Ciarán Lynch (Cork South Central, Labour)
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I welcome everyone to the 14th public hearing of the Joint Committee of Inquiry into the Banking Crisis. During our sessions this week, we will hear from a number of witnesses on the theme of relationships between state authorities, political parties, elected representatives, supervisory authorities, banking institutions and the property sector. Later this morning, we will hear from Professor Niamh Hardiman on systems of governance. However, at our first session this morning, we will hear from Professor David Farrell, a professor of politics at UCD, to discuss the issue of public policy in parliamentary democracies. He is a member of the Royal Irish Academy and a specialist in the study of parties, elections, electoral systems and Members of Parliament. His current research focuses on the role of deliberation in constitutional reform processes. In 2012, he was elected president of the Political Studies Association of Ireland. In 2013, he was elected speaker of the council of the European Consortium for Political Research. He is founding co-editor of the publication Party Politics. Prior to his move to Dublin, he was professor and head of social sciences at the University of Manchester. He is very welcome to the inquiry this morning.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the Chairman to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given. As the witness has been informed previously, the committee is asking witnesses to refrain from discussing named individuals in this phase of the inquiry.

Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

I invite Professor Farrell to make his opening comments.

Professor David Farrell:

I thank the Chairman for the invitation to speak to the committee. I have been invited to speak about the role of parliament in scrutinising government. My paper has been circulated. I propose to pick out some of the main features of the paper, if that is acceptable, and I will try to keep to time. I apologise in advance if I inadvertently offend anyone in anything I say. I am not a specialist in parliamentary procedure. The members are and all of them know how this Parliament operates. I am just an academic, a theoretician. I have some knowledge of how the systems work in other countries, and that is the main reason I have been invited to contribute to the discussions. If I make mistakes in what I say about the way in which the Oireachtas operates, I apologise.

In my comments, I want to observe a general consensus, which is that the Parliament in Ireland is weaker than in most other countries. That is the context for my paper. What I want to addresses is the question of whether this might have contributed to the circumstances that gave rise to the banking crisis. I have framed the note in two parts. I want to start by giving some general ideas on what we might consider to be an "effective parliamentary democracy". I will set out the three main features of an effective parliamentary democracy and then address each of them in regard to the Irish case.

Starting with an effective parliamentary democracy, we might reasonably expect it to consist of three factors. First, the parliament should be organisationally and structurally suited to fulfilling its scrutiny role over government. What I mean is that we should see some appropriate structure both in its plenary sessions and in its committee structures. In terms of its plenary sessions, among the things one gets from the literature is that the parliament should be able to determine its own agenda, to varying degrees in collaboration with the government. However, the parliament has a big say over its own agenda. At the heart of this is a chair of the parliament who is elected by the Members of the parliament, MPs. In virtually all of the other European cases it is by a secret ballot of the MPs. Regarding the committee structure, one should see that the committees have a very major role in the legislative process. That would include, among other things, sufficient time for committee work. The features I pick out include the proportional allocation of chair positions among the parties; the election of the chairs by secret ballot of the members of the parliament; the notion that committee membership is not a right but a privilege; the notion of a well staffed and well resourced committee structure. These would be the main features of what we might expect of a well structured parliament.

Second, it is one thing to think about the parliament having control over its own agenda, but if we are to see it also operating effectively we must also think about the culture of the parliament and how it is attuned to its role as a more equal player vis-à-visthe government. The second main factor of an effective parliamentary democracy is a culture of effective parliamentary scrutiny. How this plays out in parliaments today, particularly in the last part of the last century and the first part of this century, is through its committee structure. We should see an effective use of the committee structure as the core to this. In those parliaments with effective committees there is a tendency for many of the members of those committees to take their committee role very seriously. Some even see the committee as an alternative career route to ministerial office. We see committees that follow a tight schedule of policy scrutiny, with meticulous attention to tracking the detail of the policy process, careful background research, well structured interviewing of witnesses and a philosophy of operation that specifically eschews ambulance chasing.

There is a third feature of an effective parliament. One might have a parliament that is well structured and a parliament whose members take their role very seriously, but the third link in the chain is a culture of open and transparent government. This obviously relates to a robust freedom of information regime, whistleblower legislation and the like. However, it also relates to how the government interfaces with parliament. The government and its agencies must be prepared to work with parliament in providing access to information and to key officials. Of particular relevance to the work of this committee, I would argue, is an open budgetary process and the right for parliamentarians to quiz heads of agencies and senior civil servants on policy and operational matters.

Those are the three main features of an effective parliamentary democracy. How does the Irish Parliament relate to that? As I said earlier, the first point relates to the strength of the parliament. The consensus among academics is that the Irish Parliament is one of the weakest in Europe. It is not just the academics who say it, the politicians also say it. Look at what happened in the most recent election in 2011. Every political party represented here put parliamentary reform very high on the agenda in their manifestos, so it is clear that the politicians think this. A key feature of the programme for Government of this Government is a commitment to deal with parliamentary reform. Dáil reform was also a topic that was taken up by the Constitutional Convention as one of the agenda items it chose to examine.

It is the weakness of the Oireachtas that explains why so little attention is paid to it in the three reports we have had to date on the banking crisis. Having read through the three reports in preparation for my presentation today, I was struck by the absence of attention to the Oireachtas. The only thing I could find was in the most recent, 2011, commission of investigation report which says, in passing, that one of the causes of a systemic financial crisis is likely to include a parliament that remains unaware of the mounting problems. That is the only reference I could find to the Oireachtas. Given the recent flurry of interest in Dáil reform, it would be nice to think that this issue has been resolved. There is not too much evidence that the issue of a weak Dáil has been resolved to this date, and I will be happy to discuss that matter in further detail during the questions and answers.

The second feature is the question of whether there has been sufficient scrutiny by the Oireachtas. It is one thing to talk about the weakness of the Oireachtas, which I have just outlined, but it is quite another to see to what extent the Oireachtas has been making use of its existing powers. As I outline in my document, committees already have quite substantial powers. I list them on page 4. The question is whether the committees were prepared to make sufficient use of those powers to test the veracity of the Government and other regulatory offices that were suggesting things were fine in the lead-up to the banking crisis. The second point is the lack of scrutiny by the Oireachtas and whether a culture shift is required by the Oireachtas to address that.

The third feature of an effective parliamentary democracy is open government. That relates to active engagement by the government with the parliament of the day, or Oireachtas in this case. As I set out in my report, as a Westminster democracy we follow what is found in Westminster democracies. First, there is a very tightly controlled, highly secretive budgetary process with a fixation on budgetary secrecy. That question was meant to be addressed. In the programme for Government in 2011 the Government talked about how it could open up the budget process to the full glare of public scrutiny. We have yet to see that.

The second feature in the open government agenda is the issue of the ability to question senior civil servants. The protocol followed in this country is that the Minister's word is final. Any advice that might have been provided in conflict with the decision of a Minister is not divulged, and certainly not divulged to the Parliament. In a context in which we know now, from the reports, that there were differences of opinion between Departments over the direction of economic policy leading up to the banking crisis, it should be possible for a senior civil servant to provide additional information to an Oireachtas committee on the different scenarios that might have been explored in the lead up to a decision. Arguably, it should even be permissible for a civil servant to inform the committee of areas where he or she may have been in disagreement with their Minister. That issue was raised in the Labour Party manifesto of 2011 and was included in the programme for Government: "Restrictions on the nature and extent of evidence by civil servants to Oireachtas committees will be scrapped, and replaced with new guidelines for civil servants that reflect the reality of authority delegated to them, and their personal accountability for the way it is exercised". I would hazard the argument that we get to see that.

In my main conclusion, what I draw from all of this in the period under scrutiny is that the Irish Parliament performed poorly. It lacked sufficient organisational and structural fire power to provide effective scrutiny. It lacked the political will to use what powers it did have, indicating what I call cultural shortcomings, and it was hindered by a governmental system that places great emphasis on secrecy, particularly in its dealings regarding budgetary matters. There is little evidence to this day that those matters have been resolved. My overall argument is that if the Parliament has sinned in any regard relating to the origins of the banking inquiry, it is more in respect of sins of omission than sins of commission.

Ciarán Lynch (Cork South Central, Labour)
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Thank you. In the full text of the statement you presented to the committee you refer on a number of occasions to the culture of the Oireachtas and how this may have impacted on the effectiveness of the Oireachtas in providing oversight of the actions of the Government and the various agencies under its direction. How would you characterise this culture and what mechanisms do you think should or could be employed to develop a culture which supports more effective and deeper scrutiny in regard to both the status of the Government and the Oireachtas in the future?

Professor David Farrell:

It is a fundamental question, from my area of the world. There is a need for some dramatic change in how our Parliament operates. It would be a mistake to suggest there are one or two magic bullets that will fix things.

What we need is a fundamental overhaul of how the Oireachtas operates and the Government relates to the Oireachtas. It is only by way of a fundamental overhaul that a cultural shift might be realised. If only one or two things are changed, the culture of how the process operates will not change. There is a need to change how the whole system operates. In effect, I am suggesting issues such as what it is that motivates a Member of Parliament to be an active member of a committee need to be examined. There is no doubt that this committee is a model of good practice and that its members take their role very seriously, for understandable reasons, given the subject matter of its deliberations. Having appeared before and observed other committees, I argue that, in comparison with committees I have observed in other countries, there is a need for reflection on how committee work in this system is done. While it is largely about changing the structures, it is also about changing how members treat their committee role.

Ciarán Lynch (Cork South Central, Labour)
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Before I call Deputy Pearse Doherty, in his written opening statement and oral commentary to the committee Professor Farrell said the failures of parliamentary practice in terms of oversight were more sins of omission. Perhaps he might elaborate further on this? Given that oversight of the actions of the Government is a central role of the Oireachtas, what is Professor Farrell's view of the importance of this role in the context of the banking crisis?

Professor David Farrell:

Obviously, I do not know the details of the banking crisis in nearly as much detail as members of the committee. I did not even live in Ireland during those years, but based on what I have learned from the banking reports thus far, there is a general sense that regulatory authorities of varying types all the way down to government took their eye off the ball. If government, through all of these regulatory authorities, can be accused of having taken its eye off the ball, it is pretty safe to say the Oireachtas also took its eye off the ball.

Ciarán Lynch (Cork South Central, Labour)
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Perhaps Professor Farrell might elaborate further.

Professor David Farrell:

There is no evidence that I have been able to find of any committee within the Oireachtas at any stage leading up to the banking crisis seriously testing the veracity of arguments that everything was all right. There were individuals who in the lead-up to the banking crisis were pointing to problems, but there is no sense that the Oireachtas or its committees were tuned into this.

Ciarán Lynch (Cork South Central, Labour)
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Did Professor Farrell note a change in attitude and behaviour in that regard post-2007 and 2008 or post-2011?

Professor David Farrell:

I cannot say I have noted any change in that behaviour.

Pearse Doherty (Donegal South West, Sinn Fein)
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Cuirim fáilte roimh an tUasal Farrell chuig an fiosrúchán seo. Professor Farrell has referred in his oral evidence to a weak Parliament and stated he seeks to address the issue of if this contributed to the banking crisis. Did it contribute to it?

Professor David Farrell:

That is a nicely framed question. The answer is it did. Like all other agencies with which the committee is dealing in the context of its hearings, it contributed in the sense that, as I said, it took its eye off the ball. If at the time of the banking crisis the committee structure had been closer to that which was in place in the Scandinavian countries and if the budgetary process here had been closer to that in the newer east European democracies, which have a powerful budgetary office under the control of Parliament that scrutinises in close detail the assumptions underlying a government's budgetary policies and holds it to account, there could be grounds for saying the Oireachtas had done its best. The problem is that was not the case. We did not have the proper structures in place and, as I suggest in my paper, the structures in place still do not appear to be used by any of the committees in place. In that sense, the answer is "Yes".

Pearse Doherty (Donegal South West, Sinn Fein)
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Professor Farrell went on to say this was a sin of omission. When speaking about parliamentary oversight and sins of omission, he is speaking not about the Government but the parliamentary system as a whole. Perhaps he might elaborate on who, in his view, was guilty of sins of omission in this regard.

Professor David Farrell:

The Government and the Oireachtas. The Government is held to account by the Oireachtas under the Constitution. As we know, that is a constitutional fallacy rather than the political reality. It would have been nice to have lived in a world where the Oireachtas would really have held the Government to account. Therefore, in that sense, it is to blame. Both are to blame, not one or the other.

Pearse Doherty (Donegal South West, Sinn Fein)
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In terms of the weakness of Parliament, who or what, in Professor Farrell's view, controls Parliament and is the structure of the weak Parliament a sin of omission or a sin of commission?

Professor David Farrell:

That is a good question. In that sense, one can talk about a sin of commission. There is a failure on the part of successive Governments, the current one included, to address a serious shortcoming in how government systems operate and that is the weakness of our Parliament. There has been much talk about Dáil reform, but we have yet to see serious Dáil reform. With the singular exception of pre-legislative scrutiny, there has not been serious engagement by this or previous Governments with Dáil reform. What many of us have been arguing for in terms of parliamentary reform - as I set out in passing in part of my paper - is a secretly elected Ceann Comhairle and a clear agenda for root and branch reform of how the Dáil operates, with an equivalent exercise being undertaken in the Seanad at the same time. There is a need to look at how the Dáil can have a much greater say in setting its own agenda and the allocation of its own resources, with other reforms relating to how committees are formed, including the notion that committee membership is more a privilege than a right. It should be the case, perhaps, that a Member would be appointed to no more than one committee and that committee work is viewed as a serious part of a Member's parliamentary work. There should be committee weeks in order that committee members would have the scope to get on with their committee work, quite apart from any other legislative work. There should be proper resourcing of committees and proper resourcing of the parliamentary function rather than the resourcing of individual parliamentarians. I could go on, but these are the sorts of thing that have been mentioned and bandied about and on which we have yet to see any serious engagement. In that sense, I would go along with the Deputy's question as framed in that there are some sins of commission in that regard.

Pearse Doherty (Donegal South West, Sinn Fein)
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Professor Farrell mentioned the resourcing of committees. What is his view of the competence of parliamentary and committee resources in terms of the effectiveness and independence of Parliament?

Professor David Farrell:

From what I have read, in previous times when there was talk about increasing the resources of the Oireachtas, this translated into individual Dáil Deputies being given an additional parliamentary resource by way of an additional staff member. That is the wrong way to go. The right way is to realise modern day Parliament needs an effective committee structure. Parliamentarians are parliamentarians first and foremost. They have a parliamentary role to play and should be serviced in that role. If we were starting with a blank sheet, what I would be advising - others would agree with me on this - is that resources should be given to committees. I can see that this committee is well resourced, but that should be the norm rather than the exception. The library and information service should be better resourced than is the case. As I mentioned, there should also be a budgetary office that would work to the agenda of the Oireachtas.

Pearse Doherty (Donegal South West, Sinn Fein)
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Professor Farrell mentioned in his opening statement that, on paper, at least, the committees already had pretty substantial powers to monitor and scrutinise the Government. Will he explain this further for the committee? In that regard, does he mean that limits on powers are not important in restricting the work of committees or does he believe it would be useful for committees to have additional powers?

Professor David Farrell:

I think it would be useful for a committee to have additional freedom to control its own affairs. With all due respect to the Chairman of this committee, because chairmanship and, for the most part, membership of a committee is effectively in the gift of the Government of the day this means that because the whole agenda of Parliament is controlled by the Government, the agendas of the committees are controlled by the Government. All of this needs to change. We need to move more towards a continental European consensus approach. In this regard, I am not speaking about what happens in the United States of America, rather I am speaking about the type of powerful committees in place in north European countries. It is not about giving committees additional power; it is more about giving them greater control. The Deputy is correct; as I set out in my paper, there is already quite a degree of power available to committees.

There is quite a degree of power available to committees. They can take oral and written evidence. They can send for persons and papers. They can draft recommendations for legislative change. They can engage specialists or technical knowledge. There is a list and I have only given the committee a flavour. There is sufficient power.

There is another thing in the mix. We need to change the mindset, with all due respect, of committee members and alert them to the need to take their committee role seriously. That matter needs to be addressed.

Pearse Doherty (Donegal South West, Sinn Fein)
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In regard to Mr. Farrell's observations on the structure and way committees operate, and the culture which members of the committee have, is this committee an outlier in terms of continental Europe? Are there common features that we can see in other parliamentary democracies?

Professor David Farrell:

It is not completely an outlier. My late father used to talk about how the institutions of Irish Government are more British than the British themselves. In effect, we are the personification of the Westminster democracy. I lived for 20 years in Britain and while there observed their parliamentary democracy modernise while ours stood still. That means what my father said 20 or 30 years ago is even more applicable today than when he was writing. Our parliamentary system has not kept pace with the need for change and in that sense we are moving towards being an outlier. In fairness, we are an example of a Westminster system.

On the scale of things, one has a Westminster democracy system where power lies with the government and the parliament is largely subservient to the government and the other extreme, as members will well know, is the United States of America. What is often missed, as I said earlier, is that within continental Europe and consensus democracies, there is a much closer degree of correspondence between the power of government and the power of parliament. That is where we should be going.

Pearse Doherty (Donegal South West, Sinn Fein)
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Does Professor Farrell believe that politicians have the ability to reform parliament to the degree he believes it needs to be reformed? It would mean ceding power from Government to the Oireachtas. Does he believe that is possible? Does he believe it is not possible?

Professor David Farrell:

I think it is possible but political realities of party politics lie as they do. For whomever is in government the same problem will always emerge that once one is in government one is in control of the reins of power. It is very difficult, no matter what one has said in Opposition, to follow through on that. Under the Constitution the Parliament has the right to assert its own power.

Pearse Doherty (Donegal South West, Sinn Fein)
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The professor mentioned that since 2011 there have been attempts at Dáil reform and went on to say they were little more than cosmetic. What did he mean? Why have the changes been little more than cosmetic?

Professor David Farrell:

I refer to Friday sittings, changing the names of committees, perhaps reducing some committees and turning them into sub-committees, sitting more hours and reducing the pay of parliamentarians. I am sure the Government has pleased certain audiences with that set of proposals. They will not change the power relations between the Parliament and the Government. As I said earlier, the only thing of significance I would pull out and applaud the Government for is the heads of a Bill proposal at pre-legislative stage in committee work. That is an important change. There are some serious reform proposals. They were outlined by the conventional constitution a year ago, in one of its final reports. The report was meant to be responded to by Government within four months of its receipt. It has never been responded to by the Government. If it were to be responded to, then it could go some way to addressing those issues.

Pearse Doherty (Donegal South West, Sinn Fein)
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The professor has mentioned, as he did in his opening statement, that one useful innovation has been the introduction of pre-legislative scrutiny. All of us on this committee are familiar with the way scrutiny works.

Under the terms of reference of this committee of inquiry, we can look at IBRC and its liquidation. The professor may know that the legislation to liquidate the IBRC passed all Stages of the Dáil and Seanad within 14 hours. Does he believe that is a good example of parliamentary oversight or not?

Professor David Farrell:

I cannot comment on specific cases and I have not got the expertise to really comment on specific cases.

A point that is often made is that bad legislation, if we can talk in that sense, is legislation that is rushed. I know members know that one needs time, in an ideal world, to reflect and allow differing views and voices to be raised just to test the veracity of what is being considered before the Dáil and Oireachtas of the day. That is the general argument I am making here. Democracy is really messy and somebody mentioned that it is a bit like watching sausages being made. Democracy is an extremely messy thing if done properly but it can be very inconvenient for the Government of the day. It can be very slow and expensive but that is democracy. What we have is not as good as it could be, in the regard.

Pearse Doherty (Donegal South West, Sinn Fein)
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I am not sure if the professor followed yesterday's evidence from Mr. Carswell but he told the committee the following:

Individuals who worked in the political arena afterwards took up highly paid roles representing and lobbying on behalf of the construction and financial industry. Easy and ready access to politicians brought easy and ready access to policy and decision-making that drove the growth of the property and financial sectors.

Professor David Farrell:

I do not have a particular expertise in lobbying. It is something that a colleague of mine in Dublin City University, Professor Gary Murphy, would be better able to talk to the committee about. Certainly, I understand that the current proposals under consideration to bring in a register of lobbyists, if done properly, will be an example of good practice and are to be welcomed.

Pearse Doherty (Donegal South West, Sinn Fein)
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I wish to raise the issue of the Irish budgetary process. Professor Farrell mentioned in his statement that there is a "tightly controlled, highly secretive budgetary process." Can he explain what he meant by that comment? Who benefits and does anybody benefit from such a secretive process?

Professor David Farrell:

It goes back to the Westminster tradition, the notion that it is the government's budget. Effectively, there is a default notion that it is the government's budget and, therefore, it should be kept under tight wraps until the very moment that it is released and that is the way it is done. As I tried to suggest earlier, in more consensus-based democracies, particularly in the north European cases, it is inbuilt in the DNA of politicians and civil servants who work in those systems to have an open government. Plus, there should be a much greater awareness of the underlying macroeconomic assumptions that lead towards to the budget. There should be much greater potential to scrutinise, in detail, the assumptions that lead towards what will be produced on budgetary day. As part of the mix, a budgetary office that comes under the remit of the Oireachtas is one way to address the matter. Those are the sort of areas where I suggest one could improve things.

Pearse Doherty (Donegal South West, Sinn Fein)
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The professor said that to have an effective parliamentary democracy there are three key factors and one of them is the culture of open and transparent government, a culture that is lacking in this State. In this module we are here to deal with the relationship between property, finance, politicians, developers and so on. Would a culture of open and transparent government hinder or help those relationships that the inquiry seeks to investigate?

Professor David Farrell:

I would generally argue that a culture of open government is what we need to aim for. The freedom of information legislation that is finally going through the books, after a lot of delay and prevarication, is only a very first and very early step down that road. We need to move from the notion that freedom of information is something one replies to, which is a reactive process, to something that is totally proactive. We should have as open a set of government as possible. There will be areas of limitation and security matters would be the obvious one. That aside, there is no reason the citizens of this country should not be given total access to learn who is talking to Government, why they are talking to Government, how regularly they are talking to Government and matters of that kind.

Ciarán Lynch (Cork South Central, Labour)
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I thank Deputy Doherty and Professor Farrell. I call Senator O'Keeffe, she has 15 minutes.

Susan O'Keeffe (Labour)
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Good morning, Professor Farrell. How can Parliament be an equal player with Government when the latter has a majority? That is always the crux of the matter.

Professor David Farrell:

Yes, that is the crux of the matter. Ireland is kind of unusual. As I keep saying, we are an example of a parliamentary system that operates in the Westminster tradition. Unlike most of the other cases of Westminster-type parliaments, we have a coalition tradition which means we have the makings of a consensus parliament. That is one of the abiding features of the consensus parliaments of continental Europe - a coalition accommodating an inclusive notion of government. A coalition government is comprised of several parties, hence the need to co-operate and work well. There is also a notion that at any given time one party might be in or out of government. That means there is not an adversarial us versus them. It is quite a different culture.

