Priority Questions
1. Deputy Michael McGrath asked the Minister for Finance if he supports the view that the negotiation of a precautionary credit line for Ireland, subject to acceptable conditionality, would underpin a smooth exit from the troika programme and enhance our prospects of a sustainable return to the international bond markets; and if he will make a statement on the matter. [49472/13]
Amharc ar fhreagraThis question relates to the Government decision not to adopt a precautionary credit line regarding our exit from the programme. I look forward to our discussion on this at Question Time and later when we have statement on the programme exit. I would like the Minister to outline to the House why he has opted not to apply for a precautionary line of credit.
There is new procedure whereby the person asking the question can avail of 30 seconds to explain the question.
Very interesting.
As the Deputy will be aware, the Government decided on 14 November that Ireland is now in the best position to exit the EU-IMF programme of financial assistance on 15 December without the need to prearrange a new precautionary credit line from our EU and IMF partners. Following a careful and thorough assessment of all of the available options, and various consultations with the European Commission, the ECB, the IMF, the President and members of the Eurogroup, the Governor of the Central Bank of Ireland and the National Treasury Management Agency, the decision was taken to exit the programme without a prearranged precautionary facility or backstop.
All along I have indicated that the decision was finely balanced, and since the announcement of the decision many commentators have also acknowledged that to be the case. That said, taking all factors into account, exiting our EU-IMF programme of financial assistance without a prearranged precautionary facility or backstop is the right decision for Ireland. This view is widely held both in Ireland and abroad, based on the generally positive reaction to our decision.
Market confidence in Ireland is high, the public finances are under control, we are reducing our deficit and debt levels, and economic conditions and sentiment are improving. We have already returned successfully to the financial markets. We have a domestic backstop in place, with cash reserves expected to be approximately €20 billion by the end of the year. This option represents greater normalisation, with Ireland now subject to EU economic co-ordination, fiscal surveillance and governance rules that apply to other EU and euro area member states that are not in a programme of assistance.
This decision is the latest in a series of steps to return Ireland to normal economic, budgetary and funding conditions. Like most other sovereign eurozone countries, from 2014 we will be in a position to fund ourselves normally on the markets. Confidence in Ireland has improved considerably in recent months and interest rates on Irish Government bonds are at highly affordable levels. This is the right decision for Ireland. We will be exiting the bailout in a strong position.
Conditions are benign now, and if those conditions persist the Minister's decision will have been right and we will not need a precautionary credit line. The Minister has acknowledged that the decision was finely balanced, with arguments on both sides. Two issues that arise as a result of our not applying for a precautionary credit line are important. One is that we will be excluded from the ECB's outright monetary transactions, OMT, policy, the ultimate backstop in the event that we need it. The other is to do with the failure to reach an overall agreement on the single resolution mechanism at last week's ECOFIN meeting. This means that if next year's stress test shows a capital shortfall, particularly in the case of AIB and Permanent TSB, the national authority - the State - would come in ahead of the ESM to plug that hole. Neither the Minister nor I know whether that capital shortfall could happen. Did the Minister get a feel for the conditions that would have applied in the event that we had sought a precautionary credit line, to which we will not now be subject by virtue of our decision not to seek such a credit line?
We never applied for a precautionary credit line; nor did I ask for one in my discussions. However, I gathered an amount of useful information as I talked to different people. There is a misunderstanding in Ireland, even at the highest levels of economic thinking, about OMT. I had a long conversation with Mario Draghi and his two deputy presidents in Frankfurt. OMT is not a policy for intervening in individual countries that are in difficulty. If Ireland had a problem, OMT would not be the solution. If there is a systemic difficulty with the euro affecting several countries across the eurozone, OMT is an option. While being part of a programme is one of the conditions necessary to avail of OMT, it does not automatically make a country eligible for OMT.
OMT has never been applied. According to Mr. Draghi, OMT is for a systemic crisis in the euro and will apply across the eurozone. If we got into that position it would apply to Ireland as to any other country. For any country that would avail of it there would be conditions, so there would be some form of programme. We have not ruled ourselves out or in, or changed our position at all. There is a serious misunderstanding in Ireland about how OMT operates.
