Seanad Éireann - Volume 168 - 06 December, 2001
Asset Covered Securities Bill, 2001: Second Stage.
Question proposed: “That the Bill be now read a Second Time.”
Mr. Cullen Mr. Cullen
Minister of State at the Department of Finance (Mr. Cullen): I am delighted to have the opportunity to bring this Bill before the Seanad. Although it is technical, this is an important Bill which will enable the further development of the international financial services sector here and provide a new and efficient form of financing to domestic credit institutions. We will, of course, discuss the technical aspects in detail on Committee Stage. What I would like to do today is explain the purpose of the Bill, set out broadly how it will operate and place it in a European context.
The purpose of this Bill is to allow international banks based in Ireland, and domestic banks and mortgage providers, to access international capital markets on the most competitive terms. This will underpin the strength of the Irish financial system and the continued attractiveness of Ireland as a base for financial institutions. To do this, this Bill provides for the introduction of new financial instruments – the asset covered securities of the title – by Irish institutions into the eurozone market. These securities will be backed by assets held by the institutions concerned, in particular mortgages and public sector loans.
The Bill provides that asset covered securities issued by a financial institution will be statutorily secured on a pool of underlying assets held by the same financial institution. These underlying assets are primarily mortgages or public sector loans. In the event of the insolvency of the issuing institution, the cover assets must be used first to meet the claims of the holders of the securities. Ordinary creditors of the institution may not make a claim against these assets until the full obligation due to the investors in the securities has been discharged. The enhanced security which this preferential status offers to the holders of the securities is one of the key features of the  product. Because of the reduced risk to investors, it will be possible for financial institutions to borrow more cheaply and easily. This is an important basis to the Bill.
The product which we are introducing is not new to the European capital markets. It is similar to the German Pfandbriefe securities. These Pfandbriefe are the largest single bond type in Europe. They allow German institutions to access finance on exceptionally good terms, with consequent knock-on benefits for the strength of their financial system and the availability of credit. In recent years other European countries have taken the view that their institutions should also be able to access this source of funds. For example, France, Spain and Luxembourg have introduced enabling legislation to facilitate the issuance of these types of securities.
As I have indicated, securities similar in nature to the proposed product have long been a feature of European capital markets. They are longest established in Germany where they have a demonstrated history of 125 years. No issue has ever defaulted. Asset covered security markets are also long established in Austria and Sweden. As I have already mentioned, other European countries have introduced enabling legislation in recent years to facilitate the issuance of similar securities. This is because the enhanced security afforded by the preferential creditor status, the specification of strict matching of assets and liabilities and the regulatory environment for the product have resulted in the German Pfandbriefe attaining a triple-A credit rating and becoming an extremely popular investment.
The availability of asset covered securities has contributed to stability in the continental European markets due to their long-term primarily fixed rate nature. Their high credit rating enables issuing institutions to raise long-term funds at interest rates only marginally higher than those of a sovereign borrower. Of course, this confers a significant competitive advantage. Introducing this type of bond into Ireland will allow Irish-based banks and building societies to take advantage of this cheaper funding source and ensure that they are able to continue to compete against other European credit institutions within the Irish and the broader European markets.
Enabling legislation is required to allow Irish credit institutions to issue asset covered securities because the legal basis for the new securities must be clearly established. It is also necessary to provide a legal framework for the type of regulatory supervision required which is unique to Pfandbriefe type securities.
I would now like to set out the key features of asset covered securities. The first point is that asset covered securities are securitised bonds backed by a pool of high quality assets. In a conventional securitisation of the type we are used to in this country, the bond is secured on a defined and unchangeable set of assets which are removed from the issuing institution's balance sheet. Essentially, this means that the issuing  institution sells the collateral for the bonds to an independent trust which then issues the bonds backed by this collateral. The principal and income earned on this collateral is used to meet payments to the bondholders who no longer have to worry whether or not the issuing institution as a whole is creditworthy.
By contrast, asset covered securities will be secured on a pool of assets called the cover assets pool. These assets, even when put into the pool, remain on the issuing institutions balance sheet but are ring fenced. This means that, in the event of the issuing institution getting into financial difficulties, these assets must be used to meet the institution's obligations to the holders of its asset covered securities before they can be used to meet the claims of any other creditors.
