ECB Opinion on NAMA

During today’s Oireachtas Committee meeting, the Minister for Finance referred to a formal ECB opinion document on NAMA and that it was being published this afternoon. Well, lo and behold, here it is.

I haven’t had a proper chance to read this but two sections jumped out. First, on valuation of assets being transferred:

Although the measures contemplated by the draft law should restore confidence in the Irish banking system, the ECB considers it important, in line with previous opinions that the pricing of acquired assets is mostly risk-based and determined by market conditions. The preference expressed in the draft law for the long-term economic value of assets, rather than current market values, requires careful consideration in this context. In particular, it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme.

And on nationalisation:

the ECB notes that the Irish Government shares the guiding principle that the preservation of private ownership is preferable to nationalisation. If the NAMA scheme will be successful in this respect, this strategy should help to avoid, in the short-term, the high costs involved in nationalisations and, in the medium-term, the risk of banks’ objectives being diverted from profit maximisation to alternative goals that might distort the market structure and jeopardise the level playing field.  

The opinion is silent on what should happen when their preference for pricing that is “mostly risk-based and determined by market conditions” comes into conflict with their preference for preserving private ownership.

42 thoughts on “ECB Opinion on NAMA”

  1. Seventh, given that an ultimate aim of any asset removal scheme is to help banks restore an adequate flow of lending into the economy and, to the extent possible, avoid large scale and expensive direct government ownership, it will be necessary to carefully monitor the institutions participating in the NAMA scheme to ensure that their self-interest does not cause them to focus on preserving and rebuilding their own equity, instead of lending into the economy

    So don’t nationalize the banks but don’t run for them the benefit of equity holders!

  2. One wonders is there some divergence between the EU Commission and the ECB on the use of long term economic values. The EU Commission promoted the use of long term economic in their March 2009 communication.

    There seems to be greater clarity in relation to NAMA bonds. It seems that NAMA will not be able to issue asset covered bonds:

    “2.2 It is understood that NAMA will not purchase any assets eligible as collateral in Eurosystem operations. NAMA may of course purchase assets that could alternatively be used as underlying assets for Eurosystem eligible asset-backed securities. However, as NAMA will finance asset acquisitions by transferring newly-issued bonds issued or guaranteed by the Irish State to participating institutions, it may be expected that NAMA’s activities will increase the amount of Eurosystem eligible collateral available to Eurosystem counterparties. Irish Eurosystem counterparties may therefore find it easier to raise liquidity in central bank operations. Moreover, as government bonds are generally accepted as collateral in interbank repo markets, Irish banks may be in a better position to borrow in the market. Accordingly, the NAMA scheme may contribute to improve the funding situation of Irish banks.

    ….
    3.2 Prohibition of monetary financing

    It is understood that the draft law will comply fully with the prohibition of monetary financing laid down in Article 101(1) of the Treaty, read in conjunction with Council Regulation (EC) No 3603/93 of 13 December 1993 specifying definitions for the application of the prohibitions referred to in Articles 104 [now 101] and 104b(1) [now 103(1)] of the Treaty (‘Council Regulation (EC) No 3603/93’)37. In this respect, NAMA will qualify as a ‘public undertaking’ within the meaning of Article 101(1) of the Treaty and Article 8 of Council Regulation (EC) No 3603/93 as NAMA is to be established under the draft law as a ‘public undertaking’ over which the Irish State may exercise a dominant influence by virtue of its ownership of it, its financial participation therein and the rules which govern it. In particular, the Minister advances to NAMA the funds that are necessary for performance of its functions, and appoints all the members of the NAMA Board. Moreover, the Minister (after consultation with the CBFSAI Governor, acting independently) will have the power to issue written guidelines to NAMA in connection with its functions, and may give binding written directions to NAMA concerning the achievement of NAMA’s purposes. NAMA’s assets will thus be under the effective control of the Irish State. Therefore, overdraft facilities or any other type of credit facility with the CBFSAI in favour of NAMA, as well as the direct purchase from NAMA by ESCB central banks of debt instruments, will not be possible, in view of the prohibition of monetary financing under Article 101 of the Treaty.”

  3. Long Term Economic Value.

    Mulcahy came over ok today in the Oireachtas committee until he took out his chartist analysis that Irish property (from memory) typically increases about 88% from trough about 7 years after a crash.

    1. This is not a normal cyclical property crash – this is out there with the Dutch tulip bulbs.

    2. Even if it did recover that much, applying a commercial discount rate (say 10%) to a value in 7 years time would just get you back to the trough value as its Net Present Value. But of course the choice of discount rate is crucial in such an analysis.

  4. Except the ECB don’t seem to support paying long-term economic value.

    NAMA paying current market value, and no more, is a completely different beast to the current version of NAMA.
    It automatically brings many other things into play that people have been calling for.

