Last week Dermot Desmond, a long-standing critic of lending practices at AIB and Bank of Ireland, offered his own solution to the problem of souring property loans on bank balance sheets. "Let's park it, freeze everything, without loss to anyone," was Desmond's advise.
Put simply Desmond, believed to have a net worth of €1.5bn, said he believed all developers should be made repay their borrowings, but equally the banks should be allowed sit on the property loans for a few years until the market returns to some type of normality. "You can't get blood out of a stone," said Desmond last week.
However, while this would benefit banks in terms of halting further rounds of damaging write-downs, it is simply not doable under current accounting rules observed by the main banks. Irish banks have to write down assets and loans under various Irish acts (including the Central Bank Act 1971 and the Building Societies Act 1989). But it's mainly under the terms of IFRS accounting rules that credit write-downs have to be undertaken.
The banks must react when loans are impaired and this is triggered when a "loss event" takes place. The chief "loss event" in relation to loans is when the recoverable amount is likely to be less than the amount on the bank's balance sheet. That triggers an impairment and there is no provision for "freezing" the write-down in that context.
In fact, the rules under IFRS are so broad there is virtually no way out for an Irish bank trying to avoid an impairment. Even the "disappearance of an active market for that loan" is taken to be evidence of an impairment. Far from allowing any "freezing" process, the Irish financial regulator demands that impairments be assessed at least annually, but "if new information comes to light in the period between impairment measurements'', it should be done on at least a quarterly basis.