Senator Barrett’s Financial Stability and Reform Bill 2013

The debate within the Seanad around Senator Sean Barrett’s private member’s bill on financial stability and reform is here. It’s well worth looking at. Some of the contributions are excellent, and I think it gives us a sense of what’s going on within policy circles as well as they types of legislative actions that might be considered by the government in the coming years around transparency and accountability.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

12 replies on “Senator Barrett’s Financial Stability and Reform Bill 2013”

This appears promnsing:

‘8.—Any affiliate or subsidiary of a credit institution, MFI, Irish
20 branch of a foreign bank or insurance entity that does not have a preexisting
arrangement with the Central Bank of Ireland for depositor
insurance shall be prohibited from receiving any assistance from the
public exchequer.

9.—Any credit institution, MFI, Irish branch of a foreign bank or
25 insurance entity that is subject to the jurisdiction of the Central Bank
of Ireland may only receive assistance from the public exchequer
following the triggering of the provisions of the Central Bank and
Credit Institutions (Resolution) Act 2011 and a decision by Dáil
Éireann supported by a super majority of 75 per cent of its members’

On my wish list is safer mortgage lending. 3.5 times gross slaray. Nonrecourse mortgage debt. Longer fixed term options available. That kind of thing.

Great Kudos to Sean (And charlie larkin his worker bee) for this the latest in a series of great initiatives. None get accepted of course because in ireland governments dont accept non government initiatives. They might at best redraft and represent as their own.
That Sean (and Charlie, with his PhD from TCD fwiw) can produce these kinds of well structured sensible bills is great. Its proof that if parliamentarians have good support they can do good work. But all too ofthen the support is purely political not skills based. A properly resourced oireachtas research and support service would work wonders.

@ BL: “A properly resourced oireachtas research and support service would work wonders”

No, it would not. Our government is an elected dictatorship. It would indeed work if the opposition parties had a real, positive input and where their efforts were incorporated rather than being junked.

@ IA: “On my wish list is safer mortgage lending. 3.5 times gross salary.”

Opps! x2 nett salary for ONE earner only is considered the MAX that is ‘safe’ (0.01 probability of default). That is, the potential borrower offers up x3 consecutive and current P60s as proof. No hinky ‘personal’ side letters.

The Golden Rule of Residential Mortgage lending is:

– 20% cash downpayment – from savings only
– proof of cash availability to settle all transaction costs
– x2 proved up nett salary/wages (or not in excess of 28% of nett earnings)
– total debt repayments, mandatory house insurance and a % contribution toward home repair fund, NOT to exceed 32% of nett.

The logic behind this is very simple (so simple it eluded most folk). The lender can spread default risk over nn,nnn mortgages, whereas the borrower is on their lonesome. Hence great prudence is required.

Volker Rule? – – Paul Volcker is the name of the former Fed chairman.

As for Brian Lucey’s point “A properly resourced oireachtas research and support service would work wonders,” like Brian Woods Snr, I would not expect that to have any impact — not because of a need for a formal distribution of power but simply racehorses cannot be made from mules.

BL has obviously not seen any improvement from the ramping up of research resources before the bust and in addition to existing secretarial services, a parliamentary assistant gofor was made available to members to handle some of the donkey-work.

Unless members of the Oireachtas have an interest in a national issue such as challenging the Government’s laundry lists of tasks that do not make a jobs strategy etc, no amount of research will change the prevailing parish-pump standard.

The transcripts of the proceedings of some of the committees, reveal much and little.

There could be an effective opposition but since 2007, how many members have made a difference in these brutal times? The poorly informed broadcast media in particular, also doesn’t help.

As for ‘transparency and accountability’, now that would be a good thing — but give it 20 years!

A classic illustration of the struggle to end the buck stops nowhere system was provided yesterday in an article in The Irish Times.

The Office of the Ombudsman , Information Commissioner & Commissioner for Environmental Information announced that it would add 180 additional bodies to its functions, including the universities.

Maybe that could be a good thing but there appears to have a striking lack of transparency when it comes to its own operations.

There are no financial details or staff level information provided via the website: the Annual Report has none and there is a statement of strategy 2013-2015 which is basically a wish list.

Maybe I missed the relevant links but if they are not available, it is poor example to others from such an office as sunlight is said to be the best disinfectant.

