Seanad Éireann díospóireacht -
Wednesday, 1 Oct 2008

Vol. 191 No. 2

Credit Institutions (Financial Support) Bill 2008: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

Minister of State at the Department of Finance (Deputy Martin Mansergh)

I thank Senators for agreeing to sit late tonight. This Bill provides legislative underpinning to the financial support provisions announced by the Government on 30 September for depositors and lenders to Irish financial institutions. It is a significant measure so that they can continue to provide the financial services that are vital for the proper functioning of our economy and the well-being of society.

The financial services sector in Ireland has contributed enormously to growth in employment, export earnings and economic activity. Our banks entered the current period in a position of strength but, like financial institutions everywhere, they rely on international capital markets for liquidity. When that becomes harder to access, banks find it increasingly difficult to carry on normal business. It is the shortage of liquidity that is at the heart of much that is happening in financial institutions around the globe. Moreover, what funding is available is also at a significantly greater cost than official market rates and lending periods have continually shortened.

This is the context in which the Government determined to take action. The primary purpose of the Bill is to maintain the stability of our financial system which it does by providing a legislative framework for the guarantee arrangement for depositors and lenders to Irish financial institutions announced by the Government yesterday. The Bill responds to the difficulties caused for Irish credit institutions because of the turmoil in international financial markets that began in August 2007 and which have persisted and deepened since that time. That crisis originated in the credit markets of the United States and has now spread and broadened. Internationally, major financial institutions have gone into liquidation, been forced into partnership or been subject to state takeover. In both the US and Europe, public authorities have been called upon to provide unprecedented support. Where once financial institutions and markets were the concern of a few, there is now near universal awareness of and interest in their well-being.

Having received the advice of the Central Bank and the Financial Regulator, the Government decided the right and necessary step was to provide a guarantee to the six domestic financial institutions which were not in a position to rely on the support and assistance of a parent institution. I want to put it clearly on the record of this House that the Government's decision is intended, in the first instance, to underpin the financial standing of the Irish banks and building societies. It provides a framework for the future to address financial stability, which is of common concern with our EU partners and especially our closest neighbours in view of the strong degree of financial integration between the two jurisdictions and the several financial institutions which operate in both.

I have been at pains to stress that the provisions in this Bill should in no way be viewed as a free lunch for the banks. The guarantee provided by the State is not intended to insulate the shareholders of banks from the risks that they have taken on. I want to reiterate that this guarantee is not free and it is not a bail-out. The taxpayer who ultimately underwrites this support will be paid for the support provided. The terms and conditions on which the guarantee is provided will ensure the taxpayer gets value for money.

Our society and economy will benefit from a guarantee that helps to secure greater stability for our financial system. That system not only plays a crucial role in the Irish economy and our day-to-day lives but also, through the financial sector, has broader social responsibilities to society at large. More directly, the Minister has announced in the other House that he will draw on the advice of the Central Bank and the National Treasury Management Agency to put a fee mechanism in place to remunerate the guarantee at a commercial rate taking into account such factors as the possibility of increased funding costs for the Exchequer, the economic value for the institutions and the need to support investor confidence in the Irish financial system overall.

There has been comment that the Exchequer is potentially assuming very significant risks with the measure in this Bill. This simply is not the case. There are real and substantial factors that mitigate any potential financial exposure as a result of this decision. Crucially, there is a very substantial buffer comprising the equity and near-equity of these institutions. The Central Bank and Financial Services Authority of Ireland is preparing detailed analysis, but initial work by the NTMA indicates the assets of the Irish finance institutions supported by this measure exceed their liabilities by approximately €80 billion. This is not diminished by the access some of the banks have had to European Central Bank liquidity on the basis of asset swap.

It is important also to appreciate that the asset quality in our financial institutions is good with a strong concentration in residential mortgages with a relatively low loan-to-value ratio, LTV, on average. While Ireland, along with all developed economies, has experienced a sharp decline in its property market, there is very significant capacity within the institutions concerned to absorb any losses.

We have all learned much from the current period of turmoil and one important lesson is that we must maintain the increased level of scrutiny and oversight of financial institutions which was put in place by the Financial Regulator since the onset of the current turmoil. This will be maintained and strengthened further to ensure high regulatory standards are achieved in Ireland and the quality of corporate governance in these institutions is a protection against any risk of loss for the State. As for the issue of moral hazard, I stress it will be a priority of the Government to ensure the highest regulatory and corporate governance standards will apply in all of the institutions concerned, including in respect of lending practices, to safeguard the interests of taxpayers against any risk of financial loss.

An important feature of the Bill is that it provides that in certain circumstances, the Minister for Finance can step into the role of the Competition Authority. He has done this to ensure the maintenance of financial stability fully informs decisions on mergers and acquisitions in the financial services sector, while ensuring no diminution of competition.

I will now describe the main provisions of the Bill. Section 2 establishes that the functions of the Minister for Finance under the Bill are exercised in the public interest having regard to the importance of maintaining the stability of the financial system in the State. The functions in the Bill are granted, in the public interest, because the Minister, having consulted the Governor of the Central Bank and Financial Services Authority of Ireland, has formed the opinion that the exercise of these functions is necessary to protect the stability of credit institutions and to maintain the stability of the financial system of the State. The Minister may continue to consult the Governor and the Financial Regulator in the exercise of his functions after the passing of the Bill. Section 2 also confirms that the Bill will not interfere with the exercise by the Central Bank or Financial Regulator of their functions in respect of credit institutions authorised or regulated in the State.

In section 3, the term "relevant date" is defined as 30 September 2008, the day upon which the Minister announced the decision to guarantee deposits in credit institutions and subsidiaries and protect the interests of creditors of credit institutions on their subsidiaries. This is the date from which the Minister may provide financial support to credit institutions.

Section 5 provides that the Minister for Finance may make regulations to do anything that appears necessary or expedient for bringing the Act into operation. Section 6 provides that the Minister may give financial support in respect of the borrowings, liabilities and obligations to the Central Bank or any person, of any credit institution or subsidiary which the Minister may specify by order. Financial support will not be provided beyond 29 September 2010. Such support would be in such form and manner and on such commercial or other terms and conditions as the Minister sees fit.

Conditions attaching to financial support may include stipulations to require the institution or subsidiary to fulfil all requirements of the Financial Regulator or relevant authority, as well as conditions to regulate the competitive behaviour of the credit institution or subsidiary. The Minister may subscribe for shares and other securities in a credit institution on such terms as he sees fit. For the purposes of this section, the Minister may create and issue securities subject to such interest, consideration and terms and conditions as he sees fit. Money paid by the Minister as financial support under this section will be repayable with interest once funds to do so are available to the company. The section also provides for annual reports to the Houses of the Oireachtas by the Minister on the position regarding any financial support provided under this section, commencing with 2009.

Under section 6, the Minister can make arrangements for this support by means of a scheme. At present, the Bill provides for the scheme to be laid before each House of the Oireachtas and each House can annul it within 21 days. However, the Minister, who will be present later tonight, intends to bring forward an amendment in this House which will significantly enhance the role of the Houses of the Oireachtas in scrutinising regulations under this section. As amended, it will require a resolution approving the scheme before it is made.

Section 7 provides that if a merger or acquisition involves a credit institution and the Minister considers that the proposed merger or acquisition is necessary to maintain the stability of the financial system in the State, then the power to determine whether the merger or acquisition would be in breach of the prohibition on anti-competitive practices in that Act lies with the Minister rather than with the Competition Authority. It also provides for the circumstance in which the Minister may approve a merger or acquisition.

The State is underwriting very substantial liabilities in monetary terms but is, as I have outlined, at a far remove from loss arising from these liabilities. I commend the Bill to the House.

Senator Marc MacSharry

Hear, hear.

Senator Liam Twomey

The debate on this legislation is reminiscent of a patient presenting himself to one with a large unsightly abscess. One has two options to treat such a patient. One can start him on antibiotics or, if it is a particularly difficult case, one can lance the abscess to release the underlying pus. I have the impression that all that has been done this week thus far is to start the patient on antibiotics and time will tell whether that will be enough. While Members will be obliged to go through a number of amendments on Committee Stage, they should consider the background. Although Fine Gael fully supports this legislation and has done so in the Dáil, it is timely to begin to examine the background to what has happened. Members are trying to control a very large pyramid-style scandal. The developers and banks forced thousands of Irish people to buy houses that were highly expensive. The Government did nothing about this scandal because it got a large cut from the outcome and was thereby allowed to fulfil its own agenda in the budgets of recent years. It is regrettable that some of the bodies under discussion, the Central Bank and the Financial Regulator, failed to fulfil their remit by preventing this scandal. That will become more obvious later as we continue to discuss the matter.

There will be a serious backlash from the public concerning this crisis. People realise that the legislation was needed because the banks lent money irresponsibly to a small group of individuals. I heard a comment earlier in the Dáil to the effect that only 40 individuals are involved in half of the considerable loans and property deals under discussion. To some degree the Government, the Central Bank and the Financial Regulator were complicit in what went on. We must face up to that. The sad thing is that it is the ordinary taxpayer who is left with a potentially high bill at the end of it all. Taxes will increase and people will suffer in the future with poorer services, whether in education or the health services. That goes without saying and anyone can understand it.

It was the toxic mix of developers, banks and complicit Government that led to this problem. The toxic failure of the Government, the Central Bank and the Financial Regulator got us into the mess and, unfortunately, it is the same toxic trio on which we must rely to get us out of it. During the debate and discussion of amendments we must discuss this issue further. Can we really trust the Government, the Central Bank and the Financial Regulator to change the practices that we now condemn in both Houses? There will be significant changes from now on in how the banks are regulated and how we conduct our business with them. Some people believe it is a matter of making small changes only and then it will be business as usual. It will not be business as usual and can never be so again.

It is only three months since the Irish Banking Federation came to the Joint Committee on Finance and the Public Service. I have with me the presentation they made to us, including the slides they showed us. The representatives told the committee that the Irish banking system was competitive, well capitalised, profitable and had a strong shock absorbent capacity. They said there was negative exposure to sub-prime markets and that Irish banks had a clean bill of health from respected agencies. They told us this only three months ago and said there was nothing that should worry us. They admitted to some concerns about negative consumer sentiment and said there was a correction in the housing market, but they gave no indication throughout their presentation that there was anything to worry about in the Irish banking sector. Three months later we find ourselves in the middle of a considerable banking crisis. People can say that liquidity changed quickly over the summer but we must be straight in our discussion here. The time has come to talk about it. We have saved the banks with this legislation but there is need to discuss these matters, not to hide behind the argument that the crisis occurred because of international causes. International factors alone did not lead to this crisis.

The Minister of State should discuss what might come out of this and what might be the next step. At issue are six institutions in the Irish banking sector which are being protected. What does the Minister of State believe may happen in the next three or four months? Is it possible that Irish banks will be merged? How would that affect Irish taxpayers, who may be supporting many of the loans involved? What approach will be taken? The proposals under discussion in America constitute a €500 million bailout of the banks there. Members have witnessed what happened in Japan, where the authorities failed to lance the aforementioned abscess. They allowed the problem to drag on, which kept the Japanese banking system in a state of almost permanent recession for more than a decade. Members have been informed that the Minister is following events in Sweden in the early 1990s in the context of his current actions. It might be important for him to come into the House and broaden the discussion to clarify what ideology he is following when he contemplates going down this road. He should state what were the positive points of what transpired in Sweden, how they emerged from their problems and what fears he might have, were we to fail to make the correct decisions in the next few months.

The Irish banking system contains a great amount of toxic debt, about which something must be done. All that has been done up to now is that we have stated we will guarantee depositors. It is highly important to so do because it maintains the confidence of those who put money into the banks. However, we must deal with the issue of toxic debt. This is about giving loans to banks to improve their liquidity and ensure the banking system can crank up again and begin to operate. However, one reason the banks are in this position is that they are carrying what they consider to be incredibly bad or dodgy debts. The Minister should provide Members with an indication of the figures involved. While it appears as though billions are involved, how many billion? Such information would have an important impact on the acceptance of this legislation by the public who need to know exactly how much debt there is about which the Minister considers something must be done.