    Existing shareholders wiped out, losses shared with sub-ordinated debt, banks nationalized and then immediately flipped onto other private investors.

  5. Given the ECB and EU Commission drafted the guidance on valuation and the use of long-term guidance, it is inaccurate to state the ECB is against long term economic value. I would take the line below to mean that a State should not overestimate the long-term economic value.

    “In particular, it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme.”

  6. @Maurice
    “Mulcahy came over ok today in the Oireachtas committee until he took out his chartist analysis that Irish property (from memory) typically increases about 88% from trough about 7 years after a crash.”

    Heard this one myself and suddenly I am in favour of nationalisation if he’s the guy to decide the valuations (and I would be naturally against the government running anything!).

    I would suggest that for this to happen we have to create another property bubble. That’s what has happened in the UK.

    Will Nama refuse to sell anything until this long term economic value is reached? If so it’s going to be a very quiet property market for a while. Surely they have to drip feed the properties out with some realising bigger losses than others (that’s assuming a rising market).

  7. @zhou
    The second part you quote is deeply troubling, in my view.
    1. It limits the ability of NAMA to raise debt independently (aside from issuing futher NAMA bonds).
    2. It appears to be saying that NAMA debt will be counted against the GGD as it will not be arms length enough. Now, the bond markets are already saying they will factor NAMA debt in when calculating Ireland’s borrowing/debt servicing ability, but it is a different thing altogether to be catapulted to the top of the debt/GDP tables…

  8. So the “No Nationalisation” position comes directly from the ECB.

    I’ll have to wash my brain of what I thought a Democratic Republic is.

  9. Richard Bruton gives a useful summary in a statement issued this evening of what FG see as the best available solution to the banking crisis after hearing Minister Lenihan at Committee on Finance and the Public Service and taking into consideration the views of the ECB today:

    “The shape of the best available solution to the banking crisis is becoming clearer:

    • the need for a mechanism to get credit flowing immediately to business – our wholesale “Good Bank” or National Recovery Bank could be up and running within two months if the political will existed, pushing out lending to SMEs through the branch networks;

    • the need to replace NAMA with a public private asset recovery vehicle, in which the private investors – equity and subordinated debt holders – take a significant share of the risk and responsibility for working out the toxic assets;

    • the need to drop this dubious concept of “long term economic value” in setting the price for loans to be transferred to an asset management vehicle.”

    I still believe that this is the safest and most fair way to deal with this crisis. It is also the one most likely to make the necessary credit available to businesses and households in the shortest time.

    Sorting the banking crisis will take a long time. It’s better to get it right at the start, even if there is a general election, rather than have the citizens of the state unfairly and excessively lumbered with the gambling debts of the few for many years.

  10. @greg
    That interpretation seems right.

    ‘…will not involve undue premium payments to the participating financial institutions…’ Operative word here IMO is ‘undue’. The minister will argue such premium paiments as r made are due/appropriate.

  11. @Maurice,

    I didn’t see the 88% man’s presentation. Did he set it in any context? Was it real or nominal?

    At face value it seems a silly assertion. Under which the 2007 peak should be 88% of the previous peak and so on. On a positive note, he must believe that future oscillations will get smaller and smaller. He makes a strong case against supporting the government’s current nama plan.

  12. This opinion includes an excellent summary of what the draft law on NAMA comprises.

    It is silent however on the issue of transparency that is to say the opinion makes no demands on the minister to release publicly valuation details including their rationale. While transparency may not actually be necessary in order that NAMA fulfills its 5 purposes as outlined in the opinion’s paragraph 1.1 NAMA’s success or failure depends on its acceptance by the Irish people as an appropriate method of overcoming the difficulties in Irish banks. Without transparency and an assurance that ‘commercial confidentiality’ will NOT always stand between the operation of NAMA and the citizen NAMA’s acceptance b the Irish people will be compromised.

    The crucial passage as highlighted above in the Opinion however appears in paragraph 2.4.3: ‘…the ECB considers it important, in line with previous opinions that the pricing of acquired assets is mostly risk-based and determined by market conditions…’

    Paragraph 2.4.7. appears to contradict paragraph 1.1 when it states that ‘an ultimate aim of an asset removal scheme is to get the banks lending again’. Whereas 1.1 states in fact there are five purposes of NAMA and while this ‘ultimate aim’ is among them it does not appear to be privileged: ‘…inter alia, to remove uncertainty about the valuation and location of certain assets of credit institutions of systemic importance to the Irish economy; to facilitate their restructuring; to restore confidence in the banking sector; to facilitate the availability of credit in the Irish financial markets; and to address the serious threat to the Irish economy and the stability of credit institutions in Ireland generally’.

