Resolution Regime

Colm McCarthy makes a strong case for a bank resolution regime in today’s Sunday Business Post (article here).   If I understand intent of the argument correctly, however, Colm is proposing the regime as a critical element of a new regulatory system for the long term.  He is not proposing it as a means of imposing loss sharing on existing creditors.    Looking to the longer term, he argues that a resolution regime will make it possible to withdraw the guarantee.  

The wide-ranging guarantee of bank liabilities announced at the end of September 2008 runs out in little more than six months. Assuming that the banks have been recapitalised by then, the government can minimise subsequent risk of exchequer cost through getting out of the guarantee business as quickly as possible.

Bank resolution legislation – clarifying the power of the authorities to ensure that all providers of risk capital share quickly and appropriately the losses incurred by failed banks – is an important component in the state’s exit strategy from the banking collapse.

I believe the more pressing issue is to have a resolution regime in place for the period after the current guarantee expires and before existing subordinated bonds mature.  If the banks are insolvent, or at least incapable of reaching minimum capital adequacy requirements on their own, there should be a willingness to impose these losses on creditors, most likely as part of the debt-equity swap long advocated by Karl Whelan. 

While it may just be semantics, I think it is better if this is not viewed as temporary nationalisation, which raises the spectre of a (possibly long) period of political control.  There is a dangerous appetite for political control of lending.   Thus we get this in an otherwise sensible analysis by Alan Ruddock in the Sunday Independent:

If the Government’s new policy is to have any teeth it must be able to force the banks to do what they have not done for a long time, if ever: support the Irish economy. That will have to involve very close monitoring of margins and lending quantities, but without the political system becoming too involved in the day-to-day operations of the banks. In other words, effective regulation.

The real sin of NAMA may end up being one of omission rather than commission: it has distracted from putting in place the needed resolution regime.  I fear that a banking commission, though ultimately essential, might be another expensive distraction for the coming months.  The focus now should be on the joint tasks of ensuring losses are fairly borne by the providers of risk capital, recapitalising through debt-equity swaps and ensuring control of lending is kept as far as possible from politicians. 

60 thoughts on “Resolution Regime”

  1. Colm writes: “Corporate insolvency procedures kick in after solvency has been lost. With banks, in order to avoid bank runs and contagion effects on other solvent banks, it is desirable that imminent failure be preempted prior to actual insolvency which, in any event, can be difficult to distinguish from illiquidity.”

    Did I read that right? “preempted”? If there’s one thing I’ve learned from our pro-NAMA commenters it’s that doing anything pre-emptively is bad. Very bad. Back to the drawing board for Colm. 😉

  2. Indeed, pre-empt is what the FDIC does. So bad a system it is still in use, almost unchanged, nearly eighty years after it was put in place.

    Debt to equity was the only sensible outcome to the fiasco. The time for it has not yet passed, Anglo under finally decent management seems to be heading towards that pass with its post-NAMA split into good/bad bank.

    I agree entirely that government should not be telling banks where to lend to… but government should absolutely be telling banks where NOT to lend to, or at least how not to do it. In addition to a resolution regime (which should not just apply to banks, imagine if Eircom went bust?), we need a credit control regime.

    We need to specify consumer protection legislation that has unbalanced contracts as unenforcable, so only x% of LTV is recourse, only y multiple of salary as mortgage is enforcable, only z term is enforcable; by enforcable I mean a legal contract under Irish law; a citizen can only be subject to a maximum credit amount of p at an average interest of q (where both are sustainable amounts). This has to be part of the quid-pro-quo for bailing out the banks – it is not so much banking becoming a utility function, but banking becoming a service function.

  3. @ John McHale,

    What have we lost as a result of our economic turmoil? We have lost 3 no. things in particular. We have lost Ireland’s good reputation abroad, and the opportunity to take advantage of that good reputation. (See professor Niamh Brennan’s Sunday Tribune article today) In the Celtic Tiger years we witnessed a willingness on the part of young Irish citizens to invest in Irelands future. We blew that opportunity too, and have empty houses all across the country. We mis-managed and abused that opportunity. If we take the route as suggested by Irish economists, we are also about to abuse a third opportunity also. Given to us, down through the years, by thousands of small shareholders of BOI and AIB, who contributed. They weren’t affording ‘risk capital’ to the large Irish banks, as economists like to think. (Because it fits some mental model of how the world operates) How could the small shareholders be affording risk capital when some of them own shares in bank(s) since my grand father’s time? I don’t think Irish economists have an answer to that.

