Category: Banking Crisis

Irish Nationwide Annual Report

The Irish Nationwide were pretty tardy in putting their annual report online. However, it’s up now, available here.

I’m not sure what to add to what’s already been said about the multi-layered failures at this institution. That said, one useful aspect of the report is that it gives us some additional information on the quality of the loans going into NAMA. The INBS loans are being purchased by NAMA at a discount of 58% relative to their original face value. The report tells us that, of these loans, €1.4 billion of the total of original €8.7 billion face value are currently counted as neither past due or impaired. (I’m not a big fan of the phrase “performing”.)

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.

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.

Continue reading “Anglo’s Northern Rock Strategy”

Elderfield at the Regulatory Committee

The transcript of Matthew Elderfield’s appearance at the Oireachtas Committee on Economic Regulatory Affairs is here. Reading over the answers, this was clearly a very impressive performance by Mr. Elderfield, one that signalled a break from past practices and attitudes in a number of ways. There are a couple of issues arising from Mr. Elderfield’s comments that I would like to discuss at greater length but don’t have time to discuss now, so for the moment I’ll leave it to our commenters to dig through the transcript for interesting material.