Government will increase stakes in banks - Central Bank boss

Honohan made his comments today during an address to the Trinity Alumni Career Network in Dublin.

As the banks begin to transfer loans over to NAMA over the coming weeks they will clear the way for capital-raising exercises, meaning the cost to the Government of recapitalising the banking system will become clear, Honohan said.

The banks are going to require a “sizable sum”, he noted, adding that some of what is needed may be raised by the banks themselves through such steps as asset sales, new issues of equity, and discounted debt buybacks

However, Honohan acknowledged that the Government would have to lend a hand in the banks’ recapitalisation, saying “it is pretty clear that the Government will be acquiring additional equity stakes”.

“While I’m not yet in a position to put a number on it, I can say that the overall net cost to the State of recapitalisation will be manageable,” he said.

Moving banking situation forward
According to Honohan, this recapitalisation of the banks will ensure that the banks are clearly seen as “strong, financially self-reliant entities able to fund themselves in the market into the future”.

“By the same token, the overhang of the banking situation on the state’s finances will be removed.

“These transactions are thus a key ingredient in moving both the banking and the budgetary situation forward,” Honohan added.

Banks lost SME lending edge during boom
Honohan also said that he had got the impression that while the Irish banks' decreasing risk appetite over the course of the financial crisis had led to limited availability of credit for start-up firms and SMEs, those same banks had also “lost their edge in small business lending” during the years of property-based lending.

However, Ireland’s financial institutions will need to pay more attention to the SME sector in future, he predicted, not just for the sake of the economy, but also for their own business performance in the years ahead “when property-based lending will be on a much more limited scale”.

Honohan also clearly indicated it was time for Irish banks to get moving on lending to the country’s viable SMEs: “It is important that the banks get going now on improving their techniques for making sound small business loans.”

Continued public belt-tightening
The Central Bank Governor also said that one of the country’s greatest strengths when it comes to tackling economic recovery is the recognition now that a continued belt-tightening of Ireland’s public finances is still required.

According to Honohan, foreign confidence is clearly building in Ireland’s ability to restore its public finances to a sustainable level. He pointed to the fact that the interest rates on Irish government bonds have remained “relatively unscathed during these past weeks of heightened tensions in the international markets for sovereign debt”.

“Continued adherence to this disciplined path will result in lower borrowing rates for the Government – and will help accelerate the budgetary correction and reduce the long-term drag of debt servicing as we come out of the recession,” he added.