On that very important policy point, has the Minister received reassurance from the President of the ECB that not having a precautionary credit line does not make a country ineligible for OMT in the circumstances he has outlined in which there is a systemic risk to the euro? If that systemic risk exists, all countries could potentially benefit from OMT, even those that are not in a precautionary credit line. Has the Minister received that reassurance from Mr. Draghi? That is a very important point to clarify.
I am not quoting him.
Just generally.
I am recounting the narrative. According to Mr. Draghi and the other ECB officials, it is a policy device to deal with a systemic crisis across the eurozone. By definition, if that happens, several countries will need and get that assistance under certain conditions. Because there is conditionality, they would be in some kind of programme, so they would fulfil the precondition of being in a programme. It is all theory. It has never happened and OMT has never been used. It was a great announcement which calmed down the eurozone without anyone spending any money. I have assurances along those lines.
2. Deputy Pearse Doherty asked the Minister for Finance if he is as confident as he was in June 2012 that the ESM will be used to retrospectively recapitalise Ireland’s banking debt; and if this issue was discussed at recent ECOFIN and Eurogroup meetings. [49576/13]
Amharc ar fhreagraThere was a huge fanfare 17 months ago when European leaders agreed to consider using the ESM to recapitalise banks, and at that time the Minister told the Irish people it would be applied retrospectively. However, there is serious concern now that the hope given to the people at that time that the many billions of euro pumped into our pillar banks would be recouped to Irish taxpayers is disappearing. I raise this question because I want to keep this issue on the agenda and to find out what discussions, if any, happened at the ECOFIN or Eurogroup meetings this week in regard to retroactive recapitalisation of our banks.
The Eurogroup agreed in June 2012 to break the vicious circle between banks and sovereigns, and that when a single supervisory mechanism involving the ECB was in place and operational the European Stability Mechanism could recapitalise banks directly. The Eurogroup meeting of 20 June 2013 agreed on the main features of the ESM's direct bank recapitalisation, DBR, instrument. There is a specific provision included in those main features which states: “The potential retroactive application of the instrument should be decided on a case-by-case basis and by mutual agreement.” Therefore, the agreement, which we were active in negotiating, keeps open the possibility of our applying to the ESM for a retrospective direct recapitalisation of the Irish banks, should we wish to avail of it.
The DBR instrument will come into effect when the single supervisory mechanism is in place and operational. This is not expected to take place until the second half of 2014. The Eurogroup has agreed that there will be strict eligibility criteria as well as a clear pecking order for the ESM-DBR instrument, so any possible application for DBR will be determined on its own merits within the rules laid down by the ESM’s DBR instrument. The overall framework agreed this summer builds upon the earlier euro area Heads of State or Government agreement secured on 29 June 2012 and is an important step in the eurozone’s efforts in this regard.
I remain confident that the commitment made by ECOFIN in June last year to break the vicious circle between banks and sovereigns will be respected. The DBR issue was not on the agendas of the most recent ECOFIN and Eurogroup meetings.
Everybody in this House and the majority outside the House want to see the commitment given in June 2012 upheld and delivered. At the time I believed and said publicly that the Minister had oversold that commitment, because retrospectivity was not a part of the agreement. That said, it has been negotiated into some text recently. However, we must listen to the head of the Eurogroup, the German finance Minister, the troika and the head of the ESM. All of these, in one way or another, have told us that the chances of retroactive recapitalisation of our banks are slim, that it is impossible, not likely, or words to that effect. It seems the door is closing all the time. The Minister talks about separating sovereign debt from banking debt, but ECOFIN has agreed rules that state clearly that in the event that a comprehensive stress test reveals a capital shortfall, the established pecking order is as follows: first private sources, then national, and then euro and EU instruments-----
I will allow the Deputy to speak again.
It is a long process, and the question of whether banks will be recapitalised through the ESM is part of the process of moving towards banking union. The conclusions of the October 2013 European Council outline the hierarchy of decision-making for bank recapitalisation - to which the Deputy referred - and continue to provide for direct bank recapitalisation by the ESM as part of the process. Of course there are different opinions, and the Deputy has mentioned some of those who see a very limited role for direct capitalisation by the ESM. However, other countries are strongly in favour of it. I believe the issue will only come to a head when the capital requirements of the European banking system are identified through the stress testing next autumn, but it is part of the process.
