Nama will not put banks in position to lend more

Amhran Nua

Karl Whelan on how NAMA will not achieve its intended purpose - even the banks say so.

AMID THE controversies generated by the debate over the National Asset Management Agency (Nama), the key position of supporters of the Government’s approach could be summarised in one sentence: Nama would get credit flowing, writes KARL WHELAN

The Government repeatedly assured us the banks would use bonds given to them by Nama to secure loans from the European Central Bank (ECB), and these funds would be lent to Irish businesses and households.

The truth is that Nama was never likely to get credit flowing, and this has now been confirmed by the recent appearances of AIB and Bank of Ireland executives before an Oireachtas committee.

Despite the Government’s consistent claims that the banks were going to take the Nama bonds to the ECB as security for loans, it was clear before the Bill had even passed that this was never likely to happen. The Irish banks were already heavily indebted to the ECB, which had begun warning banks that they should not be dependent on it for funding.

For instance, in September ECB executive board member Jurgen Stark said the ECB’s lending “was not designed to counter funding problems at the individual bank level” – a strong hint that Irish banks needed to get ready to reduce, rather than increase, their reliance on ECB borrowing.

Rather than convey this reality, however, Government politicians repeatedly gave the impression Nama was a brilliant wheeze to get cheap European money flowing into Ireland.

According to Minister John Gormley, Nama was “about injecting a stimulus into the Irish economy through a very good deal with the ECB”. The truth is there was no such deal: the ECB did not change its procedures by one jot to accommodate Nama; nor did the Nama legislation contain anything that required banks to borrow from the ECB and lend out those funds to Irish businesses.

Unfortunately, the Government’s fondness for its “cheap ECB money” sound-bite meant that the truth was rarely allowed get in the way. To cite just two of the many instances of how the ECB’s role in relation to Nama became grossly distorted, Fianna Fáil TD Seán Fleming told RTÉ that “the taxpayer is not contributing any of this money . . . The European Central Bank is providing all the money”; and Minister Willie O’Dea informed listeners to RTÉ Radio One’s Morning Ireland that “the ECB has agreed to give Nama money” when in fact no such transaction will ever occur.

The fact that there will be little or no flow of ECB-provided credit was confirmed, albeit highly reluctantly, by the bank executives themselves at their Oireachtas appearance.

So what this means is that the point of NAMA, to get credit flowing and restore liquidity to the economy, will almost certainly never happen. You mean we can't use ECB money as collateral to borrow ECB money? We'll still have to repay it with interest though.

herya

The truth is that Nama was never likely to get credit flowing, and this has now been confirmed by the recent appearances of AIB and Bank of Ireland executives before an Oireachtas committee.

Great, can we scrap it now?...

whatnext

Look around you. If you were a bank for arguments sake, can you think of ten businesses that you deal with that you would lend money to in this environment?

I had this conversation with a few colleagues and of all the companies we work with there is only 1 that we would loan to, based on what we know of their current trading conditions.

Unfortunately it was a supplier not a client:eek:

I really think we have to look at some form of government backed bond for the lending institutions. with this being tied to the company directors personally and in perpetuity( or till the loan was honoured), as an indication of their belief in their ability to pay loans back.
The cost of this bond would then have to be recovered from a secondary tax charge on the company over say a 10 year period. This is on top of the loan repayments of course.

I'm not smart enough to figure out how this could work in reality but I'm sure that their is something that could be worked on.

But to expect the banks to just start handing out money to people is mindeless, and could only make things even worse, I think.

nesf

I thought the justification for the need of NAMA was to make it easier for Irish banks to source external funding by reducing their exposure to the Irish property crash?

The whole credit for businesses thing follows from this per se.

Amhran Nua

whatnext wrote: »

Look around you. If you were a bank for arguments sake, can you think of ten businesses that you deal with that you would lend money to in this environment?

Why do we need the banks at all then? Lets just scrap them, save the domestic and business deposits, and move on.

whatnext wrote: »

I really think we have to look at some form of government backed bond for the lending institutions. with this being tied to the company directors personally and in perpetuity( or till the loan was honoured), as an indication of their belief in their ability to pay loans back.

That would just transfer the responsibility for collecting overdue loans to the taxpayer, not the banks.

nesf wrote: »

I thought the justification for the need of NAMA was to make it easier for Irish banks to source external funding by reducing their exposure to the Irish property crash?

The whole credit for businesses thing follows from this per se.

