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« EU approves NAMA Tranche 2 valuations
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“A toxic bank by any other name is still a toxic bank” – the banks after the bailout

November 30, 2010 by namawinelake

Somewhere in one of the secondary school poetry books is a couple of poems by Robert Frost – “Stopping by woods on a snowy evening” and “The Road not taken”. Other than an anthology by Seamus Heaney, the only other poetry book I paid money for as an adult was a Robert Frost collection and I must say that the editor of our school books probably picked out the best two examples of the man’s life work. But another simpler poem by Mr Frost was about the rose and from recollection it goes

“A rose is a rose
And has always been a rose
But the theory now goes
That the apple’s a rose
And the pear, and the plum
I suppose
The dear only knows
What next will be a rose,
And then, you
You are a rose
But then again, you have always
Been a Rose”

The poem was apparently about some botanical debate about whether apples, pears and plum plants were part of the rose family. I think the poem was simply called “A rose” but a better title might have been that phrase from Romeo and Juliet “a rose by any other name” and I am reminded of it this morning as yesterday’s news that Anglo Irish Bank Corporation (Anglo) is to change its name within weeks, pass its deposit book which was worth €33bn in June 2010 (or indeed sell? why not, after all if Anglo is paying depositors from 1.5% and given the cost and difficulties in accessing money market funding, the deposits might have some value) and will rebrand its €38bn residual loan book under a different name which according to Anglo Chairman, Alan Dukes speaking on RTE radio this morning, will be run down over a period of years. It seems from Irish Times reporting that Anglo’s loanbook will “conceivably” be combined with INBS’s loanbook and that there is to be a v4.0 restructuring plan (v1.0 in November 2009 was rejected out of hand by the EC, v2.0 in May 2010 was rejected in early September 2010 despite Brian Lenihan making personal entreaties to Competition Commissioner Joaquin Almunia in Brussels and v3.0 was reportedly submitted to the EC “the last week of October 2010” – let’s hope v4.0 is a charmer!). The media seemed obsessed yesterday with the change of name as if taking a sledgehammer to the signs on the bank building will obliterate the toxicity of the loans and derivatives that will remain in the rebranded bank (€38bn alone from Anglo).

Despite the flurry of activity with Anglo in the last couple of days, that bank did not feature in the awkwardly-worded release from the Central Bank on Sunday night which accompanied the announcement of the bailout. The press release dealt with Allied Irish Banks (AIB), Bank of Ireland (BoI), EBS and Irish Life and Permanent (ILP – parent to Permanent TSB) and announced a further €10bn injection into these four financial institutions – €8bn in capital injections and a further €2bn in “early measures to support deleveraging” – a total of €10bn. The wider bailout announcement made clear that another €25bn would be available as a contingency.

Of the €8bn in capital injections, €5.265bn is to go to AIB, €2.199bn to BoI, €0.438bn to EBS and €0.098bn to ILP which will lead to all four institutions having a Core Tier 1 capital cover of 12.5-14.0%. AIB, BoI and EBS have another three months to 28th February, 2011 and ILP has six months to 31st May, 2011, to put the additional capital in place. At this stage it is not clear to what extent the State will need make up to €8bn available and to what extent the capital can be raised privately through a rights issue or disposal of assets. There was no indication which banks would be the beneficiaries of the €2bn in “deleveraging support”

The announcement from the Central Bank was dreadful in that there was little information or rationale for the details in the announcement which also announced that AIB and BoI would now transfer €0-20bn land and development loan exposures to NAMA, a volteface on the decision announced on 30th September, 2010 to allow those two banks to keep €5-20m exposures because it was more “effective and efficient”. Why is AIB’s Core Tier 1 capital to go to 14%? How safe are credit unions in the State which are to be subjected to stricter rules in 2011 – “A significant strengthening of the regulation and stability of the credit union sector will be carried out by end-2011.” And in the interview with Governor of the Central Bank on RTE yesterday, of course no-one asked for a rationale though it seems that Patrick himself wasn’t in favour of the capital injections. Bizarre and confused and doesn’t inspire confidence.

