Rules hold implications for banks

The introduction of the Basel III banking regulations will have huge implications for the Irish banking sector, particularly the ability of banks to write off unsustainable mortgage debt.

The banks face another round of stress tests in July. This will determine whether they will need to be recapitalised. If State-owned Permanent TSB or AIB fail the stress tests, they will have to look to the Government or possibly the European Stability Mechanism for more capital. However, the stakes are much higher for Ulster Bank and Bank of Ireland.

The Government has a 15% share in Bank of Ireland. Ulster Bank is a wholly owned subsidiary of Royal Bank of Scotland, which is 82% owned by the British state.

Bank of Ireland is also looking to make a full exit from State ownership.

Consequently, the main priority for both banks will be to preserve capital. Ulster Bank and Bank of Ireland have both said they will not countenance debt writedowns or debt forgiveness in their range of treatments for mortgage arrears.

A key part of the Basel III banking rules will be the capital requirements regulation, which is supposed to be in place before the single supervisory mechanism is operational.

Bank of Ireland, Permanent TSB, and AIB were ordered to raise €24bn following the last set of stress tests in March 2011. The idea was to make them strongly capitalised to act as a buffer against future losses.

The governor of the Central Bank, Patrick Honohan, told the Oireachtas Finance Committee that the banks would have to consider long term debt modification and debt forgiveness in tackling the mortgage arrears crisis.

AIB chief executive David Duffy said recently that the bank would write off irrevocable debt after all forbearance measures have been exhausted.

Before Christmas, Permanent TSB released a statement saying: "If, in due course, it becomes clear that it will not be economic over time to continue to pursue a shortfall in money owed, then the bank will consider writing off such debt for those customers."

In a recent speech, the deputy governor of the Central Bank, Matthew Elderfield, welcomed Mr Duffy’s comments.

How realistic Bank of Ireland and Ulster Bank’s position is in terms of ruling out debt forgiveness is unclear, but they are likely to come under huge pressure from the Central Bank over the next number of months.