THE GOVERNOR of the Central Bank, John Hurley, has signalled that he endorses the valuation of loans moving to Nama, the State’s bad bank, at both relaxed “through the cycle” values and more severe market pricing.
At the publication of the Central Bank’s annual report for 2008, Mr Hurley said that the pricing of development loans “must balance restoring the role of the banking sector in the real economy with value for the taxpayer”. He said pricing the assets was “critical”.
The Government is still considering how to value development and associated loans sitting on the books of the banks at between €80 billion and €90 billion.
Minister for Finance Brian Lenihan has said that assets will be valued on a market basis, which would involve severe writedowns on values, but that they could also be valued taking into account “a longer term economic value”.
Mr Hurley declined to comment on whether the taxpayer should carry some losses on the loans, saying it was a matter for Nama.
“I wouldn’t want to get into the process which they are now going to put in place but we have to look to the recovery of the economy in general and the recovery for the banking sector,” he said.
Mr Hurley said Nama will be a “catalyst” for consolidation in the banking sector and that the banks that emerge “may well be smaller” following the transfer of the loans.
“The financial institutions emerging will be leaner and we have, in the course of this process, to take a view on what is the banking sector we require for this economy,” said Mr Hurley.
“That does mean that we have to look at consolidation.”
He said the Nama process would “clear up” the balance sheets of the banks, strengthen liquidity in the system and allow for an assessment of the banking sector required for the economy.
He said Nama would “renew confidence” in the banking system and create a sufficient flow of credit, and that it would lead to a “more focused” banking sector.
“Clearly we need the two main banks to be strong but we need to look at the rest of the sector to see what is the configuration of banking that this economy needs,” said Mr Hurley who will retire as governor in September.
Mr Hurley said that, in the Central Bank’s view, supporting Anglo Irish Bank was “absolutely essential” and that nationalising the bank was necessary to protect the stability of the financial system.
“You only have to look at the scale of the balance sheet and the funding requirements of Anglo Irish [to see] that in our situation it was systemically important,” he said.
He said the collapse of US bank Lehman Brothers last September “turned the financial world on its head in a matter of days”.
Mr Hurley defended the Central Bank’s record on regulation, saying the bank issued warnings on the risks facing the economy but this didn’t change behaviour.
“We would have thought that we had outlined the very strong financial stability risks over time – we didn’t change behaviour and I think that is the issue we need to focus on,” he said.
