Agency to deal with toxic bank assets

Ireland is to set up an asset-management company to purchase development loans, Minister for Finance Brian Lenihan said in his budget speech today.

The measure was being brought forward to deal with impaired assets in the banking system. He said a National Asset Management Agency will be established on a statutory basis, under the aegis of the National Treasury Management Agency (NTMA).

Speaking at a press conference in Dublin after the budget was published Mr Lenihan said Irish banks would have to take a "substantial reduction" in loan values as part of the plan. He said the Irish economy was not in jeopardy.

Shares in Bank of Ireland and AIB rose modestly after the announcement, which had been widely expected. Bank of Ireland shares closed at 96.5 cent, a gain of 9 per cent while AIB closed at €1.28, up 9.4 per cent.

Bond spreads on Irish debt rose marginally after the plan was announced.

Bank of Ireland said it would "actively engage" with the NTMA on the new plan.

Under the system proposed by the Minister impaired assets will be transferred from the banks to the new agency with the “purpose of ensuring that banks have a clean bill of health, their balance sheets are strengthened and uncertainty over bad debts is reduced”.

He said this was to ensure a “sustained flow of credit on a commercial basis to individuals, households and businesses in the real economy”.

Distressed land and development loans in Irish banks will transfer to the new agency as these “pose the main systemic risk to the banking sector in Ireland and the most significant obstacle to the recovery and restoration of lending by the banking system”, Mr Lenihan said.

These assets will be purchased by using Government bonds, resulting in a sharp increase in gross national debt.

Mr Lenihan said the cost of servicing this debt “will be offset, as far as practical, from income accruing from the assets of the new agency”.

He said the potential maximum book value of loans to transfer to the new agency was estimated at between €80 and €90 billion, although be believes the final amount paid will be significantly less than this.

However, if the agency falls short of recouping all of the costs the Government said a levy would be applied to recoup any shortfall. All borrowers will be required to meet full legal obligations for repayment.