    The opinion furthermore appears to confirm two matters: 1. That it is the ECB which is the source of Irish politicians’ refusal to countenance nationalising Irish banks and thus acquiring all of their assets for a few billion instead of the projected (at least) EURsixti billion in ‘bonds’ (paragraph 2.4.six); and b. That the ECB is concerned about Ireland paing an ‘undue’ premium for these assets (loans and derivetives) from banks.

  13. The scale of NAMA’s operations under what Joan Burton called the Property Tsar (Minister for Finance) is emerging slowly – 1500 borrowers with 18,000 loans regulates Sweden’s Securum to third division when it comes to scale.

  14. @Bill
    Sorry if I am being pedantic, relegates or regulates. I know we have been starved of regulation on many issues but i am not sure how regulation puts things in the third division with Mighty Leeds??

  15. On the subject of the 1,500 borrowers and 18,000 loans. It has been my understanding since the start that these 1,500 borrowers and all their “connected exposures” will be taken over by the new agency. Surely, at least some part of these loans must be buy-to-let portfolios with loans outstanding that are performing. Further to this, do we know the stats on the various progression levels of the development loans? What is the breakdown for example between, green fields no planning or zoning, green fields with planning and zoning, nearly completed projects and just started projects. Making valuation even more difficult, surely not all the loans were issued at the top of the market (seems like a reasonable assumption to me??). Maybe someone has already discussed this, if so I apologise for going over it again but I saw on this site the other day someone trying to come up with a definitive valuation of the loans going to NAMA. Given the complexity of what we are dealing with even in terms of the various types of exposures, this would strike me as near to impossible and that each loan would have to be valued separately according to its individual characteristics. Can someone point me in the right direction on info on this?

  16. @ld The issue of valuations was covered today – see notes of Oireachtas session when available. As I understand it banks will be required to provide independent current market valuations CMV’s on collateral (property). Valuers to professionally indemnify NAMA and use a template provided by NAMA. Valuations are to be provided for each loan to NAMA who will assess the valuation provided and apply an appropriate LTEV – if applicable – rural zoned land was evidenced as having no LTEV but only agri prices – LTEV will apply where it can be justified –

  17. This might be an Opinion of the ECB on NAMA but it seems a very far reaching opinion as a number of contributors have already noted. For instance, under Sect 3.2

    “Moreover, the Minister (after consultation with the CBFSAI Governor, acting independently) will have the power to issue written guidelines to NAMA in connection with its functions, and may give binding written directions to NAMA concerning the achievement of NAMA’s purposes.”

    “Binding written directions.” So, after all the NAMA legislation is passed in the Dail Minister Lenihan can consult with the CBFSAI Governor and then issue “binding written directions to NAMA” i.e. change NAMA without any further debate in Dail Eireann. To me that is almost like having unlimited powers handed to him and removing the oversight of the Dail. Please correct me if I am wrong and I hope I am.

  18. Given the upcoming Lisbon 2 referendum and the tendency of bodies like the ECB to pull their punches and express criticisms ambiguously this must be taken as two unprecedently strong attacks on long-term economic value and hence the government’s entire approach:

    1. “the ECB considers it important….that the pricing of acquired assets is mostly risk-based and determined by market conditions”, i.e. you should not use LTV for most assets.

    2. ” The preference ….for the long-term economic value of assets…requires careful consideration in this context…it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions”, i.e. for the minority of assets you do use it for it should not be significant.

    Even if, as I would expect, the ECB put in some more qualifications and ambiguities to soften the political impact those are two criticisms that are really blunt by official standards.

    Now expect some people to try to convince you that when they said the above they really meant the opposite. If I was the government I would be furiously endeavouring to get a much kinder clarifying statement from them and with Lisbon 2 coming up the Government have a lot of leverage.
    Can they put the cat back in the bag?

  19. @ld
    ‘…surely not all the loans were issued at the top of the market (seems like a reasonable assumption to me??)…’
    The point has been made elsewhere on this site that even if a loan was taken out in e.g. 2003 bi 2007 the positive price difference between what the underling asset was worth in 2003 and in 2007 would have been used to release more equiti perhaps several times. Therefore it would be right (this is mi spin) to assume the collateral for most loans is worth on the banks’ books close if not exactli its peak of market value.

  20. I’ve said it before, I’ll say it again, the whole show is orchestrated by ECB. Viz., Lenihan’s ‘announcement’ of the document, and the wording…..

    Also, although I am only a scientist and you are mostly only economists…. can anybody really understand the English???

    e.g. “….will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme…… ” talk about gobbledegook.

    Why don’t they says it as it is “to avoid giving the banks an opportunity to trouser the money”

    Bye, Barry

  21. Robert Browne
    The Dail asks Min Fin et al, questions. That is all it does. If the gov sustains a defeat on a vote of no confidence then they should resign and trigger an election. They do not see what the MinFin does as s/he does it.

