ANALYSIS:A super-mutual with two million members could guarantee the banking sector's long-term stability, writes SIMON CARSWELL

THE DECISION to create a State-owned bad bank, the National Asset Management Agency (Nama), presupposes that the process of buying up to €90 billion in toxic loans from the lenders will leave behind six “good” banks.

The Government has said the banks can resume the normal business of lending once their balance sheets have been repaired and purged of the dodgy property development loans and associated borrowings weighing them down.

Following the transfer of problem loans to the State agency, which undoubtedly will take some time to conclude, the Government must then consider a means of strengthening the system further for the sector’s long-term stability.

The most widely-discussed option involves the creation of a “super-mutual”, which NCB Stockbrokers described last month as “the ultimate ‘good’ bank”, comprising the retail banking businesses of Irish Life & Permanent (IL&P), EBS building society and Irish Nationwide Building Society.

Many commentators see merit in such an entity. As NCB concluded, a marriage of the three would create a lender with about 31 per cent of the State’s mortgages, far in excess of the State’s two largest banks, and a base of more than two million active members, depositors and borrowers.

“The scale of membership numbers involved in an Irish super-mutual would be an attraction not lost on the political parties,” said NCB.

Fergus Murphy, chief executive of EBS, has said that the building society’s preferred option in the future reform of the Irish banking sector was for the creation a “Government-sponsored mutual”.

Speaking at the recapitalisation of Allied Irish Banks (AIB) and Bank of Ireland in February, Minister for Finance Brian Lenihan said that bank mergers internationally had not worked as a means of strengthening weak banks, as often the stronger bank was left damaged by the marriage.

He was responding to a question about the possibility of consolidations in the financial system, a strategy that the Government had considered for a time last autumn.

IL&P’s interest in a merger with EBS has waned since the departure of chief executive Denis Casey over the controversial €7 billion deposits into Anglo Irish Bank.

IL&P’s heavy reliance on wholesale funding, which fuelled its mortgage lending in recent years, was a turn-off for EBS, while the society’s souring €500 million development loan book was a disincentive for ILP, which has no loan exposure to developers.

The State’s purchase and transfer of the society’s €500 million loans into Nama, together with the agency’s acquisition of Irish Nationwide’s €8.1 billion commercial property loan book, would help cleanse both institutions.

Irish Nationwide would be left with a residential mortgage book of €2.3 billion, which could be combined with the €16.4 billion primarily home loan book at EBS.

Both lenders, or a merged entity, are still likely to need State capital to tide them over, particularly if mortgage losses rise.

IL&P is considering a restructuring of its corporate foundations by creating a new holding company and moving Irish Life, a subsidiary of Permanent TSB, out from the under the bank’s wing.

Such a restructuring, which could facilitate a quick sale of the banking business, creates options for the bancassurer, but it would need the approval of Government and the company’s shareholders.

Funding a super-mutual of ILP, EBS and Irish Nationwide may pose more difficult problems, as the combined entity would be heavily dependent on wholesale funding.

The three have a combined loans-to-deposits ratio of about 220 per cent, compared with about 140 per cent at AIB.

This means for every €1 the three lenders combined have on deposit, they have €2.20 on loan.

The three institutions have about €9 billion in debt funding to renew this year and next.

However, since last September’s bank guarantee the State already “owns” this problem and “it would be arguably easier to solve for the larger combined entity than for the three as separate entities,” according to NCB.

The broker says that “considerable synergies” could also be created by merging the three which would provide “an additional source of internally-generated capital through increased earnings”.

The idea of creating more mutuals or “friendlies” out of the banking mess has gained favour internationally as a means of rebuilding less profit-hungry and more measured lenders that avoid the risks that created this crisis.

British chancellor Alistair Darling extolled the virtues of mutuals last month and suggested that collapsed bank Northern Rock could be reinvented as a friendly society.

However, the failure of Dunfermline, Scotland’s largest building society, and the downgrading of nine UK building societies this week (based on a 40 per cent peak-to-trough fall in British house prices), shows that even the safest mutuals are not immune from the raging financial crisis.

Any Irish State-sponsored super-mutual would need a strong regulatory hand to steer it clear from the risks that have left Irish Nationwide and EBS with troublesome property loans and far from their simple savings-and-loans roots.

Economics academics favour nationalisation of banks

TWENTY OF the State’s economics academics have called for the temporary nationalisation of the banking system.

Writing in today's Irish Times, the academics disagree with the Government's limited recapitalisation of the banks and the creation of the National Asset Management Agency (Nama) to buy up to €90 billion in bad loans, saying this was "only a partial solution" and "one that is unlikely to protect the taxpayer".

“We believe that full nationalisation now will end up getting the State out of its involvement in the banking business faster than the current approach being taken by the Government,” they said.

The academics dispute the Government’s claim that it can buy the bad loans at a discount, keep the banks adequately capitalised and keep them out of State ownership.

“These three outcomes are simply mutually incompatible, and we are greatly concerned that the Nama process may operate to maintain the appearance that all three objectives have been achieved by failing to meet the first requirement,” they said.

They said that a situation where “a dripfeed of recapitalisation is required would be the worst of all possible outcomes”.

“A nationalised banking system with a mandate to restructure and reprivatise would be a preferable approach at this time,” they said.