The key question is how many people are needed to handle complaints from 180 additional bodies?

The universities for example will also need additional staff to handle queries from the office.

The ombudsman, Emily O’Reilly’s article bizarrely did not cover this issue.

Credit to Sean Barrett for trying.

@Brian Woods Snr

Are those golden rules for mortgage lending leverage limits based on actual data (or some model of bank’s sustainability in a housing crash)? Surely simply making all future mortgages nonrecourse would give banks the incentive not to break the property market (since they would then own it)?

Why legislate for the rights of individuals to deal with skewed incentives in the financial sector?

I wonder whether without the roll of recourse mortgages, and the various crackpot securitization strategies pursued to fillet and disguise risk, could the property bubble have become such a threat to states?

@ Shay: “Surely simply making all future mortgages nonrecourse would give banks the incentive not to break the property market.”

Yes, it would tend to ‘concentrate minds’.

The idea behind the GRoMs is actual experience of res property lending. You keep the rules, you have very few defaulters. Always will be some.

And as I noted, it is the individual borrower who is most ‘at risk’ but who only purchases one, two or possibly three properties during their lifetime. A bad hiccup on their income and they are bust! The lenders on the other hand process maybe dozens of res mortgages each working day and can ‘spread risk’ over thousands of mortgages. So a few defaulters could be ‘adsorbed’, but hundreds? Thousands? That’s Sh*tsville time!

So guess who should know all about res property mortgages? It sure ain’t the borrower!

If you really get thinking about contemporary ‘money’ you realise it is used primarily, and in excessive amounts, for speculative gambling! Using financial derivatives, commodities – anything and everything that can be virtualized over the InterNet! The boyze did that with residential mortgages! Boom!

And what do folk thing ‘they’ are doing with all that QE money? Stirring their tea?

A 10% common equity ratio is pretty severe. What kind of time frame is envisaged here? The Irish banks would need a huge equity injection to reach that target unless it is done over a long period of time through retained profits. Also it may well mean extending the process of credit contraction in the Irish economy that has been going of for the last 5 years for perhaps another 10-15 years as banks hunker down.

So while the measure would have the positive long term outcome of making future bank failures much less likely, it could have huge costs in the short to medium term.

Also, there is a separate risk if a small country like Ireland was to impose much a more stringent capital adequacy regime than Basel III in isolation. Would foreign banks still want to operate here? What are the implications then for competition in the market?

I don’t want to sound dismissive of this proposed legislation because I do think in the long term we need to get to a situation whereby taxpayers are never again on the hook for private sector losses. It is a question of how do you get to that point without killing the economy in the meantime.

Limited liability is also an issue in lending. Corporations with over 100Mn Euro in whatever, should be unable to hide shareholders behind the corporate veil. The shareholders would tend to be directors …. Banking used to open only to partnerships, like auditors … no accountability breeds contempt!



I don’t think Regulators, interested parties et al fully understand the importance of what you are suggesting but to me its the big turd in the room that nobody has the balls to mention but whats really a massive issue i.e. whilst longer term nobody could have the slightest argument suggesting that bigger is always better regarding the size of Tier 1 ratios in banks however now is so clearly not that time.

Back towards the end of 2010 Prof Honohan suggested that filling the banks with capital would entice equity buyers from all angles the belief being that excess capital would trump all ills. Nonsense. Utter nonsense. I don’t have the time or the inclination to look back at exactly what I said at the time but I suggested on this site that this made zero sense to any would be buyer. Since the end of 2010 the share prices of the Irish banks have fallen by approximately 95% despite PCAR and any amount of taxpayers cash going into these blackholes and pain felt in every economic corner in the country – and still no functioning banks. Capital me arse.

It seemed clear to me at the time that recapitalising insolvent dead institutions in the hope that normalisation would resume following such an event as uttely stupid. Especially when the dogs in the street were suggesting that the mortgage disaster would frighten away any half witted investor. Time has since suggested the CBI and Messrs Eldefield and Honohan have called this wrong, as I said at the time.

I have since suggested that what we now need to do is to seek a derogation from Basel III for at least another 5 years and allow the banks gradually build their capital bases over time and following that ensure that capital is built in a way in which links the loans/deposit ratio above all other metrics thereafter. Suggesting as this paper does to have banks recapitalised to a level in which ensure they remain zoobiefied is clearly a silly policy.

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