    We have lost badly on all 3 no. counts I describe. But most of all, we have mis-managed and abused the opportunity to put all of those 3 no. opportunities together somehow. If those opportunities had been combined together in better policy making by the Irish government, we would not be in our current predicament. That is the super mis-management flaw of all. I do welcome input from Colm McCarthy about a long term resolution regime. We need to be careful in my view, how we treat the resolution of existing shareholders of BOI and AIB. I don’t buy into BL’s assertion, they simply lose it all. I don’t. If those small shareholders are treated badly, people who have been around since the 1920s and have contributed to the building of the state’s financial infrastructure, we will make a very grave mistake. In my blog entry, The Rise of Dumb Bank-ing, I added a sub note to professor Whelan today. I do not believe Irish economists have grasped the full extent of where we are. That is evident in the way they present their arguments and their proposals.

    http://designcomment.blogspot.com/2010/03/rise-of-dumb-bank-ing.html

  4. @John McHale
    Yes – we need resolution mechanisms BEFORE the bank guarantee is NOT RENEWED in September 2010. As Ms Justice Denholm is reported to have put it [Irish Examiner, March 6, p. 9] on the Supreme Court Judgment in the Fleming case recently – ‘… The Companies Acts were not designed to immunise company principals or shareholders from the consequences of financial difficulties’. One could add bond-holders here, and the Irish Supreme Court remains one of the few institutions to retain any credibility, and in terms of Corporate Governance, it did not fudge any issues in the DCC case. Perhaps time for Professors Brian Lucey and Karl Whelan to expand discourse with pragmatic legal eagles, and constitutional experts, and investigate how a case could be made to the Irish Supreme Court, on the Irish Citizenry’s behalf, re the present crisis. I retain faith in the Irish Supreme Court, and its members, not to make errors of judgment on behalf of an entire generation of Irish citizens.

    Yes. V. important thread.

    @Brian Lucey & Karl Whelan

  5. @ All,

    What I suggested in a series of comments on Gregory Connor’s thread, is we transfer holdings of many small Irish bank sharedholders into some kind of low-risk, primary banking infrastructure vehicle. The place where those small shareholders wanted to be in the first place. In fact, they believed they were there all along, not at risk central as described by economist(s). Maybe their shareholding will not be worth much today, in monetary terms, but it would represent a much fairer deal than simply telling them to go whistle after 80 years of contribution. Which is un-speak-able in my book. I am not sure what Dr. Peter Bacon’s view on shareholders was when he designed NAMA. BOH.

    http://www.irisheconomy.ie/index.php/2010/03/05/finding-foreign-capital-for-irish-domestic-banks/#comment-38928

  6. I have no problem with what Colm McCarthy writes, but John McHale is proposing something more. It depends on the letter of the bond contracts, but what is being proposed certainly sounds a lot like an examinership rigged in favour of certain creditors and to the detriment of others. Is this really legal?

    It would be better to find some other way of drawing a line under the old banking regimes (as was done at LTCB and Nippon Credit in Japan).

  7. Is it ironic or laughable but most of the shareholders in our financial ‘to big to fail’ banks are small shareholders who did not want returns of double digit magnitude, just a few quid in divdend to help them in old age pay the bills and buy the grandchildren their birthday present but now they have bits of paper that would not even buy the a McDonalds Eurosaver hambuger. BOH’s idea of moving them somewhere else and protecting these people from the reckless carry on of the greedy is one that has much merit.

  8. @ Paul,

    Thanks Paul. BTW, I am not a shareholder myself. But I merely wish to confront Irish economists (who understand the mechanics a lot better than I do) with different points of view. That will strengthen their argument(s) and strengthen their position(s). At the moment, as I see it, the Irish economist operates like the boxer in a ring fight, who hasn’t learned to use any footwork. They are able to adopt a strong stance, and throw a knock-out blow. But they also need to develop the footwork. BOH.

  9. If it’s a choice between the shareholders getting hammered or all us tax payers furthering our capacity ‘to take pain’ I know what I’d choose. Most citizens don’t have shares, most citizens children and future children don’t have shares.

    So Im not an economist but did shareholders give their dividends to the state during the profitable bubble times? Considering the losses are being socialized I can only assume the profits were too?

    It doesn’t matter what they thought the risks were!!!! I can’t go to paddy power and say I thought there was only going to be my horse in the grand national! Theses are grown ups you guys are talking about.

  10. @ Karl

    i’ve got nothing against pre-emptively doing anything, so long as there’s an actual process that will work once you do. Isn’t that the entire point of Colm’s article, that we need such a process? As such, its a valuable effort to move the debate along to preventing future situations like the one we are in now. Going way way way way back i have continually said that as there is no way to enforce losses on subordinated debtholders, therefore nationalisation would only serve to endanger our funding whilst giving very little benefits. As Colm says:

    “The difference is that the wider economic and social consequences arising from widespread or systemic bank failure are potentially very damaging…Thus, the ordinary insolvency legislation which applies to limited liability companies is not suitable for banks…..the options open to government in dealing with the failure of Anglo Irish Bank were constrained by the absence of resolution options.”

    As i have previously said, the threat of liquidation of AIB or BOI is a empty one, and therefore we have a far weaker hand than most people admit when negotiating with bondholders.

  11. @John McHale
    It will be hard enought to repair AIB:

    http://www.independent.ie/business/irish/aib-has-the-worst-loan-book-ever-seen-in-europe-2091324.html

    On Anglo/Nationwide it is now the Public vs FF/PDs/Developers/Bank investors. We need a referendum before we put another cent into these zombies through NAMA or anything else. 95% would vote against giving them any more money.

    “I believe the more pressing issue is to have a resolution regime in place for the period after the current guarantee expires and before existing subordinated bonds mature.”
    We must have a resolution regime ASAP to give ourselves maximum leverage.