The most important feature of the cover assets pool is that it is dynamic in nature. This means that non-performing or redeemed assets may be replaced in the pool by new assets, an option that is not available through conventional securitisation. By replacing non-performing assets with new assets, the high quality of the cover assets pool can be maintained. It is this dynamic feature of the cover assets pool, allied to the conservative management of the pool, which enables institutions to obtain high credit ratings and to issue asset covered bonds at low interest rates.
There are two distinct types of asset covered security. The first is a “public credit covered security”. These securities are usually issued by specialist banks whose main activity is the provision of finance to governments, municipalities and local authorities. The securities are primarily backed by public sector assets such as sovereign bonds, local authority loans and government guaranteed loans.
The second type of asset covered security is a “mortgage covered security”. These securities are usually issued by institutions whose main activity is the provision of mortgages. These securities are primarily backed by mortgage assets.
Public credit covered securities are, at all times, secured by a pool of assets of at least equal nominal value and yielding at least equal interest. Mortgage covered securities are similarly secured, but based on a conservative valuation of the assets concerned. The ultimate investors in asset covered securities are normally institutions wishing to hold high quality securities offering a modest yield premium over comparable government securities. The introduction of asset covered securities will, I believe, greatly assist the financial services sector in the new era of EMU, globalisation, deregulation and new technology. It will remove the structural disadvantage which could otherwise affect Irish capital markets through the undercutting by foreign financial intermediaries of the rates offered by their Irish counterparts. The mortgage sector is probably the best example of what I am referring to here.
The advent of the euro with its consequent  elimination of exchange rate risk, the mutual recognition of credit institutions throughout the EU and the advance of e-commerce which will enable institutions to penetrate a market without establishing a branch network all pose particular issues for the domestic mortgage sector. Such a situation could allow foreign institutions to “cherry pick” customers and provide increased competition to the domestic mortgage sector. Of course, this is not a bad thing and I am all in favour of competition in this area. However, I do want to ensure that the domestic mortgage sector is well equipped to compete.
Specifically, we need to ensure that domestic institutions are enabled to raise funds on terms similar to foreign institutions which are in a position to raise capital through the issue of their own mortgage covered securities. The introduction of mortgage covered securities will enable Irish mortgage institutions to raise funds more efficiently and to compete with their European counterparts. They should also facilitate the introduction of more attractive and longer-term fixed rate mortgages which will provide greater security for borrowers.
The issue of public credit covered bonds is a more specialised operation. It is likely that issuance of these bonds will be mainly concentrated in the IFSC. The Government is committed to maintaining a vibrant and growing international financial services industry in Ireland, building on the success of the IFSC and further boosting employment in the sector. To do this, we need to be proactive in providing the environment which will attract new business here. The enactment of this Bill will do precisely that.
I would now like to describe for the House the main features of the Bill. The Bill provides for the establishment of designated credit institutions, i.e., designated mortgage credit institutions and designated public credit institutions which may issue securities under the terms of the Bill. Designations must be approved by the Central Bank and only credit institutions already regulated by the Bank may apply for designated status. The sector will be regulated by the Central Bank. The Bill contains restrictions on the types and amount of business activity other than core mortgage or public sector lending in which designated credit institutions may engage. This is to ensure that designated credit institutions engage only in conservative lending practices.
The Bill also contains detailed provisions on the issuance of asset covered securities. These include the issuance by designated credit institutions of mortgage or public credit covered securities secured on cover asset pools, specifications on the type and location of assets which may be included in cover asset pools and specification of requirements for matching of securities and cover asset pools with respect to duration, principal, interest and currency and allowing for the use of hedging contracts in this regard. It should be noted that to provide some flexibility and diversity in the cover asset pools, the legis lation allows up to 20% of the pools to consist of high quality assets other than mortgage credit or public credit assets.
