Speech by An Taoiseach, Mr. Brian Cowen TD, North Dublin Chamber of Commerce, Dublin City University 13 May 2010 "The Irish Banking Crisis - the Mistakes, the Responses and the Lessons"Introduction

I am pleased to be with you this evening and I want to talk about the economic challenges this country faces and the progress we have made to restore prosperity. We live in one of the most dynamic and challenging times in economic history. It is a time defined by great change and upheaval not just in Ireland but also throughout Europe and across the world. In the midst of the greatest global financial crisis in the post war world, I can tell you with confidence that this Government is providing the leadership needed to restore economic growth and return stability to the banking sector. Tonight, I want to speak with you about what happened and why it happened and, about our plan.

We have worked hard to develop a plan for economic recovery and it's working.

The plan has four parts:

To restore order to the public finances;

To regain competitiveness;

To support enterprise to create jobs;

and,

To repair the banking system.

Over the past two years, significant progress has been on all fronts and we can be sure Ireland is turning the corner.

This evening, I want to focus primarily on the banking crisis but before I do that, I think it is worth saying something, first of all, on the progress we have made on the other fronts.

The good news is stability has been restored to our public finances. We have made a fiscal correction of 5% of GDP in 2009 and 2.5% in 2010. This was not easy, it involved pain but it's those painful choices that were the key to recovery.

Without these measures, our budget deficit would have ballooned to 20 per cent. A year ago Ireland was labelled as just another member of a group of countries which was facing serious

trouble. Today we are held up as an example and people are talking about our resolve and capacity to deal with problems.

Confidence in Ireland is rising and the decisive action we took means our economic outlook is good. The ESRI has predicted that growth will return to the economy in the second half of this year and the European Commission is predicting that Ireland will grow at double the Eurozone average next year.

The markets too can see this. Our decisive action has brought us credibility. This credibility is reflected in our reduced costs of borrowing which is crucial to keep the country running.

That does not mean we should be complacent. This recession has changed the financial world. The lesson we need to take from it is that we are in a competitive global market-place and soft option solutions are not going to provide the basis for sustainable growth and the improvement of living standards.

This relates to the second and third elements of our plan, the need to regain competitiveness and to create jobs. The good news is prices are falling and competitiveness is being restored in Ireland.

Recovery looks set to be supported by a significant adjustment in relative labour costs. There was an estimated fall of 4% in unit labour cost last year and an expected further fall of over 8% between this year and next. This is against the backdrop of an expected increase of 1.2% per annum between 2009 and 2011 in the rest of the euro area. Our improving competitiveness is also reflected in a fall in prices. Consumer Prices fell by 2.5% in Ireland in April 2010 over the year previously. This compares with an increase of 1.5% in the rest of the euro area.

These competitiveness improvements are bringing us back into contention for foreign investment that previously we had been too expensive to win. They are also improving the competitiveness of our exports. We have all worked to improve the value and efficiency of the goods and services we trade and sell abroad.

In addition, we take encouragement from the fact that the labour market -- where the recession has hit hardest -- looks like it is beginning to stabilize since the end of last year. We are looking at net job creation of 20,000 next year and 45,000 each year thereafter. Our balance of payments is moving towards a surplus. These are all positives but we have to drive job creation straight away to get people back to work.

The Government's entire economic strategy is about sustaining and creating jobs - as we set out in our Framework for Economic Renewal: Building Ireland's Smart Economy. We are positioning Ireland as a global innovation hub - the best place to start, grow and transform companies both multinational and Irish. This will lay the foundations for future employment growth. We are developing opportunities in the green economy, renewable energy and clean technology. We are spending, proportionately, the highest amount in the EU on critical infrastructure to support the economy and to support jobs.

The final element of our plan is to repair the banking system. Put simply, we need to get the banks back to banking to get credit to viable business, particularly SMEs. That is why we recently imposed specific lending targets on two main banks. We are harnessing the banks to

get the economy back working, to generate lending, so business can thrive and jobs can be created. We will be closely monitoring the banks to ensure that now they have had a helping hand from the taxpayer, they don't forget their responsibility to the people of this country.