There is no particular reason we have to be like this. All that is required is for one of the leaders of the parties represented here to make an undertaking in a manifesto for the next election that the first acts of his or her party if it is elected to Government would be to introduce a secret ballot to elect the Ceann Comhairle and to ask the new Ceann Comhairle to examine and change the Standing Orders for the Dáil. The Government should be willing to engage seriously in allowing the Parliament of this country to have more control over its agenda. If we start down that road, we would be well on the way to a more consensus based system.

Susan O'Keeffe (Labour)
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I would like to tease out Professor Farrell's comments on the election of Ceann Comhairle. If a party has a majority in the Dáil, is it likely to agree to such arrangements? On paper I understand the argument about secret ballots as a means of aiming for an independent Ceann Comhairle, but if a party is in the majority are Members not going to vote for the person they want?

Professor David Farrell:

A game like that might be played. We have to hope Members would engage with open minds. As I noted at the outset, if we are going to change the culture of how this place operates we need to think about radical change. It has to be part of a general piece. If we are going to have a secret ballot to elect a Ceann Comhairle, it should be associated with secret ballots to elect committee Chair positions. Chairs have not been allocated proportionately to all parties represented in the House.

Ciarán Lynch (Cork South Central, Labour)
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I am hearing a beeping from a phone or iPad in the committee room. I ask that it be silenced.

Professor David Farrell:

It would be part of a general process of change. To give an example, during my time the House of Commons established a secret ballot to elect the Speaker of the House. There is no doubt that the Speaker of today is very different to those who occupied that position when I arrived in the late 1980s.

Susan O'Keeffe (Labour)
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If one takes that to the corridors of power or the Galway tent, how do political scientists account for the impact those realities have on better governance structures? It will always be the reality in any organisation in any country that conversations take place or influence is peddled in such places.

Professor David Farrell:

I would think openness and transparency has to be the mantra there. In the ideal world I have been trying to outline, whereby Parliament has a greater say than it does at present, there would also be a movement away from the notion that if the Minister needs advice it should be put on a sticky note rather than written in the margins or that the list of who visits what Ministers should not necessarily be made available to the public unless they submit freedom of information requests. The daily diary for Ministers, including who they have seen or spoken to, should simply be published on a website. We have to move away from reluctant, reactive responses to requests for information to a more proactive engagement with an open government agenda in all areas of Irish politics.

Susan O'Keeffe (Labour)
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In his testimony to the committee, Mr. Rob Wright referred to the cooling effect of freedom of information, whereby civil servants and others are reluctant to commit to writing. I accept this is a dilemma but how does one reconcile this practice with making processes more transparent and open?

Professor David Farrell:

It is also necessary to change the culture of the Civil Service. There was discussion during the 2011 election about whether senior appointments to the Civil Service should be more open in terms of recruiting people from the outside. It is only by bringing in people from outside the organisation that one effects a cultural shift. Part of this change would be the notion that a senior civil servant might be allowed to speak about when he or she disagreed with a Minister while giving evidence to a committee. I would make the argument that the notion of openness and transparency must go right across the piste.

Susan O'Keeffe (Labour)
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Is Professor Farrell saying that the culture at the time of the banking crisis could not have responded in any other way? The changes he outlined had not happened. Would a different outcome have been possible?

Professor David Farrell:

Probably not. However, as I noted earlier, Oireachtas committees might have had powers to call people in to ask them questions and test the veracity of senior Ministers' claims about how good things were. There was theoretically the potential, through the powers already available to committees, for the Oireachtas to have been more active than it actually was.

Susan O'Keeffe (Labour)
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He noted in his opening remarks that the reports do not mention the role of the Oireachtas. That probably reflects the terms of reference laid down for them. Does he wish to make an observation on the fact that the terms of reference did not include the Oireachtas?

Professor David Farrell:

I will take the Senator as correct in saying that the terms of reference would have guided the reports. That speaks to the phenomenon that our Oireachtas is very weak. The knee jerk reaction of senior policy makers is to sideline the Oireachtas. That is the nature of how politics has operated, and is still operated to this day. I was actually surprised to see a reference to the Oireachtas in the most recent report but, as I noted, it was a passing reference. The 2011 report stated in a footnote that it was not an essential feature that the Oireachtas took its eye off the ball. It speaks to the need to seriously engage with Oireachtas reform.

Susan O'Keeffe (Labour)
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Can Professor Farrell comment on the idea that the Oireachtas would not have been included in the terms of reference? When I read the first report I remarked on the absence of mention of the Oireachtas but when I checked the terms of reference I realised the producers of the report were not asked about it. Was that a deliberate decision or was the Oireachtas sidelined?

Professor David Farrell:

I am sure it was the latter. There was a lot of information to go through and it was necessary to deal with the actors who mattered. The reality is that the Oireachtas was not an actor who mattered.

Susan O'Keeffe (Labour)
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Professor Farrell spoke about restrictions on civil servants giving evidence. Section 93 of the Houses of the Oireachtas (Inquiries, Privileges and Procedures) Act 2013 removes the restriction on civil servants giving evidence to committees. Is that a mark of progress and does he expect to see civil servants coming before committees like this one?

Professor David Farrell:

I hope so. I was not aware of that change, so I am glad to be told that part of the programme for Government is seemingly being implemented. It would nice to see it in practice. It would be nice to see the first senior civil servant come before a committee to say "as I was saying to the Minister".

Susan O'Keeffe (Labour)
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The question I really want to ask pertains to the role and importance of the Civil Service. We discussed the Oireachtas and the Government, and then there is the Civil Service. How important is it in this great arrangement? Perhaps Professor Farrell would like to compare the role of the Civil Service, or perhaps its powers, with its counterparts in other countries. The public often forgets about the Civil Service, never mind sidelining the Oireachtas.

Professor David Farrell:

What I have seen in the more consensus based democracies is that senior civil servants are more visible because they are expected to speak more openly. Whether that suggests the Civil Service in this country is any weaker or less influential than in other countries I could not say. All I am trying to suggest is that there is a need for greater visibility. We need to move away from the Sir Humphreys notion of a civil servant in the background giving quiet advice but never appearing in front of the camera. If the new legislation addresses that issue, it will help but I suspect that what will really help is opening competition for senior civil servant posts in a way that we have not yet seen.

Susan O'Keeffe (Labour)
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I understand the premise of the visibility and I accept that. I am asking about the power of the Civil Service in this. If a group in a piece is invisible how much power did it wield, if any, in the debate that was undoubtedly had at the time of the banking crisis up to the point at which we all became very aware of it?

Professor David Farrell:

I do not have the expertise to comment on this.

Susan O'Keeffe (Labour)
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Since the Government took office the Oireachtas has had an oversight and petitions committee, of which I am a member. It has oversight of all the ombudsmen and takes petitions from members of the public and pursues those where it feels it is able to do so. Is this the type of reform Professor Farrell thinks would be good? How would he qualify it?

Professor David Farrell:

I had to paint in broad brush strokes when I was giving my answers, particularly to Deputy Doherty. It is quite an important change. With regard to how it affects relations between the Parliament and the Government I am not sure I would put it very high on the Richter scale. What we need is not only pre-legislative scrutiny of Bills but a move towards the idea that a committee might change the wording of legislation. We should move away from the notion that the most a committee can do is try to get a nod and a wink from the relevant Minister to agree to make a change on the next Stage, towards the idea the committee would seriously engage in amending draft legislation. The Oireachtas as a whole should look at this. This is the area one would like to see greater change.

Susan O'Keeffe (Labour)
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To go back to the budgetary process and the secrecy about which Professor Farrell spoke, some changes have been made, such as the comprehensive expenditure report, and some alterations have been made. How in particular did the secrecy of budgets at the time we are speaking about, between 2000 and 2008, contribute to the disaster in which we found ourselves? Did it do so specifically or was Professor Farrell being more general in his remarks?

Professor David Farrell:

In large part I am treating this rather generally, but in my paper I noted one of the observations from the 2011 inquiry report was the sense the Department of Finance was trying to push against an agenda in the 2006 to 2008 period but did not get its way. It stated it was not being nearly pro-active enough but at least there was evidence of differing views in various Departments. Obviously it is counterfactual and we will never know, but I wonder what would have happened if we had much greater investigation by relevant Oireachtas committees during the period. They might have unpicked the division of opinion across Departments.

Susan O'Keeffe (Labour)
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Various observations have been made by people giving testimony here about reports being watered down, diluted or changed before being published. Is this something on which Professor Farrell has observations to make?

Professor David Farrell:

No.

Eoghan Murphy (Dublin South East, Fine Gael)
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I welcome Professor Farrell. In his opening statement he said the culture of the Parliament needs to be attuned to its role as a more equal playervis-à-vis the Government. Nowhere in the document does he mention Whip reform. Does the use of the Whip have a role in bringing balance and making Parliament able to hold the Government more effectively to account?

Professor David Farrell:

I know Whip reform is something in which Deputy Murphy has a lot of interest, as do I. There are differing views among the academic community on the merits of relaxing the Whip. I like to think there is a way in which to relax it somewhat, that we seem to be a little bit off the scale in this regard, but where one relaxes is another question. Undoubtedly an area to look at is committees. It is an unwritten rule when one observes committees in operation that the more open and less party-tied the committee is in its culture of operation the better. If we were to go down the road of having committee members able to speak the unspeakable across party lines, and even vote across party lines on committee reports, with the understanding it might still go back to plenary and there would still be the possibility of the Government saving the day if it was particularly worried about its legislation, at least it would start to instil the notion that individual parliamentarians have their own voices and are able to think their own thoughts.

Eoghan Murphy (Dublin South East, Fine Gael)
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Professor Farrell mentioned the powers committees have. If a committee is to effectively hold the Government of the day to account, does it need an Opposition Chairman to do so?

Professor David Farrell:

It is not sufficient but it helps. In consensus democracies the more normal way is a proportional allocation of committee chairs. Depending on how many seats a party has in Parliament it would have a couple of committee chairs. It is not enough, but it certainly helps.

Eoghan Murphy (Dublin South East, Fine Gael)
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In his answers to Deputy Doherty, Professor Farrell spoke about the role the Oireachtas might have played in the lead-up to the crisis and whether it played a contributory role. He mentioned it took its eye off the ball. Was it not more than this? A bad budgetary decision is ultimately made by Parliament. Is this not where ultimate responsibility then rests for decisions taken by government?

Professor David Farrell:

That is a fair point. It does go back to Deputy Doherty's question. The Government of the day consists of the Parliament and the Executive, and in this regard if we are to attach blame for poor budgetary practice both parts of government are to blame.

Eoghan Murphy (Dublin South East, Fine Gael)
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Will Professor Farrell weight this blame? Are they equally responsible or is one more responsible than the other?

Professor David Farrell:

Constitutionally speaking they are probably equally responsible, but in terms of political reality when dealing with an Oireachtas as weak as ours the Government holds greater responsibility in this regard.

Eoghan Murphy (Dublin South East, Fine Gael)
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When it comes to issues such as budgetary decisions, is it possible to distinguish between the Government and the Dáil?

Professor David Farrell:

I think so. The Constitution states that only with the Taoiseach's permission can the Dáil discuss issues relating to financial expenditure. There is already a sense of weighting things more in favour of the Executive than the Legislature in our constitutional practice. Come the next election it will be the Government parties which will be held to account on their budgetary practices over the preceding number of years.

Eoghan Murphy (Dublin South East, Fine Gael)
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Professor Farrell believes it is possible to distinguish between the two and he can see a clear line.

Professor David Farrell:

Politically it is, even if constitutionally one cannot. In the political reality one would attach greater responsibility to the Government than the Parliament.

Eoghan Murphy (Dublin South East, Fine Gael)
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When it comes to the budgetary process, Professor Farrell examined other jurisdictions. Does he believe the process here is unusual in that the decision is taken by the Government, and once it is taken it is debated by the Parliament? Is this sequence of events unusual vis-à-visother parliaments?

Professor David Farrell:

It is unusual vis-à-visnot all but many continental European parliaments from what I have seen. It is an exact example of the Westminster tradition in operation. We are not that different from British practice as far as I can see.

Eoghan Murphy (Dublin South East, Fine Gael)
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Has Professor Farrell seen any significant changes to our budgetary process since the pre-crisis and crisis period?

Professor David Farrell:

There have been moves which are potentially interesting, such as the establishment of the fiscal advisory council, which is a good example of something that down the road might develop into quite an important stage in the budgetary process. As I stated in my remarks, it would be more important to see the establishment of an agency, perhaps a version of it, that is vested within the Oireachtas and, therefore, answerable directly to it and working for it, which is something we see in many of the newer democracies in central and eastern Europe.

Marc MacSharry (Fianna Fail)
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I thank Professor Farrell for being here. The issues highlighted by him had an impact on the crisis, as Deputy Doherty stated at the outset. The Chairman might have a problem with the framing of this question but I will try anyway.

Ciarán Lynch (Cork South Central, Labour)
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Let me be clear. The committee may have a problem with the Senator because of our terms of reference.

Marc MacSharry (Fianna Fail)
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At the risk of angering committee members, given Professor Farrell's research and the issues he has highlighted in terms of the weakness of Parliament, is it correct or incorrect to say we live in a dictatorship disguised as a democracy?

Professor David Farrell:

I would not go so far as to say that. I would just make the argument that there is a big body of literature around what are better forms of democracy and it boils down to the separation I have been talking about in my remarks between the Westminster tradition and the consensus tradition. There are some differing views but for the most part the balance of arguments would favour the consensus tradition. Therefore, I would not go so far as to say what we have is a dictatorship, I would just argue that what we have is not as good a democracy as we could have.

Marc MacSharry (Fianna Fail)
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Are there examples throughout the world? Would it be correct or incorrect to say that parliaments, as things stand, are subservient to the Cabinet of the day?

Professor David Farrell:

Yes.

Marc MacSharry (Fianna Fail)
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Are there examples throughout the world where, following a general election, alternates are run with candidates and when parliament elects the government that the government of the day steps outside parliament and is replaced by alternates, thus having to sell their policy to the parliament, even their former party colleagues, so to speak? Are there examples of that and, if so, can Professor Farrell outline them?

Professor David Farrell:

There are examples of that but right now in my head I do not have any examples. I can say, however, that the more normal situation in most of the continental European democracies is for the Ministers to be external from the parliament, either they have been appointed from outside the parliament or they are appointed from the parliament but give up their parliamentary seats on their appointment.

Marc MacSharry (Fianna Fail)
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Alternates, is that how that works? Is it that alternates run in parallel?

Professor David Farrell:

There are different ways in which one can produce that but that would be one version. Actually, that is one of the recommendations of the Irish Constitutional Convention which-----

Marc MacSharry (Fianna Fail)
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Does that help to improve the situation?

Professor David Farrell:

It can improve the situation because, among other things, it means there is a greater population of members from which to select the committee chairs and committee members and it means there are more parliamentarians who are playing their parliamentary role. That would be one area. It does allow, depending on the version one has got, for more expertise to be brought into the Cabinet.

Marc MacSharry (Fianna Fail)
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Following on form Deputy Eoghan Murphy's questions, in those circumstances would there be a relaxed Whip situation?

Professor David Farrell:

It is very hard to get accurate information on the strength of the Whip systems across the different democracies. All I know is that when compared to the British our Whip system operates a bit more rigidly than in its case, but they operate slightly different systems in other countries.

Marc MacSharry (Fianna Fail)
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In his paper, "External Shocks, Leadership Replacement and Party Change - The Case of Fianna Fáil", Professor Farrell was very critical of PR-STV as a method of election. He said: "PR-STV reflects the diktats of the Irish political culture." Why, in his opening statement, did Professor Farrell make no reference to that? Will he comment on what the better system may be?

Professor David Farrell:

I would love to know which paper that was from which the Senator is quoting me.

Marc MacSharry (Fianna Fail)
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That is what it was called. To clarify for the Chair, I will consult my notes. There may be some additional note. It may have related to Fianna Fáil. It was titled: "External Shocks, Leadership Replacement and Party Change - The Case of Fianna Fáil". Does that ring a bell?

Professor David Farrell:

The problem with being an academic is that one writes a fair bit and then one forgets about it.

Marc MacSharry (Fianna Fail)
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That is fine. It does exist so-----

Ciarán Lynch (Cork South Central, Labour)
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Will Professor Farrell answer the question?

Professor David Farrell:

It is a pertinent question about the electoral system because it comes up regularly as to whether the electoral system is a villain in the piece here. There are differing views about whether the electoral system could be changed and, therefore, we might produce a better form of politics. The problem is - it goes back to what I said at the beginning - that if one is to effect a cultural change one needs to do a radical overhaul in how our governmental and political system operates and, perhaps, changing the electoral system would help. I am prepared to accept that but it is not a magic bullet as is so often portrayed. If we changed PR-STV to a closed list system, we would get away from the ambulance chasing of constituents by parliamentarians but what one might get instead is ambulance chasing of party members by parliamentarians because now one is moving from trying to get as many votes as possible to get elected, to trying to get as many votes as possible to get selected.

Marc MacSharry (Fianna Fail)
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Does the ambulance chasing become more elitist?

Professor David Farrell:

No.

Marc MacSharry (Fianna Fail)
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Does it change the lane of the ambulance so that only certain people get into it?

Professor David Farrell:

No, what is causing things to happen is not the electoral system, it is the culture of how politics operates. There have been four cases on this planet of electoral reform in the past 50 years, in France, Italy, New Zealand and Japan. They are the only four countries that have established democracies that have changed their electoral systems and none of those changes have fixed the problem they were supposed to fix.

Marc MacSharry (Fianna Fail)
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As I am running out of time, I have a final question which is in two parts. Has the stripping of power from local authority members in the past decade to 15 years contributed to a lack of focus by parliamentary members on important national matters, such as preventing crises, or the bank crisis or has it been a good thing? Considering - I am quoting Professor Farrell's own testimony - "the weakness of the Irish parliament", is it his view that a banking crisis of such a damaging nature was unlucky, unfortunate or inevitable?

Professor David Farrell:

I would not have the expertise to answer that question. I would like to think it was unfortunate. The weakness of local government is, to my mind - I am not alone in this - a bigger factor in trying to explain the cultural problems with how the Oireachtas operates than the electoral system. The issue is a demand based problem not a supply based problem.

Marc MacSharry (Fianna Fail)
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It focuses the national body of politicians more on the local situation than on the national situation.

Professor David Farrell:

Because individual citizens - I am guilty of this as a citizen - find nowhere else to go, they go to a Member of Parliament. What we need is a much more influential local government, a far better interface between public service and citizens and that affects the demand on our parliamentarians.

Marc MacSharry (Fianna Fail)
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I thank Professor Farrell.

Sean Barrett (Independent)
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I welcome Professor Farrell. Regarding an incorporeal Cabinet meeting, apart from being an oxymoron, is it not anathema in a democracy that a crucial decision was made at that kind of meeting?

Professor David Farrell:

Obviously, I cannot comment on that specific example. In an ideal world one would like to think that a Cabinet meets in a well-considered way and takes its decisions with as much information and as much thought as possible and as openly as possible. I was not there, I was not even in the country, so I cannot comment on exactly how frenetic those few hours were.

Sean Barrett (Independent)
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Deputy Eoghan Murphy raised the Whip system. I think the British army would be in Syria now because the Prime Minister wanted to look for some weapons and so on but enough people in the Tory party made that impossible. Could we have a percentage of days off from the Whip system? Would that be one of the ways we could develop the kind of system Professor Farrell has been advocating?

Professor David Farrell:

This is where there are some differing views among the political scientists. I am on record as asking why do we have to have committees apply for each and every vote, why not, for example, have it that it applies for money votes, if one is a Government member, or, perhaps, votes that are very specifically relating to manifesto promises by one's party, that maybe one should identify those areas as areas where the Whip system should apply. One is a signed up member, one fought the election, therefore, one should sign up to the agenda of one's party, but that in other respects the committee system should be relaxed and we should be relatively more relaxed about Governments occasionally losing votes. That is the type of views I have set out in the past but others have suggested that one is on a slippery slope if one does that.

Sean Barrett (Independent)
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Is it usual in the parliaments that Professor Farrell studied that Ministers come in with a coterie of civil servants who whisper in their ears or pass them notes? I do not see that in Westminster, for example.

Professor David Farrell:

It may not be physically manifest that there is somebody there whispering but there would certainly be an entourage supporting the Minister behind the scenes, so in that sense it would not be that uncommon. What is less common is the notion that the parliamentarians are more or less on their own in responding to the Minister. There is not the resource base to help one to respond or interrogate that Minister in a way that we see in other parliaments.

Sean Barrett (Independent)
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Is parliament stronger in the public mind than sometimes around here or in the media? I have in mind the attempt to abolish the Seanad, for which the vast majority of Deputies voted and the majority of the Senators voted for its abolition. The opinion polls showed that it would be abolished but in fact the people decided it would not be abolished. Are there secret parliamentarians in the Edmund Burke tradition influencing public opinion in these matters who want a stronger parliament?

Professor David Farrell:

That for me is an example of why we should not be such a Westminster democracy because we have referendums. The last time I checked, apart from Italy and Switzerland, we were the most regular user of referendums in Europe. That is giving the people a direct say in important issues of policy at a national level. In that sense, that is a good example of a more consensus approach. The Government was forced to have a referendum to decide on something it wanted to push through.

Sean Barrett (Independent)
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In regard to committees, we had a case where a person did not want to appear as a witness and the majority of the committee summoned him to appear and he did so. In terms of people's reluctance to appear as a witness, there is some case law which the professor might discuss afterwards.

He said the Government actively supported the market over an extended period against the fairly weak but clear opposition of the Department of Finance. We found the Department of Finance did not want compliance codes for directors, for instance, and that it was more interested in developing the IFSC than the prudential role. There are criticisms of the Department of Finance in regard to the lack of qualified people. I am not so sure its role was as good as the professor stated.

Professor David Farrell:

I was just going literally on what I was reading. I was desperate to find anything that related to the theme of what role the Oireachtas played, or did not play, and that seemed to be one area that was worth paying attention to.

Sean Barrett (Independent)
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I refer to the absence of individual responsibility in Irish public life in that people do not resign, they do not take responsibility for what they do and they hide behind systems failures. Have political scientists written on that aspect?

Professor David Farrell:

I have not seen anything systematic on that.

Sean Barrett (Independent)
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I thank the professor.

Michael McGrath (Cork South Central, Fianna Fail)
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The professor is very welcome and I thank him for his time. He makes a pretty clear conclusion at the end of his opening remarks that the Irish Parliament performed poorly during the period in question and he outlined the reasons. He talked a lot about parliamentary reform and the need to strengthen the committee system. Even within the constraints of the existing Oireachtas system and the constraints that applied over the past ten to 15 years, there were, and remain, opportunities to raise issues, including on Leaders' Questions. The Opposition has Private Members' time every week and the Government can organise debates but, in the main, that did not happen in regard to banking and regulation. The role of the Oireachtas is part of our terms of reference. How can he reconcile that? He has made points about reform but even within the constraints, there was not really adequate debate by any objective measure.

