THE GOVERNMENT can eliminate significant risks facing the taxpayer by underpaying for property loans worth up to €90 billion within the banks under the State’s “bad bank” plan, according to an expert on banking crises.
Patrick Honohan, a professor at Trinity College, said the Government should pay only €20 billion for the loans and give the banks the ability to recover losses by taking “an equity-type claim” in the State “bad bank”, the National Asset Management Agency (Nama).
Estimates of how much the State should pay for the loans of up to €90 billion have so far varied from €50 billion to €75 billion.
Speaking at the Oireachtas Committee on Finance and the Public Sector, Dr Honohan and UCD economics professor Karl Whelan said the Government would end up paying more than €7 billion being invested by the State in the two biggest banks, Allied Irish Banks (AIB) and Bank of Ireland.
Dr Honohan said that the two banks would need about €10 billion to €15 billion to recapitalise the institutions – in addition to any capital deficit to be met following the losses on their property loans.
He said the International Monetary Fund’s €24 billion recent estimate of the cost of the Irish bank rescue plan was “not a surprise”.
Dr Whelan said the banks needed more than €15 billion.
He said AIB and Bank of Ireland had shareholders’ funds of €7.7 billion and €7.3 billion respectively, but that their losses on bad property loans would “wipe” this out.
The Government has said that, under extreme stress scenarios, AIB requires €5 billion in extra capital (including the €3.5 billion from the Government), while Bank of Ireland needs €3.5 billion.
“Very few people believe those figures to be accurate,” he said.
He said that the Government needed to face up to the scale of the problems within the banks.
Dr Whelan said that he was “extremely concerned” the Government was heading into the Nama process with “an inadequate diagnosis of the problem”.
“Nama is being potentially prepared as a vehicle for opaque recapitalisation where the Government overpays for bad assets.”
Dr Honohan said that while the Government did not intend to overpay for bad loans, the State could “end up overpaying unintentionally due to over-optimism”.
He said he was worried that the proposed scale of the Government’s Nama plan was “unprecedented on an international scale” given the size of the bad loans.
Some countries used bad banks as “a covert way of recapitalising the banks by paying too much for their problem loans”, he said.
This was “a bad idea” as it was “a non-transparent subsidy from the taxpayer to shareholders and other unguaranteed creditors”.
Dr Honohan expressed concern that the Government was buying performing in addition to delinquent loans, but was also ignoring “delinquent non-property loans”.
Dr Honohan said the Government was buying the loans from “going-concern private banks”, as opposed to public, nationalised institutions, and this made the valuation process “tricky” and increased the risk of overpaying.
He said he believed the Nama plan would “definitely” take the estimated 10-15 years to resolve.
Dr Honohan said that the loan transfers into Nama could lead to a negative capital position at the banks where ownership control would pass to the bank’s creditors.
“There would not in that case be much economic basis for allowing any residual claim to the private shareholders,” he said.
Dr Honohan said the Government was heading into territory where it would end up with 90 per cent and perhaps 100 per cent of the two main banks following the transfer of the bad loans to Nama.
He said that greater State ownership was “associated with more crises” and that government-owned banking systems “serve their economies poorly”.
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