Matthew Elderfield has cut himself a big stick with which to beat the banks if they don't hit their targets under the new proposals for dealing with mortgage arrears. The banks have been given the choice of either coming to sensible arrangements with people in arrears or writing down the value of their mortgages to the current market price of the properties.

The incentive to the banks is clear: if they do deals they can value the loans at more than the market price to reflect the additional amount they will recover.

That the deputy governor of the Central Bank needs such a big stick tells its own tale of the banks' reluctance to confront the losses in their mortgage books.

It also means it would be naive to expect the banks to go along with what he has proposed because it is in the national interest or the interests of their customers.

When we say banks, we are really talking about Bank of Ireland, Ulster Bank, ACC and KBC. AIB and Permanent TSB are both in effective State ownership and their ability to resist is limited. Both banks have struck a much more ameliorative tone on the whole issue of debt write- downs over the last six months.

The other four have been more circumspect reflecting – in the case of KBC, ACC and Ulster Bank – that they are not in hock to the Irish taxpayer. Bank of Ireland is in a third category, being only partly owned by the Government and having a certain status as flagship for the notion that the domestically owned Irish banking system is not an entirely State-run disaster area. Its north American investors, led by Wilbur Ross, have the Government's ear.

It is not a given, then, that Bank of Ireland and the other three will go along with what the regulator has proposed. It may not be in their interests or – via the law of unforeseen consequences – in the interests of their parents, which in Ulster Bank's case include her majesty's treasury.

Compliance with company law

No doubt they have

lawyers poring over the proposal and its compliance or otherwise with company law – something not without irony. The core issue seems to be that undervaluing a loan is, in accounting terms, as bad as overvaluing it; and just because the Central Bank says unrestructured mortgage loans are worth only the market value of the house does not make that so. The potential to restructure a loan – even if the bank has not done it – has to be taken into account.

Not surprisingly the Central Bank devoted several pages of its Mortgage Arrears Resolution Targets document published last week to the legal basis for what it is doing, which is – if you are curious – Regulation 16(1) of the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992.

This regulation says banks must manage their business “in accordance with sound administrative and accounting principles and shall put in place and maintain internal control and reporting arrangements and procedures to ensure the business is so managed”, according to the Central Bank.

The bank went on to explain at some length why it thinks what it has proposed complies with this regulation. The most powerful argument seems to be that any bank that has not faced up to the problem in its mortgage book at this stage is self- evidently not in compliance with the licensing regulation.

The bank argues that the banks are not managing problem mortgage debt because they are not putting sustainable solutions in place. They are also incurring ongoing costs as a result and, very significantly, they are not correctly making provision for losses and thus may be inadequately capitalised. All together this does not amount to the sort of effective systems mandated by the regulations.

It's a robust argument but clearly fertile ground for a legal challenge or two and the Central Bank seems to have adopted a belt- and-braces approach by pointing out that notwithstanding regulation 16 – about which we may well be hearing a lot – it also has powers under the equally catchy- sounding European Communities (Capital Adequacy of Credit Institutions) Regulations . These include telling "a credit institution to hold additional own funds or requiring a credit institution to apply a specific provisioning policy or treatment of assets, in terms of own funds requirements".

It does seem to be a case of Elderfield telling the banks: “Come and have a go if you think you’re hard enough.”