Central Bank governor issues warning to banks over distressed mortgages

The banks will be required to raise more capital if they do not begin dealing with distressed mortgages, the governor of the Central Bank has said.

Addressing an Oireachtas committee yesterday, Prof Patrick Honohan said there were approximately 100,000 cases of loans in distress and the Central Bank had been putting pressure on the banks to put in place “a machine” to process them.

He said that once the machine was in place, the Central Bank “can and will” then require the banks to deal with prescribed numbers of cases.

If the banks failed to do this, the Central Bank would require them to raise more capital, as not dealing with the loans would affect the risk position of the banks.

Force banks

Prof Honohan made his remarks to the Joint Committee on Finance, Public Expenditure and Reform, where a number of TDs complained that the Central Bank was not doing enough to force the banks to deal with people who had loans they could not service.

Prof Honohan told e committee chairman Ciarán Lynch (Labour) that the issue was a key one for the Central Bank.

His comments came as the ratings agency Standard Poor reiterated its negative view on Ireland and said the banks may need more capital.

Richard Boyd Barrett (Independent) said the policies supported by Prof Honohan shared the common thread that it was “Joe Public who carried the can” and the financial institutions that were protected.

Prof Honohan said this was not the case and there would be “dire consequences”, not least for Joe Public, if Ireland followed Mr Boyd Barrett’s suggestion that bondholders owned billions by the banks were not repaid.

“Considerable goodwill”

Prof Honohan said he did not want to speculate as to whether Ireland’s bid for a deal on the €3.1 billion Irish Bank Resolution promissory note payment, would be achieved before to March 31st next, when the payment is due.

He said there was “considerable goodwill from all interlocutors in this process” but that it had not been easy to find a generally acceptable solution.

“Taking into account both the statutory position and wider policy stance of the ECB, an initiative of this type will be novel and, as such, challenging.”

The bank had been working carefully to build understanding and confidence around a set of proposed transactions designed to deliver for Ireland, while not taking other decision-makers too far out of their comfort zone, he said.

“What we have designed is, I believe, largely in the interests of the euro system as a whole,” Prof Honohan added.

Done and dusted

When Pearse Doherty of Sinn Féin said it was clear from those comments that the solution was “done and dusted”, the governor said he was “over interpreting” his comments.

He said the deal, if achieved, would be “something of great advantage to Ireland”.

The solution being sought would allow a slower and better path for the debt going forward, he said.

Any transaction that allowed a lengthening of maturity could increase the level of interest to be paid, but if the interest rate was low enough that issue could be addressed

Joe Higgins (Socialist Party)said Ireland had 1 per cent of the EU’s population but was, according to Eurostat, shouldering 42 per cent of Europe’s banking bailout costs.