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26 January 2010 - Statement by Dr Martin Mansergh TD, Minister of State at the Department of Finance, to Seanad Éireann
I welcome the opportunity to speak to the Seanad this evening on the Government decision last week to establish a framework for a comprehensive investigation into the causes of the systemic failures in the Irish banking sector which culminated in the need for the State intervention in the sector.
The Government has taken this decision in recognition of the public expectation that there be a full examination of what went wrong in our banking system. The mistakes that were made have required the Government to introduce the Bank Guarantee Scheme in September 2008 and to make some very significant interventions since then to ensure financial stability. These measures include the recapitalisation of our two biggest banks, Allied Irish Banks and Bank of Ireland, the nationalisation and recapitalisation of Anglo Irish Bank; the establishment of the National Asset Management Agency and the recent introduction of the Eligible Liabilities Guarantee Scheme.
The proper functioning of the banking system is critical to the economy and therefore must be protected by the Government. In all the steps we have taken as a Government, our overriding objective has been to maintain a functioning banking system that will ensure a flow of credit to viable businesses and households in this economy.
We are all aware that the global international crisis has created extreme stress for the financial system worldwide. The drying-up of funding in international credit markets and the huge write-downs of securitised assets has generated a financial shock which has resulted in the most negative economic conditions since World War II.
Ireland’s exposure to the sharp deterioration in international financial conditions has been significantly exacerbated by practices which failed to address unrestricted credit growth in the Irish banking system. We know that this credit growth was facilitated by access to wholesale financial markets with no exchange rate risk and low interest rates and was both driven by and facilitated an unprecedented property boom and an unsustainable increase property development lending.
The international context provides only a partial explanation. The State has been required to pour very significant, scarce resources into our banks arising from decisions that were made specifically by Irish banks over a number of years. Therefore, it is essential that we learn the lessons of our recent experiences as we set about the task of refashioning our banking system to restore trust in that system and to enable it to perform its proper role in meeting needs of the economy.
Government Decision on framework for a banking inquiry
The Government’s framework for inquiry will have two stages.
First, the Government will commission two separate reports – one from the Governor of the Central Bank on the performance of the functions of the Central Bank and the Financial Regulator and the second from an independent ‘wise’ man or woman with relevant expertise to conduct a preliminary investigation into the recent crisis in our banking system and to inform the future management and regulation of the sector. These reports will also consider the international, social and macro-economic policy environment which provided the context for the recent crisis. Both reports are to be completed by the end of May this year and laid before the Houses shortly thereafter.
The second stage of the inquiry will be the establishment of a Statutory Commission of Investigation which will be chaired by a recognised expert or experts of high standing and reputation. The Terms of Reference for this Commission will be informed by the conclusions of the two preliminary reports. The aim will be for the Commission to complete its work by the end of this year. Its report will then be laid before the Oireachtas for further consideration and action by an appropriate Oireachtas Committee.
These reviews will build on important work being done at international level. Over recent months substantial analysis of the failures of the banking sector has been undertaken elsewhere. The analysis to be commissioned by the Government will complement and build upon, for example, the European Commission’s High Level Group on Cross-Border Financial Supervision (the de Larosière report) and the UK Financial Services Authority’s Turner Report. These reports have recommended an extensive programme of reform of financial regulation at EU and international level which is now being put in place. These reforms will make a major contribution to underpinning the stability of the financial system both in Ireland and the EU in the future.
The Commission of Investigation will examine and report on the causes of the systemic failures such as corporate strategy, governance and risk management in the Irish banking sector. The terms of reference for the statutory inquiry will be shaped by the conclusions of the two preliminary investigations and in consultation with the Oireachtas. But there are clearly a number of broad themes that ought to be examined thoroughly. These include:
- the performance of individual banks and bank directors where wrongdoing and lax practices have contributed considerably to the crisis;
- the performance and structure of the banking system generally;
- the performance of the regulatory and Central Bank systems; and
- the response of the relevant Government Departments and agencies, including the linkage between the banking crisis and overall economic management.
The two preliminary reviews will prepare the ground for the formal inquiry and ensure that it is effective and efficient.
Role of the Oireachtas
There was extensive debate in the lower house last week on the appropriate role for the Oireachtas. For reasons that the Government has already set out, a Committee of the Oireachtas is not best equipped to conduct an inquiry or investigation of this nature:
- unlike the Public Accounts Committee DIRT Inquiry, the issues in the banking situation are significantly more complex and will require a greater range of expertise; indeed the PAC itself was able to draw upon a comprehensive investigation into the DIRT issue by the Comptroller and Auditor General;
- in addition, the issues involved continue to be ‘current’ issues, rather than issues simply of the recent and more medium-term past, and that Members of these Houses continue to be engaged in debate on these issues.
There could be some mitigation of these effects by confining the remit of the inquiry, but this would clearly not satisfy the need for a comprehensive investigation of all of the relevant issues. The advice the Government has received from the Attorney General is that such an investigation would also require legislation following the Supreme Court judgment relating to the Abbeylara inquiry.
Notwithstanding this, an Oireachtas Committee will have a vital function in this process through:
- assisting in the formulation of appropriate terms of reference with regard to where the inquiry goes at the conclusion of the scoping exercise; and
- exercising its constitutional role of examining matters of public policy arising from the findings of the statutory inquiry.
Specifically, the Oireachtas will be involved at each stage of the planned inquiry process:
- an appropriate Oireachtas Committee will meet both the Governor and the independent expert at the outset of their work to be briefed on the members’ priorities for investigation;
- the two preliminary reports, when completed, will be laid before the Houses of the Oireachtas and the Oireachtas Committee will be invited to consider the findings of the reports;
- the terms of reference and draft Government Order to establish the statutory Commission of Investigation will be laid before the Oireachtas; and
- the report of the Commission of Investigation will, when completed, be laid before the Oireachtas for further consideration by the Committee. It is open to the Committee to hold public hearings on the Report.
Governor’s comments of role of Oireachtas
It is important in this context to underline a point which is relevant to the debate on the role of the Oireachtas in this inquiry. The Governor of the Central Bank, in his appearance before the Joint Oireachtas Committee on Economic Regulatory Affairs at the end of last year, said that the banking crisis was bigger and more complicated than one that could be accommodated by an Oireachtas inquiry.
He went on the say the question would not be sufficiently answered by a judicial inquiry because it is not simply a matter of establishing the nature of what happened and the sequence of events; that an inquiry should involve experts in economics and social science, with the involvement of politicians; and he continued by stating:
"The crisis is not simply a question of discovering who did what and who knew what. Uncovering the deep roots of the crisis will require expertise and broad social scientific understanding more than merely forensic skills."
A Cathaoirleach, the Government’s agreed approach will allow for the timely completion of expert, authoritative and structured examinations of the financial crisis. It will form a comprehensive framework of investigation into the recent crisis in the banking sector, which will enable us to understand the origins of the crisis and help us to learn lessons which will inform our future management of the banking sector.
The framework will involve the Oireachtas at each stage. It will be efficient and cost-effective. Most of all, it will restore trust and confidence in our banks so that they can play their full and proper role in promoting economic recovery.
This will allow the Government to assess how lessons can be learned to inform our future management of the sector, both in relation to institutions and their management and direction and in relation to the management of risks and stability issues within the regulatory and Governmental systems.