Commission Approves NAMA

I guess the news that the Commission has approved NAMA (statement here) will get some attention over the next few days but it’s hardly too surprising. EU guidelines allow governments to introduce an asset management agency of this type and it’s very hard to imagine that the Department of Finance had designed something that wasn’t guaranteed to get approved. However, as I’ve noted before, if you read those guidelines closely, they also suggest that the Commission isn’t in favour of packages that are overly friendly to providers of risk capital.  For instance, the guidelines state

(21) As a general principle, banks ought to bear the losses associated with impaired assets to the maximum extent …

(22) Once assets have been properly evaluated and losses are correctly identified, and if this would lead to a situation of technical insolvency without State intervention, the bank should be put either into administration or be orderly wound up, according to Community and national law. In such a situation, with a view to preserving financial stability and confidence, protection or guarantees to bondholders may be appropriate.

(23) Where putting a bank into administration or its orderly winding up appears unadvisable for reasons of financial stability, aid in the form of guarantee or asset purchase, limited to the strict minimum, could be awarded to banks so that they may continue to operate for the period necessary to allow to devise a plan for either restructuring or orderly winding-up. In such cases, shareholders should also be expected to bear losses at least until the regulatory limits of capital adequacy are reached. Nationalisation options may also be considered.

The relatively tough line suggested by these statements has been evident in the Commission’s rulings on payments to subordinated bonds and on various restructuring plans. This approach undoubtedly limits the government’s ability to overpay for the assets going into NAMA and with the assets falling in price with every passing month, the opportunity to keep the banks from actual or near insolvency via overpayment seems to be slipping away.

In my exchanges with our old friend John the Optimist, I have regularly pointed out economists shouldn’t necessarily be judged on their forecasts and I certainly have made calls here that have turned out to be incorrect. However, I will take this opportunity to point out that tomorrow is the one year anniversary of this column that I wrote for the Irish Times. Among other things which I’d still stand by, the column pointed out the following:

In addition to being unfair, it is questionable whether the bad bank proposal could achieve its goal of properly re-capitalising private sector banks. There may be limits on the price the Government can pay for impaired property loans under EU state aid rules. Banks may still have to write down their assets. It is easy to imagine a scenario where banks struggled with weak capital bases even after a bad bank scheme has been put in place.

And here we are.

Eugene Regan’s NAMA Submission to EU

As many of you may have heard, Fine Gael’s Senator Eugene Regan (who’s been having a busy few weeks) submitted a formal complaint about NAMA to the European Commission in January. Last week, Regan followed this up by submitting a detailed discussion of how the NAMA legislation is inconsistent with the EU’s guidelines on impaired asset schemes. The detailed document is here and the summary is here.

Government Banking Policy Based on Best International Advice?

The Taoiseach has emerged to defend the government’s banking proposals. He has been reported as saying:

The proposal we have brought forward is on the basis of the best international advice, including the European Commission and the International Monetary Fund, and we are doing this in consultation with the European Central Bank.

Invoking international support for their approach has been a key element in the government’s PR strategy in recent months. However, these comments seem to me to confuse the actual roles being played by the various international organisations referred to.

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Long-Term Economic Value

It is clear that when the NAMA legislation is published later today, there will be a lot of focus on the question of long-term economic value and the European Commission’s guidelines for pricing assets transferred to government asset management agencies.

I have written about this issue before and don’t want to repeat myself. However, I’d like to emphasise two issues.

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Market versus Economic Values

When the NAMA Project was announced, Peter Bacon discussed the pricing process as follows on Morning Ireland:

Peter Bacon: It will be set by reference to the market. The market, as you know, has fallen dramatically. And I think people have overestimated the difficulties in estimating what these market values are.

John Murray: At the moment there is no market.

Peter Bacon: Well, there is a market.

John Murray: Nothing is selling.

Peter Bacon: For example, in the residential sector, you have monthly indices telling us how house prices have fallen by 1.4% to whatever level. We have information about yields on commercial properties moving out to 8%. I think a lot of people are saying “well, there’s no market” but really what they’re saying is “we don’t like the answer that’s there.”

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NAMA, EU Guidelines and Pricing of Assets

My previous post discussed the price that our new National Asset Management Agency (NAMA) could pay for impaired loans from the perspective of how much of a loss relative to book value the banks could take under the assumption that the government didn’t invest more than its €7 billion planned re-capitalisation. The answer was that the discount from book value would have to pretty small relative to the figures being widely quoted for likely losses.

Admittedly, this was a bit of an around-the-houses way of warming up to the NAMA discussion and Patrick was completely correct in his comment that the key sentence in the speech was

If the crystallisation of losses at any institution requires additional capital the State will insist on participation by way of ordinary shares in the relevant institution.

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ECB on Asset Support Schemes

The ECB released what looks to me like an important document on Friday.  In response to a February 26 Communication from the European Commission,  it sets out the ECB’s recommended guidelines on “asset support schemes”, i.e. over-priced purchases of impaired assets by the state or under-priced state insurance of these assets.  I have described my objections to these proposals a number of times and won’t go into them again here.  A quick look at the ECB document didn’t reveal anything that made me more convinced of the merits of these proposals (though I may report back after I’ve had a bit more time to read the document in detail).

In the Irish context, my concern is that the EU and ECB documents seem likely to convince the government that these schemes should be pursued.  However, there are other ways to go about dealing with our banking problems and a broader debate needs to be had than simply focusing on the details of how asset support schemes should be implemented.