Wednesday, 16 January 2013
Joint Committee on Finance, Public Expenditure and Reform DebatePage of 18
[Professor Patrick Honohan:] It is no secret that the Central Bank has been concerned at the pace of both dimensions. In going well beyond what has been customary for a regulator, the Central Bank has been closely reviewing the steps being taken by banks to engage with stressed mortgage and other borrowers under what we call the mortgage arrears resolution process. Certainly the banks have ramped-up their activity here, but progress towards ensuring that unsustainable debts are appropriately restructured, while also ensuring - in a manner consistent with the code of conduct on mortgage arrears - that those currently in arrears whose circumstances should enable them to service their debts get back on schedule, is clearly far from adequate so far. There are risks on both sides here. Too lenient an approach to loan recovery would result in an intolerably heavy bill for the Exchequer and hence the taxpayer and the user of public services. On the other hand, too much reluctance to face up to reality about unsustainable debts on the part of the banks will also delay the economic recovery.
The Personal Insolvency Act, PIA, 2012 provides a welcome new route whereby distressed mortgage borrowers - especially those with multiple indebtedness - can find solutions, but it would be better for all if the banks could still get ahead of the curve and resolve the bulk of the cases without them having to go through what is still, of course, an untested process. The Central Bank will continue its intensive step-by-step engagement with the banks on this matter until we are satisfied that they have sufficient policies and procedures in place.
The introduction of the European banking union and single supervisory mechanism, SSM, has been agreed since I appeared last before the committee. The design, development and implementation of the framework for the SSM will be a key task at euro level throughout 2013.
The move towards a systematic approach to supervision, resolution and deposit protection is part of what is needed to place the euro area institutional structure on a more robust basis, building market and public confidence across the Union. We in Ireland recognise, perhaps better than others, the value of filling these institutional gaps, but it must be done well. To be successful, it is important that the new mechanism has a best practice supervisory toolkit, effective and efficient decision-making procedures, a top notch risk-assessment framework and a robust jointly-shared supervisory culture. New resolution rules, and particularly important in Ireland's case the potential use of ESM direct recapitalisation, need to come into full operation and be ready for use by the SSM to ensure the success of the project. To all of this, the Central Bank will continue to contribute, not least during the six months of the Presidency.
As far as supervision is concerned, greater distance between supervisors and the banks they regulate can help improve the capacity for challenge and ensure a broader, more detached perspective on issues. At the same time, local knowledge is equally important. Balancing these two dimensions will be a key part of the new regime.
While many details remain to be determined, it is clear that much of the supervisory work will still be delegated in practice to national supervisors so that the work we have been doing in Ireland to strengthen the national supervisory system will remain equally relevant for the period ahead. In addition, it should not be forgotten that the current proposals only refer to banks, and by far the largest part of the national supervisory and regulatory regime relates to other types of financial firms.
My last attendance at this committee was in March 2012 and was focused on the issue of that month's instalment payment on IBRC's promissory notes. As the committee will recall, an interim solution was applied to that instalment, which was effectively settled with a long-term Government bond rather than cash. While this was not altogether an ideal solution from anyone's point of view, seeking a non-cash solution for that instalment was a sound tactic for the Government, embarking as it was on the larger question of rearranging the duration and terms of the overall Central Bank indebtedness arising out of the failure of Anglo Irish Bank and INBS and the payment of their creditors.
Since then, there has been an intensive process of discussion and negotiation on this matter, which is one of the two main thrusts of the Government's policy to have a euro area review of the overall indebtedness arising out of the banking crisis. There is considerable goodwill from all interlocutors in this process. Nevertheless, it has not been easy to find a generally acceptable solution. Taking into account both the statutory position and wider policy stance of the ECB, an initiative of this type will be novel and, as such, challenging. Using our knowledge of central banking law and practice, we have been working carefully to build understanding and confidence around a set of proposed transactions designed to deliver for Ireland, while not taking other decision makers too far out of their comfort zone. The ECB is an organisation that seeks to proceed as far as possible by consensus, and it is not surprising that this work has been taking quite a while. In fact, what we have designed from our side is, I believe, largely in the interests of the euro system as a whole. On work in progress, I have nothing to add today to what has already been said by the Minister for Finance about the prospects and timing of the conclusion to these discussions. I am happy to take any questions the committee might have.
Chairman: I thank Professor Honohan. Given there is a fairly packed committee this afternoon, I would propose that we take the first round of questions in batches of ten minutes if that is agreeable and depending on how that is proceeding, in five to six minute batches thereafter.
Before I call on the first speaker, in light of Professor Honohan's comments on the Personal Insolvency Act 2012, his colleague in the Central Bank, Ms Fiona Muldoon, made strong commentary on how the banks themselves were engaging with mortgage debt prior to the passing of the legislation. Now that the insolvency legislation has been passed, one observational difficulty there might be is that with the deferment process that was there prior to the insolvency legislation, the ongoing deferment of problems was making difficulties in some situations even worse where compound debt was merely being added up on top of compound debt. The intention of the insolvency legislation is that it would be seen, for those who are in what might be described as an unrescuable situation or for whom if they were left in their situation it would merely become worse, as an opportunity of getting out of that level of burden. How will the Central Bank set out to monitor how the banks will progressively and positively engage with that legislation?
Professor Patrick Honohan: Our view on the legislation, as I mentioned, is favourable. It is needed. Certainly, in some cases it is definitely too complex for one bank to work on. We think the banks should still be doing the engagement with the customers who are in difficulty to sort them out before they need to have recourse to this elaborate procedure. In fact, as the committee will be aware, the legislation provides, speaking loosely, that there has to have been a six-month engagement period between the bank and the borrower and that is to allow both of them to sort the matter out.
Chairman: On Saturday morning last I had two constituents in my office who now are aware that the insolvency legislation has passed. Both of them bought apartments approximately five or six years ago for in the region of €300,000 that are probably, at best, worth €125,000. They have not been able to service the mortgages on those premises because they have lost their jobs and because of other circumstances and they are now in a situation where continuing to reside in these properties is making a bad situation worse. The monitoring, evaluation and reporting plan, MERP, for them was only a deferment or a stay of execution. What they want to do is get out of that property in such a way that they do not have legacy debt remaining in it, and that is what people would hope to see as a result of the insolvency legislation. My question to the Governor, which is indirectly with regard to how the banks engage with this, is what will the Central Bank be doing to monitor this and create some level of accountability with the banking sector in this regard.
Professor Patrick Honohan: I would reiterate it is neither our intention nor the design of the current regime to only kick the can down the road and make temporary arrangements. We have not been satisfied with the amount of reliance on temporary arrangements for situations which certainly require permanent loan modifications. This is all within the banks' capacity. We are trying to ensure that the banks have the in-house capacity and the policies to deliver solutions which are as good as the solutions that would be achieved under the PIA.
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