Senators will be very familiar with the context and background to today's debate. An unparalleled period of instability and loss of confidence in financial markets has been the driver of a broader global economic slowdown. Few countries have felt the impact of this downturn harder than our own. We have one of the most open economies in the world, largely dependent on international finance and unfortunately this international crisis has coincided with the bursting of a domestic property bubble.
It is important to set out, up front, the reason for the Government's interventions to date to stabilise the banking sector, including the establishment of the National Asset Management Agency. The banking system is unique. Its proper functioning is absolutely critical to the smooth running of the economy and therefore must be protected by Government. Our overriding objective is clear — to maintain a functioning banking system that will ensure a flow of credit to the real economy. To realise this objective, the banks must have strong balance sheets and solid capital buffers. NAMA is designed to do just that and I will explore the operation and impact of NAMA in more detail later.
Before getting into the details of the operation and establishment of NAMA, I would like to address what many commentators seem to be suggesting is an alternative to an asset management agency approach, that is the wholesale nationalisation of the State-guaranteed banks. The Government does not accept that nationalisation of the entire Irish banking system would be the short-term panacea that many envisage. The Government believes it is important, where at all possible, that the banking sector has a market presence and that it operates within market disciplines and constraints. The Government's objective is to ensure the lending needs of the real economy are met. A commercially focused banking system, which includes banks having a market presence, operating within market disciplines and constraints, is best equipped to achieve this aim.
No country is currently adopting a policy of wholesale bank nationalisation and there is no immediate reason for Ireland to adopt such a policy. If Ireland was uniquely to proceed down that route, it could, from an international point of view, be very damaging to Ireland's reputation and attractiveness to international investors, not only from the perspective of the provision of funding to the banking sector, but from the perspective of international investment more generally. Nationalisation will not in itself make the problems faced by the banks go away. Many of the difficulties relating to managing impaired loans, cleansing the balance sheets of the banks and dealing with legal challenges will also arise in the context of a nationalised banking system and perhaps even to a greater extent. Nationalisation is something we should avoid, if at all possible. This is not a position held no matter what the cost, but is rather a balanced approach to the existing situation. The Minister for Finance has also made it clear that if any further capital injections are required from the State for either of the two main banks, these will be in the form of equity capital, which would have the effect of increasing State ownership of these two banks.
The financial crisis has precipitated Government interventions across the developed world. Governments have provided guarantees to banks, injected capital into them and established short-term liquidity supports. Central banks have also intervened to support banks and banking systems. Initial government interventions focused on the liability side to ensure banks could access funds as necessary and the Irish guarantee scheme is a case in point. This allowed Irish banks to access funds from international markets during an unprecedented period of credit tightening.
The focus of Government interventions has recently shifted to the asset side of the banks' balance sheet. Markets are concerned that likely future losses will erode the capital of banks, undermining confidence in banks and banking systems. The matter has been discussed in detail at EU level and guidance has been issued by the Commission and the ECB. Guidance at EU level provides for flexibility in dealing with impaired assets. For example, in many countries banks hold structured financial products based on US sub-prime mortgages. The appropriate State intervention to deal with these types of assets may be quite different from that required to deal with property-based loans.
Concerns over asset quality in Irish banks relate to risky property-based exposures — mainly land and development loans. The economic downturn and sharp decrease in property prices has led to increasing impairment charges on these types of loans.
Following the advice of the Central Bank, the Financial Regulator and the NTMA, and from legal and financial advisors, the Government concluded that the establishment of an asset management agency was the most effective way to bring stability to the Irish banking system. The asset management model has been supported and recommended by banking experts across the globe and used successfully in many countries in the past, as part of the work-out process of problem loans. Done properly, investments in the banking system using this approach have eventually been recovered in full.
The objective of NAMA is to strengthen the banks' balance sheets which will considerably reduce uncertainty over bad debts and as a consequence ensure the flow of credit on a commercial basis to the real economy, to protect and increase employment, while also protecting the interest of taxpayers. The evidence from other countries shows that the longer bankers and developers are allowed to deny the reality of the losses they face, the greater the ultimate cost to the taxpayer and the economy more generally.
Transferring development loans to a State-owned asset management company protects taxpayers. Decisions about which development projects are viable and which are not should be made in the taxpayers' interest, not in the interests of developers and bankers. Managing distressed assets also requires expertise that rarely exists inside banks, but can be brought into a single asset management company with benefits of scale.
The potential book value of loans that will be transferred to NAMA is in the region of €80 billion to €90 billion, but the amount paid by the agency will be considerably less than this. It is important to emphasise that the State will not take all of the risk in the acquisition of such assets. The price of the assets will have regard to current and expected market value of the relevant assets and what is sustainable for the taxpayer. In the longer term, if the agency were to fall short of recouping all of the costs, the Government intends that a levy should be applied to recoup any shortfall incurred.
Significant further detailed work and extensive due diligence on the loans books will be needed to ensure the appropriate categories or portfolios of loans are transferred and that the banks are cleared of the identified riskiest loan portfolios. The riskiest loan category for banks in Ireland is "land and development" and the largest related aggregate exposures across the institutions. Entire portfolios of loans will be transferred to the agency.