  12. Excellent post John, we need to concentrate on what happens when the zombies have been hacked to bits by the toothsome teenagers. Whenever that occurs.

    Except Ireland will not be deciding, having lost sovereignty, deservedly. Ireland may continue to make stupid, partial proposals as long as politicians have hot air. But others who are nameless apparently, faceless and may have no connection with any of the thirty two counties, will actually nod or more likely shake. Until they get it right.

    We have all the time in the world as there is no hurry. Soon. “A word our Lord gave us” to contrast with the hasty, urgent and driven, Mexican “Manana”. Remember that justice delayed is justice denied. Ireland needs mercy, not justice.

    I can see that going down well with bondholders who are being wiped out elsewhere by derivatives they got suckered into. More delay may solve the problem as there will be fewer creditors standing to demand their money. And lesser ability to borrow funds and thereby waste more of the future.

    Greed does not pay!

  13. I’d like to thank Colm for his excellent and important article, which to my mind strikes exactly the right notes. A good bank/key financial institution resolution regime is something that all should be able to agree is an extremely important policy tool to have in the arsenal of the Government and financial regulatory authorities.

    It should not be a matter of partisanship over political affiliation or over the proper strategy for our current crisis, hard though that is to set aside in discussing the issue. If it is treated as a matter of partisanship, to my mind that kills whatever chance we have of getting the resolution regime within a reasonable period of time, and it also, as Antoin highlights, risks having the regime seen as being a means of improperly favouring one set of creditors over another in the current crisis.

    A resolution regime will not force a particular strategy to be used in any crisis, but it will add valuable new options to the slate of choices from which any Irish Government can choose. I think we should all be able to sign up enthusiastically for that.

  14. @ Eoin

    “As i have previously said, the threat of liquidation of AIB or BOI is a empty one, and therefore we have a far weaker hand than most people admit when negotiating with bondholders.”

    With all due respect, Eoin, I don’t think you get what the point of a resolution regime is. Here’s the idea: The bank is taken over by the authorities who guarantee that depositors are safe, books are examined, the bank is declared insolvent, equity holders lose out and bondholders get money back according to the strength of their claims. And then the bank recapitalised or sold off. Complete liquidation doesn’t come into it.

    In our case, the guarantee complicates things but it runs out in Septembenr. So there is something to negotiate about but our hand isn’t necessarily so weak, and it gets stronger as we get closer to September.

  15. @ Karl

    with all due respect Karl, im quite clearly talking about “as things stand right now”. My point is that everyone keeps calling for the banks to be nationalised and subbies taken out, without very much debate about the need for a new resolution regime to actually make this process work. For example, for all the threads on here and articles in the papers (ie dozens and dozens) about nationalisation, loss-sharing etc, isn’t this pretty much the first one on here about the need for a brand spanking new resolution regime to actually make all these great ideas work? I think Brian O’Hanlon made the most salient point in noting that its now time to start looking at this from a legal perspective as much as an economic one.

  16. @KW

    I think Eoin is in agreement with the call for a resolution regime. He was saying liquidation ‘as is’ is an empty threat and therefore a resolution regime is required.

    Personally, I am worried by the lack of any visible progress by the Civil Service or legislature towards producing the a bank resolution scheme. Is there any reason to think any work is going on in the background?

  17. @ KW,

    Equity holders lose out. Hmmm, still stuck on that particular rut.

    What aught to happen, is the government of Ireland should pump €2.0 billion into both AIB and BOI at the moment. Whatever the market capitalisation of those banks currently is. Then a separate vehicle should be created, where the existing shareholders of BOI and AIB are moved to – some sort of a low risk, non-high return vehicle, a basic framework for a new banking infrastructure. To which we should then plug onto that, the enterprises which are ESB, Irish Nationwide (what is worth saving) and some one of the small components, which Anglo is spinning off. Sunday Tribune journalists Neil Callanan and John Ihle featured the latest story on Anglo’s business plan here:

    http://www.tribune.ie/business/article/2010/mar/07/anglo-irish-to-shrink-loans-to-just-24bn/

    My point is, you don’t allow the ‘equity holders lose out’. That is the whole flaw in the KW proposal in my view. It represents too much of a political hot potato. We are in the realm of political economics at this stage, rather than classic economics per se. Once the equity holders have been moved out of the way, then you can go to work on subordinated debt. The point is, with that €2.0 billion market capitalisation from existing equity holders of BOI and AIB, that can provide liquidity to the third banking force. (I don’t know how much you can leverage that €2.0 billion in terms of lending, but certainly, it would offer lending that SME’s currently don’t enjoy – say, half a billion of new money in circulation) Those equity holders will be happy with that deal, and as another poster pointed out above, they are only interested in the long term picture. To buy a present for their grand kids perhaps – a whole plethora of McDonalds Eurosaver hamburgers! BOH.

  18. @ KW,

    I think what happens is the subordinated debt holders, moved down to the position of equity holders – is that what Morgan Kelly has suggested by a debt to equity swap? I mean, the previous subordinated debt holders become the current shareholders of BOI and AIB. So that the banks stay on the market, with many billions worth of equity value. The point I am making, is you move away existing small shareholders to a separate vehicle, and join it to the third banking force. BOH.