As much of this debate has been aired in the Lower House during the last two days, Members will not try to reinvent the wheel here. However, for their information, it might be worthwhile to hear the Minister's views on what will be the next two or three steps after the passage of this legislation. The banking system has been protected and confidence restored. However, if we begin to prevaricate or cover up, the people will become worried again, which will perpetuate the crisis. As I noted, markets can handle ups and downs but they cannot handle uncertainty, which is what happened before last Monday. There was uncertainty and people began to withdraw their deposits from the Irish banking system. In order to better inform Members, the discussion now should be on the next steps beyond this legislation. The Minister of State should fill Members in on the thinking behind the Minister's actions.

Senator Marc MacSharry

I welcome the Minister of State. Although this is an extraordinary hour of the night at which to be addressing the Seanad, it has been dictated by extraordinary times. On behalf of Fianna Fáil, I thank all the Members of Fine Gael and the Labour Party for their co-operation in this regard, despite the many false starts last night and today. I also thank them for the spirit in which they made their suggestions by way of amendments in the other House and for the discussion that will take place here tonight.

These are extraordinary times and I welcome the introduction of the Bill to the House. In recent days Members have had the opportunity to have a debate on the economy, as well as on the Order of Business, which has allowed many of them to reiterate several points. Given the lateness of the hour, I do not intend to enter into repetitive rhetoric but wish to make a few points. First, the Irish State will go down in history for the action it has taken in recent days. In an unprecedented set of international circumstances, we have witnessed an unprecedented act of leadership by the State in taking this action which was necessary and decisive and, ultimately, will help to deal with the problem, which pertains to liquidity.

Although Senator Twomey and I are friends outside it, we often differ during debates in the House and I must do so in the context of his description of what he called toxic trios and toxic levels of debt. There is no substance to the suggestion that there is such a level of toxic debt in Ireland. No financial institutions engaged in the reckless, ninja-type lending that took place in the United States. While there will be bad debts——

Senator Paddy Burke

We do not know that, as we do not have the facts.

Senator Marc MacSharry

——and I am sure there were developers——

Senator Paddy Burke

Why are Members here?

Senator Marc MacSharry

I am sure no Member wishes to interrupt any other Member tonight.

An Cathaoirleach

Senator MacSharry to continue without interruption.

Senator Jerry Buttimer

Senator MacSharry should not lecture us.

Senator Marc MacSharry

I certainly will not interrupt anyone but one must deal with the facts to hand. While one may discuss the American situation if one wishes, at issue here is the Irish situation and the fact remains that this debate pertains to liquidity. The solvency issue still is up for debate and there may be some banks which will be obliged to have write-downs and there may be impairments. However, I am confident that because of the interventions of the Central Bank and the Financial Regulator in recent years, about which one may not often have read, there will not be impairments that the capitalised system in our banking system is unable to sustain.

Ultimately, this action has not been an intervention by way of helping, saving or bailing out Irish banks. It is about what my friend and colleague, Senator O'Toole, who I greatly respect, has stated it is in recent days in the House; it is about saving the economy which is our people. Lest anyone is under any illusion, the economy, banking system and society are inextricably linked. One depends on the others to survive. Were the banking system to go, it would have adverse effects on society, the economy, the people and our ability to sustain jobs and operate on a day-to-day basis. That is the reason this measure is important. It arises from an international seize-up that, as all international experts will acknowledge, predominately was caused by reckless banking practices in the United States, not in Ireland. I again acknowledge there will be bad debts.

Senator John Paul Phelan

That is all rubbish.

Senator Marc MacSharry

Members are obliged to listen to levels of interruptions. I do not wish to interrupt anyone, nor will I. Members will be here until 4.40 a.m. on this Stage and all will have their say.

Senator Jerry Buttimer

That is no bother. We are going nowhere.

An Cathaoirleach

There should be no interruptions. I will ask Members to leave the House if they continue to interrupt.

Senator Marc MacSharry

I commend the Government, with the support in spirit of the Opposition, on the innovation and forthright leadership it has shown in recent days. It shows the rest of the world, not least our people, that their legislators are in control and prepared to take the appropriate action as and when needed. One has seen a level of courage and innovation that, lest there was any doubt in recent months, certainly now is present.

I wish to make some points in the context of the Bill. Most importantly, I refer to regulation. While the Financial Regulator has come in for undue criticism in recent days and it might take some time while the solvency issue is dealt with, ultimately we will see how well it has acted in respect of its input into matters such as 100% mortgages and the steps it has asked the banks to take when lending in that fashion. Time will tell exactly how well it has performed in that regard. Personally, I believe the Financial Regulator and the Central Bank have performed in a responsible manner.

On foot of this new legislation, the regulator must be much more vigilant. Having listened to the debate in the Dáil, I agree the State must establish a corporate presence in each bank to ensure lending behaviours are at the optimum level and their most responsible. The State must take a more vested interest because, effectively, this constitutes the people taking a stake in the banking system. The Minister noted the Government was going deep into banking. As it is going deeper than any previous Government, it must be vigilant.

In recent months, far from daily contact with each financial institution, the regulator has been in contact with each of them on an almost hourly basis. However, it is important to take a direct interest in risk analysis and if this constitutes board representation, so be it. The regulator certainly must have some corporate presence in the institutions. I ask the Minister to take this on board. I hope the regulator will actively seek to assess the asset quality of our institutions in order that we can see, for want of a better expression, what is under the bonnet. I do not share the fear expressed by Senator Twomey that there might by some ninja type problem in this country and I believe my view will be borne out in due course.

Senators will agree that in the aftermath of current events, we must seek to have a pan-European, if not global, level of regulation to ensure these events are not repeated. As citizens of the world, we have a responsibility not only to Irish citizens to ensure these problems do not recur.

In recent days, many colleagues have referred to the risks to the taxpayer. As the Minister of State, Deputy Mansergh, has clearly pointed out, the risk is not anywhere near the level indicated by some Members. According to the National Treasury Management Agency, the difference in value between bank assets and liabilities is €80 billion. Nevertheless, we must be vigilant and continually assess the asset quality of financial institutions.

Issues such as remuneration, salaries and bonuses will arise when we consider Committee Stage amendments. I acknowledge that in some cases colossal salaries are paid in the banking system. While I have no particular view on how low or high salaries should be, if the State gets involved in directly dictating salary levels it must ensure we do not impair our ability to attract the best people. I have a mild concern in that regard because there is global competition for the best people.

We are taking the right action at the right time on behalf of our citizens who are our economy. I thank the Minister of State for coming before us and commend the Bill to the House.

Senator Joe O’Toole

I wish to share time with Senator Bacik.

I have no inhibitions in supporting this bold, courageous and necessary legislation. Senators should take care when commenting in the House and those who make statements should be prepared to back them up. For the past two weeks, outrageous, unfounded and unfair criticism has been made of the Financial Regulator by Members of both Houses and commentators across the board. The Oireachtas gave the regulator the powers it wanted to give it. The Financial Regulator does not have legal power to ban products such as 100% and 110% loans because we chose not to give him the authority to take such action.

Approximately five years ago — the Minister of State was a Senator at the time — when the Seanad debated the issue of directors' compliance statements only a small number of Senators fought for such statements. I ask Members to read the debate to see how committed Senators were to directors' compliance statements because the outcome of our deliberations was a watered down and clearly inadequate version.

While I hold no brief for the Irish Banking Federation — like Senator Twomey I consistently criticise the organisation — the harsh reality is that the points it made in its presentation three months ago are as factually correct now as they were then. People can argue otherwise if they wish. If there is toxic debt of a level that should worry us, I cannot find it and I assure the House I have made many inquiries in this regard in the past week. If someone is aware of toxic debt, he or she has a duty to say so tonight. I must base my decisions on what I have learned.

Congressmen emerged from the events on Capitol Hill in Washington last weekend looking like a bunch of amateurs with as much credibility as Ballymagash district council. They could not deal with the problem in the United States, whereas all sides in both Houses of the Oireachtas have approached the problem here in an admirable manner, showing unity of purpose, even if there are differences in approach. The debate in the Dáil today was conducted in a highly impressive manner by the main spokespersons, although some of the comments made by other Deputies were completely off the wall.

I regret we have not heard how the proposals will work. The legislation before us will not bail out the banks. I will give an example because it is the only way the issue will be understood. If a developer borrows €400 million from the banks to buy half of Ballsbridge and then goes belly up, the banks are left holding a debt of €400 million and the developer's property in a depressed market. They must then liquidate the property, for which they will receive perhaps half the value. This means they are owed €200 million, as a result of which they must access their capitalisation. As Senator Twomey noted, Irish banks' capitalisation is stronger than that of any other national banking system in Europe because the Financial Regulator imposed on them the most intensive and stringent demands in terms of loan-to-value and capitalisation of any European country. Last year, for instance, Irish banks cried foul arguing that the stringent regime operated by the regulator placed them at a disadvantage compared to other banks. For example, in the area of loan-to-value the regulator insisted that any loans of more than 80% of a house's value had to be backed up——

An Cathaoirleach

The Senator is using up the time of Senator Bacik.

Senator Joe O’Toole

I would like to see how we will make the banks pay for the guarantee. I share Senator Twomey's mistrust of the banks and I do not want the legislation to operate on the basis of trust in the banks. We must have watchdogs operating in the banks as well as additional scrutiny. Their boards should be dissolved and reconstituted. An oversight body should be also established to examine perks and high salaries and an excess provision should be introduced requiring banks to pay out of their capitalisation.

Senator Ivana Bacik

I am grateful to Senator O'Toole for sharing time. I agree with the Senator that we share a unity of purpose and we all appreciate the necessity that the Government take decisive action to maintain confidence in the economy. Nevertheless, I will criticise the Bill, albeit in a constructive manner rather than for the sake of it. I am genuinely unhappy with many aspects of the Bill about which there is immense uncertainty. While I note Ministers' comments that the proposed measure will not cost the taxpayer up-front, there is no doubt it will expose taxpayers to an enormous potential liability. The figure of €400 billion is extraordinary. We are effectively giving a guarantee to a banking sector which, in the words of Government spokespersons, has acted recklessly in the past. The Bill provides insufficient guarantees that it will not act recklessly in the future.

I cannot accept the assurances of Ministers and others regarding the substantial equity-based buffer of €80 billion because it sounds like a fiction based on an overvaluation of the property and assets held by banks. It is clear these assets were overvalued and there is no doubt Irish banks hold some toxic debts. None of us knows the extent to which their debts are toxic or the precise liability to which we are exposing ourselves. Given this degree of uncertainty and in the absence of stronger guarantees for the taxpayer and stronger assurances on when the charging regime will come into play and how banks will be penalised if the taxpayer is forced to pay out money, it is difficult to support the Bill.

We were told the measures in the Bill would extend to six institutions. It is difficult to see the reason only six institutions were chosen. An argument has been made about increasing the number. Clearly, however, if more institutions are covered by the measures, the potential liability for the taxpayer will increase. This is another matter of concern. We already know the measures have the potential to impose significant costs on the State coffers should the cost of borrowing increase. The Bill has received strong support from bankers and financial institutions, as one would expect if the measures amount to some sort of bailout. It is very difficult to take their assurances at face value. As Senator O'Toole noted, it is difficult to trust institutions when we know that much of what we have been hearing about the stability of the sector has not been true. If the capitalisation is so secure, why do we need to give this guarantee in the first place? With this level of uncertainty, it is hard to support the Bill, much as I appreciate the need for some form of package to ensure confidence in the economy.

Senator Dan Boyle

At this ungodly hour of the morning we need to ask ourselves how we got to where we are now. It has resulted from a combination of factors, mainly the global situation and partially the situation in which we find ourselves in this country. We are in a position, not unlike that in other jurisdictions, to present to other countries an alternative and a response that is unique. The Government has come up with a response that is in the Irish interest and reflects the reality of the economy. That said, we are in epoch making times. Many of us may question the epoch we are about to make but we must live with the reality of where we are because of a combination of factors, partially global but many brought about by irresponsible practices. The fact that there were those irresponsible practices must be acknowledged by this Chamber and those of us in public life who recognise that we live in a world where the global situation is having too much of an affect on our everyday lives.