A bit more from the article:

AIB’s Eugene Sheehy, a Latin scholar it seems, argued that “banks should be de minimis in their reliance on central banks”. When questioned by Kieran O’Donnell TD as to whether his bank was going to use the Nama bonds to get loans from the ECB, Sheehy repeatedly declined to say that this was planned.

The bankers, it turned out, had a completely different story from the manna-from-ECB line that the Government had spent months peddling. By removing bad property loans from the banks – passing them on to the taxpayer instead – the bankers argued Nama would make them appear less risky and might reduce their cost of borrowing. These reduced costs might be passed on to Irish businesses in a “trickle down” process, although Sheehy conceded it would be disingenuous to lead people to believe the “funding premium” for Irish banks would be reduced.

The bankers also declined to say that Nama would loosen up credit in the future because, apparently, they are not restricting credit at present so there isn’t anything to loosen up.

In other words, Nama won’t result in extra lending, nor is there any promise of cheaper lending.

Since the Oireachtas appearance, there has been further evidence that the Nama-bonds-for-ECB-loans plan was never likely to work. The ECB has signalled it will be unwinding its extensive lending to European banks. And ECB president Jean-Claude Trichet has told the European Parliament that he wanted “to avoid a situation in which banks are heavily dependent on exceptional central bank financing” and that troubled banks needed to “restructure their balance sheets through recapitalisation”.

Far from being a source of increased credit for Ireland, the ECB has become another source of pressure on Irish banks to get their houses in order to a point where private lenders believe they are well capitalised. Nama is not going to achieve that goal.

The Government plans that Nama will overpay the banks for their property loan portfolios relative to their market value. However, with the EU Commission keeping a watchful eye over how much State assistance is being provided through Nama, extensive writedowns will still be applied to the transferred assets of Bank of Ireland and AIB.

The result is that, despite the Government’s consistent extolling of Nama as a solution to our banking problems, our main banks will be significantly undercapitalised after the scheme has come into operation.

Banks that are undercapitalised are not in position to increase their lending – indeed, they may be forbidden from doing so by financial regulators – so getting the Irish banks fully recapitalised must be the principal goal of our banking policy. Unfortunately, a Government that consistently misled the public about Nama is not in a good position to convince people that further hard work is required to fix the banking sector.

It does rather lead one to the conclusion that we should be looking at alternatives to NAMA, not just in function but in purpose.

whatnext

Amhran Nua wrote: »

Why do we need the banks at all then? Lets just scrap them, save the domestic and business deposits, and move on.


That would just transfer the responsibility for collecting overdue loans to the taxpayer, not the banks.


A bit more from the article:

It does rather lead one to the conclusion that we should be looking at alternatives to NAMA, not just in function but in purpose.

I was trying to point out that a lot of the compamies that "I know" would be judged as very high risk, and therefore "I believe" the true cost of the finance would be prohibitive. Risk v Reward

What I was thinking about the bond is like an insurance policy. Like the local authorities were supposed to get off developers but didn't, its a kind of insurance policy against default. There are companies out ther that do these things, LLoyds for example.

There is an irony out there in that because the banks were so wreckless and unregulated (even though someone was being paid to do it) their share value was so over inflated that the were never swollowed up by the big international players. If it wasn't for that we would be in a hell of a lot more trouble. At least we have some (limited) over our destiny, and its not the decision of a banker in NY or London.

But as I said, I am no expert in this area, its only an observation based on noting but reading.

Amhran Nua

whatnext wrote: »

There is an irony out there in that because the banks were so wreckless and unregulated

I don't think insuring their lending will make them less reckless though. If this insurance were to be given the government may as well start lending directly to businesses, which might not be such a bad idea. What the country needs is significant top down investment in growth industries, a direction chosen and followed to wean us off the construction business, legislation put in place to pave the way, and a leathery neck to see through cries of uncompetitive practice from countries who did the exact same thing before they put in legislation to prevent it.

population

Everyone knew it was a scam and yet did nothing.

Horse has bolted. End of

johnnyskeleton

nesf wrote: »

I thought the justification for the need of NAMA was to make it easier for Irish banks to source external funding by reducing their exposure to the Irish property crash?

The whole credit for businesses thing follows from this per se.

