Central Bank on a collision course with banks over accounting standards

“the Central Bank is minded to require credit institutions to set the present value of future cash flows at zero other than those arising from  disposing collateral for the purpose of calculating the amount of the impairment provision required, without exception, for all loans in arrears greater than 90 days which have not been subjected to restructured arrangements on a sustainable basis at the time of assessment” Central Bank of Ireland publication “Mortgage Arrears Resolution Targets 13th March 2013”

You might recall the fanfare of the announcement on 13th March 2013 when the Department of Finance announced it was finally getting serious with banks over distressed mortgages. Targets – which appear fanciful on here with the banks supposed to provide sustainable solutions to 25,000 mortgages by the end of June 2013 – have been set for the banks. And Minister for Finance Michael Noonan says that the Central Bank now has a stick with which to warn the banks, and hold them to account and that stick is that the Central Bank can force the banks to write down the value of loans to the underlying asset.

Let’s explain that.

If Bank of Ireland has loaned you €300,000 on a 25 year mortgage for a property that is now worth €200,000 and you have fallen behind on your payments and are in arrears. Then, under the Government’s targets, Bank of Ireland has to propose a sustainable solution for you. That may mean that Bank of Ireland places you on interest-only for a period of time or reduces your monthly payment in some other way, and in some instances, may give you a payment holiday. We don’t know exactly was “sustainable” means but you get the idea.

Now, if Bank of Ireland fails to provide you with a “sustainable solution” then the Central Bank is going to force Bank of Ireland to write down the value of the €300,000 loan in its books to €200,000. That means Bank of Ireland has to book a loss of €100,000 and if Bank of Ireland has big enough losses overall with other peoples’ mortgages, Bank of Ireland may become insolvent and need more capital – that’s the stick. As the borrower of the €300,000 mortgage, don’t get excited by the above, you still owe the €300,000 – unfortunately, it’s just the bank that books the €100,000 write-down.

All straight-forward so far?

Here is where it gets messy for the Government, the Central Bank and the banks.

Banks in Ireland, and in fact all businesses that produce public accounts, comply with accounting standards. At present, when Bank of Ireland produces its accounts, it is required to look at your €300,000 loan and because you are in arrears, it needs to estimate what the loan is worth. At present, Bank of Ireland estimates how much cash it will receive in future from you and also what the value of the property is. So, if Bank of Ireland thinks that you have temporary difficulties and will make reduced payments for the next five years and then get back to full payments, it will probably value the loan at €300,000 because it figures that between the repayments and the value of the property if it repossesses it, it will get back its €300,000.

This valuation of your loan by Bank of Ireland is governed by International Financial Reporting Standards and specifically International Accounting Standard 39. And that’s what banks here use when producing their accounts. But what is now envisioned is that the Central Bank can intervene to direct banks to write down the value of a mortgage to the value of its underlying security, regardless of whether or not the bank thinks it can get more money out of you.

This new approach is only to kick in from January 2014, but this represents a serious interference by the Central Bank into accounting practice and the view on here is that banks can tell the Central Bank to “sod off” and that banks will continue to prepare accounts in the old manner and those same accounts will be audited and approved by accountants. Of course the Irish banks are mostly owned by the Government, so they may yield to this arm-twisting, but Ulster Bank and KBC for example are more independent, and I don’t think the Belgian government will think too kindly on a demand for more capital for its Irish operation because the Central Bank wants to subvert international accounting standards.

Or, in other words, the main threat to the banks for failing to meet targets, is almost completely hollow.

The information reported above is in part derived from two parliamentary questions by the Sinn Fein finance spokesperson to Minister Noonan, these are the two questions.

Deputy Pearse Doherty (26th March 2013): To ask the Minister for Finance further to his announcement on mortgage arrears on 13 March 2013, if financial institutions will continue to prepare their accounts under International Financial Reporting Standards, and particularly if the requirement to write down the value of certain loans to the value of the underlying security, will lead to the necessity for banks to produce two sets of accounts.

Minister for Finance, Michael Noonan: The Central Bank has informed me that its publication on Mortgage Arrears Resolution Targets, which can be accessed on the Central Bank’s website at http://www.centralbank.ie, addresses the use of IFRS standards in the context of MARS targets and on page 16 states:

“An entity which prepares their financial statements in accordance with International Financial Reporting Standards (IFRS) is required to comply unreservedly with all of the requirements of those Standards. The Central Bank is conscious that its guidelines in respect of provisioning against impaired loans must be consistent with those standards and is satisfied that the approach to provisioning set out below meets that consistency requirement.”

