Neary sheds new light on banks' property exposure

An Oireachtas committee is told banks may need fresh equity beyond regulatory requirements, writes Simon Carswell, Finance Correspondent

PAT NEARY, chief executive of the Irish Financial Services Regulatory Authority, seemed to leave the door open yesterday on the issue of whether Irish banks would have to raise fresh capital when he was questioned at the Oireachtas economic and regulatory affairs committee.

He said that, while Irish banks have, under existing rules, enough capital to absorb future loan losses, "we must be mindful that the rules of the game are changing internationally".

While Ireland was the first to guarantee bank deposits and inter-bank lending, other countries went a step further, injecting equity into banks.

"Market expectations could push other banks to seek equity injections, irrespective of whether or not they continue to meet their regulatory requirements," he said.

In other words, Irish banks have enough regulatory capital, but the market may want more.

Neary said that markets needed the stability of state intervention but that it was "not possible to say at this point" whether further capital may be necessary.

He said he couldn't give "a definitive answer" on whether fresh capital would be needed, but that it may be necessary as "market conditions remain extremely difficult". If required, it would be sourced privately first and only then from the State, he said.

Neary also shed new light on the banks' property exposure. He said the six guaranteed Irish banks had set aside capital of €42 billion to cover bad debts of €2.1 billion on impaired loans of €3.6 billion. He said speculative lending on Irish construction and property development - an area of concern for investors due to the property downturn - amounts to €39.1 billion with €15 billion of this secured directly on the properties and the remaining €24 billion on "additional collateral or alternative sources of cash flow and realisable security".

Losses on these loans would arise over time and be offset by profits on performing loans, he said. Neary said the question of whether banks could maintain their capital levels from profits depended on property-related bad debts and their dividend policies.

He said the "potential difficulties" from these debts are linked to "how the economy unfolds".

Britain's offer of up to €47 billion in capital to three UK banks has raised the stakes, literally and metaphorically, as the banks' tier one capital ratio - a key financial measure of their safety net - have been pushed up to about 9 per cent with the state's cash.

The three main Irish banks would have to raise about €10 billion to catch up, according to stockbroking firms, Davy and Merrion. One banker said the "magic number" for capital had risen to 9 per cent, though this didn't mean Irish banks would curry favour if they reached it, as falls in UK bank share prices on Monday showed.

But investors may demand it, he said, so it's a case of "damned if you do and damned if you don't".