This evening, I want to spend some time looking at the banking crisis in Ireland. I want to talk about its root causes, the measures we have taken to resolve the crisis, and the next steps we will take to ensure it can never happen again.

The banking crisis in Ireland has damaged the livelihoods of our citizens. It has tarnished our international reputation. It has required the Irish taxpayer to give unprecedented financial support to the banking sector. This has caused much legitimate anger which I share.

Only by learning from what mistakes have been made can we ensure we have sustainable policies for the future. The Government's focus on fixing the banking crisis is fundamental to Ireland's return to economic prosperity and employment growth.

My Government has introduced a programme of radical reform of the banking sector, including recapitalisation of the banks, the outlawing of unforgivable malpractices, and the introduction of fundamentally changed regulation. We now have in place a solid platform to rebuild our banking sector. I think this, therefore, is an appropriate time to answer the key questions concerning the near collapse in the Irish banking system.

There are six fundamental questions which I believe need to be addressed.

1. Were the causes of the Irish banking crisis internationally determined or self inflicted?

2. Does the balance of evidence suggest that banks had or did not have sufficient capital to absorb likely losses?

3. What actions, if any, were taken to minimise potential vulnerabilities?

4. With hindsight, were mistakes made prior to this crisis?

5. Did policymakers make the correct decisions and judgement calls to respond effectively to the crisis?

6. What are lessons which must be learned?

 

First, the causes. Much debate has centred on whether the causes of the crisis in the Irish banking sector were international or self inflicted by decisions within Ireland. This debate will be informed by the Banking Inquiry which the Government has established, and which will be a crucial input to future policy.

I know many people will expect me to say that the crisis was exclusively caused by international developments. But that is not my view. The global financial crisis did begin in the US sub prime market and it spread to the world's financial system causing unprecedented

loan losses. As early as November 2008, the Bank of England estimated that global banking losses could reach 3 trillion dollars and those losses may turn out to be even higher.

So certainly international factors were a critical component in the crisis, but it would be wrong for us, not to accept that the crisis was made worse for Ireland because of internal factors. The reality is that there were domestic vulnerabilities and when Ireland was confronted with the global crisis, and these led to the near collapse of the banking system.

In meeting leaders in other EU countries, I am well aware of similar debates in their respective nations, as to whether the crisis was caused by actions within any individual country, or was due primarily to the international financial crisis. This is the subject of intensive arguments in all of the countries which have experienced a banking crisis.

In the Irish context, I think one of the most accurate assessments of the contribution of domestic and international factors to the Irish banking crisis was made by the IMF's Assistant Director, Mr. Ashoka Mody, on 24 June 2009 when he pointed out that:

"There were three features that were particularly prominent in the evolution of this crisis: overvalued property prices, the vulnerabilities built up within the banks and the gradual loss of competitiveness of the Irish economy.... Put together, when the global crisis manifested itself in the middle of 2007, these domestic vulnerabilities interacted with the global crisis and that has now led to what is likely to be a protracted downturn".

I believe that if the unprecedented global financial collapse had not happened, there would have been a soft landing for the Irish economy. However, the overvaluation of properties, and related vulnerabilities within banks, put Ireland in a weaker position when we had to face the global crisis.

I accept that ongoing actions would have been required to address these vulnerabilities even in the absence of the global crisis. To suggest otherwise would, in my opinion, be to bury one's head in the sand.

The Irish banking sector's image at home and abroad has been badly damaged by the litany of scandals of non compliance within individual banks and the unacceptable scale of payments to individual bankers, some of whom presided over reckless lending. Regardless of the international crisis, these practices are simply not acceptable.

 

Second, the sufficiency of capital to absorb losses. Everyone now knows that the Irish banks did not have sufficient capital to deal with the crisis which emerged but what was the balance of evidence prior to the crisis? While some people may like to rewrite history, it is useful to review what was the actual assessment of independent bodies.

The IMF assessment of the banking sector in Ireland in September 2007 suggested that:"The banking system continues to perform well, but rapid growth has led to vulnerabilities. The banking system is well capitalised, profitable and liquid, and non-performing loans are low. However, bank lending to construction and real estate firms amounts to 47 per cent of GDP. Most lending to households is at variable rates and household debt amounts to 160 per

cent of household disposal income. At the same time, loan growth has outstripped deposit growth, so banks have become more reliant on wholesale funding".