An important feature of the Bill is the appointment of a cover assets monitor by a designated credit institution to supervise the cover assets pool. The cover assets monitor acts like a trustee on behalf of the holders of an institution's asset covered securities and may be either an individual or an institution. The role of the monitor is to supervise the detailed operation of the cover assets pool. The institution must obtain the consent of the cover assets monitor before including assets in the cover assets pool so the monitor can verify that the assets to be included are permitted assets, conform to the valuation criteria for the asset class and ensure that none of the prescribed limits on any of the asset types is breached. The appointment of the cover assets monitor will ensure that designated credit institutions are regulated closely and that they operate cover assets pools in the best interests of security holders and in accordance with the legislation.
The key provision of the Bill and the basis on which asset covered securities are issued is the provision of preferential creditor status to the holders of asset covered securities. This is dealt with in Part 7 of the Bill. It provides that the insolvency or potential insolvency of a designated credit institution does not affect the claims and rights of the holders of asset covered securities issued by the institution. In the event of insolvency, the cover assets pool will continue in operation until such time as the claims of the holders of the securities have been met. Only then will excess assets, if any, be distributed to the other creditors of the institution.
Other features of the Bill which should be mentioned are the setting out of detailed measures to ensure that an institution's obligations to the holders of its securities continue to be met in the event of the insolvency of the institution or the revocation of the institution's designation, the reciprocal recognition between Ireland and other States of priority of claims similar to those provided for in this Bill and the amendment of the Building Societies Act to enable building societies to issue securities under this Bill to enhance their powers to fund through the issue of securities generally and to ensure that the rights of members are not adversely affected by these changes.
Overall, the Bill treads a balance between conservatism and innovation. On the conservative side the Bill is clearly modelled on the German Pfandbriefe legislation. This is because of the German model's long and successful history, its market acceptance and the volume of securities in issue. It is expected that the similarity of the product to the Pfandbriefe will assist in its quickly gaining market acceptance. However, the Bill also contains some innovative features which address issues raised by credit rating agencies regarding the operation of asset covered securities markets generally. These features should help  in gaining high credit ratings and ready market acceptance for the Irish product. They include specific interest rate risk management requirements, express powers to enter into hedging contracts to manage risk and clear provisions on what happens if an institution gets into financial difficulties. Much effort has gone into making the Bill a state of the art product and ensuring that it meets the needs of domestic credit institutions. It will be studied closely by rating agencies and investors in the sector and it has an important role to play in launching Irish-based asset covered securities and making them competitive in the wider European market.
The introduction of the euro is leading to the development of an integrated and competitive capital market in the euro area. Mortgage and public credit covered securities are now becoming a standard feature of European markets. They are a recognised asset class in their own right and are attractive to long-term institutional investors. They offer financial institutions the prospect of raising funds in a cost effective manner and, as a consequence, they can have a substantial and beneficial impact on competitiveness. We are part of the European mainstream now and we must compete in the wider euro area capital markets. This Bill will enable Irish lenders to finance their activities as efficiently as their European counterparts and demonstrates the Government's commitment to the further development of Irish capital markets and the IFSC. It introduces a product for which there is a proven market demand and I commend it to the House.
Mr. J. Doyle Mr. J. Doyle
Mr. J. Doyle: This measure will certainly not be as controversial as the one we discussed last night. As the Minister of State has said, this is a very technical Bill and, in my view, the Members of this House are not geared to deal with it as we do not have the required back-up services. It is my hope that, in any future reform of the Dáil and Seanad, Members will have the necessary research staff to deal with Bills of a very technical nature. However, I am thankful to an official in the Minister of State's Department who gave me some insight to the Bill.
I know the passing of this Bill is very important to the financial institutions as a mechanism of refinancing and I believe that, when it is passed, it will be of benefit to mortgage holders in Ireland. I hope the Bill will enable mortgage holders in the Irish market to obtain long-term fixed mortgage rates that have not been available previously. This, I hope, will be a by-product of the legislation and I intend to return to this point later.
The Bill appears to be a worthy attempt to provide a legal framework to allow bonds backed by mortgages, that is, mortgage covered securities or Government credits, meaning public credit covered securities, to be issued in Ireland. It would appear that the principle of mortgage covered securities and especially public credit covered asset securities originated in Germany and the famous Pfandbriefe securities are the  largest single bond type in Europe. These bonds enable German financial institutions to access finance on exceptionally good terms. Other European countries have taken the view that their financial institutions should be able to access this source of funding and France, Spain and Luxembourg have passed enabling legislation to facilitate the issuing of this type of bond. I understand the pressure for this Bill comes from a German financial institution based in the Dublin International Financial Service Centre and I assume it has a special interest in this type of financial product. The German Pfandbriefe bond has an excellent record. It has never defaulted in Germany. As a result, the Pfandbriefe bond has obtained a triple A credit rating and, as there is little or no risk to investors, it is possible to borrow more cheaply and easily.
