Lenihan says Government will consider setting up 'bad bank'

The Government will consider setting up a “bad bank” to deal with the toxic assets held by Irish financial institutions but only…

The Government will consider setting up a “bad bank” to deal with the toxic assets held by Irish financial institutions but only after its bank capitalisation scheme is finalised.

It has also warned it will not be bounced into removing bad debts from bank balance sheets in order to restore credit flows if it exposures taxpayers to unlimited risks.

"We can't be jump-led by markets and market expectations into solutions that suit the banks rather than the people," said Minister for finance Brian Lenihan last night, who noted banks were using the media to try to force politicians to adopt these types of state rescue plans.

"We want to clean up the banks balance sheets and get them back to resuming normal lending we will do everything in our power to do that but governments have to protect the interests of the taxpayers," he said at an EU finance ministers meeting on the subject.

Mr Lenihan confirmed the Government is actively considering whether it is necessary to set up a so called "bad bank", to which Irish financial institutions could transfer their contaminated assets in an effort to restore confidence in global credit markets.

Such a scheme would enable banks such as Bank or Ireland and AIB to transfer the toxic assets on their balance sheets- mainly development land and property- to the bad bank.

But he warned dealing with toxic debts through either bad banks or risk insurance schemes, such as that recently proposed by Britain, could leave the taxpayer exposed.

"Some of the proposals that have been advanced today such as risk insurance seem to involve a payment of a definite premium to the taxpayer in return for the assumption of an indefinite risk. And that is not something that any government could commit itself to," said Mr Lenhian, who nevertheless added that he was studying all the available options.

He said one of the difficulties with creating a scheme to deal with toxic assets was that it would add to the exposure of the state in relation to its sovereign debt. But he said it could be argued that if the Government had enough information on toxic assets - and Ireland was a small enough country to do this - and it could eliminate the risk then it would improve the risk posed by the existing Government bank guarantee scheme.

"We are at a great advantage that many of the larger (European) states have very extensive loan books and it is very difficult for them to do the type of comprehensive trawl through their banking system that we have been able to do," said Mr Lenihan, who noted that a lot of the toxic assets held by European banks related to commercial paper, which was much harder to value than the property-based debts held by Irish banks.

He said the Government had an estimate for the amount of toxic assets held by Irish banks but he preferred not to release it. It had been stress tested against the expected downturn in economic activity this year and fed into the bank capitalisation scheme.

Mr Lenihan said the Government was making progress in its negotiations with the banks on the bank recapitalisation scheme. He said he hoped to be able to give more definitive information on the talks today if discussions on certain sensitive issues could be resolved.

He said the outstanding issues in the talks with the banks included security for those homeowners threatened with house repossession, the whole question of remuneration and pay in the banking sector, and loans to SMEs.
"There has to be real reform and change in the banking sector as well" said Mr Lenihan, who defended the amount of time it was taking the Government to complete the recapitalisation process in the Republic.

"I think we have been able to learn from the capitalisation plans in other countries," said Mr Lenihan, who noted some European countries had already had to revisit their initial bank recapitalisation schemes as the first plans hadn't worked properly.

Mr Lenihan played down the suggestions expressed in some European media that Ireland was on the verge of bankruptcy or that it would find it difficult to raise sovereign debt.

"Ireland is well funded so this suggestion that is canvassed in some quarters that Ireland is an immediate peril is wrong. The Irish state is funded this year… We had a successful bond issue in January and I've no doubt we will have a successful bond issue in April," said Mr Lenihan.

“What the markets are concerned about in Ireland is the danger of economic deterioration. The major concern is economic deterioration and exposure of the banking system and we are addressing those concerns,” he added.