Pádraig Mac Lochlainn (Donegal North East, Sinn Fein)
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Question 28: To ask the Minister for Finance if he has estimated the potential costs that may be faced by banks as a result of the personal insolvency legislation; and if there is an estimate of the maximum the banks will be able to absorb from potential mortgage and other defaults. [25636/12]

Michael Noonan (Limerick City, Fine Gael)
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The proposed new policy framework for personal insolvency to be set out in the Personal Insolvency Bill which the Minister for Justice and Equality plans to publish before the end of June 2012 was seen by the report of the Inter-Departmental Committee on mortgage arrears as a key catalyst in dealing with the problem of mortgage arrears. The introduction of these reforms will reinforce the Central Bank's ongoing interaction with individual lenders to enhance their Mortgage Arrears Resolution Strategies, the current phase of which involves the segmentation of loan books into sustainable and unsustainable categories and the development of a range of suitable options. The legislation should encourage lenders to allocate sufficient resources and attention to negotiating, where possible, voluntary debt restructuring arrangements with individual debtors on a bilateral basis outside of the non-judicial or judicial framework. However, it is not the case that the agreement of such restructuring arrangements is dependent on the enactment of the Personal Insolvency legislation but rather the legislation underpins a broader framework within which agreement can be reached on a case-by-case basis between the lender and the borrower. It should be noted that the proposed introduction of both the Debt Settlement Arrangements and the Personal Insolvency Arrangements (PIA) as an alternative to court based bankruptcy for over-indebted creditors should serve to support greater stability in the financial sector. Firstly these non-judicial mechanisms are premised on both debtors and creditors obtaining a better outcome than under the reformed bankruptcy regime. Secondly creditors avoid the administrative and financial costs of debt enforcement proceedings that are incurred through the courts process. Thirdly creditors, by agreeing to a PIA, can avert the immediate crystallization and write-down of negative equity that might otherwise occur in bankruptcy.

A further key aspect of the new legislation is that it will carefully distinguish between individuals who can't pay as opposed to those who won't pay. For individuals who are insolvent without any reasonable prospect of being able to repay their debts, the new legislation will allow them to rehabilitate their financial situation over a defined period. Any losses that creditors must bear as a consequence will not be caused by the new legislation but by the fact of the individual's insolvency.

The general position in relation to the capital situation of the Irish covered banks is that these institutions were subject to a robust, rigorous and independent Prudential Capital Assessment Review (PCAR) in March 2011 by the Central Bank and by international standards, such as the EBA, the Irish banks remain well capitalized. As a result, in July 2011, some €24 billion was invested in the Irish covered banks to cover losses from asset portfolios and deleveraging. On the basis of lifetime projections by BlackRock, losses were assumed on the residential mortgage books of between €5.7 billion and €9 billion under base and stress case scenarios over the 2011-13 period under PCAR. For the latest available period of data from the Central Bank, the mortgage arrears numbers lie between the Central Bank's base and stress tests projections.