The conclusion of the IMF was that:"Given the Irish economy's strong fundamentals and the authorities commitment to sound policies [IMF] Directors expected economic growth to remain robust over the medium term. At the same time, however, a number of downside risks will need careful attention in the period ahead...... Directors underscored that rapid house price increases and a boom in residential construction have been an important driver of growth and bank lending. While the slowdown of the housing sector has been gradual so far, and will help to rebalance growth and contain inflationary pressures, a sharper correction in house prices could significantly slow economic growth".

While there were also numerous other positive views on the prospects for the Irish economy in 2007 from the OECD, the European Union, Moodys, ESRI and many other commentators, it is important to consider in some detail the assessment of financial stability undertaken independently by the Central Bank prior to the crisis.

The Central Bank and Financial Services Authority of Ireland produced a Financial Stability Report for 2007. The report indicated that:"Our overall assessment is that financial stability risks have, on balance, increased since the 2006 Report. Nevertheless, the overall conclusion is that the Irish financial system's shock absorption capacity remains robust and the system is well placed to cope with emerging issues."

They indicated :

"We are reassured by the fact that our credit institutions do not have significant exposures to the sub prime market, either directly or indirectly, and their shock-absorption capacity is sufficient to deal with the current period of heightened stress in financial markets".

The Central Bank assessment concluded that:"the central expectation, based on an assessment of the risks facing both the household and non-financial corporate sectors, the health of the banking sector and the results of recent in-house stress testing is that, notwithstanding the international financial market turbulence, the Irish banking system continues to be well placed to withstand adverse economic and sectoral developments in the short to medium term. The underlying fundamentals of the residential market continue to appear strong. The central scenario is, therefore, for a soft, rather than a hard, landing. The health of the banking system remains robust when measured by the usual indicators: solvency, profitability, liquidity, asset quality and market indicators. The Irish banking system continues to be well placed to withstand adverse economic and sectoral developments in the short to medium term."

The advice at the time was that the balance of evidence suggested that the banks had sufficient capital to absorb the likely losses but, that there were vulnerabilities and risks. With hindsight this proved to be fundamentally wrong, however, those were the views expressed at the time.

We now know grave mistakes were made in the judgement of the capital adequacy of the Irish banks and the assessment of future loan losses. It is, however, important to note that no

one in the independent authorities ever advised the Government that the capital adequacy was not sufficient or that higher capital adequacy ratios should be imposed.

 

Third, what actions were taken to minimise potential vulnerabilities. Prior to the crisis, the overall assessment of the Irish economy was that there was likely to be a soft landing, a gradual moderation in property prices over time and that the banking sector had sufficient capital.

When I was Minister for Finance, I shared in this positive view of our prospects which was held by all the main research and international agencies. But contrary to what some are now trying to suggest, I was concerned about the potential vulnerabilities and risks arising from the rapid escalation in property prices which was a recurring theme in risk assessments.

It has since been alleged that no action was taken by the Government to deal with these risks. This is simply not true. The facts are that prior to any signs of an emerging international crisis, there were four important actions taken to attempt to minimise the potential vulnerabilities in the banking sector related to the dependence on highly valued property.

The four actions taken were as follows:A) The decision in December 2005 to abolish a very wide range of property based tax incentives.B) The refusal by the Government to abolish or dramatically reduce stamp duty.C) The decision of the Regulator at the start of 2007 to increase the capital requirements on banks for speculative property lending from 100% to 150%.D) The decision by the Government to allocate every year 1 per cent of GNP into a National Pensions Reserve Fund.

These key actions taken prior to the crisis were significant and reduced the risks and vulnerabilities of the Irish economy. Without these actions the crisis in the Irish economy would have been even far worse.

The world changed forever in 2008 following the crisis in the international financial sector and the failure of Lehman Brothers. The resultant extent of the economic depression meant that the actions taken prior to the crisis were in no way adequate. However, without these actions being taken, the situation would have been considerably worse. In this scenario, our economic sovereignty would have been gravely threatened.