I acknowledge the presence of the Minister for Finance. The reality of what we are proposing is that the Government is choosing a response that what is local and indigenous is what we need to protect in the first instance. The uncertainty of the global economic climate means we have to take a course of action that whatever economic activity we need to protect, enhance and promote in the future must in the first place be based in the economy. We have come through an economic climate globally where we have been led to believe the shifting sands of what can be produced in terms of economic wealth do not require long-term sustainability. We know this is not the case. There is a responsibility to which we must live up. In terms of where we need to get to, we must recognise that the financial systems internationally and what has been practised in this country and elsewhere throughout the European Union have been based on a mythology and dishonesty such that people believe wealth can be created out of nothing.

What is being proposed by the Government is that the State needs to take in hand, by way of a underwriting agreement, that the future of the economy is based on the fact that, being the only body that can bring about a guarantee of stability, at least in the short term, it is putting in place a financial system that will be more sustainable in the future than that which we have had in the recent past. We can look at others to make accusations, the United States being the pre-eminent economy on which we have relied too heavily to bring about an unreality as to where we are at.

Ultimately, the Bill asks questions not only of our financial system but where we as legislators can bring our people in terms of a new economic reality. I am satisfied that the safeguards in place here are better than those being proposed by other countries. The reality of the United States vote, which many of us were watching while we were waiting to start this debate, whereby a toxic debt that is not redeemable in the short term is being bought and where our nearest jurisdiction, the United Kingdom, is buying up financial institutions, as and when they are likely to go out of business, is not one that a small economy such as ours can face up to. We are proposing a measure that is bold in its intent but which can be more successful in the medium and long term than what I would argue are the other panic reactions of larger and more established economies. We should take the courage of that conviction and bring it forward and learn the lessons of the economic success we have gained during the past ten years. Otherwise, we will just be repeating the mistakes and replicating other economic failures we have seen throughout the world. I encourage Members to follow that example.

Senator Alan Kelly

I welcome the Minister at this fine hour. The Bill is unprecedented. The reality is that the Minister for Finance is being forced to bring it before us or else the banking sector in Ireland will be facing what many have admitted is a catastrophe. The Irish banks have a build-up of liabilities on their books due to the backing for and dependence on the construction industry. Consequently, they were out of favour on international markets. That is the tone and reality.

The Minister has acted because he was backed into a corner. It is similar to his reaction a few weeks ago to guarantee deposit holders and raise their protection level — he did so only after it had been pointed out to him time and again. Some have said the Bill proposed is an Irish solution to an Irish problem and that worries me. It is not true to say there were no other options because there were, whether it was through an equity shareholding or something similar. Were other options examined and, if so, will the Minister outline any of the ideas considered?

The Government has gone down the road of deciding to bail out the six banks. I agree with Senator Bacik when she raises the question of why these six banks specifically. I would like more information in that regard. It did not emerge in the debate in the other House. We are gambling the State's silver on the banks. They must respect this and act accordingly, a point to which I will return.

We must examine how we got to this stage. The issue of regulation needs to be examined. We have a banking system that operated recently under the following premise. They could give huge loans to developers across the country without any comeback, especially when it was obvious that the sector was heading for troubled times. They could give out reckless subprime mortgages to people who could not afford them; it was crazy that first-time buyers were given 100% mortgages over 40 years. How was this justifiable? There was real change in the area of credit cards with consumer limits with which they could not live. They were allowed to introduce banking practices that were borderline in their justification whereby people were encouraged to change their banking methods in order to maximise their exposure. In 1992 a couple on lower executive salaries were able to borrow X amount of money from financial institutions; in 2007 they were able to borrow up to five times that amount. If that is not evidence of banking gone mad, that does not show that regulation was not working or demonstrate greed, then I do not know what does. There is a lack of ethics in how the banks have been behaving, pure and simple. However, we would not think that was the case from the way the bankers presented themselves and their analyses in front of the Joint Committee on Finance and the Public Service a number of months ago. The change in international factors has brought new challenges but outside of that everything was rosy in the garden. Were they living in the real world? It seems not.

I do not agree with Senator O'Toole. The chief executive of the Irish Banking Federation said:

We have a clear purpose, which is to foster an innovative, stable and dynamic banking system which contributes not just to the economic life of the country but also its social well-being. We take this seriously...

I argue they did not take it seriously enough. Either the bankers did not know what was coming down the tracks or they simply were not telling the truth. Either scenario is equally worrying.

Senator Alex White

Hear, hear.

Senator Alan Kelly

I stated these bankers should be brought back before the Joint Committee on Finance and the Public Service or other similar committee to explain their comments and the scenarios in which we now find ourselves. If they are incompetent, why are they in their jobs? If they lied, that is another matter. The bank representatives should sit down and be interrogated again. They should be told that they have an opportunity to explain how we got into this scenario. The taxpayer has bailed them out. An explanation is the least we deserve. How will the Government ensure the taxpayer is not exposed to a huge risk? I am concerned that the Bill is merely postponing the problem for another day. We are still not rid of the debt incurred by the banks. What will happen if our model for bailing out the banks is copied by other large economies and the competitive advantage it is purported we will enjoy is removed? What will happen if a bank collapses? What will be the exposure of the taxpayer and how will this be managed?

Deputy Brian Lenihan

The Senator has no solution.

Senator Mary M. White

Hear, hear.

Senator Jerry Buttimer

The Minister only blames Joe Duffy.

Senator John Paul Phelan

Exactly.

An Cathaoirleach

Senator Kelly, without interruption.

Senator Alan Kelly

There are a number of actions the Government must take and these should be addressed in the Bill. For example, serious consideration must be given to having State representatives on the boards of the relevant banks in order to ensure that proper practices are put in place to protect taxpayers. That condition should be absolute. Members of the public want to see such a measure put in place because it would give them comfort, which is important and which they deserve. If there is an excuse for not including provisions in this regard in the Bill, I hope the Minister will provide it later and will, if necessary, introduce supplementary legislation to deal with the matter.

We should follow the US model and put limits on executives' pay and perks. We cannot allow millions of euro to be given to bankers in pay and perks while the taxpayer is obliged to write a blank cheque. Last year, the chief executives of the six institutions covered by the Bill were paid €17 million. It would be preposterous not to cap their salaries and the Labour Party will be pushing an amendment to ensure such a cap is put in place. In addition, bankers cannot be allowed to issues shares to themselves during this bail out and a structure must be put in place to deal with how dividends are paid out in order that, should a bank need to be bailed out, taxpayers will not be obliged to look back in envy at the money shareholders received on foot of recent dividend payouts.

Rules must be put in place in respect of how banks are audited. In particular, auditing must be rotated in order that sharpness is maintained. I am concerned that charges which will come into play for the banks as a result of this underwriting are not adequately penal. We must teach the banks a tough lesson for the future. As my party leader, Deputy Gilmore, stated earlier, we have effectively given an insurance policy to the banks under which they will be obliged to pay the premium when they make a claim. That is a good analogy. We must take a stronger line. The banks should be obliged to pay a much higher price, particularly if they are being given a blank cheque by the taxpayer. They should have to pay for the privilege of knowing that such a cheque, the purpose of which is to underwrite their work to date, exists.

In view of the fact that taxpayers are bailing out the banks, what chance is there of latitude being extended in turn to mortgage holders, small businesses and other customers of the banks? During the heady days of rapid economic growth, banks and other financial institutions were dishing out mortgages to first-time buyers hand over fist. It is now incumbent on the banks to allow latitude to home owners to ensure that the nightmare scenario of houses being repossessed and families being turfed out on the street does not materialise.

What does the Government intend to do about non-Irish banks, particularly British institutions, with a significant presence on the Irish high street? This matter, about which there has already been some discussion, must be addressed. I understand the Government is moving towards including other institutions. Such a move threatens to open up a financial Pandora's box and further increases the potential exposure of taxpayers. What will happen if the EU decides that state aid rules have been broken? The British Prime Minister, Gordon Brown, has already commented on this matter, which is a cause of some concern and which is being examined by the EU Commissioner for Competition.

The Bill simply does not contain enough detail regarding the terms and conditions of the deal. I refer, in particular, to section 5. There is also no indication of the amount the banks will pay for the insurance cover that will be provided under the Bill. This is another matter which must be addressed. What guarantee is there that the banks will limit their current exposure? How can we be sure that the €400 billion liability will not increase to €800 billion? Should the banks covered by the Bill be obliged to seek permission——

An Cathaoirleach

The Senator must conclude.

Senator Alan Kelly

——to make acquisitions during the two-year period for which the guarantee will be in place?

An Cathaoirleach

The Senator's time is exhausted. He must conclude.

Senator Alan Kelly

I will do so. Will acquisitions made by the six banks currently covered by the Bill be covered under the Bill? Will the Minister explain why the guarantee is to be of two years' duration?

Senator Ciaran Cannon

I welcome this opportunity to speak on the decisive action taken by the Minister for Finance in moving to restore confidence in the banking sector and, in particular, to improve liquidity. We cannot expect Irish business to be able to flourish in an environment where there is no liquidity and where banks would have no choice but to turn off the taps on entrepreneurial effort. The Government has made a decisive move that will give Irish banks AAA status internationally and, moreover, access to cheaper funds.

The US sub-prime crisis is not the fault of anyone — the Government, the banks or the people — in this country. It has led to an international credit crisis that has obliged our banks to operate in an extremely difficult environment. Those banks could not have continued to trade in such an environment without the support of the Government. The support we are offering will allow them to leave credit lines open so that people can continue to secure business loans, mortgages and car loans — the kind of credit needed to keep Ireland in business.

Let us be clear that our plan is fundamentally different from those of the US and the UK. Unlike the US, we are not wiping out bad debts or buying up toxic loans; we are simply allowing the State to act as guarantor on Irish banking credit for the next two years. We are not following the UK model of nationalising one bank after another while the entire banking sector suffers death by 1,000 cuts. We are concerned with restoring confidence and getting the economy moving again.

In the past 48 hours, global financial analysts have acknowledged the model we have chosen as an elegant solution to the crisis of liquidity and one which could pave the way for action on the part of other nations experiencing similar problems. This evening there are indications that some other EU nations are moving in the same direction as Ireland. The Financial Times described the Government’s action as the Irish solution to a global problem.

A key element of the plan is that the guarantee is not being given freely to the Irish banking sector. It is being given on commercial terms and the banking sector will pay for it. The guarantee is being provided at a charge to the institutions concerned and will be subject to specific terms and conditions so that taxpayers' interests can be protected. Furthermore, as a result of this legislation, the Minister for Finance will have far-reaching powers to intervene in the banking sector when he believes that a particular bank is acting irresponsibly.

During the past 48 hours, we have shown an example to the world of how to act decisively. We elect the Government to govern and that is what is happening here today. I congratulate the Minister on his courage and decisiveness. I urge him to continue in this decisive vein during the coming months. That same approach is needed to keep Ireland in business and, more importantly, to ensure that it is in pole position when the global recovery begins.

I was heartened to hear the words uttered yesterday by Senator Quinn, one of the most successful business people of his generation, when he referred to the challenges we face. The Senator stated:

This is the very time to do something dramatic... This is the very time to be courageous and to have a belief in the future and to say we can do something about it.

The Minister, Deputy Brian Lenihan, might not agree with me when I say that he is most fortunate to be in the position in which he finds himself. He has been presented with the greatest opportunity of any Minister for Finance in the past 20 years to make the kind of sweeping reforms this country urgently needs. It is the difficult situation in which we find ourselves which gives him the real licence and authority to push through the type of changes that will allow hard-working and enterprising people to put Ireland at the very top of the global premier league.

The Minister has begun what I hope will be a swift and effective programme of tough reforms. In March 2006, Michael Dell summed up the relationship that exists between Ireland and the multinationals when he stated:

I don't think it's coincidence that Ireland and Dell share the same character and connection. Every success we've achieved around the world has been due to the old Irish recipe of big dreams, hard work and strong relationships.

In October 2008, we are faced with the real possibility that Michael Dell and many others no longer believe in Ireland as a place to do business. We must ask ourselves why that is the case. It is time for us to once again dream those "big dreams" and do what is right to achieve them. The people will, in large numbers, support the person and the Government that has the courage to make the tough decisions required to secure our children's future. The time is right for such decisions and they must be made now.

Senator Paschal Donohoe

I welcome the Minister. I wish to emphasise that Fine Gael will be supporting the Bill because it believes it is in the national interest. I acknowledge the major effort the Minister has been obliged to invest in dealing with this matter in recent and extremely trying days.