And speaking of inspiring confidence, it seems that after the Prudential Capital Assessment Review announced in March 2010 and updated in September 2010, there is to be another PCAR undertaken by 31st March 2011 and this time there will be a review of loan provisions by (a) the Central Bank and (b) an “independent third party”– you’d have to ask if that is to be the same unidentified “independent consultants” which informed the predicted loss levels on 30th September, 2010. It was disappointing in the extreme to hear the Financial Regulator, Matthew Elderfield, last week outline future examination of non-NAMA loans at the banks at a “granular level” – why the blazes has this not happened already? NAMA uncovered atrocious lending practices and documentation on a loan-by-loan basis, why has this regime of independently verifying non-NAMA loans not already taken place? The Irish Times today reports that an “independent assessment of the new financial regulator will also take place to ensure that international best practice is being followed”.

The immediate reaction of the stock market to the announcement on Sunday night was very positive – shares in the three State-guaranteed banks not in 100% State-ownership recorded major gains yesterday with Allied Irish Banks up €0.02 (6%) to €0.362, Bank of Ireland up €0.05 (17%) to €0.31 and Irish Life and Permanent up €0.30 (58%) at €0.81. The markets seem to have formed the view that ILP will be able to raise its own capital by May 2011 without recourse to the State which might have brought that institution into majority State control.

So where does the announcement on Sunday leave the six State-guaranteed banks?

(1) AIB – still 18.6% State-owned today and likely to be 100% nationalised
(2) BoI – still 36.5% State-owned today and if the €2.199bn is to come from the State, the State will own over 70% of BoI. If the €214m preference share dividend due by BoI to the NPRF in February 2011 is paid in ordinary shares then the State share will increase to nearly 80%
(3) EBS – presently 100% owned by the State but offered for sale with two final bidders (a) ILP and (b) Cardinal Consortium with rumblings that ILP may have to drop out
(4) INBS – 100% state owned, deposits likely to move to new bank in association with Anglo, loans to be run down over time
(5) Anglo – 100% state owned, deposits likely to move to new bank in association with INBS, loans to be run down over time

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Posted in Irish economy, NAMA | 5 Comments

5 Responses

  1. on November 30, 2010 at 4:52 pm who_shot_the_tiger

    It’s scary! We think too much alike.

    Even though we come at it from different ends, my first thought on hearing about the closure of “Bad Anglo” and rebranding it into “Anglo Nua” was “a rose by any other name….”


  2. on November 30, 2010 at 5:53 pm sf ca writer

    The “off balance sheet” nature of NAMA is a bit of a tough one for me to grasp.
    While this would have been fine for an entity that makes money….NAMA has most certainly turned into another black hole (which really really should not have surprised anyone)
    It seems like we don’t have a
    ‘good bank/bad bank’ system….
    instead we have
    ‘good bank / bad bank / invisible,prentend youre not a bank.’ system
    Poetry is the finest art for sure, but for this particular occassion the lyrics read not of roses and Robert Frost, but of a smokey dinner dance in a dodgy midlands hotel featuring the local showband……
    ‘I’m a lonely little Petunia in an Onion patch,
    and all I do is cry all day,
    bu-who, bu who…”
    Seperatley, the giant American double dip begins, as they like to say…right here, right now.
    It’s going to get ugly. And I say that as a feverish fan of America in all its beauty and splendor.


  3. on November 30, 2010 at 6:33 pm Gilroy

    You ask ‘Why is AIB’s Core Tier 1 capital to go to 14%?’. The answer is in footnote 3 referring to table 1 at the bottom of page 3 of the technical statement on the Financial Regulators website. Essentially, the assumption is that if it has 14% now it will have 12% at year end. The Central Bank is telling everyone that AIB will have losses of 2% of risk weighted assets. BOI will have a 0.5% loss (somewhere between 400 and 450million).


    • on November 30, 2010 at 6:43 pm namawinelake

      Thanks Gilroy – note 3 says “3 Based on the latest information available and the bank’s own estimates, the Core Tier 1 ratios of the banks at yearend 2010 are estimated assuming capital required is injected immediately, and where relevant, the completion of NAMA transfers and proceeds of divestments agreed and announced. The buffer in terms of the estimated Core Tier 1 ratio above the PCAR base case benchmark of 12% reflects the capital required for loss absorption on an individual bank by bank basis.”

      Your interpretation makes sense but I must say I found the wording of the release particularly awkward.


  4. on November 30, 2010 at 8:19 pm who_shot_the_tiger

    @sf ca writer

    Regarding the double dip in the USA, I think the 3 graphs in the link say it all:

    http://www.businessinsider.com/the-housing-problem-in-3-pictures-2010-11



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