I am glad to be able to participate in the general debate on banking issues requested by the House. This is a broad and topical issue and I expect that Senators will range widely in their contributions. I will cover a number of aspects of current interest and no doubt others in their contributions will touch upon elements not mentioned by me. It is important that at the end of this debate we have a greater and balanced appreciation of this important sector of our economy and of its importance to our everyday life.
Banking and the related sectors of investment, securities and insurance account for a significant part of economic activity and employment both in Ireland and in the wider EU. It has been estimated that the financial sector represents 6% of the EU GDP and about 2.5% of employment. In Ireland, the numbers employed in the banking, insurance and building society sectors are estimated by the Central Statistics Office at 48,900. The banking sector worldwide is going through a major period of change. There are major technological changes which are changing the way and the speed at which banking transactions are carried out. New and sophisticated banking products are coming on stream all the time which raises risk management problems for financial institutions and oversight concerns for their regulators. Banking consolidation at both national and transnational levels is taking place at an increasing pace. The EU itself is busy trying to bring about a single market in financial services. All this has major implications for our own banking sector. Banks operating in Ireland need to ensure that they can provide an efficient and competitive service which meets the needs of their customers and they need to maintain the confidence of their customers throughout the period of change.
The economic benefits of a single financial securities market are considerable. They involve lower cost of capital and a more competitive EU, which leads to greater investment and more growth and jobs. With rapidly evolving financial markets, it is necessary for regulators to keep pace with market developments. This has led to a push by the EU to try to update EU regulatory provisions and to introduce a new legislative framework for fast-track updating thereof, as proposed by the Lamfalussy group of wise men. I am glad to note that the institutional impasse which had been holding up this reform has been overcome and the community can now move forward to a new tier of secondary legislation in this area. Since I have touched upon regulatory issues at EU level, I will now comment on financial regulation at domestic level.
The Central Bank of Ireland is the main financial regulator in this country, covering the bulk of the financial services sector. Its role as regulator has been evaluated on several occasions by several authorities and found to be on a par with its peers overseas. The VFM audit by the Comptroller and Auditor General in December 1999 was comprehensive and found that "current international practice is followed for prudential supervision". The IMF also looked at financial regulation by the Central Bank and found that Ireland had a competent, professional supervisory staff and a satisfactory regulatory framework to supervise banks.
No doubt many Senators will want to express views on the recent events regarding AIB. This has been the subject of debate in the Dáil, but I will touch on some of the issues again today. This issue is the subject of detailed investigations by the bank itself and by a whole range of regulatory authorities. Since Allfirst is licensed in the US, the primary regulators are there. These include the Federal Reserve Bank of Richmond and the Maryland State Regulator.
The Central Bank of Ireland has supervisory oversight on a consolidated basis and it too is carrying out an investigation into the events in question. The Central Bank is independent in the exercise of its regulatory functions and will not be reporting to the Minister for Finance on events in AIB as such. However, it will report to the Minister on whether legislative changes are warranted as a result of these events. Banks, regulators and legislators must be open to learning from events of this kind so as to avoid recurrence.
AIB itself has been very forthcoming to date and no doubt will keep the public informed as to the outcome of its own investigation. This House will be aware that the bank has commissioned an eminent person with appropriate experience to report on what happened at Allfirst. The bank's capital ratio is well within international norms and there is no threat to its viability. Indeed, despite these events, it is still expected to return a substantial profit for 2001.
This leads me to the Government's proposals for a new financial services regulatory authority, or IFSRA as it has been called. When it is launched, the proposed new authority will put in place a new framework for the comprehensive supervision of financial institutions. It will also have responsibility for upholding consumer interests. The events at AIB prove the importance that regulators must attach to prudential regulation. Capital adequacy ratios ensure that banks are sufficiently capitalised to withstand shocks. Their finances must be maintained in a healthy state and their overall financial vulnerabilities must be understood and controlled. The issue of banks' relationships with consumers is also very important.
