One of the government's chief commitments to the International Monetary Fund and our European partners – which are providing us with our €85bn rescue package – is an undertaking to shrink the banking sector so that it no longer presents a threat to the financial stability of the state.
According to the memorandum of understanding with the IMF, the shrinking of banks' balance sheets must occur in the shortest possible timeframe, either through sales of business divisions or whole loan portfolios. The deleveraging is necessary so that the banks will in the future be funded mainly through customer deposits rather than cash from the European Central Bank.
The rhetoric from those involved in cleaning up the banking mess has stepped up in recent weeks, particularly about the need to get foreign investors interested in acquiring Irish bank assets. In a lengthy speech to the Institute of International and European Affairs (IIEA) earlier this month, Central Bank governor Patrick Honohan enthused about downsizing the remaining banks.
"Increasingly it seems evident that placing the continuing parts of the system on a firm footing can best be done through the involvement of new foreign owners who can bring capital, risk- control and other management skills," Honohan said.
There has been speculation since the financial crisis began in 2008 that private equity firms would be interested in buying all, or parts, of Irish banks. While Cardinal Asset Management, run by Nick Corcoran and Nigel McDermott, and its backers have stalked several Irish banks (and are now in the running to buy EBS), there have been few firms willing to take a punt on Irish financial assets. Mark Duffy, the former Bank of Scotland (Ireland) chief executive, who set up Asset Resolution Corporation in 2009 to buy Irish loan portfolios, has yet to publicly disclose any deals.
According to a senior banking analyst, there is little appetite among international, or even domestic, investors for Irish bank assets. The analyst pointed out that even "good assets", like AIB's UK and Northern Ireland division, failed to sell or attract much interest, even though it was on the block at a knock-down price. The analyst said that what has been sold by the banks so far were mainly small peripheral divisions such as Bank of Ireland's asset management arm and AIB's stockbroking business. Selling at rock-bottom prices would involve substantial losses that could trigger further capital requirements, the analyst said.
"It is desirable that the big two banks deleverage. One way to do that is to sell off blocks of assets," said a source involved in deciding the future shape of the country's banks.
Michael Torpey, who heads the banking unit at the National Treasury Management Agency, which has a frontline role in resolving the banking crisis, said the best way to get "substantial shrinkage" is the sale of loans. But he said: "The market to buy chunks has not been there. It's close to static."
In an interview earlier this month, Financial Regulator Matthew Elderfield suggested that batches of loans could be housed in Nama or a Nama-like vehicle. In his speech to the IIEA, Honohan gave a little more insight into the bank's thinking.
"This includes some expansion in the role and streamlining of Nama, and streamlining of the procedures required for its price determination, as well as employing some borrowed funds to enhance the credit rating and saleability of portfolio assets. To the extent that assets can be sold outright (as distinct from being placed in a 'bad bank' vehicle), then some of the banks' excessive borrowings from the Central Bank – a legacy of the years of extravagant bank reliance on footloose foreign funding – can be reduced," he said.
In recent weeks the Central Bank has appointed heavyweight international advisers to work on the deleveraging process, bringing in Barclays Capital, Boston Consulting Group and Blackrock Solutions to work on the problems facing the Irish banks, including the upcoming capital and liquidity assessments that must be completed by the end of March.
Analysts believe that housing tens of billions of euro of loans in a Nama-type vehicle is the most likely solution. But unlike the existing Nama process, which has seen huge writedowns on loans going from the banks to the agency, a steep discount would not have to be paid, thereby eliminating the need for further capital injections into the banks.
NCB Stockbrokers financial analyst Ciaran Callaghan wrote in a research report last week that the rump of Anglo Irish Bank and Irish Nationwide could be used to house the loans.
With the European authorities keen to avoid being soft on countries that require a bailout, convincing them to stretch the timeline for deleveraging out further will be a difficult battle to fight. But with very few options available, they may have no choice.
Get off to a profitable sports betting start today at sportsbetting.co.uk