  19. @ Karl/Zhou

    100% backing a new resolution regime for all the obvious reasons. Basically i see the steps as follows:

    1. Set up/Have effective resolution regime
    2. Enact it on failing bank
    3. Deal with ordinary share holders
    4. Enforce losses/loss sharing on debt holders in order of subordination/rank
    5. Re-capitalise, re-structure, assess viability etc
    6. Re-float/sell on
    7. Get on with running the country

    As previously noted by me, unless you have Step No 1 in place, i think its rather foolish to talk to the ends of the earth about how we need to get on with Steps 3 through 6, and the government “ideologies” that are currently preventing this. At the moment it seems like people are almost ignoring the fact that there is no resolution regime in place (until this thread). As Zhou noted, this is where the criticism or analysis should be focused – why don’t we have one, and how can we go about setting one up?

  20. @ Zhou and Eoin

    Let’s meet up in Buswell’s tomorrow afternoon and start protesting for a resolution regime. “What do we want? Resolution Regime! When do we want it? Now!

    The combination of a Prof, a banker and a former Chinese premier should prove sufficient to get this thing going.

    I’ll bring the placards!

  21. Karl, the FDIC can act ‘pre-emptively’ in the sense that it need not definitively distinguish a failed from a failing bank. Any sensible bank resolution regime needs to help the authorities with this type of adverse selection problem. It’s disingenuous to conflate Ireland’s ‘pre-emptive’ extension of a too-broad liability guarantee in October 2008 with pre-emptive powers under a proper resolution regime.

  22. @ Colm

    Just in case you didn’t get the in joke, I was referring to people who like to object to “pre-emptive” interventions to nationalise insolvent banks.

  23. Karl is of course right that this is not the first time a resolution regime has been called for. But I think the waters have been muddied by the sometime equation of such a regime with temporary nationalisaion. I think it would be very helpful to have more views on the legal constraints on imposing losses on existing bondholders short of bankruptcy.

  24. @All

    … and back to the concept of TIME …….. and prioritisation of actions, and an Executive that appears crippled by blind hope in the ‘fullness of time’ …… there is more than sufficient brainpower around to get things done reasonably quickly … legislated, and acted on …. and the cost of inaction is not about wiping out shareholders or bondholders (who will negotiate) but about wiping out an entire Irish generation …

  25. @ Karl

    ok, apologies on not noting these three contributions, but you’ll also forgive me for pointing out that this represents 3 threads over the space of 10 months. I’m guessing that loss-sharing/enforcements and nationalisation have had maybe 10-20 times that in terms of discussion space (and 100 times that in terms of comments), despite the fact that neither of them are particularly effective without the resolution regime in place to start with. Most discussions on nationalisation etc generally don’t even have a mention of the concept of a resolution regime. I have on dozens of occasions raised this point by asking “how do we impose losses on the subbies?”, and very very very rarely has the response been “by first bringing in a new resolution regime”. It generally ends up being “tell ’em we’ll pull the g’tee”, and then peters out after that.

    At some point you need to leave the sanctury of the Arts block, lumber up to Roebuck and see what the legal eagles there think about how we do this. 😀

  26. @KW

    Sound like a plan. I’ll get on to the animal welfare groups, the socialist workers party, people before profit, the alliance of lone anti-nama protestors, and the family protesting about their council house to try and avoid a clash.

    Any suggestions as to what we can paint on the placards to represent the pre-emptive nature of the required scheme?

  27. I dunno Eoin. From the point where I started to emphasise dealing with bondholders — the post linked to last July — I’ve been pretty clear about the need for a resolution regime. Perhaps some of our readers haven’t always realised that this is the case but I think all the contributors to this site who’ve discussed the issue have been clear.

  28. @Karl Zhou Eoin

    Bushwells?

    Think Tora_Bora and the Dublin Mountains for a few days more appropriate – then come back down (-;

  29. @Eoin/Karl

    The resolution scheme has long been part of the debate. I think that some contributors to the national debate, such as Constantin Gurgdiev, did not perhaps appreciate the size of the administrative obstacle posed by the lack of such a scheme at times. Certainly Prof Honohan, Karl Whelan, Colm McCarthy and [I think] Philip Lane have all alluded to the importance of a bank resolution scheme form time to time.

    I can only think of two reasons for the ongoing delay in progressing a bank resolution scheme:
    1. A lack of DoF competency and/or capacity.
    2. A fear that some elements of the bond markets might see a resolution scheme as a signal that Ireland is getting ready to default on senior bonds after the guarantee expires. That fear may be justified.

  30. @ All,

    Look at the different strands, in evidence, on the Irish Economy blog site. Karl Whelan has been a wonderful asset to the Irish Economy blog for one reason – he is the only one able to pick up on the psychology of the Irish government. Karl Whelan is able to read people, in a way that I or few others can do. (Must be a poker players talent I think) It all begins with Dr. Peter Bacon last April, setting himself against the idea of nationalisation. How would nationalisation help us with a half finished shopping centre outside Athlone or Mullingar. Karl Whelan has been able to to track the government’s psychology as it developed since then. He rightly points out, we are at a stage in the debate where frogs and locusts, are about to descend upon us. That is the view at cabinet level. In terms of political economics. Karl is correct, it is a great pity it got to that stage without being checked by an informed economist’s point of view.

