Léim ar aghaidh chuig an bpríomhábhar
Gnáthamharc

JOINT COMMITTEE ON JOBS, SOCIAL PROTECTION AND EDUCATION díospóireacht -
Tuesday, 27 Sep 2011

Strategic Investment Fund for Small and Medium Enterprises: Discussion with Irish Business Corporation

In the next session we have a presentation by the Irish Business Corporation and proposals for the creation of a strategic investment fund for small and medium enterprises.

I welcome Mr. Mike Geoghegan, chief executive officer, and Mr. Gerry Fahy, finance director, from Irish Business Corporation. I apologise for the delay at the start of the meeting and that the representatives had to wait.

I remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official, either by name or in such a way as to make him or her identifiable.

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

I invite Mr. Geoghegan to commence the briefings on proposals for the creation of a strategic investment fund for small and medium enterprises. As the representatives were present for the earlier presentation they are welcome to make comments on it as well if they think they are useful to the committee.

Mr. Gerry Fahy

I thank the Chairman and members for inviting us to appear before the committee. By way of background, up to 2005 I had the experience of working in seven different banks which gave me wide experience in terms of the different styles of management and the different aspects of risk taking. In 1999 I was asked by the gentleman at my right to assist him as part of a change management programme for the then troubled State bank, the ACC Bank. In that period we had the experience of the programme for Government of 1997-2002, whereby it was one of the only banks that lost a significant amount of money. To change, fix, focus and reposition it was a challenge in its own right.

My background is as a chartered accountant and I specialised in cashflow lending and in the food sector, the health care sector and the waste management sector. I thought those sectors were significantly robust, in good times and bad, in terms of constituting acceptable risk.

In regard to the development of our thought process on SME lending, this is not something that has just been a recent flavour of the month. Mr. Mike Geoghegan and I and some of our team had real concerns in respect of the credit crisis and credit crunch in 2008. We liaised with Government officials and senior politicians. We met Mr. Niall O'Donnellan, a previous speaker, at a European Investment Bank meeting with Vice President, Mr. Sakellaris, on promoting the concept of SME lending.

In regard to comments made by the previous speakers, Mr. Mike Geoghegan and I will attempt to share with the committee the reason we think it is not possible for the pillar banks to have lending as its core priority. We will go through it in detail because we think the challenges facing them are onerous and multiple and we have got multiple, conflicting objectives. They probably do not achieve their single core objective, hence the reason we are appearing before the committee. As we see it, the objectives and the challenges facing the pillar banks is that they have to deleverage, that is, reduce the balance sheet size and to do that they must reduce their loan to deposit ratio down to 122%. They must restructure and downsize or, as the Americans would call it, right size, and with that there will be HR issues, because the level of staffing will be inconsistent with the shrunk balance sheet. As a result, the priority of lending is down in terms of the core objectives they have to hit.

Since 2005, I took up a lecturing position specialised in accountancy and tax and in 2011 with the Chartered Institute of Management Accountants, the Global CIMA, I have been short-listed as Global lecturer of the year in accounting and tax. It is with that and my banking experience that I have spoken tothe Chairman of the committeewho asked me to attend this meeting with Mr. Mike Geoghegan.

Mr. Mike Geoghegan

I have sat on both sides of the fence. I am currently an SME and a business owner. I have sanctioned loans and refused loans to businesses and I sat at the other side of the desk asking for loans from banks. One of the businesses I own is Ryan's Food Company in Naas. Yesterday I was dressed in jeans and T-shirt doing my business, but today I look like a banker. It is the persona we have.

As Mr. Gerry Fahy has said, we have looked at this issue for three or four years. We have had some meetings with previous Governments and Government officials and we have had some heated meetings and disagreements. On the record, we said that NAMA alone would not work the free credit in the SME sector. We made a bold statement - we were told we were wrong. Four years later, it is clear that NAMA alone has not freed up credit in the SME sector.

Our background is the reason for setting up an IBC and a specialist entity to supply credit into SMEs, exporters, local businesses and domestic businesses. We believe that up to two years ago the banks had undercapitalised problems and were non-functioning. We now believe the banks have been capitalised but are non-functioning. The reason for this, as Mr. Gerry Fahy said, is the list of objectives. The banks in Ireland have to deleverage by €70 billion; they have to reduce their loan books by €70 billion. Capital allows them have a strong capital base to lend more.

