Elderfield: Banks may find it hard to shrink balance sheets next year

IRELAND’S banks will find it harder to shrink their balance sheets next year as European rivals step up their own such efforts, possibly pushing asset prices too low, according to the financial regulator Matthew Elderfield.

Under the country’s EU-IMF bailout, Bank of Ireland, Allied Irish Banks and Irish Life & Permanent need to shrink their balance sheets by €70 billion by 2013 — €34bn of which is to be achieved through asset disposals.

The banks had reduced core and non-core assets by some €13bn by the end of September, according to Central Bank figures.

“The first year is probably the easier year and I think they are going to hit their targets, [or] get pretty close to it,” Mr Elderfield said at the IBEC conference.

“The next two years will be more of a challenge,” he said.

“Across Europe, there is the capital-raising exercise done by the European Banking Authority, which means a lot of banks are going to be selling assets into that market at the same time,” he added.

Ireland has put almost €63bn into the banks following a disastrous property-lending binge and believes its latest recapitalisation drive, following fresh stress tests in March, drew a line under the country’s banking crisis.

However, Irish-based banks are still reliant on the central bank for almost €50bn of emergency funding.

They are reliant on the European Central Bank for over twice that, due to tens of billions of euro in deposit outflows and their inability to raise money on the interbank lending markets.

Prices achieved for asset sales have so far come within targets, but if prices fall much further, the Central Bank may be forced to step in, Mr Elderfield said.

“So far, haircuts for that deleveraging have come in at the base level and not at the stressed level, so there is a bit of headroom ... If it gets up to the stress level, we will be prepared to say slow down a bit.”

“We have put a lot of capital into the banks so they can fund that deleveraging, but there is a limit to that, so we will be prepared to moderate that pace to make sure that the prices are fair,” he added.