Colm McCarthy: 'Strategic' defaulters must be pursued
Capacity of our banks to help those in genuine mortgage distress is at risk of being reduced.
The IMF's managing director Christine Lagarde spoke in Dublin last Friday and expressed concern at the slow pace of restructuring in the Irish banking system. She was echoing comments made earlier by government ministers, by the ECB, the secretary-general of the Department of Finance and by the Central Bank governor. There has been plenty of re-structuring but no more Irish banks are likely to be closed or merged, and the injections of State capital are hopefully over. So what is the source of the impatience with bank re-structuring?
In a word, mortgages. The banks covered by the original guarantee and subsequent re-capitalisation which are still in business now number just three – Bank of Ireland, AIB and Irish Permanent. Of the original six, Anglo and Nationwide have been closed and Educational merged into AIB. These three surviving Irish banks have roughly €80bn outstanding in mortgage loans in Ireland. The total amount outstanding in mortgages for the entire Irish banking system is €142bn according to the Central Bank data for end-2012 released during the week. The balance is owed to the foreign-owned banks operating here.
The adequacy of capital in the three surviving Irish banks cannot be definitively ascertained until full provision has been made for loan losses. This process has been under way for several years now with each bank recording steep losses after impairment provisions. However, this process has much further to go. The share price of Bank of Ireland, for example, gives the bank a capitalisation which is way below the book capital shown in the bank's balance sheet, an indication that investors expect capital to be depleted substantially as further provisions are made.