Professor David Farrell:

That is a really core question. I tried to say that in my written document but I may not have expressed it so well. I am talking in general terms here. One could talk about a particular period but it does not matter which period one picks, the point is applicable regardless of who is in government at the time. It is the culture. Culture is such an amorphous thing, is it not? What is culture? It is very hard to define. We have whole courses just trying to define the damn thing. If one is going to change the culture of how an organisation operates, one needs to do some pretty radical transformation and that is what I am trying to suggest. In part of my paper, I talk about how the Oireachtas in the lead up to the banking crisis had existing powers that it could have deployed, for example, to test the veracity of Government's arguments. There were individuals who were saying we had a problem. Why were they not called in? Why was there not some discussion with those individuals? The powers were there and it says a lot about the willingness of Oireachtas Members to deploy the powers they already had.

Michael McGrath (Cork South Central, Fianna Fail)
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The professor spoke about reforming and strengthening Oireachtas committees and giving them resources. Does he believe there is an optimum number of members on an Oireachtas or a parliamentary committee?

Professor David Farrell:

The general rule of thumb is that one needs a decent critical mass. One of the leading people in this area, Kaare Strom, said about ten or 11 would be the ideal number. Obviously, it depends on the number of parliamentarians one has to play with. We have a small Parliament, so there are only so many Members available. That is why I was trying to suggest that one way to help move towards this ideal world that I tried to outline would be to move to a situation where a Member sat on only one committee.

Michael McGrath (Cork South Central, Fianna Fail)
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If I pointed out that the Oireachtas Joint Committee on Finance, Public Expenditure and Reform, for example, has 27 members, what would be the professor's reaction to that?

Professor David Farrell:

It would sound to me like it is too large. It would be far better to have a small membership but a better resourced committee, so one would have professionals supporting those members on the committee.

Michael McGrath (Cork South Central, Fianna Fail)
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Does the professor think having such a large number of members impacts on the ability of the committee do its work effectively?

Professor David Farrell:

I have never observed it. Those on it would have far better expertise than I but anyone who knows anything about how committees operate will know that at a certain stage, committees become dysfunctional.

Michael McGrath (Cork South Central, Fianna Fail)
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I suppose I should have said "on a committee" and not necessarily that committee. Does having a membership of that number, in general, have an impact on the ability of a committee to do its work?

Michael McGrath (Cork South Central, Fianna Fail)
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Yes. I would argue it is too big.

Ciarán Lynch (Cork South Central, Labour)
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That is a cross-departmental committee and includes the Department of Public Expenditure and Reform.

Michael McGrath (Cork South Central, Fianna Fail)
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That is correct. Looking back over the Oireachtas debates, which is part of the terms of reference of this inquiry into banking and regulation, if I said to the professor that the Central Bank and Financial Services Authority of Ireland Act 2003, which was very significant legislation setting up the new Central Bank structure and separating the Central Bank from the Financial Regulator, was introduced by the Minister for Finance and, from my reading of it, about 11 other Deputies took part in the debate on Second Stage, how would the professor characterise that level of engagement in the context of 166 Deputies in the House and given the significance of the Bill?

Professor David Farrell:

I do not have any knowledge of that particular episode, so I cannot really comment on the specifics of it but it would seem to me that if the legislation was as important as the Deputy suggests then, in an ideal world, it would be better to have a better populated House.

Michael McGrath (Cork South Central, Fianna Fail)
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In light of the professor's comments on Government control, and not talking about any particular Government but in general, of Parliament and of the committee system and given that we are sitting as part of a very important parliamentary committee, has he any observations to make on the fact the Government, in respect of this committee, ensured it had a majority of the membership, despite the original membership which was designed to be nine members? The Government did not have majority by way of the manner in which the votes fell but it subsequently changed it and introduced two additional members to ensure it had a Government majority. Does the professor have any observations to make on that?

Professor David Farrell:

Going back to what I said earlier, one of the features of a well-run committee system is a proportional allocation of committee chairs and a proportional allocation of committee positions, so in general it is unfortunate to have committees where there is an in-built Government majority.

Michael D'Arcy (Fine Gael)
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Professor Farrell made the point that if there was a better funded and structured committee system, the Government arguments, say, in regard to the bank guarantee, could have been tested. I refer to the evidence we have heard and discussed on the information given to the Government, and subsequently after the guarantee by PwC. PwC had six months in the banks to see whether they were solvent. In light of PwC going into the banks subsequently and finding they were solvent, how would a small number of individuals have been able to contest that argument when it had access which maybe a committee would not have had? How could it be tested under those circumstances, given the evidence we have heard?

Professor David Farrell:

The tenor of my remarks, in fairness, are much more focused on the period leading up to the banking crisis rather than the onset of the crisis itself. In the frenetic period around the time of the guarantee, it is very hard to post-hoc try to suggest what might have done otherwise.

However, in terms of the long process, particularly in the period between 2006 and 2008 leading up to it, my remarks are focused on whether the Oireachtas might have performed better than it did. I am suggesting it did not perform well enough.

Michael D'Arcy (Fine Gael)
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I refer to the confines imposed by the Abbeylara judgment. A large proportion of Professor Farrell's submission was about the expansion of committees but I seek his views in the context of the confines of the Abbeylara judgment and then subsequently, the confines of the referendum that was lost to expand the powers of a committee of investigation.

Professor David Farrell:

It is unfortunate that the referendum was defeated. One can only hope an attempt will be made again, hopefully more effectively, to get something like that through a referendum. However, my remarks are less focused on what happens afterwards than on good governance in a normal period. The focus is less on an investigation into an issue that has arisen and more into a proper policy process and the role of a modern day parliament in that policy process. I refer to effective scrutiny of legislation as it is going through the books, picking out details and coming up with amendments that are taken seriously by the Government of the day. That is the sort of modern day parliament we really do not have and we could have.

Michael D'Arcy (Fine Gael)
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What is the view of Professor Farrell regarding a committee potentially impugning the good name of a citizen?

Professor David Farrell:

I suggest it would be necessary to have good controls in place with regard to the powers of a committee, were legislation or a referendum of that nature to go through. Other than that, there is not much more that I can contribute.

Michael D'Arcy (Fine Gael)
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Earlier, Senator MacSharry discussed the reluctance, not just of the body politic itself but of the public to change. For instance, the Constitutional Convention was reluctant to move away from proportional representation through the single transferable vote, PR-STV. Can Professor Farrell shed some light on why the public and the body politic are reluctant to change a system which, in his analysis, is poorer than most? Why is there such reluctance to so do?

Professor David Farrell:

My difficulty with Senator MacSharry's question is I do not think the system is worse than most. I must have had a brainstorm on the day when I wrote whatever article he is citing. I must check when I go back.

Marc MacSharry (Fianna Fail)
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Perhaps even a moment of clarity.

Professor David Farrell:

What we know from the analysis that has been done across continental Europe since the Second World War is that most of the continental European democracies are moving their electoral systems towards our system. While it is not the single transferable vote, STV, they are moving towards a system in which voters have a greater say. There is a great merit in our system which is that, as members are aware, there is good linkage between politicians and their constituents. That is a good and is something we should value. The problem is our politicians perhaps take it to another level and as I stated earlier, much of that is less to do with the failings of our politicians and more to do with the failings of the system that causes greater demand on our politicians to so do. As to why the Constitutional Convention chose not to propose a radical change of our electoral system, it is because its members spent two long weekends reading briefing documents, listening to briefings by experts and considering, in a well-considered deliberative process, the merits of whether to change our electoral system. Having informed themselves in a well-considered process like that, they decided that on balance, the electoral system was not that bad after all.

Michael D'Arcy (Fine Gael)
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Finally, what is Professor Farrell's view of the quality of the referendums? As he has stated we have had more referendums than most, what is his view on their quality and the impact of the change in the general system?

Professor David Farrell:

While we have a lot more referendums than most other countries, we also have a lot more referendums than used to be the case. The problem with our referendums is we have not developed the machinery for how to run a referendum properly. There needs to be a serious engagement with the referendum process and on issues to do with balance of coverage and the finances surrounding the referendum process. Obviously, that is outside the remit of this committee but there is a body of work to be done on the referendum process in Ireland.

Ciarán Lynch (Cork South Central, Labour)
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I wish to round off one issue with Professor Farrell regarding the level of access members of the public have to public representatives in Ireland. In the context of levels of accessibility among our European partners, how would it rate? Does Professor Farrell rate it as being high or low and is that a good or bad thing?

Professor David Farrell:

It is high. The level of connection between our Members of Parliament and citizens is very high.

Ciarán Lynch (Cork South Central, Labour)
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For example, were someone to ring his or her congressman, for want of a better word, to arrange to meet on the following Saturday, how does that play out internationally and in Ireland?

Professor David Farrell:

We are off the scale. There is an Irish national election study, which incidentally needs to be funded the next time around. There is no funding for proper analysis in this country but that is another day's work. In any event, the study asks a set of standard questions that are asked in election studies across the world. Usually, one asks a question along the lines of how often was the respondent of the survey contacted by a member of the campaign organisation or by the candidate. Usually, one gets a figure in single figures, that is, 8% or 9% or that sort of level. In Ireland, the figure is 20% or 25%. Respondents will state they were contacted more than once. I remember that having returned here after 21 years in Britain, I was here for the 2011 election and had forgotten what it was like to have candidates knocking on my door several times. One just does not get that.

Ciarán Lynch (Cork South Central, Labour)
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That is at election time but I am talking about the level of access-----

Professor David Farrell:

In between.

Ciarán Lynch (Cork South Central, Labour)
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----- the public has to national elected politicians. On an international scale, how would we rate?

Professor David Farrell:

Very highly.

Ciarán Lynch (Cork South Central, Labour)
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The highest?

Professor David Farrell:

There is no cross-national study that uses the same standard question in the way the election studies do.

Ciarán Lynch (Cork South Central, Labour)
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However, Professor Farrell would rate Ireland as being very high.

Professor David Farrell:

In any comparative analysis that ever has been done, we are off the scale.

Ciarán Lynch (Cork South Central, Labour)
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In terms of participating in democracy, how does Professor Farrell rate that? Is it a good thing or a bad thing?

Professor David Farrell:

In principle, it is a good thing. The problem is it is taken to an extreme and that is the area that must be addressed. It needs to be toned down somewhat.

Ciarán Lynch (Cork South Central, Labour)
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I thank Professor Farrell. I call Deputy O'Donnell, who has six minutes.

Kieran O'Donnell (Limerick City, Fine Gael)
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I will take up that point. I refer to our political system with multi-seat constituencies and note that Professor Farrell has come from the United Kingdom. In Professor Farrell's view, to what extent has our political electoral system impinged on or had an impact on the efficiency of Parliament?

Professor David Farrell:

I do not think the electoral system is the feature, as is often made out, that is causing a lot of these issues. I believe the issue is a poor interface between the public service and the citizens. It simply is poor and having spent 20 years in Britain, I can see that myself. I also think it is the weakness of our local government and so there is this sense on the part of the average citizens that if there is something they need to get done and they cannot find the answer to the question anywhere else, they will contact the Member of Parliament because they know the Member of Parliament will do it for them. It is this issue about the demands on our parliamentarians that needs to be fixed. While changing the electoral system might be part of a bigger mix of change, it would not, in and of itself, do much to change things.

Kieran O'Donnell (Limerick City, Fine Gael)
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To get the type of change he seeks in terms of the efficiency of Parliament, what does Professor Farrell think of the models in which there is separation of power, such as one has in the United States vis-à-visthe President and Congress? Our system here effectively is a parliamentary system in its entirety, in that people must be elected before they can hold public office. In addition, I note that at present, Congress and the President are at loggerheads and consequently, no system is not absolutely proof. What is Professor Farrell's view on the different systems?

Professor David Farrell:

This is important and gets to the kernel of a lot of this issue. The system of separated powers in the United States is on one extreme, while the Westminster system, of which we are part, is on the other extreme and both have their problems. In the case of the system in the United States, the big problem, as the Deputy has identified, is the issue of logjams and gridlock and therefore, there is a lot of dysfunctionality in how the governmental system can operate. However, there is an in-between position and that is continental Europe. It is a consensus form of democracy where there is a much greater balance of power between Parliament and Government. However, it need not go to the American extent of gridlock to get to be a better form of democracy.

Kieran O'Donnell (Limerick City, Fine Gael)
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To take up another point, in essence Professor Farrell really is talking about the list system when he speaks about a European system. He is talking about having a list system alongside an electoral system. Is that his basic premise?

Professor David Farrell:

No, it is not. In fairness, it is a reasonable question to ask but the point is there is a great variety. I could spend hours on it and it is my first love.

Kieran O'Donnell (Limerick City, Fine Gael)
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No, the professor should pick one parliamentary model that in his view works.

Professor David Farrell:

However, I am not focusing on the electoral system, so I deny the electoral system as a feature. The feature is the parliamentary system.

Kieran O'Donnell (Limerick City, Fine Gael)
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In that case, the professor should tell me one parliamentary system that in his view works.

Professor David Farrell:

Norway.

Kieran O'Donnell (Limerick City, Fine Gael)
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Why?

Professor David Farrell:

Because there is a much greater culture of open government and an understanding that it is a proactive form of open government, and there is a much more powerful parliamentary system and much more effective committee structure. There is no such thing as an ideal, but if you held a gun to my held and asked which is the one I would pick out, I would give you Norway for starters.

Kieran O'Donnell (Limerick City, Fine Gael)
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How much time have I left, Chairman?

Ciarán Lynch (Cork South Central, Labour)
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Two minutes.

Kieran O'Donnell (Limerick City, Fine Gael)
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In the Irish context, which committee does Professor Farrell believe has been the most efficient?

Professor David Farrell:

I have not looked at the Irish Parliament enough to give a clear answer. All I can say is what I am seeing here is----

Kieran O'Donnell (Limerick City, Fine Gael)
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Professor Farrell made a fairly critical comment on the workings of the Parliament.

Professor David Farrell:

Absolutely and I did start with an apology before I said anything, to say that I am dealing with parliamentarians and I know I am treading on thin ice because you are the people who actually have to work the system I am telling you about.

Kieran O'Donnell (Limerick City, Fine Gael)
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Professor Farrell has been quite critical even in his opening statement on committees, yet when I ask him for a committee he tells me he has not studied the committee system in Ireland.

Professor David Farrell:

I said at the outset that I have not studied the committee system in Ireland.

Kieran O'Donnell (Limerick City, Fine Gael)
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If Professor Farrell has not studied the committee system, how can he give a view on it?

Professor David Farrell:

I have observed it.

Kieran O'Donnell (Limerick City, Fine Gael)
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What is the difference between examining and observing?

Professor David Farrell:

In political science we have to carry out informed, evidence-based----

Kieran O'Donnell (Limerick City, Fine Gael)
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In terms of observing, which of the committees has Professor Farrell observed to be efficient?

Professor David Farrell:

I have not observed any to be efficient. Perhaps this one will be the exception.

Kieran O'Donnell (Limerick City, Fine Gael)
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I think there is a career in politics beckoning for Professor Farrell. Does he believe in Cabinet confidentiality? How does he reconcile the principle of Cabinet confidentiality with senior public servants being able to give a view, for example a view which differs from the Minister's, and which may be critical of a decision under which Cabinet confidentiality has arisen?

Professor David Farrell:

That is a very good question. Many of the points I am raising, in all honesty, are points by way of suggestion of things that could be looked at for improving how we operate. What is said in the Cabinet----

Kieran O'Donnell (Limerick City, Fine Gael)
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I am afraid Professor Farrell is being provocative.

Professor David Farrell:

I would not say that at all. What is said in Cabinet is said in Cabinet and therefore there should be a degree of confidentiality. Many people would agree on that. However, the Minister going into Cabinet is receiving information and the official from whom he or she is receiving information might have differing views or might wish to suggest alternatives the Minister might want to consider. That is the dimension I am getting at - whether then a civil servant might be willing to speak to an Oireachtas committee and say, "the Government may have taken that decision, but this was the information that the relevant Minister went into that Cabinet meeting informed by and there were differing views, and these were the differing views".

Joe Higgins (Dublin West, Socialist Party)
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Professor Farrell refers in page three of his written statement to the Nyberg commission and states: "The Oireachtas is notably absent from this coverage, receiving only passing reference in the Commission of Investigation report where it is noted that one of the causes of a 'systematic financial crisis' is likely to 'a parliament that remains unaware of mounting problems'." Earlier in the same page, Professor Farrell states: "The consensus among academics writing about the Irish parliamentary process is that it is weak and ineffectual by comparatives standards." We will leave that hanging there for a moment.

We had evidence yesterday from Mr. Simon Carswell, the current Washington correspondent with The Irish Timesand an experienced financial and banking affairs journalist. In page three of his written document, he writes: "There are examples of politicians and public representatives getting involved in land speculation deals, building projects and property investments - in one notable case, in partnership with a major figure from banking - while continuing to serve as public representatives, right up to and during the economic crisis." In page two of his statement, he writes: "I would characterise the relationship between the major players in the property sector and construction industry and government, certain elected representatives and the banks - as well as the relationship between the government, the banks and financial supervisory authorities - as extremely cosy in the period leading up to the 2008 banking crash."

Does Professor Farrell believe that if politicians in the national Parliament had the relationships alleged by Mr. Carswell, the ideology or motivation that led to those relationships could supersede and pervert the workings of a national Parliament?

Ciarán Lynch (Cork South Central, Labour)
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I need a question and ask Deputy Higgins to re-frame that.

Joe Higgins (Dublin West, Socialist Party)
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Professor Farrell has dealt well with structures in Parliament and how it should work, and whether the structures enable it to work. I am trying to clarify the issue of whether there is a different motivation that subverts that particular----

Ciarán Lynch (Cork South Central, Labour)
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You are asking Professor Farrell his interpretation of the dynamic in those processes.

Joe Higgins (Dublin West, Socialist Party)
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Can politicians serve God and Mammon? Can they serve the interests of these close relationships on the one hand while serving the interests of the majority of ordinary people on the other?

Professor David Farrell:

I can understand the premise underlying the question perfectly well. I really think it is an important question. It goes back to what I am saying about the need for a full, open and transparent political system. It is not just that Members would have to be completely open about any relationships they may have with any entity or individual; it also gets right down to funding of parties and proper regulatory controls over that, and full auditing of party accounts at all levels of political parties in a way that we do not have. In that sense, an effective parliamentary democracy, among the other things I set out in my paper, also includes the premise underlying your question, that there should be an understanding that a Member of Parliament is there to represent the citizens, not individuals.

Joe Higgins (Dublin West, Socialist Party)
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Could it be the case that no matter how efficient the workings of Parliament or parliamentary committees are, other motivations can obstruct that efficiency being deployed in the best interests of society?

Professor David Farrell:

It is entirely possible in any system and that is why you need good, rigid controls to minimise the dangers of that.

Joe Higgins (Dublin West, Socialist Party)
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On page six, and Professor Farrell quoted this himself today as well, he writes: "The main conclusion to draw from all this is that in the period under investigation the Irish parliament performed poorly: it lacked sufficient organizational and structural fire power to provide effective scrutiny; it lacked too the political will to use what powers it did have indicating 'cultural' shortcomings." Could it be that the political will that was lacking and the cultural shortcomings indicate an ideological agreement between a majority in Parliament on the right of bankers and developers to blow up a bubble? Professor Farrell said that Parliament took its eye off the ball. Could it be the case that he is speaking of a different ball from the ball that certain politicians had in mind? That might have determined the outcome.

Professor David Farrell:

It is very hard to give an answer. I know where your question is coming from and can appreciate that. In any parliamentary system, one would like to think that if there is something going on that needs to be investigated and tracked and warning signals to be sent up, in an effective parliamentary democracy, that will happen, there will be those warning signs. We did not have it and beyond that, it is very hard to speculate. I can appreciate that perhaps the ideological composition of the Parliament might also contribute somewhat. The ideological composition of Parliament across the main parties might be skewed in a certain direction that might facilitate certain activities that were unfortunate.

It is very difficult to get a grip on the extent to which it was contributing to the problem.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Does Professor Farrell believe that a more effective Oireachtas could have reduced the cost of the financial crisis to the citizens of the country or reduced the burden of the financial collapse on the people?

Professor David Farrell:

Given that I was focusing on the lead up to the crisis rather than the event itself, I cannot answer. Deputy Pearse Doherty also asked about it. I have not examined the period. I find it difficult to see how things might have been handled differently in the frenetic moment when decisions were being taken on the fly, even if the Oireachtas had had more of a say.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Earlier, Professor Farrell said rushed legislation was bad legislation. On the night of the bank guarantee, legislation was rushed through. I got my speaking slot in the Seanad at 5 a.m. and the then Minister, the late Brian Lenihan, was there for the duration of the debate. Notwithstanding the impact of the legislation, in certain circumstances is rushed legislation necessary? We might have seen similar yesterday with the legislation following a court of appeal decision on misuse of drugs.

Professor David Farrell:

Yes, sometimes rushed legislation is necessary. In moments of crisis such as the night of the bank guarantee, it would be difficult to see how it could have played out differently. The period of focus in terms of the role of the Oireachtas is the period leading up to the crisis regarding whether structures and culture could operate differently to try to minimise the danger of it happening again.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In response to a question by Deputy Michael McGrath, Professor Farrell said committees should be representative of party or grouping strength, but added that it was unfortunate that the Government would always have a majority. If a committee is to be representative of the strengths of groups and the Government is a majority Government, as a matter of course the Government will always have a majority.

Professor David Farrell:

It is a fair point. While a Government will not always have a majority, it is likely that it would often have one. In other contexts, when one is allocating on a proportional basis, parties bid for posts and will prioritise some committees over others. Thus, there may be committees in which the opposition parties are in the majority.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Professor Farrell has clarified it. Article 28.7.2° of the Constitution provides for Senators to be appointed to the Cabinet. Why has the provision been availed of only twice in the history of our current Constitution?

Professor David Farrell:

It is remarkable. I am old enough to remember when former Taoiseach Garret FitzGerald appointed James Dooge to the Cabinet and the media frenzy that followed it. There was a fair bit of excitement and also criticism that he had dared to step over the heads of far more deserving Members of the Dáil to pick a Senator out of nowhere and make him the Minister for Foreign Affairs.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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He was a retired Senator.

Professor David Farrell:

Yes, he was a retired Senator. This part of the culture needs to change. Another member asked me about external Ministers. It is more normal in other European systems to have Ministers who come from outside or, if they come from within parliament, they must vacate their seats to become a Minister. Part of the mix for fixing our political system which the Constitutional Convention proposed was to move in this direction.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Professor Farrell pointed out Deputy Eoghan Murphy's interest in the Whip system. The system that operates in many other countries, principally our neighbouring island, allows for a more relaxed form of whip, and that the whip is relaxed depending on when the party whips decide on issues. When I was first elected to the Seanad, 12 years ago, every week we were told there was a three-line whip on every vote. Can such a system be relaxed? Is there scope for relaxation?

Professor David Farrell:

There is scope and I suggested earlier some ways in which it could be done. Others say it is a slippery slope to an unintended result. If the British can do it, given that we have adopted in large part their parliamentary system, there is no reason we cannot at least do what they do.

