THE GOVERNMENT may create a second “bad bank” by merging the remaining operations of nationalised lenders, Anglo Irish Bank and Irish Nationwide, to cleanse the other four banks of troubled loans.
Officials are exploring the possibility of moving the rump of Irish Nationwide into Anglo – after both lenders transfer loans to the National Asset Management Agency (Nama) – and using the merged entity to “cleanse” the other banks.
The plans are being examined under the proposed restructuring of the banking sector to create healthy lenders that can stand on their own without State support or European Central Bank (ECB) funding.
The restructuring is being carried out in tandem with a further recapitalisation of the banks to international standards as part of the €85 billion bailout of Ireland by the European Union and the International Monetary Fund (IMF).
Merging the post-Nama operation of Irish Nationwide into Anglo and running down both over time could send reassuring signals to the markets about their future, sources familiar with the proposals said.
The merged entity could then be used to take bad loans from Bank of Ireland, Allied Irish Banks, Irish Life and Permanent and building society EBS, cleansing them and allowing them to borrow in the markets.
This plan would be in addition to the splitting out of “non-core” parts of the four banks and their sale over time as part of the restructuring.
The second so-called “bad bank” is unlikely to take full loan books from the other banks, but soured loans from across the other institutions may be moved to the entity to segregate them so they can be worked out over time in a dedicated bank.
Such transfers would be similar to the bank rescue plan followed by Sweden in the early 1990s.
Anglo is the subject of a plan to split it into a funding bank and an asset recovery bank to be run down, while the Government has said that Irish Nationwide has no future as a standalone entity.
Proposals to merge the two are being considered by the EU and IMF teams that are working with the Central Bank and the Government on the €85 billion rescue plan.
The plans are being managed by the Department of Finance, as the Minister is the shareholder of both.
Anglo will have about €36 billion in loans after transferring €35 billion of property development and related loans to Nama. Irish Nationwide will have €2 billion in residential mortgages after moving €8 billion in loans to the State loans agency.
Officials are reluctant to use Nama to remove other problem loans from the banks, fearing the impact of further heavy losses in the transfers and because it is not equipped to deal with large volumes of other loans such as mortgages or business loans.
Irish Nationwide’s €4 billion deposits are likely to be moved to boost the funding of another lender, possibly State-owned EBS, which the Government plans to sell quickly.
Taking Irish Nationwide into Anglo, which focused on commercial property and business lending, would give the merged bank the ability to service bad residential mortgages taken from the other banks.
Funding the merged Anglo-Irish Nationwide entity is seen as the most difficult part of the process, although ECB funding drawn over a longer timeframe is being considered.
Alan Dukes, the chairman of Anglo, suggested at a conference earlier this week that the State-owned bank could be used to clean up the other banks and to help create at least two viable banks in the country.