Deputy Pearse Doherty (16th April 2013): To ask the Minister for Finance further to Parliamentary Question No. 193 of 26 March 2013, the way advertised threat of forcing banks to write down the value of problem loans to the value of the underlying security is any different to pre-existing requirements under International Financial Reporting Standards and particularly International Accounting Standard 39..

Minister for Finance, Michael Noonan: The Central Bank has informed me that it is minded to require credit institutions to set the present value of future cash flows at zero other than those arising from disposing collateral for the purpose of calculating the amount of the impairment provision required.  This applies without exception, to all loans in arrears greater than 90 days which have not been subjected to restructured arrangements on a sustainable basis at the time of assessment.

This will force credit institutions to value assets on their books which are 90 plus days in arrears and not sustainably restructured based on the expected net proceeds of collateral disposal only. Credit institutions would not be allowed to incorporate assumed or expected future cash flows from other sources into these valuations as may be the case currently.

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Of the Week…

Unfolding fiasco of the Week

This was the week we learned the strictures that would apply to those seeking protection from the new personal insolvency processes. What makes the rules on spending so farcical is that it reflects this government’s strategy of dealing with highly-indebted households by stretching a process over six years, rather than the template used elsewhere to recognize indebtedness today, liquidate the assets, pay off as much of the debts as possible and allow the debtor to get on with their lives and contribute to the economy. The reason for this approach is we own the banks which will need more bailouts to fill the holes left by losses crystallized today, but it means we have a farcical experiment where lives are supervised at a micro-level for more than half a decade. We learned during the week that not a single personal insolvency practitioner has been authorized yet the processes are supposed to be available in less than three months. Meanwhile Minister Noonan said it was feasible to have a target of banks producing sustainable solutions for 25,000 mortgages by the end of June 2013.

Accidental Fine Gaeler of the Week

 

You’ll be hard-pressed to find better comedy than that on Thursday night when, on the Vincent Browne show, Vincent asked Peter Mathews if he could name three Fine Gael policies with which Deputy Mathews, , a career banker and restructuring expert, agreed. Despite the intermission of a commercial break, the south Dublin TD – who incidentally confirmed his intention of running in the next general election – could come up with only two policies and neither has any relevance to finance or economics. It was comedy gold and here is the transcript:

Vincent Browne: Peter, why do you support a government who allows rich people, people who were formerly very rich and many of whom are still rich to live the life of Reilly still today, and people who have never been rich and who are living on the margins are going to be forced to adhere to these strictures which will make their lives miserable. Why? Why are you supporting a government doing this?

Peter Mathews: I am not supporting a government. I am informing a government from within of the true-

VB: You vote for them. Do you vote for them in the lobbies?

PM: “Do I vote for them in the lobbies?” In general, yes.

[Niamh Lyons: You’ve never voted against them]

PM: I’ve had pairings

VB: So you are supporting the government in something that you think is unjust.

PM: On matters that I consider important I have had pairs

[NL: But pairing is the same-]

PM: It is not

[NL: The person on the other side is not voting]

VB: Peter, you agree to support a government on issues which means you vote in support of things which you feel are unjust.

PM: I support a government which is doing its best in a least-worst effort to mend this economy.

VB: Yeah, but your view is that they are taking measures, they’re taking measures which are unjust.

PM: I don’t agree with all the measures that the policy has arrived at (sic) and that’s reasonable and that’s democracy is all about. In a family not everyone always agrees.

VB: I thought the Fine Gael family is obliged to agree

PM: Well, Vincent you know, as I mentioned before the programme began, today is the 65^th anniversary of the 18^th April 1948 when Ireland became a republic for the first time. Now it’s important that we try to get back the ideals of a republic and that’s why I am in this Dail to try to do.

[Mary Lou McDonald on different matter]

NL: Let’s be honest about it, NAMA was just one big personal insolvency slush fund for developers and builders.

PM: Can I ask you a question? Do you know that I actually anticipated and wrote about this, four and a half years ago, before NAMA was even finalized-

NL: Before you were even a TD!

PM: And then you joined Fine Gael!

PM: Vincent, I anticipated that the way the previous government’s strategy to address the banking crisis from the NAMA project was actually going to lead to all the kind of stuff that you guys are talking about now.

NL: And? But what’s your contribution in government then? Why aren’t you in there in parliamentary meetings, I mean we have talked about this on this programme before=

PM: She [indictating MLM] is on the same committee meetings that I am. And Mary Lou, do I contribute?

MLD: You do. The finance committee I hasten to add. I do not attend FG parliamentary party meetings.