Ciarán Lynch (Cork South Central, Labour)
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This committee has 11 members and I do not know how many other committees we have been involved in. In his presentation, Professor Farrell quoted the Art O'Leary briefing note on Oireachtas committees and the functionalities they can continue. To reframe Deputy O'Donnell's question on which committee is the best, is Professor Farrell aware of examples of situations in which some committees engage with the roles and responsibilities better than others?

Professor David Farrell:

I have not examined it and I am not aware of anybody who has had the money to examine it systematically.

Ciarán Lynch (Cork South Central, Labour)
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Much of Professor Farrell's presentation was about reform. Does he mean he is also engaging in the sharing of power as opposed to reforming the structure?

Professor David Farrell:

It is a great question. It is exactly that. If one is to reform the system, one must engage with the idea of power sharing and the consensus model of democracy. It is a form of sharing power, accommodating differing views and allowing conflicting voices around the table. One must share power.

Ciarán Lynch (Cork South Central, Labour)
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Does this imply that there is a certain crux in the dilemma that when one shares power, one shares responsibility?

Professor David Farrell:

Yes, if one shares power one shares responsibility. One of the members was probing me on where one would attach blame. In an effective parliamentary democracy, the parliament should also be held to account for mistakes.

Ciarán Lynch (Cork South Central, Labour)
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Given Professor Farrell's continuous restatement this morning that power has not been shared in the Irish democratic model since the foundation of the State, who has the ultimate responsibility, the Parliament or the Government?

Professor David Farrell:

Deputy Pearse Doherty asked me about this. While a higher level of blame would attach to the Government than to the Parliament, it is an order of scale.

Ciarán Lynch (Cork South Central, Labour)
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I have been Chairman of approximately five committees and have witnessed this in government and in opposition. Is Professor Farrell familiar with how the Estimates process is run here?

Professor David Farrell:

Not in any systematic way.

Ciarán Lynch (Cork South Central, Labour)
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Professor Farrell outlined difficulties in how Governments might hand over responsibility and share power with Opposition parties. Might Opposition parties also have difficulties with sharing in that engagement? For example, in the budgetary process one would have to be more forthcoming and open about one's financial positions rather than cherry picking. I am basing this on having been in government and in opposition during the Estimates process.

Professor David Farrell:

It is also very important that the Government reflect that in this proposed change. The Westminster tradition is an adversarial one and the Opposition is just as guilty as the Government of playing an adversarial role. The consensus form of democracy is one in which there is give and take on both sides and a process of policy, whether budgetary or other areas, where there is an accommodation of differing views and one tries to come up with a consensus of opinion. Although it can be very slow, inefficient and messy, it is preferable to the adversarial ping pong we have.

Ciarán Lynch (Cork South Central, Labour)
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Does it require that the Opposition take responsibility regarding the process?

Professor David Farrell:

Absolutely.

Ciarán Lynch (Cork South Central, Labour)
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Is there a difference between rushed legislation and emergency legislation?

Professor David Farrell:

That is a good question. My first attempt to answer that would be to say that the only rushed legislation should be emergency legislation. What we have seen last night and today would be a good example of that.

Ciarán Lynch (Cork South Central, Labour)
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Deputy Pearse Doherty referred to the emergency legislation to wind up IBRC. This committee would look at the extent to which it was prepared in advance of the emergency legislation coming through the House. Was the legislation actually ready? Was it worked upon months beforehand or was it written that afternoon? Are there different types of emergency legislation where a Government might be prepared for something and then enact it or is it a case that all emergency legislation is more or less written on the hoof that afternoon?

Professor David Farrell:

I cannot answer that, except that I would put in parenthesis there that if one had a better-resourced committee structure and a better-resourced Parliament, it would be better placed to react even in the event of rushed legislation than might be the case today.

Ciarán Lynch (Cork South Central, Labour)
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To wind up I call Deputy Doherty followed by Senator O'Keeffe - just two questions.

Pearse Doherty (Donegal South West, Sinn Fein)
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Professor Farrell said earlier, I think in response to Senator O'Keeffe, that the Oireachtas is not an actor that matters. In terms of framing economic policy, apart from Government, which he has mentioned, I ask Professor Farrell to outline the actors that matter, if any?

Professor David Farrell:

In terms of budgetary policy-----

Pearse Doherty (Donegal South West, Sinn Fein)
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Framing economic policy.

Professor David Farrell:

I am going to be cowardly and say that my colleague, Professor Hardiman, who follows me, is better attuned to that than I am.

Pearse Doherty (Donegal South West, Sinn Fein)
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Professor Farrell is very hard on himself. That is a fair enough answer to it.

He spoke at length about removing the Whips from committees. Let me quote to him a statement in recent weeks by a Deputy who called a vote at a committee. He stated:

What happened subsequently was that members of the Select Committee who were absent had to be substituted so seven substitutions were made.

Seven TDs then arrived in to vote on this incredibly important issue that affects many vulnerable students’ lives and they barely knew what committee they were standing in let alone what issue they were voting on.

Professor David Farrell:

I can talk about the generality rather than that case. I do not know the case. I think it is extremely important. That is why I was saying we should move away from the idea that Members are sitting on more than one committee, but also moving towards the idea of committee weeks. The European Parliament shows how that can work very effectively - move away from the idea of long plenaries as being the main agenda for how the Dáil or Oireachtas works and move to committee weeks so that then there is no excuse. One is on the one committee. This is the week in which the committee meets. More normally than not, one should be at that committee.

Pearse Doherty (Donegal South West, Sinn Fein)
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The current configuration in the Dáil has a large number of Independents. We have a Technical Group which has been a feature of, I think, the four most recent Dáileanna. Within that period for a number of years there was no ability to establish a Technical Group because the numbers were below seven. Indeed it was my election to the Dáil in a by-election that allowed a Technical Group to be formed in 2010. What is Professor Farrell's view on the fact that elected Members of the Dáil would have no speaking rights on major issues, such as Leaders' Questions, Private Members' business, Second Stage debates and Committee Stage debates in the Dáil Chamber as a result of not having six colleagues with whom to form a Technical Group?

Professor David Farrell:

This goes to the point I was making earlier about a secretly elected Ceann Comhairle with an agenda to review the Standing Orders so that the Dáil takes much greater control over its affairs as a Chamber, and similarly in the case of the Seanad. It should be up to the Dáil to come up with its own rules to address issues like this. As I am sure Deputy Doherty knows, if one puts together all the Independents in all the parliaments in Europe there would be less than we have in the Dáil.

Pearse Doherty (Donegal South West, Sinn Fein)
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Who agrees the Dáil Standing Orders at this point in time?

Professor David Farrell:

Technically, from what I understand, it is agreed by the Dáil, but in large part it is to the satisfaction of the parties in power as to whether they would like changes made or not made. In effect, it is the Government that controls the agenda, and controls the Standing Orders and how they might be changed.

Pearse Doherty (Donegal South West, Sinn Fein)
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We have had the conversation about power, relinquishing power and empowering the Parliament. Is there a role or has there been a role for an independent authority in any of the areas Professor Farrell has studied to look at this issue and make recommendations, such as an electoral commission to look at constituency boundaries? If there is a failure in what Professor Farrell says to reform the Parliament beyond cosmetic changes, is there a role or not for an independent authority to come up with its proposals that should be supported by Government and Opposition?

Professor David Farrell:

In this instance the role should be to constitute a body within the Dáil, itself, comprising Members of the Dáil with whatever advice and support they might need to come up with their conclusions. However, the Dáil should be taking charge of its own affairs. That is what we see in better run parliaments. The agenda - the issue of whether there should be guillotines for example - is either decided by the parliament itself at least is decided by the parliament in consultation with the government.

Susan O'Keeffe (Labour)
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Some people may remember in the run up to the banking crisis the unfortunate remarks of the then Taoiseach, referring to the whole idea of the green jersey. I do not want to talk about that in particular. I just want to ask about the Office of the Taoiseach and the atmosphere or a pervading view that can be created by any Taoiseach. In all the talk we have had about Cabinet, Government and the Oireachtas we have not talked about the Office of the Taoiseach or the power of the Taoiseach, any Taoiseach. Does Professor Farrell have any observations to make about that in this context?

Professor David Farrell:

In the world over we are seeing a presidential-isation of politics. What we are seeing in Ireland is pretty much consistent with what we are seeing everywhere else. Power is at the top. It is around the single officeholder and the coterie around him or her. I do not think we are that unusual in that regard. It is more the area we have been focusing on today where we would stand out.

Susan O'Keeffe (Labour)
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So it is like trying to move to a position where there is more accountability at Oireachtas level, there is a pushback with the presidential role of a leader. Are they-----

Professor David Farrell:

It creates a tension. There was a recent instance where there was a discussion about the Greek situation in the European Council where various Ministers for Finance were talking about the need to get agreement from their parliaments before they could decide once and for all. In fairness to our Minister for Finance when he said that, most of us just had a wry grin on our faces because it was obvious that whatever the Minister might decide in our case would be the decision. So it would be a token gesture by the Parliament to try to suggest otherwise. However, in the case of some of the other Ministers that was a genuine concern they had.

Susan O'Keeffe (Labour)
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Page 236 of evidence given by Professor Edward Kane, who appeared before the committee, stated:

In particular, a firm’s access to political elites grows with its interconnectedness, geographic footprint, and the number of employees and creditors that can be persuaded to contribute on its behalf to re-election campaigns.

Professor David Farrell:

I think it gets to what Deputy Doherty was saying. The openness of our party funding regime needs to be looked at. An electoral commission that takes on the responsibilities that SIPO currently has and that has far greater teeth to really truly get to grips with how much money the parties are raising. We have this farce right now where year-on-year it seems that most of the parties in this country do not receive any funding from outside, when we absolutely know that the opposite is the truth. That is part of that culture of openness that I have been talking about that we need to address. An electoral commission that can actually get down to branch level accounts, fully audited accounts, and get to grips with the information on who is being seen by whom and who is funding whom. We are far from that.

Ciarán Lynch (Cork South Central, Labour)
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Would Professor Farrell like to add anything further?

Professor David Farrell:

No.

Ciarán Lynch (Cork South Central, Labour)
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I thank Professor Farrell for his participation today. It has been a very informative and valuable meeting which has added to our understanding of the factors leading to the banking crisis in Ireland.

Ciarán Lynch (Cork South Central, Labour)
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I now call the committee back into public session. Is that agreed? Agreed. We will now commence with session 2 of this morning's hearings, which is a discussion with Professor Niamh Hardiman, UCD, on systems of governance. At our sessions this morning, we are focusing on the theme of relationships between State authorities, political parties, elected representatives, supervisory authorities, banking institutions and the property sector.

For our next session, I would like to welcome to the meeting Professor Niamh Hardiman to discuss the issue of systems of governance. Professor Hardiman is associate professor of political science and public policy. She has studied at UCD and Nuffield College, Oxford, and worked for a time at the Economic and Social Research Institute in Dublin. For several years, she was a fellow of Somerville College, Oxford, where she was the tutor in politics before moving to the school of politics and international relations in UCD, where she is director of graduate studies and director of the interdisciplinary public policy programme. Her research interests centre on the political economy and public policy. She is interested in the politics underlying policy outcomes, the politics of how public policy priorities are formed and implemented, the implications of institutional design for good governance and the political economy of growth, distribution and redistribution. Among her recent papers are work on comparative fiscal responses to crises, methodological challenges arising from analysis of fiscal policy choices, the political economy of housing bubbles, new approaches to thinking about the European periphery, the effects of crisis on State structures, the implications of State structures for vulnerability to crisis and the fiscal foundations of the State. Professor Hardiman is very welcome to the inquiry this morning.

Before I begin, I wish to advise the witness that, by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If Professor Hardiman is directed by the Chairman to cease giving evidence on a particular matter and continues to so do, she is entitled thereafter only to qualified privilege in respect of her evidence. She is directed that only evidence connected with the subject matter of these proceedings is to be given. As she has been informed previously, the committee is asking witnesses to refrain from discussing named individuals in this phase of the inquiry.

Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I call on Professor Hardiman to make her opening remarks.

Professor Niamh Hardiman:

I thank the Chairman. I have been invited to talk about governance practice in Ireland. I think that the broad outlines of the banking crisis are familiar enough. We know that the banks borrowed too much, they made too many risky loans and too little heed was taken of the growing property price bubble. So, from a political science perspective, some of the key weaknesses that stand out for me are, first, there was too little oversight and accountability going on in the Irish political system. The banks, we now know, were too lightly regulated, but in political life, too, the powers of Parliament to scrutinise policy were, in my view, too limited. There was not enough accountability for things that go wrong, so it was often hard to learn the right lessons for the next time, or even better so there would not be a next time.

Second, politicians and key public officials in some respects may have had too little distance from powerful private sector interests. Third, there was too much consensus over policy priorities and critical views were marginalised. There was too little specialised knowledge in the public service and there was a resistance to using expertise effectively. Each of these features of the political system is in conflict with principles of good governance. I would like to sketch in some of the institutional weaknesses that made these kinds of problem possible.

For a political scientist, institutions are important because institutions that work well are crucial for good political outcomes. They create the framework for people's interactions with one another. That is what an institution is. However, even good institutions can end up being run badly or operating badly, so there is always a need to have appropriate incentives to keep good standards of conduct going.

When we are thinking about good governance, there is not actually any single agreed definition. It is always something that is under debate, but there is an influential contribution to this debate developed by the Quality of Government Institute at the University of Gothenburg in Sweden, which says that good governance depends on what it calls the impartiality of institutions that exercise government authority. In this sense, there are two aspects of impartiality in the way that the State relates to its citizens. One concerns what I might say is the input side of things, that is, who gets access to public authority. The principle here is that privileged groups should not be able to gain preferential access to decision making in ways that would distort considerations of public interest. The other side of things is what I might call the output side of things, the outputs of political decision making, that is, the way political authority is exercised. This means that procedural rules and guidelines should always be respected and no individual or group should be either favoured or discriminated against.

So far, so good. We might say "relatively uncontroversial", because these formal principles are well represented in Irish public life, but if we think about the Irish experience, we can see that there are a number of weaknesses in institutional design and in actual political practices. I want to identify three areas that correspond with the three sets of problem that I mentioned just a moment ago. These are about, first of all, political oversight and accountability; second, the relationships between political actors and private interests; and, third, the contestation of ideas.

First, thinking about political oversight and accountability, governments have to manage public affairs, but policy also needs to be challenged and government needs to be held to account. We have a power dimension, one might say, of the exercise of public power and also a legitimacy dimension. It is more difficult in Ireland than elsewhere to scrutinise and amend legislative proposals and more difficult to hold the Government to account.

I believe this was the subject of discussions the committee held with Professor David Farrell in the last session. His, and other research, indicates that the Irish Legislature is still a bit of an outlier in comparative perspective on these indicators. Accountability within the public service is also a problem. We are not always good at learning from mistakes when things go wrong in the public service. Too often we are inclined to say that the system is to blame and we leave it at that. All this is in the process of change at the moment. The Civil Service renewal plans are aimed at reforming the ways the Civil Service functions and includes procedures to improve and strengthen accountability. This is all very much a work in progress.

My second point is about privileged access to decision making. There should be distance in the relationship between private interests and public authority in both input and output. We know there were close relationships between banks, builders, developers and political leaders during the years of the boom. This is potentially a problem on the input side of things. It may present a problem for Government's ability to take a measured view of its policy options or to establish enough distance and aggregate all the preferences it is exposed to in a public interest perspective. We have legislation on standards in public office, regulation of political donations and freedom of information legislation, all of which really do help to reduce the incidence of inappropriate access and influence - but poor practices may be harder to control or eliminate. Our ethics legislation dates from 1995 and 2001 and I do not think many people would suggest there were no problems at all in the years that followed. Making sure that legislation has the desired effect may not be quite so straightforward.

One way of having strong accountability in other European countries involves the strong role of parliamentary committees, but this is an area where there have been some weaknesses. When we think of regulation in the financial sector there is also a gap between what the formal rules say and the way informal practices actually play out. The powers that were available to the Financial Regulator before the crash were, as I understand, not excessively weak, but enforcing an effective regulatory regime is another matter. The Irish form of light-touch regulation was never going to get full disclosure of risks and liabilities on the part of the financial institutions. Ireland was not the only country to commit taxpayers' money to providing guarantees to the financial sector, but there are a couple of things that stand out about the Irish experience. Policymakers had fairly limited access to any kind of accurate information about the true state of the banks before the guarantee was extended. This is a problem which goes back well beyond 2008. It is a clear failure of the regulatory regime.

Although large guarantees were extended in other countries, they did not necessarily have to put them into practice. The difference lies in the organisation of the banking sector itself and the links they had with each other. Denmark for example committed 259% of GDP to guaranteeing its banks and Ireland committed 232% - similar orders of magnitude. While the Danish taxpayers were eventually liable for something like 1% of GDP, in 2012 it was estimated that the direct cost of the guarantee to the State was around €64 billion, which is 41% of GDP. It seems that the government in Denmark was able to negotiate a sector wide rescue scheme which involved a lot of participation by the financial industry itself.

I am not saying that the Danish experience is directly translatable to Ireland, there are many problems in trying to translate practices from one country to another, but what it does illuminate is that the Government seemed to have very little insight into what was going on until it was too late. As one analyst said it was "torn between denial and panic" when it was too late to do anything other than step into the breach with large guarantees. One might well think that in a small country like Ireland it is quite difficult to maintain appropriate distance between the Regulator and those who are regulated, or between the powerful, wealthy business interests and the politicians. Many of these people come from similar backgrounds. They went to the same schools and may even be related to one another. All of this plays a role in lowering the boundaries between the personal and the official political roles. However, Denmark is also very small and socially interlinked. Institutions need to be well designed and appropriate incentives and sanctions should encourage good practices to try to avoid the worst happening in the first place. This involves informal practices as well as the formal rules and sanctions.

My third point is about groupthink and critical evaluation, groupthink meaning when critical judgment is not properly exercised. Peoples' opinions converge on what is perceived as general wisdom without subjecting it to too much criticism. Many people have commented on the scale of groupthink during the boom and this was clearly a problem, not just in the case of bank risk, but in macroeconomic policy more generally. Ireland was far from unique in this naive faith in the self regulating market and the ideas that property prices were going to rise forever, there was going to be a soft landing and that this time is different. This time is never different. However, at the same time there were dissenting voices - people sounding the necessary warnings. There were those who were uneasy about bank risk and the sustainability of the property boom. Sometimes these people may have lacked the confidence to speak out too loudly, but there were enough who raised their doubts and their warnings. For the most part they were criticised or even ridiculed. The question now is how to create a space for those people who offer an alternative point of view, even though it is unpopular, so they get taken seriously and that countervailing opinion gets factored into the discussions, perspectives and anticipations?

Among the safeguards against groupthink in public life there has to be: high quality information available; a public service that can use the information well; practices such as having open environment for debate; critical engagement with different points of view in different fora; and encouragement of contestation over ideas in the policy process. Open debate is the basis for informed analysis and good policy formation. Developing the policy capacity of the public service was not very high on the list of political priorities during the boom. Indeed, during those years there was a proliferation of new agencies. Why were they created? It was because often it was easier to do new things by adding on new skills outside the existing public bureaucracy. We now have a lot of State agencies and there is a clear rationale for many of them. Agencies which operate at arm's length from Government can serve a valuable purpose. In other cases one might have expected these new positions to be created inside Departments themselves but instead we have this agency proliferation. In 2008 the OECD commented, not favourably, on what it called the "organisational zoo" of Irish State agencies.

Good policy making also needs access to good technical skills of all sorts and these are improving now. We have the Irish Government Economic and Evaluation Service, but there are other areas where there are skills and competence deficits. There have been questions, for example, about the management skills of the senior civil service. Reform is under way in these areas, but it is still very much a work in progress. We want the public service to act as a guardian of the public interest. To do this it needs to maintain a culture of independence from political influence. In formal terms that is well established in Ireland, but we sometimes hear it said that some senior civil servants may be less willing now than in the past to challenge Government ministers' points of view. There may be a number of reasons for this. In other countries, when a government is in power for a long period of time, civil servants may be more likely to align themselves with Government preferences. The way we organise career promotions may encourage anticipatory adjustments. It may be that civil servants are under a lot of day-to-day pressure to protect their Minister from criticism and from bad publicity in what is an intensely media saturated policy process.

Until quite recently, if individuals wanted to expose things that have gone wrong they could expect very little protection. We now have The Protected Disclosures Act 2014. That goes a good way towards remedying this, both in the private and the in the public sectors. Here again if we want the legislation to have the effect that we want more is likely to be needed. There has to be a culture of encouraging critical engagement. The most effective way of doing this is to develop an environment in which debate and disagreement is normal, where discussion is not shut down too quickly in the interests of getting a decision, where people do not feel that their right to speak out is determined by their place in the hierarchy.

Critical analysis is exactly what universities do. We engage in information, research, evidence and so on. Some progress has been made in engaging the universities in critical debate about public policy and public sector reform, but I think more could usefully be done. We can also think about the role that civil society organisations may play, an active role as watchdogs over the public interest, over regulatory and other bodies.

Inside the banks themselves we can now see that there were weaknesses in corporate governance to do with this phenomenon of group think. Banks engaged in very risky lending practices not least because their own shareholders put pressure on the directors to match the performance of the most profitable institutions, which were also the most risky. No bank can grow its profits at the extraordinary rates that we saw during the boom, in a safe manner. The brakes were off inside the high street banks too in terms of internal vigilance. It might be useful in this regard to think about the differences in the governance of the Irish and the Canadian banking sectors. The Canadian banks did not suffer systemic crisis this time around. One contrast between the two systems is the fact that the Canadian financial regulator played a very strong role. Bank directors expected rigorous and even painful scrutiny by the regulator and they internalised that expectation in the way that they conducted their own directorial responsibilities.

Inside the banks, the way the banks functioned also shows some interesting differences. As I understand it, directors can influence board decisions and bank outcomes through very much the same sort of practice that I mentioned a moment ago, good information, good preparation, an ability to ask hard and unexpected questions, a willingness to be critical and challenging towards management and to hold them to account effectively. In Canada, some of the corporate practices provided a stronger framework than may have been in existence in Ireland for encouraging these behaviours. For example, Canadian directors often, it seems, hold in camerasessions without management present. This lets them test ideas and build support among colleagues. This seems to have helped the non-executive directors to avoid excessive deference towards managers and it strengthened the independent and challenging voices on corporate boards.

In conclusion and in summary, I think what I have been focusing on is this feature of good governance centring on the idea of impartiality. Good institutional design is vital, but so too are the practices that make institutions work effectively. In the Irish case, this has implications in three areas that I have outlined. My first point was about political accountability. I noticed a relatively weak capacity to subject the Executive to scrutiny. Improving accountability is still in its early stages. The second point is about the relationship between private interests and public office holders and this needs to be constantly monitored. My third point is about the risk of group think and this persists as long as there is too little respect for informed critical opinion, too little willingness to look for high quality information and too little openness to debating and contesting ideas.

