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DUBLIN (Reuters) - Irish banks must tread carefully before they begin to write back provisions on bad loans as a result of a recovering property market and not bow to demands to bolster profits, a senior central bank official said on Tuesday.
Irish property prices are recovering following a devastating crash and are now 40 percent below a 2007 high versus the 55 percent peak-to-trough assumption Irish banks have provided for, prompting some to raise the prospect of write-backs.
However Sharon Donnery, director of credit institutions supervision at the central bank, said banks should remember that an appropriate level of provisions was critical to stabilising a sector brought to the verge of collapse in the financial crisis.
"Whilst there have been improvements in certain key parameters such as house prices, there are still unreliably low levels of activity to have high levels of confidence in changing assumptions," Donnery told a banking conference.
"The ability to write back provisions must be reflective of a conservative view and therefore the timing and extent of any write-backs must be balanced extremely carefully.
"Demands to bolster profits, reserves and capital cannot be allowed to destabilise the progress on debt resolution."
Allied Irish Banks (ALBK.I) (AIB), which said on Monday it had taken an overall net provision write-back in the first nine months of the year, became the first bank to revise its peak-to-trough assumption to 52 percent in July.
AIB chief executive David Duffy said Donnery's comments were "absolutely right", that its writebacks came from individual restructurings where excess value had been recovered and that it would remain extremely conservative on property prices.
Permanent tsb (PTSB) IPM.I, the only Irish lender to fail last month's European stress tests, said it had also reduced the amount of money set aside to cover losses on bad loans in the third quarter, though it has kept the original price assumptions.
Donnery also defended new central bank proposals to restrict mortgage lending above 80 percent of the value of a home to no more than 15 percent of the aggregate value of all home loans, describing them as "proportionate limits".
Duffy said the deposits required as a result of the loan-to-value rates "might be a little bit high to start with" and suggested a phasing in to avoid pricing out some buyers.
Editing by Mark Potter