    Colm McCarthy brings a whole new set of observations to bear, in terms of how we identify problem(s) going forward, and how our early response/resolution system can adjust to cope with future challenges facing our financial system(s). An early warning response mechanism, to deal with collapses in institutions other than banks, stock markets and so forth. He mentions insurance companies also, which may expose the taxpayer to large liabilities. From yesterday’s SBP article.

    Failing banks tend to signal the fact through liquidity problems, but insurers get paid premiums in advance, and can be liquid, as well as insolvent. The next costly failure in Ireland does not have to be a bank.

    I wrote the other day: The trouble with the 2008 crash was, there wasn’t any one outstanding event to mark it. With a stock market crash, like 2001 dot.com for instance, it is simple. The NASDAQ is worth ‘X’ times less than yesterday, the writing is on the wall, and there is no argument. No so with property & credit collapse unfortunately. Trying to get people to re-evaluate prices downwards after a property bubble is like pulling teeth without an anesthetic.

    George Lee, makes the point we are now in un-chartered economic territory. (I think Kevin O’Rourke has picked up on George’s line of thinking also) There are no rules for dealing with our current circumstance in Ireland. There is no text book procedure. No other economy has ever had to deal with this problem, we are in. George Lee’s analogy is like that of a line technician, out on a telegram pole somewhere, who has to do real inquiry into the problem, and then inform headquarters what exactly is wrong. Hence the need for a bank inquiry as a crucial component of resolution.

    http://www.irisheconomy.ie/index.php/2010/03/08/scary-graph/#comment-39039

    I haven’t included the behavioural economists, Liam Delaney etc, but their suggestions for resolution are also present as a thread on the Irish Economy blog.

    I myself, Brian O’ Hanlon am making the point, to enable us to cope with future challenges facing all financial system(s), we need to look at the architecture. This is where Ireland can become a fore-runner, in terms of integration of legal and economic resolution strategies. I referred to the example of the AT&T communications network in the US, in my blog entry The Rise of Dumb Bank-ing. It was a paradigm shift for the US comms network. In the past the intellligence was built in at network level – the data was dumb – it was told what to do. The network was proprietary, the good bit, the market that floated on the stock market. In the future the network is dumb – the intelligence is built into the data – the data becomes proprietary, (and therefore of value) the network is just infrastructure (requiring support of lower-risk capital to work). BOH.

  31. BTW, I should have noted – I think the pulling teeth and property valuation problem, is precisely the problem which Dr. Peter Bacon set out to fix. I.e. Dr. Bacon set out to retro-actively fix the problem, that a property market doesn’t have a ticker tape, signalling mechanism. (Peter Bacon correctly identified that deficiency, because his background is in stockbroking, but his recent experience is with property investment) At least now, international investors can see the ticker tape for Irish property loans coming up on their screens, as loans move to NAMA. So it removes one more unknown, and cleans up the general market situation – from an international point of view.

    Eugene McErlean, made a similar point when interviewed about the banking inquiry, about the international view of Ireland Inc. This ties in with my point in relation to economics and the George Lee/Kevin O’Rourke resolution strategy I mention above.

    We need to see how NAMA stands as a solution, in context with suggestions from Colm McCarthy, Karl Whelan, George Lee, Kevin O’Rourke, the behavioural economists, myself and Jack the Ripper. BOH.

  32. @ Karl/Zhou

    you could actually sidestep the entire resolution process altogether (or at least to a large extent) by insisting that banks have to issue debt (at any level) with contingent capital clauses in them where they convert or get written down if capital buffers go below a certain level.

    Rabo apparently have a senior issue about to come to market that knocks you out if they blow thru 7% equity capital (currently 12%), you get written down to 25% (not mtm, full and real writedown).

  33. @Eoin

    That would only work if you could require all banks in all jurisdictions to include such clauses in bonds. That is why such reform requires huge international co-operation. Otherwise, we would place our banks at a competitive disavantage in the bonds market at a time when that is the last thing we want.

  34. Have to say I have been banging on about special resolution regimes since May last year if memory serves me well.

    We could have cut and pasted UK legislation and passed it on a Saturday morning anytime since the UK brought in their legislation which was between Northern Rock and Brandford & Bingley.

    But our clever and ever so politically cute Minister for Finance wanted to do it the way he was told by the big money boys.

    To whose benefit?

  35. @Eoin
    “For example, for all the threads on here and articles in the papers (ie dozens and dozens) about nationalisation, loss-sharing etc, isn’t this pretty much the first one on here about the need for a brand spanking new resolution regime to actually make all these great ideas work?”
    I resemble that remark.

    I’ve been calling for it for two years. It isn’t an original thought. This site is a day late and a dollar short in getting to the implications of a property bubble which results in a banking crisis. A resolution regime is always required for a successful resolution. Acting pre-emptively is also always required, otherwise you end up with dead losses like the nationalisation of Anglo (the worst examples and the worst losses nationalised).