But what's actually going to happen is that the banks will use it to reduce their loan books & borrowings (i.e. instead of having €100bn loans and €100bn deposits they will have €60bn loans and €60bn deposits). They will possibly do this at a loss (e.g. sell €1 NAMA bond for 80c). They will not have an increased capital position because they cannot use NAMA bonds for capital. They will effectively become ultra conservative and try to consolidate their position. In 10 years time, they might start lending again.

nesf

johnnyskeleton wrote: »

But what's actually going to happen is that the banks will use it to reduce their loan books & borrowings (i.e. instead of having €100bn loans and €100bn deposits they will have €60bn loans and €60bn deposits). They will possibly do this at a loss (e.g. sell €1 NAMA bond for 80c). They will not have an increased capital position because they cannot use NAMA bonds for capital. They will effectively become ultra conservative and try to consolidate their position. In 10 years time, they might start lending again.

Got any justification for any of that?

seclachi

Amhran Nua wrote: »

Why do we need the banks at all then? Lets just scrap them, save the domestic and business deposits, and move on.

And how would that work then ? Tell all the overseas investors to get lost when they come looking for there money ? I`m fairly sure it would instantly tank our credit rating and reputation. Its not that simple either way, would you not pay more money trying to sort out the insuing mess and covering the banks debts rather than just keeping them going and letting the banks gradually sort things out ?

I`m no fan of the banks by any means, but letting them all die would be most foolish option.

Mr.Micro

johnnyskeleton wrote: »

But what's actually going to happen is that the banks will use it to reduce their loan books & borrowings (i.e. instead of having €100bn loans and €100bn deposits they will have €60bn loans and €60bn deposits). They will possibly do this at a loss (e.g. sell €1 NAMA bond for 80c). They will not have an increased capital position because they cannot use NAMA bonds for capital. They will effectively become ultra conservative and try to consolidate their position. In 10 years time, they might start lending again.

They will certainly be looking to get their books in order and be conservative in lending but will have an eye on what the US banks do as well. Ordinarily they would have gone to the wall for their negligent incompetence and know now that they are in a position to consolidate themselves and look after number 1.

Amhran Nua

seclachi wrote: »

And how would that work then ? Tell all the overseas investors to get lost when they come looking for there money ?

The shareholders are already wiped out, the bondholders are meant to be experienced investors who know the risks going in. The banks probably have sufficient assets in their mortgage retail books to cover the deposits and possibly enough left over to offer a lower price to investors, which they would take.

seclachi wrote: »

I`m fairly sure it would instantly tank our credit rating and reputation. Its not that simple either way, would you not pay more money trying to sort out the insuing mess and covering the banks debts rather than just keeping them going and letting the banks gradually sort things out ?

Not really, since we wouldn't be trying to run an immensely profitable business, but rather make finance function to further the economic growth of the country.

whatnext

Amhran Nua wrote: »

I don't think insuring their lending will make them less reckless though. If this insurance were to be given the government may as well start lending directly to businesses, which might not be such a bad idea. What the country needs is significant top down investment in growth industries, a direction chosen and followed to wean us off the construction business, legislation put in place to pave the way, and a leathery neck to see through cries of uncompetitive practice from countries who did the exact same thing before they put in legislation to prevent it.

Point of note here.

If your going to quote me at least quote the whole sentence, not just a selective part like a tabloid journalist or a bearded union mupet, debating in this manner is waste of time, and waste of my oxygen. We may or not agree, but you have lost all respect on the forum as far as i am concerned.:mad:

Amhran Nua

whatnext wrote: »

Point of note here.

If your going to quote me at least quote the whole sentence, not just a selective part like a tabloid journalist or a bearded union mupet, debating in this manner is waste of time, and waste of my oxygen. We may or not agree, but you have lost all respect on the forum as far as i am concerned.:mad:

The insurance of banking loans would be counterproductive, I felt, and the best way to highlight that was via that snippet. The reasons why it would not be helpful were also explained.

I honestly have no idea why that would upset you.

johnnyskeleton

nesf wrote: »

Got any justification for any of that?

Do I have any justification for my prediction based on analysis of what has been said by the banks to the effect that NAMA will not result in any increased lending in the short term? No, not really, do you have any justification for your analysis?

silverharp

you also have to ask who wants to borrow?

ragg

Silly thread.

A Healthier balance sheet will allow banks to more freedom and will let them lend to slightly higher risk customers. At present they simply aren't lending if there is even the slightest risk - that's not how banks should operate

nesf

johnnyskeleton wrote: »

Do I have any justification for my prediction based on analysis of what has been said by the banks to the effect that NAMA will not result in any increased lending in the short term? No, not really, do you have any justification for your analysis?