It is the Government's intention that the role of consumer-director within IFSRA shall ensure that consumer interests are fully represented at the heart of financial regulation. The new legislation to establish IFSRA is currently being drafted by the Office of the Parliamentary Counsel and is expected to be published in this term. Two consultative panels, representing consumers and the industry respectively, will provide an important forum for key issues to be discussed with relevant interests. It is proposed to put in place a statutory ombudsman scheme to deal with issues raised by dissatisfied customers.
To bring some balance into the picture emerging here today, I should point out some of our successes on the financial services front. The IFSC has grown and developed beyond even the most ambitious vision we had at the outset in 1987. In addition to the new projects and direct and back-office employment that the centre has brought to the country, one must also take into account the significant indirect employment that has been generated in areas such as accounting, legal, computer and other general service industries. Substantial renewal of the docklands area has also been achieved. However, the ending of the preferential tax regime for the IFSC and the effective removal of the ring-fence around the centre poses a challenge. This challenge is to build on the substantial foundations that have been put in place and to create a dynamic top quality financial centre which can sustain high quality jobs and business long into the future. In March 1999, in anticipation of these changes, the Government published its strategy for the continued development of the international financial services industry in Ireland post 1999.
The objective of the strategy is to maintain a vibrant and growing international financial services industry in Ireland, building on the success of the IFSC. The strategy envisages the Dublin docklands acting as the hub for the longer-term development of the industry in Ireland, with front-office financial services companies being encouraged to locate within the hub and back-office activity being facilitated elsewhere in Dublin or in the country generally. We must build on the existing success. To do this we need to carefully analyse the opportunities which exist to grow what we have and to attract new business here.
It is important to recognise that the IFSC has a number of advantages outside its tax status which will assist in the further development of international financial services in Ireland. These include the calibre of the workforce; the quality of the telecommunications and support services infrastructure; the English language; the centre's EU base and its relatively low cost base. A further advantage is the brand status and reputation for excellence which the IFSC has achieved, which is a valuable asset in attracting new international clients to this country.
No doubt some Senators will wish to speak on the always controversial issue of bank branch closures. I remind the House that the Minister for Finance has no statutory function with regard to the location or size of bank branch networks. These are the prerogative of credit institutions and their decisions in this area are based on the commercial valuations of their organisational needs.
I accept that banks must react to changing commercial circumstances and the opportunities offered by new technology, such as telephone and Internet banking. However, the way in which certain changes have recently been introduced by some banks is to be regretted. It is imperative that financial institutions have regard to the needs of all their customers, especially vulnerable customers, such as older people and those with disabilities.
The banks have introduced a code of practice on branch restructuring, the key elements of which include a minimum notice period of two months before bank branches close and, in the interests of good customer and community relations, a commitment to give an explanation of the reasons for closing individual branches. Retail banks and building societies have agreed to be bound by the code. The code of practice is a positive step towards alleviating some of the difficulties which arise when local banks close.
The advent of the euro in the tangible form of notes and coins as opposed to its previous virtual status is a new dawn for the European Union. Our banking sector and retailers have ensured a rapid and smooth transition to the new currency. The greater price transparency that will ensue should serve to make us all more conscious of costs across the Union.
At European Union level, the Commission has taken an important initiative to reduce bank charges for cross-border payments in euro in line with charges for similar transactions at national level. This provision comes into effect from 1 July for electronic transactions, such as ATM and credit cards, and from 1 July 2003 for credit transfers. The regulation will initially apply to cross-border payments in euro up to €12,500 but from 1 January 2006, this limit will be increased to €50,000. It does not apply to cross-border payments in euro by cheque.
Cheques are not covered by this arrangement because there is no central cheque clearing system within the euro area. Moreover, these are not a popular method of payment in many euro zone countries. Accordingly, cheques entail higher processing costs. For these reasons a person receiving a cross-border cheque will likely incur greater charges than when undertaking a similar transaction in their own country. I believe I have covered the main areas of topical interest in the banking sphere and I look forward to hearing the views of Senators on these and other aspects of banking.