Their issue is funding. In the past three years there was a flight of deposits from the country and there was a flight of deposits from domestic banks. Currently the ratio of loans to customer deposits is somewhere 145% to 165% but that ratio must come down in two years to 122.5%. Simply put, loans must be reduced or deposits increased. In the past three years banks have not increased their deposits. Even though consumer deposits have grown, they are being invested in international institutions where they see their deposits are safer. Corporate investors cannot now place deposits with our pillar banks because their credit ratings are too low. Most corporate treasurers will not place deposits with a bank unless the rating is AA plus. The Irish banks will not be back in that position within a four to six year time-frame. A company such as Glanbia can not place deposits with AIB or Bank of Ireland. No matter how cash rich they become, and we support the company to export, they cannot deal with the Irish banks.

Cash rich companies cannot place deposits with Irish banks. Irish companies that export their products are doing so with the help of city banks and other large American banks. They have a choice of banks at the IFSC and do not need AIB or Bank of Ireland. The SMEs do not have that choice and must deal with domestic banks.

Let me tell members this story. I got an e-mail from my bank this morning on my way here asking me to lodge €75 as I was overdrawn on my business account. I paid it back €3,600 last week and an electricity bill of €2,000 yesterday. I told the bank that the credit cards are in the system, but I was told the money will not be there until tomorrow. To my reply, that it was the bank's system, I was asked to lodge €75 in cash. That does not make me think I can ask for €10,000 next week. That is what we are facing. From the bank's viewpoint, lending to SMEs is risky. It has always been seen as the risky part of banking.

The reason we are in a property bubble is that banks thought property lending was not just more profitable but safer as they had the collateral. The "biz 2 accord" came out and stated that term lending to property against security gives stronger returns on capital. It was all so risk averse. Cash flow lending became very unpopular ten to 15 years ago. ICC bank were very good at it. ACC only just got into it and tried to be good at it. The banks moved away from analysing cash flow to looking at security and the net worth of the customers. The banks wanted to know if a customer had the net worth to carry a bad project. We have all seen, since the collapse of Anglo Irish Bank, that when the whole house of cards started falling, the net worth disappears, the statement of affairs was worth nothing so they cannot pay it back. All the international accountancy bodies - I am not having a dig at my colleague Mr. Gerry Fahy, who is an accountant - thought it was safer lending because it was collateralised and secured.

Cash flow lending is difficult and requires expertise. We also hold that the banks do not have expertise. AIB and Bank of Ireland would have taken the last tranche of what they would have called the old school bankers in 1983 and 1984, that is bankers who would have gone through five years as a junior and five years as an SBO and have done banking and lending exams. After that they went for the yellow pack employees, where people were hired to sell at the front counter. Now in this time of need, the breed who came through in 1984 have probably left, the breed of 1974 are probably retiring, leaving a big vacuum in terms of expertise to analyse credit applications. At a time of greatest risk when SMEs find it harder to make profits, bank staff lack the expertise to match the difficult decisions. It is not a surprise that the banks cannot lend to the SME sector.

We are not here to defend a position, but as experts to propose one. We suggest that the Government has a difficulty in that it should be very careful about giving the banks objectives that are not complementary. We need the banks to deleverage by €70 billion but to lend the SME sector €10 billion in the next three years. One cannot find a more contradictory position. Bank of Ireland has submitted a plan to deleverage by €30 billion. In its plan it has shown growth in deposits in the next three years of €10 billion to €15 billion, after a three year period in which it lost deposits of €10 billion to €15 billion. The best case scenario requires €10 billion to €15 billion in deposit growth from its customers. AIB has no loan assets to sell. For AIB to reduce its loan base it must clear off impaired loans or try to eliminate other loans it does not want. It has to do so by repayments.

Bank of Ireland has probably about €10 billion of assets it can sell in a good market. Of the €70 billion required, at least €55 billion must be achieved by loan paydowns. We have asked ourselves how does a chief executive or a proposed chief executive deal with that? My father used to coach soccer teams, the last thing he would say on the football pitch is spread out and stick together. It is one of those instructions. How does one carry it out? The Government will have the stress of calling the banks pillar banks on radio and television while at the same time kicking them for not lending to SMEs.

