DUBLIN (Bloomberg) — Ireland's banks need to "face up to reality" and take their losses on property loans now to avoid dragging the economy into a lost decade like Japan, the country's financial regulator said.

Matthew Elderfield, who left his role as Bermuda Monetary Authority chief executive officer to take over in January, has told Allied Irish Banks Plc and Bank of Ireland Plc to raise about 10 billion euros ($12.2 billion) by the end of year to meet new capital requirements and create a buffer against losses as loans turn bad.

"Face up to the pain rather than the Japanese model, where it's drawn out and it can inhibit growth," Elderfield, 44, said in an interview in his Dublin office. "You want to take decisive action."

Elderfield's new capital levels are aimed at strengthening lenders after a real-estate slump and credit freeze brought Ireland's banking system close to collapse. He said he's sticking to the targets even as the fallout from Europe's growing fiscal crisis affects funding. Finance Minister Brian Lenihan said the government will aid the banks if they can't raise the money alone.

"We are going to get there one way or other," said Cambridge-educated Elderfield. "The capital will be on track irrespective of the market situation."

Bank of Ireland plunged 14 percent to 77 cents in Dublin yesterday, while Allied Irish dropped 8.7 percent to 1.04 euros. Stocks across Europe declined as the region's leaders struggled to contain the debt crisis.

A so-called bad bank set up by Ireland's government is buying about 80 billion euros of loans from lenders at a discount, forcing them to take losses now rather than spread them over time. By contrast, a delayed reaction to a banking crisis in Japan after an asset bubble burst in the early 1990s contributed to the country's so-called lost decade.

Japanese lenders were forced to write-off more than $1 trillion in a bad-loan crisis that spanned the 14 years to 2006. In the 1980s, Japan's banks loaned billions of dollars to real estate and construction companies to buy and build rapidly appreciating properties in Japan and abroad. The property bubble burst in 1989, with the value of land falling 62 percent in that year alone.

In Ireland, where real-estate prices have fallen by about 50 percent since their early 2007 peak, banks have laid out their proposals to meet Elderfield's targets. Allied Irish plans to sell its stakes in M&T Bank Corp. in the US and Poland's Bank Zachodni WBK SA to help raise the 7.4 billion-euro capital requirement set by the regulator. Bank of Ireland plans to sell shares to existing shareholders to help raise 2.7 billion euros.

Elderfield said investors' concerns about euro-area budget deficits "is making it harder for banks to get started on improving their funding mix". Still, it "won't affect capital targets, because the government is there as backstop".

"My understanding is there's lots of interest in those assets irrespective of the current market situation," he said of Allied Irish's plans. "Exactly what happens on assets sales, and other things may change the exact mix of ownership, but there is a very clear deadline to get to the targets."

Ireland's banks fuelled a decade-long property boom partly by borrowing on international money markets. As home prices dropped and credit markets froze, Irish lenders became more reliant on European Central Bank loans. By the end of 2009, they took 12 percent of ECB funding, more than twice their share of euro-area bank assets, according to Fitch Ratings.

Elderfield's targets allow for potential future losses, beyond those being taken on loans going to the bad bank, known as the National Asset Management Agency.

"Our job is to look at the glass half empty," he said. "Banks haven't had a great track record of loan-loss forecasting. Maybe they end up with less losses than expected. If that's so, they'll have more in the tank."