Category: Banking Crisis

New Guidelines for NAMA Pricing

Following the approval of NAMA by the European Commission, the Department of Finance has published revised guidelines in relation to NAMA’s pricing of assets. This is a revised version of these regulations released before Christmas. Based on a quick read, there are appear to be a couple of changes, both of which show that the Commission is pushing the government towards paying lower prices.

The first relates to the discount rate used to value cash flows when coming up with long-term economic value.  These had provided for an adjustment of 0.8 percent above the relevant government bond rate. This adjustment is now 1.7 percent.  This change will lower the value of the assets.

Government bond rates are, of course, lower now than they were last September. This is probably what the Minister was referring to when he said “There will, however, be a reduction in the interest rates used for loan discounting purposes” a comment widely (and now it seems incorrectly) reported as being related to the Commission’s recommendations. We see now that the Commission’s recommendations, taken on their own, will imply lower prices paid.

The other change I can spot relates to the (to me) mysterious “Standard Discount Rate”. The regulations for this used to be as follows.

The standard discount rate that NAMA shall apply in the calculation of the long-term economic value of all bank assets shall be 2.75 per cent to provide for enforcement costs, and 0.25 per cent to provide for due diligence costs.

The 2.75 percent is now 5.25 percent. From previous discussions, the prize for best answer as to what the standard discount rate was went to Frank Galton: NAMA LTEV = LTEV*(1-Standard Discount Rate). Assuming that’s correct, then this latest change would also imply lower prices. Anyone who understands the standard discount rate (or can see any other interesting changes) feel free to explain it to us.

An Irish Mirror

Paul Krugman’s NYT column focuses on the new Irish Economy Note by Greg Connor, Tom Flavin and Brian O’Kelly.

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. 

Continue reading “Resolution Regime”

Empty Houses

Here‘s a new report from UCD’s Urban Institute by Brendan Williams, Brian Hughes and Declan Redmond titled “Managing an Unstable Housing Market” (summary here.)  It supports earlier calculations from NIRSA (see this post from the Ireland After NAMA blog) suggesting a very large stock of empty houses.

The U.S. and Irish Credit Crises: Their Distinctive Differences and Common Features

Gregory Connor, Thomas Flavin and Brian Kelly write on this topic in Irish Economy Note No. 10.