    General
    Why does the NaMa Bill not contain a provision preventing all rezoning in the 26 counties until NaMa is wound up? My point made weeks ago, is that development land is created at the drop of a brown paper bag … We need a new raft of such land like a hole in the head if we are truly trying to reduce the exposure of the exchequer to the toxic debt. This would also increase the value of these excellent investments in prime locations around the state. Notice how
    this recasts the valuation debate!? Now the corrupt see their future income from rezoning disappear! Oh Woe! Woe! Pity the poor bagmen!

    LIQUIDATE AND BE DAMNED!

  22. Barry
    That is the language of diplomacy made frightfully transparent and almost brusque, so as to be intelligble to the common higher civil servant.

    I’m shocked that you expose yer egnorance so!

  23. yoganmahew
    It pains me to agree, with me learned fren’ “chow and lie”, but this is a probable STOP! sign to a debt drunk government!

    Will this explode in the cabinet? I hope so! Thank God for the ECB!

  24. Eamonn76
    I agree!
    That and the addition to the Gov Debt for borrowing purposes makes this a sick web footed water bird. Or even a dead duck! Gosh, I am feeling manic again. Time for another pill.

  25. @ Pat Donnelly

    “The Dail asks Min Fin et al, questions. That is all it does.” Agreed, but after asking questions, it votes on legislation and if such legislation is finance related and it is vote down etc,. etc. However, my point is that this legislation becomes organic and can be changed at the behest of the minister by way of his “binding written directions.” What then, is the point of going through the pretence of debating NAMA if, the minister, can practically re-write NAMA as he wishes with his friend the CBFSAI governor who doubtless would be acting “independently” of any ministerial influence.

  26. 3.2 Prohibition of monetary financing

    Therefore, overdraft facilities or any other type of credit facility with the CBFSAI in favour of NAMA, as well as the direct purchase from NAMA by ESCB central banks of debt instruments, will not be possible, in view of the prohibition of monetary financing under Article 101 of the Treaty.”

    Am i missing something – does this mean that banks cannot deposit NAMA bonds with the ECB. Instead they will just be worth the coupon to the banks

  27. Anyone know why the ECB think it’s worth including this in their opinion letter:
    “1.8 …Where the current market value of the portfolio concerned is not greater than the acquisition value of the portfolio, no adjustment will be made to the total portfolio acquisition value regardless of the basis on which that value was determined. Subject to this, where the Minister’s determination is that the total portfolio acquisition value of the acquired portfolio as determined by NAMA should be increased, the Minister may direct NAMA to compensate the participating institution”

    I’d assume market value and acquisition value relate to loans not property. Why would acquisition value be greater than current market value given the LTEV adjustment? this seems unlikely, however its an area where the Minister can alter any outcome should the answers not be to his liking.

  28. @ Ahura Mazda
    My reading of the whole of 1.8 (and I’m not fluent at legalese) is that they are ruling out that Government can be compensated at a later date for takign on property at too high a price.

    I’m serious abut not understanding 3.2 – can anyone help?

  29. Robert Browne
    That is why voting in people who are trustworthy is so important. There are limits to the degree of interpretation a minister can engage in.
    Look at the Tribunals and their very expensive opinions of past ministerial conduct. Surely you don’t begrudge a system where the truth comes out after a decade or two, at the cost of a billion or so? Democracy in action, how are ye!

    Surely you can see that ministers cannot allow the GARDAI to investigate corruption within the government?

  30. I raised the issue of shadow banks within banks before. Inspectors of Taxes in Investigation Branch have come across cases of an omnibus bank account kept by managers. It held moneys on deposit for persons doing business with the bank. Secretly. Any documentation on this can easily be made to disappear. This puts into context how easy it was for some bank managers to abscond, doesn’t it? This system has probably not fallen into desuetude.

    Will NaMa go after this money? How will it know whose it is?

    It is a tribute to the honesty of bank staff that more has not disappeared. But then how would we know?

    Perhaps the new Governor will make enquiries?

  31. @ Pat Donnelly
    Just stumbled on this post again, strange we have tribunals where people looked young, fit, healthy when they first started asking questions and answering them.

    Now many of them seem rather unwell, they have grey hair and are rather pudgy. They are probably further from the truth today than they were when they started 13 years ago. The only solace we can take from all the feckless flittering away of our money is that the greedy ones did not realise that they were also wasting their own careers dragging out (teasing out) the various modules as if the rest of us were living on another planet. They probably invested the ill gotten gains in property and bank shares hence the need for the new gravy train. After the scoping I am sure there will be plenty of time for a bit of scooping. Don’t you just love the way our ruling classes come up with these elegant new words to make the whole process seem rather painless.

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