Public confidence in the pillar banks does not grow. There is a constant stress between Government and pillar banks. If it was my call, I would ask the banks to go into a corner to fix the mess and rebuild strong entities and then come back into the market to do what they were set up to do in the first place. The Government has invested so much capital in the banks that it believes they should be lending. The banks should be lending but they cannot because the Government cannot bridge the gap of €70 billion on the funding side. That is where the major issue is at present. We have come up with an idea that we first mooted three to four years ago. When this State was in serious trouble back in the 1920s and 1930s it created the ICC and ACC banks. Both played very effective roles in doing advances, equity injections and structured deals to customers that even back then the main banks did not want to touch. Over the years the ACC and ICC gave the banks comfort, so a farmer could go to ACC Bank and get a seasonal loan of €100,000 against grant cheques. That would be then lodged in the AIB account to be drawn down over the year.

The ICC was more technical and did equity injections and bought shares in companies. It acted in a complementary manner to the banks in their main stream banking. As the SME sector has such difficulty getting credit, we believe there is an option to follow a proven successful precedent, which is ICC and, to a lesser extent, ACC.

Our business case is that ten to 12 years ago, there were up to 12 institutions actively involved in the SME lending market in Ireland. When we were coming out of crisis, I came back from the UK in the early 1990s, those 12 banks all shared the burden in increasing lending to the SME and business banking sector. That sector is down to the two pillar banks, Bank of Ireland and AIB Banks with Ulster Bank as the third. At the time we also had a number of specialist players in asset finance, where a SME could get the asset finance for the €500,000 worth of equipment outside the mainstream banking and a specialist company, such as Smurfit Finance, would deal with it. Now those asset finance companies are not doing that same business and most of them have withdrawn from the market. What AIB Banks and Bank of Ireland are doing now is asset financing and calling that SME lending. It is replacing a service provided by somebody else. It is not mainstream cashflow lending to SMEs but asset finance backed against equipment or machinery.

Foreign banks will not fill the gap in the market. We all know that there is no chance that foreign banks will come back in unless somebody brings confidence to the SME sector. The need must be met from an initiative by the people in this room and from the Government to come up with something to deal with a new crisis. Partial guarantees have proven successful before when there is a robust banking system. They are complementary to that banking system. Banking guarantees in place of a banking system begs obvious questions. Who monitors the bank guarantee? If the Government gives a bank guarantee to AIB and it in turn gives a customer €350,000, then €100,000 is guaranteed. When the customer has trouble paying back the €250,00 who monitors that the €100,000 guaranteed portion is not paid back? There are practical issues. Who does the credit assessment on the guarantee? Who wears the risk if the guaranteed portion is not paid back? There are tricky issues around that scheme. We know that the big four firms will come in and do the plans for its introduction but once it is introduced who will manage it?

I will now deal with the critical success factors for the IBC. If the IBC is to work in the format that we are suggesting, it needs an expert and experienced management team. It needs people who have dealt on the ground with SMEs, who can understand cashflow lending and how a business person is thinking and who can fill in the gaps.

Mention was made earlier about the standard of a proposal and the standard of cashflow not being strong enough. We are in banking for years. There are many ways of saying "No". One can say "No" by asking a further ten questions or attaching conditions that one knows the entrepreneur cannot meet. If I have a loan proposal based on a 15 year lease on a restaurant, the bank can say that it will approve my proposal on the basis that I have a 20 year lease, but I cannot satisfy that condition, which, in effect, is a sanction.

One can play with sanctions whatever way one likes. When I was in the ACC Bank the members of the credit risk department there could put statistics to me in any which way. One could then go for a beer with one's business colleagues in The Barge and they would say, "That is bullshit, those are not the facts". Statistics can tell what one wants them to tell. Therefore, there are many way of saying "No".

An entrepreneur may not put forward a proper case for his or her proposal. In the past the old bankers would have helped that entrepreneur and taken him through the proposal. Entities like the IBC can take a client through a proposal, help fill in the gaps and make decisions on robust and viable businesses as against those who put forward the best presentations and have the best advisers.