The Eurogroup does not use the word "retrospective" in the piece I cited. It refers instead to the "potential retroactive application of the instrument" and says it should be decided on a case-by-case basis and by mutual agreement. The word "retroactive" is the word being used, rather than "retrospective".
Again, I go back to the point that the Government seems to have taken its foot off the pedal in regard to this measure. There was a window of opportunity when Spain was in crisis, which was when this was agreed. I believe many of the European leaders would not have wanted it, but that was when we should have stuck the ball in the net. Now, 17 months further on, it will be a harder job for the Minister and the Government to deliver the commitment given, although I fully support their efforts.
Can the Minister elaborate on what efforts are being made? The Minister did not raise the issue at the ECOFIN or Eurogroup meetings, although the issue of the pecking order was discussed at ECOFIN. When was the last time the Minister raised the issue at a formal meeting of ECOFIN and the Eurogroup? What has been the response of his counterparts at those meetings? For example, when we met with the troika recently, the ECB president did not talk about recapitalisation being off the agenda. It is on the agenda. What he said was that retroactive application of the instrument was off the agenda. That is where the difficulty lies, due to political circumstances and all the rest. When was the last time the Minister raised the issue of retroactive recapitalisation for Ireland, given that the Taoiseach took it upon himself to write to every EU leader in the past three weeks saying that the fulfilment of this commitment was required in order for us to get back into the markets sustainably after the troika exit?
The meetings of the Eurogroup and ECOFIN, like meetings in this House, are run in an orderly fashion. If these issues are on the agenda they are raised, but if not, we do not get up and shout and roar during discussion of another topic. On any occasion on which the issue of bank recapitalisation has been part of the agenda, I have raised the question of retroactive recapitalisation.
It was on the agenda, according to the Minister's statement.
4. Deputy Michael McGrath asked the Minister for Finance if he is concerned by the significant issues that have been identified at an insurance company (details supplied); the reason the problem does not appear to have been identified in the first instance by the regulatory authorities in Ireland; the actions that can be taken to prevent similar events in the wider insurance sector; and if he will make a statement on the matter. [49473/13]
Amharc ar fhreagraThe company to which I refer is not named in the question, but it is RSA Insurance Group. As the Minister knows, on 8 November the UK company issued a statement confirming that three senior executives in the Irish operation were being suspended as a result of some issues identified in the claims and finance functions in Ireland. Ultimately, this resulted in an injection of approximately €100 million from the UK group into the Irish company. I am very concerned because this is the second time in a number of years that under-provisioning for future claims by insurance companies in Ireland has been identified. It appears this particular issue was identified by the company through its internal audit function, rather than by the Financial Regulator or the Central Bank. I am interested in hearing what the Minister has to say about this.
In my role as Minister for Finance I have responsibility for the development of the legal framework governing financial regulation, including insurance. Day-to-day responsibility for the supervision of financial institutions is a matter for the Central Bank, which is statutorily independent in the exercise of its regulatory functions. The Central Bank of Ireland has had an ongoing programme of engagement with RSA Insurance Ireland, RSAII, since the implementation of the bank’s probability risk and impact system, PRISM, as it does with all high-impact companies. As part of the framework, the Central Bank of Ireland engages with firms at a level that corresponds to their impact category; the higher the impact, the higher the level of engagement. Engagement involves reviews, inspections and meetings, and the frequency and level of engagement is associated with a firm's impact rating. I am satisfied that this improved regulatory framework provides for enhanced supervision of the industry and protection of the Irish consumer. With regard to RSA, this programme included eight on-site inspections over a two-year period and ongoing meetings with key role holders such as the chief executive officer, chief finance officer and chief risk officer.
The Central Bank carried out an on-site review of claims cases in RSAII in August 2013 and at this point identified an issue with regard to delays in increasing case reserves for large claims in a timely manner. The identification of this issue by the Central Bank informed the terms of an internal audit that RSAII had scheduled in the same area.