The introduction of this legislation is appropriately timed. With the introduction of the euro on 1 January, Irish institutions will be able to compete with other EU financial institutions on a more level playing field. Asset covered securities are securities bonds and are secured on a pool of assets called a covered assets pool. These assets when put into the pool are ring fenced on the financial institution's balance sheet. If the financial institution gets into difficulties, these assets must be used to meet the institution's obligations to the holders of its asset covered securities before they can be used to meet other claims. In addition, if an asset in the pool underperforms or, in case of a mortgage, defaults, it can be taken out of the pool and substituted by another asset.
Another important safeguard in the Bill is that it provides for the appointment of a person known as the cover asset monitor whose responsibility will be to supervise the asset pool. Was this part of the German Pfandbriefe legislation or was it introduced in the Bill to make the system more secure? A financial institution must obtain the consent of the cover asset monitor before including certain assets in the cover asset pool and must satisfy the monitor that these assets were properly valued and are suitable for investment in the pool. These guarantees enable institutions to obtain high credit ratings and to issue bonds at low interest rates.
There are two types of asset covered securities. The first is credit covered securities which are usually backed up by public assets, Government bonds and so forth. The second type of asset covered security is a mortgage covered security. These securities are usually issued by institutions who are in the business of providing mortgages. This type of asset covered securities may be of interest to Irish financial institutions because it will enable mortgage institutions to raise funds more efficiently and will, I hope, facilitate the introduction of more attractive and long-term fixed mortgage rates.
The arrival of a 30 years fixed rate mortgage would revolutionise the Irish market which has up to now had nothing longer than five to 10  years. However, these mortgages are not without their problems since early repayments attract heavy penalties. I understand that in Germany the outstanding mortgage can be transferred as part of the sale.
This Bill will enable Irish lenders to finance their activities on a single playing field with their European counterparts. The measures proposed in the Bill will make Irish bonds more attractive to large institutional investors and will assist in maintaining activity in the Irish market when the State is not issuing bonds. As I indicated earlier, a German bank based in the IFSC is most likely the first financial institution to take advantage of this legislation and will issue bonds on assets lodged in Dublin. The Bill introduces a financial product for which there is proven market demand and I hope it will not be long before Irish institutions follow their German counterparts.
I found the Bill technical and difficult to comprehend. Nevertheless, as I read through it I got an understanding of it. I hope we will be able to take Committee Stage of the Bill, when we will deal with the technical details, at our own pace and that we will not rush it as we tend to do. I hope we will be able to tease out the different sections with the Minister. I am happy to support the Bill.
Mr. Finneran Mr. Finneran
Mr. Finneran: I welcome the Bill. This is another step in our involvement in Europe and it presents another opportunity for this country. In recent years we have seen a complete change regarding finance and mortgages generally. Everybody remembers the 14% interest rates on mortgages and the uncertainty and trauma people experienced because of turbulence in the exchange rates and changes in interest rates. That is now gone. We are now in a stable situation thanks to our membership of the European Central Bank.
Although house prices are extremely high, young people can put greater reliance on the information they are given when they take out a mortgage in that the level of interest rate change is more limited compared to what people experienced in the past. That stability in interest rates is a beneficial result of Ireland joining the single currency. One of the products this country lacked was the fixed mortgage. While there have been limited opportunities to get fixed rate mortgages over two to five years, the concept of a 20 year or 25 year fixed rate mortgage was not considered realistic.
This legislation is extremely technical and I freely admit that I am not qualified to discuss all the areas with which it deals. However, taking the point of view of the lay person in search of a financial deal to secure a home for their family, the Bill provides an opportunity for that person to get a mortgage agreement which was not previously available in this country. They will be able to get a 20 year or 25 year fixed mortgage. The other important element is that the mortgage can be transferred when the property is being trans ferred. This is innovative and new and it will be relished by the public.