It is also in the national interest to reflect on how we reached this point. An American central banker once famously observed that the role of a central bank is to withdraw from a party when that party begins to get interesting. It is clear that the opposite happened in Ireland in recent years. The punch bowl, which was full, was left in the middle of the room when the party really got going. We were informed that we should drink deeply and that there would be no hangover in the morning. We are all now reaping the consequences.

While my party does not hesitate to support this Bill, because it believes it is in the national interest, a vital issue that must be addressed is why the people, cultures and attitudes, which have so blatantly failed to regulate the banking industry over the past number of years, have now been given new power and the Minister expects us to believe the wit, determination and expertise to wield that power will appear overnight. We must know if the culture that ensured the Government and the authorities it created backed away from making hard decisions and from challenging the vested interests in our banking sector is still there. Is there the determination to make the decisions and challenge the interests which is vital to the success of our country?

For so long now we have seen how this Government was willing to be the lap-dogs of the banking sector. Is the Government now willing to be the guard dogs of it? Is it willing to use the vast, sweeping powers this Bill gives it for the benefit of taxpayers, families and businesses which are dependent on its leadership, which has been absent over the past number of years?

Two other vital points must be made about this Bill and the culture in the banking sector in Ireland. These are domestic points which we must tackle. The first one is the compensation culture in Irish banking. Much discussion has taken place regarding the salary our bank executives receive but that is missing the point. I looked at the compensation package of one of our top bankers — a top chief executive — and only one third of his compensation package goes into salary. The rest of it goes into stock options, bonuses and to deferred pension plans. Will this Government tackle the compensation culture which has rewarded and driven reckless behaviour for which we are all now paying the price?

When one hears the Republican Party in America talk about the need to cap salaries, one knows it is getting away from the bigger issue which is the stock plans and option plans. Will the Minister indicate whether he is willing to tackle them and tell the bankers who come in here and look down on us that the way they are rewarded must change for our banking sector to prosper?

Moral hazard has been discussed at length in both Houses. We now enter the greatest period of potential moral hazard our country has faced since its foundation. We are providing a guarantee by taxpayers to some banks which may be in serious financial difficulty. What is to stop them using that guarantee, or indemnity, to trade themselves out of trouble? Given that they have traded themselves into trouble in the first place, how will we ensure this is tracked and monitored by the Government?

Fine Gael supports this Bill because it is in the national interest. On Monday we heard the voices of the financial markets which said they did not trust the Irish banking sector. In the coming months and years, we could hear those voices again but I hope we do not. Those voices will be mild in comparison to the voices of the people of this country who depend on the banking sector for their houses, and for families. As committed as we are to supporting this Bill, if the Government does not use the sweeping powers this Bill gives it, we will articulate those voices and that outrage in the future.

Senator John Hanafin

I commend the Minister on his speedy response and on the introduction of the Credit Institutions (Financial Support) Bill 2008. There has been significant praise throughout Europe for the efforts of the Minister. The proof is that there is a strong indication that net inflows into Irish banks are looking positive. Last year there were long queues outside Northern Rock, a UK bank, and it was nationalised. It has now said it might stop taking deposits because it has reached its deposit limit.

The Minister has placed our economy — not our banks — on a sound footing. That was the purpose of this Bill. It was not introduced to protect the banks or the people who work for them but to protect the people of this country. He is to be commended for his speedy response, and for the strongest response in Europe. As a result of that guarantee, Irish banks will be highly capitalised and will have the one asset lacking in international banks currently, namely, liquidity.

The alternative was to do nothing. Lack of intervention in the 1920s, which is widely credited to have caused the stock market crash, resulted in a recession turning into a full depression which lasted throughout the 1930s. During that time in the United States, output dived by25%, 25% of the people were unemployed, income fell and deflation took hold. As we saw happen, there were frequent runs on banks as desperate consumers withdrew their money, eventually leading to the introduction of the bank holiday which was not to give people a day off but to stop them withdrawing money.

What we have averted by speedy and proper action is a serious crisis. It was not a serious crisis of our making. Given that what happens in the Far East and on Wall Street can affect our lives, we should have a say in how they are regulated and run. There is no doubt there was desperate corporate greed in America and Gordon Gekko took hold. Greed was not good. Billions were paid in bonuses to people who repackaged mortgages. The only criteria for getting a mortgage was that one was still breathing. That was not right because the person who gave the mortgage was no longer responsible and responsibility was transferred to the person who bought the repackaged mortgage.

The Minister's speedy response has served the country well. He has set an example which may be followed by the rest of Europe. We may soon see very strong net inflows into Irish banks not only from the UK but from Europe and the US, as well as confidence immediately restored by this necessary action. Each time there is a net inflow, our exposure is reduced. We have given an insurance policy, and no more than that.

The difficulties in the Irish market were not the reason this Bill was introduced. The reason it was introduced was because of the domino effect. Banks were not lending to each other because confidence had gone. Nobody knew which bank was secure and which bank was not. This was visited on us; we were the innocent party in this. I commend the Minister on taking action on behalf of the country.

Senator Shane Ross

It is very difficult to get a grip on this debate because people on this side of the House are very critical of the Bill and yet wish to be instruments in solving the crisis upon us and do not want to appear to be obstructive. I share that view. We must preface our remarks by agreeing there was a crisis and something had to be done about it. It is then fair to ask whether the right action has been taken and whether we have the right Bill.

I was disappointed by the Minister's speech because of what did not come through in it and all the discussion is what happened last Monday night. Who came to the Minister and told him it was a desperate situation, or did he ask somebody to come and see him? Did the banks come to him or did he summon the banks? In his speech the Minister attributed no blame for anything that happened in Ireland. The blame is being placed fairly and squarely on the global economy and what is happening overseas. That is nonsense.

I agree there is a considerable element of blame for what happened to be attached overseas. There is no doubt about that, but to pretend that is where all the blame lies is ridiculous. For months and years we have heard the leader of every bank in Ireland smugly telling us not to worry because Ireland does not have sub-prime lending, is pure as the driven snow and everything is fine. What is the crisis about here if we do not have the problem and others do? Ireland does not have sub-prime mortgages in the same sense as the United States, but has the problems the Minister and others have identified in the wholesale money market, and liquidity problems. We also have special problems here which we refuse to recognise. Instead, we try and pretend they do not exist and blame the whole problem on America. That is not right. We have our own toxic mortgages here, but we like to pretend they have not happened.

We have a serious situation in Ireland and this was acknowledged by the international markets last Monday. Why did investors from overseas sell Irish shares like there was no tomorrow and far more than overseas shares? It was because the message overseas was that Irish banks, in particular, were behaving irresponsibly in the domestic property market. That was what was happening and that is the reason there was such a run and selling of shares. The result was a crisis and if it had gone to Tuesday, God knows what would have happened. The Minister might be able to enlighten us on what the catastrophe would have been, which Government spokespersons admit would have occurred, but there would have been an unsustainable catastrophe. Why? The reason is that international markets feel Ireland was behaving especially badly and irresponsibly. The result was a magnificent operation — a public relations job which was superbly handled and came out on time — and the markets rose on Tuesday. The banks and the bankers were saved. I agree the banks should be saved, but not the bankers. The shareholders were also saved.

What about the taxpayers? They have not been saved. This solution does not come without cost. It has an immediate cost and this was touched on by Senator Alex White earlier. Already, on money and bond markets the guarantee the Minister has given will cost us millions. The rate at which Ireland borrows money has risen on bond markets overnight. It is now more expensive for Ireland to borrow than it is for Italy, which is nearly bankrupt. We have leapfrogged other European countries in recent days as a direct result of this guarantee. Those who are going to lend us money will lend it, but will charge us more. That is a direct cost to taxpayers.

It is an extremely bad time for this to happen, because we will go to the markets shortly in our budget, to which I am looking forward, to borrow money to fund a deficit. We will look for billions that will cost us more as a result of the guarantees we have given. We should be aware of this, aware taxpayers will have to pay significantly for the guarantee we have been given.

Senator Fiona O’Malley

As always, Senator Ross has forced me to change what I was going to say. I was about to applaud the Minister and Government for the swift action they have taken.

I have great respect for the opinion of Senator Ross, but he is being utterly alarmist. I agree what has happened in Ireland will cost us to an extent. The cost is €62,000 for €10 billion borrowed and when asked if that is worth it, I think it is, particularly if it is will safeguard the financial institutions in the country.

Senator Shane Ross

That is complete nonsense.

Senator Fiona O’Malley

That is money well spent and that is the reason it——

(Interruptions).

An Leas-Chathaoirleach

Senator O'Malley, without interruption.

Senator Fiona O’Malley

I have respect for the Senator's opinion, but he must be accurate and fair about these matters. I agree we need to consider what catastrophe our action has prevented. The banking sector could have collapsed. What does that mean for ordinary people? Life, as they know it, would have ceased and they would not have had access to money as previously. It was for that reason it was important the Government acted as swiftly as it did.

It is to Ireland's credit that the Government acted decisively. Tonight the American Senate has agreed on a rescue package for America. The UK did not act with the same kind of decisiveness. Our response will stand to us. I appreciate the remarks made by Senator O'Toole with regard to unity of purpose. This move is in all our interests and we are all united tonight in ensuring the banking sector and financial institutions will survive and ride out the difficult times ahead.

The Government has been decisive and we now need to look forward. There is not much merit in looking backward. We need to consider the challenges the changes to the financial sector present now. There will be significant challenges for the financial services sector and we should devise a strategic plan to deal with these. The financial sector is no longer what it used to be. Significant moneys and jobs were created in the sector in the past 20 years, but we now need to consider the long-term consequences of this financial turmoil and ensure a strategic plan is put in place to protect the sector. The sector has rewarded us and brought significant benefit to the country and we must ensure it can survive. The banks are getting a good deal and good terms. Previously, when banks were given assistance, taxpayers got no reward from the deal. They will get some reward this time. It is important we go ahead with this move. It has to be acknowledged that irresponsible lending practices were pursued but we now have a guarantee these will not continue. One would hope that banks' behaviour will change. We need to ensure that the generosity——

Senator Jerry Buttimer

Generosity is right.

Senator Fiona O’Malley

——which the Government has shown to banks is shared with the people who face challenges in paying their mortgages. These people have supported the banking sector through their mortgages and they deserve latitude in these times of difficulty.

Senator Dominic Hannigan

I wish to share my time with Senator Alex White.

An Leas-Chathaoirleach

Is that agreed? Agreed.

Senator Dominic Hannigan

We find ourselves in a surreal position. In effect, we are being asked to guarantee loans to the tune of €100,000 for every man, woman and child in the country. We are now the lender of last resort for huge amounts of money and, if the reports are to be believed, even more money is flowing in from abroad. This is putting even more strain on the country's creditworthiness. Senator Ross is completely correct and if Senator O'Malley would listen to what I have to say, the issues may become clear to her. We are making Government borrowing more expensive because we will have to pay higher interest on Government bonds.

Senator Fiona O’Malley

It will be €10 billion.

Senator Dominic Hannigan

It will be a lot more than that. It will impact on our ability to pay for schemes such as the national development plan. I would like to hear the Minister's opinion on that. The Minister of State claimed that detailed analysis from the NTMA shows that the assets of Irish financial institutions exceed their liabilities by €80 billion. This is an aggregate figure, however, which does not reveal whether the assets and liabilities of individual institutions are more finely matched. We need to know whether any individual institution is close to the edge because, once again, that will impact on the guarantees we are providing.

We must place caps on salaries and share options because bankers have each way bets at present. By increasing the risks they take, they will gain through bonuses, share options or salaries, and if their risk taking is not successful they will be paid off. They win either way. We must have regard for the moral hazards that can arise. It is not enough to state this will be a priority for the Government. I ask for details on how the Minister expects to achieve a reduction in moral hazard.

Senator Alex White

Senator O'Malley felt she had to revise her comments on the basis of Senator Ross's contribution. I am in a slightly different position in the sense that I endorse almost all of what Senator Ross said, which is an unusual position for me. With all respect to the Senator, we sometimes approach issues from differing political perspectives. Everything he said was compelling. I will repeat the question he asked several times because we have to keep asking it. For the purpose of clarifying to the public and these Houses, the Minister should tell us what happened last Monday. A momentous event clearly took place. Meetings occurred——

Deputy Brian Lenihan

The Senator wants me to reveal the details of a confidential meeting.

