More on the Nationalisation of Anglo Irish

In response to my earlier post on the nationalisation of Anglo Irish, Enrique DeLucas writes that “as Anglo was also an active syndicator with the other Irish commercial banks, any impact of large scale writedowns of their loan books would have a collosal impact on the remaining listed Irish banks”.  In response to a further comment from Alan Ahearne he writes that “under IAS39, if a fire sale of Anglo’s assets gives specific evidence of a diminution in value of these assets, they must be marked down accordingly.  As a result, this creates a requirement under Balse II to increase the capital adequacy reserve by this amount, thus impinging on the banks liquidity position and tier one capital ratios further”.  

Do we know the extent of Anglo’s syndication with the other Irish banks, so that the importance of this effect could be assessed?

By the way, some info on who is advising the government:

9 replies on “More on the Nationalisation of Anglo Irish”

is there any support out there for the belief that we should not save a bad bank and instead do our utmost to support the strong ones? Depositors are protected under the Govt. Scheme and debtors remain as such, functional and profitable departments of the bank can be sold off or absorbed into the stronger banks and that really leaves the state to settle impairment and then move on.

flawed logic?

Just a suggestion, this might be a useful data source. Check if your university has Dealscan. Its a database that covers syndicated loans, traded loans etc. I’ve seen people used this for academic research. Someone in the Finance Dept or Accounting Dept in your university might use it for their research. Its probably available through the Wharton WRDS system. Check under Anglo Irish as an originator, then see if AIB or BOI are listed as co-lenders.

From the Irish Times article, it would seem clear that (perhaps uniquely in the civilized world) the Minister for Finance does not make much use of expertise in economics. But hey he’s got lawyers advising him so thats ok.

The suggestion that Anglo should refrain from identifying a loan as impaired lest other lenders would have to recognize it is deeply flawed — indeed it is the sort of thinking that could suck us into the morass.

Part of the problems we now face is due to bankers and regulators remaining in denial about the extent of the damage. That is reflected in the huge gap between reported bank capital and the market value of the shares.

Facing up to, and making adequate accounting provision for, problem loans is the first step to recovery. Most of the major developer borrowers are likely to have multiple banking relationships. These facts are or should be known to the regulator. Prompt action to secure what’s left of the banks’ claims on insolvent borrowers should be the first task of the new management at Anglo.

The Republic of Ireland has borrowed, domestically and abroad and mainly through the banking system, huge amounts of money to acquire assets now worth substantially less than cost. The liabilities have been socialised. There seems to be some strange presumption around that assessing these losses and accounting for them properly is what will make them happen. They have already happened.

The reluctance to acknowledge the sharp drop in national wealth which has occurred, and which will not be reversed without another bubble (means can’t be reversed, for clarity), is contributing to two huge problems. The first is the widespread notion that a major macroeconomic correction should somehow be resisted through relaxed fiscal policy. The second is that the spread on our sovereign debt is widening beyond (I hope) anything which can be justified on fundamentals, due to nervousness in credit markets fuelled by the difficulty in quantifying contingent liabilities. But the extent of the damage will inevitably emerge.

Like Patrick, I can see no percentage in delaying the process.

To me, Enrique’s focus on “evidence of a diminution” smacks of Emperor’s-new-clothes logic, i.e. if we all pretend he’s got a suit on, then he’s got a suit on! I’m sorry, but I just don’t buy that argument. This refusal to acknowledge reality is precisely what caused Japan to sustain zombie banks for so long.

I am inclined to agree with the ” take the pain now” approach in terms of recognising the debts , though I presume write-downs need to be done in a managed way.

Interesting scheme annuonced in the Netherlands today re ING. The article below, while written from a British standpoint, outlines the main points. It strikes me that the argument about the degree of pain imposed on the bank versus the bank’s ability to lend is very interesting and very pertinent here, though Im not sure what the ” right” answer is.

Just to be clear, my original posting was in response to Frank Barry’s point as to whether it was preferable to let Anglo fail or to nationalise it. one of my several points was that the Government had to take into account that in the event that Anglo was let fail and a receiver was appointed, the fire sale prices fetched for Anglo’s assets would set the benchmark for other banks to revalue their assets to, and therefore from the Government’s perspective it was probably in their interests to nationalise the bank, as the knock on effects were potentially fatal to the sector. The contagion of the iceland banking crisis across their banks is a case in point…

While I agree with the general view that the Irish banks’ provisions fail to reflect the full extent of the fall in asset prices; I don’t think letting a receiver set the price of assets by disposing of them in an illiquid market is the appropriate measure of their value. As Cliff Taylor refers to above, it is likely that an orderly wind down of the book (with the bank operating as a going concern) would yield a greater value in present value terms – which in the absence of ‘evidence of diminution’ is how fair value for these assets is determined (which for the avoidance of doubt, can be less than book value but still higher than net realisable value)

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