Address by Minister for Communications, Energy and Natural Resources, Pat Rabbitte TD to the Irish Bankers Federation (IBF) National Banking Conference 16th October 2012, Shelbourne Hotel
Thank you for the opportunity to say these few words at the opening of your national Banking Conference this morning. We meet against a backdrop of almost five years of unprecedented turmoil in banking which in turn has precipitated an economic crisis of 1930s proportions. In the meantime wealth has been destroyed, bond markets damaged, public debt and unemployment are dangerously high and hardship inflicted on a great many citizens.
I don’t need to go through the developments over the past number of years in the Irish banking and financial services sector. The need for this government to support the rebuilding of the basic banking infrastructure and framework has resulted in the establishment of NAMA, amalgamations and mergers of banks, a two pillar bank strategy and massive injections of, largely, State money into the banks to recapitalise them to ratios that meet, or exceed, international standards in order to stabilise the financial system. These actions are largely historic with a capital investment of some €24bn completing that phase in July 2011.
Over the past year, we have seen stability begin to return and, hopefully, a turning point being reached. Is it possible that a turning point has been reached? Well, there are several elements that would seem to give us some hope that there has been a turn in the cycle :
1. The timetable for bank restructuring has been delivered on time
2. Deleveraging of non-core assets is being achieved ahead of target across the system as has been acknowledged by the Troika
3. Fitness and probity rules are firmly in place with top management reviews having been completed by the Central Bank
4. New management at AIB and PTSB are driving new strategies and visions for those institutions
5. Deposits at the banks have been stable and, indeed, the latest figures for the covered banks show deposits at some €153bn – higher than the June-August 2011 lows of €140bn
6. The State’s contingent liability to the banks (through the ELG or bank guarantee) continues to fall – from €102bn last December to €87bn by the end of June 2012
7. Bank of Ireland and AIB have successfully completed new capital markets transactions that have allowed some re-entry into the wholesale markets following on from the success of NTMA bond issues during the past three months
While these issues may seem more like the basics, that is what the Government and Department of Finance has needed to do in order to re-establish a foothold in the international markets and maintain the positive momentum behind the hard work that has been achieved in terms of the Programme for Government and Troika targets.
The next phase of development will be key and will determine whether the Irish banks are rebuilding people’s trust and restoring confidence to the economy.
Banks and the financial services sector will have to show that they can deliver on a number of key fronts:
Lending into the economy. While the lessons of the past number of years have been painful, banks and their management will have to ensure that they do not overshoot in terms of tightening lending criteria and drain the economy of the essential flow of funding.
The ECB have made it clear that the purpose of the various liquidity programmes such as the LTRO is to allow banks to start lending again.
Targets for SME lending were set as conditions for the capital injections and the Credit Review Office and Department of Finance are determined that those targets are met within the timetable.
Microfinance and loan guarantee programmes have been put in place to try to ‘kick start’ those sectors of the economy. The Government will continue to support initiatives in those sectors as they struggle with the domestic headwinds they face.
Notwithstanding these commitments the conviction is abroad that the SME sector is being starved of credit; the representative bodies and trade associations say as much every week. Allowing for some exaggeration – and all lobby organisations even the IBF exaggerate – securing credit lines is immensely challenging. I have to count myself amongst those who are puzzled at the low level of resort to the Credit Review Office.
The IMF August review was clear: “the banking system is not serving financing needs, including of the job-intensive SME sector” and went on to counsel that intensive financial sector reforms were necessary “to restore the banks’ ability to extend sound credit to help revive domestic demand”.
Flow of credit to the real economy is a principle government concern.
Supporting customers. The challenges that lie ahead for the banks in relation to arrears will have to be developed within the context of the extreme difficulties that genuine customers, and their families, are facing.
The Central Bank and Department of Finance initiatives around the MARS project as well as work that is being completed in the realm of the Personal Insolvency Bill will require banks to work with their customers to find equitable solutions to their financial difficulties.
This will be a difficult path for all of those concerned in this process but will require transparency, standardised approaches and co-operation between all of the parties and stakeholders.
Dealing with these issues will be the key litmus tests that will be applied to challenge of regaining public trust in the banks. The approach and engagement that the banks make will be the yardstick by which they are measured.
Being inventive. New ideas about the models of banking should be explored and developed. The public need to see that the banks are working for and listening to their customers in order to respond to needs and demands. We have the talent at the banks to develop new ways of looking at the Irish banking model.