The Central Bank has advised me that it has not had to take direct supervisory measures in relation to recent issues at RSAII, owing to the swift and prompt action by RSA Insurance plc and its ongoing engagement with the Central Bank. The Central Bank will continue to liaise with RSAII and other stakeholders to ensure all matters identified are resolved to the Central Bank's satisfaction.
Separate from the current matters arising in RSAII, the Central Bank published a consultation document in September on requirements for reserving and pricing for non-life insurers. The Central Bank proposes to introduce new measures to strengthen its supervisory framework, including requirements in respect of actuarial opinions, internal audit and the governance of reserving.
In addition to increased staffing levels and the new risk-based supervision framework, PRISM, the Central Bank (Supervision and Enforcement) Act 2013, passed on 11 July, enhances the power of the Central Bank to regulate, supervise and take action against financial service providers. The enhanced powers include whistleblower protection and powers of inspection, investigation and information gathering for Central Bank authorised officers.
At EU level a directive known as Solvency I places requirements on the amount of regulatory capital insurance companies must hold against unforeseen events. Furthermore, on 1 January 2016 Solvency II will commence. The Solvency II EU directive will require new, stronger EU-wide requirements on capital adequacy and risk management for insurers, with the key aim of increasing policyholder protection. This will ensure a modern, risk-based system for the regulation and supervision of European insurance and reinsurance undertakings. Negotiations on the directive reached political agreement on 13 November and preparations are already under way for its implementation in Ireland.
While I am concerned about the issues identified by the Central Bank in the case referred to, I am confident that the improved powers of the Central Bank and the improved regulatory framework, as described, will ensure a safe and solid insurance sector that can provide sustainable insurance products and support the real economy through long-term investments and additional stability.
The bottom line is that as a result of the issues identified, an injection of €100 million had to be made into the Irish company. Thankfully, RSA is part of a UK group; therefore, the State and Irish policyholders were not on the hook for the additional money. If it had involved an Irish company only, potentially we were looking at another call on the insurance compensation fund and a possible increase in the 2% levy people pay for the losses at the Quinn Insurance group which could potentially amount to €1.6 billion.
I checked again this morning and can find no statement whatsoever on the Central Bank's website on RSA. Is the Minister satisfied the issues the company brought into the public domain were originally identified by the Central Bank and not by the company? The company has made the unchallenged claim these issues were identified during a routine internal audit through its own internal function. It does not in any way state this was informed by earlier findings by the Central Bank. This is a very important question we need to have answered. Did the Central Bank identify these issues in the first place or was it the company which brought them to its attention?
The information I have to brief me in replying to the question comes from the Central Bank; therefore, what I have stated is its view. According to the first point, RSA brought the findings of the internal audit report to the attention of the Central Bank as soon as they became known on 1 November 2013. The RSA group then took action and last week injected €100 million in capital after discussions with the Central Bank. The additional capital was taken with solvency capital requirements of 228% and is in excess of the 200% level required by the Central Bank. The RSA group has assured the Central Bank it will provide any further capital required, should it be necessary to do so at the end of the current investigation.
On 9 November RSA suspended three senior executives, namely, the chief executive, Mr. Philip Smyth; the chief financial officer, Mr. Rory O'Connor, and the claims director, Mr. Peter Burke, pending an investigation into issues involving its Irish claims and finance functions. RSA appointed the chief executive of its UK and western European division as acting head of the Irish business. Another gentleman, Mr. Rash, the group chief accountant, has taken over as acting chief financial officer, while Mr. Pitt, claims director for the UK and western Europe, is taking over operational leadership of the Irish claims function. RSA acted very expeditiously when this issue came to notice.
What the Minister has stated confirms that on 1 November RSA brought the findings of the internal audit report to the attention of the Central Bank. Earlier in his first response he referred to findings the Central Bank had made, perhaps as far back as June, which it claimed had formed the basis of the internal audit work RSA subsequently undertook. It is important to get to the bottom of this issue because it is the second time in a number of years when significant market players in the Irish insurance sector have been aggressively building market share on the back of attractive premium claims while clearly under-provisioning for future losses in respect of future claims. I want to know whether the Central Bank has a good handle on the sector. In his first response the Minister referred to findings made in June which the Central Bank claimed had formed the basis of RSA's internal audit work.
