Banks could ‘ring fence’ tracker mortgages internally

Banks with a substantial level of loss-making tracker mortgages on their loan books could internally ring-fence the portfolios and fund them with cheap lines of credit, instead of transferring them off the balance sheet, a report has suggested.

Such a move would be less likely to trigger capital losses at the banks, even if the transfers were conducted on a “long term value” basis.

But Merrion Stockbrokers acknowledged that it may be more difficult to get the European Central Bank and the European Stability Mechanism to support such a proposal.

“In order to avoid an off-balance sheet transfer which is likely to be capital destructive, the optimal solution in our view would be for the banks to internally ring-fence these portfolios in non-core units, while obtaining a cheap dedicated credit line to fund the assets,” Ciaran Callaghan wrote in the report. “While such a structure would clearly be beneficial from the banks’ perspective, we are not as confident that the ESM and/or ECB will be as willing, or legally capable, in assisting with such proposal in the near-term.”

Analysts estimate that tracker portfolios, which account for about 59 per cent – or €46 billion – of total Irish mortgages at AIB, Bank of Ireland and Permanent TSB, generated losses of around €708 million last year.

Banks are effectively locked into the loans, as there is also no obvious provision in Irish tracker loan contracts that would allow the banks to renegotiate tracker terms by, for example, applying floors to protect against falling base rates. With many homeowners in negative equity, the report said only “modest redemption levels” could be expected on the portfolios over the coming years, leaving banks with a heavy burden to carry.

Some institutions have moved to solve the issue by implementing negative equity mortgages that allow the borrower to retain their tracker rate for a set period of time.

But Merrion Stockbrokers said the only way to alleviate the issue adequately was for the property market to recover and activity in the sector to pick up.