Year: 2010

Mazers on SME Lending in 2009:Q4

The latest Mazers report on lending to SMEs is here.

As usual, Mazars report a very high acceptance rate for credit applications — 87.7% in 2009:Q4. Mazars acknowledge that these figures are skewed to the high side because “limitations exist within bank applications support systems”. In other words, if you call into the local bank branch, have a word with the manager and he tells you there’s no chance of a loan, so you don’t bother filling out the paper work, then this doesn’t count as a loan application that’s been turned down. Somewhat surprisingly, Mazars reckon that “an approval rate of 84% is more representative.”

This still seems to me to be far too high. Mazars own evidence on credit quality provides plenty of evidence for why banks are likely to be extremely cautions in handing out credit in the current environment, regardless of any issues to do with undercapitalisation.

Only 65% of SME loans were fully performing in 2009:Q4.  22% are on “Watchlist” because they are behind 30 to 90 days and 13% are “Impaired” because they are more than 90 days behind. By contrast in 2008:Q2, 85% of loans were performing, 14% were on Watchlist and 1% were Impaired.

These figures show that lending to SMEs is currently a very risky business. Indeed, the fact that 15% of loans were behind on repayments back in 2008:Q2 when the economy was performing much better shows that this class of lending is always somewhat risky.

Personally, I find it hard to believe that the major banks are not currently restricting credit as part of a strategy to get risk-weighted assets down and thus minimise the amount of new capital required to achieve the capital ratio targets set down by the Central Bank. However, in reality, it is very difficult to distinguish between this mechanism and the normal banking approach to screening credit risks during a severe recession.

The fact that this screening often takes the form of turning down loans rather than simply raising the cost of credit has been well understood for a long time and was best explained in this classic paper by Stiglitz and Weiss.

The UK Election: Economic Analysis of Key Issues

The CEP at the LSE is releasing a series of briefing notes on some of the key economic issues facing the next UK government: you can find the list here.  Among the recent contributions are Luis Garicano on financial regulation and Brian Bell on bankers’ bonuses.

Economies with Large Banking Systems

The IMF has released a new report on the challenges facing economies that have large banking systems: Ireland is included in the analysis.  The report is here and the abstract is below:

Summary:
This paper examines cross-country perspectives on economies with large banking systems relative to GDP. As such economies tend to have domestic institutions with major foreign currency cross-border activities, strong links are generated between the health of the financial system and sovereign sustainability. These links are of central interest to the paper. It does not cover off-shore centers as their international links tend to be relatively unrelated to domestic activities.

To make the analysis more concrete, the experience of five economies—Hong Kong SAR, Iceland, Ireland, Singapore, and Switzerland—are featured (plus a Box on the Benelux region). These economies had large and relatively diversified international banking sectors compared to their fiscal capacity before the global financial crisis of 2007–09, and divergent experiences over the crisis. The paper analyzes the reasons for these outcomes. (A range of private and public sector individuals were interviewed during missions to Belgium, Hong Kong SAR, Ireland, Singapore, Switzerland, and the United Kingdom.)

Anglo’s Northern Rock Strategy

Matthew Elderfield’s Oireachtas appearance generated some interesting discussions about the future of Anglo Irish Bank. Alan Dukes has, on a number occasions, stated that the bank’s management are putting forward a restructuring plan that involves splitting the bank into a bad bank to be wound down over time and a good bank that will continue to operate.

Elderfield on the Anglo Split

Elderfield’s prepared comments shed some additional light on the nature of this split:

It is likely that the bulk of Anglo Irish Bank which remains after NAMA will be transformed into an asset management company to manage the bad assets of the bank. A small new bank is likely to be carved out and it is on this entity that we will apply our process.

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Elderfield on Resolution

Thanks to Karl for the link to the transcript of Mr. Elderfield’s appearance before the Oireachtas Committee in the post below.  There is clearly a great deal that is of interest in the transcript, and it might be useful to develop some separate threads.  

One part of the transcript worth highlighting is Mr Elderfield’s responses to questions on the need for a resolution regime.  These responses came in exchanges with Deputies O’Donnell and Varadkar.   I have included the relevant extracts after the break. 

It is encouraging to see Mr. Elderfield engaging with the resolution regime question.   It is also hard to argue with his portrayal of the complexity of the issue, and with the legal challenges in particular.  While we must sympathise with how much he has had to deal with since taking the job, I am still struck by the lack of urgency he appears to give to the need for a resolution regime to limit the extent of the creditor bailout. 

Mr. Elderfield is understandably taking a forward-looking approach, and is concentrating on putting in place a regulatory regime that limits systemic risk, including consequent future liabilities to the exchequer.  This is indeed essential.   Maybe I am naive, but I think the risk of Irish banks engaging in reckless lending in the near term is low.   How we allocate the losses associated with the reckless lending of the past is still a live issue, however, and should be higher on the list of Mr. Elderfield’s priorities.   We should be focused on how we can draw on international best practice to have a regime ready for when the guarantee expires so that losses can be fairly shared with long-maturity investors. It is as if we are out in the workshop building a state-of-the-art new door, all the while the horses are still bolting. 

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