Sunday 4 December 2016

No easy fix for banking crisis, warns regulator

Elderfield says it will take time to wean lenders off funding as Davy estimates fire sale of assets could result in losses of €20bn

Published 23/03/2011 | 05:00

FINANCIAL Regulator Matthew Elderfield yesterday warned there were "no easy solutions" to Ireland's banking crisis and it would "take time" to wean institutions off their dependence on central bank funding.

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The comments come as the Central Bank puts the final touches on proposals to restructure the banks, a process stockbrokers Davy warned could "realistically" trigger losses of €20bn from asset sales alone.

Addressing a group of students at Trinity College, Mr Elderfield refused to be drawn on the outcome of the banking review, dubbed the 'stress tests', which are due for publication next Thursday.

Some commentators have suggested the results could be so bad the banks could end up needing more than the €35bn that has been earmarked for them under Ireland's bailout.

Mr Elderfield hinted that would not be the case, saying the bailout programme provided "capability for the Irish Government to have assistance with any results that come out of the stress tests".

The banks are being scrutinised through two separate processes -- a capital review that assesses the level of likely losses going forward and a liquidity review that examines ways for banks to sell assets so they won't need so much 'last resort' funding from central banks.

The European Central Bank, which is providing funding of as much as €150bn to Ireland's banks, originally favoured a quick sell-off of banking assets so that cash could be repaid swiftly.

"Forced deleveraging at an unrealistic pace would crystallise huge losses by selling assets into depressed markets," Mr Elderfield said. "But it is also critical that the deleveraging process moves ahead as swiftly as practicable.

"There are no easy choices or overnight solutions. The process of deleveraging and of reducing reliance on central bank funding will take time."

Desperate

In a research note circulated to clients, the credit team at Davy warned that forced fire sales could "realistically" trigger losses of about €20bn since it was "not a sellers' market".

"It [banking asset sales] can't happen this year because buyers would know Irish banks were desperate," Davy's Stephen Lyons said.

"It will probably be in two or three years' time."

In the interim, Davy believes Irish banks need a "medium-term funding commitment from Europe" that will tide them over until they can sell assets without triggering losses.

So far Europe has not seemed eager to embark on such a project, but Davy believes a solution will have to be found because Irish banks won't be able to meet all their commitments if they take massive hits from a fire sale.

Under the bailout, the Government acceded to European demands to repay all 'senior' bank debt, including the €16bn owed to unsecured unguaranteed bondholders.

A €20bn hit from asset sales, coupled with the €10bn-plus that will be demanded by the separate capital assessment, could impact on the banks' abilities to repay that €16bn.

Since failure to repay that €16bn would have profound effects for other banks across Europe, Davy says it "has confidence that Europe will deliver a solution to bank funding".

Irish Independent

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