Another factor is that there must be strong and transparent risk management. We believe that risk management should always be a "4-eyed" principle. The front of house staff assess cases and they are then passed to the risk department which carries out a more objective assessment. There should always be a stress and strain between a front of house banker and the person assessing the risk. That was part of the banking system under which we worked. There should always be that stress and challenge in assessing a case.

During the property bubble many banks disregarded the assessment by the front of house staff and put the property proposals directly into the property department and therefore the "4 eyed" principle was disregarded. The people who were the credit sanctioners were the same people who had the relationship with the clients. The process needs to return to a relationship model backed up by a strong risk and credit model.

Another factor is sectoral and product expertise. As Gerry Fahy said, when he was in banking he had expertise in three sectors. Most of the people we brought in have experience in various sectors. If staff were examining a proposal for a nursing home and considering projected nursing home occupancy levels, they would know if the detail submitted was right or wrong. They would know what the standards are in that sector. That expertise is important. In terms of the staff at an IBC, one would not need a large number of general bankers but people who understand sectors and are able to make a call on a risk.

Another factor is relationship managers with local knowledge. We believe the business must have a local feel to it. Any entity set up must have a local feel to it. If one is dealing with a business proposal in the west, one must have somebody who knows that business, can get local feedback on it as to whether it is as robust as the entrepreneur claims, knows the inside story and can promote the business. Once that person is confident that a loan should be granted, that person can make a strong case on the client's behalf to the risk department.

A further factor is effective and modern technology. One must have correct customer information, correct sectoral analysis information and correct risk portfolio information.

Another factor is flexible and innovative human resources. We cannot pay huge salaries to get people to do these jobs, and nobody is claiming otherwise any more. What is required is flexibility. We need to create a enjoyable atmosphere where the people who would work for an IBC, if one is ever set up, would have a sense of purpose and derive a sense achievement from doing a good job, which would be to provide credit to the SME sector.

Distribution channels for an IBC include nationwide coverage by relationship managers and a presence in cities and some larger towns. We are not talking on the scale of bank branches. When we put forward this model four years ago, we got feedback from somebody whose name I will not mention, who asked how could we set up branches on every street corner. We do not intend to open branches on every street corner. This entity could have a few representative offices in which there would two staff members and they could operate from a first floor premises but they would be locally based and have a local feeling. They could be approached locally.

A further distribution channel is a network of intermediaries including accountants, solicitors and other introducers of business. Another channel is a strong relationship with other business bodies such as county enterprise boards and the ISME to be complementary to the current infrastructure. There are also technology channels.

In terms of product offering, while much of what would be involved was mentioned, the product offering would include medium to long-term tailored loans, credit lines, trade finance, asset finance, deposits and investments and Forex. What the corporation would not do is engage in transaction banking. We are not talking about current accounts, ATMs, laser cards, none of the facilities associated with mainstream banking. The role of the corporation would be to be complementary. We would not propose to issue cheque books but we could provide credit lines by assessing a client's credit rating. If a client had a requirement for €500,000 to buy machinery, that loan request could be sanctioned and the loan could be drawn down into a AIB or Bank of Ireland current account and the client would operate his or her business from it.

In terms of credit management, risk would be an issue. If one sets up a new entity, it will be under the spotlight. Decisions made, declined and approved will be under the spotlight together with the percentage a business has improved or not improved and what has gone bad. We have considered some safeguards in that respect. They include having controlled expansion, to build a business over a four to five year period in tandem with demand, clear policies and sectoral and customer limits. Such limits existed in the past to protect the banks and the State. It might be difficult for people to believe that but banks were limited to a 20% exposure of their loan books to one sector such as property. We all know that was not adhered to. Proper management and controlled sectoral and customer limits are required. Other safeguards are to have in place the "4 eyed" principle, to which I referred, expertise, a management information system and regular reviews of client relationships.

I will ask Gerry Fahy to speak on the funding element.

We will have to move on to questions soon. I want to clarify, in case there is any concern among the members, that the delegates know we are not here to endorse any particular company or group. The idea is to discuss the option of creating a fund to provide funding for small business. It is referred to in the programme for Government. There are different groups with different approaches on how to achieve this. We brought in these delegates to discuss the topic to see how it could contribute to the committee's consideration of this matter. We are here not to endorse a particular example but simply to discuss it. These delegates have been lobbying the Department for a long time for a change in this respect.