In order to refute the claim that no action was taken to minimise vulnerabilities, it is worth considering the significance at the time of each of the four main actions cited above. It is important too that we reflect on some of the opposition to these actions, which if heeded would have left Ireland in a very detrimental position.

Abolition of Property Based Tax IncentivesAs Minister for Finance, I was concerned about the Irish property market and the cost and role of related tax incentives. In my first Budget in December 2004, I decided to direct the Department of Finance and the Revenue Commissioners to undertake a full review of all property based tax incentives. I also highlighted my preference for a complete and

comprehensive reform of the system rather than a piecemeal approach. I made it clear that I would take appropriate action in the 2006 Budget.

In presenting the 2006 Budget, in December 2005, I decided to immediately restrict the ability of the use of property based tax incentives by those on high incomes. I introduced for the first time in the Finance Bill a measure to ensure that such taxpayers were no longer able to use property tax incentives or other measures to reduce their tax bill in any year below a certain level. In Budget 2006, I also decided to undertake a fundamental dismantling of the property based tax incentives which had developed over many years.

I did this because I was concerned that these incentives were contributing to an overvaluation of property with resultant vulnerabilities. This decision did not gain favour with many interested parties in the property market. It also represented a decisive policy shift because over a long period successive governments had added more new property incentives rather than engage in a wholesale abolition of existing incentives.

Those who suggest I did nothing to curb the property spiral, specifically ignore the fact that in presenting my 2006 Budget, I announced the most radical abolition of property based tax incentives made by any recent Minister for Finance.

In particular I announced the discontinuation of the following property based tax incentives. (i) Abolition of Urban Renewal Scheme.(ii) Abolition of Rural Renewal Scheme.(iii) Abolition of Tourism Renewal Scheme(iv) Abolition of Special Property based relief for hotels.(v) Abolition of Property reliefs for holiday cottages.(vi) Abolition of relief for student accommodation.(vii) Ending of relief for multi-storey car parks.(viii) Abolition of reliefs for third level educational buildings.(ix) Abolition of sports injury clinics property incentives. (x) Abolition of reliefs for property developments associated with park and ride facilities.

The property based incentives for the general rental refurbishment scheme was also abolished. Similarly, the tax relief which was available for tax reliefs for interest on loans taken out to acquire ain interest in property rental companies was abolished for all new loans taken out after 7th December 2005. This decision to eliminate so many of the property based tax incentives and also to regulate the use that could be ahead of incentives and to remove the abuse of some high-earning tax incentives represented one of the most fundamental dismantling in recent history of the incentives of the state in the property sector in Ireland.

I took these and other measures to reduce the vulnerabilities of the Irish economy to the escalation in property prices and to secure a greater return for the Exchequer and to enhance equity and to do so in a way that reflected fact that there were over 250,000 jobs in the sector. These actions were the subject of strong criticism from many in the construction and property sectors. But I felt they were needed to reduce the vulnerabilities arising from the dependence on the property sector.

Resistance to Calls to Abolish Stamp DutyI was also the subject of sustained criticism for my decision as Minister for Finance to resist widespread demands to abolish or dramatically reduce stamp duty on property.

At that time, I accepted that the levels of stamp duty in Ireland were among the highest in the world and that this meant real consequences for people buying houses. While I agreed that some adjustments were appropriate, I realised that the high levels of stamp duty were a break on the escalation of property prices and acted as a disincentive to greater property speculation.

Put simply, I felt that calls for the abolition of stamp duty were simply irresponsible in a context of rapid property price growth. I, therefore, strongly resisted such demands.

There is no doubt abolishing stamp duty at that time would have been politically popular. But it also would have increased the vulnerabilities of the banking system and the Irish economy to overvalued property. I therefore refused to go down this route. I was subject to much criticism for this. It is hardly surprising today that the cheerleaders for the abolition of stamp duty, or its radical reduction, are now silent on what would have been the impact on property prices or the resultant impact on the scale of banking crisis had I heeded their calls.

Increase in Capital Requirements on Speculative Property The decision of the Financial Regulator at the start of 2007 to increase the capital requirements on banks for speculative property lending to 150% from 100% was a decision which I strongly supported. I accepted that this brought the capital requirements on Irish banks for speculative property lending to one of the highest in the developed countries but, I believed it was totally appropriate given the vulnerabilities of Irish banks to property prices.