The other great advantage is that our financial institutions will be able to tap into this pool of finance at a better rate and pass on that rate to the public. Those two aspects of the legislation alone have practical and positive consequences for people, particularly those who wish to take out a mortgage. I am pleased with the safeguards provided in the Bill. The system is overseen by the Central Bank. All Members appreciate what the Central Bank has meant to this country over the years. While it does not have the power it had previously due to the European Central Bank overshadowing and taking control of many matters, it is still the regulator of financial institutions in this country and has done a wonderful job in that regard.
Mr. J. Doyle Mr. J. Doyle
Mr. J. Doyle: It was very helpful yesterday also.
Mr. Finneran Mr. Finneran
Mr. Finneran: I appreciate that. People were appreciative this morning when they read in their newspapers that their standard of living has been enhanced as a result of decisions made yesterday and that we are not in hock to any foreign bank or institution. The public is appreciative of a prudent Minister for Finance because of the decisions he took. He has allowed the people to avail of the finance they provided and that is a very good thing.
Mr. J. Doyle Mr. J. Doyle
Mr. J. Doyle: That is a nice way of putting it.
Mr. Ryan Mr. Ryan
Mr. Ryan: The Minister for Finance is putting things off until the future.
Mr. Finneran Mr. Finneran
Mr. Finneran: I listened last night in the House to the incoming president of the Irish Congress of Trade Unions. He sat on the benches where Senator Ryan sat not so long ago. He endorsed totally the decision of the Minister for Finance—
Mr. J. Doyle Mr. J. Doyle
Mr. J. Doyle: He did not see the small print.
Mr. Finneran Mr. Finneran
Mr. Finneran: —on the matter. I am not sure of the total membership of the trade union movement in Ireland but it is probably close to 1 million people. The president speaks on their behalf so we are good for one third of the nation on that alone. I spoke to my constituents in Longford-Roscommon today and the feedback from them is very positive about the decisions of the Minister and the Government yesterday, and they are a smart electorate.
Regarding the Bill, I mentioned the involvement of the Central Bank as one safeguard. The other is the monitor. I am not sure that I understand the position of the monitor and perhaps the Minister could explain what the monitor does, how it will operate, whether the monitor works in parallel with the Central Bank and if he is independent of the Central Bank. I am at a loss on that matter but I do not doubt that there is a reasonable explanation.
 I compliment the Minister and the Government for bringing this Bill forward. It is another step forward in our involvement with Europe. This country has benefited enormously from our membership of the EEC and the EU. Our decision on the euro is positive and, hopefully, people going into the mortgage market will now have a new opportunity to get a fixed mortgage. This will create increased stability. People will know where they stand when they are paying back a mortgage. That is important and will be embraced by the people. I hope that financial institutions embrace it and make it available to the people.
Mr. Ryan Mr. Ryan
Mr. Ryan: I will refrain from diverting from the Bill to a discussion on the budget. Senator Finneran and I will have many opportunities to discuss that and I have plenty of other fora to discuss it with the incoming president of the Irish Congress of Trade Unions and to explore the degree to which he represents the membership of that body.
One should not pretend to understand what one does not and I will not pretend that I understand the intricacies of this Bill. If the Members who spoke on the Bill understood its intricacies, we would be working in the financial services centre and earning £250,000 per year. I compliment the Minister on his explanation of the Bill. He would make a fine teacher as he gave such an intelligible explanation of something that is profoundly unintelligible. I would love to have the expertise to test him on Committee Stage, but even my considerable abilities to be awkward on Committee Stage would be well tested by this Bill. I will not make much trouble for the Minister.
I wish to take up a point raised by Senator Finneran. The political sensitivity in Ireland and Britain of mortgage interest rates has been widely reported in the media over the years, particularly prior to EMU. Such interest rates are not as sensitive a political issue in many countries in mainland Europe because the rates tend to be stable and are in the background. That is related to different forms of funding which facilitate stable long-term interest rates. The Bill is a welcome innovation on the issue of providing people with long-term stability in terms of mortgage interest.
