The European Central Bank has backed the Government's plans to move toxic bank loans into a national 'bad bank', but urged caution on how much banks should be paid for the toxic assets.
In a legal opinion published on its website today, the ECB said Nama created no major legal state aid problems or unfair advantages, adding it should help strengthen Irish banks' balance sheets and increase liquidity.
But it highlighted the dilemma and risks of deciding a price for the bad assets.
"The preference expressed in the draft law for the long-term economic value of assets, rather than current market values, requires careful consideration," the ECB said.
"It should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme."
The Nama plans have been criticised in Ireland for potentially over-paying banks for the toxic loans which could lumber taxpayers with the bill for the mess created by bad decisions by bankers.
Minister for Finance Brian Lenihan has said he will value the loans, some of which are still performing, to reflect their "long-term economic value" and has said he will not force banks to accept fire-sale prices.
The ECB warned that such a plan carried risks. "The ECB considers that a guiding principle for the scheme should be that there is an adequate degree of risk sharing in order to limit the cost to the government," the Frankfurt-based central bank said.
The plans will be debated in the Dáil next month and are expected to be voted on in October.