According to the reply, with regard to RSA, the programme of inspection included eight on-site inspections over a two year period and ongoing meetings with the key role holders. The reply also states the Central Bank carried out an on-site review of claims cases in RSA in August 2013 and at this point identified an issue with delays in increasing case reserves for large claims in a timely manner. The audit results then came in from RSA in early November and immediate action was taken by RSA in consultation with the Central Bank. The Central Bank is happy it has a full handle on the issue and it has committed that if there are other discrepancies, the obligation to fund will be with RSA's parent company in the United Kingdom, not with the Irish Government or any Irish fund of any sort.
5. Deputy Pearse Doherty asked the Minister for Finance if he will provide an update on the mortgage crisis; if he has communicated to the Central Bank that legal letters threatening repossession will not be counted as sustainable offers under the mortgage arrears resolution targets, MART; and the options being explored on the issue of tracker mortgages at State-owned banks. [49577/13]
Amharc ar fhreagraWe are about to enter the sixth calendar year of a mortgage crisis which has got out of control and doubled during the course of Minister's tenure. Despite efforts and various proposals, it seems it is not waning substantially. There has been much discussion on threats of repossession, the letters issued by the banks, the mortgage arrears resolution targets, MART, and the issue of tracker mortgages. What communication has the Minister had with the Central Bank on these targets, particularly the legal letters issued by the banks?
I have stated on many occasions that it is a key responsibility of financial institutions to do more to assist those in severe financial difficulty. The implementation of sustainable mortgage arrears strategies and solutions by individual banks for their distressed customers, with Central Bank oversight, is, therefore, a key element of the overall framework to address the mortgage arrears problem. The Deputy will be aware that the Central Bank’s mortgage arrears resolution targets, or MART initiative, which was announced last March set time-bound and measurable targets for the six main lenders, requiring them to systematically address their arrears books. The Central Bank initially required the main mortgage lenders to propose sustainable solutions to 20% of mortgages in arrears for over 90 days by the end of June. The initial results of the Central Bank's audit of the banks' end of June returns will be available shortly. They will provide an independent assessment of compliance by the banks with all MART requirements.
The target for proposed solutions rose to 30% by the end of September and will increase to 50% by the end of December and 70% by end of March 2014. Lenders have submitted their end of September returns to the Central Bank and indicated that they have met and, in some cases, exceeded the 30% end of September target. The Central Bank is now also requiring banks to conclude sustainable solutions with 15% of their customers by the end of this year and 25% by the end of March 2014.
As the Deputy is aware, the Central Bank publishes quarterly statistics for the levels of mortgage arrears. As of June 2013, some 79,357 PDH mortgages had been restructured, of which over 60,000 were deemed to be meeting the terms of their arrangements. The Central Bank has informed me that updated data for September 2013 are due for publication around the end of November.
Separately from Central Bank quarterly reports, my Department is publishing monthly data for primary home mortgage restructures put in place by the six main lenders covered by the Central Bank's MART process. This will place more timely information in the public domain on the progress made by the main banks to resolve mortgages in difficulty. This should greatly assist the objective of placing more information in the public domain on the progress being made by banks on mortgage restructures. The recently published data from my Department for the end of September show that the number of PDH mortgage accounts in arrears for greater than 90 days had fallen from 82,624 to 81,156, a drop of 1,468 accounts.
Additional information not given on the floor of the House
I have previously informed the House that letters threatening repossession or legal action could not, in my opinion, be considered a sustainable solution under the mortgage arrears targets process and should only ever be considered after every possible avenue for a solution has been exhausted. The Governor of the Central Bank has stated any bank proceeding lightly to legal recourse with co-operating borrowers without satisfying the protections of the code of conduct on mortgage arrears, or where alternative sustainable arrangements are available, is not acting in a manner consistent with the MART regime.
