November 28, 2012 / 11:02 AM / 5 years ago

Irish insolvency laws may see bank losses

DUBLIN, Nov 28 (Reuters) - Ireland’s new insolvency regime may push losses at participating banks higher in the short term but the laws are an important part of resolving the crisis in the sector, the central bank said on Wednesday.

In response to growing arrears among homeowners and outdated bankruptcy laws, Ireland has proposed new non-judicial routes for struggling mortgage holders to settle both unsecured and secured debts of up to 3 million euros ($3.9 million).

The new laws are being passed through parliament and set to be introduced early next year. The European Central Bank has warned that the wide scope of the rules could have an impact on the capital adequacy at Ireland’s ailing banks.

“Credit institution losses could conceivably rise in the short term following the implementation of the new personal insolvency legislation,” the Central Bank of Ireland said in its biannual macro financial review.

“However, this legislation is an important part of the solution for managing private-sector indebtedness and promoting long-term growth.”

Dublin has to radically shrink its banking system as part of a European Union-International Monetary Fund bailout in 2010. Only Bank of Ireland avoided full state ownership following an unprecedented property crash that quadrupled national debt.

The central bank said it was clear that lenders needed to address the issue of distressed debt in a more structured and efficient way, and that setting measurable targets of both the workout and resolution of borrower distress may be required.

It said that while capital ratios throughout the mostly state-owned sector have held fairly steady since its last review in March, the outlook for profitability remains weak in the short term, limiting potential for internal capital creation.

This, together with banks’ restricted access to longer term debt markets, means the future Basel III liquidity requirements will present significant challenges for Irish banks, it added.

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