So where does the substance of the AIB announcement leave us? As has often been the case with the government’s approach to the banking crisis, this pushes us one step closer to some kind of resolution, while still maintaining lots of uncertainty as to what that resolution will look like.
The positive viewpoint is that it represents an acceptance that AIB’s losses are such that they require more than €3.5 billion in recapitalisation and so perhaps this is a small step towards accepting the losses associated with a fair valuation of the bank’s assets.
On the negative side, even forgetting the fact that most of the extra €1.5 billion in capital appears likely to come from an accounting gimmick, it remains the case that €5 billion falls far short of most estimates of the likely losses on property loans at AIB. Goodbody and JP Morgan have both estimated these losses at being larger than €10 billion, which would wipe all of the bank’s current Tier 1 capital. And this is before we factor in the coming losses on mortgages, business loans, credit cards and the like.
Against that background, the description of the €5 billion as only being required to cover the losses associated with an “extreme stress test” is depressingly familiar. Yesterday’s Department of Finance statement noted that the stress tests were carried out with the assistance of our old friends, accountancy firm PWC. Now the evidence shows that the good ladies and gentlemen of PWC have a somewhat rose-tinted low-sigma view of the world. Recall perhaps their initial stress tests of all the institutions covered by the state guarantee (including Anglo). The IT from November 20th reported that
The report had demonstrated that under a number of stress scenarios capital levels in the covered institutions would remain above regulatory levels in the period to 2011.
There then followed a period during which the banks denied they needed any re-capitalisation before conceding that they did. Hopefully, the claim that €5 billion is all that is required will also go the same way. However, if €5 billion is the limit to how much the state is going to provide in re-capitalisation funds to AIB, then maintaining sufficient Tier 1 capital for this bank will almost inevitably involve overpaying through NAMA.
Finally, I didn’t find this statement from the Minister to be a compelling argument against nationalisation:
It’s very much a last option because the key issue for the Irish banks is to raise funds abroad for them, and their presence in the marketplace is very important in order that they do raise funds.
Recall that these are the same banks that were in the marketplace last September when nobody would lend funds to them, thus leading them to request a blanket state guarantee on their liabilities. It is the state guarantee that is securing access to funds for these banks, not their stock market listing.