ECB seeks lower insolvency threshold

THE EUROPEAN Central Bank has called on the Government to reduce the €3 million threshold proposed in the new personal insolvency regime.

In an opinion paper, it recommends that the upper limit for aggregate secured debt eligible under personal insolvency arrangements should be €1 million. It also called for reformation of Irish bankruptcy law to make it easier for banks and lenders to repossess homes.

The ECB warned that the current proposals could impact on the capital adequacy of the lenders.

“The potential inclusion of such large amounts of secured debt in the personal insolvency arrangements, including ‘buy-to-let’ mortgage loans, is unprecedented and may have significant financial implications for creditor banks if it results in deteriorating payment morale of debtors,” the ECB said.

It said that if used by a large number of highly indebted individuals, such arrangements “could significantly increase default rates and thus impact on both the capital adequacy and liquidity position of credit institutions at a time when they are still undergoing restructuring”.

The view of the ECB on the draft law was requested earlier this summer by Minister for Finance Michael Noonan.

In its written opinion, the ECB said it was difficult to be confident that the objectives set out by the draft law could be achieved without an impact assessment.

The Department of Justice welcomed the general expression of support for the reforms and said it would be considering the comments of the ECB in regard to possible amendments to the Bill in the finalising of the text.

A spokesman for the Department of Finance said maintaining the cap at €3 million “strikes an appropriate balance to reflect the views of all stakeholders”.

Noeline Blackwell, director of Free Legal Advice Centres (Flac) called on the Government to explain the reasons behind the €3 million threshold. “There is no real understanding of what that limit is doing there,” she said.

The ECB, which also advised that the review period for the new regime should be shortened to one or two years from the five proposed, noted that no detailed assessment had been made of how the new provisions would affect creditor banks.

The Irish Banking Federation noted that a number of the ECB’s observations and concerns had been previously raised by the federation, including the preference for a lower eligibility threshold of €1 million and for debtors to be obliged to show that they have engaged in bona fide debt negotiations for a reasonable period of time.