    As Maurice O’Leary points out, we didn’t even have to think it up.

  36. @ All,

    I tidied up my comments above, into a blog entry, Jim Gray on Telco’s. When we get past the loan valuations stage, move the toxic assets, and have no option except majority state ownership, (you cannot be a bit pregnant, everyone outside will see Irish banks as national-ised) there is still the fact the banking business model itself is insolvent.

    (This is a problem that exists above the European level problem which Kevin O’Rourke/George Lee are trying to tackle)

    I refer to Jim Gray’s observations of Telco’s in the US, in my blog entry. The new global banking business model does have implications for how we think about market capitalisation of banking infrastructure. We cannot think in the old fashioned way any more. BOH.

    http://designcomment.blogspot.com/2010/03/jim-gray-on-telcos.html

  37. Diverging to NAMA:

    It would be good if there could be analysis of the NAMA valuation regs which were published on Wednesday last:
    http://www.nama.ie/Publications/2010/NAMALongTermEconomicValueRegulation.pdf

    I note the Regs refer to the “relevant period” for determining long term trends as from 1/1/1985 to 31/12/2005. That means a huge chunk of bubble uplift is included in determining what is supposed to be a historical norm. Never mind that 1/1/1985 is not long ago.

    I also understand from my attendance at the NAMA legal conference on Saturday that a model for valuing LTEV has been settled upon and has been circulated to the banks. The banks are using this model to determine recapitalisation costs. The word model was not used but it was said that the methodology for detrmining LTEV was highly scientific, had been developed over a long period and that if one fed certain inputs into the methodology then one got a specific answer at the other end. This was in answer to an accusation that the methodology was anything but scientific.

    If there is a model then where is it and why have the public and the Oireachtas not been afforded the opportunity to scrutinise same?

  38. When the guarantee passes, why would it be a problem to cut a deal with senior bond holders. Surely the markets would realise that the government was not loading itself up with debt, so the risk of contagion to sovereign debt would be minimal.

    Why can’t we let 2 banks that weathered the crisis well(say, BNP Paribas and HSBC) take over AIBs and BOIs deposit base and branch network. They can give a small chunk of their equity to the bondholders in a debt equity swap. Some form of vehicle should be set up to sell off the property portfolios should be set up and any money made passed back to banks/government/bondholders.

    Is there any strategic value in having a bank network run by indigenous companies?

  39. @Zhou_EnLai

    Chase down that ‘scientific’ model, equation or whatever it is being called. It has some fairly mega_implications for Joe, Joan, and their offspring. If anyone else around here can track it down – and open it up to ‘peer review’, supported by most on this blog, it might be illuminating.

  40. “The word model was not used but it was said that the methodology for detrmining LTEV was highly scientific, had been developed over a long period and that if one fed certain inputs into the methodology then one got a specific answer at the other end. This was in answer to an accusation that the methodology was anything but scientific.”

    As a scientist I can say that this made me spurt some coffee out my nose. I suspect these guys are conflating basic maths and stats with science. Just because you have a formula does not mean you are right. And as far as “scientific” econ models go:
    Recipe for Disaster: The Formula That Killed Wall Street
    http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

    was pretty damn scientific.

  41. @Eoin
    “you could actually sidestep the entire resolution process altogether (or at least to a large extent) by insisting that banks have to issue debt (at any level) with contingent capital clauses in them where they convert or get written down if capital buffers go below a certain level.”

    That would confine us dealing with future crisis’
    A bank resolution regime may allow us to spread the losses from the current mess.

  42. @Zhou,
    I’m open to correction on this, but my reading of the (publicly available) data I have seen is that the real capital value of investment property trended quite steeply down (albeit with substantial deviations from trend) between 1970 and 1985.

  43. I am not aware if that is the case Con. However, 1985 is not long enough ago by any stretch to ascertain long term values. Futhermore, we were told the bubble years would not be counted. This is not the case if 2005 marks the end of the periof over which the long term trend is assessed.

  44. @zhou
    We have a cash mountain so now is the time to introduce the legislation
    but I don’t think we will ever willingly get it from the government. Why? To ensure that it can’t be used on Anglo/Nationwide. Resolution needs to be fought for and won. It will be a bitter fight though. We will be told that Resolution! will extinguish all life on the planet etc. I fear though that the Lenihen is determined to sit on this while swallowing the debts of Anglo/Nationwide and laying his toxic NAMA eggs all over us.

    On senior debt, given that the 3 banks plus Nationwide are all insolvent shouldn’t investors just get back the face value of their bonds less any interest they have received or are still due? That would seem fair?

  45. @ Jan,

    Is there any strategic value in having a bank network run by indigenous companies?

