Elderfield hints at bondholder discount

THE Financial Regulator has told a Dáil committee that there is scope for the Government to buy debt back from bondholders in the banks, at a discount, but warned that any approach should be made with extreme caution.

Addressing the Joint Oireachtas Committee on Economic Regulatory Affairs, yesterday, Matthew Elderfield noted the Government’s recent statement that it doesn’t intend to impose losses on senior bondholders in Anglo Irish Bank and Irish Nationwide, but “this doesn’t rule out the possibility of some negotiations or a liquidity management exercise agreed by consent”.

The Government is unlikely to change its stance on the issue, while Central Bank Governor Patrick Honohan advised only last week against contemplating discounts on senior debt.

Meanwhile, when asked about the full cost of the Anglo Irish Bank bailout and, specifically, if there is any likelihood that even the revised €29.3bn-€34.3bn range could swell, Mr Elderfield said that last week’s estimate is reasonable and accurate at the current time.

“Nothing in life is absolutely certain, but this is as certain as we can reasonably be,” he said.

Mr Elderfield reiterated his call for a Special Resolution Regime (SRR); although he did admit that even if it had been introduced when he first made the call, six months ago, it probably wouldn’t have made any real immediate difference to the domestic banking crisis.

An SRR – recommended by the IMF – would allow the regulator to take control of a failing bank at an early stage and to solve its problems without having to rely on hefty state bailouts.

“Early action – while still imposing losses on shareholders and other exposed stakeholders – minimises the disruption to the financial system and the economy that would arise in a full insolvency. Equally, if public funds were called upon, this would be to a much smaller extent than in the absence of an SRR,” he told the committee.

The Regulator is set to publish the results of four major examinations of the main banks (mainly AIB and Bank of Ireland) within months. They will feature a review of their governance and risk management arrangements in January and a report on their lending standards next month.

Mr Elderfield said the re-building process surrounding the Irish banking system will be a long-term project. His office will intervene if the banks were seen not to be managing their risks adequately.

“While the Irish banking system deteriorated rapidly, it will only be rebuilt slowly. At the Central Bank we’re under no illusion about the work that still remains to be done. We’re, by no means, near the end of this process – it will be a multi-year effort – but we are coming to the end of the critical recapitalisation phase.”

In also making a renewed call for legislation protecting would-be banking industry ‘whistleblowers’, Mr Elderfield issued an apology (on behalf of the public authorities) and paid tribute to Eugene McErlean, who uncovered instances of overcharging at AIB.

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