I apologise for having had to briefly leave the meeting. From my reading of the delegates' presentation before they came into the meeting, I sensed that what they are proposing smells like what is in the programme for Government, which is the setting up of a strategic investment bank or what might be called a fund. I have a concern about that. Many of the words the delegates use are to the effect that they are branding themselves as a potential client. As the Chairman said, if that is not the case, they should make sure that if they mention something in this respect they do not brand themselves as such with the use of words such as "we could" or "we can if it was us who was doing this". I am a little scared by that.

I understand but I have set out the position.

The Chairman has made his point but I wanted to say that. The last thing we need on top of the mess we are in is a third party to get us into something else. I acknowledge the sentiments of what the delegates have said and I am sure they are in line with what the programme for Government would endorse but I want to set out before they finish their presentation that I would be very sceptical of having any third party outside the public sector involved in another sort of banking situation at this stage. I want that put on the record.

The last point made by the Deputy will be clarified in the presentation. I invited these witnesses in because we want this matter discussed. The proposal to have a strategic investment bank is included in the programme for Government. This committee's job is to drive that forward and make sure it happens. This is the one way of making it happening. It will only happen with the involvement of both the private and public sector. We are very much aware of that. There are different people with different ideas as to could it can happen. We have to get this discussed and that is what we are doing here. We are not here to endorse these two delegates. If they use the word "we", they are entitled to do that. There is no problem with that - it is their version of how this can work.

Mr. Gerry Fahy

With regard to point made by Deputy Lyons, I must confess that we would also share the public view and public concern. The last thing the public wants to hear is of another bank in the Irish vocabulary on the basis that we have enough exposure through our banks. My primary raison d’être and motivation in making this presentation today is to pick up on what the Deputy’s fellow members have stated, which is that access to capital creates wealth. Right now people do not have access to capital. The Irish SME community does not have access to capital because multiple and conflicting objectives are preventing real capital getting into the marketplace.

We need to understand and distinguish the difference between capital and funding. The Irish banks are one of the most well capitalised right now but they are mostly well capitalised to shore up and protect against future losses. That is quite a different from lending and providing funding to the SME sector.

I want to clarify that this can be done publicly or privately. The presentation the gentlemen have made to other groups and to Departments is that this should be done publicly as a State. Am I not right in saying that? However, if it is not going to be done solely by the State it needs to be done. That is the argument. We talk in the House on a daily basis about the need for businesses to have access to credit. That is what we are here to discuss. The delegates have listed remedies to obstacles and solutions and Mr. Fahy might deal with them because I am aware that a vote might be called in the Dáil.

Mr. Gerry Fahy

The information is set out on page 7 and slide 1 of the presentation. What we consider to be obstacles in this regard are the Department of Finance and the obtaining of European approval for it. It would require Troika approval, etc. We need to acknowledge that of the approximately 1.5 million people employed in the private sector - I am open to definitive correction on this - more than 50% are employed in business with a staff of between one and 50 people. That is the heartbeat of the economy as members know better than I do because they are on the ground.

We need ensure there is access to capital. We believe there will be resistance primarily from the Department of Finance and also in terms of European approval. As Deputy Lyons has stated, the State has already extensive holdings in Irish banks. There is protectionism of the franchise of the existing players. There is a perception that this would be a difficult entity to set up and there is a greater perception of risk and also in terms of funding. We have compartmentalised how we see the obstacles and are merely suggesting an alternative view of how those obstacles could be overcome.

The Department of Finance and Europe need to accept that now is not the time to build a new business in either AIB or Bank of Ireland - it is an unfair expectation on the banks. They need to deleverage, restructure, downsize operations, get funding and then lend to SMEs. It is not a realistic and feasible achievement within the timeframes and assertions the banks have given. We may be wrong. We do not have a monopoly on wisdom or a franchise on intelligence but we have experience.