Ciarán Lynch (Cork South Central, Labour)
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I thank Professor Hardiman for her opening statement. I will deal with two matters before I open up the questions to members. The first matter is political oversight. Which countries does Professor Hardiman consider to be more effective than the Republic of Ireland in their political oversight and how do they differ from the Irish political system? Further to that, to what extent are political institutions and the electoral systems in which they operate important in determining these types of differences?

Professor Niamh Hardiman:

There are some indicators of the strength of the executivevis-à-visthe legislature in different countries. Ireland and Britain stand out as having particularly weakly developed powers available to the legislature. This is usually measured in terms of the powers and competences available to parliamentary committees, powers of compellability of witnesses, powers to command papers, but also agenda setting of the work of the parliament itself, the time-tabling within committees, the ability to get amendments accepted inside committees, the degree to which committees work along party political lines, the ending of debate and the guillotining of debates in committees. All those indicators suggest that in Ireland and Britain the parliamentary committees have a weaker scope of powers available to them. Many continental European countries have stronger powers. The strongest of all are in Scandinavian countries, it seems, and in the Netherlands where committees have extensive powers to set agendas and so on.

To what degree is this influenced by the electoral system? There is extensive debate about the Irish electoral system and electoral system reform is the first answer whenever anything goes wrong. I am not so convinced. Practices and expectations might not necessarily be changed by having, for example, a list PR system. One of the things that is encouraged in continental European systems by having a list system, is the ability to prioritise getting people elected on account of their policy competence but there is a price to be paid for that and that is that they get onto party lists without necessarily having to have a very close association with their constituency base, with their electorate. I do not have to tell that to people here. You are all elected politicians. You know much better than I do what it takes to get elected.The very strong features of the Irish electoral system are that it enables a strong connection with the local electoral base and to have a strong sense of responsiveness to civil society. These are very important things that I do not think we would want to lose from the current electoral system.

Ciarán Lynch (Cork South Central, Labour)
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That issue was addressed with Professor Farrell this morning.

Professor Niamh Hardiman:

I would imagine so.

Ciarán Lynch (Cork South Central, Labour)
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The question that was put to him was how would he rate the level of connection between the public and the public representatives in Ireland compared with other jurisdictions. Does Professor Hardiman have a view on this also?

Professor Niamh Hardiman:

Yes, I am sure I agree with Professor Farrell. The point that the Chair has asked about was about the powers of the Legislature. It may be that parliamentary committees could be encouraged and supported to work more actively.

Ciarán Lynch (Cork South Central, Labour)
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The statement that madness is doing the same thing over and over and expecting different results has been attributed to many people, from Sigmund Freud to Roy Keane. With regard to Professor Hardiman's statement that Ireland has been very poor at ensuring that the appropriate lessons are learnt when things go wrong in the public service, can she provide examples of specific failures from which we have not learnt lessons or maybe have learnt lessons? What lessons would she say need to be drawn from the banking crisis?

Professor Niamh Hardiman:

The particular things that I was asked to think about in connection with engaging with the committee have to do with the banking crisis. There are other areas where sometimes the easiest response to a policy mistake is to move on and to press on with new kinds of practices and arrangements, ensuring that people who have occupied positions of responsibility are maybe moved aside, but really probing what went wrong can be problematic. In the context of the banking crisis things did go wrong in the banking sector before. There was a financial sector collapse in 1984 and I wonder if the right sort of lessons were learnt about risk that can happen inside financial institutions and the sort of oversight that may be required at that point. We know, for example, that Pat Gallagher was subject to criminal proceedings in Northern Ireland and many commentators have asked why that was or why these were not pursued in the Republic.

I do not know the answer to that question. There were questions about the financial sector in the past and questions were raised during the 2000s. The Comptroller and Auditor General raised questions about the functioning of the regulator's office during that period. German financial regulators suggested more vigilant oversight might have been desirable in the mid-2000s, but somehow these warnings and lessons were not taken on board or absorbed into a type of critical reflective practice in order that, in anticipation of things happening, measures might have been put in place ahead of time.

Kieran O'Donnell (Limerick City, Fine Gael)
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I welcome Professor Hardiman. I will focus on the area on which she was asked to contribute - the contribution of the system of governance pertaining to the circumstances that gave rise to the banking crisis in Ireland - as well as the second and third points she mentioned - privileged access to decision makers and groupthink. She said politicians and key public officials had too little distance from powerful private sector interests, resulting in what is sometimes termed "cronyism" or "crony capitalism". She also spoke about groupthink. How big a factor were the two features of crony capitalism and groupthink in contributing to the banking crisis that unfolded in 2008?

Professor Niamh Hardiman:

Both were very important. If we look at what happened to the growth model Ireland was following in the 2000s, the emphasis shifted a little from the 1990s. Economists tell us that the Celtic tiger economy had two phases. During the 1990s growth in productivity and adding new resources to the economy were generating a strong export performance and a strong performance in traded services. After 2000 there was a shift towards investment in capital stock, most of which was going into construction, especially housing. There are many reasons for this. The Irish population was growing and there was a housing shortage; perhaps the early indicators of the housing bubble that were first explored in the late 1990s did not necessarily see the full magnitude of what was coming along. The context had changed a great deal, of course. By 1999-2000 we were living in the eurozone and very cheap credit was available. We now see the fiscal incentives to facilitate additional economic activity in the area of construction were misplaced in terms of generating a long-term sustainable growth model. They were also unwise in a context where it was becoming very much cheaper to borrow and use money in the banking sector. There were tax breaks for construction and incentivised building supports for quite a long time. It was well into 2005 and 2006 before these started to be withdrawn.

Kieran O'Donnell (Limerick City, Fine Gael)
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How did the crony capitalism manifest itself in the groupthink? What were the examples of it? How did it manifest itself practically in that period?

Professor Niamh Hardiman:

We have evidence of a great deal of personal interaction between politicians and some of the key actors. We know that some of the political donations and so forth contributed to some of this personal closeness. That is not necessarily problematic in itself, but it is problematic where it might encourage too strong a commitment of public policy to policies that are very favourable to these sectors. There is a type of win all around. It is very favourable and attractive for politicians to be able to generate more economic activity at a time, as in the early 2000s, with the dotcom crash there were problems in attracting new inward investment. With elections coming there is always a bias in the electoral cycle towards generating growth, making sure people have more money in their pockets and having more people at work. This type of self-reinforcing bias towards policies-----

Kieran O'Donnell (Limerick City, Fine Gael)
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What institutional forms could have been put in place at the time that would have provided stability in helping to prevent the banking crisis from taking place?

Professor Niamh Hardiman:

One thing that was very much in evidence during the 2000s was the particularly strong bias in fiscal policy towards pro-fiscal commitments. We know that this is a recurring problem in Irish political life. There are very strong political and electoral pressures to commit to increased public spending in the good times and when the bad times come, there is no fiscal headroom. As there is very little scope for evening out the economic cycle, corrective measures are introduced at a time when they are most difficult. One of the corrective measures is the type of thing that has been put in place in recent years in the form of the Fiscal Advisory Council, to have an independent advisory body to provide information and expert and informed commentary on Government spending plans. It would not stop the Government. Irish Ministers for Finance have a tremendous amount of discretion when it comes to devising and implementing fiscal policy. The good side of that is that when a quick turn around in policy is needed, as we saw in response to the crisis, Irish Governments, in the context that they have good networked governance in the wider society, which we can discuss as well, have the capacity to make policy and implement it quite well through a very effective public administration system. They can turn around quite quickly. The balance side of it is that if disadvantageous or perhaps unwise fiscal policy is being pursued, there is very little friction in the system. There are very few institutional breaks. Again, this comes back to parliamentary scrutiny.

Kieran O'Donnell (Limerick City, Fine Gael)
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In her paper Professor Hardiman speaks about the proliferation of the organisational zoo, with the growth of State agencies. One of those involved the separation of the Central Bank and the Financial Regulator, which happened at the time. How much of a factor was this organisational zoo of the various animals of Government and State organisations? How much did it contribute to institutional designed dysfunctionality? How big a factor was it?

Professor Niamh Hardiman:

I would make a distinction between the mode of regulation specifically in the financial sector and in State agencies more generally. The design of the regulatory system in the financial sector is not that important - whether we had one regulator or the two-headed regulation system - but it could have been made to work better. Professor Patrick Honohan's report suggested lines of accountability were not always clear and that some oversight issues might have fallen through the cracks between the two bodies. If true, that would be a problem, but the real problem was the manner in which financial regulation was implemented. I see this as separate from the growth in new agencies and the creation of an ever greater number of new agencies during the 2000s, especially in the second half of that decade. I led a research project in UCD that gave rise to the Irish State administration database, which is an interesting and very useful research tool. We document every State agency created since the foundation of the State, categorised according to multiple criteria, and can show when and where different agencies were created.

Kieran O'Donnell (Limerick City, Fine Gael)
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Where was the high concentration? Where was the exponential increase?

Professor Niamh Hardiman:

Quite a few were in regulatory areas, but many of them were in service delivery and advisory bodies.

Kieran O'Donnell (Limerick City, Fine Gael)
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In what period was the exponential increase in numbers?

Professor Niamh Hardiman:

It was during the 2000s, especially the mid to late 2000s. It is not that these agencies are doing a bad job in what they are asked to do.

The problem is really about policy co-ordination. We have made it more difficult than we might really have to for ourselves to have good, coherent policy and to aggregate all the activities we can see going on in the different agencies. Some agencies have to be stand-alone and at arm's length from the Government. We have to have arm's-length regulatory agencies. It has worked out very well for Ireland to have, for example, a great deal of autonomy accorded to IDA Ireland. We need a lot of agencies but the problems of policy co-ordination can be problematic.

Kieran O'Donnell (Limerick City, Fine Gael)
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Professor Hardiman referred in her briefing paper to Denmark's banking crisis. She said that, according to various analyses, differences lie in the relationships between the banks and government. When she compared Denmark and Ireland, what differences did she find in the relationship?

Professor Niamh Hardiman:

Denmark has had a very different kind of banking system. For a start, there are very many banks, and they are all quite small. Second, they tend to be quite highly networked with one another. They have good habits — if one wants to put it like that — of sorting out problems together.

Kieran O'Donnell (Limerick City, Fine Gael)
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Could Professor Hardiman deal specifically with the relationships between the banks and government?

Professor Niamh Hardiman:

The Irish Government had more segmented relationships with the banks. It tended to deal with them one at a time. It did not have the corporate interlinkages that have existed in Denmark. That was a problem in respect of the flow of information between the Government and banks. I refer not only to the flow of information between the banks and the regulator. The Government did not necessarily understand what was going on inside the banks. There was a moment when some kind of networked solution looked like it might be getting off the ground in Ireland. Bank of Ireland and Allied Irish Banks, for example, might have become involved in offering some assistance or support to Anglo Irish Bank. It did not happen, as I understand it, because it was thought to be unnecessary at the time, again because of a dearth of information. When it did become necessary, it was effectively too late for everyone. Therefore, there was a drift to a point of no return. The real problems I am interested in trying to identify lie further back, in governance relationships. Weaknesses might have arisen that made problems-----

Kieran O'Donnell (Limerick City, Fine Gael)
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With regard to good governance, what are the key elements in the Irish context? First, what were the weaknesses in terms of practical key elements? Has progress being made in that area? What would Professor Hardiman like to see?

Professor Niamh Hardiman:

In general or in particular policy areas?

Kieran O'Donnell (Limerick City, Fine Gael)
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We are here to deal with the banking crisis. What does Professor Hardiman believe has been taking place since the crisis that is positive? What more needs to take place?

Professor Niamh Hardiman:

We are learning the lesson the very hard way this time. Many changes have been taking place that are very valuable. Certainly, the restructuring of the pillar banks, the intensification of oversight on the part of the Central Bank, the vigilance and due diligence are immensely more valuable.

My thoughts are partly about formal institutional reform and partly about being attentive to the way institutions work in practice. We thought we had a financial regulation regime but the way it was being implemented was highly influenced by inappropriate expectations about the way the economy worked, based on the idea that markets would be self-regulating and that banks would not take unnecessary or excessive risks on behalf of their depositors, shareholders and so on. These assumptions turned out to be inappropriate. This time, we are correcting the mistakes of last time, but we do not know what the mistakes the next time will be. My point is really that although we are now busy correcting the mistakes that we learned about, we must also try to make sure we have institutions that are themselves adaptive, resilient and capable of policy learning and policy anticipation.

Kieran O'Donnell (Limerick City, Fine Gael)
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In summary, in terms of the work of the inquiry, what further institutional reforms does Professor Hardiman believe need to take place to prepare us for another banking crisis that may arise down the road?

Professor Niamh Hardiman:

I am not an expert in banking regulation; I am not really equipped to speak on that. More generally, the points I am raising have to do with our capacity to ensure accountability and democratic legitimacy, insight and oversight. All the points I have been making about having really informed and engaged parliamentary debate are important. Another important point to which I am drawing attention is that, in all our institutions, there is a need to develop the capacity for critical reflection and the encouragement of engagement. Professor Patrick Hohohan's report mentions the culture of hierarchy and authority inside the Central Bank and Financial Services Authority of Ireland. That is the enemy of critical debate, critical inspection and good governance.

Ciarán Lynch (Cork South Central, Labour)
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I will let Deputy O'Donnell in again. Deputy Michael McGrath has 15 minutes.

Michael McGrath (Cork South Central, Fianna Fail)
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Professor Hardiman is very welcome. I thank her for her time. Could she clarify a reference in page 31 of the paper she wrote in 2012 with Professor Clarke? It states: "Career mobility between the boards of the Central Bank and the commercial banks was not uncommon, and indeed directors of both AIB and Bank of Ireland held simultaneous appointments on the board of the Central Bank". Could she clarify what she is referring to without naming any individuals?

Professor Niamh Hardiman:

It would be inappropriate for me to comment on issues that are currently under discussion elsewhere in the political system and that may be under review elsewhere. That comment came directly from somebody else's research. My understanding of good governance is that there should be separation in the appointments people hold. In so far as this may have been true, there might have been questions to raise about people having conflicted interests and preferences.

Michael McGrath (Cork South Central, Fianna Fail)
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Is Professor Hardiman saying there were individuals serving on the board of a commercial bank at the same time as serving on the board of the Central Bank?

Professor Niamh Hardiman:

As I said, that is not original research that Professor Clarke and I undertook. The comment is attributed to another source. I refer to that source.

Michael McGrath (Cork South Central, Fianna Fail)
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Is it not established as a fact on the public record?

Professor Niamh Hardiman:

To be honest, I would have to look again at that paper. I am not exactly sure what the Deputy is referring to so I could not endorse or comment further on it.

Michael McGrath (Cork South Central, Fianna Fail)
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Could the professor characterise the corporate governance arrangements that would have applied within the Irish banks during the 2000s, or from 2002 or 2003 onwards? What are her thoughts and observations on the corporate governance arrangements that applied at board level in terms of important sub-committees, such as credit committees and risk and compliance committees?

Professor Niamh Hardiman:

I am not an expert on corporate governance; I have to say that from the outset. Therefore, my knowledge is second hand and I am not sure how valuable specific comments would be. I have read reports, including a PhD thesis by a student of mine who has investigated the activities of non-executive directors. I reference that in my paper. The student suggested there is room for non-executive directors to change some aspects of their practices. She suggested that, quite apart from exercising risk and compliance functions within banks, non-executive directors could exercise a greater voice and challenge usefully. Preparation and information are very important, as are challenge and debate, and opportunities to facilitate these inside banks are important also. I have made mention of the in camera sessions apparently held in Canadian banks. These are practices that seem to have worked well for the Canadian banks. As I understand it, they do not seem to have been common in Irish banks.

There are codes of practice for directors of banks. A lot of the professional reflection is now being guided by developments in Britain including, for example, the common code recommendations in the Walker review of 2009, where some of the advice for directors is very much along the lines of developing information, engaging with challenging behaviour and engaging in the type of critical debate I am characterising as the enemy of groupthink.

Michael McGrath (Cork South Central, Fianna Fail)
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To clarify, Professor Hardiman did not look specifically at the governance arrangements within individual financial institutions?

Professor Niamh Hardiman:

No, that is not my area.

Michael McGrath (Cork South Central, Fianna Fail)
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Professor Hardiman made reference in her opening remarks to the comparison between the Irish and Canadian banking sectors. She spoke about the role of the regulator in Canada and highlighted one particular difference in terms of the in camerasessions. The regulatory environment is one aspect, and a very important one, but in terms of how the banks were run and the arrangements internally, does she have any other examples of key differences between what was being done in Canadian banks versus Irish banks during the years in question?

Professor Niamh Hardiman:

Corporate governance of Canadian banks is even less an area of expertise for me than corporate governance of Irish banks. However, it should be noted that what were then the two large Canadian banks had a major collapse in 1984. On foot of that, the banks themselves got a terrible fright and adopted a conservative business model thereafter. As a result, they were a little bit more resistant to the temptations of ready credit and financialisation than were many of the American banks and others in the English-speaking world.

Michael McGrath (Cork South Central, Fianna Fail)
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On page 31 of the 2012 paper she wrote with Professor Blanaid Clarke on the crisis in the Irish banking system, Professor Hardiman makes the point that from the establishment of the Office of the Financial Regulator in 2003 to October 2008, not a single Irish bank was fined as a result of an inspection. She makes a contrast in this regard with the situation in the UK. What does the professor think this tells us, if anything, about the regulatory regime and the conduct of the institutions?

Professor Niamh Hardiman:

I do not know if any Irish banks deserved to be fined during that period. That is the first thing to say. The second thing to say is that knowing now what happened, it does seem there may well have been, at a minimum, questions to be asked. We were pushed back to asking about the vigour of the regulatory regime that was in practice. There were many reasons that Ireland wanted to adopt a light-touch regulatory regime. It was the norm in Britain as well and Irish expectations about what financial regulation would do were very much shaped by the fact that we really wanted to have an IFSC in Ireland. We wanted to encourage investment by traded financial services, and it has been very valuable to the Irish economy to have that. The real question is how light is light enough? Those are the sorts of questions the committee is concerned to investigate now.

Michael McGrath (Cork South Central, Fianna Fail)
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On page 18 of the 2012 paper, there is reference to an initiative by the Central Bank in 2005 to introduce a corporate governance code for credit institutions and insurance undertakings. The bank engaged in pre-consultation in 2005 and 2006, but decided to delay the code until early 2007. The point is made in the paper that this delay was unfortunate as the introduction of the code, even at that late stage, might have shone light on the serious corporate governance deficiencies in some of the institutions prior to the Government's decision in September 2008 to guarantee the banks. Will the professor expand on what difference it might have made if those new corporate governance code arrangements had been introduced at an earlier date?

Professor Niamh Hardiman:

It is very difficult to speculate about what might have happened and it would be quite inappropriate for me to do so. What we are looking at is a rather late introduction of more exacting compliance requirements and practices.

Michael McGrath (Cork South Central, Fianna Fail)
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By describing the delay as unfortunate, Professor Hardiman is speculating that things might have been different if it was done earlier.

Professor Niamh Hardiman:

I am speculating to the extent that we might also say, for example, that tighter restrictions on lending between 2003 and 2007 might have prevented the banks from being exposed to such a large degree of liabilities. These are issues about which it is easy to speculate in hindsight, but I do not have any special expertise to allow me to comment further than that.

Michael McGrath (Cork South Central, Fianna Fail)
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The professor noted in her opening remarks before the committee today that the powers available to the Financial Regulator prior to the crash were "not excessively weak". Will she expand on that and indicate the basis on which she arrived at this conclusion?

Professor Niamh Hardiman:

Again, there are people who have greater expertise than I do in financial regulation and the legal arrangements around that, but my understanding is that the powers available to the Financial Regulator would have permitted a more vigorous oversight regime than was actually implemented. There is a report by the Comptroller and Auditor General which states that the Financial Regulator might have asked for more resources but did not do so. I mentioned this in the context of noting that there can be a distinction drawn between formal institutions, rules and laws on the one hand and, on the other hand, the ways they are put into practice, the informal practices that develop and how these things are actually lived out. One can have lots of appropriate strong rules and so on in place but whether they actually have bite in terms of really regulating practices may be another matter. There are all sorts of aspects to how conduct actually goes on that we also want to know about and understand. That is a matter as much of trying to contribute to changing culture, changing expectations, and changing the norms, values and mutual understandings people have about how institutions need to work as it is about designing the institutions in the first place. This comes back to my point about critical engagement and antipathy to groupthink.

Michael McGrath (Cork South Central, Fianna Fail)
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On page 4 of her opening statement, Professor Hardiman makes reference to a dearth of accurate information available to policy makers about the true state of the banks prior to extending the guarantee, which she describes as a clear failure of the regulatory regime. Is she relying on the work of others in making that statement or what is her basis for saying it?

Professor Niamh Hardiman:

Most commentators would have expected that in a robust regulatory regime, there would have been more information about the degree of exposure of the Irish banks. That is exactly what my comment refers to.

Michael McGrath (Cork South Central, Fianna Fail)
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The professor referred to privileged access to decision making. Is there one clear example of where that type of access was used successfully to influence a decision by policy makers or influence the approach of the Central Bank or regulator to conducting their functions? Is she talking in the round and in generalities or does she have specific instances to back that up?

Professor Niamh Hardiman:

What I am trying to sketch is a pattern of economic governance. On the specific issue of relationships between private interests and political decision makers, we could look to, for example, tribunals of inquiry for evidence of instances where payments to politicians occurred, where words like "corruption" have been used and so on. It is not really my concern to delve into those sorts of issues here. I understand Dr. Elaine Byrne will appear before the committee; she is the expert on this.

Michael McGrath (Cork South Central, Fianna Fail)
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I am asking this question in the context of the banking crisis.

Professor Niamh Hardiman:

In a banking context I have no observations at all to make directly on that. What I would say is that it really is the structured set of relationships that is important. It does not even necessarily have to be the case that banks lobby to get their interests attended to by Government for them to be very important players in the political process.

It is these structured relationships between different interests that I want to flag and I am suggesting government needs to have the capacity to establish a distance in policy formation processes from powerful social interests. That involves scrutiny and deliberation of competing policy proposals and a critical analysis or evaluation of the priorities being followed in economic policy. I have mentioned previously what we now see to be inappropriate fiscal incentives and as an inappropriately loose stance in allowing a great deal of credit to be built up in the Irish economy, but these were policy decisions Governments took. We do not have to look for and it would probably be impossible to find any instance of specific lobbying that resulted in these policy decisions being taken. It is the policy structure that is the problem and we really want to try to understand how we can do better.

Marc MacSharry (Fianna Fail)
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I thank Professor Hardiman for coming. On pages 3 and 4 of her presentation she refers to the close relationships which developed between "banks, builders, developers and political leaders." There is also a reference to Ireland's poor ranking in the global competitiveness index of the World Economic Forum in 2014. Among the poorest ratings for Ireland was "favouritism in decisions of government officials". If the Professor is familiar with this, will she give us some examples of such favouritism?

