must come out.

Having worked in finance and banking, I understand the recapitalisation of banks was to deal with impaired loans. The capitalisation of the banks was for the purposes of dealing with impaired loans. If Mr. Masding is telling members the operating costs and the impaired loans are being built into the present cost of funds when the bank considers setting variable rates, how is that the case? Mr. Masding should elaborate a little further on how he answered Deputy O'Donnell earlier.

Mr. Jeremy Masding

Let me have a go at trying to explain it. The Deputy should stop me at any time if I am not speaking in plain language. We were capitalised against a potential stock of impairments in the future. Every month, in our profit and loss account, obviously the performance of the loan book is changing. Consequently, every month we take that stock of provisions and they go up or down depending on the performance of the book. If they come down, then by definition that goes straight through to our bottom line but if they go up, they become a cost in our profit and loss account. At present, net, there are more customers who are flowing into impairment. Does that make sense?

Mr. Jeremy Masding

In consequence therefore, each month we must add in another level of flow to the stock of impairments.

Was the capital not put in there for the purposes of shoring up anything that would happen along those lines in order that the continuous basis should not be affecting the bank's cash flow or profit and loss? That is the question. I also am happy to allow Deputy O'Donnell to come in at this point.

The bank was not obliged to maintain the status quo. Our understanding-----

While Deputy Spring might be happy to allow Deputy O'Donnell to come in and I will allow that if necessary-----

It is self-explanatory.

Yes. We should try to get the answers.

Mr. Ian Dilley

As mentioned earlier, while we were capitalised for a certain level of credit losses over the three-year horizon of the prudential capital assessment review, PCAR, plan, that also was taking into account all the interest income we would earn on the mortgage book through that period, in addition to our cost base and the cost of funds. None of those things have changed materially.

I need to come in. The Governor of the Central Bank, Professor Honohan-----

If Deputy Spring wishes to yield some of his time-----

I am happy to so do.

----- within the period I have allotted to him, he may so do. However, he should be aware.

That is okay, if Deputy O'Donnell will be brief, as this is crucial to the understanding of how the banks have been capitalised.

Professor Honohan-----

Mr. Jeremy Masding

Perhaps I can help. As three members essentially have asked us the same question, we obviously have not been able to articulate it. If members will please allow me to return to the ranch, I will provide the joint committee with a written explanation of the science behind impairments.

No, that is not-----

I certainly would like to read that. Not being precisely familiar with it myself, I would like Mr. Masding to prepare such a note for the benefit of the joint committee, even if verbal discussions on this issue continue.

Mr. Jeremy Masding

I will do that.

The Governor of the Central Bank has stated we have more than adequately capitalised the banks. If one capitalises a bank for the purposes of impairments, then there should not be a knock-on effect in respect of any of those loans which are not performing at present. Consequently, the margin that is being offset on a monthly basis, or however often the bank is drawing up its profit and loss accounts, is beyond my comprehension and that of some of my colleagues on this committee who also have a background in finance and banking. Mr. Masding should elaborate a little in respect of the principle in this regard. Members are not trying to badger him in any way and appreciate he is attempting to do something. However, he also must understand this is a public forum. When the Minister for Finance indicates in the Dáil Chamber, 16 months after taking office, that he has a problem with the banking institutions and is unsure of the level of accuracy of the information, it is the duty of members to probe to get to the bottom of this.

Mr. Jeremy Masding

I will revert with the details. The principle is that we are adequately provided and this is reviewed on a regular basis. I will then explain how this links into the PCAR and the capital process.

Briefly, this is very simple. When the banks were recapitalised, surplus capital was put in by the Irish taxpayer to enable the bank to be able to provide for impairments in the future which had been examined in the PCAR process. However, the bank is factoring such impairments into additional bank charges to customers. This was not the intention behind the recapitalisation. Effectively, the bank is taking X number of billion euro and intends to hold onto it and to not let any of that money flow out. In the case of any slippage, it will not come out of the capital pile but will affect the interest rate. This was not the intention at the time.

Ultimately, this will have the effect whereby those whose loans are performing will carry the loads for those with non-performing loans.

In what way is the proposition Deputy O'Donnell has put to the witnesses not true?