The existing State holdings are in institutions that do not have short to medium-term growth prospects and SME focus, which is an obstacle. The institutions will and should be more concerned with repayment of taxpayers as opposed to growing an SME loan book. We did this before in 1988, 1999 and 2000. When a State bank is in trouble the Government needs to fix it by refocusing and repositioning it. It needs to give the pillar banks the space to do that. There also needs to be a second incubating unit with regard to access for credit. If a bank has loans that have gone into arrears, have defaulted and are impaired, while at the same time has an objective to lend, its view is tarnished and hampered by having those impaired loans and requires a different mindset to lend out. Banks see all the reasons not to lend primarily because they have multiple objectives.

The culture of the existing participants will be to continue to defend their patch at all costs. The pillar banks have multiple objectives and need to be given space to sort them out. While I am open to correction on the date, I believe that ICC bank was established in 1926 or 1927, before the Great Depression in 1932. We are now in a major depression. We are not looking to do something that has not been done before - there is a tried and trusted precedent.

The business sector is key to economic recovery and access to credit is vital. There is a distinct absence of competitors. As Mr. Geoghegan said, a number of years ago there were 13 and now there are only three at best. Existing players have complex legacy issues, and competing and conflicting objectives. Setting up a new credit corporation is the least risky option for delivery of credit. The State has a role to play with the intervention to support SMEs. We do not have an agenda other than our past experience. The objective is to link into the existing infrastructure in the State, including IDA Ireland, Enterprise Ireland, and the county and city and county enterprise boards. Every morning on "Morning Ireland" we hear that no single co-ordinating unit is managing the disparate aspects of access to credit. Let there be one fulcrum that manages and co-ordinates that through the organ of the State. Whatever that is let it be the conduit for access to credit.

We thank the Chairman and committee members. We would be happy to deal with any questions they might have.

I thank the witnesses for their presentation. Our party would have the same view on the complexities of the banking system and incongruous objectives banks have. Like Deputy Lyons, we would strongly believe the State is probably the best system in which to develop this. IBC's suggestion is very interesting and gives food for thought.

I am somewhat confused as I was not sure what this presentation was about when it started. I would like to get some clarity. I am not suggesting that IBC is proposing anything but it is suggesting the State should establish a fund and a body such as itself should roll it out and manage it.

Mr. Gerry Fahy

It is the recreation of the ICC model.

The strategic bank is in the programme for Government. This is a way of doing it. Obviously we believe it should be State run. The option would be to bring in individuals with skills to do this within an existing bank or a new State bank - a business or recovery bank. This is about the fund. The witnesses did not give us the figures but I would be interested to see them at some stage.

Mr. Mike Geoghegan

We are interested parties but we are not incorporated or an organisation. If we were, we would not have made anything out of this for four years. We have other businesses and are interested citizens of this country who are making a proposal. There are two steps. If the proposal is adopted and the State decides to do it, it is fine; it does not mean we have applied for positions in the bank or asked for positions in any corporation. If the positions come up, we may or may not apply for positions in that corporation. It does not mean we do not believe this should not be done. We have many other things we also do. Today affords us the opportunity to get our view across. Even with the expertise we have it can be very difficult to get our view across.

How easy is it for a fund like this to be set up? When in opposition and now in government when we are trying to advance this, we are told that it is very costly, cumbersome and time consuming. That is the real issue regardless of the fund for small business.

We all agree the fund needs to be set up. It is a question of how to get it done.

IBC's initial correspondence contained some good ideas as to how it could be done in order to get it moving quickly. I ask Mr. Geoghegan to elaborate on that.

Mr. Mike Geoghegan

There are two parts. One is the balance sheet growth element of it. If the Government wants to make €1 billion available to the market by way of a fund, an effective way is to put in capital of approximately €103 million in order to achieve €1 billion. It would then be a funding issue. As a potential mechanism the State could use we propose raising a bond to support it. There are entities such as the ESB which makes a considerable amount of money from SMEs, which could be asked to invest in a bond. Such a bond would not have a legacy loan book attached to it. An investor could see the risk and see that the loan book could grow to more than €1 billion in five years or six years. It depends on the pace at which the State wants to get money to SMEs. Lending of €1 billion over five years would require €103 million in capital.