An Leas-Chathaoirleach

Senator White, without interruption.

Senator Alex White

The Minister will have plenty of time to respond. A speaker opposite had an anxiety attack earlier when people interrupted him, so I might be given my two minutes.

Deputy Brian Lenihan

I am not attacking the Senator.

Senator Alex White

Without spin, I ask for a precise explanation of what happened and who was involved. Who approached whom?

Senator Jerry Buttimer

He cannot remember.

Senator Alex White

I am sure he can remember very well.

Senator Jerry Buttimer

He called Joe Duffy.

Senator Alex White

I ask for clarity on the matter. The Minister might then answer the bigger question of what happened between July and last Monday. What happened over the past six weeks?

Do Senators MacSharry and Hanafin really believe their claims that we live in a cocoon of virtue or that the problems are arising in the United States? If they repeat their claims often enough maybe they will believe them. More than 60% of the €416 billion lent by Irish lending institutions is property based. We know what has happened in the Irish economy and construction industry. Irrespective of whether this is toxic debt, a phrase which Senator O'Toole does not like, or debt which we can simply describe as dodgy, a significant domestic element is involved. Lending to the construction industry resulted in a splurge.

An Leas-Chathaoirleach

The Senator should conclude.

Senator Alex White

I ask to be allowed to speak for a further 20 seconds to make up for the Minister's interruption. The Minister of State stated that the Bill carries no significant risks. Manifestly, however, risks will arise because we do not have a continuing guarantee to the banks. The decision has been made to extend this guarantee, so it is out of the ordinary. Presumably the Minister weighed the risks and the cost to the taxpayer. There is a great deal of self-congratulation coming from the other side but the plan clearly carries costs and risks. The Minister should come clean on what precisely happened. Does he agree with Senator O'Malley and the Tánaiste when they say the banking system was heading towards collapse? Would he use those words?

Senator Geraldine Feeney

I envy the Minister's stamina because I do not know how he is still going. I am delighted to have an opportunity of speaking on this important Bill. I concur with Senator Cannon that it is an Irish solution to a global problem. Any sensible and informed person would understand this is a brave and decisive move which is necessary to protect the security of our banking system and the wider economy.

This has been an era of prosperity and unprecedented growth in the Irish economy. We were called the Celtic tiger but, when faced with adversity and aggravating external factors, we must bring forth our Celtic fighters. In mathematical terms, I would call that "Brian2”.

Senator Jerry Buttimer

Send in the clowns.

Senator Geraldine Feeney

I compliment the two great Celtic fighters we have in the Government, namely, the Taoiseach and the Minister for Finance——

Senator Jerry Buttimer

The Senator is canvassing for Seanad votes.

Senator Geraldine Feeney

——for the great foresight and courage they have shown in giving us this decisive and brave legislation.

Senator Eugene Regan

The Minister is embarrassed.

Senator Geraldine Feeney

The Celtic tiger may be wounded but our men in Government will not stand idly by and let it die.

Senator Nicky McFadden

Please Senator, for God's sake.

Senator Geraldine Feeney

From what I hear in the world media——

Senator Paudie Coffey

Can the Senator put that to music?

Senator Eugene Regan

It is nauseating.

Senator Geraldine Feeney

The Senator hates the truth.

Senator Jerry Buttimer

Are the Oscars being announced tonight?

Senator Geraldine Feeney

The world media have applauded this move and I believe they are ready to imitate it. In my humble opinion, which Senator McFadden will be delighted to learn——

Senator Jerry Buttimer

The Senator was never humble.

Senator Geraldine Feeney

Put that in your pipe and smoke it.

Senator Nicky McFadden

Get off.

Senator Geraldine Feeney

This legislation will save and consolidate our economy with no great cost to the taxpayer.

Senator Frances Fitzgerald

The State has guaranteed €400 billion.

Senator Geraldine Feeney

Irish banks are facing loan losses, as are all the banks in the Western world tonight. They are, however, well capitalised and will be able to cope with these losses. The only thing they cannot control is fear in international credit markets. This, along with the credit crisis, will be solved in time and we will all applaud that. The world economy has not collapsed and the credit markets will return to normality. This brave decision by our Government will allow the banks to ride out the storm.

Criticism has been thrown at the banks, some of it partly justified, about the earnings of their top people.

Senator Jerry Buttimer

The Senator is a populist now.

Senator Geraldine Feeney

However, we should also remember that thousands of Irish people are employed in our banks. They are not fat cats. They are doing an honest day's work rearing and supporting their families on the salaries they earn. They are ordinary people like you and me. We jump up and down about the loss of multinational manufacturing employment in this country, but we should remember that the Irish financial services employ thousands of people here.

I commend the Bill to the House and I thank the Government, not for propping up the banks, but for propping up our State and our economy.

Senators

Hear, hear.

An Leas-Chathaoirleach

I ask Senators to consider sharing time because 15 Senators have indicated they wish to speak.

Senator Paul Coghlan

I, too, welcome the Minister to the House.

Senator Donie Cassidy

Is the Senator sharing time?

Senator Paul Coghlan

If necessary.

The Minister acted decisively. Perhaps he had little choice. Apparently, a gun was put to his head on Monday night when some of the leading executives of our top financial institutions invaded Government Buildings, and people had to burn the midnight oil. As has been stated, we are acting in the national interest to safeguard our economy, to which the banking system is obviously vital. We need it to keep the wheels of commerce and industry oiled and to safeguard the jobs and livelihoods of our people. As Senator Feeney has just said, there are many people working very hard in our banks, whatever about some of the people at the top, although I am not saying some of those are not working hard also.

It is obvious that the banks masked the situation and totally understated what would appear to have been the necessary provision for bad debts, despite the assurances they gave, as mentioned by Senator Twomey, to the Joint Committee on Finance and the Public Service not too long ago. We must be careful about buying into all of their past poor lending decisions. I look forward to hearing the Minister's response to this, as well as the other points I will address.

Directors' compliance, in regard to proper and correct corporate governance, must be examined. I have no doubt this is very much on the Minister's mind. The Minister will also, I am sure, talk about the scheme that will lay out the basis for the levy. It is in the public interest, as the Minister has indicated already, that he ensure proper representation on the boards of the banks. Equally important are the codes of practice for risk assessment committees and the proper regulation of these. The quality of management of the banks, in light of what we have now learned, has left much to be desired. This requires careful examination. I would also like to hear from the Minister on that. The State is going in deep. There is now no doubt about that. There has been excessive remuneration at the top in the banks for short-term success which did not last. That must be ended forthwith.

I would like to hear the Minister's view on auditing within the banks. Auditors are there ad infinitum, it would appear. They are there too long and too many cosy relationships have been built up. What equity is it proposed to take, and on what account would the Minister propose to take it? As has been said, the Minister is being given major powers. I am not saying he will not act responsibly; I accept that he will. However, there is major responsibility involved, and the Minister must talk to us about the banks. Some of them behaved badly, perhaps recklessly in a few instances. I agree on the need for higher charges and for the State guarantee, and those banks that engaged in higher-risk lending——

An Leas-Chathaoirleach

The Senator has one minute.

Senator Paul Coghlan

We need an approach of due diligence. No doubt the Minister will talk about that.

This is a very important point. Is the State guaranteeing the overseas operations of our banks? Do we have sufficient regulatory control in terms of guarding against any future rustling? I also mention the ring-fencing of foreign banks operating here. I understand the Minister is looking into banks, other than the six Irish banks, that are licensed and regulated within the State, such as Ulster Bank. These matters must be very tightly contained. We must ensure there is no jiggery-pokery with regard to inter-bank lending. I would very much like to hear the Minister's comments on this.

Senator Mary M. White

On Monday morning, when I heard the Bill would be going through——

An Leas-Chathaoirleach

Does the Senator wish to share time?

Senator Mary M. White

Yes. I wish to share time with Senator Ormonde.

An Leas-Chathaoirleach

Is that agreed? Agreed.

Senator Mary M. White

May I start again?

Senator Jerry Buttimer

Carry on.

Senator Mary M. White

On Monday morning, when I heard the dramatic statement that an emergency Bill——

Senator Alex White

That was before it happened.

Senator Mary M. White

——would be introduced, I was pleased because I knew this was leadership.

Senator Alex White

The Senator knew before the Minister.

An Leas-Chathaoirleach

Senator White, without interruption.

Senator Mary M. White

We had leadership presented to us on Monday morning. It reminded me of the debate last week between the possible US Presidents-to-be Obama and McCain.

Senator Jerry Buttimer

What about President Mary White?

Senator Mary M. White

During the course of the presidential debate, John McCain commended Ireland on its 12.5% corporation tax rate. We are an innovative people. I am not flattering or——

Senator Liam Twomey

Gushing.

Senator Mary M. White

——gushing, but I get pleasure when I see and hear leadership.

Senator Alex White

Steady on.

Senator Jerry Buttimer

Mind the chocolates.

Senator Mary M. White

I commend the Minister. I am his biggest fan.

As Senator Ross said yesterday during the debate on the economy, this is not about bailing out the banks but about guarding the Irish economy and everyone who lives and works in Ireland. Nobody is saying that Irish banks are saints, and nobody has said we are blaming America for this. When has that been said?

Senator Jerry Buttimer

The Government said it.

Senator Mary M. White

I would not say that. We all knew that the false boom we experienced, pushed by the banks' lending——

Senator Liam Twomey

That is unpatriotic.

Senator Mary M. White

The boom the banks' flaithiúlach moneylending——

Senator Jerry Buttimer

If the Senator came to the Order of Business every day she would not be saying that.

Senator Mary M. White

I was here. The Senator was not here for the last while when I was speaking, and I did draw attention to it.

An Leas-Chathaoirleach

The Senator's time is up.

Senator Mary M. White

I would like the Minister now to prioritise getting our competitiveness back in order——

Senator Paudie Coffey

Hear, hear.

Senator Mary M. White

——for the sake of the real companies doing business in this country — not the people in the banks who can sit at their desks and make quick bucks, but the people who are slaving away in manufacturing and services, selling goods abroad. As Dr. Whitaker said on 19 September, we need to prioritise competitiveness.

Senator Alex White

People one never would have seen at the Galway tent.

Deputy Brian Lenihan

What tent is the Senator talking about?

Senator Ann Ormonde

I, too, welcome the Minister, and I compliment the Government on its swift action in trying to restore stability. We are in scary times, and it is only this action, which has been recognised nationally and internationally, and the leadership of the Government, that has secured stability in the financial system. All I wish to say to the Minister in my one minute is that changes are required in the banking system.

Senator John Paul Phelan

Hear, hear.

Senator Ann Ormonde

At the moment, the trust is gone. I grew up in a town where banks were highly respected. I want that respect restored, and I want the Minister to ensure that regulatory standards will be applied to lending practices to protect the taxpayer. Confidence is down at the moment. All I ask the Minister is that he continue the scrutiny that is necessary at this time.

Senator Alex White

Start it.

Senator Rónán Mullen

I welcome the Minister. I am glad the waiting is over. I was reminded of "Waiting for Godot" earlier when Senator Donie Cassidy came in repeatedly and said, "the Minister cannot be along just now but I promise he will be along later".

Senator Geraldine Feeney

They are on tour.

Senator Paul Coghlan

It is a nonsense.

Senator Rónán Mullen

Better later than never. I support this Bill. It is an irony that the situation we are facing has been brought about by a massive breach of trust by many people in the financial world. We now find ourselves trusting the Minister to use the powers he will have under this Bill to help us into a situation where Irish financial institutions will enjoy full trust at home and internationally.

I was reminded of Donald Rumsfeld's infamous phrase about known unknowns. The truth is we do not know the precise level of exposure or risk we are taking in taking the step necessary to provide this guarantee to the banks. It is fair to speculate that whatever the degree of risk and exposure we face by acting in this way, the risk and exposure we would face by not acting would be a multiple of it.

We have guaranteed the funds and deposits in our banks, and the repayment of monies on loan to our banks. A jaded cynic commented to me earlier that now our bank officials are effectively becoming civil servants, would they have to take the Irish oral exam from now on?

