The governor of the Central Bank has said Irish banks will need further capital after transferring loans to the National Asset Management Agency (Nama).
Speaking at a meeting of the British-Irish Parliamentary Assembly in Cavan today, Patrick Honohan said the Government will end up with larger stakes in the banks.
"The Irish measures will soon be completed when the major asset purchases of Nama are finalised, and the main banks are recapitalised, at least in part with further investments by Government," he said.
However, he said he did not think full nationalisation of the institutions a year ago would have been a good idea.
Mr Honohan said he was confident that the measures introduced would confirm the solidity of the banks, and help restore confidence in the finances of the State.
But he warned the banks would be hit with further losses as loans were transferred to Nama.
"The transfer is happening at very fair and honest valuations. There's no deviation from that. The result is that banks will be showing losses that haven't yet been brought to their accounts," he said.
He also expressed disappointment at HBOS's decision to close its retail branch network in Ireland. Mr Honohan said competition in the Irish banking market had been partly driven by HBOS and its expansion into the market, which caused banks to reduce lending margins and introduce products such as the tracker mortgage.
"Since the outbreak of the crisis, banks have tended to withdraw from international commitments, reflecting not only a broad upswing in what is often termed 'home bias' in finance, but also the intensified pressure to deleverage – a pressure which has been considerably reinforced by the decisions of the European Commission, concerned to prevent State aid to banks from distorting banking markets," he said.
Mr Honohan told the conference that wage competitiveness was key to boosting the economy, and in the short-term would depend largely on containing and reducing nominal wage rates, as euro-inflation would remain low.
"Though tough, this should be somewhat less painful than might appear at first sight, given the fact that inflation in Ireland has been negative now for well over a year – quite a contrast with the UK, where inflation currently exceeds the official target," he said.
"Even indebted households may, for the present, be better able to absorb nominal wage cuts to the extent that most floating mortgage rates are currently still lower than they were before the crisis. It's a different matter, of course, for the many affected by unemployment."
Speaking at the same event, Taoiseach Brian Cowen said the government has taken "tough" measures that have stabilised the economy, the budget deficit and the banking system.
"No one is suggesting the crisis is over, we have a long way to go," he said. Mr Cowen also said he sees the economy resuming expansion later this year.
Additional reporting - Bloomberg
