The next few months promise to be the most active period for Irish banking since the six months between the introduction of the guarantee and the establishment of Nama. By June, the six domestic covered institutions are expected to be substantially restructured, smaller and fully recapitalised.
The extensive menu of tasks will require tight cooperation between the Department of Finance, the Central Bank and the National Treasury Management Agency (NTMA). But just at the critical moment, these three bodies appear to be reading from different scripts.
There have been signs that the department, Central Bank and NTMA have not settled between them the major questions facing the sector: how it will be reorganised, which assets will be sold, and what timeframe is appropriate to move the mountain of work ahead of them.
The broad outlines of the requirements for the banks are set out in the bailout memorandum of understanding between the government and EU/IMF. But the methods and details are to be filled in locally.
The first point of friction is the recapitalisation of Bank of Ireland, which must meet the Central Bank's new minimum core reserve level of 12% by 28 February. Institutional sources believe Bank of Ireland could avoid majority state ownership if it had more time to raise the remaining €1.5bn it needs to meet the Central Bank's target. One financial source said having an early deadline for Bank of Ireland was seen in the industry as putting the cart before the horse, since the Central Bank is due to conduct capital stress tests in March.
The Department of Finance and NTMA appeared to agree. According to senior financial industry sources with knowledge of the discussions, officials from both camps put on a "huge push" to get the recapitalisation deadline pushed back to May, arguing that major decisions should be left to the new government.
They were rebuffed not only by the bailout 'troika' of the International Monetary Fund, European Commission and European Central Bank, but by the Central Bank and Financial Regulator too. Without a united front in Dublin, there was little hope of persuading Brussels, Frankfurt and Washington.
A Department of Finance spokeswoman had no comment except that the terms of the bailout memorandum of understanding remained in force. The Central Bank said in a statement that "timelines remain in place", adding that, "as previously announced, the Central Bank set a requirement for AIB, Bank of Ireland and EBS to achieve a capital ratio of at least 12% by 28 February 2011. AIB, Bank of Ireland, Irish Life & Permanent and EBS will be subject, as previously announced, to [stress tests] which will be completed by the end of March 2011".
The NTMA and the Central Bank also appear to have different ideas about how to shrink the balance sheets of the big two banks quickly enough to satisfy the demands of the bailout agreement.
Early this month, financial regulator Matthew Elderfield suggested assets – both healthy and impaired – could be dumped into a "Nama II" for restructuring. Only a week later NTMA head of banking Michael Torpey said the regulator had used "misleading terminology" and that the appropriate vehicle for bank asset disposal had not yet been determined, although he said assets were more likely to be warehoused for gradual deleveraging over years than auctioned in a fire sale.
The sale of Quinn Insurance following administration has pitted the Central Bank against the department and NTMA too. The latter wants to minimise taxpayer losses from Anglo Irish Bank, to which Quinn owes billions. The bank's own plan for securing its repayment involves a bid for the insurer with the US's Liberty Mutual. But senior Central Bank officials are adamant that any bid involving Anglo faces "significant regulatory hurdles", suggesting another buyer is likely to win the bid, which needs Central Bank approval.
Central Bank governor Patrick Honohan himself is understood to be something of a thorn in the side of the NTMA. NTMA officials have reportedly become frustrated at the governor's tendency to speculate publicly about future developments in banking without making clear whether he is signalling a policy shift or merely engaging in academic reflection. The concerns centre mainly on the market impact his statements have had on funding, both for the banks and for the sovereign.
Lurking in the background to the local conflict is the EU, whose representatives have on the one hand been quick to rebuke Ireland for its failings, as Commission president José Manuel Barroso did last week, but on the other have been slow to give required direction to accelerate the country's progress towards its bailout goals.
For instance, the sale of EBS has been delayed because of EU timetables, according to the NTMA. NTMA chief executive John Corrigan said there was "a lot of frustration" at the pace the competition commissioner was setting for the transaction. He said the NTMA had "put its shoulder to the wheel" late last year to get the sale done, but the bailout intervention had actually slowed progress.
"The uncertainty means there are a lot of caveats on price," said the NTMA's Michael Torpey.
One source suggested the department, NTMA and Central Bank were showing signs of intradepartmental conflict because they're afraid of upsetting the EU and IMF and that everyone was trying to be scrupulous in executing their responsibilities. Another source said the three bodies were aligned in what they were trying to achieve for the banking sector, but that there was inevitably a healthy tension because their core responsibilities diverged.
In just a few weeks, representatives from the IMF will arrive in Dublin to conduct the first formal review of Ireland's aid programme since the government agreed to an €85bn bailout package with the agency and the EU late last year. Unless the government bodies responsible for implementing the bailout programme can put aside their differences and decide on a clear, united strategy, there is a risk deadlines could slip, jeopardising payouts from the fund.
Open conflict 'misleading' of Nama row
Nama chief Brendan McDonagh and Financial Regulator Matthew Elderfield have come into open conflict in the past few months over whether the banks misled Nama as to the extent of their likely losses on property lending.
In November, McDonagh told the Public Accounts Committee that the banks had understated in 2009 how much they expected to lose on loan transfers to Nama, leading to haircut estimates of just 30%. The average Nama haircut was nearly twice that – a difference of about €20bn, he said.
McDonagh said at the time the regulator should investigate, but it later emerged he backed off after Elderfield challenged him to produce evidence. Two weeks ago McDonagh told the committee he "unequivocally" stood over his initial comments. Elderfield is understood to be making enquiries.