We need to reflect on the valuable commodity of time. It is said that time heals all wounds. It is time that will give the breathing space needed to allow business activity and money to flow as blood flows through a living organism. We are in the business of gaining time to enable things to return to normality.

Some have commented on the extent of our exposure as a result of this move. The truth is that even when financial systems are working perfectly, there would be a huge degree of exposure if everybody was to call back the money that belonged to them. The whole system is based on confidence so credit can be given, and given again and again, and money can flow through the system. This Bill is an honourable way to build confidence. There will be a time to reflect on the many dishonourable ways in which confidence was sought to be built in recent times in the area of high finance. I would like the Minister to explain precisely how the charges will be levied on the banks for the guarantee being given, whether it will be, as Deputy Eamon Gilmore stated, a case of paying the premium only when the claim is made, or whether there will be a charge for enjoying the guarantee whether they ever have recourse to it or not.

There must also come a time when we reflect. I was taken by Senator Paschal Donohoe's speech earlier on how trust has been breeched and how people in financial services undermined trust by separating risk management from ethical decision making. Trust was undermined by not saying stop when people moved from risk taking to recklessness. Trust was undermined when people were incentivised to not be transparent and honest, and to produce results by whatever means on a quarterly basis. It was undermined whenever, as leaders, politicians, analysts, journalists or investors, people made dishonest statements about the affairs of their company or industry. Last December the CEO of AIG, Martin Sullivan said the probability of losses on AIG's portfolio of credit swaps was close to zero, and any write-downs would be manageable. Dick Fuld, CEO of Lehman Brothers, said at their AGM last April that the worst of the impact on the financial services industry was "behind us". Those are the kinds of statements that undermined trust. Joseph Stiglitz, the 2001 recipient of the Nobel Prize for Economics wrote recently, speaking in an international context, that some of our best and brightest were devoting their talents to getting around standards and regulations designed to ensure the efficiency of the economy and the safety of the banking system.

It is four o'clock in the morning, and I will share a quote from Confucius. One might say we are confused enough already. Confucius said that to put the world in order we must first put the nation in order, and to put the nation in order we must first the family in order. To put the family in order, we must first cultivate our personal life, and set our hearts right. There is a message in there somewhere for the bankers.

Senator Jim Walsh

I will refrain from throwing bouquets at the Minster for Finance or the Taoiseach.

Senator Nicky McFadden

Well done.

Senator Alex White

That will be a first.

Senator Mary M. White

He got plenty already.

Senator Jim Walsh

One does not do that until the game is over. We are only part of the way through this particular game. I went to the Davenport Hotel today with a member of the Labour Party. On the way down she said, "at least we are fortunate to have two of the best intellects in the Houses of the Oireachtas at the helm at this particular time". I agreed with that. I compliment the Minister on the initiative that has been taken. It was necessary and essential. Increasing the deposit guarantee from €20,000 to €100,000 was a very good initial step, and brought some stability. Following the example of the USA and Britain in the approach taken to hedge funds and short-selling was also important, because to allow speculators, at a time of financial turbulence, to depress prices further would have exacerbated an already difficult situation.

The guarantee has taken the international market by surprise. It was an extremely brave move. It is not without certain risks and the Minister will acknowledge that. The markets have welcomed it, and it is interesting today that one of our major banks, in New York, got between €7 and €8 billion in deposits, which is very significant.

There is money flowing in from various banks into the Irish institutions as a consequence of the initiative taken. That raises its own particular concerns or notes of caution. I know the Minister is taking the necessary precautions to ensure money coming into the bank is prudently utilised within the banking system here, and we are not adding to any exposures that might be there from previous debt that they are handling. That is essential.

People have been saying this is almost an exclusively Irish phenomenon. It is not. This is an international problem because of the globalisation of the international finance markets. It has its genesis in the sub-prime market in the USA. Some Members have compared that with the Irish situation. There is no such comparison. Institutions involved in sub-prime in the USA were lending to people who were high risk, with low creditworthiness, at high interest rates. They then parcelled those loans and sold them on to investment vehicles and other banking institutions. Senator Liam Twomey rightly said, in his opening remarks, the biggest difficulty in any market is not the good news or the bad news, it is the uncertainty. That brought uncertainty and as a consequence led to the lack of liquidity in the market. That in turn has given rise to the situation here. People say property here is overpriced; they are right without a doubt. Our income levels are significantly higher as well. In a comparison last year, Dublin came out at an average of €53,000 per annum. The next highest in Europe was Stockholm, at €36,000. Property prices will, to some extent, reflect income levels.

I have some notes of caution. I do not think we should be too intrusive into the payments and remuneration packages of people in banking. We want a vibrant banking system to continue. There is one area has contributed enormously to the difficulties we have, and it is the area of extravagant bonus payments, which were multiples of the salaries people were getting, being paid to executives. That brought short-term thinking into focus to the detriment of medium- or long-term prudent adherence to fundamental banking principles. That needs to be corrected.

I agree this should be limited to the six institutions already mentioned by the Minister. We should not, under any circumstances, extend it to externally owned banking institutions who should be getting comfort from their own states. I would make only one exception. We have a great success here, which was the brainchild of Dermot Desmond, and implemented through the vision of Charlie Haughey, and that is the IFSC. It is important that anything done in this regard would ensure the continuing success of the IFSC.

Senator Eugene Regan

The Irish banks have devised a very elegant solution to their liquidity problems. They put that to the Minister and he adopted it. He probably had very little choice under the circumstances.

Deputy Brian Lenihan

They do not know that.

Senator Geraldine Feeney

The party of which the Senator is a member would not have thought of it.

Senator Frances Fitzgerald

Will the Senator confirm or deny it.

Senator Eugene Regan

I understand how the Minister reacted. I emphasise the word——

(Interruptions).

An Leas-Chathaoirleach

Senator Regan without interruption, please.

Senator Eugene Regan

May I have an audience please? I emphasise "reaction", because to speak and gloat as Senators have done at this stage is out of order. The fact is it was an extreme situation, the Minister did act, or react as the case may be, and he has support across the House. It is entirely out of order to indulge in some of the gloating about the leadership, planning and so on.

Senator Donie Cassidy

There should be no lectures at this hour of the morning.

Senator Eugene Regan

Having said that, no lessons will have been learned if we do not recognise how we got into this situation. It is very simple. Unsustainable and reckless lending practices by the banks, coupled with reckless and inflationary expenditure by the Government, provided the context which created the lack of confidence in the Irish banks and the run on the banks earlier this week.

I have a problem with the structure of the Bill. There is a general principle in legislation that primary legislation should set out the policies and the principles and that a statutory instrument adopted by the Minister would set out more details but within the parameters set by the primary legislation. I cannot find the parameters. It is at the entire discretion of the Minister, therefore we might as well be reading a statutory instrument.

Senator Paul Coghlan

It is very wide.

Senator Eugene Regan

It starts with regulation and schemes to be adopted by the Minister. I cannot even find clear wording to provide for the type of indemnity that is being provided by the Government in this legislation.

In his contribution the Minister of State made a number of points including what it is intended to do under the legislation. He said it is intended to put "a fee mechanism in place to remunerate the guarantee at a commercial rate taking into account such factors as the possibility of increased funding costs for the Exchequer, the economic value for the institutions and the need to support investor confidence in the Irish financial system overall." Where in the Bill can I find that statement? The Minister of State said that it was a priority of the Government to ensure that the highest regulatory and corporate governance standards will apply in all of the institutions. Where can I find that in the Bill? If we are adopting primary legislation, which sets out the supports for the banks and the conditions which apply, I do not see it in the legislation.

Senator Jerry Buttimer

The Minister had no choice but to act and I commend him for so doing. He had no choice because this crisis is of our making. I advise him to speak with and listen to Joe Duffy because, without him, we would not have had the guarantee raised. He was not the person who caused a run on the banks. The crisis has been caused by three groups——

Senator Geraldine Feeney

The party of which the Deputy is a member only listens to George Hook. We do not like Joe Duffy.

Senator Jerry Buttimer

——the banks, the Government and the big developers, those who Senator Feeney and her ilk have supported at the Galway Races for many years.

Senator Geraldine Feeney

The Deputy is doing a Michael Ring on it now.

Senator Jerry Buttimer

The 21st century Ireland has been given a very valuable lesson during the past 12 months. There has been the failure of accountability by Government, loss of morale by our financial institutions and large developers and the failure of the Government to govern and act in the national interest on behalf of the people. We should represent the people, which we have not done. The Government has neglected to do so and those on this side of the House have acquiesced. The big concern of the people is what is the cost to them. How will it affect them? They need banks and the hole in the wall to cash their pay cheques but not to look after the bankers' friends, the big developers with their billions of euro. Fine Gael has always done the right thing for the country. We support the Bill to secure the jobs of our people, to protect their small savings and to keep our economy buoyant and afloat and we will never let the people down.

Senator Paul Coghlan

Good on the Senator.

Senator Déirdre de Búrca

I welcome the Minister to the House. While I will not throw any bouquets in his direction, like my fellow Green Party colleagues, I am satisfied to support the Credit Institutions (Financial Support) Bill 2008. If we are prepared to be honest, the Government had little alternative but to act in this way.

Senator Jerry Buttimer

Hear, hear.

Senator Déirdre de Búrca

To have not acted swiftly would have led to a very serious disturbance of the economy. As other speakers have said, it would have moved out beyond the banking sector and have had a much wider economic, social and employment impact. As the Minister of State, Deputy Mansergh, outlined earlier, this Bill is necessary to protect the stability of credit institutions and also to maintain the stability of the financial system of the State. In order to achieve these ends, the State has provided a guarantee to six domestic financial institutions which, as the Minister of State pointed out, were not in a position to rely on the support and assistance of parent institutions.

However, it is important to point out that the same protection and underwriting was not extended to other financial institutions operating in the State. This does raise issues and questions around competition. It appears to give an advantage to those institutions to which the State has extended a protection and it also seems to raise equity issues. It is Irish citizens in the main who have their savings in institutions such as the Ulster Bank, Bank of Scotland and so on and it does not appear fair that those citizens and those institutions do not enjoy the same protection as the institutions that the State has underwritten.

An increasing number of financial and banking services operate across the borders of member states. Fortis is an example of one of these. It is obvious that the traditional model of governments acting on behalf of or in the interests of national champions in crisis situations such as this will no longer be as effective given that financial institutions are increasingly located across a number of member states and it is hard to identify where the parent institution might be based.

I ask the Minister to use his influence on the Council of Ministers to call for an EU-wide regulatory authority for financial services. This has been mentioned in recent days. It would be sensible and feasible to begin with the countries that belong to the eurozone because they have the same monetary system, the same interest rates and so on. The Minister, as an influential player in the eurozone group, will be in a position to push for the establishment for the EU regulatory authority for financial services. In time, I hope it will extend on an EU-wide basis and ultimately we will be speaking about an international system for regulating financial services. As the Minister of State, Deputy Martin Mansergh, pointed out earlier, this credit crisis originated in the United States. The saying goes that if the United States sneezes the rest of the world catches a cold. We need an international system of regulation of financial services but this should begin at an EU level. I ask the Minister of State to use his influence to make sure this happens in the wake of the crisis we are now experiencing.

Senator Pearse Doherty

I intend to support this Bill as my party colleagues did in the Dáil when the vote was taken there in the early hours this morning. We do this because the Bill is in the national interest but we do so with reservation because we know that the Bill could be much better. It is disappointing that the Minister for Finance did not accept my party's amendments and those of other parties which would have strengthened the Bill.

When we debated the economy in this Chamber last night I said there is an onus on the Opposition not only to highlight the problems in the economy but to propose and support sensible solutions. My party understands that the Government must intervene to stabilise the economy and the financial system and that is why we will support the Bill. The logic behind this move is to undermine the bear market and lead to investment in our banking system.

This legislation is about more than the banks. It is about offering security to ordinary citizens and to investors in Irish businesses which in turn means jobs. As the media speculated, other states may well follow this move by our State.

The concern on the street in recent days is about what we will get out of the move. What will the Government extract from the banks in return for this legislation? That is where the Bill falls short. It does not offer the necessary details to inform us of terms and conditions. We must be particularly cautious about this move because the Central Bank has proved itself to be entirely incapable of doing its job. We do not know what the budget sheets of the major banks look like and what liabilities Irish taxpayers now undertake. The guarantee must be underpinned by further conditions and we must have details of these.