Mr. Niall O’Grady

I refer to Deputy O'Donnell's earlier analysis of our standard variable rate, SVR, and the periods during which our SVR increased out of sync with the ECB, of which there were four such increases in total. Actually, there were five, the most recent of which was a reduction ten weeks ago. However, the four to which the Deputy referred pertained to increases and the maximum increase we levied outside of any ECB increase was 1%. I note the organisation had passed the PCAR but fell on the final stress test hurdle and was the last organisation to fail the stress test. In advance of that, the objective of increasing the net interest income as a result of moving outside of ECB increases had been to attempt to ensure the capital base of the organisation was strong enough to absorb the additional stress test conducted by BlackRock. Obviously, this did not happen but this was the intent behind it. However, this happened in advance of any recapitalisation of the organisation. Consequently, I do not seek brownie points for this but subsequent to the recapitalisation, the only change made outside of an ECB rate change is the one we made ten weeks ago, which was a reduction of 50 basis points. Based on this, it would not be correct to link any standard variable rate increases or additional charges to customers to attempts to keep that capital base shored up.

I will ask one final question, after which Deputy Mathews can follow up.

The Deputy's time is up.

The witnesses should elaborate on the present position with the troika with regard to the cost of funds and the ESM. However, Deputy Mathews should be allowed to finish off in respect of the other issue. I have concluded.

Deputy Mathews, this should be a net question.

Standard variable rate customers sign documentation when they agree to take on a loan. They never see the words-----

Is this a question?

Yes. The phrase, "blended cost of funds" is never mentioned in that document. The Chairman is a lawyer and will be interested in this.

No, just ask a question.

Blended cost of funds is never mentioned but the average cost of funds is, as being the basis for the variable rate loan. A margin, usually on top of the average cost of funds, which will be determined by the board from time to time, usually is what is written in. While I do not have a loan document to hand, I am familiar with them. However, this average cost of funds has been absolutely blown out of the water by reckless lending on the part of the previous boards of this bank. Therefore - this is the important bit - the fundamental underlying basis of these loan agreements has been blown out of the water and standard variable rate customers would be entitled to state there has been a fundamental breach of contract on those loans.

I ask one further indulgence by the Chairman. A customer of the bank has written to me to tell me about receiving a letter-----

No, Deputy.

Please, this is about the standard variable rate. The customer in question received a letter from the bank apologising to customers about the penal rates it had charged standard variable rate customers to fill the gap left by the internal decision to advance so many tracker mortgages. The aforementioned customer asked whether the bank would consider it only right and fair that a 24-month rebate of unreasonable interest charges on such loans be advanced.

The witnesses also should answer my two questions on the troika and on negligent lending and whether there should be a moratorium on profit-making on the duration of such loans, because concern has been generated in this regard.

Mr. Jeremy Masding

As for the troika, I am not party to those discussions. As they are system discussions between the Department of Finance and the troika, I am afraid I cannot comment on them.

Did Mr. Masding not refer to a meeting next October with the troika?

Excuse me. Did Mr. Masding not state the bank had an engagement with the troika?

Mr. Jeremy Masding

Yes, we meet the troika every quarter, based on our strategic plan.

Is this what Deputy Spring is asking about?

Yes, that is exactly what I am asking. Part of that plan should be the cost of funds and how the ESM can be realised to the benefit of the consumer and ultimately the economy.

Do other issues come up when you are engaging with the troika?

I think they should.

Can Mr. Masding say?

Mr. Jeremy Masding

The discussions I have with the troika are focused on the strategy of Permanent TSB, which includes the separation of good from bad. It therefore includes how we fund good from bad. I would stop there and strategically that needs to happen in order for me to run a viable bank. In terms of how that will actually happen, I am not party to those discussions.

Maybe we can help with those; as regards negligent lending and compensation?

Mr. Jeremy Masding

I think it would be equally negligent for me to increase the burden to the taxpayer by making further losses.

It is a chicken and egg sort of reason.

Mr. Jeremy Masding

Yes, of course. I want to be part of a rational banking system that makes a reasonable return for the shareholder.

I understand that.

Mr. Jeremy Masding

In terms of the moratorium, if I do that we are going to go even further down the curve.

We are not talking about taxpayers' money. We are saying when the bank is profitable it will be making more money on the most negligent form of lendings, those hyper-extended loans with the highest level of debt. That is where I want the moratorium, because the people who have suffered the highest consequences need to have some level of forgiveness shown towards them. It is only right and just. Negligent lending must have consequences.

Deputy Spring is making a valid point.

