THE FINANCIAL Regulator has left open the possibility of negotiating a deal with senior bondholders who have lent to the banks to share some of the potential €50 billion bailout costs with the State.

Matthew Elderfield, head of financial regulation at the Central Bank, told an Oireachtas committee that a “liability management exercise” agreed by consent with senior bondholders in Anglo Irish Bank and Irish Nationwide Building Society was a possibility.

Mr Elderfield said other countries have “only extremely rarely” during the financial crisis imposed losses on senior bondholders under so-called resolution powers to deal with failed banks.

The Government should be “very cautious” about contemplating such a move, “never mind whatever legal and constitutional obstacles would need to be resolved”, given the funding difficulties of the State and the banks.

A liability management exercise would reduce losses by making an offer to bondholders to buy back their debt below face value but at a rate higher than the market value.

Mr Elderfield said that “burden-sharing” could be imposed on subordinated debt – riskier loans which pay investors a premium – to contribute to losses of up to €34.3 billion at Anglo and €5.4 billion at Irish Nationwide, but that senior debt was “something that you need to approach with caution”.

In a two-hour appearance at the Joint Oireachtas Committee on Economic Regulatory Affairs covering a wide range of topics, Mr Elderfield said that the regulator would review corporate governance at the banks by the year-end.

External appointments would be made at AIB, which is being taken into Government control.

“There is a need for fresh outside leadership in that organisation,” said Mr Elderfield.

The regulator plans to have “frank conversations” with the banks and expects to see management and board changes through “a freshening up process”, he said.

He wants to see more appointments to the boards of the banks from outside Ireland and rejected the view that there was a limited number of directors in Ireland.

“We need to broaden the gene pool of directors,” he said.

“They don’t have to be English – they can come from anywhere.”

Asked whether the cost of Anglo would rise, he said there was “no such thing as certainty in life” and that he didn’t have a crystal ball, but added that the estimate had been assessed by “reasonable men who looked at it very hard”.

He said that it would take at least five years to stabilise funding at the banks and that he was also concerned that credit unions had not set aside enough cash in reserve for potential bad loans.

“We are finding systemic under-provisioning in the credit unions that is a worry to me and I think we need to take that seriously.”

Mr Elderfield said the regulator would not sit on his hands in relation to problems at credit unions after committee members argued that they were different to banks.

Jonathan McMahon, the Central Bank’s assistant director general for financial institutions supervision, said some credit unions had “woefully” under-provisioned.

Mr Elderfield said he would like to see “more scepticism” among auditors and that they needed to look more closely at credit unions.

The regulator’s enforcement department was “critically under-resourced” and at a third of the level that it should be at, he said.

Mr Elderfield said the regulator had “quite a big pipeline of enforcement cases” and that it was important to take on “some bigger fish” compared with past cases.

He also wants to increase the regulator’s supervisors-to-firms ratio from one to every two banks up to 10 for every one institution.

Some 36,000 mortgage holders, or 4.3 per cent of these borrowers, were in arrears, he said, but these figures did not include loans where repayments were rescheduled with borrowers.

He warned that loan forgiveness schemes would cost the taxpayer and that it was hard to see them working in an Irish context.

Apology to Mcerlean: whistleblowers thanked

THE FINANCIAL Regulator yesterday apologised to whistleblower Eugene McErlean, a former group internal auditor at AIB, over the regulator’s handling of concerns he raised about overcharging cases at the bank in 2001 and 2002.

Mr McErlean claimed that he was removed from his job in 2002 around the time he raised cases of overcharging with the regulator.

“Some of the matters could have been handled better by the public authorities involved and as a result of that I am sorry for any unintentional distress caused to Mr McErlean,” said Mr Elderfield.

The regulator said he was grateful to whistleblowers who had come forward and said that some €88 million had been paid in refunds to customers to AIB.

Overcharging was “a continuing concern”, he said, and that he had set deadlines for banks to deal with overcharging cases “under threat of enforcement action”.