Thursday, September 20, 2012

ECB Urges Ireland To Reduce Scope Of New Insolvency Laws


Thu., September 20, 2012
The European Central Bank has urged the Irish government to narrow the category of debtors who will be eligible for its new insolvency regime, warning that current proposals could impact on the capital adequacy of the country's lenders, Reuters reported. In response to growing arrears among homeowners and outdated bankruptcy laws, Ireland has proposed new non-judicial routes for struggling mortgage holders to settle both unsecured and secured debts of up to 3 million euros ($3.9 million). The new laws are currently in the draft stage. In an opinion paper, the ECB said it generally supported the reforms but recommended that the limit for personal insolvency arrangements (PIAs), the category dealing with the biggest debtors, be reduced to 1 billion euros. "The potential inclusion of such large amounts of secured debt in the PIA, including 'buy-to-let' mortgage loans, is unprecedented and may have significant financial implications for creditor banks if it results in deteriorating payment morale of debtors," the ECB said in the paper. "If made use of by large numbers of debtors, the PIAs could significantly increase default rates and thus impact on both the capital adequacy and liquidity position of credit institutions at a time when they are still undergoing restructuring." Ireland's government has said the non-judicial schemes should not increase bad loan costs to banks as they will allow more flexibility and make it easier for lenders to avoid the costly process of bankruptcy and foreclosure. But the ECB, which also advised that the review period for the new regime should be shortened to one or two years from the five currently proposed, noted that no detailed assessment had been made of how the new provisions would affect creditor banks.

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