Sticking Nama with rubbish loans is no way to build trust

 

The behaviour of banks makes a mockery of their supposed acting in good faith, being grateful to taxpayers and working for a national recovery, writes JOHN McMANUS

THE PLANNED publication later this month of the results of stress tests of Europe’s banks may serve to draw a line under systemic concerns, but it does not look like being good news for AIB and Bank of Ireland.

The details of the test – which in effect simulates a default by Greece and other peripheral states – had barely emerged before various banking analysts started speculating who would fail, and AIB and Bank of Ireland were lumped in with the losers.

We will know next week whether they are right, and if that turns out to be so, it will be a blow for the Government and the Central Bank in particular. The Central Bank carried out its own stress tests of the Irish banks this year to establish how much capital they need to raise to sustain their expected losses over the next few years.

Bank of Ireland is well on the way to hitting the target, while AIB’s progress is less dramatic. Unfortunately, while it can be argued that the Irish stress test was tougher, the threshold for failure was lower.

The Irish test required the banks to remain above a 4 per cent capital-to-loans threshold, while the European test has set a 6 per cent threshold.

The Government’s problem is, how do you try to explain the difference to a market that will simply see the two Irish banks highlighted in red at the bottom of a list of European banks?

The inescapable conclusion – in some people’s view – is that the banks will have to raise more capital to pass the European test threshold and reassure the market.

The good news – if that is the right phrase – is that the European Commission has indicated there might be help available via the €500 billion fund established earlier this year to deal with the fallout of the Greek sovereign debt crisis.

Access to the fund will be for countries who have exhausted their own resources. Whether Ireland has passed this point is unclear, but one thing that is clear is the patience of Irish people with the banks seems inexhaustible.

The latest insult to our intelligence – as reported by Simon Carswell in this paper last Friday – was the liquidating by the banks of their good loans before they could go into the National Asset Management Agency (Nama).

It now appears one of the reasons why the actual number of performing loans transferred to Nama was less than predicted was that the banks had effectively liquidated any loans where the value of the underlying property exceeded the amount owing.

Doing this was in the banks’ interest because they get all the cash back, rather than the Nama bonds less a haircut, which they get when loans go to Nama. It is also in the developers’ interest because they get what cash is left over and can try to keep it out of Nama’s reaches.

But this was not in the interest of Nama and by extension taxpayers, because it undermines Nama’s basic operating premise – which is that it is buying entire portfolios, and the income from performing assets will match losses. Instead, the banks are trying to stick Nama with the rubbish – and get what they can for the good loans.

Such behaviour makes a mockery of all the fine words we have heard about the banks acting in good faith, being grateful to taxpayers, and playing their part in the national recovery. But that should not come as too much of a surprise.

It also calls into question the value of having public interest directors on the board of the banks. If they didn’t see how this behaviour is not in the public interest, they are in the wrong job.

Another point is that it highlights how little has really changed in the culture of Irish banking. Their behaviour is still dominated by short-term thinking, and is largely opportunistic.

They seem oblivious to the fact that the more rubbish they dump in Nama, the more likely that entity is to make a loss, and the more likely they are to face a levy in 10 years’ time. However, it appears that bank boards and management don’t care about this. And why should they? Good, bad or indifferent, they will be gone in 10 years.

The final issue raised by the banks’ behaviour towards Nama – and the most worrying – is what it says about who is actually in control of the whole process. If Nama is going to work, it, and not the banks, has to be the smartest guy in the room. That Nama did not see all this coming is worrying to say the least.

Ultimately, it is the boards of Irish banks who will have to face up to their responsibilities and put an end to this type of behaviour – both in their own interest and that of the taxpayer.

There is a real prospect that AIB and Bank of Ireland may have to revisit their capital-raising strategies after publication of the European stress tests. If they do, then its almost certain – in the case of AIB at least – that they will need Government or European money. All this will have to be choreographed with the ending of the Government guarantee and the rolling over of their long-term debt.

It will be a difficult process, and will require trust and taxpayer help. Cynically stiffing Nama is not the way to build trust.