Professor Niamh Hardiman:

I cannot; the Senator will have to ask the World Economic Forum for them. What I was reporting was that there was a perception that whatever the measures the World Economic Forum-----

Marc MacSharry (Fianna Fail)
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Does Professor Hardiman know what metrics the forum uses to measure such things? On what are such statements based?

Professor Niamh Hardiman:

I could look it up and find out for the Senator, but I cannot respond to the question immediately.

Marc MacSharry (Fianna Fail)
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That would be useful. It would be interesting to get an insight into it. Does Professor Hardiman have any specific comment to make on the relationship between the regulator and the banks? Is there an economic forum that can focus on this?

Professor Niamh Hardiman:

I do not know of comparative metrics used. Among the principles of good regulation are two essentials, the first of which is expertise. It is important to ensure the regulatory system has strong expertise in the area it is trying to oversee because regulators are there to stop people from doing things they want to do. When people want to do things, they will try to find ways around the rules. Recently in the Financial Times, for example, Ms Gillian Tett commented on the fact that the stress tests for American banks were possibly too lenient even still because the regulatory system was imposing stress tests that were too predictable. The financial institutions and their professional advisers are organising their reporting systems to match the tests that they know are going to be used for them. Therefore, knowledge of the systems in order that regulation can be tough, unpredictable and not pre-arranged is very important.

The second essential is relational distance. Analysts of regulation have suggested relational distance is very important, that there should not be close personal or professional relationships between the regulator and those regulated. Relational distance must be maintained, but expertise has to be prioritised. That is difficult to pull off. The Irish-----

Marc MacSharry (Fianna Fail)
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What are the metrics we can use? What prevents regulator A and banker B from being pitched against each other in the winter league at the golf club, for example?

Professor Niamh Hardiman:

That is a real problem and part of what I am flagging. We have a much tougher financial regulatory apparatus and regime now, but we can never be complacent about how well institutions, rules and laws are operating because there is no way of controlling the myriad ways around the rules, including informal social interactions. What is every bit as important is cultivating a changed insight into and an understanding of how institutions ought to behave. Institutions are not just, as I have said before, formal apparatuses; they are also underpinned by ethics, an ethos, norms, values and ideas, including the ideas people carry around in their heads about appropriate behaviour.

Marc MacSharry (Fianna Fail)
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Would Professor Hardiman describe these norms, ethics or practices as very low, acceptable or high?

Professor Niamh Hardiman:

I have no metric against which to pitch it.

Marc MacSharry (Fianna Fail)
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Other than Professor Hardiman's own experience.

Professor Niamh Hardiman:

What I am suggesting is that the Irish record on how regulators were appointed and the skills they had available to them was not optimal in terms of meeting the criteria I suggested, that is, the combination of expertise and relational distance.

Marc MacSharry (Fianna Fail)
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Should there be criteria or codes of conduct for determining how social interaction should be handled between politicians, civil servants, bankers, regulators and so forth?

Professor Niamh Hardiman:

I think all sorts of guidelines on appropriate conduct are desirable. We have had new legislation on compliance, ethics in public office, scrutiny and oversight of donations to political parties with a view to trying to control and eliminate-----

Marc MacSharry (Fianna Fail)
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Is it sufficient?

Professor Niamh Hardiman:

That is my point. Rules-based enforcement of conduct can only ever go so far. What is every bit as important is building cultures based on the ethos one would like to see developed. This is based on interpersonal expectations about what is appropriate in exchanges and relationships that are often unspoken. Codes of conduct can codify these things and in so far as they help to entrench norms and diffuse people's expectations about what is appropriate, they are very important. Again, it is only through talking, debate, criticism, exposition and critiques that we can keep these to the fore in everybody's mind.

Marc MacSharry (Fianna Fail)
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Is it codes of conduct that we require?

Ciarán Lynch (Cork South Central, Labour)
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I am sorry, but the Senator is out of time.

Professor Niamh Hardiman:

Codes of conduct can help, but they are not the end of the story.

Pearse Doherty (Donegal South West, Sinn Fein)
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Professor Hardiman made reference to groupthink in the run-up to the crisis. Has she identified traces of groupthink currently within our parliamentary system?

Professor Niamh Hardiman:

I have not had occasion to explore areas of groupthink that would be relevant to this inquiry.

Pearse Doherty (Donegal South West, Sinn Fein)
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Does Professor Hardiman believe it is a thing of the past or not? Has it been confined to the immediate post-crisis period? She talked about three areas, but does she think it is just a post-crisis issue or is it still an issue today?

Professor Niamh Hardiman:

My point is that we never really know until it is too late. It is easy to identify with hindsight. What I am suggesting is that we need to be vigilant against the danger that we might be becoming too complacent, with everyone thinking things are fine and sharing the same world view about how policy works. We should always be wary about a comfortable consensus and willing to listen to critical voices when they emerge, with a view to making space for them and assessing the validity of what they have to say. It is too easy to exclude critical voices when they are uncomfortable, but they may be the harbingers of future dangers about which we do not know from within our cosy consensus.

Pearse Doherty (Donegal South West, Sinn Fein)
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On page 2 of her statement Professor Hardiman argues that "privileged groups should not be able to gain preferential access to decision-making in ways that would distort considerations of public interest." I ask her to enlighten the committee on how to define this; how the public would know and how we can protect ourselves in that type of scenario, that is, where there is privileged access to decision-making?

There have been well-documented instances from the past where the Taoiseach of the country met with senior directors of banks and the regulator and sought their opinions on budgetary matters but it was claimed that banking matters were not discussed. How can we define whether that was an appropriate meeting? Alternatively, was it a case of, as Professor Hardiman suggests, privileged groups being able to have preferential access to decision making?

Professor Niamh Hardiman:

I did not pin that particular phrase on to any particular episode. What I want to highlight is that there are two dimensions to governing in a democratic political system. One is the exercise of power and responsibility. Governments must be able to exercise discretion, manage the economy, respond all the time to all the hard challenges that come their way and look for advice. The other dimension is legitimation and accountability. We know the Eurobarometer report suggests that Irish people have unusually low levels of confidence in our public institutions at the moment. They have been in decline for a number of years, which is very worrying because people are seeing that the levels of accountability have been weak and the mechanisms for getting that accountability have been weak. Inquiries such as this are the kind of thing I am talking about - the capacity to find out things that went wrong.

We also want these sort of processes on an ongoing basis. To come back to the points I made at the outset about parliamentary committees in other systems, it relates to this vigorous debate about ongoing policy and policy proposals and asking hard questions of the Government. It is very hard to ask hard questions of the Government in our system. A couple of times, Opposition questioners have been told that they did not ask the right question so they could not get the answers they were looking for. It relates to control of information by the Executive and the difficulties the Parliament has in gaining access. By "Parliament", I mean both the governing party backbenchers and the Opposition parties, not just on party lines.

Pearse Doherty (Donegal South West, Sinn Fein)
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Professor Hardiman quoted the World Economic Forum report of 2014 which highlighted "favouritism in decisions of Government officials". Could she explain what this phrase means? Has she any evidence to back up this statement?

Professor Niamh Hardiman:

This is very similar to the question asked by Senator MacSharry. The World Economic Forum is picking up on the experiences of economies in preceding years. I do not have the precise metric according to which it developed its comparative rankings of countries on these indicators. I flagged the fact that it thought that there was something problematic. I have been indicating that the structure and the patterns of decision making and policy formation have been problematic and have favoured some interests over others in ways that did not prove to yield a sustainable growth model and that were problematic when it came to avoiding the accumulation of risk. That is what I was pointing to.

Eoghan Murphy (Dublin South East, Fine Gael)
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We know from the pre-crisis period that there was extraordinary access on the part of the banks to senior political figures. When we look at that context, does access necessarily mean influence in policy decision making? If we think it does, are we talking about limiting access or just monitoring it?

Professor Niamh Hardiman:

Access may or may not involve influence and influence may or may not be appropriate. There is no general answer to that. One thing to remember is that people who want Government to do something like to have access and access is not evenly distributed among different groups and interests in our society. Having exceptionally easy access could be a problem in a context where we are trying think about the balance of consultation and the interests that gain access. That is the concern there.

Eoghan Murphy (Dublin South East, Fine Gael)
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Would good design mean limiting access or just monitoring it more effectively?

Professor Niamh Hardiman:

I think our recent moves to have a register of lobbyists are very helpful in that regard. Again, it is part of tightening up our rule base monitoring and trying to introduce more oversight and regulation of how interests gain voice in political access and representations. That is very helpful. The point I keep coming back to is that this is never enough by itself. We also need to think about the way in which we might open out deliberation about policy and expose the kind of engagements that Governments have with different kinds of interests to scrutiny and inspection. It is partly Government in the sunlight. Whenever something is secret, we may want to know why. Is there something we should know about here?

Eoghan Murphy (Dublin South East, Fine Gael)
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In respect of the lobbying Bill, does Professor Hardiman think it is important that where an informal contact is made, there is a requirement that this be noted and published? It is coming back to this idea of a small society and people bumping into people, people knowing each other, meeting someone at the golf course and something getting raised in that context.

Professor Niamh Hardiman:

The problem in a small society is where one stops. If I accidentally bump into the Minister for Finance at Charles de Gaulle Airport, do I report that? Where does one stop? Trying to pin down every single instance of contact in rules, trying to enforce things and reporting on everything is the high road to disaster in terms of monitoring and respect for the rules. That is probably not the way to go but there may be ways of requiring more vigorous compliance with structured and unstructured engagements that I do not know about. I am not in a position to comment how lobbying legislation is to be implemented.

Eoghan Murphy (Dublin South East, Fine Gael)
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In respect of the idea of creating an environment for competition among ideas, is the Irish Fiscal Advisory Council, which Professor Hardiman mentioned previously, an example of how one creates that environment or could it be seen as an example of creating another agency or voice that may or may not be listened to?

Professor Niamh Hardiman:

Most of all, it is about developing a culture. Developing a culture is a challenge. I have some specific thoughts about ways in which these sorts of priorities can be supported. I suggested involving universities and other people who have expertise in particular kinds of policy areas in policy debates. There are innovations inside some Departments at the moment. For example, the Department of the Taoiseach has been organising open seminars on key issues like risk assessment. The Department of Public Expenditure and Reform has been very involved in reaching out and engaging with lots of different areas of expertise as well as building up the Irish Government Economic and Evaluation Service. If I can make a small institutional plug, UCD is keen on thinking about ways in which it can develop these kinds of academic practitioner engagements. I recently organised a round table involving people from the public service which was attended by about 20 or 30 people, including people from the Departments of Finance and Public Expenditure and Reform and academics. We had a very good discussion about international trends in public sector reform which is helpful and informative for all concerned. Those kinds of practices can only be a good thing.

Eoghan Murphy (Dublin South East, Fine Gael)
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Coming back to the idea of institutional design and looking back to the pre-crisis years, does Professor Hardiman think that the Oireachtas was designed in a way that meant it could effectively oversee Government action or did it merely come down to the way it was used?

Professor Niamh Hardiman:

We have a fully functional, fully constitutional and fully democratic political system with a Constitution that says that the Executive is accountable to the Legislature so in formal and constitutional terms, we are right up there. There is nothing wrong with our formal democratic structures. I am talking about giving them effect. We have a very typical Westminster-type parliamentary system. As the Government is fully formed from the Legislature, it means that the practice of party discipline to control majorities in the Legislature means preferential access to use of power and the power to get legislation through and to curtail debate if the Government wants to do so.

This is built into Westminster systems; it is how they work, and we are very like the British Parliament in this regard.

The British Parliament has changed in some of its practices. In Ireland, we have been developing parliamentary committees since the 1980s, but Britain has gone further. House of Commons committees are, frankly, scary for those who must appear before them. Their reports are debated in Parliament and get a lot of public attention. I would like to see a situation where Oireachtas reports, and there are many excellent reports, really feature as an agenda item in public debates and where the substance of policy and learning which happens through having vigorous debates in the Oireachtas would push issues through to a legislative agenda, and certainly help create the type of environment and expectations I have been speaking about with regard to a normative reappraisal of how we do business. Often when we do business as usual it is hard to see outside the parameters.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Following Deputy Murphy's question on whether access is influence, Professor Hardiman spoke about exceptionally easy access for certain groups. Is it not the case then that access is an example of the political system we have in Ireland? Professor Hardiman and Professor Farrell outlined strong support for the method of election, and different interests have exceptionally easy access, to use the phrase Professor Hardiman used in answer to Deputy Murphy's question.

Professor Niamh Hardiman:

On the electoral system, I am not saying it is not worth looking at other electoral systems. I am not so completely wedded to PR-STV that I would say it is the best of all possible systems we could ever have. I am just saying it is not necessarily the source of all the problems people attribute to it. When we think about access we think about a number of different things. The access of individual citizens to their representative is one thing and the access of powerful interests to the wider policy-shaping agenda is something different. In Irish politics people value the fact they can get to see their representative easily, but there is a downside to this. Who am I to say, because the members know this better than I do, but my understanding is very often what people want is help with negotiating a bureaucracy which can seem very unresponsive, help with finding out rights and entitlements they have and should be able to access easily but somehow cannot, or help with problems for which a policy solution may be available to them of which they are not aware. Helping people to negotiate a system which is a bit opaque suggests not only there is a good connection between people and their representatives, but also there are things we need to look at again regarding the opacity or difficulty of negotiating our wider public services.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Professor Hardiman outlined in a number of answers that in her opinion too much consensus existed in the political system, and perhaps in other institutions and between institutions, in the lead up to the financial crisis. Professor Farrell emphasised in many of his answers the need to move towards what he described as a more consensus form of politics, and that we did not have enough of a consensus form of politics. Perhaps I am missing something, but potentially there seems to be a direct contradiction between Professor Farrell's view on the type of politics that existed in Ireland before the financial collapse and how we needed to move to a European model of consensus, and Professor Hardiman's view that too much consensus existed. Can Professor Hardiman square this circle?

Professor Niamh Hardiman:

Obviously I do not know exactly what Professor Farrell said. I was not able to see him because I was on my way here. I suspect what he may have had in mind is the tendency in Westminster-type parliaments to have a very adversarial style of politics whereby the Government sees it as its business to defend its preferences to the hilt and the Opposition sees it as its business to embarrass the Government at every point. What I am speaking about, in terms of contestation, is in the sphere of ideas, policy debates and the engagement of ideas, not simply barracking and point scoring in a party political manner but a gauged evaluation of policy and bringing to bear different critical perspectives with a view to trying to tease out the politics of feasibility. I am not saying there is a technical solution to everything. Sometimes choices are irreducibly political and it comes to a matter of the preferences, priorities, ideology and value priorities the Government may have which will lead it in one direction rather than another.

I suspect when Professor Farrell spoke on consensus he may have been speaking about a capacity to engage more constructively, through debate, negotiation and the contestation of ideas, and aggregate different points of view to find common perspectives where these might be possible or desirable. I am thinking about things like, for example, really evaluating the parameters of what is fiscally possible in an economy and what the wisdom is of engaging in expansion or contraction, or what amount of fiscal headroom would be desirable to have at a particular time.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In her presentation Professor Hardiman emphasised the role of groupthink in the difficulties in Ireland, and she also mentioned the Nyberg report. Has she found examples of groupthink to the same level, or any level, in other EU countries which experienced a financial crisis at the same time as that which hit Ireland? Has she studied this?

Professor Niamh Hardiman:

It would be hard to say. Ireland is not the only country which experienced a crisis, of course. The prevalence of belief in self-regulating markets was what did for us all. The economics profession is engaging in a lot of heart searching about the way it formulated its ideas, taught students about risk, and downplayed all the issues which were very much on the political agenda in the wake of the great depression when regulation and the separation of interests between high street banks and other financial institutions were introduced. There is great literature now on the lack of vigilance, how risky markets are and how dangerous it is to rely on markets in a world where we have new, hard to understand, complex and risky financial products, capital mobility and enormous financial corporations.

Susan O'Keeffe (Labour)
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I welcome Professor Hardiman. On page 6 she refers to the culture of independence needing to be maintained in the public service so it can function as a guardian of the public interest. To be clear, is she saying, therefore, there is a culture of independence already? Is that the implication of the word "maintained"? Does she mean there needs to be one because there is not one?

Professor Niamh Hardiman:

Formally there is. Irish institutions score very well on all the comparative metrics of democratic performance. We have a very incorrupt public service. We have a public service that has been commended by the IMF on its capacity to learn. It has a very high implementing capacity and very high effectiveness capabilities. What I am flagging is the need we have for a public service that continues to be non-political, which is its role in our Whitehall-type system, and to be the guardians of the public interest and public interest considerations.

Again, it is about senior civil servants being willing to offer challenge to Ministers. At the end of the day, it is the Government which has the electoral mandate. What Government Ministers want to do should not be countermanded by civil servants. That is not what I am saying. However, they should feel free to give advice which would not necessarily reflect what a Minister had suggested in the first instance or which might not be what he or she might wish to hear. We do not always know how these relationships play out because they are subject to privilege and secrecy. One of the reforms that some people have suggested would be helpful in understanding how those relationships work and in facilitating the Civil Service in maintaining its role as the guardian of the public interest is that which would allow senior civil servants to testify to parliamentary committees. I understand they are not able to do this at present.

Susan O'Keeffe (Labour)
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They are permitted to do so under the new legislation.

Professor Niamh Hardiman:

But they would not have been able to do so in the past.

Susan O'Keeffe (Labour)
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That is correct. If we consider the period between 2000 and 2007, it is obvious that power was vested in Government and in the Parliament. Was power vested in the Civil Service or would one even refer to it as power?

Professor Niamh Hardiman:

It depends on the theoretical perspective one adopts. I am not sure whether it would be described as power. Power to do what?

Susan O'Keeffe (Labour)
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To make decisions, to introduce policy, to change a Minister's mind or offer proposals for legislation. There are all sorts of ways in which power can be potentially manifested. I am just asking Professor Hardiman, as a political scientist, where the Civil Service fits into the power structure that exists in this country. One could examine the position in other countries but we are interested only in what happens here.

Professor Niamh Hardiman:

The Civil Service must be very much at the disposal of the State in the context of the implementation of public policy. That is its purpose. Having a good, effective and efficient Civil Service is terribly important. Both the efficient and distributive institutions of the public service can work well or they can work badly.

The Civil Service has a responsibility to be able to draw on expertise in order to be in a position to support the development of good policy. One of the areas that has come under scrutiny in recent years is the dearth of technical economic expertise in the Department of Finance. There were many hugely competent individuals within the Department who had a great deal of such expertise but the kind of structured professional training required was not in good supply. We need to ensure we cultivate the necessary skills and specific competences as well as encouraging appropriate relationships - that we think of as being reflective of good public sector practice - in the context of co-operation with and distance from Ministers.

Susan O'Keeffe (Labour)
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When Professor Edward Kane gave evidence before the committee, he described the financial system - in the way it interacts with the political system - as being elitist as a result of the fact that bankers are treated as high priests of a sort because they make the elites happy.

Ciarán Lynch (Cork South Central, Labour)
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Final question.

Susan O'Keeffe (Labour)
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It is my final question. Professor Hardiman refers to "the dearth of accurate information about the true state of the banks that was available to policy-makers prior to extending the guarantee – a clear failure of the regulatory regime". If Professor Hardiman agrees with Professor Kane that those to whom I refer are high priests and regardless of the amount of information available, is it not the case that the same decision would have been made? Does Professor Hardiman have a view on that matter? What Professor Kane stated was quite serious in nature and Professor Hardiman may harbour a different opinion.

Professor Niamh Hardiman:

This is the first time I have heard that quote. It sounds as if what is being characterised there is excessive and inappropriate deference to people who should have been carrying out a professional function.

Susan O'Keeffe (Labour)
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What is the position if there is that deference?

Professor Niamh Hardiman:

The questions I have been raising all along relate to where we accord deference and the circumstances in which it is inappropriate to do so. Questioning the bases of authority is always useful. If authority is based on knowledge and competences, then people would be willing to accept it. If, however, it is simply an assertion of right or entitlement or of entitlement due to position, then it is a problem because we are not really able to discover that which we need to know. In such circumstances, there is a risk of information which should come into the public domain not doing so. I would certainly see that as a problem.

Sean Barrett (Independent)
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I welcome Professor Hardiman. I am interested in her quote from Mary Halton's thesis regarding the conduct of non-executive directors in Canada, who held meetings without management being present "as the primary tool through which to test ideas and build support among colleagues. This arguably helped to avoid excessive deference on the part of non-executive directors and to strengthen independent and challenging voices on corporate boards." Professor Edward Kane, to whom Senator O'Keeffe just referred, sees directors as trustees for society as a whole and not as members of a forelock-touching old boys' club. Is there much literature available in respect of the new kinds of director to whom Mary Halton, Professor Hardiman and Professor Kane refer preventing the tendency to engage in groupthink?

Professor Niamh Hardiman:

As I said before, I am not an expert in corporate governance but I am sure there must be literature on directors. There is certainly a great deal of reflection on the kind of role directors can, and perhaps should, be playing. Taking seriously their role as trustees is very much part of that. I referred to the Walker review of corporate practices in financial services and the banking sector in Britain, which is developing codes of practice in this area. We are always willing to learn from systems which have lessons to teach us. Among those lessons is advice of a sort, which seems to have been adopted long ago by Canadian directors, to the effect that directors should have that combination of expertise and distance to which I have been referring.

Sean Barrett (Independent)
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Unfortunately, we do not like whistleblowers. Is it not the case that there is evidence that the careers of whistleblowers are ruined by their actions? In many cases organisations never institute reforms, rather they just gang up on the contrarians involved.

Professor Niamh Hardiman:

Yes. We have to learn to love our whistleblowers.

Sean Barrett (Independent)
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The deference we are discussing applies, particularly in this Parliament, to European matters. Professor Hardiman provided additional information to us on EMU and what it means. Did we understand what we were doing when we joined EMU? Were there contrarians who spoke up when Denmark, Sweden and the United Kingdom did not join? If so, did anyone think to follow their advice and reconsider this matter or was it a case of just touching the forelock and continuing on?

Professor Niamh Hardiman:

The decision to go into EMU dates back to the late 1980s and early 1990s. In 1992 Ireland was in a bit of a tricky situation. There were many economists who stated that the architecture of EMU did not look good and that it did not constitute an optimal currency union. They were of the view that, in the absence of a transfer union, a banking union, debt resolution and all of the things we have now learned as so important, it would prove somewhat problematic. Maintaining an independent exchange rate regime was very challenging for Ireland at the time. On the whole, compliance with the requirements to join EMU worked well for Irish economic performance in terms of the policy process. In the early stages, most people expected that upside would be very strong and that integration with the wider European economy would be facilitated by the single currency, that trade would improve, that our export links with other eurozone countries would be intensified and so on. Adaptation to the new policy regime, whereby there was no control over exchange rates and monetary policy, was probably slow in coming because it attached new importance to the domestic capacity to manage by using just cost-containing mechanisms, fiscal policy, etc. What people did not realise was all the perverse incentives that would spill out from having such low interest rates.

