Dáil Éireann - Volume 666 - 06 November, 2008

Priority Questions. - Banking Sector Regulation.

Deputy Richard Bruton asked the Minister for Finance his views on whether experience shows that putting off decisions on restructuring financial institutions only serves to deepen and prolong a crisis; and the strategy necessary to ensure there is a continuing flow of credit for enterprises and families. [39081/08]

[353]   Deputy Brian Lenihan: When I introduced the Credit Institutions (Financial Support) Act to this House, I made it clear the disruption in international financial markets required a strong and decisive response by the Government to underpin the commitment of the authorities to Ireland’s financial stability. This Government moved swiftly to put in place a guarantee to ensure Irish financial institutions’ access to the normal liquidity and funding for their day to day business, and to give confidence to depositors and wholesale lenders. The Government quickly demonstrated its resolve to support the financial system in order to support in turn the economy and society, enterprises and families.

In tandem with the guarantee, the intensified scrutiny and oversight of financial institutions put in place since the onset of the turmoil in financial markets has been maintained and further strengthened to ensure that high standards of regulation are achieved in Ireland and that the quality of corporate governance applying in all institutions, including lending practices, safeguards the interests of taxpayers. The goal at the end of this process is a banking system that is fit for purpose for the transformed financial environment in which it will find itself operating in the coming decades.

The Government continues to work closely with the Financial Regulator and the Central Bank to monitor, assess and ensure the stability of the system and flow of credit. The functions set out in the legislation, following consultation with the Central Bank and the Financial Regulator, are specifically provided to protect the stability of credit institutions and maintain the financial stability of the State. The legislation provides a detailed framework for the authorities to oversee and guide the assessment of strategic options by the banks themselves. The Irish scheme is firmly aligned with the main themes of the euro group plan, which contains an option to provide additional capital resources where appropriate to the banks. The position is being assessed and monitored on an ongoing basis.

Each institution must take appropriate steps to ensure their levels of capital are aligned with their needs. The State has a keen interest in the health and security of the banking institutions because of their role in the economy. My Department, the Central Bank and the Financial Regulator will be in continuing contact with the institutions on their business plans, capital position and liquidity. If it is the case that an assessment is made by a particular institution, or by the regulator, that higher capitalisation would be appropriate, the first step is for the institution itself to consider all possible options to meet this requirement.

  Deputy Richard Bruton: Does the Minister agree there is now mounting evidence credit to strong and viable enterprises is drying up, and there are more and more examples where people have had their overdraft facility cut back and are having to lay off staff in the face of credit problems? Against that problem does he agree the issue of the adequacy of the capitalisation of our banks is now a major source of focus and one of the reasons they are finding it hard to raise term deposits externally? Others have moved to higher capital ratios being required. The banks may meet the minimum criteria set by the regulator but no longer look to be strongly capitalised by comparison with other countries.

Does the Minister believe it is within the banks’ own capacity to resolve their capital problems? If, as the Minister says, he believes private sources of funds would be the best first option, does he agree there must be clarity on the Government’s approach before people will risk private equity in any recapitalisation? Government policy — with the new powers — could have a very big impact on private investors’ views of putting capital into a bank.

  Deputy Brian Lenihan: With regard to the shortage of credit for particular businesses and especially small and medium sized Irish firms, I have asked my Department to liaise with the [354] Central Bank, the Financial Regulator and the financial institutions to assess the reality of the many claims put forward in that regard.

On capitalisation, which was the main burden of the question put by Deputy Bruton, the Deputy opened the issue by saying the banks were experiencing difficulty in obtaining deposits. Statistics show the degree of funds attracted to the Irish banks as a result of the liquidity——

  Deputy Richard Bruton: I spoke about long-term deposits.

  Deputy Brian Lenihan: The Deputy did not qualify it. He would appreciate I was going to make the point that the degree of liquidity attracted by the banks through the guarantee was actually greater than the amount of liquidity available to the banks as of 1 September. On that date, as Deputy Bruton is aware, the difficulties had not yet emerged that led to the giving of the guarantee in late September.

On the question of capitalisation, as part of the review of the banking system now taking place, the question of the adequacy of capital ratios must be examined because of the position that now obtains in other European countries. I have made it clear at all stages that my view and that of the Government is that capitalisation by the State must only be an ultimate and last resort.