NL: But does Michael Noonan not listen to you when you bring these proposals?

PM: Hold on. Ashoka Mody which everyone got a little bit excited about last week when he was on the broadcast media. He had actually written an opinion piece in the Irish Times three months previously and two years ago, the very stuff that he was writing three months ago was the very stuff that I brought into a committee and it was dismissed. It would cause the Europeans to [indistinct, crash?]

VB: Peter, is there anything of government policy that you actually support

PM: I don’t want to take up all the programme Vincent-

VB: Tell us three biggies, tell us three biggies that you agree on

PM: I’ll tell you after the programme

VB: No, no, tell us now! Do you know why you won’t tell us now? Because you can’t think of anything off the top of your head

PM: That’s not relevant Vincent

VB: Tell us one off the top of your head

PM: Vincent, you used want to hurry on to the next point. About three years ago, when I said there were another €35bn of losses to come in mortgage loan losses and other types. Now we have Fiona Muldoon-

VB: Just off the top of your head, tell us something the Government does that you approve of.

PM: Well, it’s moved through other areas of legislation in matters to do with-

VB: We’ll go to a break to give Peter some time to come up with three things that he agrees with the government on, that’s the government he supports, join us after the break.

[BREAK]

VB: (sarcastically) Peter Mathews has told me to say that he has come up with 30 issues that he has agreed with the government policy on (sic). I can’t remember what the 30 issues now were. What were the first three of those?

PM: Symphysiotomy as Mary Lou reminded me, the pardon for the World War 2 soldiers who left without leave, various things, you can go through them-

VB: And you can’t think of a third.

PM: I’ve told you, have you forgotten.

VB: What was the third?

PM: You’ll have to do mental exercises.

VB: [Giving up and looking at notes] Somebody says “Breaking News! Peter Mathews, you’re actually a member of the government party. Do you forget that Peter?

PM: Thanks for reminding me, listen they’re wonderful people

Greedy bast*rds of the week

This was the week that NAMA confirmed that it has spent €22m on legal fees during 2012. DLA Piper in the UK was one of seven firms which received more than €1m in 2012. Let’s hope the UK firm doesn’t suffer from the same apparent greed as its US branch which was reported by the New York Times to have, what the NYT called a “lax attitude towards billing”. DLA in the US sued a client who hadn’t paid his bills. The client sought discovery of documents relating to his case and the discovery yielded emails from DLA which revealed their turbo-charged attitude towards billing.

“I hear we are already 200k over our estimate — that’s Team DLA Piper!” wrote one of DLA’s lawyers

“Now Vince has random people working full time on random research projects in standard ‘churn that bill, baby!’ mode…That bill shall know no limits” another Piperer wrote.

The case was “resolved” this week with a confidential settlement between the parties. Let’s hope NAMA scrutinizes “Team” DLA Piper’s invoices closely.

Salaries of the Week

The accounts for the Broadcasting Authority of Ireland – its board members are pictured above – were signed off by Andrew Harnkess on behalf of the Comptroller and Auditor General on 29th June 2012 but were only laid before the Dail by the Minister for Communications, Energy and Natural Resources Pat Rabbitte on 11th April 2013. The accounts weren’t available on the BAI website this week but you can access them here . They make for interesting reading. The BAI is one of the few organizations in the State where salaries increased by over 12% between 2010 and 2011 and now stand at an average of €51,000. But take a look at the note to the accounts on salaries – and these exclude pension costs of €208,000.

In 2010, the average salary (before employer national insurance and pension costs) was €48,300 for the 38 staff. In 2011 the accounts below show €1,571,000 but that excludes €489,000 transferred to the so-called Broadcasting Fund which indicates gross salaries inclusive of national insurance contributions of €2,060,000 for 38 staff which equals €54,210 average and if you exclude an average of 6% for employers national insurance (90/1571) then that leaves you with an average salary of €51,000 – up 12.5% on 2010. Nice!