That was a shock that was genuinely hard to manage.

Sean Barrett (Independent)
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The new, ethical and open complex that the professor has described to us sounds most interesting. The "big four" accountancy firms dominate accounting at the banks. With regulatory capture, the way regulatory institutions are set up and even finding that one bank gave €41 million in loans to its own directors, how does one promote the much better system described by the professor? How can one extend it into areas so we never get a recurrence?

Professor Niamh Hardiman:

With instruments on every front, I think. Formal regulatory regimes are terribly important and so also are codes of conduct by professional bodies so that banks do self-regulation and self-monitoring.

In so far as regulators get captured by those whom they were supposed to regulate, accountability to Parliament can help as well as scrutiny, opening things to question and assessing how well the regulators are doing. Civil society bodies have a role in this as well. I am referring to non-governmental organisations and civil society groups that can exercise an adequacy role and watchdog role which would alert us all to problems or shortcomings. Journalism and journalists can also play a part in this by, for example, uncovering stories that are unsavoury, need more investigation or show us where our institutions or practices are failing. It is all about democratic accountability and legitimacy that has many strands which I have tried to elaborate.

Michael D'Arcy (Fine Gael)
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I thank the professor for attending. I refer to the paper written jointly by herself and Professor Blánaid Clarke. On page 31, it states that "directors of both AIB and Bank of Ireland held simultaneous appointments on the board of the Central Bank." Did that happen in Canada? Professor Hardiman has given Canada as an example of a good regulatory regime.

Professor Niamh Hardiman:

I cannot comment on that definitively because I am afraid I do not know. If the Senator wishes, I could find out.

Michael D'Arcy (Fine Gael)
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The discussion paper continued:

In September 2008, against the backdrop of this deliberate policy of light-touch regulation that the regulator insisted that Anglo was not insolvent and that it had enough assets to cover its debts. There is no evidence to suggest Anglo is insolvent on a going-concern basis. It is simply unable to continue on a current basis from a liquidity point of view, he told the Taoiseach.

Ciarán Lynch (Cork South Central, Labour)
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I do not know if the witness has the skillset to answer that question.

Michael D'Arcy (Fine Gael)
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I am quoting what the witness has stated.

Ciarán Lynch (Cork South Central, Labour)
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All right.

Michael D'Arcy (Fine Gael)
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My question is relevant.

Ciarán Lynch (Cork South Central, Labour)
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We give a notification when it comes to reports. I shall allow the witness respond and shall take guidance from there.

Michael D'Arcy (Fine Gael)
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PwC was subsequently paid €5 million to carry out an analysis of the banks covered by the bank guarantee. It subsequently discovered, when the report was published, or the analysis was, that the banks were solvent.

Professor Niamh Hardiman:

What is the Senator's question?

Michael D'Arcy (Fine Gael)
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The professor made the point that light touch regulation led to the Financial Regulator making the statement to the Taoiseach that the banks were solvent. In light of PwC being paid €5 million to analyse direct-----

Ciarán Lynch (Cork South Central, Labour)
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Is this the Senator's commentary or is it contained in the report?

Michael D'Arcy (Fine Gael)
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It is in this report here. I ask the professor to comment on her statement in her paper on the Financial Regulator making a statement to the Taoiseach that the banks were solvent.

Professor Niamh Hardiman:

There are two things I would like to say about that. First, we now know, in hindsight, there was a dearth of information all round and that the Financial Regulator did not have access to all the information. This is what we seem to have learned. I am not in a position to comment as to the veracity of any of those claims.

Second, in regard to any particular institution about which there are ongoing discussions in the public domain, I am not at liberty to comment I am afraid.

Ciarán Lynch (Cork South Central, Labour)
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All right. I call Deputy Joe Higgins.

Joe Higgins (Dublin West, Socialist Party)
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Professor Hardiman stated on page 1 of her written introduction, under the title of privileged access to decision-making, that, "politicians, and key public officials had too little distance from powerful private sector interests, resulting in what is sometimes termed as "cronyism" or even "crony capitalism." In the letter the professor received from the banking committee she was asked to cover the following:

The key features of an effective system of governance, i.e. standards to which relationships in institutions, within a democratic structure should operate, and an understanding of good governance in the context of a healthy public and political life.

Professor Niamh Hardiman:

What I have sketched out is a policy regime during the 2000s which involved Government in prioritising a certain way of supporting economic growth and job creation. It turned out to be hard to sustain, because it was built on short-term construction interests which adds very little value or long-term value to the economy. It also encouraged and allowed risk to develop in the financial system because it depended on the ongoing availability of credit for property. This way of arranging policy and prioritising some kinds of economic activities in policy incentives, in the early to mid-2000s, is what I designated as problematic.

We can now see, in hindsight, the scale of the property bubble that developed. In future we want to try to make sure we have balanced capabilities for really assessing the viability, durability and good foundations for any particular growth regime supported by specific kinds of fiscal incentives. Opening these out to critical scrutiny and accountability, in different political and public fora, is really what I want to stress.

Joe Higgins (Dublin West, Socialist Party)
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The professor referred to critics and contrary views to those prevailing, by common consent, in the inflation of the bubble period, being ignored.Yesterday, Mr. Simon Carswell, who is a correspondent for The Irish Times, said the following about banks, Government, builders and regulators in his written evidence on page 2:

For these parties, it was too comfortable - and indeed self-serving for some - to stay in the crowd and stick with the consensus, particularly when so many people were making so much money. The result of this was that contrarians were ridiculed, silenced or ignored to ensure the credit-fuelled boom continued for years as their past warnings did not come true.

Professor Niamh Hardiman:

A lot of people have commented on this matter. When the economy is booming nobody wants to hear that it is hurtling towards the edge of a precipice. There is a wider problem for democratic societies in general. Governments have time inconsistent preferences. Governments are faced with genuinely difficult problems of trying to compete for power and win power in the next election.

Ciarán Lynch (Cork South Central, Labour)
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I am sorry to interrupt the professor but I call for order in the room.

Professor Niamh Hardiman:

Issues that have a longer time horizon than the next election are difficult to factor fully into the Government's calculations. Between 2004 and 2007, the Government, having attempted to correct some of the fiscal exuberance in the run-up to the preceding election and the European elections, was correcting the exposure with a view to the next election. It is always difficult to hear unwelcome news but my point is that we should attune ourselves to the need not to get too comfortable inside the expectation that nothing will ever go wrong.

Joe Higgins (Dublin West, Socialist Party)
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In the course of her address Professor Hardiman stated: "Banks engaged in very risky lending practices not least because their own shareholders put pressure on the directors to match the performance of the most profitable institutions, which were also the most risky." If there is no legal restriction on profiteering, for example, in the home building industry, and profit is a key driver of private banks and developers and those who run them, how fair is good governance in that situation? Does profit maximisation drive out good governance?

Professor Niamh Hardiman:

My argument is that there is a different sort of balance to be struck. At the time I am speaking about, some banks were growing profits at a rate that most expert commentators would have thought to be unwise. There would have been a question about the riskiness of the business model they had been pursuing. If there was nothing illegal about what they were doing and if they were not constrained by regulation from what they were doing, there was nothing in essence to stop them other than what their own internal audit or risk management might have suggested.

My observation is about the pressure this puts on other financial institutions that are also responsive to their own shareholders. When an economy is in this exuberant state, people expect their investments to yield a good return. My comment is that people should be sceptical about the durability of the business model that their money is tied up in. The economist, Hyman Minsky, is often cited nowadays because a long time ago he developed a model whereby he predicted that crashes were inevitable, that financial crises will recur and will happen for different reasons next time, but they will happen. They can be worse or less damaging, but they will be driven by the acceleration of expectations that there is money to be made. People pile in to try to make money while they can and the people who are slowest in getting out are the ones who will be caught most severely. The Minsky moment comes when panic sets in and exuberance evaporates and there is no more money to be made. People start to exit that apparently profit-making sector very rapidly, causing a sudden crash.

It is a monetary note to shareholders too, to be sceptical, to ask questions and to be challenging.

Ciarán Lynch (Cork South Central, Labour)
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I wish to wrap up with a number of matters before Professor Hardiman goes. Arising from the point Deputy Higgins has made, is it possible to introduce legislation to force the banks to implement better patterns of corporate governance? Do we need legislation in this area and would she indicate what type of legislation is necessary?

Professor Niamh Hardiman:

As I have already said, I am not willing to comment on what should be in legislation on corporate governance because it is not my area of expertise. There are very special competences involved in that. Legislation on many aspects is always a possibility.

Ciarán Lynch (Cork South Central, Labour)
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I do not want a generalisation. If Professor Hardiman does not have specifics I will move on. Am I correct Professor Hardiman, that you have written on political funding and donations?

Professor Niamh Hardiman:

No, I have not written on this area.

Ciarán Lynch (Cork South Central, Labour)
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Does Professor Hardiman wish to add anything further? The inquiry is not just about examining the past but also about considering the future to ensure that the mistakes of the past are not revisited on the public and the nation again.

Professor Niamh Hardiman:

I think I have had a good opportunity to bring out the themes that I really wanted, and these include the suggestion that we need more fora for democratic scrutiny of policy if we are to hold Government accountable and we need both rules, procedures and practices and expectations of vigorous questioning of policy consensus in every forum imaginable.

Ciarán Lynch (Cork South Central, Labour)
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I thank Professor Hardiman for her participation in the inquiry. It has been a very informative and a valuable meeting which has added to our understanding of the factors leading to the banking crisis. I think it should be noted that the appearance of Professor Hardiman is the first time a woman has come before the inquiry.

I propose that we suspend until 3.30 p.m., at which time we will meet Professor Honohan

Ciarán Lynch (Cork South Central, Labour)
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We will resume in public session. The Joint Committee of Inquiry into the Banking Crisis in now in public session for session 3, which is a public hearing with Professor Patrick Honohan to clarify oral evidence previously given to the committee.

I welcome Professor Honohan, Governor of the Central Bank, to this session. Following his appearance before the committee on 15 January to discuss the Honohan report, he subsequently wrote to the committee on 13 February to provide some additional information and clarifying some of his evidence. In the circumstances, the committee felt it appropriate to invite Professor Honohan back to discuss the issues raised in his correspondence. This letter is available on the banking inquiry website.

Before he begins, I wish to advise him that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If he is directed by the Chairman to cease giving evidence on a particular matter and he continues to so do, he is entitled thereafter only to qualified privilege in respect of his evidence. He is directed that only evidence connected with the subject matter of these proceedings is to be given. As informed previously, the committee is asking witnesses to refrain from discussing named individuals in this phase of the inquiry.

Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. Today's proceedings are specifically in regard to the Governor's correspondence to the committee. Other matters in regard to this inquiry that may be relevant to him will be dealt with at later stages. I invite Professor Honohan to make his opening remarks.

Professor Patrick Honohan:

Thank you very much, a Chathaoirligh. In my letter of 12 February, I sought to clarify parts of my evidence to the inquiry on 15 January. I have prepared these short introductory remarks on the presumption that the inquiry has invited me back on this occasion to amplify my views on the alternative courses of action that might have been taken by the Government at the end of September 2008. Perhaps I should recall explicitly that I myself had no involvement in the guarantee decision, so my views are based on what I learnt from preparing my May 2010 Report on Regulatory and Financial Stability Policy, as well as on many conversations with other experts and on my general knowledge of banking crises in other countries.

I will start with a critique of the decisions of end-September 2008. There are several features of the decisions at end-September that can be criticised even allowing for the limited information then available to the decision makers. The first was the guaranteeing of some of the subordinated debt. Providing an explicit guarantee to subordinated debt holders is not only potentially costly to the State, but undermines the rationale for allowing banks to meet part of their regulatory capital with subordinated debt. This was a definite design flaw in my opinion. True, thanks to steps subsequently taken, the payout to subordinated debt holders of Anglo in the end was a small proportion of the total fiscal cost; however, that payout was not negligible.

The second was guaranteeing existing outstanding debt, namely, senior bonds and term deposits, was not necessary to underpin the banks' continuing access to funds. Nor did the government guarantees introduced by other countries in 2008 offer any significant backward-looking protection in this way. It is true that imposing losses on such bondholders would have had a damaging reputational effect on Ireland as a whole, as well as impacting local holders of such bonds; but that is a different question. The decision to impose such losses could not have been lightly taken; but offering a pre-emptive guarantee on already outstanding or what I call "old" debt ahead of a full assessment of what it might cost was essentially gratuitous. Furthermore, because much of this debt entitled the holders to immediate accelerated repayment in what is called "an event of default", the Government was effectively precluded from liquidating or extensively restructuring the guaranteed institutions because it would have to repay the guaranteed debt forthwith, which it would have been unable to do because of the sums being so large. This effectively postponed the drastic restructuring action that was needed until the end of the initial guarantee period, by which time the Government's entry into the EU-IMF programme was actually imminent.

The third was failure to consult. The Irish decision to provide a blanket guarantee without prior consultation triggered immense pressure for guarantees all over Europe. Other governments resented the Irish action and this has made it difficult for the Government to make its case for burden sharing with Europe.

The fourth was the failure to seize immediate control over the management of Anglo Irish Bank. It should be assumed that the existing management of a bank whose business model has lost the confidence of the market and which has run out of cash has neither the expertise nor the incentive to recover the situation safely. The public authorities should have intervened immediately to take control of the bank, for which nationalisation was the available tool in Ireland. Fortunately, nationalisation did follow in January 2009 without evident value destruction having taken place in the intervening period.

How much does this matter? Having made these criticisms, it is important to keep the scale in perspective. The decisions on the night of the guarantee had consequences for Ireland but there has been a tendency to overstate the extent of the impact of that night's decisions on the subsequent welfare of the nation. It would be hard to deny that most of the overall hardship that followed the bursting of the bubble was already inescapably embedded in the situation. I will be put a number on this because quantification is important. While it is not a precise figure, I would hazard that at least between 80% and 90% of the overall hardship was already inescapably embedded in the situation, albeit unbeknownst to the decision makers that night.

The damage had been made unavoidable by the unrestrained credit and property boom. The fiscal austerity measures that had to be taken were not just due to the €40 billion or so in additional net debt that can be linked to the guarantee, which I mentioned the last time I came before the committee, but also reflect the far larger impact of the ending of the construction boom on the Government's tax revenue and spending needs. The fiscal costs are only one aspect of the total damage to Ireland.

In my letter to the inquiry of 12 February, I distinguished between a hypothetical hindsight scenario in which the Government would have been convincingly advised of the actual likely magnitude of the cost of a guarantee and the actual scenario with only the information available at the time. In the actual case, the Government had no information at hand indicating that any of the banks were about to experience losses far in excess of their capital reserves. What I have suggested as the best course of action, given the lack of such information in scenario 2, namely, buying time for negotiation with partners, seizing control over the two failing banks and limiting the scope of the guarantee, could hardly, unless the negotiations had proved remarkably successful, have reduced the direct fiscal bill by more than a few billion euro. While this is not an insignificant sum, it is a fraction of the actual damage.

The alternative under the hindsight scenario of bailing in some of the bondholders and depositors of Anglo Irish Bank and INBS would have imposed additional disruption to economic activity and capital formation, which would have offset much of the savings to the State from not paying the creditors. This point is made in the report of May 2010. I conclude that the need for austerity measures - the scale of tax increases and expenditure reductions that have proved necessary since - could have been reduced somewhat but not all that much by anything done at the end of September 2008.

It is important to maintain perspective and I would like to bring to your attention and call to mind some points of balance and perspective. First, as I remarked recently in an article in a newspaper, the boom and bust both damaged our economy. The boom and the decisions taken during it meant Ireland had to adjust down from living standards that could never have been sustained, with sizeable and capricious shifts in the distribution of wealth.

Second, the style of banking in Ireland, its regulation and broader economic policy were strongly influenced by comparable styles adopted at that time in countries often used as exemplars for Irish decision makers, in particular the United States and United Kingdom. This was not a solo run but the scale of the excesses in Ireland put its banking crisis in a different league, although they were not as bad as in Iceland.

The third point of balance is that the extent and nature of the guarantee decision frustrated subsequent efforts to minimise the costs and speed the recovery. However, the bulk of these costs could not have been avoided by a different course of action on the night of the guarantee.

Ciarán Lynch (Cork South Central, Labour)
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I thank Professor Honohan. The committee would like to further discuss four or five specific issues raised in his correspondence. The opening paragraph of his letter of 12 February refers to the question: "Did the Governor have the power to issue specific directions relating to a wide range of micro-prudential policies, including credit concentration limits, during the time prior to the guarantee?" When I put this question to Professor Honohan he replied that he needed to give it further thought. On that basis, will he take us through the additional information provided on the powers of the Governor of the Central Bank and their use during the period in question? Which of the powers and actions available to the Governor were not used or taken?

Professor Patrick Honohan:

This is a point about the Governor and the Central Bank narrowly thought of, as distinct from the Financial Regulator in whom most of the regulatory powers are vested. It is important that people are clear on that.

The legal opinion is that there are two particular legislative provisions that are very relevant here and give the Governor power to step into a situation which should be managed by the Financial Regulator. When I refer to the Financial Regulator, I am not talking about one person but a whole section of the Central Bank and Financial Services Authority of the time. Section 23 of the Central Bank Act 1971 is a very old provision. In fact, I think it is a slightly modified version of the provision in the 1942 Act. It is a general power to require banks or a particular bank to maintain specific ratios. However, as it does not say what these ratios are, it means any ratios in principle. This is a very wide and old-fashioned type of power, which effectively says, "We trust you to establish ratios which are for the safe conduct of banking". These powers are embodied in the Central Bank board and delegated to the Governor. They are, therefore, wide but general types of powers. That is one thing he could have used. He could have said, "Look, the situation is very bad and I am going to appeal to the 1971 Act, intervene and require the banks to have a ration of not more than 20% of their assets in this type of-----

Ciarán Lynch (Cork South Central, Labour)
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Could that include credit concentration limits?

Professor Patrick Honohan:

Yes, it could.

Turning the clock back ten years or so, the legal opinion in the Central Bank would have been that this was mainly used for the purpose of liquidity ratios and it was not ever used in a precautionary way for the balance sheet risks on the loan side. It is clear, however, that the power was there.

The members, as legislators, are aware that when one introduces new and very specific powers, it very often weakens the old, general powers because some bank might challenge them by saying, "You are imposing this power under the 1971 Act but I cannot see why you are doing that because clearly the legislator has decided that there are some specific powers". However, the advice is that those powers were there and could have been used.

The other provision gives the Governor, having regard to his European responsibilities in the European System of Central Banks or the board of the bank in relation to its objectives, particularly financial stability objectives, the power to issue guidelines to the Financial Regulator as to the principles and policies that it was required to implement in performing functions. That is a different type of action. I think that would have been the first course of action. If the Governor felt he wanted to intervene and change the way the Financial Regulator was doing things, he would have probably used that guidance power, which would amount to a significant interference with the functioning of the Financial Regulator, before using the first power that I mentioned.

I am saying this very much ex post. People at the time never imagined the Governor doing these sorts of things, although it is mentioned in an analysis by the ECB, which was required to opine on central bank legislation. The analysis highlighted the importance of this power but I believe it was thinking primarily of the power in connection with the European functions of the Governor and not in relation to concentration ratios or whatever.

Kieran O'Donnell (Limerick City, Fine Gael)
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I welcome Professor Honohan. What was the Governor's motivation in writing the letter received by the committee on 12 February, which was four weeks to the day after his appearance before the inquiry?

The Governor appeared before us on the 15 January, four weeks ago to the day. Is this appearance substantive or material to the workings of this inquiry? Was it influenced or driven by anyone mentioned in the letter of 12 February that the Governor sent into us?

Professor Patrick Honohan:

There were three motivations. One was, obviously, to answer the point we have just discussed about the powers, which I was required to answer. The other purpose was that I was not satisfied when I came away from the meeting, spoke to some people and read newspaper reports suggesting that my evidence on the guarantee had not really been understood in the way I had intended. People asked me whether I had really changed my mind on this. I replied by asking what they meant. Then, I went back, looked at the transcript and listened to it. I realised that it is not clear. What I said was not clear. I interrupted myself, as I do, all the time, without finishing sentences and by being too colloquial. I said to myself that it was not clear but it was what people were going to refer back to. I said I had better give myself a little time. I am sorry if Deputy O'Donnell thinks it was delayed, but I took the view that the committee had a lot of evidence coming to it and that there would not be a rush on this. I wanted to get it out because it is important. A lot of the questioning focused on that particular date as did a lot of the interest of the public. I am supposed to have talked to all the people and read all the documentation and, therefore, I should know something about it.

The other thing is the little note I made about Mr. Doyle. Mr. Doyle did contact me. He asked me when we talked about that. I started to wrack my brains and wondered whether I actually talked to him about that letter or was it that I had already formed a view of what his opinion was. Then I realised I was unsure whether I talked to him. The impression is definitely given in the transcript that I had talked to him after I saw that letter. I thought that needed to be corrected. I absolutely-----

Kieran O'Donnell (Limerick City, Fine Gael)
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Did Mr. Doyle contact you directly?

Professor Patrick Honohan:

He did, yes. I know him well.

Kieran O'Donnell (Limerick City, Fine Gael)
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Did he contact you on foot of your appearance before the inquiry?

Professor Patrick Honohan:

Yes, he saw the transcript and he contacted me.

Kieran O'Donnell (Limerick City, Fine Gael)
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Did he believe it was an inaccurate portrayal of his position?

Professor Patrick Honohan:

I am not sure I should speak for him. My impression is that he did not think it was inaccurate, but he was puzzled that I appeared to have said that he had said it. No doubt you will be talking to him, but I do not imagine my interpretation of what he thought is any different to what he thought.

Kieran O'Donnell (Limerick City, Fine Gael)
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You said as well: "My understanding of Mr. Doyle's perceptions of the state of Anglo in September 2008 is based on other previous conversations". When did those conversations take place? What was the content of them?

Professor Patrick Honohan:

There were conversations with Mr. Doyle and other people. I had lots of conversations with senior officials of the Department of Finance. Mr. Doyle gave evidence to the inquiry, that is to say to the group of people that I work with. I did not attend all of those conversations. I had a clear idea in my mind of what David Doyle thought. I understood it was the same as the other people, that is to say, there is not a huge hole of €8.5 billion after capital. I think that is what he thought.

Kieran O'Donnell (Limerick City, Fine Gael)
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Let us go back to the transcripts. On at least four or five occasions the Governor makes specific reference to having spoken to David Doyle. In questioning by Senator O'Keeffe he said, "I asked the person involved-----

Ciarán Lynch (Cork South Central, Labour)
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Can you give us the page reference for that?

Kieran O'Donnell (Limerick City, Fine Gael)
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It is on page 148 of the transcript. This refers back to the memo of 25 September 2008, which was completed by Mr. Kevin Cardiff and specifically revolves around the statement: "D Doyle noted that Government would need a good idea of the potential loss exposures within Anglo and INBS - on some assumptions INBS could be 2bn after capital and Anglo could be 81/2." In response your response to Senator Susan O'Keeffe you said:

I asked the person involved if that was what he thought. He replied, “No, that was wrong”. Maybe he meant €8.5 billion inclusive of capital, meaning the shareholder would have covered it all.