  An Leas-Cheann Comhairle: I want to allow a brief supplementary question.

  Deputy Brian Lenihan: I accept the point made by Deputy Bruton that as a result of the degree of supervision by the State of credit institutions entailed by the guarantee, there is an onus on the State to assist institutions if they come up with appropriate proposals.

  Deputy Richard Bruton: The central question is if the approach of the Government, in saying banks must exhaust all other options before there is a question of the State becoming involved in recapitalisation, risks this problem festering? In the process, genuine businesses could be starved of credit, which will in turn prolong the difficulties in the economy. There is a worry the Government is sitting back on its oars when other governments have moved ahead with other actions. I say this without seeking to prejudice what they may be. We are stuck at base camp one while others have moved on.

  Deputy Brian Lenihan: I assure Deputy Bruton we do not rest on our oars. We did not rest on our oars in giving the guarantee in the first place. Our political difficulty in Europe was that we were ahead in giving the guarantee.

  Deputy Richard Bruton: The Government is behind now.

  Deputy Brian Lenihan: We did not rest on our oars in bringing forward the budget either and we will not do so with this issue.

Deputy Joan Burton asked the Minister for Finance his views of the level of asset impairment of the institutions covered by the credit institutions financial support scheme; the progress of the review by PriceWaterhouseCoopers; his views of expected write-downs or required capital replacement of those institutions; the estimated exposure or contingent liability of the taxpayer for the guarantee; his assessment of the impact of the guarantee on the availability of credit to business and personal borrowers; and if he will make a statement on the matter. [38949/08]

[355]   Deputy Brian Lenihan: The credit institutions financial support scheme provides a guarantee for covered institutions until 29 September 2010. I have been advised by the Financial Regulator that it recently commissioned PriceWaterhouseCoopers to conduct a review of loan portfolios of the covered credit institutions. PriceWaterhouseCoopers is currently progressing with this work and the Financial Regulator will keep me advised of progress as appropriate. Deputy Burton will appreciate this review is highly commercially sensitive.

Given the general deterioration in the economic conditions, both national and international, the Financial Regulator has advised that he would expect the current levels of impairment in covered institutions to increase over the next few years. The expected levels of impairment charges for particular institutions will be dependent on borrowers’ financial position and the level of collateral provided. The regulator’s review of the loan books of the covered banks has shown that the covered institutions did not hold any exposures to the US sub-prime mortgages and also they have limited exposures to banks which have recently been liquidated or encountered difficulties, including Lehman’s and the Icelandic banks. It is also important to note that the covered banks continue to be profitable.

With regard to the availability of credit, the extended international credit crunch we have experienced has brought home to all of us the pivotal role of the financial system in the economy and in the day to day lives of ordinary people. One of the stated objectives of the scheme is to maintain financial stability, not for its own sake but in the best interests of the public and the economy of the State. The scheme helps the banks access additional liquidity which will allow the banks to continue to lend in a sustainable manner, supporting the appropriate availability of credit and favouring business activity in the wider economy of the State, especially trading activities. The scheme therefore includes the application of strict terms and conditions on covered institutions to ensure the public interest, which includes the general consumer and small business sector, is paramount.

It is the responsibility of the covered institutions to ensure they meet capital requirements and I expect covered institutions to take appropriate steps to ensure their levels of capital are aligned to their needs. My Department, the Central Bank and the Financial Regulator will be in continuing contact with the covered institutions on their business plans, liquidity and capital position.

The Deputy inquired about the estimated contingent liability of the scheme. As previously stated by me it is estimated the scheme will cover liabilities of approximately €440 billion.

  Deputy Joan Burton: First, that answer is inadequate given the difficulties faced by the Irish banking sector and because, at present, banks in effect are cutting off the pipelines of credit to many small, medium and large businesses, as well as to many individual borrowers, including those who seek to purchase homes. This is about Main Street and not our equivalent of Wall Street. The Minister only appears concerned about the Irish equivalent of Wall Street. He is not concerned about what is happening to local businesses. Will the Minister publish the details of the terms of reference of the PriceWaterhouseCoopers review, in which the Financial Regulator stated he intended to drill down deep into the balance sheets of Irish banks? The Minister should provide some evidence of what such drilling comprises and what it covers. The reason I stated the Minister’s answer is dishonest is that I wish to address the gaps in his answer.

