THE CENTRAL Bank says it has received “formal comfort” from Minister for Finance Michael Noonan that it will not suffer losses on collateral it receives from banks in return for exceptional liquidity assistance.

As of the end of last year, Irish banks had received €49.5 billion of such assistance, the bank said in its annual report.

“As with procedures for ECB eligible collateral, appropriate haircuts/discounts are applied with a view to ensuring that the [Central] Bank would not suffer any loss in the event of default on the loan assistance,” it said.

“The bank has received formal comfort from the Minister for Finance such that any shortfall on the liquidation of the collateral is made good.”

In its annual report for 2010, the bank said it faced several major challenges during the year.

“The main driving force was the pressing need to restore stability to the Irish banking system by identifying and providing for the heavy loan-losses incurred in the property bubble,” governor Patrick Honohan said.

“Against a background of heightened international uncertainty in several euro area countries, the bank worked to underpin a restoration of confidence in the Irish financial system as well as in the prospects for the Irish economy as a whole.

“In a year of decisive action, each step was taken with a view not only to enhancing the likelihood of a favourable outcome for the economy as a whole, but also to minimise downside risks.”

The bank said it would be paying surplus income of €671 million to the Exchequer after it reported a profit for 2010 of €840.9 million.

Looking ahead to this year, the Central Bank said it planned to continue strengthening financial regulation framework in 2011, but said it was also essential to ensure the best interests of consumers were protected.

“Our priority during 2010 and 2011 has been and continues to be to work towards the resolution of the financial crisis and to respond to the problems of under-capitalisation in the banking system,” the bank said in its annual performance statement, also published today.

“The strategy in relation to regulation is based on the need to develop and implement a new model of regulation, an assertive risk-based approach, underpinned by a credible threat of enforcement.

“The objective is to be better at not only identifying risks but also in challenging firms on the risks they face and ensuring the risks are mitigated as far as possible.”

The Central Bank said it had made “substantial progress” with improving the regulatory framework governing financial institutions in Ireland. It planned to examine the possibility of imposing limits on sectoral exposure across the industry, in the case of credit institutions that are considered “systemically important”.

Mr Honohan said the bank, along with some other some euro region central banks, had in February corrected errors in valuations of certain assets used as collateral by lenders for ECB funding.

There were delays in how a third-party informed the Central Bank of ratings changes to some securities, Mr Honohan said.

When a researcher from Germany’s Der Spiegel magazine contacted the bank on a “particular security”, the bank carried out a bigger check with the data provider and found errors with an additional 12 assets, he added.

“These have been reviewed and corrected by the data provider and the collateral was adjusted and this was completed by February 25th,” Mr Honohan said. “I understand that nine similar cases that related to other national central banks were corrected at the time.” – (Additional reporting Bloomberg)