The problem for regulatory bodies, be it the State, the Central Bank or any other body, is that the complexity of these issues means it is very difficult to have a regulator who knows as much as the regulated. I am not implying dishonesty but I know that in the environmental area the EPA has done a wonderful job. However, many industries do not like the fact that the EPA keeps working to increase standards. This results in industries withholding information from the EPA. They do not disclose what they have done until they have to. They attempt only to meet targets. There will always be a degree of uncertainty between regulators and the regulated. I hope we have got this right, but we appear to have fol lowed the German model which has been extraordinarily successful.
One of the most positive benefits of our membership of the EU is the process by which we have learned to do things that are often different from those in our neighbouring island. Our neighbouring island is a profoundly conservative institution in political and financial terms and in other ways. In spite of the radicalism of Thatcherism, Britain still has a profoundly conservative and traditional society. Many innovations in all sorts of areas, including that covered by this Bill, were invisible to Irish people because Britain formed a barrier. Ireland is moving from that position and this has been facilitated by EMU, which has allowed us to see things that we could not see before.
The Bill is welcome. It is worth pointing out that one of the remarkable achievements of this country, and one of the contributors to our economic achievements, has been our success in developing the country as an international financial services centre. It was an innovation of a former Fianna Fáil Taoiseach, who is now in disrepute but whose capacity for innovative thinking in every area of life could not be disputed. His vision in many areas, including the political, cannot be denied although it would have been better if he had been less innovative in some other areas. However, the financial services centre is an achievement brought about by State activity. It epitomises the fact that the State still has a major role to play in development. This means much more than tax incentives. It involves the identification of a physical location, the putting together of a package to attract building in that area and then the attraction, via a tax package, of international agencies. None of that could be done without a creative role for the State.
We should never imagine that the State can be left out of such development. The structure of what we are talking about here is conditional on a sophisticated regulatory agency, but a regulatory agency nonetheless. It is not the antithesis of a deregulated financial market due to the deliberate construction of a system which facilitates low and stable interest rates because of the reduction of perceived risk. That is usually the way, although it does not always happen like that in Irish banking. Interest rates should relate to the risk involved but, as we all remember from the days of bridging loans, banks used to sit on people's money and give secured temporary loans at the maximum overdraft interest rate with the minimum security. Unless there is vigorous competition in the banking sector, that will happen. One of the attractions of this is that it should encourage further vigorous competition in the banking sector and that is welcome.
Since the Minister of State mentioned the degree to which we are integrating into the European financial market, it is worth putting on the record – it is not a criticism of this Government in particular – the extraordinary fact that, not withstanding the year's notice, the European banking system has not yet addressed the issue of a single European clearing house. Until last week, it was attempting to pretend that nothing was going to change and that if we had to transfer money after 1 January 2002, not only paper but real single currency, it was going to charge us differently for moving it from the Netherlands to Belgium across the border than from one point in the Netherlands to another. Our banks were at the head of the posse in terms of the rates being charged. It seems quite extraordinary that something as central to the consumer as that has been left on the long finger. I am glad, albeit reluctantly on the part of the Government which resisted some of the Commission's proposals, we are now moving. If a single market is to be successful, it has to be seen to ordinary consumers and not just the high flyers in high finance – I am not disputing the importance of these things – to make a difference but so far, it has not. I hope it will.
Everybody in business thought that after 1 January 2001, or after the introduction of the single currency, cheques written in France would be treated as domestic cheques here. They suddenly discovered that they could pay 24% to cash a French cheque written in euro. That has to change. I hope innovation will be seen and that pressure will come from the State in this case. One of the many fine qualities of my colleague, Senator Ross, in his other career is his willingness, unlike many business journalists, to expect people in business to behave as if they were in the private sector, to compete for business and not to construct quasi-monopolies which protect them from the rigours of competition which they think are very good for everybody else. Most of the big institutions in Ireland do not do that.
I welcome the Bill. The success of the financial services centre is one of a considerable number of successes that have been developed here. If, as we hope, it produces long-term, stable and low interest rates, particularly in the mortgage area, it will be of perceived benefit to consumers. I suppose we are coming to the stage of assuming that we will always have low interest rates given the operations of the European Central Bank but, that said, it will contribute to it. It is a further indication of the degree of sophistication we are beginning to develop in our relationships with the world. We are dealing with issues which would have been unimaginable ten years ago. I compliment the Minister of State on, as I said at the beginning, an intelligible speech which, given the topic, was a considerable achievement.