This was taken at a time when international agencies and others were still benign on the prospects for the Irish banks. In the event, we now know that given what happened since this, that this action should have been taken at the start of the period of lending growth by banks but it was a significant initiative.

Allocation of % of GNP to National Pension Reserve FundThe final action taken to reduce vulnerabilities of the Irish economy was to allocate every year 1% of GNP into a National Pension Fund.

The tax revenues from the boom were used to engage in unprecedented capital investment to provide key infrastructure such as roads, public transport projects, schools and third-level research facilities. This infrastructure has greatly increased our productive capacity and will be essential in returning the economy to a sustainable growth rate when global conditions improve.

At this point, I want to stress that I do not subscribe to the theory that all of the achievements of the boom years have been wiped out or that they were built on sand. This recession does not mean we should allow ourselves to be deluded into pessimism or believing that we have lost every innate advantages that the good years in this country brought us.

We used the fruits of the boom to make unprecedented investments in our schools and colleges. As a result, we now have a young, highly educated, flexible workforce. We also used the good years to build up a substantial, knowledge-intensive industrial base and we have in place a business and innovation friendly tax system. Every community in Ireland has benefited from new roads and a world-class motorway network. We have substantially modernised our infrastructure and our communications system.

The irony of politics today is that the opposition parties criticised us during the good years for spending too little. Their new revised criticism, to fit changed times and circumstances, is that during the good years we actually spent too much. Yet the facts are we recorded budget surpluses in 10 of the 11 budgets up to when I left office as Finance Minister. We used the boom to more than halve the General Government Debt as a percentage of GDP, from 64% in 1997 to 25% in 2007. In 1997, €1 in every €6 of tax revenue went on servicing the National Debt. By 2007, this had fallen to €1 in every €29 of tax revenue. If the assets of the National Pension Reserve Fund are taken into account, the net debt position at the time I finished being Minister for Finance was about 14 per cent of GDP. This undoubtedly slowed the Irish economy from the rate which would have applied if an additional percent of GNP each year was allocated to either increased public expenditure or reduced taxes, as some others argued for at the time. And it is allowing us to borrow now to help us through this difficult period.

 

Fourth, the mistakes in hindsight. Given what we now know, the question arises were mistakes made prior to the banking crisis?

I believe the key factors which were relevant are as follows:(1) Fundamental errors were made within the management of individual banks which led to excessive risk taking. (2) Banks became too dependent on wholesale funding. As a result, when the international credit market unexpectedly froze, the banks were vulnerable and in need of Government guarantees. (3) Inadequate financial regulatory controls were implemented in Ireland and in other international economies based on a mistaken view of governance within banks.(4) There were property tax incentives in place over the period from the mid 1990s which, with the benefit of hindsight now, should have been abolished many years prior to my decision in December 2005 to abolish these incentives.(5) Individuals were left in dominant positions within individual financial institutions for too long a period. There were stunning failures of corporate governance and not enough turn-around in management personnel in those institutions. (6) There was a failure to impose international stability risk assessments and protection systems which took account of the interaction of global financial systems. This was not a peculiarly Irish problem, as recent events in Europe have demonstrated.(7) There was a failure to implement more intensive compliance regulation of those financial institutions which were too big to fail. I believe that auditors, regulators and governments all share part of this responsibility. (8) The higher capital requirements on speculative property loans in Irish banks which were introduced at the start of 2007 should have been imposed many years earlier before the rapid escalation in property lending took place.

These lessons have now been fully taken on board and policies implemented to ensure that a banking crisis can never happen again in Ireland. While Government shares responsibility for its role in these mistakes, it is noteworthy that many of the strongest critics of the Government were silent on these issues prior to the crisis and indeed were proposing measures such as the radical reduction or abolition of stamp duty which would have made the position much worse.

