“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.
NAMA Wine Lake 
Not sure if this comment belongs here but I think the Irish people should know that W. Schaüble, in today’s German weekly economic magazine “Wirtschaftswoche”, says that the Cyprus model should be used for all future bank bailouts with the participation of stockholders, bondholders and uninsured depositors. He also added that banks take great risks and then expect society as a whole to pay the bill, this cannot be.
This is translated from Spanish by way of German.
@Huodini (and @NWL)
I wonder am the only person who is sick and ******* tired of Schaeuble and the destruction he is causing throughout Europe.
He lead the charge to destroy Cyprus, and succeeded, because they had the ‘wrong business model’. He used Dijsselbloem to mouthpiece his own bank solution for Europe. He also rubbished the June accord that Merkel had signed, almost before Merkel got back to Germany.
So, now he wants the Cyprus solution. Which one? The one that was finally implemented or the one he demanded the previous week, telling the Cypriot president that he could not care less where the money came from, as long as he got it.
Schaeuble is now by far the most dangerous man in Europe.
Let him have his Cypriot solution. But first let him and Germany return every red cent lodged in German banks or in German bunds to the country the money came from.
It is time to take the gloves off with Germany.
How dare Germany, and in particular Schaeuble, impose another solution on Europe. This must be stopped now.
It would be better to smash the Eurozone and the EU to smithereens, than to allow Schaeuble go one inch further with any of his proposals.
I’d love to know what best practice International Accounting Standards and Conventions they were using when all money was flying backwards and forwards from Anglo to Irish Permanent. Also, did these International best practice not cop or cause alarm bells to ring when BoI was expanding its loan book from 100bn to 200bn between 2004 and 2008. Best practice is definitely in the eye of the beholder. I remember Meredith Whitney telling us that American Banks were bad back in 2009 but that European banks were complete basket cases that had not even begun to recognise hundreds of billions of Euro losses on its loan book. The response of the European authorities was to carry out to stress tests (I don’t know what accounting standards they were using) but they were completely bogus. Also, our own governor Honohan and the army of people seemed to get it seriously wrong. What good are all these so called “standards” if they give the wrong picture and lead to disastrous strategic decisions being taken? The one common denominator running through all the banks that went bust is that they were all audited and signed off on every single year. I suppose Sean Quinn was pouring over these sort of accounts before he decided that Anglo was such a good bank it would be a better asset than a Cement factory or a Insulation factory.
And what about Nama’s accounting standards:
1. Not taking proper account of the original value of loans (€72 bn) which they are supposed to retrieve, to maximum possible extent, as pointed out by me on this blog and to Nama, PAC and C&AG. See http://www.planware.org/briansblog/2012/01/nama-additional-disclosures-based-on-par-value-of-loans.html
2. Not accounting for losses (or profits) on loans until they actually materialise, as has been highlighted by NWL in the past, even though every dog on the street, aside from those on Grand Canal Street, knows that big losses are being accumulated (outside of prime stuff).
I am genuinely amazed NWL with your faith in IAS 39.
Have you been on the beer or smoking strange substances?
You have provided some of the best evidence that the bank accounts are works of fiction.
Any standard is open to interpretation, but IAS 39 is the daddy of all interpretive standards. At the peak of the financial crisis in October 2008, the IASB forwent any regular due process to issue emergency amendments to IAS 39 and IFRS 7 in order to relax fair value accounting.
These amendments leave commercial banks reporting under IFRS with the choice to retroactively reclassify financial assets that were previously measured at fair value into categories which require measurement at amortized cost, i.e. to effectively suspend fair value accounting for these assets
IAS 39 is a joke.
The Irish Central Bank is perfectly entitled and duty bound to make our banks deal with reality.
In fact it could provide a great service to the rest of Europe by making Banks face reality and stop issuing BS accounts and pocketing fat salaries and pensions.We are in this mess because central banks winked at the lunacy of the bubble.
For the first time the central bank is now kicking ass and you of all people are proposing that they should kowtow to an international standard that is a joke.
I’m amazed, have you take up employment with a bank?
This is totally at odds with all the excellent work you have dome here.
@Paddy, thanks for your insights. The above blogpost is not about the merits of IAS 39, there are previous blogposts that examine those eg
https://namawinelake.wordpress.com/2010/10/28/honohan-criticises-accountants-for-failing-to-show-true-and-fair-views-of-financial-performance-but-stops-short-of-mandating-the-implementation-of-ifrs-9/
The key point is whether the Central Bank is capable of imposing these rules on the banks who might cry foul under accounting standards or they may simply change their main regulator, for example, to the Bank of England, Holland, Belgium or Denmark and tell the Central Bank to get stuffed. And if there is no real threat to the banks, and if the targets are fanciful where does that leave us, that’s the key point above.
The Central Bank could use the over arching “true and fair” test to demand more accurate provisioning. The question is whether the CB could withdraw a banking licence on the basis that the CB doesn’t believe the accounts present a true and fair view – which would fly in the face of the audit opinion. I hope the CB have thought this through because it runs the risk of empty sabre rattling.
I’d expect that you would support data driven targets that would measure the bankers and drive them towards actions which I assume you support.
Why not have the Irish central Bank call the BS of IAS 39 and expose not only the Irish banks but the French, Belgium and German banksters.
This crisis has been caused by the Regulators bending the knee to bankers and their colluding accountants.
It’s about time regulators stood up and exposed the emperors new clothes of inflated valuations and bogus profits.
The central bank should set measurable targets otherwise they get waffle from the banks. The real threat is exposing the lie of annual reports from fee driven accountants.
Ulster Bank threatened to move to UK regulation but backed off when their bluff was called. I’d assume the UK regulator was less than enthused with this type of regulator shopping.