On set-up costs, setting up a fund was never as easy as actually managing a fund. If premises are needed, we would propose ten premises nationwide with a small head office - not palaces. It could be achieved with very low rental costs. It would be done with a rental lease. If recovery happens in five or six years the State could merge this institution back into one of the pillar banks. Alternatively the State could decide that it should be retained for 70 years as was done with ICC in case this should ever happen again: the State has the option.

The IT requirements can be expensive as I know because ACC bank invested €28 million in a replacement IT system. The platforms that we used to have to buy can now be leased from suppliers and keep IT costs as variable costs as opposed to a significant upfront cost. We believe €15 million would comfortably set it up, including consultancy advice. If one got in tight and did not waste too much money on consultants during the phase-out one could probably do it for less than €10 million.

Did Mr. Geoghegan say €10 million?

Yes. That is what I thought.

What about the regulator for lending? Where does that come into it?

Mr. Mike Geoghegan

The regulator would have to approve the system. We have not got involved in that area. It is an obstacle and regulatory approval must be required. No matter who sets this up and in what format it is done it would need regulatory approval.

We are part of the European Investment Bank. Could it not act as a source of funding? Is the country making enough use of the European Investment Bank?

Mr. Gerry Fahy

We know about the EIB funding to be made available to SMEs that was to be channelled through the main banks up to 2007 and 2008 and what took place in the banks in the majority of cases is worthy of note. Let us suppose for example that Deputy Tóibín was approved for a facility in the bank as an ongoing customer and he applied for a renewal of his facility. That facility would be reclassified as having been funded through the EIB although he was already an existing customer. There would have been a renewal of his annual facility. Based on the team of people who advise us, we know that the banks used the EIB's money as a cheap source of funding for their balance sheets and that it did not percolate down to the SME sector. To answer the question, it was there but it was used as a cheap source of funding on the balance sheets.

Could it be used in future?

Mr. Gerry Fahy

I see no reason not to. To re-establish the context, at the time we met Vice President Sakellaris he was decidedly supportive on this matter.

I thank the deputation for the presentation. Clearly they understand the problems facing small and medium enterprises with regard to lending. Do I understand correctly that the deputation is presenting a proposal for a similar fund to that proposed in the programme for Government?

Mr. Gerry Fahy

That is correct.

Has the deputation met the relevant Ministers?

Mr. Gerry Fahy

This is one of the greatest difficulties we have had. We are a number of disparate individuals with a certain a level of experience. If one is not part of a large accountancy practice one does not have access to key influencers and decision-makers. This has been a barrier to entry for us. We hope to articulate our view today and that the committee will hear our point of view. We are not imposing anything; we are simply suggesting an alternative. I hope that through this forum we can gain traction.

Is the deputation presenting this proposal as the Irish business corporation?

Mr. Mike Geoghegan

We put a cover-all name on it to present something. Our idea was to ape the Irish Credit Corporation, ICC. We looked at what worked in the past in the case of the ICC. We came up with a title for a new entity, the Irish business corporation. However, the Irish business corporation does not exist.

Mr. Mike Geoghegan

We are an eclectic mix of people.

Does this mean the deputation is presenting this case with the idea of being consultants to a fund?

I will clarify one point. The programme for Government contains a proposal for a strategic investment bank. Others call it a recovery bank but one can call it whatever one wishes. This is an issue many of us have worked on for many years and it must be dealt with. I invited the deputation here today to give an example of how it could be done and to given one version of it. I am aware there are other groups and I am trying to locate them and to bring them in as well to discuss other ways of doing the same thing. The objective is to get money out to small businesses through a Government initiative and this is one way of doing it. I asked them for a name. I hope there will be other ideas.

This committee will make recommendations to the Minister for Finance and will suggest that something along these lines must be done. It may be a different version or perhaps our own version. I invited the deputation here to give an example of how and how easily it could be done because we are consistency told that this will cost a great deal of money to the State but the figures do not add up in that regard. This is why we are here to tease the matter out today.

Mr. Mike Geoghegan

We are not pitching for work, consultancy fees or anything.

I apologise if the deputation took offence to anything I said. There was a sting in my tail because I became anxious when two people came in with a name I could not find when I searched for it on the Google website. I believe the deputation's proposals are excellent and we need to hear them. Nevertheless, acting as devil's advocate, I have one more question. What is in it for those in the deputation to come here and make this presentation? Why are they taking time out to do this?