 

Fifth, the decisions of policymakers. I know that the Government's response to the banking crisis has not been popular. I am, however, confident that the right calls have consistently been made to deal with this distressing situation.The Government response to the banking crisis has involved the following ten actions:1. Guarantee of Irish Banking Liabilities2. Establishment of NAMA3. Appointment of a New Governor of the Central Bank and a New Financial Regulator4. Integration of New Central Banking Commission and Financial Regulator Structure5. Setting of Higher Capital Requirements for Irish Banks6. Requirement of Banks to Increase Lending to Enterprise Sector7. Restriction on Bankers Pay8. Supporting the Gardai and the legal system in their independent investigation and prosecution of any criminal actions in the banking sector9. Introduction of a radically changed Regulatory System10. New Rules on Bank Directors and Corporate Governance

The IMF's assessment in June of 2009 indicated that the Irish Government have introduced the right policy framework. They stated explicitly that:"The authorities have responded in the right manner....... on the two aspects that matter the most, the financial sector and fiscal consolidation. The essential policy framework within which the authorities are operating are the right ones".

The OECD has also indicated that Ireland is making the right policy adjustments. Angel Gurria, the OECD Secretary General, has pointed out that "policy adjustment in Ireland has already begun and indeed is well advanced compared with some countries. The immediate priority was to stabilise the banking system. NAMA is designed to restore the banking system to health by cleaning up their balance sheets"..... He pointed out that "if the right policy decisions continue to be taken, Ireland will be on the path to a more sustainable and ultimately stronger economy".

1. Guarantee of Irish Banking LiabilitiesI have absolutely no doubt that providing an extensive guarantee of the Irish banking liability was necessary for the future of the economy. We wish that we never had to take this action. We also would have liked to have the option of having more time to discuss this with other governments within the EU but this was not an option.

Given the scale and speed of the emerging crisis in September 2008, Governments throughout Europe and the US were forced to take swift action to support their banking sector. Some actions were implemented secretly but in Ireland the Government decided to take the necessary step of providing a full guarantee to the banking sector based on careful consideration of the advice from the Central Bank and Financial Services Authority and the Department of Finance and their advisors.

This emergency measure had to be taken quickly but was not taken lightly and was not taken to protect the interests of banks or their shareholders. It was taken to safeguard the Irish economy. The guarantee explicitly did not cover shareholders in the financial institutions from the risks. Indeed, subsequently most of the shareholder funds have been lost. The

Government also decided not to provide the guarantee for free and detailed terms and conditions and fees were imposed on the banks. The Government also decided to impose new scrutiny and oversight of the institutions subject to the Guarantee.

This guarantee was subsequently positively received by international financial markets and many of the governments in other OECD countries followed the Irish example. The Irish guarantee initiative was intended to give confidence to depositors and wholesale lenders so that they would continue to transact their business with Irish initiatives.

With the benefit of what we know now, I am more convinced than ever that the Guarantee was the correct response. My views are as follows:

(i) Providing a guarantee on Irish bank deposits given the scale of the international crisis, was a decisive, courageous and innovative response which was by far the best decision for Ireland's long term economic interests. (ii) The inclusion of bondholders in the guarantee has also been debated, but I believe this was the correct decision. Primary bondholders in Irish legislation had to be treated the same as other depositors to banks. For the non-secured bondholders, I accept there was a judgement to be made. It is important to note that these only represent 3.3% of the funds guaranteed at the time and in most cases deals have been done to purchase these bonds at reduced prices with the benefit for the Irish financial system. (iii) Some have criticised the inclusion of Anglo in the guarantee. Excluding Anglo would have undermined the guarantee and resulted in contagion for other banks in Ireland. I believe including Anglo was appropriate. There has been debate on the merits of nationalising Anglo on the night of the guarantee given that we subsequently had to nationalise that bank. The cost to the State would, however, have been the same, or very similar to what occurred, if Anglo was nationalised on the night of the guarantee or subsequently. In my view, there was never a sensible option of not guaranteeing depositors in Anglo without risking contagion to the wider banking sector and without risking a run on the banks.

2. Establishment of NAMA

The decision to establish NAMA will also prove to be the correct decision to respond to the scale of the banking crisis. Despite what some have alleged, we have been careful to ensure that a rigorous approach has been taken to property values and risk sharing.

