Regulation of the State's financial institutions needs to be reformed, Minister for Finance Brian Lenihan said today. This evening, the Government motion on the recapitalisation terms relating to Allied Irish Banks and the Bank of Ireland. was passed in the Dáil.
Mr Lenihan was speaking after last night's €7 billion recapitalisation of Bank of Ireland and Allied Irish Banks and in the wake of revelations that Irish Life & Permanent had placed a €7 billion deposit with Anglo Irish Bank last year before its year end.
Speaking on radio this morning, Mr Lenihan said the reputation of Irish financial institutions had been damaged and added: "This is the real damage done in this matter. The reputational damage.
"The regulatory system badly needs reform," Mr Lenihan told RTÉ's Morning Ireland.
"We can’t rush into it but it has to be dealt with in a matter of weeks. Confidence has to be restored in the regulatory system so that international observers realise that Ireland has the robust regulatory system that maintains intensive oversight over the banks.
"Since all these matters have happened I’m satisfied that there has been a huge upping of activity at the regulator’s office," he added.
Asked about the position of senior bank chiefs, Mr Lenihan said: "In the case of the Bank of Ireland for example the chairman advised me that they are appointing a new chief executive and he will consult me about the appointment in the next few weeks.
"In the case of the board of the Bank of Ireland all the members of the court have agreed to put their positions at the disposal of the AGM at which I will have voting rights if the recapitalisation is approved at the extraordinary meeting which is coming up in a few weeks time.
"In the case of the AIB again it has always been the practice at that bank that the directors do put themselves at the disposal of the annual meeting and clearly I’ll be a shareholder there. And that’s the stage where when changes are required changes will be made."
Mr Lenihan said the international markets would be "very shocked" if they thought the Government could "directly intervene and appoint a chief executive of a bank".
"That would be a clear sign that the banks have been nationalised and I can tell the banks would have considerable funding difficulties if the impression is created internationally that I could simply ring up and dismiss a chief executive," Mr Lenihan added.
"The executives of banks are responsible to their boards, the State will now have a substantial presence on these boards and the boards are elected annual general meetings, when this arrangement is completed the state will have a substantial say at the annual meetings. That’s how I propose to exercise the substantial public interest which I will have in relation to these institutions but its important that markets understand that these institutions continue to be subject to market disciplines and not political pressures."
During the Dáil debate on recapitalistion today, Minister for the Environment John Gormley said: “I have said on several occasions in the past few months that I have been appalled by the revelations emanating from some banking establishments in Ireland - most notably from Anglo Irish Bank.”
”Let me tell you, that the latest revelations from Irish Life and Permanent and Anglo Irish Bank will result in further resignations.”
“There must be root and branch reform in the banking system. We need a general crackdown on corporate crime. In the United States white-collar criminals are led out in handcuffs. I want to see a similar regime here,” Mr Gormley said.
However, the Minister said he was now “heartened” that the affairs of Anglo Irish Bank are being investigated by the Director of Corporate Enforcement and was encouraged by the presence of two new directors at Anglo Irish - Alan Dukes and Frank Daly.
The Government had earlier agreed to Opposition demands to hold a vote at the end of the debate on bank recapitalisation.
Under the terms of the recapitalisation plan, the Government will provide €3.5 billion for each bank in return for preference shares with a fixed dividend of 8 per cent payable in cash or ordinary shares.
The plan also includes a cut in bank executives' pay, a 12-month moratorium on house repossessions and increased lending by the two financial institutions.
The Minister will appoint a quarter of the directors of each bank and will also get a quarter of ordinary voting rights at board meetings.
Mr Lenihan announced that both AIB and Bank of Ireland had accepted that the pay of senior executives will be curtailed.
Total remuneration for senior executives will be cut by at least 33 per cent, no bonuses will be paid for these executives and no salary increases will be made for 2008 and 2009. Fees to non-executive directors will be cut by at least 25 per cent. However, the Government is not insisting on any immediate resignations from the banks’ boards or senior management in the deal.
The two banks have reconfirmed their commitment last December to increase lending capacity to small and medium-sized businesses by 10 per cent and to increase loans to first-time buyers by 30 per cent in 2009.
Mr Lenihan said the Government would complete “a short, sharp due diligence” of the banks before investing the €7 billion, which will come from the National Pension Reserve Fund and borrowings.
Meanwhile, Mortgage holders have secured a 12-month window under the recapitalisation proposals before Allied Irish Bank or Bank of Ireland will take legal action over arrears – but only for their main home.
Fine Gael finance spokesman, Richard Bruton described the plan as “a €7 billion gamble on the wrong horse”.
Labour Party deputy leader Joan Burton said the plan was a “missed opportunity” and accused the Government of allowing the banks to dictate the terms.
Like Mr Bruton, she was critical of the level of reductions in the pay packages of the banks’ most senior executives. She also expressed disappointment that only a 12-month conditional moratorium would be applied to home repossession, not the two years sought by Labour.
Sinn Féin’s spokesman on finance Arthur Morgan said that the terms agreed including the moratorium on home possession were tokenistic gestures. “Sinn Féin feels that executives who received bonuses over the last three years should be forced to give them back,” he said.