The Oireachtas Joint Committee on Finance and Public Service heard yesterday that temporary state ownership of the banks would be necessary to recapitalise them, regardless of the success or failure of the Government’s proposed “bad bank” – the National Asset Management Agency (NAMA).
Trinity College Dublin economist Patrick Honohan warned that a “do nothing” approach to the thorny question of further recapitalisation would result in “zombie” banks, an under-performing economy and a much higher ultimate cost to taxpayers.
Prof Honohan recommended the Government take a decisive step to immediately recapitalise AIB and Bank of Ireland, which he estimated would cost €10 billion to €15bn.
“Recapitalisation should be done separately and soon,” Prof Honohan told TDs and senators.
“We should face up to the full reality of future losses upfront.”
He also warned that there was a danger the NAMA could unintentionally pay too much for its problem loans, despite the Government’s intention that it would not do so.
Prof Honohan said such a risk could be eliminated by the NAMA purchasing part of toxic loans in cash and the rest in the form of equity-type claims granted to bank shareholders, which would minimise the exposure of taxpayers.
He also admitted he had reservations that major problems could arise out of plans for the NAMA to take on performing loans as well as toxic property loans.
Meanwhile, UCD econo-mist Karl Whelan said Irish taxpayers had not been given a good deal by the Government’s decision to provide €7bn to recapitalise the two main banks in return for a 25% shareholding (through preference shares), worth only €1bn on current stock market values.
Prof Whelan, who is one of 20 economists who have publicly questioned the Government’s decision to set up the NAMA, said few believed the prediction by the Department of Finance’s advisers, PWC, that AIB and Bank of Ireland would only need a combined extra capital injection of €8.5bn.
“The problem is that property-related losses are wiping out the capital bases of the Irish banks,” he said.
Both economists complained about the lack of hard information from the banks, whose combined toxic loans are estimated to be worth up to €90bn.