The IMF Assistant Director, in their independent assessment of our actions, welcomed the actions taken to safeguard financial stability and explicitly supported the decision to establish NAMA. The reason IMF Directors did so was because this was the best option to deal with the mess in the banking sector.

Put simply, the decision to establish NAMA was crucial to ensuring that there was an acceptance of the reality of the underlying losses. It was also necessary to prevent the continuation of a zombie banking system which would have retarded Irish growth for a decade.

One of the main aims of NAMA is to ensure that banks are freed of distressed assets and can access the cash to lend on to businesses and households.

We are achieving this by replacing property related loans with Irish Government bonds which will strengthen the balance sheets of the banks.

This will increase their capacity to access liquidity in the financial markets and make them better able to lend and support all businesses, particularly those viable small and medium sized Irish businesses that provide so much employment in the Irish economy.

3. Appointment of a New Governor of the Central Bank and a New Financial RegulatorThe selection by the Government of new people for appointment as Governor of the Central Bank and Financial Regulator has been an important element in restoring confidence in the Irish financial system.

It is important to emphasise that while Governments can and will set the overall legislative basis for regulation, they should never attempt political interference to either weaken or otherwise influence regulatory decisions.

The new Governor and Financial Regulator will continue to have the support of my Government in exercising their independent statutory responsibilities as set by the Oireachtas. If they feel at any stage that additional legislative powers are required, I know this will be given support by my Government.

4. Integration of New Central Banking Commission and Financial Regulatory StructureLast year, I indicated my decision to integrate into a new Central Banking Commission the functions of the Central Bank and the Financial Regulators. The new structure is a significant change and is aligned with the experience of Canada which has been the only major country to have avoided a banking crisis. This structure signals the need for the primacy of the Central Bank on financial stability issues. The resultant Central Bank Reform Bill 2010 will, I believe, create the foundations for the ongoing reform of the banking sector and will create a single, fully-integrated Central Bank. It will also enhance accountability to the Oireachtas of its regulatory performance while maintaining its independence.

5. Setting of Higher Capital Requirements for Irish BanksThe establishment of much higher capital requirements for Irish banking is a decision which I strongly support, but this is not a matter for politicians to try and second guess. I, however, support the decision of the Regulator to require an 8% core tier 1 capital requirement and significantly 7% of this must be equity.

Ireland is now showing clear leadership in setting much higher capital requirements than other countries. I believe this will be subsequently followed by national requirements in other countries. I also believe the Irish lead will be subsequently reflected in international and European decisions.

6. Requirements of Banks to Increase Lending to Enterprise SectorThe Government has taken steps to require the Banks covered by the Guarantee to increase lending to the enterprise sector. Specifically this involves the Government imposing lending targets on AIB and Bank of Ireland involving making not less than €3 billion each for new or increased credit facilities for SMEs in 2010 and 2011.

We have also set up an independent credit review system to ensure that what the banks are saying is in line with the reality on the ground. I am, however, not satisfied that there is yet

sufficient supply of credit to viable businesses but, this Government is determined that the banks keep their side of the bargain.

There have been reported instances of many small businesses being 'stone-walled' when it comes to getting credit to keep going or to expand. That won't be tolerated and the banks can't show scant regard for Irish taxpayers and the Government by not lending to viable small and medium-sized enterprises.

I have asked the Minister for Enterprise, Trade and Innovation, Batt O'Keeffe TD, to meet with small business-owners throughout the country over the coming weeks to hear their first-hand accounts of difficulties in accessing credit. The Minister will also be bringing in bank representatives to his Department to ascertain what they are doing for viable but vulnerable businesses who continue to be adversely affected by the failure to provide adequate credit at the present time.

Our position is simple if the banks are not working for SMEs, then it is our responsibility as a Government to make sure that they do. If further action is required, we will act urgently and decisively on this matter.

 

7. Restrictions on Bankers PayThe levels of pay, pensions and related benefits to banks in Ireland and internationally was patently unjustified and excessive. The restrictions on bankers pay taken by the Government represented a dramatic reduction in the ridiculous packages secured within the sector.

While it was the responsibilities of the remuneration committees of the boards of directors to set these pay levels, this could not be let continue in a world where the State was supporting the very viability of these institutions.

