THE APPEARANCE of National Asset Management Agency (Nama) chief executive Brendan McDonagh and Financial Regulator Matthew Elderfield before Oireachtas committees this week – and the frankness and candour of their contributions – will have both shocked and reassured the public.
Certainly, Mr McDonagh’s revelation that just one-third of the €80 billion in loans being acquired by Nama are generating interest payments was a major surprise. The asset management agency had anticipated that 40 per cent of loans would be in this category. But the poorer performance leaves Nama with less income and raises questions about its business plan. That plan is being revised to take account of the rise in impaired loans and will be published in June. At that stage, it will be possible to make a better assessment of the Nama operation and its prospect of long-term success.
What the public will find reassuring, however, is evidence of the agency’s determination to pursue borrowers for recovery of amounts owed on outstanding loans. Mr McDonagh indicated that by September Nama would start foreclosing on bankrupt developers.
And he warned that borrowers who had offered property as personal guarantee for loans - but who later transferred that property to spouses to avoid its seizure - would be sued. Nama’s role above all, as Mr McDonagh stressed, was to protect the interests of taxpayers which means taking a commercial view of unfinished building projects. And that may require Nama to knock down houses in unfinished housing estates outside Dublin.
One reason for Nama’s difficulty in valuing the impaired loans of the five participating financial institutions was the poor lending practices of those banks and building societies. Nama has found, as its chief executive told the Oireachtas committee, “a troubling picture of poor loan documentation, of assets not properly legally secured and of inadequate stress-testing of borrowers and loans” which reflected a “reckless abandonment of basic credit risk and prudent lending”.
The Financial Regulator echoed some of those sentiments with his criticism of the corporate governance failures at the main financial institutions. To say, as he did, that the boards of many banks and insurers “need to raise their game”, is an understatement. But his proposals to set more exacting standards for bank boards and to limit the number of directorships that bank board members can hold, should ensure that happens.
Mr Elderfield also favours the regulator having the power to interview candidates for top bank appointments, and presumably retaining a veto over such appointments. What he is proposing – a robust model of financial oversight – is necessary to ensure past banking mistakes cannot be repeated.
One measure of his seriousness was his move to put Quinn Insurance into administration to protect policyholders following its breach of solvency rules. That action was fully vindicated yesterday when the Quinn Group’s belatedly decided not to contest the appointment of administrators.