Full text of NTMA chief Michael Somers’s appearance at the Public Accounts Committee is now available here.
Category: Banking Crisis
Last night on The Week in Politics, Fine Gael’s Leo Varadkar criticised proposals for nationalisation of the banks on a couple of grounds, one of which was that it “wipes out 300,000 small shareholders.” Later, in describing FG’s plan he said that the new banks created as part of this plan “would buy the good loans off the banks, take the good loans off the banks and set up a clean bank and, by doing that, you then create capital for the old banks and give them some chance of survival.”
Those watching would probably interpret these comments to imply that Fine Gael’s plan does not involve nationalisation and that it would be better for bank shareholders than what has been proposed under nationalisation. In my opinion, neither of these positions are correct.
The German government announced a plan last week for dealing with problem assets on the books of its banks. This plan has been compared favourably to NAMA by a number of Irish commentators but I’m not really sure why.
The essence of the plan, as described by the Wall Street Journal, is as follows
banks will have the option of putting structured products, such as mortgage-backed securities, into special-purpose vehicles at 90% of their present book value, which is often far above the assets’ likely market value if sold today.
In return, the vehicle would give its parent bank a note promising to repay it an equivalent amount in up to 20 years’ time. The German state would guarantee the repayment in exchange for a fee from the bank, which would free up capital by swapping toxic assets for a risk-free note.
In addition, the bank would have to pay the vehicle the difference, spread out over as long as 20 years, between 90% of an asset’s book value and its estimated ultimate value when it matures. If an asset’s ultimate value turns out to be less than auditors’ estimates, the bank will have to pay dividends to the German state instead of to shareholders until the full loss is covered. If assets perform better than expected, the bank gets the upside.
Brian Lucey provides a critique of the various banking plans here.
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As Patrick Honohan has noted often in his recent contributions, despite the confusion prevailing in Ireland today about our banking problems, there is wide agreement among banking experts about what constitutes best practice when dealing with banks that are either insolvent or failing to comply with capital adequacy regulations. Regulators seize the bank, place it into administration and the bank’s assets are used to pay off depositors first with bondholders getting paid off if there is anything left.
In our current circumstances, the almost-blanket guarantee on liabilities agreed on September 30 prevents such a solution from being imposed now on the covered Irish banks. I interpret Fine Gael’s new plan as an attempt to achieve an FDIC-style resolution while sticking within the restrictions imposed by the guarantee.