ANALYSIS:THE STATEMENT of intent by the G20 leaders of the world's largest economies to fix the global economy and financial system has much resonance for Ireland on the strengthening of financial regulation, but particularly on dealing with toxic bank assets.
G20 leaders meeting in London yesterday agreed to a common approach to cleaning up banks’ balance sheets of their toxic assets. The difficulty for the Government is that the impaired assets on Irish bank balance sheets relate to property and not the troublesome credit market assets that are contaminating international banks.
An Irish-tailored approach will be required to mend the banks and the Government is moving toward a type of “bad bank” where losses are taken up front, rather than an insurance plan where losses are spread out.
The G20 leaders stressed as a priority the need to repair the global financial system to restore lending. Addressing problem loans, which continue to affect bank capital requirements, is seen as an essential part of this process. “Our actions to restore growth cannot be effective until we restore domestic lending and international capital flows,” the G20 leaders said.
The State’s three biggest stockbrokers, NCB, Davy and Goodbody, issued a joint statement for the first time, saying that the six guaranteed Irish-owned financial institutions face €25 billion in loan losses, or 6 per cent of their loan books, over the three years to 2010.
They said the Government needed to inject more capital into the banks but in the form of pure equity, not through the hybrid capital the State is investing in Allied Irish Banks and Bank of Ireland with €7 billion being injected for preference shares.
A further €3 billion may be required, the stockbrokers said, but the combined €10 billion would need to be invested in return for ordinary shares. They said investors and ratings agencies view pure equity as the only sufficient buffer against losses.
The creation of an asset-management scheme, a variation on the bad bank option, would address problem loans but could force the guaranteed institutions to take much higher loan losses up front.
This could put further pressure on the banks’ immediate capital needs and may force the Government to take large equity stakes, pushing the State further down the road of bank nationalisation.
Banks will also benefit from the decision of the US accounting standard setters yesterday to ease mark-to-market accounting, which has forced financial institutions to take severe write-downs.
The US Financial Accounting Standards Board voted in favour of giving financial firms more flexibility on their accounting rules. This will primarily benefit banks with complex toxic credit investments on their books rather than Irish banks with large books of impaired property loans.
The G20 agreed on “much greater consistency and systematic co-operation between countries”. This is particularly pertinent for Irish financial regulation which requires greater co-operation with overseas regulators due to the international reach of financial firms operating in Ireland.
The G20 has pledged to improve the “quality, quantity and international consistency of capital in the banking system”. This includes stronger regulation to prevent “excessive leverage” and to compel “buffers of resources to be built up in good times.” This is relevant for Ireland where regulatory capital requirements failed to curb speculative development lending and 100 per cent mortgages.
The G20 has agreed to introduce measures worth $1 trillion to stimulate the global economy, which will undoubtedly help trigger Irish economic growth.
Goodbody economist Dermot O’Leary said: “We have to get our own house in order in Ireland but our recovery will be on the back of a global stimulus and recovery.”
