Ireland Said to Consider RBS Model for Banks’ Unprofitable Loans

Irish authorities are considering moving unprofitable home loans into strengthened non-core units within banks as proposals to strip them from lenders run into difficulty, a person with direct knowledge of the matter said.

The government has been in talks with its aid partners on transferring these loans to a so-called asset warehouse to make the banks easier to sell in the future. Instead, the state may urge transfer of the loans into clearly-defined separate units, similar to the approach taken by Royal Bank of Scotland Group Plc, said the person, who asked not to be identified as the matter is still being considered.

Ireland experienced the costliest banking crisis among advanced economies since at least the Great Depression, according to the International Monetary Fund. The Irish state controls three of the nation’s four biggest domestic lenders, after injecting about 63 billion euros ($78.3 billion) into the industry when a real-estate bubble collapsed in 2008.

So-called tracker loans, which are tied to the European Central Bank’s key rate, account for about half of the mortgage market in Ireland and have become unprofitable as official interest rates fell and the banks’ funding costs soared.

IBRC, the former Anglo Irish Bank Corp., was in talks about taking over the troubled loans, Chief Executive Officer Mike Aynsley said in March. Freeing the banks of these mortgages would encourage them to start lending again, he said. Finance Minister Michael Noonan has said a removal of the loans would help the state sell down its bank stakes over time.

The Finance Ministry said in an e-mailed statement today that “it has been and continues to examine various alternatives concerning the Irish banking system within the context of the evolving European frameworks.”

‘Complicated Process’

Viable proposals to strip such loans from the lenders balance sheets are proving hard to formulate, the person said. No final proposal on an asset transfer is in sight, three people familiar with the matter said.

The troika overseeing Ireland’s bailout, the IMF, the ECB and European Commission, arrive in Dublin next week for the seventh review of the nation’s 67.5 billion-euro aid program.

John Moran, the most senior finance ministry official, told lawmakers on June 7 that talks with European officials on the issue include the “complicated process of assessing the capital impact of moving assets around the system.”

Against that backdrop, segregating the mortgage assets into separate units within the banks is being weighed.

RBS Approach

The model implemented by Edinburgh-based RBS is under consideration. Chief Executive Officer Stephen Hester created a separate unit to reverse the $140 billion of acquisitions made by his predecessor Fred Goodwin, which led the bank to cede control to the government.

The bank in 2009 said the division would include 240 billion pounds ($373 billion) of third-party assets and 145 billion pounds of derivative balances to wind down or sell over five years.

While state-controlled Allied Irish Banks Plc (ALBK) has set up a unit for assets it plans to sell or run off, it does not include tracker mortgages. Permanent TSB Group Holdings Plc, also more than 99 percent government owned, is moving risky home loans to a new internal asset-management unit. Bank of Ireland Plc, which is 15.1 percent owned by the state, doesn’t have a separate unit for assets it intends to sell or wind down.

Ireland already removed troubled loans to property developers from lenders by setting up the National Asset Management Agency, a state-run bad bank. Taxpayers had to pump cash into the lenders after NAMA paid a 58 percent discount on the loans it bought, blowing holes in the banks’ balance sheets.

To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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