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Regulator to impose strict capital rules on Irish banks
07 March 2010 By Cliff Taylor and Pat Leahy
The Financial Regulator is set to impose stringent new capital standards on the banks as they prepare to begin transferring property loans to the National Asset Management Agency (Nama).
The new rules will include strict requirements on the amount of equity capital the banks must hold. They are designed to bring Irish banks into line with new international guidelines more quickly than their EU counterparts, in a bid to rebuild confidence in the banks in international markets.
Details of the rules are still being finalised, but it looks likely that the state will have to provide equity capital to both AIB and Bank of Ireland in the first phase of their recapitalisation.
The banks will shortly be told about the new rules by the regulator, Matthew Elderfield, and the Central Bank governor, Patrick Honohan.
The rules on bank capital are part of a major announcement on banking due by the end of this month, which will also include details of the start of the Nama process.
Honohan and Elderfield are expected to tell the banks that they will be obliged to move towards a tier one capital ratio of about 8 per cent, which is emerging as the international norm. Crucially, the banks will be obliged to hold a significant proportion of this as ordinary equity capital - cash from shareholders.
This buffer of shareholder cash is seen as vital if the banks are to be able to access funds normally on international markets in the future. While AIB managing director Colm Doherty said last week that he hoped the banks could raise funds privately, a requirement to raise fresh equity capital in the short term is likely to involve equity injections from the government.
Government funds to recapitalise the two main banks will be drawn from the National Pension Reserve Fund, which already holds €3.5 billion in preference shares in each. Some or all of these shares will be converted into ordinary equity, while other assets in the fund may also be liquidated, if further cash is needed.
However, any further cash injections for the nationalised Anglo Irish Bank cannot be taken from the pension fund, as it is prohibited by law from investing in government-owned stocks. Thus, the Anglo funding will have to be provided directly by the exchequer.
Despite what government sources expect will be the huge unpopularity of the banking bailout, they also believe that lending by the banks will be slow to start in the coming months.
Meanwhile, evidence is growing that Nama will pay the banks less than originally indicated for their property loans.
In a statutory instrument published on Friday, the Department of Finance altered the formula for calculating the ‘‘long-term economic value’’ of some assets which will be transferred from the banks to Nama.
The regulations will allow for a lower value to be ascribed to some assets, thereby reducing the amount paid to the banks by Nama.
However, other assets will retain a higher value - different discounts will be applied to different classes of assets, with less money paid in cases where the asset underlying the loan is expected to take a longer period to yield a return.
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