Mr. Costello Mr. Costello
Mr. Costello: I welcome the Minister of State. He gave an intelligible address given the considerable technicality of the legislation before us. It would seem the legislation presents a win-win situation and that there is no downside whatsoever. We are providing a mechanism through which we can get the most competitive rates available into which Ireland has not yet linked  even though we are operating in a global economy. The way it is being done, according to the Minister of State, is that there is an exact matching of assets with liabilities. I always thought that happened anyway and that anybody looking for a loan had to have collateral which pretty much matched what they were looking for and that, in the open market, these were the basic principles that operated. The Germans seem to have pioneered the particular environment in which this has happened.
About what type of assets are we talking? What provides these high quality assets which hitherto were not acceptable for rating? In what context does this operate? What demands will be made on the Irish bank or financial institution seeking to access this cheap capital? Is there a definition or description of these assets? Is there discrimination in the marketplace in relation to certain countries which might not be regarded as having a track record in the financial area? I am not saying we are one but I would like to know the context in which the assessment is made in terms of what constitutes these high quality assets. It would seem we are accessing a European and an international market elsewhere and that this type of operation has not existed here. What is the capacity and the likelihood of this operation being based in Ireland in the financial services centre? The Minister of State said the multinational banking institutions will have the opportunity to access these markets elsewhere and that our own domestic banks and financial institutions—
Mr. Cullen Mr. Cullen
Mr. Cullen: From within this market.
Mr. Costello Mr. Costello
Mr. Costello: What about our own market? Will we be likely to get the benefit of an expansion in employment and in capital coming into the country so that this will be a location for this high quality market? The Minister of State said decisions are made in a very conservative environment and that adds to its likelihood to attract a triple-A credit rating. What started as a national institution, largely in Germany, has now expanded to France, Spain and Luxembourg. The Minister of State said that in the event of an issuing institution getting into financial difficulties, these assets must be used to meet the institution's obligations to holders. What is the situation in that regard? Obviously this is the purpose for which the assets are used. How do we know how the parent body is dealt with and how it operates? What mechanism do we have in that respect?
Mr. Cullen Mr. Cullen
Mr. Cullen: It will be licensed by the Central Bank here.
Mr. Costello Mr. Costello
Mr. Costello: The Central Bank monitors it.
Mr. Cullen Mr. Cullen
Mr. Cullen: Yes. There is a monitor in it as well but the banking system, the banks that operate, are licensed by the Central Bank of Ireland.
ÜfcMr. Costello ÜfcMr. Costello
 Mr. Costello: Is the Minister of State satisfied that is taken care of? If an Irish building society decides it wants to get a long-term fixed rate mortgage, in so far as it can get a new dispensation for its clientele and present an attractive package in Ireland and goes abroad and accesses one of these institutions, what guarantees can it give? Does it have any say other than that it is going to be what is regarded in the international market as a credit worthy body? What further guarantees does it have in that respect? It almost seems that we are accessing a pool of money abroad with competitive rates while at the same time having no clear indication whether it will be a reliable source in the long-term, especially if it is a long-term fixed rate for which we are looking.
What is taking place is good in terms of competitiveness and rates, but it seems that one of the most likely spin-offs will be further closure of financial institutions. Already, the Bank of Ireland and Allied Irish Bank have substantial plans to denude rural areas and many urban areas of offices. If most of the activity is to take place by way of e-commerce and the Internet, which is the direction the Bank of Ireland in particular is going in terms of its trying to limit the amount of face-to-face customer contact, it seems there will be very little need for financial institutions to have offices. One of the down sides will be a justification by institutions for getting rid of offices because it will eliminate overheads and allow them to obtain capital much more cheaply. They can do business over the Internet. At least that is the theory. The small customers, whether it is small businesses or elderly people, who do not do business in this way will be left to the wolves once again. This will further that particular practice, which is not very desirable at present.
The Bill looks very attractive to the borrower. It will open up an area of credit which would not be here otherwise. It is important that we ensure we are in the most competitive arena in that respect. Will the Minister state if there is a downside? I am suggesting that there might be in respect of some areas. I presume the Minister is suggesting it is a win-win situation right down the line.
