'Stark reality' of bank losses


Madam, – I refer to the letter of Dan Loughrey (September 10th), head of group communications, Bank of Ireland (BoI). It contains misrepresentations relating to my Opinion piece of September 9th.

On September 16th, 2009, Minister for Finance Brian Lenihan advised by PricewaterhouseCoopers, reporting consultants to the National Treasury Management Agency and the Department of Finance, presented to Dáil Éireann the summary details of the loans listings from five Irish-owned banks that would be participating in the Nama project.

The Minister told the Dáil that Nama would purchase loans totalling €77 billion from the banks for €54 billion. Included in the €77 billion were €16 billion loans to be purchased from BoI.

Dan Loughrey states that BoI’s Nama-listed loans on the audited (by PWC) balance sheet dated December 31st, 2009, only three months after September 16th, 2009, amounted to €12 billion. Curiously, a large €4 billion amount of reclassification of Nama “eligible” loans had materialised in the three months since September.

No plausible, transparent explanation has been offered. At a 30 per cent write-down level, reducing the Nama-destined loans from €16 billion to €12 billion, achieves a smaller total write-down of €3.6 billion instead of €4.8 billion and, correspondingly, a reduction in losses of €1.2 billion. In turn, this reduces by €1.2 billion the pressure on the bank to recapitalise, thereby reducing and avoiding existing shareholder dilution.

This type of “economical” accounting, in my professional opinion, actually undermines proper measurement and true assessment of the capital requirements of the bank, and, arguably, undermines the safety of customer deposits.

As Christmas 2009 approached, all emerging evidence across the banks and markets indicated that the scale of the asset bubble and bust was far greater than the Government and the banks and their beholden professional advisers had feared.

Unfortunately, from the very outset of the Nama proposal in April 2009, despite the warnings of a substantial body of independent analysts, the Government and its cheerleader advisers had insisted that their approach was unassailably correct.

However, shortly after Christmas it had become obvious that far higher levels of loan write-downs were required. Levels of at least 40 per cent were clearly indicated, even on the relatively better and less impaired well-documented loan cases.

In my article I show that a 40 per cent writedown on BoI’s €16 billion loans amounts to €6.4 billion. This should be rounded to €6.5 billion as a minimum capital replacement requirement to address adequately the non-recoverable element in its original Nama-listed loans, all of which still have to be managed and worked out irrespective of any and all reclassifications carried out prior to December 31st, 2009.

In relation to reviews and reclassifications on the original Nama loans lists since September 2009, not surprisingly Anglo’s Nama-listed loans rose from €28 billion to €36 billion; AIB’s Nama loans essentially remained at €24 billion; Nationwide’s (INBS) rose from €8 billion to €9 billion; EBS remained at €1 billion. Lastly and completely “against the tide”, and surprisingly, BoI’s fell from €16 billion to €12 billion!

There’s no apparent objective logic for such a major reduction reclassification by BoI.

More recently, the bank’s half-year results to June 30th, 2010, revealed evidence of some further “economical” accounting.

In this instance, Nama-listed loans on the audited balance sheet were transferred to Nama shortly after June 30th, crystallising losses of €300 million after June 30th that had not been provided for at that date. This meant that losses for the six months to June 30th, 2010, were understated by €300 million.

In relation to Prudential Capital Assessment Review capital ratios, there’s an in-built assumption that the assets and liabilities of the institutions will realise their stated amounts. That’s where the problem is for Irish institutions. The recoverability of the loan assets of the Irish banks is still only in the course of truthful measurement. To date, impending loan losses have been hopelessly undermeasured.

Two years have passed since the blanket guarantee of September 30th, 2008. The discovery of the true extent of appalling lending by the banks and the frightening scale of loan losses has terrified the Government, the institutions, the banks and their professional advisers into drawn-out denial. This has been unhelpful and the real economy has been hurting badly for two years. Businesses are bankrupt, hundreds of thousands of jobs have been lost, unemployment stands at 14 per cent, intelligent, educated young people emigrate, and so on. People are depressed by the lack of truth and honesty among our politicians and professionals. These are the real stress-tests that the people of Ireland have experienced.

With regard to Moody’s upgrade, I invite BoI to furnish Moody’s with a copy of my article in The Irish Times, together with a copy of Dan Loughrey’s letter on behalf of BoI and also this reply.

I would remind Dan Loughrey and the board and management of BoI that all the citizens of this State, jointly and severally, guarantee all the liabilities of BoI and all the other Irish-owned banks. That’s why we should have a say in what levels of capital each and every bank should maintain. The regulators are merely our assistants. We shouldn’t be in serf-like awe of our public servant assistants. – Yours, etc,


Mount Merrion,

Co Dublin.