Mr. Jeremy Masding

Yes. I dream of the day I come back here to talk about a profitable Permanent TSB. Once we are in a situation where we have got the bank fixed, the values of transparency and customer fairness will be right at the heart of it. I will look at a variety of different scenarios at that time.

I would like Mr. Masding to comment on one thing that baffles me, not just in his bank but with all of the banks we have recapitalised. What precisely is the relationship between his bank's policies and the Government, which represents the people, which has rapidly recapitalised Permanent TSB? Frankly, I find it frustrating at this stage that we have recapitalised Permanent TSB and kept it in business, when those of us on the left argued that we should have nationalised the banks immediately as a response to this crisis. We often get the response from the Government: "Oh, but the banks are nationalised". The very same Government then gives out about the behaviour of banks and essentially says it has no control over the banks' policies even though it has effectively refinanced them.

What is Mr. Masding's relationship to the Government, which represents the people, and to the troika? To what extent does the Government or the troika tell him what to do? I am thinking in particular about the European Central Bank. On a number of occasions in the Dáil I have tried to highlight guidelines issued by the ECB at the outset of the crisis, which I frankly believe are key to a lot of what is going on. At that time, the ECB warned governments that they should avoid nationalisation if possible, but if it were necessary to nationalise, no bank must divert from the central orientation on profit maximisation and a commercial approach to banking. It should not be deflected on to social goals or wider macro-economic goals. To my mind, that is the heart of the problem because I think Permanent TSB should be diverted on to those issues, particularly because the bank is only in existence because of public money. In my opinion, the bank is there to represent the public interest and not just shareholder interest.

So can Mr. Masding comment on what his relationship is with the public authorities and the troika? To what extent do they have any say or influence over his bank's policies, including the sort of policies we are debating and discussing here?

Mr. Jeremy Masding

We run the bank as an independent organisation. I am accountable to a board of directors for the decisions that I make. As an institution, we run a standard model. We have a shareholder, which is the Government, and I meet with that shareholder regularly. I am accountable to that shareholder for delivering the strategy and plan which has been agreed by the shareholder and the troika.

Could Mr. Masding elaborate on that a little? This is the crux of it to my mind, although I have a few other questions about the specifics. It seems to me as if people can pass the buck around forever on many of these issues, but we need to clarify who is making the decisions.

Mr. Jeremy Masding

I make the decisions.

Mr. Masding makes the decisions?

Mr. Jeremy Masding

Yes.

Let us say, for argument's sake, that the Government represented by the Minister for Finance, says:

We're not happy with Mr. Masding's decisions. We think that people on standard variable mortgages, for example, are getting excessively and unfairly penalised. We're not happy with it. We're not happy with the way you're dealing with people in mortgage distress. We don't think it's transparent enough. We don't think it's fair. We don't think you're properly taking into account their individual circumstances. We don't think you're properly taking into account the culpability of the bank in recklessly giving out the loans in the first place. We want you to change your approach and your policy on these things.

How would that stand, if the Minister were to say that? Are there guidelines around Mr. Masding's relationship with the Minister?

Mr. Jeremy Masding

Let me go back to what I said. In the model that we are operating, I present a strategy to the shareholder and the troika. Within that are the various choices that I recommend we make about how we run the bank. Within those boundaries I am obviously accountable to the board and to the shareholder for executing the choices that we have made within our plan. If at any point in time the shareholder mandates to me that those choices need to change, then in a market the shareholder is the ultimate decision maker. In terms of how that works, I meet with the shareholder on a monthly basis. I share our progress against the plan. I am regulated by the Central Bank of Ireland. For example, if any of the stakeholders feel that my own stewardship is not fit for purpose, they have the right to remove me from office. If at any point in time they wish to change the way we conduct business, they obviously have the ultimate right of decision. Within the boundaries that I described to the Deputy in terms of trying to be part of a group of people who fix this problem, I make decisions within those boundaries.

That is very helpful. I am not trying to get at Mr. Masding because I think he is working within confines that are set up around him. It is quite useful to clarify this, however, so perhaps he could amplify what he has just said. Am I correct in saying that if the sole shareholder, which is the State, decides that it is not happy with the particular manner in which Mr. Masding is dealing with some of these key issues - like standard variable mortgages or distressed mortgage holders - the Minister could relay that to Mr. Masding who would respond with a change in policy? Is that the nature of the relationship?

