Cost of Anglo will be less than estimates -- Honohan
Central Bank Governor says lack of resolution regime hampered action
Published 21/09/2010 | 05:00
Central Bank Governor Prof Patrick Honohan has welcomed the Government's decision to wind down Anglo Irish Bank, and said he believed that the cost of the Anglo debacle would ultimately be less than commentators are suggesting.
In a deviation from his speech, Prof Honohan said the ultimate costs of Anglo would be "less than the numbers currently being touted around, actually".
However, Prof Honohan said the collapse of Anglo with massive bad debts had "damaged the domestic and international reputation of Irish banking".
The comments were part of a prepared speech delivered at a banking conference in Dublin yesterday.
Prof Honohan said the proposed 'good bank/bad bank' structure would insulate depositors from the process of running off the Anglo loan assets.
Responding to a panel discussion following the speech, Prof Honohan said the lack of a bank resolution regime -- a legal process to shut down failed banks -- had made dealing with the Anglo situation difficult.
In the wake of the nationalisation of Northern Rock, the UK responded by introducing legislation on bank resolution or special resolution.
The 2009 legislation set out how to deal with failing or failed banks in future.
But two years into the banking crisis here, Ireland has yet to create such a regime.
Prof Honohan said that introducing legislation was more difficult here because of the relative inflexibility of the Irish Constitution.
Resolution tends to involve limiting or even suspending the rights of creditors to prevent bank failures.
For Anglo itself, the Central Bank has now been asked to conduct stress tests for the two new Anglo Irish Bank entities.
It has already completed its Prudential Capital Requirements stress tests for most large financial institutions.
Prof Honohan said the assessments for the Anglo 'good' and 'bad' banks would be different from previous exercises because of the planned wind-down.
Capital requirement assessments will ensure the new structure meets international banking requirements.
For the other banks, the Central Bank sought higher levels of capitalisation than the international minimum.
But Prof Honohan said the stress tests would aim to provide as much certainty as possible on just how bad the cost of shutting Anglo could be, under "a severe hypothetical stress scenario".