THE Central Bank will explore getting private insurers to cover against unforeseen losses in the Irish banking sector if Europe fails to come up with a banking insurance scheme, the Irish Independent has learned.
Central Bank Governor Patrick Honohan has repeatedly spoken about the benefits of such a scheme, which would effectively remove the risk of further banking losses from Irish banks and the State.
The Central Bank believes an insurance scheme provided by the EU and/or the IMF would be the best option, because those organisations have access to extensive data on the banks and so would be best placed to price the insurance competitively.
However, it is understood that if the European Commission's bailout fund and the IMF are unable to provide such insurance, the Central Bank will "see what can be done" in the commercial market.
Insurance sources say traditional commercial insurers would be reluctant to get involved, even on a syndicated basis, given the scale of the potential risk and the complexity of the Irish banking crisis.
Many commercial insurers, including Lloyds of London, have been scaling back their financial services insurance after being stung by the Enron collapse back in 2001.
"It would probably be more suitable for the big credit insurers, the specialist guys," said one senior commercial insurance source, suggesting bond insurers like US giant MBIA.
A spokeswoman for MBIA, one of the world's leading financial insurers, declined to comment on the prospect of it being involved in such a scheme for Ireland. Other bond insurers also refused to comment.
Addressing an event last week, Prof Honohan said insurance for unforeseen banking losses would be "very attractive" even if Ireland had to pay "a premium in excess of the fair value expected claims".
"An insurance scheme would be even more attractive under present circumstances than additional capital in restoring market confidence in the banks, enabling them to access wholesale term funding at a reasonable cost," he said.
The scheme would also "lower the perceived risk" of lending to the Irish State since the State would not have unlimited liability for banking losses, he added, stressing that while the "numbers were big for Ireland", there were "small for the world and for Europe".
Citigroup's top credit strategist Matt King said anything that would limit Ireland's exposure to further banking losses could "improve" the funding outlook for both the banks and the sovereign. However, he stressed that the cost of securing such insurance would be closely analysed by the international investment community, since unduly high costs could choke growth and erode Ireland's ability to repay its debts.
The issue was discussed as part of Ireland's €85bn bailout deal, but neither the IMF nor Europe's EFSF (European Financial Stability Facility) are able to offers such insurance under their current structures.
The Irish authorities are hoping an upcoming review of the EFSF's framework may result in the fund being able to expand its activities into areas like insurance for banking losses, although such a change would require approval from all 16 of the eurozone's national governments.