Mr. Jeremy Masding

That is the nature of the relationship. If the shareholder determines that I am not delivering to a standard or set of rules which the shareholder sets, then as per any capital market institution, I am removed from office.

No. I am not talking about removal from office, I am talking about policy.

Mr. Jeremy Masding

I was using that as an example.

Mr. Jeremy Masding

I have a strategy and a financial plan. I have a set of aspirations that the shareholder wants to work to create a rational banking market. I need to participate in a rational banking market as I have described. That is where we are.

Okay, I think I am getting a little bit closer to an answer.

Mr. Jeremy Masding

That is codified in an agreement known as the shareholder framework.

Could Mr. Masding send a copy of that on to the committee?

Mr. Jeremy Masding

I will have to ask the shareholder.

If Mr. Masding could pass on the request to the shareholder,-----

The Deputy himself could ask the shareholder.

(Interruptions).

-----the shareholder being the Minister for Finance.

Mr. Jeremy Masding

I will do so with pleasure.

Is it Mr. Masding's understanding-----

Mr. Jeremy Masding

The wheels are turning a bit slow now but I think that framework agreement is on the Government's website.

Is it the policy of the European Central Bank that banks, whether nationalised or not, must not divert from the central objective of profit maximisation to other social or macroeconomic goals?

Mr. Jeremy Masding

The best way for me to answer that is that I signed a contract to do this job under a business model which is to return this bank to viability and eventually back into private hands. On that basis, the Deputy can assume I am running the bank for a particular end-goal. I cannot comment on the ECB.

I think Mr. Masding has answered reasonably. To my mind, ECB policy is the crux of the problem but it is not one Mr. Masding can solve individually.

Mr. Masding said the bank has no policy of debt forgiveness. As a consequence, its approach is to deal with cases of mortgage distress case by case and there may be some write-off further down the road if the bank feels it cannot get any more back from a customer.

Does a case-by-case approach for customers also extend to lenders? In other words, given that Mr. Masding has acknowledged the bank has culpability for the reckless lending that went on during the bubble, does the bank take on board its culpability when examining an individual's case? This is important to me. The other day, I was in PermanentTSB with a borrower who was given a leave of execution-----

Mr. Jeremy Masding

Was the Deputy made welcome by the staff?

Yes, the bank officials were very friendly. However, it is not at all clear what will happen to the borrower who is in an unsustainable situation. The bank did not pull the trigger that day but it is not all clear how the bank will deal with it. One recurring element in such cases is the borrower claiming the bank was flinging the money at him or her. Is the bank looking at this when it makes a decision on how to deal with individual customers? It seems to me that it is morally bound to do so.

The banks, the politicians and the developers were the ones responsible, not the people who were just trying to put a roof over their heads. It is different for people who were borrowing for big commercial deals or engaging in speculative borrowing to profit. When it comes to people trying to put a roof over their heads, however, the bank bears the primary responsibility for a grossly overinflated market.

Mr. Jeremy Masding

There are two parts to the question. First, I have a fiduciary duty to protect the capital base of the bank. Accordingly, it would be remiss of me to enter into a debt forgiveness world. What we are all trying to do is rebuild a rational banking system.

With regard to individual cases, I assure the Deputy, I am an active member of the credit committee. When there are learnings around policy, process or people, I will take the appropriate action.

What is the total amount in euro that the bank has surrendered all legal call on?

Mr. Jeremy Masding

There has been no debt forgiveness.

There has been no debt forgiveness at all.

Mr. Jeremy Masding

I have written off------

In fairness, Deputy Boyd Barrett, time is up.

Every other member got-----

No, I have been timing it very carefully.

How much in capital?

Deputy Mathews cannot come back in again. Deputy Twomey is next.

By how much was the bank recapitalised?

We have been through a great deal of this already.

By how much was the bank recapitalised and how much in losses was predicted in the prudential capital assessment review, PCAR, exercise?

Mr. Ian Dilley

It was recapitalised with €4 billion. The credit and deleveraging losses would have been approximately €2.5 billion to €3 billion over the three-year plan.

On the basis that the projected losses do not exceed the amount given to the bank, what is the problem with debt forgiveness for domestic mortgage holders when it has the money?

As well as writing down settlements.

Mr. Jeremy Masding

The answer to that is the infamous moral hazard argument.

The same applies to the other banks.

Sorry, Deputy Mathews I call on Deputy Twomey.