The BAI is a strange quango and has only been around since 2009. It is an utterly useless waste of resources and it has failed miserably in its primary role which was to ensure diversity in Irish media. Oh, and take a look at what you could be watching in the UK last Sunday night on their Freeview and then take a look at what was on our equivalent Saorview on a Sunday (which uses an incompatible and more expensive set-top box)

Freeview

Saorview Sunday 21st April, 2013

Coincidence of the Week

5th April, 2013 – Attorney General sends letter from Minister for Public Expenditure and Reform, Brendan Howlin to the Chief Justice Susan Denham who forwards it to members of the judiciary. The letter sets out the cuts to judges’ salaries under the Croke Park 2 agreement which was expected to be ratified mid-April

11th April, 2013 – Judge Kelly delivers a speech to a conference in Dublin in which he castigates the government for interfering with the judiciary. The two examples of interference are cuts to judges’ pay and the creation of new judicial structures such as the insolvency courts without appropriately qualified judges

14th April, 2013 Sunday Business Post reports the speech by Judge Kelly

14th April, 2013 Minister for Justice and Equality, Alan Shatter responds saying “at a time when we are still fighting to restore our economic sovereignty and bring about sustainable economic recovery, we all have a duty when speaking to ensure that what we say has no unintended consequences and does not undermine international business confidence in the State”

15th April, 2013 Back in 2011, the judges found they had no platform to voice their objections to the referendum on judicial pay when justice minister Alan Shatter told the Court Service to remove a statement by the judges setting out their objections to having their pay exposed to reduction. Well, the judges learned their lesson and they have their own website now, and the judges responded to Minister Shatter’s comments by issuing a statement which included “The judge pointed out that for almost 90 years of the State’s existence there had been no need for an association of judges given the mutual respect demonstrated by the executive and judicial branches of government, one for the other.  All structures both formal and informal which existed for communication between those two branches of government have ceased”

16th April, 2013 (8am) Master of the High Court Edmund Honohan wades in by speaking on RTE’s morning Ireland and using that phrase guaranteed to get anyone’s gander up by criticizing the “sense of entitlement” of judges in their comments about the government

16th April, 2013 (11am) President of the High Court, Judge Nicholas Kearns responds to the uppity Master Honohan by saying he “is not a judge but an office holder with limited functions created by statute” and “specifically, he has no authority to speak on behalf of the High Court or its judges. Any impression to the contary would be mistaken.”

16th April, 2013 (3pm) Opposition warn of “constitutional crisis”

16th April, 2013 (4pm) News filters through that Croke Park 2 is voted down by unions

17th April, 2013 Judges adjudge themselves satisfied that government is not interfering with judiciary

We still don’t know how many judges are in NAMA – finance minister Michael Noonan refuses to answer that question, but we believe there are a few, and it is remarkable that the momentum drained from the “constitutional crisis” as soon as judges saw the Croke Park 2 agreement was dead in the water and that the threat to the salaries of the cash-strapped ones has been lifted, at least for now. A coincidence, shurely.

League table of the Week

This week, an organization called Corporate Reputations produced its annual survey of the reputations of companies in Ireland. It produces a Top 100 based on some 5,000 interviews, and this year, it found that the most reputable company and brand in the State is BMW. Irish companies, the Kerry group and Superquinn also made it into the Top 10. RTE, which has new self-promotional advertising ahead of unveiling its 2012 financial results which are expected to be atrocious, is ranked at position 53 which is above Sky at 56 and TV3 at 59 but way lower than the Irish Times at position 20. Independent News and Media, which published the Independent, Sunday Independent, Sunday World, Herald just about makes the table at position 93. There are four banks, Bank of Ireland, AIB, PTSB and Ulster Bank in the last five positions 95-100.

Sad statistic of the Week

In (the Republic of) Ireland, we beat ourselves up about suicide. In 2011, the provisional statistics indicate that 525 died through suicide. That equates to 11.4 per 100,000 citizens. Every single one is a tragedy. Although of cold comfort to individual tragedies, comparing suicide rates with other countries, suggests we are well below average and certainly far, far better than across the Border where provisional figures for 2012 – see above, from the Northern Ireland Statistical and Research Agency – indicate there were 278 suicides in a territory with a population of 1,810,863 indicates a suicide rate of 15.4 per 100,000 down from 16.4 in 2011 when 313 died through suicide. So Northern Ireland’s suicide rate in 2011 was 44% greater than that in the Republic. This week, the Northern Ireland Minister for Health, Edwin Poots observed that the rate doubled in Northern Ireland in the past decade and the reasons for the dramatic increase are unclear.

Quote of the Week

“Every now and again you’ll see these so-called republicans parading. And I look and I see these 50-year-olds, and I see these 40-year-olds, and I see these 35-year-olds … and I don’t recognise most of them. You know what I wonder – I wonder where they were when there was a war” Martin McGuinness at the Sinn Fein Ard Dheis

Oddly enough the above quote which was widely reported in the media doesn’t appear in the Ard Fheis speeches published on the Sinn Fein website indicating that it was an improvised addition.

Donnchaidh O’Laoghaire delivered perhaps the most poignant speech of the Ard Fheis on emigration.