When the Government bailed out Allied Irish Bank in the 1980s after the ICI collapse, a levy on banks was introduced. A similar initiative must be included in this Bill to build a fund that will serve to meet the insurance requirements the banking sector clearly needs. If this guarantee does what it should the banks should make a profit from borrowing the State's name. They should pay significant compensation to the State for that security.

There should also be a commitment from bank management to forgo any bonuses over the time covered by this guarantee. Those individuals should consider cutting their enormous salaries. As a separate matter, there must be transparency in the banking system and better regulation.

While my party welcomes this decisive move we must point out that action could, and should, have been taken many years ago. As long ago as 2005, the Oireachtas Joint Committee on Finance and the Public Service made recommendations on bank charges and interest rates. My party colleague, Deputy O Caoláin, was a member of the committee and initiated the process. The committee exposed the lack of transparency on the part of the banks with regard to customer charges and urged the need for further regulation of banks.

We must know what assurances will be given to ordinary people. That is one of the big questions we must ask the Minister. What assurance will be given to those people who have lost their jobs in the construction sector, who are mortgaged to the hilt, who face negative equity in their homes or are at risk of losing their homes? These people did not earn big bonuses over the boom years while others reaped millions. This guarantee will mean nothing to those people or to those whom the banks haul before the courts and who find themselves currently embroiled in court hearings because of mortgage default. When was the last time the Government sat through the night to come up with solutions for the problems of such people? When was the last time the Government showed the same type of commitment, sitting through the night to deal with the crisis in our health care and our school building programme or our unemployment rates that are spiralling out of control? I urge the Minister to show the same determination to those issues that he brings to this one.

It is imperative that the Government offers the same level of security now offered to the banks to ordinary people who are in debt to the same banks. Thus far, no bank has moved on any major developer to recoup loans but homes continue to be repossessed. I seek, along with this guarantee, an immediate moratorium on home repossession. Every step must be taken to ensure that people can re-schedule loans where required, defer payments on the capital sum borrowed, and negotiate interest-only payments for a designated period if required.

I support this Bill and hope the Minister will accept some of the amendments put forward, but I do not believe he will. The Bill could have been better but it is in the national interest and therefore my party supports it in this House as it did in the Dáil.

An Cathaoirleach

There are only five minutes left and four people on the Opposition side wish to speak. Senator Fitzgerald is next on the list.

Senator Frances Fitzgerald

I will share my time with Senator Phelan.

Senator Paddy Burke

On a point of order, is there provision for the Minister to reply?

An Cathaoirleach

I was due to call the Minister at 4.40 a.m. but because two people are to speak now I ask if the Leader will agree to allow five minutes extra for the other two people to share time. Is that agreed? Agreed.

Senator Frances Fitzgerald

I welcome the Minister to the House. It has been made clear that Fine Gael supports this legislation. We believe it to be in the national interest. I caution, however, against the euphoria and self-congratulation which comes from some members of the other side of the House. This is by no means the end of the game but rather the beginning of an entirely new set of circumstances, the outcome of which is uncertain.

Senators

Hear, hear.

Senator Frances Fitzgerald

We hope it will give the kind of confidence in the economy that will safeguard our banking sectors and jobs and create a new economic dynamic. As we have seen in recent months, there is now considerable uncertainty in the world economy and in world finance. That magic ingredient, confidence, is not always present when we have expected it to be. There is no absolute guarantee that this step will work in the way we hope it will. We wait and see. The Government must take several actions which it has not taken in previous years. Regulation and management have been sadly lacking in overseeing our public finances.

Take, for example, the property bubble where warnings were received month after month up to the 11th hour. Under the former Taoiseach, Deputy Bertie Ahern and the former Minister for Finance, Deputy Brian Cowen, the Government supported the bubble and said there was no problem right up to the 11th hour. There has been much criticism of the Financial Regulator and the Central Bank but they were influenced by what the Government said about the property market and the state of the economy. The Government questioned anyone who raised concerns about that property bubble.

Senator Donohoe spoke very well about the challenge the Minister has in the weeks and months ahead, given the powers he has appropriated in this legislation. The Minister will be required to report back to the House about that action and about the type of regulatory function and discipline which he must show.

Senator John Paul Phelan

I thank Senator Fitzgerald for sharing her time. I have some points to make that have not been mentioned. One relates to section 5. In my time in the Oireachtas, this is the most sweeping section I have seen in any legislation. It states that the Minister for Finance may make regulations to do anything that appears necessary or expedient to bring this Act into operation. I understand that when emergency legislation is drafted it may be necessary to have a catch-all section. Those, however, are unprecedented powers. I echo the sentiments of Senators Donohoe and Fitzgerald in hoping that the Minister will use those powers correctly.

Earlier in the debate, someone asked how this legislation sits with EU competition law. While I am not an expert on that subject, it is the single issue on which I have received a fair amount of correspondence in respect of the Bill in recent days. A number of people who have a detailed understanding of EU competition law have told me the Bill does not sit squarely with EU competition law. The Minister's response should explain how he perceives this matter. I echo Senator Alex White's simple question regarding what happened on Monday night, as the public is due an explanation as to how this series of events came about. I also agree with Senator Regan's observation that the Minister, who has taken some action, has received many plaudits. However, it appears to me that this constitutes the bankers' solution. While I support the Bill, it contains much that turns my stomach and to which I would be diametrically politically opposed in normal circumstances. However, I understand and accept that the circumstances are extraordinary.

The Minister of State, Deputy Mansergh, made a sweeping statement, which I ask the Minister to interpret. In the middle of his speech, he stated, "We have all learned much from the current period of turmoil". What have we learned? Have we learned that the banks can do as they wish and ultimately, the Government will bail them out on any issue? What specifically has been learned from the current period of turmoil?

It appears there are two distinct strands to this crisis at present, namely, the global credit crunch and the bad lending practices that have occurred in Ireland in recent years. There is a danger in the midst of this crisis that we will turn a blind eye to those bad practices and that they will continue in future. This cannot be allowed to happen.

Senator Paudie Coffey

I thank the Leader for allocating additional time to allow me make a contribution. As have previous contributors, I must ask the reason we are in this position. Some reality has hit home, in particular on the Government side of the House, where I detect that the smugness and arrogance of the past few years has begun to dwindle. I refer to most, rather than to all, Members. Members on this side of the House wish to co-operate for the sake of the nation. I have heard that international factors have contributed to the position in which we find ourselves and I agree the credit crunch has reached these shores and is affecting us to a significant extent. However, as has been outlined in this debate, it certainly is not the only reason. Why have the unemployment figures increased by 50% in the past year? As noted by previous speakers, that is related to competitiveness and not simply to international factors. The Minister should consider this.

I have been castigated for making the point in the House that since the birth of the Celtic tiger, the Government has propagated a climate of over-dependence on property. We now are reaping the rewards of that policy and ethos. While continually ignoring the warning signals that were being brought to its attention, the Government was not prepared to listen because of a certain degree of smugness and arrogance as the good times rolled. Anyone who questioned this was labelled as a prophet of doom. It was highly unfair to be dismissed in that manner and the Government has a lesson to learn in this regard. I am no economist and do not claim to be an expert on financial matters. However, I understand the fundamental point in respect of the risk associated with over-exposure. At present, this State is dwindling towards this risk, which is a pity because of the associated victims. I refer to people who were allowed 100% or 110% mortgages and who, 15 years ago, were unable to secure a basic ESB loan to buy a washing machine.

The fundamental question is why the banks were allowed to run riot in this regard. It was scandalous to allow it to happen. Where was the Government in this respect? The answer is simple; its fingers were in the greasy till. It was on the take as it took in the associated revenue from capital gains tax, stamp duty and VAT. However, taxpayers and people holding mortgages have been left to carry the can. Three months ago in this House, I asked the reason the Government could not come to the rescue of Waterford Crystal. Why was it unable to guarantee that company's loans when it now is able to guarantee billions to the banks? As this was an indigenous industry, the same principle applied. However, when it suits the Government does as it wishes, given what took place in the early hours of Monday morning. I am entitled to raise these issues and while the Minister might look at me in astonishment, this is what people are thinking today. I refer to the hard workers who built the economy while the Government was getting carried away.

Senator Paddy Burke

I also thank the Leader for extending the allocated time to give me a few minutes to ask some questions. The Minister for Finance stated in the Dáil that he will await the outcome of his officials' investigations in conjunction with the Central Bank and the Financial Regulator before announcing the scheme. When does he expect to receive a report from his investigators and when does he believe the scheme will be laid before the Houses of the Oireachtas?

Although a number of Senators have queried what took place on Monday last, everyone knows what happened. The Minister's office and the Taoiseach's office were inundated with calls from business people and banks to rescue them. I note the Minister is finding it extremely difficult to find a formula to ring-fence the two remaining banks, that is, Ulster Bank and National Irish Bank. The legislation under discussion makes provision for amalgamations, mergers or buy-outs by other institutions. What would be the position were one of the six banks the Minister named on Monday morning taken over by an English or German bank? Would the guarantees still apply or would they cease?

I wish to raise another point with the Minister in respect of clearing cheques. When one cashes a cheque, one must first lodge it into one's account and it takes 12 days to clear. While the Minister had no alternative to do other than what he did, he should insist to the banks that it should not take 12 days to clear the cheques of ordinary people who wish to cash their wages. He should stipulate that the banks must take control of the matter immediately.

The Minister's other option was to take a stake in some of the banks. If, contrary to the comments of some, there is no great risk in this regard, why did the Government not choose to take stakes in some of the banks?

Senator Paul Coghlan

The Minister still has that power.

Senator Paddy Burke

It appears this might have been a different or better option if the risk outlined by some people is not there.

Minister for Finance (Deputy Brian Lenihan)

First, I thank Members for their diligence in attending to this legislation, which did not commence in this House until after midnight. I understand this is the first time since the foundation of the State that Seanad Éireann has sat and considered all stages of legislation after midnight. There is a reason for this. Markets are watching Ireland all the time and it is important that we send out appropriate signals. This is something the United States has failed to do in recent weeks but is something we can do for our country. I am grateful to the Opposition parties, and to Seanad Éireann in general, for the co-operation they have extended on this matter. As a small country, it is important that whatever we do should be done swiftly and this has been done. I appreciate the strain it places on Members who are attending at this hour and I appreciate the large attendance this evening to discuss the matters before us.

Senator Burke raised the interesting question of the reason the State did not acquire shares in a bank. Under this legislation, it might be possible on some future date to so do. It may be essential for the State to so do on some future occasion. However, to do so in effect would be to bail out a bank. I do not want to hear the verb "bail" again because it is not accurate in respect of this legislation.

As for the scheme that will be brought before both Houses in a matter of days, it is not a bail-out. The legislation is clear that the guarantee must be paid for and I will insist the banks pay the correct charge. The proposals will be brought before the Government. The Central Bank is involved because its staff are our technical experts in this field and, with the National Treasury Management Agency, will advise the Government on what is the appropriate level of charge. The Government will consider the matter, decide what is correct and then stand over a proposal in both Houses. Senators will have an opportunity to comment on many of the details of that issue at that stage.

The reason I mention Senator Paddy Burke's proposal — I do not criticise him for making it — is that participation in a bank is participation in the risk of a bank. While we have not yet reached that point, it raises the interesting question of what approach we should take on this issue in the legislation.

Before I deal with that issue, I want to mention the subject of the past, upon which many Senators dwelt. From listening to the debate in both Houses, it appears the Opposition parties do not want any persons who work in the banking or building industries to support them in any future election. There are many good builders and bankers and while there are certainly people in both industries who have not covered themselves in glory, they are important industries in our national life.

The question of the culpability of various parties in this matter was well analysed by Senator Donohoe when he cited Alan Greenspan's famous words about the function of a central bank being to withdraw the punch bowl when the party is getting too strong. Our Central Bank has not controlled the punch bowl since we joined the euro and in any case it never had much control over the punch bowl because we have been in a monetary union since the early part of the 19th century.

While the Central Bank could have taken drastic measures to reduce lending, it was the Fine Gael Party which made abolition of stamp duty a centrepiece of its most recent election strategy.

Senator Paudie Coffey

The Minister is drunk on power.

Deputy Brian Lenihan

Such a measure would have further overheated an already overheated housing sector.

