Next May 20th, the Financial Mathematics and Computation Cluster (FMCC) will again hold a conference on financial risk modeling of European investable assets (see below). Once again the conference will be held in Dublin, Ireland, poster child for the flaws in Eurozone financial risk architecture. As was the case last year, we hope to attract papers covering the full span of Eurozone risk modeling and analysis. In addition to the Call for Papers, the FMCC is actively seeking industry partners for this conference and our other research-practitioner outreach programmes. For more details contact gregory.connor@nuim.ie or irene.moore@ucd.ie.
The Basle Committe has announced an agreement for higher capital proposals. The agreement is, unsurpringly, somewhat watered down relative to earlier proposals and components such as a countercyclical capital buffer don’t seem to have much substance. Implications for the Irish banks seem minimal, as the total common equity requirements announced are the same as those set down by the Central Bank in its PCAR exercise.
The FT has a new editorial on Irish banking policy and it is perhaps surprisingly harsh. Text below:
Just shy of the second anniversary of the Lehman collapse, the Irish government last week issued its latest plan for Anglo Irish Bank. It reveals how little Dublin – and most other governments – have learnt from the crisis.
Back then, there were good reasons to offer taxpayer crutches to toppling banks. Contagion could bring the system to its knees. Panic made market valuation useless: even solid banks looked wobbly on a mark-to-market basis. It made sense to tide them over until the insolvent institutions could be distinguished from the illiquid.
Uncertainty is now receding. Unhappily, what is emerging in Ireland is how staggering bank losses are. It is time to let them fall where they should: on unsecured creditors once shareholders are wiped out. But Irish leaders are prolonging the uncertainty in the hope that zombie banks will, Lazarus-like, come back to life.
Dublin has poured €23bn into Anglo. The new plan – to split deposits from a “recovery” bank with loans not yet transferred to the government – looks like another round of three-card monty. It does not clarify the final size of the hole to be filled (S&P thinks it can reach €35bn), and continues to make citizens protect bondholders from their own folly.
Dublin fears that cutting loose Anglo’s bondholders will kill demand for Irish sovereign debt. The opposite is true, as record-high sovereign spreads show. Its huge fiscal deficits are manageable – just. It is the open-ended exposure to private liabilities across the banking system that drives up sovereign yields. Dublin must get its priorities right.
Irish depositors must be protected, but they fund less than half of the €776bn domestic banking balance sheet. Bondholders are owed €98bn, some of it guaranteed. Explicit state guarantees must be honoured. But the extension of a scheme to guarantee new debt issues to maturity forces taxpayers chained to a sinking ship to build lifeboats for exiting creditors.
The guarantee scheme should be cancelled for new issues, and sweeping resolution authority put in place immediately. It should apply to any bank that cannot refinance itself privately, and ensure that viable business continues while assets secure the claims of depositors and already-guaranteed creditors. Any shortfall thus crystallised should be put on the public balance sheet once and for all.
This will be painful. But investors who know the bleeding has stopped will soon prove that there is life after death.
Reading this, it strikes me as interesting how quickly we’ve gone from a situation where the government’s defenders were complaining about domestic malcontents and pointing to increasingly receptive audiences overseas to one where the exact same people are blaming the international press for our problems on the grounds that they don’t understand the situation as well as those who are living here.
AIB have (finally!) sold their 70% stake in Polish bank Bank Zachodni for €3.1 billion (press release here). The bank reports that the disposal
will generate c. €2.5bn of equivalent equity tier 1 capital towards meeting AIB’s Prudential Capital Assessment Review requirement set by the Irish Financial Regulator.
As I understand it, there are two elements to this €2.5 billion figure.
Page 225 of the bank’s 2009 annual report states
The market value at 31 December 2009 of the shareholding in BZWBK S.A. of €1.5 billion (2008: €1.3 billion) exceeds the carrying amount including goodwill of the investment by €0.09 billion
In other words, the stake in Bank Zachodni was valued at €1.4 billion on AIB’s balance sheet. So AIB has sold this asset for €1.7 billion more than this carrying value, triggering a corresponding increase in the bank’s equity.
In addition, because the Polish bank’s balance sheet was integrated into AIB’s consolidated balance sheet, the disposal allows AIB to deduct €10 billion from its risk-weighted assets (see page 35 of the 2009 annual report). With a target Tier 1 equity ratio of 8%, this implies a reduction of €800 million in the amount of equity the bank is required to have to meet its target (this is the part of the general Honey I Shrunk the Bank survival strategy). Added to the €1.7 billion gain on the sale, you arrive at the €2.5 billion figure.
This is a positive outcome but it’s not too far ahead of expectations as I understood them. For instance, a nice analysis from Barclay’s Capital a few months ago assumed the sale would generate a profit of €1.3 billion, which would put this €400 million ahead of that. The Barcap analysis foresaw the bank converting €3.3 billion of its €3.5 billion in preference shares into common equity, with the state then having €3.3 billion of €5.5 billion in common equity for a 60 percent ownership stake.
Keeping everything else unchanged, the additional €400 million from today’s sale would see the state converting €2.9 billion to common equity, which would still see it having a 53 percent stake (2.9 / 5.5 = 0.53).
Of course, the baseline 60 percent stake of that analysis may have been a bit low (others have been more pessimistic) and there’s lots of other moving parts to this analysis. However, today was a step in the right direction for AIB in its quest for the ultimate prize: 49.999% state ownership.
The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here (click on 27.09.2010). They focus on a range of interesting questions provoked by the sovereign debt crisis, such as what follows after the current bailout funds expire in 3 years and how to reform and implement the Stability and Growth Pact.