Mr. Cullen Mr. Cullen
Minister of State at the Department of Finance (Mr. Cullen): I thank the Senators for their contributions to the debate. Even though it is technical and complicated legislation, the contributions were worthwhile. Many Senators had a good grasp of the main thrust of the Bill, which is a credit to them and the Seanad in general. This is always the case.
Senator Joe Doyle asked about the monitor in terms of its role and how it was brought about. It is almost entirely based on the Pfandbriefe monitor so it is not something new. The role of the monitor has a long history of 125 years. While it may be adapted to suit the Irish market, one can take it that the construction of the monitor is based exactly on how it is in the German Pfandbriefe market.
 Senator Finneran asked about the monitor's role vis-à-vis the Central Bank. First, the monitor is independent but he or she will have a lot of serious functions which he must carry out in terms of his responsibilities with regard to the monitoring of the pool. Although independent, there is clearly a relationship with the Central Bank. The Central Bank is the overarching body with responsibility in this area. If the bank felt the monitor was not carrying out his or her responsibilities properly, it could act on that.
The monitor does not have to be an individual. It could be an institution or firm. These are the regulations that are being worked out in detail with the Central Bank at present. Wide experience shows that the monitor does not have to be an individual, but a particular firm could be made responsible for monitoring the particular assets pool.
Senator Costello asked why the assets pool has worked. I do not know if the Senator was here earlier when I said that in the 125-year German experience there has not been a default. One of the reasons is the quality of the assets pool. What goes into the assets pool is valued by the Central Bank. In other words, it is the mortgage itself. It takes a prudent view of it. It is not necessarily what I might think is the current market value. When the bank's view is taken, up to a maximum of 75% of the value can be included in the pool, as one can see in the Bill. There is another substantial ceiling of space for anything deteriorating. If an asset is underperforming or something has gone wrong with it, it can be taken out of the pool immediately and replaced by a stronger asset. This creates a pool that is almost impenetrable in terms of something going wrong because of the facilities involved in the asset pool itself.
There are banks in the IFSC at present whose mother companies are operating in Germany or elsewhere. This facility was not available on the Irish market so clearly there was a strong wish on the part of the IFSC to operate this type of facility. We examined this matter in relation to Irish institutions, particularly building societies. It is important that the assets invested and the rights of the members who own the individual assets are equally protected.
Assets must be mortgages or public sector borrowings. That is the custom. They are guaranteed by Government loans, etc., so they are pure credit triple-A types of assets. That is why this covered assets pool has worked so successfully internationally. The Pfandbriefe model is the most successful model. That is why our legislation is based largely on it. We have tried to be as innovative as we can.
Assets are limited to the European economic area or G7 countries. One would not be dealing with other countries that might have questionable track records in the physical area. One obviously tries to confine one's dealings to areas where there is certainty and stability. Again, the Central  Bank of Ireland makes the assessment. It is a very prudent, conservative assessment of what the asset is worth, not necessarily what somebody might say is the market value of an asset. As I said, only 75% of that is allowed in the pool.
There was some confusion in the Dáil over a matter with which I will not deal today. We will obviously address some of the questions Members raised in more detail on Committee Stage. Because I am saying 75% is allowed in the pool, this does not exclude people with 90% or 100% mortgages. It means that only 75% of the value is included in the assets pool. The rest is discounted. This point was raised in the Dáil, particularly by Deputy McDowell, and the matter was made more clear. People felt that because recent Irish mortgages are much higher, they might be excluded.
Overall, it has been a very good debate. I welcome all the contributions. I look forward to addressing the matter on Committee Stage. It is clear Members have an understanding of the thrust of the Bill. As they have rightly said, much of the Bill is technical, which is necessary if everything is to work properly. I thank my officials for the clarity of the information with which they provided me to give to the House. Obviously, most Senators have realised that a complex Bill can be put across in a clear way. I thank everybody for their co-operation.
Question put and agreed to.
Committee Stage ordered for Tuesday, 11 December, 2001.
Seanad Éireann 168 Asset Covered Securities Bill, 2001: Second Stage.