The Government will consider setting up a “bad bank” to deal with the toxic assets held by Irish financial institutions but only after its bank capitalisation scheme is finalised. It has also warned it will not be bounced into removing bad debts from bank balance sheets in order to restore credit flows if it exposures taxpayers to unlimited risks.
“We can’t be jump-led by markets and market expectations into solutions that suit the banks rather than the people,” said Minister for Finance Brian Lenihan, who noted banks were using the media to try to force politicians to adopt these types of state rescue plans.
“We want to clean up the banks balance sheets and get them back to resuming normal lending we will do everything in our power to do that but governments have to protect the interests of the taxpayers,” he said at an EU finance ministers meeting on the subject.
Mr Lenihan confirmed the Government is actively considering whether it is necessary to set up a so called “bad bank”, to which Irish financial institutions could transfer their contaminated assets in an effort to restore confidence in global credit markets. Such a scheme would enable banks such as Bank or Ireland and AIB to transfer the toxic assets on their balance sheets- mainly development land and property - to the bad bank.
But he warned dealing with toxic debts through either bad banks or risk insurance schemes, such as that recently proposed by Britain, could leave the taxpayer exposed.
“Some of the proposals that have been advanced today such as risk insurance seem to involve a payment of a definite premium to the taxpayer in return for the assumption of an indefinite risk. And that is not something that any government could commit itself to,” said Mr Lenhian, who nevertheless added he was studying the options and did not rule out going down this route following the Government’s bank recapitalisation scheme.
Mr Lenihan said the Government was making progress in its negotiations with the banks regarding the bank recapitalisation scheme. He said he hoped to be able to give more definitive information today if talks on certain sensitive issues could be resolved.
He said the outstanding issues in talks with the banks included security for those homeowners threatened with house repossession, the whole question of remuneration and pay in the banking sector, and loans to SMEs. “There has to be real reform and change in the banking sector as well,” said Mr Lenihan, who defended the amount of time it was taking the Government to complete the recapitalisation process in the Republic.