    For the immediate future, certain parts of the banking sector are destined to suffer a miserable, profit-less existence. For a whole variety of reasons, not least of which is, we simply don’t know how the Irish banking system is meant to plug into Europe, and ensure compatibility with the larger system. I would say, allow the Irish government to sponsor development of a basic infrastructure, until such time as we everything figure out. The reason I mentione George Lee above, is because since 2002, our banking network in Ireland which is part of a larger Europe wide network. Your part of that overall system has been mal-functioning in all sorts of ways we do not understand. The old banking management were not able to deal with the problems experienced. (They didn’t have to be brilliant trouble shooters previous to 2002, because banking hadn’t altered in fundamental ways) It is now up to the Irish as a people to understand, why our reception (to employ the phone network analogy) has been so awful since 2002. The best way to conduct the de-bugging exercise, is to impose state control over all of the basic levels of banking infrastructure. That erases any unnecessary boundaries that might get in the way of investigators doing their work. Unless we figure out how Ireland can operate at the edge of this new banking super-grid of Europe, it is pointless making very ambitious plans.

    George Lee is right, in that we can afford to push for a better deal with Europe. Until such time as we apply the best, legal/economic coordinated technical resources to the problem in Ireland. We needed a €440 billion guarantee scheme to simply hold onto our deposits. Yeah, I would say, a large portion of our banking infrastructure (and thinking) is ready to go into the dustbin. The truth is, as George Lee described it I think. It is up to the Irish to communicate back to Europe, what exactly are the problems we are experiencing here on the periphery. What do we need to implement solutions. Only then can we see how the markets feel about Irish bank(s) as investments. People often say we are lucky to have Europe, or else we would be hosed. That is missing the point a bit. We plugged ourselves into this single currency gadget, like plugging an old out-of-date appliance into a modern power socket. We short-ed out on this end basically. BOH.

  46. @Zhou_EnLai

    “I can only think of two reasons for the ongoing delay in progressing a bank resolution scheme:
    1. A lack of DoF competency and/or capacity.
    2. A fear that some elements of the bond markets might see a resolution scheme as a signal that Ireland is getting ready to default on senior bonds after the guarantee expires. That fear may be justified.”

    On point 1 – there are no excuses – as above take a few them on a purposeful stroll thrugh the Dublin mountains with Eoin, Brian and Karl and a reasonably competent legal eagle or two – camp out for 2 nights (just to let the Dept types know what Blind Biddy is feeling now that she can’t afford that other bag of coal; you might consider Oliver in case you run into any wild-men or Captain Rockites; must be why the department of defence are in the market for 10million bullets!) ……. draft it up ……. and have it legislated in the Oireachtas within 24 hours. We are smart people – this is doable.

    On point 2 – you certainly have a probably stong point – the political decision makers have been blinded by fear for the past 18 months or so – fear of the structural deficit(only question here is how), fear of sovereign debt and who they might upset who might lock the doors on sovereign credit[think ECB and bondholders] it is cripping them and it really shows in poor decision making – as any competent psychologist will tell you – it appears that they are in a fudge of denial and grasping at so called ‘revealed truths’ from those up the hierarchy who can (in their own interests, not ours) pat them on the back and tell them they are grand fellows/lassies etc. The ‘Solidrity Bond’ in Europe is holding – see Greece, and Sarkozy today – Angela is staying mum ’til after her local elections)They are wrong, because we are not that weak – we may be down but we are certainly not out ………. and the ECB, the bond-holders, and the hedge-shark cabal need to have it demonstrated. We can, and morally we should, wind down the toxic legacy of Shawnee, FIngers and co. And we will survive it. To clean up the other 2 (forget the socalled 3rd force for the mo – bit of board cleanout needed aside) we need a Dictatorial Transformation of the Big-2 – all present upper-echelons in boards and management must go [we can fund it] – there is an international labor market in banking expertise, cut reasonable deal with the bonds etc ………….. ruthlessly restructure, and when in order spread the risk on the equity market again. As this is going on we can kick-start an economy and save an entire generation. DOABLE.

  47. @ All,

    I haven’t gotten around to reading Vince Cable’s book yet. But I understand from listening to an RTE podcast, that Cable has come up with a vision for financial markets in the future, which involves 2 no. layers. One layer below, which needs to work 100% all of the time, and cannot let people down. Then there is another layer, which sees to operate according to different regulations, but should not be entitled to support. If you lose, you lose, simple as that. If you look at most succesful pieces of engineering you see this strategy in evidence. The TCP/IP protocol which is the foundation of the internet, is a combination of a base layer, where speed and robustness is obtainable, with another set of devices on top, which address the more intricate needs of the network. The Unix operating system, and Linux operating system operate exactly along the same principles. It works basically. Banking is something like a network, like an OS, which should not go down. Brendan Keenan in the podcast also made the observation, we tried to make financial markets – i.e. markets for ‘money’ operate like markets to buy computers and beef – that was a big, big mistake. We cannot expect those markets to be exactly the same. BOH.