“She came up to me and she said, ‘I’ve got one thing to say to you, my boy … you can’t trust the Irish, they are all liars’, she said, ‘liars, and that’s what you have to remember, so just don’t forget it. With that she waltzed off and that was my only personal exposure to her.” Labour party politician Peter Mandelson recollecting his only “exposure” to Margaret Thatcher whose funeral took place during the week. Let me say as an Irish person, she left the world a better place socially and economically, her contribution to international relations was spectacular particularly in south America, she will be much missed. And of course, she was the first woman to run the mile in less than four minutes.

“I am pleased, first of all because Dundonald is somewhere where there is clearly demand for houses. Where there is a market for houses, and where there’s a land bank available, I have been stressing to Nama not to hold on to the land because it holds back development and prevents jobs” Sammy Wilson, Minister for Finance and Personnel in Northern Ireland responding to the ground-breaking NAMA announcement that it was investing €11m in a south east Belfast development. Just 24 hours beforehand there were carefully crafted mutterings about NAMA’s malign effect in Northern Ireland in the wake of the Kennedy Group foreclosures and we saw on here the connection between Alistair Kennedy of the Kennedy Group which was sponsor of the NW200 annual motorcycle road race and the DUP.

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Judge rules NAMA must comply with information access requests now

Judge Mac Eochaidh yesterday morning apparently ruled that NAMA must now comply with environment information requests. The judgment isn’t online yet at the Court Service and no doubt Gavin Sheridan will place it on TheStory.ie when he has had a chance to scan it. The Twitter-feed above is from Gavin Sheridan, who made a request back in 2010 which then became the subject of an appeal to the Information Commissioner and then a High Court case which was decided in Gavin’s favour but which has been appealed by NAMA to the Supreme Court.

The judge yesterday was giving his decision after NAMA had sought to prevent the public submitting environment information access requests until the Supreme Court had heard its appeal against the High Court decision that it is a public authority and must consequently provide responses to environment information access requests. The Supreme Court has yet to schedule a date for the appeal but it could be up to four years so the issue of the application for the stay was important. Judge Mac Eochaidh is said by Gavin to have ruled that NAMA has the “administrative armoury” to deal with the requests now and suffers no harm from processing access requests.

The refusal by the Judge to allow the stay, means that NAMA must now comply with environment information access requests. A comment was sought from NAMA in reaction to yesterday’s judgment; details were also sought for how the requests should be made to NAMA. There has been no response at time of writing.

It remains to be seen what information these requests will provide. NAMA is entitled to suppress commercially sensitive information and when considering the topics most of public interest in NAMA’s dealings, “environment” doesn’t rank very highly. However these requests can have unintended consequences and can yield unexpected information. There will be updates here with the judgment and the process to be used for submitting requests.

UPDATE: 23rd April, 2013. The judgment rejecting the NAMA request for a stay is available here and apparently NAMA has two weeks in which to submit observations. It is an odd judgment with Judge Mac Eochaidh again making reference to matters outside the the purview of the case, particularly that NAMA is well resourced to deal with these requests. Lawyer Fred Logue who assisted Gavin in his presentation to the court analyses the judgment here.

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NAMA launches barrage of High Court applications against Gemma Stack

If this is the Gemma Stack I think it is, and if these applications are what I think they are, and if I were Gemma Stack, I would be thinking about taking defamation action against the Court Service for maligning my name. The Court Service today reveals that yesterday NAMA made three applications in Dublin’s High Court where the respondent is named simply as Gemma Stack – the application numbers are 2013/1288 S, 2013/1289 S and 2013/1290 S. As is usual with recently filed applications, there is no solicitor on record for the respondent.

The applicant in all three cases is National Asset Loan Management Limited represented by Dublin solicitors – and as we learned this week, recipients of €382,000 in 2012 from NAMA. – Gartlan Furey.

As this is Ireland, we have no further information as to the respondent, cause or remedy and NAMA doesn’t provide any information on individual court cases. In the past NAMA has initiated action that covered a very wide spectrum of situations, ranging from the recovery of 100s of millions to merely making a protective application because of statute-of-limitations issues.

A month ago NAMA sued Gemma Stack, but the Court Service changed the respondent to “STACK IN HER CAPAC AS LPR KEVIN FITZSIMONS DECSD GEMMA” – in other words NAMA was suing a solicitor in her capacity as legal personal representative of a deceased person. And it may be that this is what NAMA is doing in the present three applications also.

So, our medieval and very expensive Court Service may well be maligning the good name of a solicitor by withholding details of the respondent. All we know is NAMA is suing Gemma Stack in three separate applications.

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