  Deputy Brian Lenihan: The Deputy did not say that.

  Deputy Joan Burton: I stated his answer was less than adequate. Allow me to rephrase what I stated. The Minister stated the regulator knows the Irish banks in the scheme are not necessarily exposed to sub-prime mortgages. Everyone knows that already because the sub-prime business was only beginning to get off the ground in Ireland. The Minister also stated we are [356] not exposed to, for example, fall-out from the US banks or Lehman Brothers. However, he avoided what I wish to know, namely, the exposure of every bank in the scheme to bad-risk construction lending and lending for land speculation. That is where the risks are, particularly in respect of two of the institutions covered by the guarantee. The Minister should answer that question. As for the contingent liability of €440 million, did the Minister not acknowledge to me last Thursday that there is no cross-indemnity between the banks in the scheme, contrary to what the Minister and the Taoiseach had implied? Is it true that the first port of call on the €440 million now is Joe and Josephine Taxpayer?

  Deputy Brian Lenihan: I never have visited Wall Street and my fundamental concern in this matter——

  Deputy Joan Burton: The Minister ought to.

  Deputy Brian Lenihan: ——is to ensure the Irish banks have the capacity to ensure the economy remains viable, businesses continue to thrive and consumers can borrow. As for the Deputy’s reference to the inability to acquire housing finance, the Government introduced an initiative in the budget to address that specific issue in cases in which the banks failed to advance credit. While I would welcome the opportunity to visit Wall Street, there has been too much to do in the Department of Finance since my appointment to take time out and visit such an institution.

As far as the terms of reference and the requests made of PriceWaterhouseCoopers are concerned, I will examine the request made by the Deputy and will forward such information as I can within my possession. As for the exposures of the banks, the purpose of the exercise commissioned by the regulator with PriceWaterhouseCoopers is to assess that degree of exposure and bad risk on the asset side in the loan book. That element of risk may not necessarily be connected exclusively with construction or investment in land. It may relate to other loans and advances that financial institutions have made. However, the purpose of the PriceWaterhouseCoopers inquiry is to establish the extent and depth of such exposure.

As for the issue of the cross-indemnity and the guarantee, the Taoiseach and I have always made clear that were any deficiency to arise, the financial sector would be levied for it. That was made clear at all stages and is reflected in the language of the scheme. However, the particular reference to the scheme to which Deputy Burton refers is the specific legal obligation here and now on the institutions. Deputy Burton is aware that no institution would have signed the guarantees under those conditions.

  An Leas-Cheann Comhairle: The Deputy may ask a brief supplementary question as we are well over time.

  Deputy Joan Burton: I have two supplementary questions. The Minister finally has confirmed there is no cross-indemnity and, therefore, at a minimum, the Minister and the Taoiseach misled the House.

  Deputy Brian Lenihan: No.

  An Leas-Cheann Comhairle: Is there a question?

  Deputy Joan Burton: I ask the Minister to answer my question again. The Financial Regulator and PriceWaterhouseCoopers for several weeks have been engaged in this review to drill deep into the balance sheets.

[357]   An Leas-Cheann Comhairle: We are well over time.

  Deputy Joan Burton: Can the Minister indicate what such drilling has revealed thus far in respect of risky construction and land speculation loans? That is where the risks are, particularly in respect of two of the institutions concerned. Is the Minister more concerned to save the developers than to save the capacity of ordinary businesses to borrow for legitimate business requirements?

  An Leas-Cheann Comhairle: An tAire, a brief reply.

  Deputy Brian Lenihan: The fundamental issue for me is to safeguard all businesses, irrespective of their activities, which are in good standing, need credit and are capable of contributing to this economy.

  Deputy Joan Burton: They are not getting it.

  Deputy Brian Lenihan: That is a fundamental objective behind the installation of the guarantee and is the reason the Government will continue to reform the banking sector, now that the guarantee agreements have been concluded with the individual institutions. As for the cross-indemnity issue, I repeat it was never the case under the scheme that there was a cross-indemnity. Deputy Burton is aware I never suggested there was such an indemnity. However, a general undertaking has been given by the Government that any deficiency would be levied on the financial sector.