Regarding the tracker issue, officials from the Irish authorities are in regular dialogue with all of the State supported banks in an effort to enhance stability and facilitate the sector's return to profitability. The long-term profitability of the State supported banks depends on many variables, of which the impact of tracker mortgages is only one. The Irish authorities have also engaged with the troika to discuss possible ways of funding Irish banks' tracker mortgages at an overall lower cost and in a sustainable manner. Discussions to date have mainly focused on examining the tracker books of the domestic banks and the implications that alternative funding costs will have for the loan books and the profitability of the banks in question. Discussions have been exploratory in nature and further analysis is being carried out.
The Minister has indicated that the banks have informed the Central Bank that they have met and, in some cases, exceeded the next round of targets which are pitched at 30%. However, they also told the Joint Committee on Finance, Public Expenditure and Reform the same thing. It took a great deal of digging on the part of the members of the joint committee before it emerged that 15,000 legal letters had been issued and that the process in this regard was being regarded by the banks as one of the ways in which they could reach the targets. Has the Minister informed the Central Bank of his analysis which he has highlighted publicly to the effect that the issuing of legal letters is not acceptable under the MART process?
As the Minister stated, his Department is publishing the relevant figures. I welcome this important initiative because it assists us in fully understanding what is happening. However, the figures indicate that 118,000 mortgages remain in arrears and that two thirds of them are in arrears for over 90 days. The really eye-catching aspect is that 77% of them have not been restructured. Worse again, the figures show that the number of mortgages in arrears for over 90 days which have not been restructured actually increased since August last year. Is the process working? It lacked ambition from the outset. After five years of a mortgage crisis is the Minister satisfied that 118,000 mortgages remain in arrears and that three quarters of them have still not been restructured by the banks?
I previously informed the House that letters threatening repossession or legal action could not, in my opinion, be considered a sustainable solution under the mortgage arrears targets process and should only ever be considered after every possible avenue for a solution had been exhausted. The Governor of the Central Bank has stated any bank proceeding lightly to legal recourse with co-operating borrowers without satisfying the protections of the code of conduct on mortgage arrears, or where alternative sustainable arrangements are available, is not acting in a manner consistent with the MART regime. It is true that quite a number of mortgages are in arrears. The banks under the direction of the Central Bank are moving through these mortgages systematically in order to ensure proposals will be made to each mortgage holder and that sustainable restructuring will take place. A more important statistic in respect of the people involved is that they continue to live in their own homes, despite the fact that their mortgages are in arrears. Ensuring they remain there is the primary policy objective.
As stated on previous occasions, the Minister is treating the banks with kid gloves. He should light a fire under them, as well as the Central Bank. He is in his third year in office and I am sure he finds it unacceptable that 118,000 mortgages remain in arrears and that 77% of them have not been restructured. These are the figures of failure. When he entered office, the Minister was lighting fires or at least he was talking tough with the banks. When the ECB dropped its interest rate, he stated the banks should pass on the reduction to their customers. Would he be willing to reiterate these comments, given that the ECB has reduced its interest rate to an all-time low?
Tracker mortgages constitute a major issue for a number of the banks. Are there proposals on the table or is the Department developing any proposal to ease the burden within financial institutions in respect of these mortgages in order that the costs relating to them will not have to be shouldered by those with variable rate mortgages?
Regarding the tracker mortgage issue, officials from the Irish authorities are in regular dialogue with all of the State-supported banks in an effort to enhance stability and facilitate the sector's return to profitability. The long-term profitability of the State-supported banks depends on many variables, of which the impact of tracker mortgages is only one. The Irish authorities have also engaged with the troika to discuss possible ways of funding Irish banks' tracker mortgages at an overall lower cost and in a sustainable manner. Discussions to date have focused mainly on examining the tracker books of the domestic banks and the implications alternative funding costs would have for the loan books and the profitability of the banks in question. Discussions have been exploratory in nature and further analysis is being carried out.
As the Deputy is aware, the Central Bank is independent under law. The Minister for Finance lighting a fire under it would not, therefore, be the appropriate way to proceed. I have regular meetings and telephone conversations with the Governor of the Central Bank and will pass on the Deputy's views to him on the next occasion on which we speak.
