Question on measuring foreign risk capital inflows during the Irish financial sector recovery

One of the key drivers behind the better-than-expected recovery of the Irish financial sector has been the strong inflow of foreign risk capital, particularly from U.S. “vulture funds” as they are inaptly named. This healthy demand for Irish banking assets has allowed the PCAR and PLAR plans for the domestic banks, and the unwinding of NAMA, to progress successfully. Similarly healthy demand for the Irish assets of foreign banks, such as Irish loan portfolios sold by Ulster Bank, has also contributed indirectly to the Irish financial sector’s partial recovery.
There is a risk capital inflow when a foreign institution buys a troubled loan portfolio or property portfolio from an Irish bank, or from an Irish subsidiary of a foreign bank, or from Nama. These risk capital inflows are not intermediated through the Irish banks and do not appear on their balance sheets. Prof. Brian O’Kelly (DCU) and I were able to trace the 2000-2009 destabilizing inflow and sudden outflow of foreign credit into the Irish banking sector using the aggregate Irish banking sector balance sheet Table A4.1 published by the Irish Central Bank. Question: how can one measure this new source of risk capital inflows? It seems healthy and stabilizing rather than (like in 2000-2009) unhealthy and destabilizing, but it still deserves to be measured accurately. Is it necessary to list all the individual deals and add them up? Has some hardworking analyst done that already? Is it possible to create a quarterly or annual time series? Answers on a postcard (or better on a spreadsheet) are welcome!

3 replies on “Question on measuring foreign risk capital inflows during the Irish financial sector recovery”

“It seems healthy and stabilizing rather than (like in 2000-2009) unhealthy and destabilizing,”

It’s foreign capital . It’s there for the yield, not whatever JTO thinks.

Big and chunky yield

Treasury bonds and QE mean they have to look elsewhere.
If Janet gets it wrong and Minsky is right and there’s another balance sheet WTF moment in the US that money will be going home sooner than you can say Dick Roche.
So it’s good to be prudent about it. It’s not because they love Ireland. It’s business.

A lot of it has been through a reasonably small number of deals. Were Namawinelake still going, it would be easy to add them up. I would imagine the CBI would have the figures, but I have imagined things like that before and been wrong.

Re: In Flows and Risk Exposures

@ Gregory,

We should be more aware of how inadequate our level of real insurance is against risk exposure, in parts of the Irish financial system. We should focus and monitor markets, that are experiencing new and un-planned levels of growth.

Between 2000 and 2009, the innovation of the Irish financial institutions (they all achieved it to a greater or lesser degree), was to create new markets, and succeed in generating transactions within those markets, that in fact made the projects, plans and endeavors of participants, seem like they were real.

In 2014, we do hear a lot about projects, plans and endeavors, . . . and as they say, very few boots on the ground.

Irish financial institutions in the 2000’s, discovered ways to stuff capital on to the balance sheets of companies (many of whom had no real plan, for what to do with the capital, or didn’t really understand it).

It generated some very strongly co-related risk, that belonged firmly on the balance sheets of our financial institutions, but instead they were dispersed across balance sheets of leveraged clients (we still don’t have a clear picture of how it worked).

The amount of this risk and its high co-relation, seems to have been hidden from the gaze of shareholders. We know that much, at least.

Many people say that the ‘bubble’ in Ireland, was a plain, old-style, vanilla property bubble. I would disagree.

What we witnessed between 2000 and 2009 in Ireland, was the creation of brand new markets for assets, which had never been traded before in the same volume.

We witnessed the buying and selling, of what could be described as very ill-liquid assets (land in Irish towns and cities, and parts of Irish towns and cities, where previously, where previously, little transaction activity had occurred).

Without the creation of these new markets, it would not have been possible for the Irish system to soak up the amount of the capital inflow that it did in the 2000’s. Although these markets, it would seem to me, are still very un-proven and immature, we still seem to place a high degree of confidence in them.

Their existence on terra firma, here in Ireland has enabled the country for the second time no less, to become a sponge for foreign capital investment.

What we see in Ireland, in 2009 to 2014, is a level of trading in those same assets (bundled or packaged up different now than before), which may over-exaggerate the level of real liquidity, that exists for those assets.

In the decade of the 2000’s, everyone crossed their fingers, and hoped that a liquidity event would not happen. We got instead, the mother and father of all liquidity crises. That’s how it goes. We in Ireland, did no cause that crisis, . . . but what we were very successful in doing, was developing the huge exposure to the risks that such a crisis could bring.

I am sure that the Irish financial institutions were ‘prudent’ to a degree, in that they built in some amounts of capital buffers, liquidity reserves, contingency lines of credit and so on.

In 2008, in Ireland, what we witnessed was the complete melt-down affect, that a cessation in trading of a certain asset class, . . . had on the rest of the whole economy.

In 2014, we should ask ourselves, if we are becoming more or less exposed to this same risk? We are definitely being paid a premium at the moment, for accepting the risk of high volumes of trading in ill-liquid markets, for a second time, so close after 2008. I think that this is how we should interpret our bond yields and so forth.

The question we should ask ourselves, is whether Ireland is prudent or not to continue to chase after that kind of a premium (as pleasure-able and all, as it is, to be able to bask in the glory of that, at the moment)? BOH.

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