However, this proposal is not being considered by the Government, according to a Department of Finance spokesperson who said the solution to the tracker mortgage problem is finding an appropriate funding model.
Bank of Ireland, AIB, Permanent TSB and Ulster Bank have roughly €70bn of tracker mortgages between them which makes up two thirds of their mortgage books.
These types of mortgages track the main ECB rate which is at an historically low 0.5%.
However, the cost of the banks’ funding exceeds what it charges on these mortgages, which means that they are a huge drain on the banks’ limited capital.
A troika source told the Irish Examiner that the country’s chances of making a sustainable exit from the EU/IMF bailout programme to a large extent hinged on solving the tracker mortgage problem.
PTSB and AIB are state-owned while the Government has a 15% stake in Bank of Ireland.
One of the options the Government had put forward was to hive off the tracker mortgage books in special asset management units that would then be funded by a credit line from the ECB.
The banks would put in place guarantees against future losses. However, the ECB has consistently ruled out funding tracker mortgages.
An ECB source said it favours a domestic solution including the Government phasing out tracker mortgages over a five-year period.
The ECB source acknowledged that this would be a very politically difficult policy to implement, but “it was something that had to be considered”.
The only other possibility was for the ESM to provide funding for the tracker mortgages, said the ECB source. However, the head of the ESM, Klaus Regling, has rejected this proposal.
The ECB cannot pressurise the Government on policy — it can only offer guidance.
If the Government tried to phase out tracker mortgages then it would meet legal obstacles as well as political resistance.
The Government said that it is focused on solutions based on finding a suitable funding model.
“This [tracker mortgages] is a funding issue and we are currently exploring options in this area,” said a spokesman for the Department of Finance.
The restructuring plan for Permanent TSB has been submitted to the European Commission for approval.
The plan is based on separating the viable assets into a good bank and the bad assets, including a sizeable proportion of its €15bn tracker mortgage book into an asset management unit that would be wound down.
However, the success of this plan hinges on securing an appropriate funding model.