Encashment of NAMA bonds by banks

ifconfig

This is an area I am still a bit unclear about.

Let's take it as a given that the NAMA bonds can be exchanged with ECB for repo financing at a low/extremely competitive rate (from the banks standpoint)
The government line seems to be that there is an inbuilt incentive for the banks to lend on the cash received from ECB (at a profit) to worthy business folk.

The bonds are meant to address liquidity into the banks since the banks are having such a hard time raising liquidity from wholesale interbank loans due to the credit crisis and also their downgraded credit ratings, etc.

Some commentators have observed that the banks may prefer instead to sit on these bonds (or do they mean the cash advanced from ECB)?

My basic question is ... can the banks use the liquid funds released by using these bonds as collateral with ECB to merely add them to their balance sheets or can they use them to fund the writedowns on the loans which were purchased from them by NAMA.

In other words - is there muddying of the waters possible so that funds intended to inject liquidity into the banks could be used to wipe out the developer loan writedowns ?

Or, is it only via conventionally provided capital (eg further state equity ownership or rights issues by the banks) that they can boost up their capital base ?

--Ian

ashleey

The cash doesn't go into capital reserves. The cash is like giving a clothes shop a load of shirts to sell. If they sell them on for more than they paid then that profit can go into reserves to pay off their losses from earlier loans as they arise. They may lend on the new supplies of cash to try and make a profit or they might use it to pay back their own loans if they feel that would be a better use. I don't think they'll be going mad lending for jeeps and 'investment' properties like before.

Économiste Monétaire

It's a collateralised loan, i.e. the money has to be repaid to the central bank. The bonds are just eligible collateral in the refinancing process, they could use other securities in the process, so this isn't a unique process/facility to the NAMA bonds. The NAMA bonds will have a lower risk weight than the previous developer loans so that improves their risk-adjusted capital ratios, but they will take a hit on the transfer that will diminish the overall capital base. About the only way the ECB money could influence their capital position would be through reserves, e.g. the bank taking that 1% money they borrow from the central bank and investing it in, for example, 5% government debt.

ifconfig

Économiste Monétaire wrote: »

It's a collateralised loan,....
About the only way the ECB money could influence their capital position would be through reserves, e.g. the bank taking that 1% money they borrow from the central bank and investing it in, for example, 5% government debt.

Thanks for that EM, I was aware of the collateralised loan mechanism.
Reinvesting it in higher yielding government bonds sounds like an abuse of the scheme to me. Is it technically ? Are there any oversights there to ensure they don't do this.

It would seem that , if they were to do this, it would generate some kind of negative feedback loop which would backfire if not on the banks then, on the state ?

Would you say that they would see any incentive in doing this ?


Also - what's your guess on the maturity of the bonds. There's a load of contradictory info around about the bonds being 6months or 10 yr maturity dated bonds. It seems certain that the coupon resets every 6mths but the maturity of the bonds seems to be still guesswork and seems to me that the fact it wasn't officially disclosed (given how central the funding of NAMA is as a concern to the taxpayer) that there is something troubling about why there is an info vaccum on that.

Économiste Monétaire

ifconfig wrote: »

Thanks for that EM, I was aware of the collateralised loan mechanism.
Reinvesting it in higher yielding government bonds sounds like an abuse of the scheme to me. Is it technically ? Are there any oversights there to ensure they don't do this.

It would seem that , if they were to do this, it would generate some kind of negative feedback loop which would backfire if not on the banks then, on the state ?

Would you say that they would see any incentive in doing this ?


Also - what's your guess on the maturity of the bonds. There's a load of contradictory info around about the bonds being 6months or 10 yr maturity dated bonds. It seems certain that the coupon resets every 6mths but the maturity of the bonds seems to be still guesswork and seems to me that the fact it wasn't officially disclosed (given how central the funding of NAMA is as a concern to the taxpayer) that there is something troubling about why there is an info vaccum on that.

Well, my example was mostly for illustration, but it's difficult to prohibit exactly what part of the overall banks' funding goes to finance what (from a regulator's perspective)—one metric is mortgage lending relative to residential deposits, the amount of fixed rate debt issued, etc. But, when you're looking at the aggregate balance sheets of the main mortgage lenders, they do have positions in government bonds (both here and abroad) and debt issued by other banks: about €42bn in total—and that's small when you consider their assets come in at €735bn.

I believe there is a rule on what they can (read: should) do with the weekly auctions (prior to the crisis, this was the main lending mechanism of the central bank), but the longer-term lending is up-in-the-air. In June, the Eurosystem had the first one-year repo, and that came in at €442bn, from the date of 28th August, the Irish central bank had €87bn in longer-term lending outstanding (30 days to one-year). This mirrors what happened during the South American debt crisis, from my understanding: banks were allowed to borrow cheap and reap a 'fat spread' to help improve their balance sheets.

Banks usually buy at the short end of the yield curve; the central bank gives that a very low discount when it's used as collateral. The return on this isn't great and it would probably be better for the bank to lend the money to Joe Sixpack. The demand for lending isn't really there, so there are supply side issues (banks tightening lending conditions) and demand side issues (an over-leveraged private sector). The more money they make from doing what's described above (plus a bit more risky ventures, maybe ventures into forex and such), the less the taxpayer will have to invest, so you could describe it as an abuse of the system or a deliberate policy approach :pac:.

On the length of the NAMA bonds, I don't know. The Minister said they would be 'renewable' every 6 months, and that could mean either of the scenarios you outlined. It's probably long-dated debt with interest resets every 6 months, but we'll have to wait for the DoF to clarify this.

ashleey

It all has a whiff of the infamous 'yen carry trade' where investment banks were borrowing in yen (at their low rates) and 'investing' in dollars but later in wilder higher yielding currencies like the iceland krona. It wasn't a free lunch and the currency collapse in Iceland, where the inflows were recycled into property and to further afield (retail brands in UK, also devalued) was another factor in exposing the leverage of our high street banks. A move in ECB official rates could do the same to this 'NAMA' trade of an attempt at interest rate arbitrage.

ifconfig

I see on Constantin Gurdgiev's blog, TrueEconomics he has illuminated how bad a deal those bonds are.
He is going on the assumption that they are 1.5% above ECB base bearing 6 months maturity.