Did I offer any analysis? I'm just curious if you're going to back up statements like "They will effectively become ultra conservative and try to consolidate their position. In 10 years time, they might start lending again." or whether it was mere assertion.

Flamed Diving

population wrote: »

Everyone knew it was a scam and yet did nothing.

What did you do? Apart from whinge on an internet forum?

johnnyskeleton

nesf wrote: »

Did I offer any analysis? I'm just curious if you're going to back up statements like "They will effectively become ultra conservative and try to consolidate their position. In 10 years time, they might start lending again." or whether it was mere assertion.

Well,

nesf wrote:

The whole credit for businesses thing follows from [NAMA making it easier to access external funding] per se.

is analysis to the effect that the purpose of NAMA is to make it easier for banks to access external funding and this will lead to increased credit for businesses.

I'm curious as to what you want me to back it up with? Should I perhaps travel forwards in time and obtain a future article which talks about how the banks failed to extend increased funding to businesses post NAMA? Or is it acceptable if I give links to an RTE article from which the banks' intentions can be inferred?

http://www.rte.ie/business/2009/1125/banks.html

I can no more prove that the banks will not increase lending post NAMA any more than you can prove that they will increase lending. My analysis is that it won't, as I explained above, and yours is that it will. If you want to question the specific asserts I made then I'm happy to discuss them with you, but I fail to see how I can "back up" such statements.

nesf

johnnyskeleton wrote: »

Well,

is analysis to the effect that the purpose of NAMA is to make it easier for banks to access external funding and this will lead to increased credit for businesses.

Nah, I was saying that was what I thought the stated intention of NAMA was. I didn't offer any analysis of the idea or agreement with it!

johnnyskeleton wrote: »

curious as to what you want me to back it up with? Should I perhaps travel forwards in time and obtain a future article which talks about how the banks failed to extend increased funding to businesses post NAMA? Or is it acceptable if I give links to an RTE article from which the banks' intentions can be inferred?

http://www.rte.ie/business/2009/1125/banks.html

I can no more prove that the banks will not increase lending post NAMA any more than you can prove that they will increase lending. My analysis is that it won't, as I explained above, and yours is that it will. If you want to question the specific asserts I made then I'm happy to discuss them with you, but I fail to see how I can "back up" such statements.

No, you misunderstand me.

I mean this. To predict 10 years of low credit availability one must make some assumptions about bank capitalisation over the period, market forces, the general economic situation and usually call on some previous event where this happened or theory to justify it to back it up. Otherwise it's unsupported and is just an assertion. There must be some attempt to model the financial system, in whatever simple a manner you want, in order to answer the question "how long will low credit availability persist for". Analysis presupposes some form of understanding being purported to explain what will happen. Otherwise we're just picking numbers out of our heads and might as well just go guess lotto numbers for the evening instead.

johnnyskeleton

nesf wrote: »

I mean this. To predict 10 years of low credit availability one must make some assumptions about bank capitalisation over the period, market forces, the general economic situation and usually call on some previous event where this happened or theory to justify it to back it up. Otherwise it's unsupported and is just an assertion. There must be some attempt to model the financial system, in whatever simple a manner you want, in order to answer the question "how long will low credit availability persist for". Analysis presupposes some form of understanding being purported to explain what will happen. Otherwise we're just picking numbers out of our heads and might as well just go guess lotto numbers for the evening instead.

Well first of all it is surely up to those who assert that NAMA will get lending going again to prove it. I find the tactic of throwing the onus onto the critics to a) disprove what they are saying and b) prove a better alternative to a higher standard to be a very poor method of debate.

Second of all, I think that to look at current trends (with up to date information now available here at p.5 in particular) and the statements of the heads of the banks (linked above and here's another one about BOI's focus on profits and provision for bad debts which implies they are also reducing their loan book) suggest that the banks are currently consolidating their position by increasing deposits and reducing debts without creating new loans. Effectively, the Central Bank report suggests, to me anyways, that the banks are reducing credit and sitting on the repayments. Surely if I look at current trends and extrapolate them gives us a reasonable picture of where we are heading?

I think that the banks will try to reduce their loan books by up to half, and increase their customer deposits to more or less the same level and trade at this level for a few years while slowly increasing the available credit. Effectively, a return to the more traditional model of banking rather than the form of banking which relies on cheap easy credit from abroad and rising asset prices to make even the most risky loan seem a dead cert.

