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Banks Fighting New Irish Insolvency Service Before It Starts

posted by Jason Kilborn

ISI_logo_FinalOn Monday, the new Insolvency Service of Ireland will begin taking applications from overindebted Irish consumers seeking relief under the new debt relief law. Already, Irish banks, who received a huge government bailout, are scurrying to deploy scare tactics to deter consumers from seeking relief. According to one report, a major Irish bank has sent letters to distressed customers warning that relief under the new law requires "continuous review and any increase in income would be included under the [relief] scheme." Also, debtors seeking relief under the new law are "subject to the ISI [expense] guidelines, which are quite severe. ... These place restrictions on all spending, ban a second car and holidays, and only allow private healthcare in exceptional circumstances." In fact, anyone familiar with "means testing" and other budgeting practices in world consumer bankruptcy laws would be quite impressed with the Insolvency Service's new expense guidelines, which are sensitive, flexible, and reasonable.

The banks' scare tactics are particularly odious in ligth of the fact that the banks, predictably, have opposed all efforts to implement reasonable concessions voluntarily to turn around the horrible mortgage mess the country is in. The Central Bank has all but ordered the major Irish mortgage banks to implement long-term solutions, rather than simple stop-gap measures of interest reductions and temporary payment holidays, but the banks are not budging. Where have we heard this before (here, here, and especially here)? Will regulators never learn?

The Central Bank may have the last say here, as it is reportedly threatening to force banks to make special provisions (beefed up loss reserves?) to respond to the continuing risks related to distressed mortgage debt remaining on the banks' books. This seems like the sort of incentive that might "nudge" the banks in the right direction--do a deal that implements relief, or set aside special reserves if you refuse to do so, but acknowledge and deal with the problem one way or another. Color me skeptical that the threat will materialize or, if it does, that the banks won't figure some clever way to evade any thoughtful and effective solution.

Update:  In case there was any lingering doubt, the CEO of Bank of Ireland (a private bank) recently told the Irish legislature that engaging with distressed mortgagors to strike debt adjustment deals is “not a policy of the bank.” Falling back on the same, tired old excuse, he claimed that any debt forgiveness deal would impose costs on the bank. The now well-established notion that these losses are already baked into the cake is either lost on people like the BofI chief, or they're playing a rhetorical game with legislators.


Dear Mr. Boucher,

Defaulted loans are sunk costs. Sunk costs are sunk. If you don't understand what that means, not only should you not be CEO of BofI, you should immediately enroll in Remedial Accounting 001. You should be looking for ways to minimize future expenses from these loans. Instead, you are playing the American game of carrying inflated book values and hoping you've retired to the Caribbean before it all blows up and the bank is left holding a massive REO and the expenses that come along with it, as well as suffering a reduction in value of the collateral for the remaining, performing loans.

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