Mr. Mike Geoghegan

There may be nothing in it for us. Three or four years ago when we read the NAMA proposals we wrote to Brian Lenihan during the Christmas holidays about NAMA and we outlined why we believed NAMA would not work. Perhaps as people who have been banking for 40 years and who are interested in it we believed wrong decisions were being made on the basis of the wrong information. We spoke to people we knew in the banks and we knew what they were saying was wrong, factually incorrect. We met the Small Firms Association which stated at the time that the banks would not lie to Government. We took the view in our discussions with the SFA that they were providing incorrect information. The holes in their balance sheets were worse. As a small and medium sized business owner one could sit back and say nothing, one could put posters on the wall outside or one could try to get one's expertise across. If we could brand ourselves Deloitte it would be easier but we cannot.

That is fair enough. I believe the deputation's proposals are quite good and given that this is the case, the Ministers should hear them.

This is precisely why we are here to discuss it.

This was not clarified at the beginning of the meeting and it could have taken a good deal of the hot air out of the room.

It was clarified but not everyone was here.

If the State decided to set up this proposal tomorrow how long would it take before the funding could hit the ground?

Mr. Mike Geoghegan

This is capable of being done using the experience of when we turned around ACC Bank from a €17 million loss. We may have no wish to be the right people but the right people could get this up-and-running in six months. There is more simplicity to financial institutions than financial institutions lead everyone else to believe.

The reason they have expensive infrastructure is because they are stuck with their legacies. One would not start a bank the modern world from Allied Irish Banks' position. The fund management idea is that a simple, low key institution could manage risk on behalf of the State. Regardless of how the State decides to inject risk vis-à-vis funds, capital, funding or partial guarantees, the risk must be managed. In case we do not attend this committee again I emphasise that we do not believe any entity in the State is in a position to do that now.

I was a little confused when I saw the job titles and the name of the company. I understood an established organisation was attending today. The deputation's comments are most interesting and will stimulate a good deal of discussion. Why should the committee look favourably on this proposal? What differentiates what the deputation is proposing from other avenues the Government might be considering based on what is in the programme for Government? What other organisations could help to get funding to small businesses? What is the deputation's main selling point?

Mr. Mike Geoghegan

The main selling point we have at the moment is that something new must be done. People continue to refer to the pillar banks. The pillar banks are not referred to as AIB and Bank of Ireland any more, yet they remain AIB and Bank of Ireland. They went through complete destruction and became pillar banks. AIB and Bank of Ireland are not in a position to do this. They cannot carry out this objective. We consider ourselves experts and our view is that the chief executives of those organisations should be told not to do it and should be told to fix their messes instead.

If we leave aside those banks and allow Ulster Bank to operate in a more low-key way and manage their current clients, it leaves no one else. Some entity or body within the public sector must be established to carry out this brief. Even if there are partial guarantees, someone must manage it. I was interested to hear a reference to the Department bringing in consultants. Consultants will come in to set up the paperwork and the instructions but who will manage the risk from there on? This is where we are coming from.

Mr. Gerry Fahy

The Chairman made the point previously that Mr. Threthowan is liaising with the two banks to devise a simple application form. I was once tasked with that responsibility. There used to be a stress and tension between business and credit but it is perfectly simple. I came up with a system called PARTS, which focused on the purpose of the loan, the amount being sought, the manner in which it will be repaid, the term of the loan and the security on the loan. The security was the last thing. Expensive consultants were not needed to come up with PARTS, which stands for "purpose, amount, repayment, term, security".

We will conclude shortly as there is a vote in the Dáil. Would anyone like to ask a further question before we finish?

I thank Mr. Geoghegan and Mr. Fahy for coming in. I compliment them for taking the time to research this matter and showing an interest in the work of the committee. We all agree that a fund of this nature is needed in some shape or form. It is a question of figuring out the best way of doing it.

I am sorry that we have to finish early.

Mr. Gerry Fahy

That is fine. I thank the committee for its time.

I apologise for the confusion.

The joint committee adjourned at 4.50 p.m. until 2.30 p.m. on Thursday, 29 September 2011.
Barr
Roinn