FORCING BANK losses on senior bondholders and the quick disposal of bank assets must be weighed carefully, the Central Bank’s head of financial regulation Matthew Elderfield has said.
Speaking at an event in Trinity College in Dublin, Mr Elderfield said that deleveraging the banks to meet new rules on their funding and liquidity would be “a multi-year process to slim down and restructure the banking system”.
The Central Bank is reviewing plans by the banks to meet target loan-to-deposit and other ratios to be met by 2013. The timing of asset sales was crucial, he said.
“Forced deleveraging at an unrealistic pace would crystallise huge losses by selling assets into depressed markets,” he said.
“But it is also critical that the deleveraging process moves ahead as swiftly as practicable.
“There are no easy choices or no overnight solutions. The process of deleveraging and of reducing reliance on central bank funding will take time.”
The “adverse implications” of forcing senior bondholders to share bank losses “have to be weighed very carefully”, he said.
So-called burden-sharing with senior bondholders was viewed by the EU authorities as “being destabilising to the EU banking system”, he said. “I wouldn’t say it’s a no-cost option.”
Any decision had to be taken in the EU context and it was important that Ireland doesn’t go it alone, said Mr Elderfield.
The Central Bank is to publish the results of stress tests tomorrow week, March 31st, to show the amount of further capital required by the banks to meet losses and the amount of assets that must be disposed of to reduce the banks in size by 2013.
Some €35 billion has been set aside in the EU-IMF bailout fund to cover the cost of the banks.
Mr Elderfield said there was a programme in place that allowed the Government to seek assistance with any results from the tests.
He added that the banks had to be “slimmed down and right-sized over time”.
The Central Bank’s objective was to approach the tests with “more conservatism, more transparency and stronger validation”, he said. Outside consultants – asset manager Blackrock and US firm Boston Consulting – are advising the Central Bank on the tests.
There will be a strong focus on residential mortgages, he said. (Additional reporting Bloomberg)
