Group of private equity firms in bad bank approach

TOXIC LOANS:THE GOVERNMENT has received an approach from a group of overseas private equity firms interested in the possibility of investing in a bad bank created with toxic property loans on the books of the guaranteed lenders.

Senior sources within Irish banking said Merrill Lynch, which is advising the Government on the recapitalisation of the banks, had received an approach from a group of private equity firms about investing in an Irish bad bank.

It is understood that the group includes a private equity firm from the UK and one from the US. It is not believed to be connected to the Mallabraca consortium that approached the Government last autumn about investing in Bank of Ireland and possibly a second bank.

The approach is being led by an investment team from overseas, although contact has been made by a number of Irish individuals.

The Department of Finance was not able to comment last night.

The approach emerges following the appointment of economic consultant Dr Peter Bacon to assess the possibility of creating a “bad bank” or risk insurance scheme to remove toxic assets from the banks in a bid to increase the level of new lending.

Dr Bacon has been appointed special adviser at the National Treasury Management Agency on a three-month contract and will report to Minister for Finance Brian Lenihan. It is expected that his work will focus on how international proposals for a combined bad bank/risk insurance scheme, which are being devised to address toxic credit-market investments on bank balance sheets, could be tailored to remove impaired property loans from the Irish banks.

The belief is that such a scheme would remove uncertainty about future losses on property loans, freeing up capital requirements and enabling banks to lend more.

Much of Dr Bacon’s work is likely to focus on assigning values to property assets that cannot be sold because of lack of activity.

He is likely to assess proposals to involve private-sector interests in the purchase of those assets.

Under a bad bank scheme, governments would purchase bad assets upfront, although this could force banks to recognise much higher additional losses, leading to greater capital demands.

Many analysts say a bad bank would only work in a fully nationalised banking sector as there would be no concerns about appeasing market investors with sharp reductions in property values and demands for higher capital levels.