Senator Liam Twomey

Whatever the Fine Gael Party policy was, the Government adopted it.

Senator Paudie Coffey

The Minister did not heed the warning signals.

Deputy Brian Lenihan

We have a collective responsibility.

Senator Alex White

It was the actions of the former Minister, Michael McDowell.

Deputy Brian Lenihan

There seemed to be an obsession with chasing the vote in south Dublin at the expense of the coping classes and younger people.

Senator Jerry Buttimer

The tent at the Galway races was a good example.

An Cathaoirleach

Allow the Minister to continue without interruption, please.

Deputy Brian Lenihan

The reason I raised the contentious issue of the abolition of stamp duty is that people want us to deal with the problems they have, rather than analysing the past.

Senator Jerry Buttimer

The Minister has been caught out and is rowing backwards.

Deputy Brian Lenihan

I want to address again the issue of the punch bowl because the Central Bank was not in charge of it. Since we joined the euro, we have had very low interest rates. That is the fundamental cause of the overheating which occurred in the economy. In the circumstances in which we now find ourselves, we must make a principled decision about which direction to take.

I am pleased Senators have welcomed this measure and are in broad agreement with it. The State faces a difficult choice in this area. On the one hand, it has the option of stepping aside, acknowledging the primacy of moral hazard at all costs and deciding that in appropriate circumstances a bank, as a private institution, should be allowed to go to the wall and be liquidated and wound up. We could have proceeded on the basis of this view which is one that has been taken in the United States and is still strong in Congress. However, if we, as a small, exposed globalised economy, had done so, we would have done incalculable harm to this country's trade and commerce and the goodwill we enjoy around the world. When one exercises this option, one has default and this undermines the security of credit. In a small country such as Ireland, this would dramatically reduce the confidence others have in dealing with us.

Senator Alex White

Was such a scenario in prospect?

Deputy Brian Lenihan

I will speak about Monday evening later.

On the other side of the equation, one has the option of nationalising one, two or three vulnerable institutions. Does anyone believe that if we had nationalised an institution, it would not have resulted in a run on all the institutions in a small country such as this? We must devise policy which is appropriate for our country. As far as Europe is concerned, and I am a strong European who is proud of our participation in the euro, we were on our own last Monday evening. People are complaining that only six institutions are covered by the proposed measure. The six institutions in question would have been orphans in the world if the sovereign Irish State had not supported them last Monday evening. All the other institutions which want recognition have other sovereigns behind them, some of which are much bigger and more powerful than this State. We had six institutions which had no one to turn to but the sovereign Irish State.

Senator Alex White is entitled to ask what happened last Monday evening and why it happened. I assure Senators that for some weeks my officials and I, the National Treasury Management Agency, the Financial Regulator and the Central Bank had been monitoring developments in the banking sector with great intensity. Following the collapse of Lehman Brothers, an act of default by the United States authorities, a huge shock wave went through the world financial system. Of course, particular banks are vulnerable and Senators identified some of the weaknesses in the asset balances of the Irish banks on the commercial book side, where one has lending for development in the context of a falling house price market and construction sector. These were weaknesses but the banks were working their way through them. However, the shock wave through the world financial system worked itself out in subsequent days and last weekend it worked itself out in all the European countries. A bank failure occurred in one of the largest banks in Belgium and the Belgian state, owing to the bank's extensive indebtedness, required the assistance of the Grand Duchy of Luxembourg and the Kingdom of the Netherlands to find a solution. A bank failure in a company associated with the financial services centre threatened in the Federal Republic of Germany last Sunday and a failure on Saturday night in Britain was dealt with overnight by the United Kingdom.

Given these international trends and local circumstances, our banking sector has shown immense resilience in withstanding the pressures of recent weeks. It continued to show this resilience but by Monday evening it was clear to the Government that the huge battering the Irish bank shares had taken on the Stock Exchange reflected a general collapse in market confidence in the whole Irish banking sector. This was a very serious situation.

The Government did not initiate any contacts with the banking industry. The Department of Finance has a constant discussion and is in constant liaison with the different banks and the Central Bank to monitor the position and determine what is taking place in the world of Irish banking. I was asked for a meeting by the chief executives of AIB and Bank of Ireland who indicated to me that they and the chairmen of their respective institutions were both interested in meeting me and the Taoiseach. A meeting was arranged and we convened the relevant parties.

While I do not propose to discuss the details of the meetings as they are not relevant for present purposes, the chief executives made clear to us that liquidity was drying up in the Irish banking system and the maturity dates for the various loans they need to fund their business were shortening all the time and reaching dangerous levels of exposure in terms of time limits. All these issues were spelt out to us. The Taoiseach chaired these meetings and acted with total propriety. He heard what the banking interests had to say and asked them to leave the room. He sequestrated them from the rest of those present in order that we could make decisions in what was in the best interest of the nation and State as opposed to private institutions. Six institutions were at issue and we had to consider the collective interest of the Irish banking sector and what measure we could adopt. Naturally, in light of the global position, contingency planning had been under way in my Department for some weeks and we had examined and evaluated various options.

In the circumstances, we consulted the Central Bank and Financial Regulator and the judgment we made was that the best course of action was that which is embodied in the Bill before the House. No course of action is free from risk.

I am very pleased at the international reaction, especially that of North America, to our initiative. The American people feel somewhat paralysed by the inability of their politicians to find a solution and I am glad they seem to be approaching one now.

In regard to our relations with our European partners, I could not advise the Commission prior to the announcement of the decision because of the sensitivity of the matters involved but, contemporaneously with the decision, I advised the Commission of the position. I am glad it has initiated a dialogue with us, it is examining the issues and, as the Commissioner said, she is delighted to assist us in every possible way. There are issues to be worked through. It is well established in European Union law that when there is a threat of systemic disturbance to a whole national economy, a member state is entitled to take action.

Senator Paul Coghlan

Absolutely.

Deputy Brian Lenihan

At the end of the day, there are six banks which would be orphaned without us. Europe was not prepared to adopt them. Therefore, we had to take decisions.

Senator Frances Fitzgerald

That is the point.

Deputy Brian Lenihan

I would be delighted to see the putting in place of a Europe-wide system. I would fear a retreat to economic nationalism or isolationism such as happened after the Great Crash in the United States in 1929. I agree with those Senators who urged me to take the issue up at ECOFIN and within the eurozone group of Ministers to determine if we can we have a Europe-wide protection for banks because difficult issues have arisen here and Senators have referred to them in the context of subsidiary banks.

Our six domestic banks have subsidiary banks elsewhere. An issue arises about their protection because a systemic failure in regard to them could cause contagion within the Irish banking system. In the 1980s we had the systemic failure of an overseas subsidiary institution, which led to a true bail-out of an Irish bank, and the then Government sought nothing in return for the then rescue package for the Allied Irish Bank. I was very conscious of that example because we should not introduce moral hazard into the equation and for that reason the Government decided that, as far as the scheme proposed here is concerned, we are insistent that the banks must pay a price for what they are obtaining.

Side by side with the provisions dealing with the scheme, the contract on foot of it and the provisions of it that we have brought to this House for approval, we have taken the precaution of putting other provisions in this Bill, which, I accept, confer very wide-ranging powers on the Minister and the Government, but they are designed to ensure we can act swiftly if any further problems arise. It is important we have that power in the difficult circumstances in which we find ourselves. Hence, Members will note a provision in the Bill in section 8 where the Competition Authority will not be consulted because, as we can see, it is essential that we can come to a conclusion rapidly, on occasion, on amalgamations and mergers when there is financial instability.

Likewise, we have provided for an amplitude of power in the National Treasury Management Agency whereby the Government can request it to undertake financial powers on the Government's behalf. Likewise, the powers of financial assistance can be exercised by the Government in regard to these institutions when it is in the national interest to do so and to prevent financial instability.

As far as the particular scheme we are proposing at this stage is concerned, there is no risk for the taxpayer. We are getting value for the banks from it. Speakers rightly have questioned the issue of the ultimate exposure of the taxpayer. Much has been made of the fact that the banks have substantial assets as well as liabilities and that perhaps some of these assets are impaired. There is a substantial cushion of the excess of the assets over the liabilities, but let us be frank about it: we are not going to have a fire sale of all Irish assets tomorrow. That is what the Government does not want to happen. It wants to see the orderly management of the Irish banking sector. The Government is anxious that this House would agree — this is the reason I am in this chair now — to give us the powers to ensure such orderly management takes place. I sense in speakers, naturally from those on the other side of the House but from those on all sides of the House, a legitimate and entirely understandable concern to ensure we will not see the same again as far as Irish banking is concerned.

It is important not alone to deal with the issues that threatened the financial stability of the Irish economy but, as we assume these powers over the banking sector, to ensure the sector lives up to the faith which sovereign Ireland invests in it through the decision of the Government last Monday——

Senator Jerry Buttimer

It was reactionary.

Deputy Brian Lenihan

——and the ratification of it which the Houses have given. I appreciate the support which has been given on all sides for this measure but I am also deeply conscious of the responsibility it will impose upon me in the days and weeks ahead.

I want to update the House on the progress we have arrived at in designing the scheme and the plans we have for it because it is an important one. My officials are working directly with officials from the Central Bank and Financial Services Authority of Ireland and the National Treasury Management Agency to design the scheme. Good progress has been reported to me and, following the enactment of the Bill, I want the scheme to be laid before this House early next week. It may be that the resolution of technical issues will mean it may be delayed for a few days beyond that but it is in the interests of the State that this be done as rapidly as possible because the Government statement, while it has given confidence and succour to the financial sector for some days, is not of itself a legal document. We require the scheme to be put in place and the contracts to be arrived at with the individual institutions under it so that we have a clear and binding relationship with the institutions which are availing of this benefit.

I have been very much informed by the debate in this House in respect of what is needed in this scheme in a number of areas. The scheme will set out the basis on which the charges will be levied on the credit institutions benefiting from the State's guarantee, the revenue that it is expected to raise for the Exchequer and the conditions on which the guarantee will be granted under the Act. Clearly, however, there is a need for individuals who have a public interest perspective to participate at board level in the relevant institutions. There is a need for codes of practice for the work of risk committees in financial institutions. There is also a need to have lending practices that are in favour of sustainable, exporting and trading enterprises. There is a need to improve the quality of management. An essential requirement is to check the remuneration approaches, a point to which I wish to return later, which reward short-term performance and excessive risk-taking. Senator Walsh identified the problem very well. That is the essential problem with the remuneration packages that seem to be on offer and which have caused horror not only in Ireland but across the European Union and among my colleagues in the European finance ministries.

There is a need, as Senator Ormonde said, to return to traditional banking values in all our credit institutions and a need for responsible and prudent lending practices on consumer lending. We need a code of corporate social responsibility. We need careful assessment of the risk characteristics and sustainability of our new financial products and we need effective standards of corporate governance. All this has to be written in. I assure Senators that their concerns will be factored in to the drawing up of the relevant scheme.

In regard to remuneration, I do not want to be misunderstood on this point. It is not an appropriate role for the State to interfere in the commercial decision-making of any commercial body provided that decision is subject to appropriate corporate governance standards. The reality is that finance and banking professionals have been highly valued and highly remunerated by markets. As a whole in Ireland, both domestically and in the Irish Financial Services Centre, we need highly experienced and skilled expert people to succeed. Our banking sector is 10% of our gross domestic product. It is easy to abuse the banks, but it very easy also to forget how big a part they now play in our economy. However, success must be built on a sustainable basis. The rewarding of excessive and imprudent by risk-taking by executives is at the heart of the serious problems that emerged in the international financial system. For the future, sensible and long-term sustainable remuneration policies must be part of how financial institutions go about their business in Ireland.

A large and interesting range of contributions were made by Senators. I assure them that I have listened carefully to those whom I was present to hear and I read detailed notes of those who were here while the Minister of State, Deputy Mansergh, substituted for me for a short break. I was interested in the debate in this House, which I found refreshing, and I hope we can continue now with Committee Stage and proceed to see how we can improve this Bill.

Question put and agreed to.

An Cathaoirleach

When is it intended to take Committee Stage?

Senator Donie Cassidy

With the agreement of the House, we will take it at 5.25 a.m.

Sitting suspended at 5.10 a.m. and resumed at 5.40 a.m.