Sunday 19 January 2020

Pump ESM funds into banks – Chopra

Governor of the Central Bank Patrick Honohan with former IMF mission chief for Ireland Ajai Chopra at the conference on bank-resolution mechanisms, held at the Institute of Bankers in Dublin’s North Wall yesterday
Governor of the Central Bank Patrick Honohan with former IMF mission chief for Ireland Ajai Chopra at the conference on bank-resolution mechanisms, held at the Institute of Bankers in Dublin’s North Wall yesterday

Peter Flanagan

THE European bailout fund should be used to pump more money into Irish banks if they require further capital, the IMF's Ajai Chopra has said.

The former mission chief for the International Monetary Fund in Ireland, Mr Chopra told a conference in Dublin that the IMF favoured the direct recapitalisation of the banks if necessary.

Analysts are growing increasingly concerned that Irish banks are going to need even more capital in order to cover losses from the number of mortgages that are either in arrears or in default.

As things stand, it is not clear if Ireland will be able to tap into Europe's bailout fund – the European Stability Mechanism – for its banks, even though when the ESM was set up the EU said that it could be used to recapitalise banks directly.

Mr Chopra said yesterday: "Our view is that the ESM could play an important role in strengthening the repair of banking systems.

"Troubled banking systems are holding up the recovery, so we are very pleased that the ESM will be allowed to recapitalise banks.

"If there are weak domestically systemic banks which the sovereign cannot recapitalise, the (ESM) could help to remove future tail risks from their balance sheets.

"Directly recapitalised banks also have an owner of unquestioned financial strength. By just having a strong owner (such as the ESM), you can improve bank funding positions."

SUPERVISION

Mr Chopra went on call for European-wide banking supervision – the so-called 'Single Supervisory Mechanism' – to be implemented sooner rather than later and for a Europe-wide bailout fund to be set up quickly.

He continued: "We saw during the crisis of the last four years that national supervisors can order banks to shrink their balance sheet, which may make sense for one jurisdiction but have negative consequences elsewhere."

The ESM, he said, should be a long-term investor in a bank, but it should not be used simply to cover expected losses. Rather, the ESM should be used as a backstop against unexpected losses in the long term.

For a bank to qualify for ESM support it must have a viable business model, said Mr Chopra, adding: "If it does, then by its very presence, the ESM could reduce the risk facing a lender."

Irish Independent

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