Minister for Finance Brian Lenihan has defended the Government-backed guarantee scheme to support the banking sector and has insisted the right balance is being struck in terms of the cost to the banks and the State’s intervention in the sector.
Mr Lenihan said he believed the Government decision to guarantee the liabilities of the banks had “injected a lot of confidence into the Irish banking sector”.
“There is far more liquidity, far more money in the banking system and it has assisted in generating confidence in the banks and that is very important,” he said.
He rejected criticism of the scheme by Fine Gael finance spokesman Richard Bruton, who said he believed the €1 billion cost of the scheme to the banks was too low. Mr Bruton also expressed concern about the mechanism by which State-approved directors would be appointed to the boards of the banks.
Speaking on RTÉ's Morning Ireland,Mr Bruton said it was not clear to him that in the event of a conflict between the interests of the institution concerned and those of the taxpayer, that the director would have the taxpayers' interest at heart.
“It was supposed to be a commercial deal, but this calculation is based on the extra interest rate that the State will pay on its borrowing."
“The truth is that the taxpayer is bearing a risk that is worth much more than that and that risk exposure isn’t being reflected in the charge. The banks are getting much cheaper money as a result of having a State guarantee and I think we have an entitlement to expect that the taxpayer would get cover for that.”
He said the Government had worked out the scheme on “a very minimum” charge basis and that this did not cover the taxpayer for the risk involved.
“And we were told from the outset that the taxpayer is not going to be left carrying the can here,” he said.
Mr Lenihan insisted the taxpayer would not be left “carrying the can”.
He said the €1 billion cost was “more than 10 per cent of the profits of all the Irish banks put together in the last year” and more than 10 per cent of the total value of the banks on the stock exchanges.
“The Government has a very difficult balance to strike in arriving at a final price,” he said.
“Clearly, in current world conditions were you to charge the total commercial price for a guarantee, no bank could pay it – that’s the reality of the prevailing conditions in the banking world and governments all over Europe are introducing guarantees of this type at present – there’s nothing unusual about what’s happening in Ireland because we have to generate that confidence in the banking system.”
Mr Lenihan said he agreed that the issue of the Government appointing a director to the boards was “difficult to work out” because, ultimately, a director had to act in the best interest of an institution.
“What the scheme provides is that I can constitute a panel of people who I believe in the public interest should be on these boards,” he said.
He said the Government had taken “huge powers of supervision over the banks in this scheme”.
“It’s not just a matter of the pricing mechanism – it’s also a question of the degree of control we can now exert over the banks in relation to lending, borrowing, imposition of directors, credit control committees.”
He said he welcomed Fine Gael’s overall support for the scheme.
“It’s very important that the Government acts responsibly here.”
The bank officials' union IBOA said the Credit Institutions (Financial Support) Scheme offered "many real opportunities to make a decisive and positive shift in the current culture within the banking sector in Ireland in the wider economic and social interest”.
General secretary Larry Broderick said the union hoped the Government would follow through on these opportunities. But he said the scheme should go further and make provision for the appointment of employee representatives to the boards of the banks.
“A number of provisions in the scheme could, if applied in a positive fashion, significantly improve corporate governance and executive accountability among the various institutions and contribute to a return to what might be called the traditional values of prudence, integrity and long-term stability," he said.
“While the scheme appears to be a step in the right direction, we believe it should go further by making provision for employee representatives on the boards of these institutions. With the inclusion of Government nominees on the boards, the only stakeholders who will not be represented are ordinary staff and customers."
Mr Broderick said it was also important in the current uncertain climate that employees receive "firm assurances that their jobs, terms and conditions will be protected and that they will not be scapegoated by either employers or Government".