The Irish Times today reports on a phenomenon that others have speculated about for some time – borrowers are placing property on the market at levels designed to repel potential buyers with the banks’ intention that they can defer recognising a loss in their books and with the borrowers’ hope that placing the property on the market will placate the bank and both sets of parties hoping to buy time until there is some recovery in the market.
The Irish Times is reporting an analysis by Property Week which apparently showed that “some of the properties owned by property investors were advertised to give the impression to their bankers that they were “trying to get their finances in order”.”
It would not take long to peruse a multiple property listings website like DAFT.ie or myhome.ie to see examples of property, particularly in estates, where the asking prices are completely out of kilter with neighbouring properties.
And so what if this little game is being played out when both parties know the reality? If it can be shown that AIB, BoI, Anglo, INBS and EBS are using the €25bn injections from the State to avoid doing what they would have done in the normal course of business, then those institutions risk action under competition legislation. And in the normal course of business, when cash gets tight you sell assets. Even the EU’s impaired asset relief for banks guidelines (IP/09/322) require
- full transparency and disclosure of impairments, which has to be done prior to government intervention; [not done in relation to non-NAMA loans]
- coordinated approach to the identification of assets eligible for asset relief measures through development of eligible categories of assets (“baskets”); [not done, banks are not writing down non-NAMA loans by any significant amount]
- coordinated approach to valuation of assets ex-ante, based on common principles such as valuation based on real economic value (rather than market value), implemented by independent experts and certified by bank supervisors, [certainly not done]
- validation by the Commission of the valuation of the assets, in the framework of the State aid procedures on the basis of uniform assessment criteria; [not done]
- adequate burden-sharing of the costs related to impaired asset between the shareholders, the creditors and the State, [not done]
- adequate remuneration for the State, at least equivalent to the remuneration of State capital [on paper done in respect of AIB and BoI, no chance with Anglo, INBS and EBS]
- coverage of the losses incurred from the valuation of the assets at real-economic-value by the bank benefiting from the scheme [no done because banks are not valuing at “real-economic-value”]
- aligning incentives for banks to participate in asset relief with public policy objectives, through an enrolment window limited to six months during which the banks would be able to come forward with impaired assets; [how can it be in the wider economic interest to artificially distort an important market which is still likely to drop for the next 1-2 years]
- management of assets subject to relief so as to avoid conflicts of interests; [because non-NAMA assets are not on the State’s radar there is no management or co-ordination of policy]
- appropriate restructuring including measures to remedy competition distortion, following a case by case assessment and taking into account the total aid received through recapitalisation, guarantees or asset relief, with a view to the long-term viability and normal functioning of the European banking industry. [recaps and injections are not taking into account true losses on non-NAMA borrowings, the Financial Regulator may brandish a stick at the banks but there is strong anecdotal evidence, eg the Irish Times story above, that banks are just not listening]
In a nutshell, if banks are avoiding recognising losses on smallscale developments and property investment (the assumption is that with the NAMA institutions, the larger exposures are moving to NAMA) and are effectively colluding with borrowers to defer the realisation of losses and those banks are in receipt of State-aid, then on the face of it they are acting anti-competitively and are not covered by the EU’s special Impaired Asset Scheme rules.