This will need to be kept under ongoing investigation. I believe that restrictions on the pay of top bankers should remain in place. We will also ensure that pensions or other mechanisms are not used to subvert the pay restrictions.

8. Supporting the Gardai and the Legal SystemAs Taoiseach, I am often asked to comment on non-compliance practices in individual financial institutions or concerning named individuals. While privately I have been deeply angered about certain developments, my public comments have often not been able to reflect this. This is because I and the Government strongly support the independence of the Gardai and the legal system.

As Taoiseach, I am determined that no comments which I make will in any way hamper the role of the Gardai or the judiciary or other regulatory investigations.

9. Radically Changed Regulatory SystemsA radically changed regulatory system has now been introduced and it has the full support of my Government. It involves much more intensive investigation of practices in banks, the establishment of a strengthened risk assessment framework and strong controls on the activities of the individual financial institutions. This is fit for purpose in the light of the risks which the sector faces and the losses which have been incurred.

10. New Rules on Bank Directors Corporate GovernanceThe Financial Regulator has recently announced new corporate governance rules. This involves a clear separation between the roles of chairman and chief executive and new standards relating to the composition of boards of directors.

 

Sixth, the lessons learned. The dramatic and unprecedented turmoil and near collapse in the Irish banking sector raises a number of important lessons which must be learned and which I hope will guide policy in Ireland for the future. These key lessons are as follows:

The regulation and supervisory rules for the financial institutions must have a much greater international element which would prevent contagion from developments in one country and prevent the need for small countries to take unilateral actions in times of crisis.The regulation of banks in Ireland must reflect more fundamentally the absorptive capacity of the banks to respond to losses arising not only from any unexpected downturn in the Irish economy but from the contagion impact of any international financial crises.Bankers in institutions of systemic importance must never again be allowed to set their remuneration policies in a manner which incentivises excessive risk-taking and short-term gain. A cap on bankers' pay and pensions must remain for as long as is necessary to ensure the long term sustainability of any expected financial gains.The Central Bank's stability role must be given absolute primacy in the regulation of the financial sector. The new integrated Central Bank/regulatory organisation is the best way to achieve this.Governments must never again intervene in property markets via tax incentives or other measures to a degree which may make possible property bubbles. The banking crisis has done untold damage to the country. The full rigour of the law must be independently and vigorously implemented where applicable. This means that any banker who has engaged in fraud or other criminal actions which are subject to custodial sentence can expect the Gardai and the Courts to pursue legitimate convictions with determination. There is a need for much more intensive and risk based supervision of financial institutions and the new regulatory system which has been put in place has the full support of my Government.The capital requirements on Irish banks must be set to ensure that the need for the exceptional support of the Irish State is never again required. For this reason, I fully support the new capital requirements imposed on the Irish banking sector which I believe are among the highest in the world. There is also a need for a radical change in culture in Irish banks. Regulation, and legislation underpinned by the Gardai, and other regulatory agencies must effectively police this on an ongoing basis. The trust that was given to the banks was misplaced and it will take many years for banks to re-earn that trust.We must also ensure that there are new standards of corporate governance including limits on the timescale which any chief executive or chairman can serve in a bank. If legislation is needed to achieve this it will be introduced.

In conclusion, I believe that unacceptable levels of non compliance and excessive risk taking took place in the Irish banking system and that grave mistakes were made within the management of individual banks. This was facilitated by insufficient international and Irish regulation which gave too much responsibility to the banks and which did not implement

adequate risk based frameworks. The Government in 2006 took decisive and unpopular action to reduce the vulnerabilities of the Irish economy and without this action we may not have been in a position to stabilise the system.

The actions now taken by this Government will stabilise the banking sector and provide the basis for rebuilding the Irish economy. The Government will now focus with urgency on employment and growth strategies to secure the successful future of this country.

We have learned hard lessons and have taken difficult decisions. Our economy is now emerging from recession and Ireland is strongly fighting back. If we continue on this road, we will emerge from these tough times with a renewed unity of purpose and with a nation poised to regain the momentum that we knew not long ago. I am determined to lead a government that will get us there as quickly and as wisely as possible. That is the way that together we can and will secure Ireland's future.

ENDS