Radical reform of Irish banking system to get under way

7 Apr 2009

In today’s budget, Finance Minister Brian Lenihan TD revealed the role of the Central Bank is to be reformed, and that the assets of the banks will be transferred to a National Asset Management Agency in order to free up the flow of lending to individuals, homes and businesses.

“Our sole objective is to ensure that householders can access credit for home loans and consumer credit, that small and medium-sized business can fund their enterprises, that deposit-holders have confidence that their money is secure and protected, and that international investors are satisfied about the stability of our banking system,” Lenihan told the Dail this afternoon.

He pointed out that across the world governments have intervened to preserve financial stability in the midst of the financial crisis, and that Ireland has so far reacted via the bank guarantee, bank recapitalisation and the protection of public ownership. But more, he said, needs to be done.

Minister Lenihan also promised the country that the actions of those who have tarnished Ireland’s reputation will be dealt with “through the appropriate process.”

In order to ensure that, in future, Ireland has a well-regulated financial system, the role of the Central Bank will be reformed to place it at the centre of financial supervision and financial stability oversight.

The Central Bank of Ireland will in the future be headed by a Commission, chaired by the Governor.

As well as this, Minister Lenihan has asked the former Deputy Governor of the Bank of England and former member of the UK Monetary Policy Committee, Sir Andrew Large, to advise on the process to select a new head of financial regulation within the new institutional structure.

“This search will be wide-ranging and the person chosen will be of the calibre, reputation, experience and expertise to lead the reforms of financial regulation that I have outlined,” said Minister Lenihan.

But further radical action is also necessary to help the country emerge from the mess caused by over-aggressive lending.

“A National Asset Management Agency will be established on a statutory basis, under the aegis of the National Treasury Management Agency.

“Assets will be transferred from the banks to the new National Asset Management Agency with the purpose of ensuring that banks have a clean bill of health, their balance sheets are strengthened and uncertainty over bad debts is reduced.

“This will ensure a sustained flow of credit on a commercial basis to individuals, households and businesses in the real economy. The agency will have a commercial mandate and will have the central objective of maximising over time the income and capital value of the assets entrusted to it.

“Because it is clear that the principal uncertainties in relation to asset quality in the Irish banking system lie in the banks’ land and development loans, and in the largest aggregate associated exposures in the banks, these will be transferred to the agency. These assets pose the main systemic risk to the banking sector in Ireland and the most significant obstacle to the recovery and restoration of lending by the banking system.

“The agency will purchase the assets through the issue to the banks of Government bonds. This will result in a very significant increase in gross national debt, to be offset, of course, by the assets taken in. The cost of servicing this debt will be offset, as far as practical, from income accruing from the assets of the new agency. The debt will be repaid from funds raised through the realisation of those assets over time.”

The Finance Minister said the potential maximum book value of loans that will be transferred to the agency is estimated to be in the region of €80 to €90bn, although the amount paid by the agency will be significantly less than this to reflect the loss in value of the properties.

“All borrowers will be required to meet their full legal obligations for repayment. There will be a hardening of the approach to these borrowers – taxpayer’s money is at stake, and the agency will be expected to protect it in a commercial way and with an independent remit,” Lenihan said.

By John Kennedy

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years