OPINION:The Government seems to have belatedly decided that some sort of bad bank is needed, writes JOHN McMANUS

THE ONGOING tensions between the Government and banks spilled into the open last Friday with the Taoiseach accusing the banks of being in denial about the extent of their problems.

He may have been referring to the situation last September when the Government guaranteed the banks, but he was presumably expressing frustration about the banks’ ongoing reluctance to face reality when it comes to resolving the issue of their €56 billion or so in problem loans.

The Government would appear to have belatedly come round to the view that some sort of bad bank or asset management company is needed.

An announcement to that effect is being trailed as part of tomorrow’s budget and will form a significant part of what we hope will be a coherent strategy to restore confidence and stabilise the economy.

But it’s clear that the two big banks – AIB and Bank of Ireland – are not fully on board, even at this late stage. They have identified a number of problems that are unlikely to be resolved over the next 24 hours.

These include the thorny issue of cross collateral, where a bad loan on almost valueless development land might be partly secured against other assets of better quality, such as office blocks. Does it all go into the bad bank?

There is also the issue – according to the banks – of what to do about loans spread across a number of banks, including banks that are not going to be part of the scheme.

As an alternative, the banks have proposed that the State bring in some sort of assets insurance scheme – instead of a straightforward bad bank – as a way around these problems.

The assets insurance scheme approach has an added advantage – from the banks’ point of view – in that it allows the banks to avoid having to take their losses upfront, as would be the case if they were to transfer loans into a bad bank.

This in turn offers the banks their best chance of minimising the amount of money they are going to have to take from the State to shore up their balance sheets, and thus the dilution of their shareholders and loss of independence.

When you bear this in mind it looks like the banks are once again trying to have it both ways.

They have accepted the State’s help, both by way of the guarantee and the recapitalisation, but stubbornly refuse to do what the State wants them to do. In this case, it’s agreeing to a bad bank as a way of drawing some sort of line under their problems.

They have been able to do this because the Government has – until now – had no coherent strategy for dealing with the banking crisis, and thus lacked confidence in its dealings with them. Perhaps even more significantly, it has very little credibility with the banks.

If you were the chief executive of AIB or Bank of Ireland, whose judgment would you trust when it comes to sorting out the bad loan problem? Your own or the Government’s, given the events of the last year and what led up to them? The Taoiseach may be right when he says the banks are reluctant to face reality. But denial is still the order of the day as far as the Government’s assessment of its role in the crisis goes.

Both the ESRI and the Central Bank have said that most of our troubles are of our own making, and stem from policy mistakes made over the last seven years.

We have yet to have a comprehensive response or explanation from the Government on the issue.

And this in turn leads to an issue which to date has received very little attention – who is going to run the proposed bad bank, and how will it be policed? Bear in mind that it will have assets of €56 billion and they will include huge banks of development land and various commercial and residential developments, which are bankrupt now but could be extremely valuable in the coming years when the economy recovers.

By taking control of these assets the Government is in a position to control the property market and, if it wishes, perhaps undo some of the damage done over the last seven years. It will give it an immensely powerful lever on the economy.

By the same token, the bad bank holds out opportunities for mismanagement, patronage and corruption that will make the Fianna Fáil tent at the Galway races look like a church fête.