Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

A factor in the decision to remove section 396C was that it improved the capital ratios under the new capital standards that were being introduced at the time under CRD IV. The rules under CRD IV, which came into effect on 1 January 2014 on a ten-year phased basis, meant that deferred tax assets in respect of trading losses would no longer be considered as tier 1 capital.

The repeal of section 396C shortens the timeframe over which the deferred tax assets are used. The deduction from capital required under the new rules is, therefore, less important. For example, following the repeal of section 396C, when forecasting bank capital ratios a few years out, they are higher than they would otherwise be.

Second, it reduced the risk to the State in its role of backstop provider of capital. Aside from an increase in the bank's capital ratios under the new rules, the change also improves the quality of bank capital, thereby putting the institutions in a stronger position when being assessed by regulators and investors. This reduces the risk of a future requirement for State support.

Third, it improved the existing value of the State's equity and debt investment in the banks. Most investors value banks off the new, more stringent capital rules or what is referred to as a fully loaded basis, in other words, capital when calculated when all the new CRD IV rules are taken on board. It stands to reason that the improvement in the capital levels of the banks following the removal of section 396C has a positive impact also on valuation of the State's investments.

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