The announcement of the ominously-titled National Asset Management Agency (NAMA) has left most people rather bewildered about what this actually means for our banking system and our economy. The only certainty in banking at present is that we have a huge problem with confidence, and confidence is the life blood of any bank.

NAMA arose from the government's decision that it had to intervene rather than allow the banks to procrastinate in declaring the losses they are holding. Hopefully it will jump-start the heart of Irish banking and allow liquidity to flow through the arteries of our economy. While other countries around the world have rejected the concept of a "bad bank", the idea of stripping existing lending institutions of toxic debt has found favour here.

Although the new agency will not hold deposits or have a banking licence, it is envisaged that all existing development loans will be transferred to it. But what are the implications of this approach, and why have other countries rejected it?

A leading criticism of this policy is that government-funded agencies are buying bad debts, which could mean a huge loss to the taxpayer if the loans are not repaid. The government's position is that the new agency is intended to be profit-making, but remember, that was also the intention of the developers when they took out these loans.

So what was the alternative? Other countries have demanded a more realistic compulsory audit of banks' loan books. This compels the write-down of debts internally followed by further investment at more realistic values. The attractive feature of this approach is that taxpayers are buying the certainty of an actual asset.

The government encouraged state investment in our banks in the absence of such a stringent review of development loans. Indeed, one of the biggest issues that will arise with NAMA will be how to value the loans being transferred from the banks to this new agency.

However the decision is made and we are now faced with a hybrid "bank/agency" that will manage its existing development loans. It is incumbent on all those implementing these changes to make sure they work. The single biggest drawback, although it's admittedly a necessary evil, is that the agency faced with this task is controlled by the government, albeit at arm's length. Government bodies have never shown the ingenuity or managerial stealth to resolve their own crises, let alone the single biggest economic issue faced by the country for decades.

Largely due to public pressure, the government has gone to great lengths to confirm that developers will be pursued "to the ends of the earth" to recover these loans. It is of paramount importance that such sabre-rattling does not pollute proper commercial thinking.

The goal of this agency must be, quite simply, to recover the most money for the taxpayer . This should not be confused with "punishing" developers. Most businesses, even healthy ones, would collapse if their loans were immediately called in. So while it may be unpalatable, the best commercial option may be to resist the urge to demand full loan repayments and consider options for the completion of sites with developers. Numerous sites lie idle because banks have been reluctant to continue to finance them. This agency must not only take over these loans, but must also try to resolve the stalemate.

NAMA cannot simply be a bureaucratic book-keeper or debt collection agency. It must not become a political football: commercial considerations, not political ones, must govern its operation.

Graham P Kenny is a partner with Lyons Kenny Solicitors. Kenny is a property investor himself and advises a number of property developers