The Irish government is “very supportive” of the country’s existing covered bond framework, which helps banks access long term wholesale funding, said Ireland’s finance minister yesterday (Wednesday) in a speech rejecting a private members bill calling for a covered bond system incorporating the Danish balance principle.

Minister for Finance Michael Noonan

The speech was made in the upper house of parliament in response to a bill proposed by Senator Séan Barrett that proposed establishing a new mortgage system based on the balance principle that underpins mortgage lending and funding in Denmark. (Click here for previous coverage.)

Michael Noonan, Minister for Finance, welcomed the Mortgage Credit (Loans & Bonds) Bill 2012 as a contribution to the debate about the challenges facing the Irish banking system, but said that he could not accept the bill as proposed by the Senator.

He acknowledged that the market for mortgage credit is “sub-optimal” at the moment, but said that the Danish model could not be readily transposed to Ireland, and adopting it would involve many risks.

“While accepting the many merits of the Bill proposed by Senator Barrett,” said Noonan, “I consider that the direction being taken by the Irish Government is appropriate at this time and I am satisfied that the initiatives currently underway will resolve the situation.”

As part of restructuring Ireland’s banking system the government is downsizing financial institutions to a more sustainable level, he said, and restoring a more traditional funding model that largely comprises customer deposits.

He addressed the role that wholesale funding can play in the Irish banking system, noting that this type of funding can help banks better align the long term nature of their lending with that of their funding.

“Indeed it is for this reason that this Government is very supportive of the covered bond structure we have in place in this country,” he said, “which has proven to be a robust and valued framework by international investors.”

He set out several reasons for rejecting Barrett’s bill, noting, for example, that it, in conjunction with central bank regulations, could conflict with personal insolvency legislation and the Irish approach to repossession resulting from mortgage arrears.

In addition, it would not be appropriate to introduce new lending and banking practices before the legislative process on the Capital Requirements Directive and Regulation has been finalised, he said, noting that there have been concerns about the treatment of Danish covered bonds under this legal framework.

The minister said that he accepted many of the principles behind Barrett’s bill and the spirit in which it was proposed, but that the government had to reject it. It will, however, look into whether certain proposals contained in the bill could be feasibly rolled out as the financial system returns to a more sustainable level.

A review of Ireland’s asset covered securities (ACS) legislation is due next year.

The bill remains on the order paper after the debate in the Senate was adjourned by Barrett, which means that it, and the topic, can come up for debate in the future and that the government could present modifications at a committee stage if it wishes to do so. [Updated.]

The full text of the minister’s speech can be found here:

http://www.finance.gov.ie/viewdoc.asp?DocID=7402

And a transcript of the debate can be found here.