Ciarán Lynch (Cork South Central, Labour)
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Can you pose a question now? You are going to run out of time, Deputy.

Kieran O'Donnell (Limerick City, Fine Gael)
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I am coming at the question. When you finished up with Deputy Doherty, you stated:

This minute came to light quite late in the process, but I think I probably spoke to people. We can check with Kevin Cardiff, who was the author of the minute and from whom I would have understood that he too had not really adverted to this. He felt that nobody thought there was a loss. It is worth further exploration.

Professor Patrick Honohan:

No.

Kieran O'Donnell (Limerick City, Fine Gael)
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Did you not consider it? Have you spoken to Mr. Cardiff about this memo? When?

Professor Patrick Honohan:

I have not spoken to Mr. Cardiff about this memo in at least four and half years. I know you may think there is something here, Deputy O'Donnell but-----

Kieran O'Donnell (Limerick City, Fine Gael)
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No, I have a job to do.

Ciarán Lynch (Cork South Central, Labour)
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Please let the Governor respond.

Professor Patrick Honohan:

I know, but when I spoke to the committee I thought I knew in my mind what David Doyle said. I know I had conversations with David Doyle towards the end of the process. Did I speak to him on this? I am saying I am not sure that I did. He is saying that I did not. That is fine. It is not a big issue. That is why I wrote to the committee. I wanted to make it clear.

Kieran O'Donnell (Limerick City, Fine Gael)
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In your most recent discussions with Mr. Doyle what did he confirm about his view on the memo?

Ciarán Lynch (Cork South Central, Labour)
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I am going to make an intervention here, Deputy.

Kieran O'Donnell (Limerick City, Fine Gael)
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Sorry. I withdraw that.

Ciarán Lynch (Cork South Central, Labour)
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The issue of the whole engagement around the night of the guarantee will be fully explored as part of the nexus review. Some of the individuals that you have mentioned this evening may actually be physically present in this inquiry room and we could probe into those areas. The matter at hand is to seek clarification on the substance of what the Governor actually said. Was it a reference to Mr. Doyle or Mr. Cardiff?

Professor Patrick Honohan:

All I want to say now is that I was convinced and I am convinced that this is what Mr. Doyle thought. I have had no recent conversations with Mr. Cardiff on the matter. Mr. Doyle can confirm this or otherwise, but he says that he does not disagree with my interpretation of what he thought. There is no difference between us on this matter. He is quite clear that I did not speak to him. I am not really all that clear, but I am sure he is right.

Kieran O'Donnell (Limerick City, Fine Gael)
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Let us go back to the substantive issue of the memo of the 25th, which made reference to potential losses in INBS of €2 billion after capital and potential losses in Anglo Irish Bank of €8.5 billion. Professor, in your professional capacity, if a bank's core tier 1 capital is wiped out, does it indicate a solvency problem?

Professor Patrick Honohan:

Absolutely, without a doubt. I will set out where I think the €8.5 billion comes from. Obviously, the banks had a solvency problem and obviously the advisers from Merrill Lynch also believed there were solvency issues. Was the bank insolvent or not? That is a different matter. What they said was that in an extreme stress case analysis, write-offs in Anglo Irish Bank would deplete ordinary shareholders and other lower category subordinated debt by €7.5 billion. I am unsure whether that is €8.5 billion or €7.5 billion. They were saying that under extreme stress, essentially, most of the capital would have been wiped out. But that would have left a scenario where the Government would not have had to pay in a liquidation.

Kieran O'Donnell (Limerick City, Fine Gael)
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The Merrill Lynch report was e-mailed to Kevin Cardiff on the 29th, the night of the guarantee, at approximately 6.45 p.m. It also stated that Irish Nationwide Building Society, in a worst-case scenario, would have €1.8 billion of a write-off.

Professor Patrick Honohan:

Yes.

Kieran O'Donnell (Limerick City, Fine Gael)
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Irish Nationwide Building Society had only a core tier 1 capital of €1.4 billion with a write-off of €1.8 billion. It would have completely eliminated it. Anglo Irish Bank had only €7.1 billion of core tier 1 capital, with a potential write-off of €7.5 billion.

That is almost identical to what is in the memorandum of 25 September that was completed by Mr. Kevin Cardiff, at which everyone was present, including Merrill Lynch, the Minister for Finance, Mr. Kevin Cardiff, Mr. David Doyle, Mr. John Corrigan and various other interests.

Professor Patrick Honohan:

Absolutely.

Kieran O'Donnell (Limerick City, Fine Gael)
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Surely-----

Ciarán Lynch (Cork South Central, Labour)
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The Deputy can ask the question but he should not imply. No "surelys", just ask the question.

Kieran O'Donnell (Limerick City, Fine Gael)
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In Professor Honohan's professional opinion, is it a fair observation that if one received a report stating that a scenario could arise whereby all one's core tier 1 capital would be wiped out, it was a clear indication of a major solvency problem in both Anglo Irish Bank and Irish Nationwide Building Society on the night of the guarantee?

Ciarán Lynch (Cork South Central, Labour)
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Was that a clear indication?

Kieran O'Donnell (Limerick City, Fine Gael)
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Correct.

Professor Patrick Honohan:

Absolutely and that is why I am saying - people are surprised - that even with the evidence that was there, they should have seized control over Anglo. It had lost the confidence of the markets, had no cash and in an extreme stress situation, it could have wiped out its capital. I am not disputing that at all. I actually am making that point and people seem to be surprised.

Kieran O'Donnell (Limerick City, Fine Gael)
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In the limited time I have, Professor Honohan has not changed his mind from his previous appearance before the joint committee that in his view, based on the evidence that was available on the night of the guarantee, Anglo should have been let go.

Professor Patrick Honohan:

I ask the Deputy to please not say "let go" because people do not know what he means by that.

Kieran O'Donnell (Limerick City, Fine Gael)
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Should Anglo have been nationalised on the night of the guarantee?

Professor Patrick Honohan:

It should have been nationalised because that was the only tool available legally for the State to take control. Control should have been taken. It should not have been left in the hands of the management. It was very risky to leave it in the hands of the management. I would have left it to the end of the week using emergency liquidity assistance, ELA.

Kieran O'Donnell (Limerick City, Fine Gael)
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Does the Merrill Lynch report indicate that on that night, Anglo and Irish Nationwide were both insolvent?

Professor Patrick Honohan:

No, they do not say that. What they do say is-----

Kieran O'Donnell (Limerick City, Fine Gael)
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Would it indicate that there were major solvency problems with both institutions?

Professor Patrick Honohan:

There was high risk on solvency. However, even in the stress situation, they had enough capital to get through. But that is not the point. The main point is-----

Kieran O'Donnell (Limerick City, Fine Gael)
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In fairness, forcible write-downs?

Professor Patrick Honohan:

No, it would not be good but-----

Kieran O'Donnell (Limerick City, Fine Gael)
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Good?

Professor Patrick Honohan:

----- what happened subsequently was between them, they lost €35 billion over the capital. That is what was not perceived. That was the big fiscal cost to the State that was not perceived. If that had been known, then it would have been a different scenario. I absolutely agree with Deputy O'Donnell's point that the signals were clear enough. If one reads that report by Merrill Lynch, it is quite clear that Merrill Lynch, which calls it "State protective custody" because they had just arrived from London, thought the State should seize control over the two banks. Merrill Lynch clearly thinks these banks have no future. In fact the report states at one point:

It is clear that certain lowly rated monoline banking models [guess who?] are likely to be unviable as wholesale markets stay closed to them. ... we believe it is important to act quickly to deal with these institutions to avoid a systemic issue.

Kieran O'Donnell (Limerick City, Fine Gael)
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There was enough evidence available on the night of the guarantee, with the Merrill Lynch report forming the backdrop for-----

Ciarán Lynch (Cork South Central, Labour)
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Sorry Deputy, if you ask your questions incorrectly, you are using up your time.

Kieran O'Donnell (Limerick City, Fine Gael)
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I will ask the question again.

Ciarán Lynch (Cork South Central, Labour)
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Please do not ask a leading question because you are not helping the inquiry by doing that.

Kieran O'Donnell (Limerick City, Fine Gael)
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Based on the evidence that was available in the Merrill Lynch report, which formed a basis for discussions on the night of the guarantee, what is Professor Honohan's professional opinion on what should have been done with both Anglo and Irish Nationwide on the night of the guarantee?

Professor Patrick Honohan:

By the end of that week, they should have been nationalised.

Kieran O'Donnell (Limerick City, Fine Gael)
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I thank Professor Honohan.

Ciarán Lynch (Cork South Central, Labour)
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Before moving on to Deputy Michael McGrath, I wish to round off an issue on that subject. Is the sourcing information on the potential Anglo losses material?

Professor Patrick Honohan:

Pardon?

Ciarán Lynch (Cork South Central, Labour)
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Is the source of the information on the potential Anglo losses, whether it was Mr. Cardiff or whoever, material in terms of Professor Honohan's report or the information he gave to the inquiry at his last appearance before us?

Professor Patrick Honohan:

No, I do not think so. Absolutely not. I do not think it is material whether I asked David Doyle "what about this afterwards" or if I had just had picked up that his view and the view of everybody in the room was this and that.

Ciarán Lynch (Cork South Central, Labour)
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Is Professor Honohan saying the sum of money is material; not the individual?

Professor Patrick Honohan:

Yes, absolutely. In fairness to Mr. Doyle, I want to represent our conversations in a way with which he agrees and with which I am confident.

Michael McGrath (Cork South Central, Fianna Fail)
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I welcome Governor Honohan back. When he appeared before the joint committee on 15 January, I asked him if Anglo Irish Bank should have been allowed to fail at the end of September 2008. I refer to page 113 of the transcript. This was in a hindsight scenario and the Governor replied, "Yes". I went on to ask, "Is the Governor saying that that decision should have been made even with the information available at that time or is he saying it with the information we now have about the insolvency?" He replied, "I think that decision should have been taken at that time", and then went on to explain what he meant by that. He referred to ELA and stated we should have said the following to the European authorities:

"We have this bank going down. We cannot afford to guarantee. The risks are too big. You have got to risk-share with us. If you want to wind this down orderly you’ve got to put European capital into this bank and then we will liquidate it down”.

Professor Patrick Honohan:

This must have been a senior moment because I leapt from one scenario to the other scenario in the middle of my response to the Deputy. That is why I want to make it absolutely clear that there are two distinct things. Different things should have been done on the night in both scenarios. One scenario is the realistic one, where they had the information available and if they had absorbed it and got the right technical advice-----

Michael McGrath (Cork South Central, Fianna Fail)
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Let us deal with the scenario of the information they actually had available. Let us tease out the scenario involving the information available at the time, that is in September 2008, in respect of Anglo Irish Bank.

Professor Patrick Honohan:

With that information, they should have nationalised it. But I am not saying they should then have said "we are not going to pay a penny; this is just a wind-down liquidation situation". The wind-down liquidation situation becomes the thing to do only where one suddenly discovers it is going to be €35 billion or something like that. The problem is, and the reason this gets complicated, is one must think through what would have happened then. One nationalises it, puts in new managers, the old people are thrown out and one starts to evaluate it. There are a number of twists and turns that can be taken after that which were not available because the guarantee had been put in place.

Michael McGrath (Cork South Central, Fianna Fail)
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I seek clarity, because what the Governor said on the day was quite different. Moreover, it was in the scenario of the information available at the time and certainly, the clear impression was that Anglo should have been allowed to fail.

Professor Patrick Honohan:

On the word "fail" again, in the technical language, they already had failed because they had run out of cash. It was a bank failure which was overlaid by a guarantee, which brought them back to life.

Michael McGrath (Cork South Central, Fianna Fail)
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The Governor is clarifying today that what he meant by allowing it to fail was to nationalise it.

Professor Patrick Honohan:

I think, with the information available, they should have nationalised Anglo Irish Bank. Would it have saved €40 billion? No.

Michael McGrath (Cork South Central, Fianna Fail)
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Sure. On page 133 of the Governor's 2010 report he states: "Still, given the perceived lack of a solvency problem at Anglo (or the other banks) on balance a guarantee seems to have been the best approach, not least because no other clear and effective medium-term solution appeared available." He went on to refer to ELA and that it also could have allowed the nationalisation of Anglo.

Professor Patrick Honohan:

Yes.

Michael McGrath (Cork South Central, Fianna Fail)
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However, in his report the Governor appears to be favouring a guarantee for Anglo.

Professor Patrick Honohan:

This is a separate issue. One should consider the Merrill Lynch report because its authors had laid it out. It was not bad and while Merrill Lynch was criticised afterwards, for a few days work it was not bad in terms of giving the outlines. Merrill Lynch stated that one should nationalise and then start guaranteeing. However, they thought one could get away with just guaranteeing Anglo and Nationwide and one would not have to guarantee the whole system. An extensive guarantee would have been necessary and I have not deviated from that. The danger is with terms such as "let go", "fail", "guarantee" or "nationalise". They are all different aspects of the same thing and the way things pan out subsequently depends on exactly which step one takes at which time and how much leeway it gives one.

Michael McGrath (Cork South Central, Fianna Fail)
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The Governor is holding to the view that Anglo should not have been liquidated on the night, allowed to fail the following day.

Professor Patrick Honohan:

Given the information, absolutely not. That would have been a terribly disruptive thing to do.

Michael McGrath (Cork South Central, Fianna Fail)
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The Government should have stepped in, issued a partial guarantee at least -----

Professor Patrick Honohan:

A more limited guarantee.

Michael McGrath (Cork South Central, Fianna Fail)
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----- removed the management, nationalised the bank and then what?

Professor Patrick Honohan:

Then it would have to work it down. As I have pointed out today, it would have still ended up with the bulk of the losses but they would have been reduced by the fact that the subordinated debt and the old debt would not have been guaranteed. There was a considerable amount of old debt which was not due to mature for some months or even years and could have been bailed in subsequently. We know how difficult the bail-in debate subsequently became in 2010 when we had our backs to the wall but we might have been the leaders in designing bail-in mechanisms, which we now have in Europe, if we had done it from a strong position when we were still a triple A country.

Michael McGrath (Cork South Central, Fianna Fail)
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Much of this comes down to the interpretation of language. When Professor Honohan was asked about whether Anglo should have been allowed to fail even with the information available at the time, and he said "Yes", the vast majority of people would take that to mean it should have been allowed to hit the wall. That is not what he appears to be saying.

Professor Patrick Honohan:

One journalist, whose work I very much respect, wrote that Lenihan wanted to burn bondholders - no, Lenihan wanted to nationalise. That is not the same thing at all.

Michael McGrath (Cork South Central, Fianna Fail)
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He also made reference to the investment banks in his previous evidence, when he suggested that in hindsight Anglo should have been allowed to fail. He stated: "all the investment banks that looked at it saw that Anglo’s business model was not credible in the market." What investment banks were they and what did they say? What was Professor Honohan referring to?

Professor Patrick Honohan:

I suppose the one to hand is the Merrill Lynch report, which stated these "are likely to be unviable as wholesale markets stay closed to them". However, the other investment banks that were advising the Government were PwC and Goldman Sachs, although they were not specifically working on Anglo. Then again, how does one know given that it was a long time ago? These people were of the same opinion that Irish Nationwide's model and Anglo's model were broken.

Michael McGrath (Cork South Central, Fianna Fail)
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Professor Honohan will be familiar with the memorandum e-mailed from Merrill Lynch to Kevin Cardiff at 6.43 p.m. on 29 September 2008, which enclosed a memo dated 28 September. The member states: "it is important to stress that at present, liquidity concerns aside, all of the Irish banks are profitable and well capitalised." There was no warning about Anglo.

Professor Patrick Honohan:

There was evidence from Professor Eamonn Walshe, and more colourful evidence from Professor William Black, on what bank accounting can and cannot do. It cannot cope very well with situations of this nature and it gives highly misleading signals. However, that is what people work with and capitalise based on the accounting standards. They presumably said they had checked the capital and, in accordance with accounting standards, it was satisfactory. This is quite important because a lot of legal things attach to the question whether the bank is adequately capitalised, that is, whether the capital is above zero or above the 8% weighted risk. One has to rely on something, and all banking regulators rely on the accounting measures for most practical purposes. However, the memo goes on to note there is a huge risk in a stress scenario that it could lose €8 billion, in which event the wholesale markets would stay closed to them and they would be likely to be unviable. The question of viability and the future business model is a separate and more important issue. The question of whether it was well capitalised is essentially a preliminary health check.

Michael McGrath (Cork South Central, Fianna Fail)
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Is it Professor Honohan's view that there were warnings, whether implicit or explicit, from the investment banks about solvency issues in Anglo?

Professor Patrick Honohan:

There were warnings about solvency issues but there was no indication that they were going down for big amounts of negative capital. It is the negative capital that cost the State. That is why the €8.5 billion figure mentioned by David Doyle is important. He seemed to say the State could lose €8.5 billion but in my interpretation of what he said, and probably his interpretation, he did not think that. He simply felt that it was going to burn through €8.5 billion of the capital. It had €8.5 billion or something like that.

Michael McGrath (Cork South Central, Fianna Fail)
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To clarify Professor Honohan's view on Anglo Irish Bank at the end of September 2008 and the options available to it in a hindsight scenario, he is saying that if there was knowledge about the scale of the black hole in the bank and the potential cost of €35 billion, it should have been let go and liquidated.

Professor Patrick Honohan:

I am saying that a high wire exercise would have been done. Those involved could have waited until the end of the week and spent the weekend saying they were going to close the bank and asking Europe if it was going to do anything about the issue.

Michael McGrath (Cork South Central, Fianna Fail)
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Within days they would have been liquidating it if they had known the extent of the problem but Professor Honohan accepts that the extent was not known.

Professor Patrick Honohan:

That is because it was so huge.

Michael McGrath (Cork South Central, Fianna Fail)
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In the actual scenario, with the information available at the time, he is saying they should have taken the bank into public ownership with a partial guarantee on future debts, changed the management and used emergency liquidity assistance to work it out over time.

Professor Patrick Honohan:

Yes.

Michael McGrath (Cork South Central, Fianna Fail)
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Does he take the view that his report and letter of 12 February are consistent in that regard?

Professor Patrick Honohan:

Yes. My letter is more explicit because if in May 2010 the Central Bank had indicated that the guarantee might not have been such a good idea, that might have started to affect the markets. I said it but I did not say it in bright lights. I said it in footnotes.

Michael McGrath (Cork South Central, Fianna Fail)
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Does he accept that his evidence in public session last January was not very clear and may have given a misleading impression?

Professor Patrick Honohan:

Yes.

Michael McGrath (Cork South Central, Fianna Fail)
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In regard to the letter that he sent, the Governor clarified the question on the statutory powers of the Central Bank. Is he satisfied that both the Central Bank, which he dealt with specifically in this letter, and the Financial Regulator had adequate statutory powers to intervene to deal with the build up of losses, the extent of the lending to the property sector, and so forth?

Professor Patrick Honohan:

I think they were adequate. They could have asked for more and subsequently we did ask for more, and we have more. The powers that we used recently, with the approval of the Oireachtas, on loan-to-value and loan-to-income ratios were the new powers that we were given. We had discussions internally on why we were not using the old Central Bank Act 1971 but we were advised to use the new powers.

Michael McGrath (Cork South Central, Fianna Fail)
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In regard to the reference to Anglo and the figure of €8.5 billion in the note from September 2008, is 25 September the correct date?

Professor Patrick Honohan:

I do not know the date.

Michael McGrath (Cork South Central, Fianna Fail)
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That is handwritten on it.

Professor Patrick Honohan:

It states "Date? about 25/9/08" so we do not know. It is sometime around that date.

Michael McGrath (Cork South Central, Fianna Fail)
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It states: "D Doyle noted that Government would need a good idea of potential loss exposures within Anglo and INBS - on some assumptions INBS could be 2bn after capital and Anglo could be 8½.". Does Professor Honohan view that as evidence that people in senior positions knew there was a potential capital shortfall in Anglo and INBS, and were even at that stage speculating on the possible extent?

Professor Patrick Honohan:

My interpretation is that it was misleading and did not represent what they thought. It was a scribbled note which might not even have been transcribed correctly. I think I saw it in handwritten form a long time ago, at the time of my investigation. I am not saying it was wrongly transcribed but I do not think it represents the views of those in attendance. I would be astonished if it did because everybody I spoke to at the time were of the same view. They said they did not know.

Pearse Doherty (Donegal South West, Sinn Fein)
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Does Professor Honohan think it appropriate that a potential likely witness to this inquiry, a committee investigation set up by the Houses of the Oireachtas, should contact another witness to the inquiry to suggest the evidence he has given is untrue?

Professor Patrick Honohan:

Absolutely. I welcomed his intervention and it is very important that the inquiry get all the facts right.

Pearse Doherty (Donegal South West, Sinn Fein)
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Does Professor Honohan not think it is more appropriate that the information be related to the committee?

Ciarán Lynch (Cork South Central, Labour)
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Please allow the Governor to finish answering the question.

Professor Patrick Honohan:

It is absolutely right and it is a business-like way to do it. I was satisfied. I looked back at my notes to make absolutely sure I had no evidence.

Pearse Doherty (Donegal South West, Sinn Fein)
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Did Professor Honohan not have the conversation?

Professor Patrick Honohan:

No.

Pearse Doherty (Donegal South West, Sinn Fein)
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On four occasions - once in response to a question from Senator O'Keeffe and three times in response to me - Professor Honohan attributed comments and direct quotes to a conversation that he now acknowledges did not happen. Is that the correct position?

Professor Patrick Honohan:

No, it is not the correct position. If the Deputy starts reading out selected parts-----

Pearse Doherty (Donegal South West, Sinn Fein)
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If I ask-----

Professor Patrick Honohan:

I have already acknowledged that I created a misleading impression of the sequence of events and understandings. We work very quickly here at these meetings and I tried, in a summary way, to convey my understanding. I acknowledged, and I have done so in writing, that I created a misleading impression.

Pearse Doherty (Donegal South West, Sinn Fein)
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I appreciate that. The question was on the statement that nobody in the room on the night of the bank guarantee knew how bad the banks were. Professor Honohan said the note we are discussing, note No. 6 released by the Committee of Public Accounts, was "the only evidence that I found written or oral". On four occasions, Professor Honohan directly attributed a quote to Mr. David Doyle, who said it was wrong. On the second occasion, Professor Honohan said Mr. Doyle had no concept of it; on the third occasion he said he had no concept that it was a loss; and on the fourth occasion he said he did not think it was insolvent. On the first occasion, Professor Honohan did not have the conversation with him. Is that correct?

Professor Patrick Honohan:

I have already acknowledged that I am vague about when I picked up my understanding of Mr. Doyle's position. I had many conversations with Mr. Doyle. The report we are talking about was completed almost five years ago. Deputy O'Donnell has already asked the question.