An expert on banks and their crises, the new governor supports a policy of risk sharing, writes SIMON CARSWELL

THE APPOINTMENT of Patrick Honohan, finance professor and an expert on banks and banking crises, as Central Bank governor should help ease at least some of the concerns about Nama.

The first governor to be appointed from outside senior civil servant ranks in the bank’s 66-year history, Dr Honohan has advocated the sharing of the unquantifiable risks on Nama between taxpayers and the banks.

The draft Nama legislation includes no such measure to protect taxpayers in the event of a property market recovery being much further away than expected.

Dr Honohan’s appointment will help assuage the uneasiness among the Green Party, the junior Government partners, which has pushed for a form of risk sharing – such as staggering the payment for the Nama-bound loans – as suggested by the incoming governor.

Speaking on the Nama plan before an Oireachtas committee last May, Dr Honohan suggested the Government’s payment for loans with a book value of close to €90 billion should be split to spread the risk of overpayment.

Part of the payment should be in State bonds, he said, while the remainder should be “in the form of an equity-type claim on Nama” granted to bank shareholders.

“By definitely pitching the certain payment – the bond payment – well under the recoverable value of the loans and allowing the shareholders to claw back any recovery above that, we are leaving the taxpayer in a much safer position,” he said.

This option, he said, was better than the proposed levy on the banking sector which the Government plans to introduce if Nama completes its task with a loss. The academic said that a levy was “not really consistent with the overall Nama approach”. It remains to be seen whether the Government will now shelve the levy in favour of a split payment.

He also warned against using Nama “as a covert way to recapitalise the banks by paying too much for their problem loans”.

“That is a bad idea because it is a non-transparent subsidy from the taxpayer to shareholders and other creditors that are not guaranteed,” he said.

He said the Nama process was “likely” to lead to the Government taking a high percentage shareholding in a bank, perhaps 100 per cent of an institution.

He acknowledged the Government had said it did not intend to “overpay” for loans, but said that there was a risk Nama could end up overpaying “by accident due to over-optimism”.

Dr Honohan’s appointment will be seen as timely as it coincides with what will be a heated debate on the Nama plan and puts an individual with criticisms of Nama (as outlined in its draft form) in a position where he can influence policy.

Another arena where he can hold sway is at the European Central Bank (ECB). As governor, Dr Honohan will become a member of the bank’s 22-member governing council, voting on future interest rate hikes and falls.

Dr Honohan has criticised the style of communication of ECB president Jean-Claude Trichet as “oblique” and said that Ireland’s membership of the euro zone and the ensuing period of low interest rates weren’t the sole causes of the decade-long credit boom

Irish policies were “not retuned”, following euro membership, to account for the absence of “an early warning system” in the financial markets, he said.

A long-time proponent of an EU-wide banking regulator, Dr Honohan said last June: “Isn’t it now obvious that we in Ireland should be cheerleaders for an early move in this direction?”

However, Dr Honohan’s first task as governor will be to help guide the Government on the controversial Nama plan.

He will also have to shepherd the Irish banking system through the most severe upheaval in its history in industry-changing consolidation and mergers post-Nama.