Thank you, Chairman. Deputy Boyd Barrett was moving on to a philosophical level as to how the banks are operating. Essentially, the ethos is still the same with them being profit-motivated even though they have changed drastically from being the life flow of credit in the economy to being on life support.

Some of us have been on this committee since 2007 but I still get that sickening feeling that the culture within senior management in the banks has not changed. I am not specifically referring to Mr. Masding who has been quite open to the committee, as well as some of the newer senior executives. I wonder, however, has much changed behind the walls of the banks' headquarters.

I suppose it goes back to the discussions in the days after the bank guarantee in September 2008 as to whether there was an issue with liquidity or insolvency. At the time, we were informed it was an issue of liquidity which then turned out to be an issue of insolvency. Even with the information coming out now, I still feel we are not getting full answers. That is still a concern to this committee. We all know PermanentTSB has been hiking up interest rates for some business customers quite significantly in the past several months. That hike will drive people out of business or will cripple them for years. That has happened.

There is a need for the banks to investigate their ethos. Perhaps Mr. Masding needs to explain to the Government or the troika that we need to move away from a pure ethos of profit. I am no socialist and I am certainly not a member of the United Left Alliance, but we are trying to keep households and businesses going. I have concerns in this regard. I look forward with interest to hearing subsequent answers. When we hold a banking inquiry we will need to take account of what is currently happening in the banks. I hope Mr. Masding is a breath of fresh air to the system because some of us still have our doubts.

Before I invite Mr. Masding to make his concluding remarks I will allow each of the four other Deputies one minute to ask questions.

Mr. Masding gave us a breakdown on his funding. Am I correct in calculating that the deposit rate is approximately 3.8%? The ECB rate is 0.75%. As the bank is currently unable to obtain funding on the wholesale markets I presume the wholesale rate is historic. I ask for an approximate estimate of the rate so we can get an idea of the blended rate. What is the margin on the standard variable rate mortgage? The margin on tracker mortgages is approximately 1.1% higher than the ECB rate. I assume that the gross profits of €260 million are net of the margins charged. It appears that variable mortgages are picking up the balance of the cost of funding.

What has been the typical income-cost ratio for Permanent TSB to date? Will there be a shortfall in endowment mortgages and how are they going to be addressed?

I ask Mr. Masding to do his best to answer these questions but if they require further detail I will explain how that can be facilitated.

The observations I made earlier on standard variable rates, cost of funds and loan documentation also apply to the other banks. They have been less than forthcoming in their explanations. I do not want Mr. Masding to feel alone in this regard. What is the lowest margin and what is the highest on loans of, for example, €300,000 in the book?

Having sat through three hours of this meeting and listened to Mr. Masding's frank comments, I wish to leave him with an observation as a public representative. The bank which he now represents engaged in reckless lending in the lead up to September 2008. He has acknowledged that and apologised to customers for it. Since September 2008, the same institution has engaged in rent gouging, specifically around standard variable rate mortgage customers. It is clear that its rates are several percentage points higher than the other State owned institution, AIB. The people of Ireland made €4 billion available to this same institution as part of the recapitalisation and Mr. Masding has admitted that not one euro of that amount has been forgiven for borrowers. I recognise that he is citing fiduciary responsibility but I do not think that is acceptable. His apology and those actions are in conflict and I ask him to consider that in his time as chief executive.

Mr. Jeremy Masding

We will answer the questions in a timely and transparent way. I have no closing comment other than to say I am here to try to be part of the group of people who fix the banking system. I know I am accountable to the committee for that.

I reiterate what I said earlier regarding additional information. Once the transcript of this hearing is available, the clerk will send a copy to Mr. Masding to give him an opportunity to review it. He indicated that he is prepared to address several questions when he has the opportunity to reflect on them and take further instruction and advice. I ask him to revert to us with further comments or answers which he was not in a position to provide today. If anything else occurs to him we would be happy to receive further information. I ask that he deal with the matter at the earliest opportunity and revert to us without undue delay. As it will be several days before we can supply him with the transcript, everybody will be operating within reason.

I thank the witnesses, Mr. Masding, Mr. O'Grady and Mr. Diley, for the briefing they provided and for answering members' questions. The committee appreciates Mr. Masding's application to these matters and, by his demeanour, his willingness to assist us. I am sure we will have further contact in the future.

The joint committee adjourned at 5.05 p.m. sine die.
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