One important example of being inventive arises in an important Programme for Government commitment within my own Department’s Energy brief – Pay-As-You-Save towards energy efficiency. PAYS is about using future energy savings to pay for upfront capital works, by creating a mechanism where people who may not be in a position to afford to upgrade their property are given the opportunity to do so through an innovative financing mechanism.
PAYS can provide the finance for retrofit activity to take place, but it requires us to think of a new way of communicating. PAYS can’t be talked of as a loan, it needs to become a new way of financing – anything else will not work; and everyone in this room needs it to work.
As much is PAYS is important to stimulating activity in the domestic sector, it is equally important that we deliver an energy saving solution to the public and commercial sectors. We have a good track record in this area, with the Better Energy Workplaces programme disbursing €11 million in 2011 to co-finance 85 projects in the public, commercial, industrial and community sectors.
I am pleased to say that we are pushing ahead on this front designing a framework that will be supported by a financing mechanism so as to trigger 20 pilot projects in 2013. But the prize is not about getting 20 projects funded, the real objective is to create the environment and structures that will allow us to attract investors to create a far bigger fund, one that will be big enough to realise the multi billion euro worth of economic activity that we know is out there.
I want to acknowledge the cooperation so far from the two main banks and I look forward to their involvement in the design of a project that will contribute to job creation as well as energy efficiency.
A fourth broad front where the banks need to deliver is in adjusting to the new paradigm. A number of the banks have gone through painful resizing programmes in order to cut their cost base with the number of staff at Irish banks going from 49,663 in 2008 to, it is estimated, 29,000 in 2013. This has, unfortunately, led to voluntary redundancies in the sector.
A remuneration review being conducted by the Department of Finance will assess new models for remuneration and compensation in the sector in order to retain the best and motivate staff in a reasonable manner.
The State, and taxpayers, are the key investors in the banks and, as the Taoiseach stated recently, we want the banks to be profitable again but in a manner that is fair, transparent, allows their employees to regain a sense of pride in working at those institutions and allows for fair pay for hard work.
Developing the international financial services sector. The strategy of successive Governments, from the Custom House Docks development in the 1980s through the establishment of the IFSC, has been a policy of promoting the international financial services sector. The Government’s IFSC Strategy identifies the key foundations for future success as:
§ a tax framework which is competitive and internationally respected, and
§ a regulatory regime which supports responsible business operations and ensures effective oversight and control.
The 21 supporting tax measures contained in Finance Act 2012 demonstrated the Government’s commitment to developing the IFSC further. The Act introduced a package of measures to further enhance the competitiveness of a number of successful sectors within the IFSC such as:
§ reducing double taxation in the corporate treasury and aircraft leasing sectors based on the 68 treaties that have been negotiated
§ providing clarity around the tax treatment of complex financial transactions in terms of stamp duty in particular
§ addressing tax issues arising for investment funds due to the UCITS IV Directive which was implemented on 1 July 2011, and
§ easing the administrative burden for business.
The emphasis on a controlled, well-regulated jurisdiction is clearly developed with new regulatory structures in place responding to an increasingly internationalised environment
However, the focus of the Irish government over the next 4 years will be on job growth in the IFSC sector. When one considers that direct employment in the industry grew by 8,500 in the 5-year period between 2003 and 2007 and has been maintained in spite of the very negative economic environment, the strategy aim of 10,000 jobs over the next 5 years is very ambitious but attainable provided the right supporting conditions are in place.
The Government Strategy identified new sector opportunities such the Green Banking initiative and Islamic Finance products. In some cases, they can be built on existing successes such as using Islamic Finance products to fund aircraft fleets. There were tax measures introduced in the Finance Act all help to underpin and develop the environment for the IFSC and allow it to adapt in a globally competitive market.
The IDA is working to develop a platform that appeals to a rapidly changing financial services industry. Indeed recent delegations to China and Singapore and Malaysia are designed to showcase Ireland, exploit opportunities and understand the nature of the challenges. Indeed on that trip, we heard back that Ireland had been chosen as a location by a Malaysian asset management firm in preference to other European locations because, while European, we were undoubtedly more international in our perspective.
Finally, in conclusion, I would like to say that we recognise that many challenges lie ahead in the domestic and international financial services sector. However, we should not forget the enviable progress that we have made so far, the shared determination to emerge from the Troika programme successfully and the ambition that your Government has to regain the standing that Ireland had worked hard to develop during the 1990s and early 2000s. The global economic outlook is fragile, but it should not dissuade us from making the changes and taking the steps that we know to be right and that set us on the road to medium term recovery and long term stability.
Many thanks for your attention and I wish you the best with the remainder of your programme today.