Central Bank and Credit Institutions Bill 2011- Dail Speech 29th June

Of the three major banking reports, the Honohan and Nyberg reports stated if a resolution mechanism had been in place at the time of the initial banking crisis, public losses would have been considerably reduced. Therein lies the rationale behind this overdue legislation. The Central Bank and Credit Institutions (Resolution) (No. 2) Bill 2011 will create a permanent and special resolution regime, involving a resolution fund managed by the Central Bank. Up to 40 banks and building societies, along with 400 credit unions, will pay into this fund. This welcome and meritorious development will, in contemporary jargon, constitute a form of burden sharing, albeit a tentative one. It will also have a regulatory effect in itself in that the banks will be contributing to the outcome of their own possible future misdemeanors.

The legislation also provides for a transfer order to move deposits from one institution to another, for special management orders to put in place special managers, for bridge-banking and a modified liquidation process. It covers the entire eventuality around the collapse of one or several banking institutions. In June 2008, there had been discussions on these types of proposals but at the time it was decided not to go ahead with them for a combination of reasons. In hindsight, this was a regrettable and regressive decision.

This legislation does not preclude the need for a proper regulatory process in our banks. While considerable progress has been made in this area, vigilance needs to be maintained. Neither does the legislation preclude the need for the rationalisation of the banks. I welcome the Minister for Finance, Deputy Michael Noonan’s, initiatives in this area with the designation of the two pillar banks.

All these exercises and measures, however, are needed to create a normal banking environment. The Honohan, Regling and Watson and Nyberg reports established several phenomena in the Irish banking sector including bad governance, poor management, over-dependency on single assets, namely property, and insufficient regulation. While the banks’ management structures stand condemned, the then Government, as the custodian of the people’s interests, must do so also. It failed both to set the agenda and keep a watching brief.

The banking system has still not returned to normal, in that there is insufficient credit available to small businesses. Credit availability is the great need in our economy to kick-start its recovery. Allied Irish Banks and Bank of Ireland are committed to lending €12 billion between 2010 and 2012. This injection of new credit into small businesses needs to be monitored on a monthly basis, a commitment made in the programme for Government. Will the Minister for Finance confirm this arrangement will be put in place? We need small businesses to thrive again and employment to be created. While today, at least we had the launch of the national internship scheme, we need small businesses to create the single job here and there which, in turn, will generate the economic recovery of our small towns and communities.

In 2007, some 90% of small and medium-sized enterprise loan applications were granted. In 2010, this figure dropped to 50%. This, along with the overall drop in the number of loan applications, tells how incomplete the banking system has become and how limited credit availability has become for our small and medium-sized enterprise sector. These are not good developments and they illustrate the fact that we have moved from one extreme to another.
In addition to dealing with the structural issues involved, the regulatory process, the doomsday scenario the legislation is designed to tackle, the matter of lending, we must also consider the broader picture. The Minister, Deputy Michael Noonan, is to be congratulated on the statement he made in Washington to the effect that we will ask unsecured senior bondholders in Anglo Irish Bank to share losses. That is both a progressive and necessary step. It is correct that the Minister should go through the process with the ECB because a solution must be found. The position with regard to Greece underlines that fact. There is a risk of contagion and Spain, Portugal, Italy and Ireland are in a perilous position. The position of Greece is even more perilous. As a result, there will be a need for a pan-European or at least a broad-based European solution to this problem.

Europe will be obliged to return to the drawing board. It is unreasonable that taxpayers in this country and those in other member states should be obliged to accept all of the losses involved. Those who hold bonds – senior unsecured bondholders and others – invest with a view to making a profit. When the wind is at their back, these people accept profit. When it blows against them, they should be asked to accept their losses. The losses must not be transferred on to taxpayers.

If the situation regarding Greece brings anything into focus it is the fact that the EU, the ECB and the IMF – the so-called troika – must come together in order to resolve this issue. I am of the view that a pan-European solution will be required. In the context of interest rates, the terms of our loans will have to be changed and the length of time applying to repayments will have to be extended. In addition, bondholders are going to be obliged to accept significant losses. The same type of prudential financial management that has been imposed on countries such as Ireland should also be imposed on a broader European basis. The Minister, Deputy Noonan, both in terms of his stewardship of the domestic economy and in the context of the initiatives he has taken at international level, has moved us a fair distance into our journey. However, he must be joined by his partners in Europe.

I commend the legislation, which is an important step in the process of rectifying what was a horrendous wrong, to the House. We can only learn from the terrible situation into which we have been placed in the context of building a better future for coming generations.

Senator Joe O'Reilly representing Cavan & Monaghan 2010. | An ExSite website