It must be stressed, in this context, that developers will continue to be required to repay their loans in full. Where borrowers have made losses, they will need to recognise and take such losses and it will certainly not be the function of NAMA to "go easy" on them. NAMA will operate on a full commercial basis and will be determined to recover monies owed to it to the fullest extent possible. The stream of income from the assets and the proceeds from the eventual sale of the underlying asset or the repayment of the loan will accrue to NAMA. This will be used to pay interest on the bonds issued to pay for the assets and eventually to repay these bonds.
NAMA will be developed and implemented within the common EU framework detailed in the European Commission guidance on the treatment of impaired assets, working closely with the European Commission to obtain prior state aid approval. By drawing on the best advice and experience available internationally, the Government is committed to ensuring that this very significant measure will be an example of best practice which meets all of the objectives the Government has set for it.
I would like to update Senators on recent developments with regard to NAMA. The initial preparations for NAMA are being managed by a steering group made up of representatives of the Department of Finance, the Office of the Attorney General and the NTMA. The steering group is overseeing the preparation of the legislation in parallel with the practical preparations for the establishment of NAMA.
An interim managing director has been appointed to drive the implementation process forward. Mr. Brendan McDonagh, a director with the NTMA, has been appointed to this position and will be assisted by an advisory committee, to be appointed shortly, which will provide him with a range of expert advice.
The Minister for Finance has also directed the National Treasury Management Agency to provide the necessary staffing and other facilities through its existing resourcing arrangements to support the interim operation of the National Asset Management Agency pending its establishment on a statutory basis. The NTMA is engaging experts to assist the interim managing director and, on their appointment, substantive work will commence on analysis of eligible assets, valuation methodology and management of engagements with the financial institutions.
Senators may have noted from media coverage that the National Treasury Management Agency issued a questionnaire to the banks last week seeking details of their loan books as a basis for the National Asset Management Agency's work in determining details of the assets. Yesterday was the deadline for the banks to provide a breakdown of their property loan portfolios to the NTMA. These details will inform the development of the NAMA business model and its staffing requirements.
The Department has also opened communications with the European Commission with a view to ensuring the establishment of the National Asset Management Agency on a statutory basis is consistent with European Union guidelines on the treatment of impaired assets and complies with state aid rules.
While substantial progress has been made since the Government's announcement in April to establish the National Asset Management Agency, clearly much more needs to be done. We cannot allow ourselves to rush the process as the impediments to be overcome are both complex and challenging. Nevertheless, practical arrangements for the operation of NAMA are progressing apace. The Minister for Finance will publish legislation in July which should allow sufficient time to get things right. I confirm that the Oireachtas will be given adequate time to debate the important issues in the legislation. I understand the intention is that the legislation will be debated in the House in September.
I alluded to the fact that there has been much discussion in recent times about the difficulties the National Asset Management Agency is likely to face in its operation. There is no doubt the establishment and ongoing operation of NAMA will entail logistical, legal and technical challenges. Previous examples internationally highlight the importance of a speedy and comprehensive approach to cleaning up the balance sheets of distressed banks. The Japanese banking crisis is an example of where Government procrastination and inability to take decisive action prolonged a banking crisis, hampering economic growth.
While the establishment of the National Asset Management Agency is an enormous task, it is necessary and appropriate to strengthen our banks and kick-start lending to the real economy. The Government, the Department of Finance and the National Treasury Management Agency have sought and taken the best advice available in their responses to the evolving financial crisis and will continue to do so in finalising the design of NAMA. The Government will draw on the advice of the Office of the Attorney General and commercial legal advisers, where appropriate, to ensure the legislative and operational model of NAMA is robust and can withstand all legal and constitutional scrutiny. It will also have regard to European Union state aid guidelines, particularly with regard to the valuation of impaired assets.
I reiterate that the rationale for the establishment of the National Asset Management Agency is to free the banks from their risky property assets so that they can lend again to the real economy, creating jobs, generating tax revenue and improving standards of living. Credit is the lifeblood of the economy and its flow is a prerequisite for economic recovery.
The establishment of NAMA is a decisive and comprehensive solution to deal with concern over asset quality in Irish banks. Getting the agency up and running effectively will be a major task which we must get right. While we recognise that there are practical difficulties to contend with, the Government is confident these will be overcome. This is the reason it is taking its time in doing the preparatory work with the banks and preparing legislation.
The Government's approach to the National Asset Management Agency builds upon all its previous actions in response to the financial crisis. At all stages, whether it was the initial announcement of the guarantee, the nationalisation of Anglo Irish Bank, the recapitalisation of the two main banks or the establishment of the National Asset Management Agency, the response has been structured and considered. The Government has consistently demonstrated its commitment to prevent the failure of any systemically important financial institution, at the same time having regard for the overarching principle of protecting the interests of the taxpayer.
I assure Senators that this same fundamental principle of protecting taxpayers' interests will also apply in the roll-out of the National Asset Management Agency. The Government is absolutely determined to meet the challenges that lie ahead and provide the necessary stability that will allow the banks to support the recovery of our economy, a recovery in which the Government is determined to play its part to the maximum and to the benefit of all Irish people.