However, I'll look at the issues you raised:

Bank capitalisation over the period
Well, some of the banks are indicating that they intend to increase their capital ratios, as they should. The banks will have a difficult time recapitalising. If the government follow through on their plan to convert their preference shares into ordinary shares (link) then this will seriously hamper any potential rights issue or other attempts to raise capital privately as the banks will be mostly nationalised and the ordinary share capital will IMO be too diluted with government shares to be any sort of decent investment.

Once NAMA is fully implimented it will be an instant loss to the banks, wiping out their bad debt provisions and eating into reserves. The trading loss arising from NAMA will also reduce interest in investment in the banks, further impeding recapitalisation as above.

So over the short to medium term, capital will have to come from the state, and they tend not to do a very good job at these things, so nationalisation could well be on the cards for AIB/BOI. Following the example of Anglo (see for example here and here) if nationalised they will stop lending, borrowers will be more inclined to keep up repayments and the need for capital increases at an alarming rate. While Anglo was the worst of the banks in terms of reckless lending, AIB and BOI weren't all that far behind.

A further consideration is, while not strictly speaking a capitalisation issue, ECB lending. The ECB has been providing emergency funding on a more stable basis for the last few years because of the banking crisis. JCT has indicated that the ECB will withdraw funding starting next year. I can't find the link right now, but PTSB has approximately €9bn borrowed from the ECB, and I'm sure the other banks have similar amounts. These loans will have to be replaced with private capital which will be difficult and expensive, and this will IMO create a greater need for a higher tier 1 capital requirement if the banks are to return to profitability/normal trading conditions.

Market forces
Again relying on the Central Bank's report above and a number of articles/commentaries suggesting that savings rates are increasing (e.g. here) suggest that the demand for credit is diminishing. People are not buying houses, cars or luxury goods on credit as much as they used to and are instead paying off debts or saving. I don't necessarily agree with the commentary which suggests that overall savings are increasing/debts decreasing as much of the macro economic effect is caused by institutional deposits and debt writedowns but the sentiment is important. The increase in poor credit hisory/excess borrowing and higher standards for lending, mean that the pool of people willing and able to obtain credit from the banks has diminished dramatically, and those who have good credit ratings, no borrowings and meet the bank's increased standards (e.g. greater job security) are becoming more prudent as well. While it is hard to find impirical evidence for this, I am not alone in saying it.

General economic situation
This can only really be dealt with in very broad terms. The general economic situation for the next 5-10 years is bleak. There is no viable plan to encourage job creation (smart economy and green ifsc are buzzwords with no real substance; green manufacturing is possible but in order to compete with the germans we need to have massive reductions in wages and the cost of living; multinationals are shaky and our tax haven status is being targeted from the US and the EU; construction is dead, etc) and we are starting to see net migration from Ireland (anecdotally skilled and professional workers). The government is currently spending almost twice as much as it takes in and this will have to end. We are no longer a net recipient of EU aid and are a net contributor. Our economy for the last few years has been based on the FIRE economy - basically getting rich by selling houses and foreign made goods to each other while investing in the banks that allowed us to spend so much so recklessly.

some previous event
Japan. An obvious example but a good example. There demand for credit was destroyed and the banks simply sat on deposits while trying to hopefully reclaim something on the bad debts of their debt-fulled boom. The wikipedia article suggests this lasted to 2000 but some say that the Japanese banks are still in this situation, having regained late 1980s house prices in 2006, only to see them plummet again later that year.

Timescale
I'm not saying that this is definately going to happen, but if things remain as they are without some serious economic intervention then we will see the banks slowly increase their customer deposit:loan ratio as international/ECB/capital funding dries up or becomes unsuitable and they adopt very conservative lending criteria. Morgan Kelly has suggested that this will continue until 2015. Even the government cannot realistically stand over their assertions that by 2015 the economy will have turned a corner and there will be full employment and balanced government books etc. After 2015 it becomes harder to predict - after all, the premise of all the above is that America, the EU or some other benign superpower doesn't suddently decide to give a bailout to the Irish people by locating loss making factories here to provide jobs, payments to the government to balance the books, and debt forgiveness to the banks.

If such does happen then of course it's back to happy days look at me I'm a property millionaire etc, but I think we can safely say that what little chance there is of that happening should not be relied upon: if it happens it's a bonus but we should be realistic and at least try to get ourselves out of this mess on a more solid basis that hoping things will get better soon.