    Off the Shelf 3 Oct. 09.
    Mary Raftery, Alan Dukes and Brendan Keenan discuss “The Storm” by Vince Cable.

    http://www.rte.ie/radio1/podcast/podcast_offtheshelf.xml

  48. @ All,

    It is very interesting today, to observe the news media coverage of results released by AIB bank. Bear in mind, what the media has honed in upon, is only the payments to directors, and breakind down those numbers. Here is the thing, imagine there wasn’t a NAMA scheme. Imagine, that for the next 10 odd years in Ireland, we had to rely on these awful news media reports of information released from Irish banks, in relation to performance of troubled property loans. Bearing in mind, that a lot of build-er(s) had multiple lender(s). So on a particular day, we would all be trawling back through figures released about performance of loans from other lenders, and trying to extrapolate from that, the situation regarding build-er(s) and loans. Imagine the sheer time and effort required by that pathetic sort of exercise. At least with NAMA it cuts down an awful lot of the information processing load, with regards to results reporting of Irish banks – there is no one bad bank for all sizeable & troubled property related assets. NAMA is a reporting device, to enable better functioning of the financial market, vis-a-vis Irish banks. As Brian Lucey would say, either way the discussion is academic, the hold still exists to be filled. The only difference that NAMA makes I would argue, is we are destined to spend a lot less time actually speculating and listening to whispers and rumours. BOH.

  49. More on those Rabo bonds i mentioned above…

    http://www.ft.com/cms/s/0/0e2cc458-2a20-11df-b940-00144feabdc0.html (story below)

    http://ftalphaville.ft.com/blog/2010/03/10/169921/rabobanks-new-non-regulatory-capital/

    ***
    Rabobank hybrid bonds offer new funding template
    By Jennifer Hughes

    Published: March 7 2010 22:45 | Last updated: March 7 2010 22:45

    Rabobank executives will begin marketing a new form of contingent capital bond on Monday that could provide a template for other banks seeking to raise fresh funds from the markets.

    Bankers are currently devising new forms of contingent capital – hybrids that contain features of both debt and equity – to meet the stricter criteria expected to come from the new Basle capital requirements after existing forms were discredited during the crisis.

    The notes from Rabobank, the Dutch co-operative lender, would act exactly like normal bonds unless the bank breached pre-set ratios, at which point the value of the notes would be written down by 75 per cent and the remaining quarter returned to investors.

    The bonds are particularly notable because Rabobank, a triple A-rated institution, is doing this from a position of strength.

    “Given the events of the past couple of years, we wanted to be absolutely sure that even the unthinkable could be hedged or mitigated,” said Bert Bruggink, chief financial officer.

    The deal is also the first to use this sort of write-down feature. Rabobank is a mutual organisation, so could not offer to convert the bonds into equity as the UK’s Lloyds Banking Group did with an offer of contingent convertible, or CoCo, notes last November.

    The CoCos were designed to switch into equity at a pre-set level. That structure generated interest from regulators around the world, but was not considered a true test of the market since it was an exchange for existing, poorly performing bonds.

    The Rabobank deal will raise fresh capital and executives are looking to issue at least €1bn ($1.4bn) of the new bonds.

    Michael Gower, head of long-term funding at Rabobank, said: “Contingent capital is a new flavour for the markets. A bank of Rabobank’s standing is probably the appropriate name to take a leadership role in this sector.”

    Investors have already shown strong interest and a team of bankers and executives will hold a series of meetings and presentations across Europe this week.

    “This sort of structure can work for listed groups as well as mutuals like Rabo. Can it dictate the path of new products in this space? I think it can,” said Sandeep Agarwal, head of the financial institutions debt capital markets team at Credit Suisse, one of four banks working on the deal.

    Marc Tempelman of the debt capital markets team at Bank of America Merrill Lynch, also on the deal, said that many executives were waiting for new regulations before addressing their own funding.

    “It’s very significant because everyone could theoretically apply a structure of this type, but a number of possible candidates may want to see what happens with capital regulation first,” he said.

  50. @Eoin

    Most interesting to the non-expert on these Rabo (as distinct from Robo) type hybrids. Think we will be returning to this …….. sure you have a few ideas gestating away in the background …….

  51. Eoin says:

    Rabobank executives will begin marketing a new form of contingent capital bond on Monday that could provide a template for other banks seeking to raise fresh funds from the markets.

    The markets themselves have changed in what they want to buy, or don’t want to buy. I hope economists in Ireland can catch up with that fact soon. They aught to look at what is going on in telecommunications and mass media to see it. Chris Anderson’s book, The Long Tail, isn’t a bad reference. I hope this sort of innovation mentioned by Eoin continues to happen, (and we could do well in that space in Ireland) The Irish economists have failed to address problems in one crucial part of their ‘work out’ solution in my opinion. This notion we can ‘clean up the banks’ and sell them back to the markets. The banking system as we know it, will become more like the music industry and the Abbey Road recording studios, where the Beattles recorded their albums. A museum piece, with more of historial value than anything else. No one wants to own the large piece of central broadcasting (money, voice, media) infrastructure anymore. It is impossible to own any large significant piece of the network anymore. The capital is radically altered, it has dispersed to the very edges. (I can manage my own investment fund with Rabobank for as little as €100.00 – heck, most people spend more than that on eBay) A very good book references is Yochai Benkler, The Wealth of Networks, or Andrew L. Shapiro, The Control Revolution. We are witness today to a death battle on legal & economic arenas, to see if the old age company can maintain its control. The outcome is not decided. For the old to win out, it requires all sorts of extreme reinforcement to laws to do with intellectual property etc. Refer to online videos of Richard M. Stallman for some interesting lectures. BOH.

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