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Banks may be forced to front-load billions in losses

MEASURES to compel bailed-out banks to take billions of extra losses upfront this year could be announced as part of July's €24bn bank recapitalisation, the Irish Independent has learned.

Officials at the Central Bank are examining options to allow Irish banks to book loan losses now for debts that they know will become problematic in the future. The approach of taking provisions for future losses is at odds with current IFRS accountancy conventions, though the standard is set to be revised at the end of the year.

The Central Bank's plan would essentially see Irish banks adopt the new approach earlier than their European peers, allowing them to take the hit on "future losses" in the second half of 2011.

The move would make the banks' results look worse for 2011 but would prevent a steady drip of bad results and could help convince the markets that the banks are "facing up to" all their losses.

Both effects could improve sentiment around the banks over the medium term and put them in a better position when they approach the market for liquidity or fresh equity.

The banks will be financially in a position to take the losses upfront, since AIB, EBS, Permanent TSB and Bank of Ireland will together take in an extra €24bn by the end of the year.

The Central Bank is examining whether its existing powers could be used to empower the banks to front-load losses. External accounting advice has also been sought.

If measures can be drawn up, they could be announced as part of the July recapitalisation of the four banks.

A spokesperson for the Central Bank declined to comment, but referred to statements made by the organisation's credit institutions director Jonathan McMahon back in April.


In a speech, Mr McMahon noted the upcoming changes in IFRS rules that would "provide a rationale for a more realistic approach to provisioning" and also pointed out that the latest banking stress tests had given the banks a capital "buffer" to deal with future losses.

A new standard is expected to become effective toward the end of the year, but different jurisdictions across the world will have their own timeframes for implementing it.

London City veteran Tim Bush, who sits on the UK's Accounting Standard Board (ASB), has previously criticised Ireland's implementation of the IFRS rules as "catalysts" for the banking collapse.

In a letter sent to former Finance Minister Brian Lenihan last September, Mr Bush pointed out that the way the rules were implemented meant banks could no longer make prudent provisions for future losses.

"Under the old rules, if the bank lent €100,000 to someone, they'd make a risk assessment of how much they were likely to get back and make an immediate provision for that," Mr Bush explained to the Irish Independent at the time.

"Under the new rules, you don't make those provisions until the loans actually start going bad.

"People wonder why banks can go from looking good to bad so quickly -- this is why."

Irish Independent