How to resolve our banking armageddon
By putting economic rationale ahead of retribution, the Irish taxpayer is infinitely better off, says Kevin Beary
THE Irish banking and real estate landscape resembles any post-war situation at present. There are some very visible legacies (such as unfinished ghost estates) and many people fear for their immediate future.
We have seen retribution too, in the pursuit of some misbehaving former bankers; radical changes being made within the legislative and regulatory framework; a rehab clinic for war veterans in Nama; and newly elected leaders at both political level and within the banks themselves.
Yet we have seen few signs of recovery two years on.
We need to understand the role of Nama in assisting recovery. It is a matter of fact that Nama purchased €72.3bn of property loans from the Irish banks for €30.5bn. To fund this purchase, Nama has effectively borrowed the cash from the ECB and it must be repaid with annual interest of 2 per cent, which will rise in line with the ECB interest rates. Over the last 18 months, €1.55bn of these borrowings has been repaid. The primary task for Nama must remain the repayment of the €30.5bn in Nama bonds to the ECB.
Separately, there are other major functions which are necessary for a full banking recovery, and these need to be devolved into autonomous government-led commercial businesses which generate value for taxpayers.
Nama has always expressed a strong preference for working with compliant borrowers. This is wise, as the majority of borrowers fall into this category, where their business plans are either approved or modified.
Borrowers who choose the path of resistance or obstruction face wipeout -- and deservedly so, as they have already cost the taxpayer €40bn. Foreclosure is always last resort for a bank, as asset values usually plummet further. Nevertheless, in certain cases, even where it is uneconomic, foreclosure remains the right course of action for the bank where an illegal act has been committed or if borrowers are not willing to work with the bank. The willingness to be decisive in these circumstances helps redress the 'Wild West' image of the Irish banking sector overseas.
Equally, it makes little sense for Nama to choose not to work with compliant borrowers who have the commercial savvy required to execute workout or refinancing programmes. It is also worth saying that most of the Nama clients have under-utilised entrepreneurial skills and an ability to create employment as assets are re-developed. We don't need a further brain drain. By putting economic rationale ahead of retribution, the Irish taxpayer is infinitely better off.
The new direction needs to be government-supported and is absolutely necessary for our recovery. The manner in which the government have tackled the economic and systemic banking problems in recent months has been lauded internationally. This momentum allows the government latitude to press on.
What are the possibilities?
• A new lending bank
There is little banking liquidity at present, with banks focusing heavily on non-performing loans and preserving their revised levels of capital.
The prevailing culture in these banks is 'anti-embarrassment', rather than capitalising on fresh viable lending opportunities to generate profit. I suggest a clean break by delegating new lending discretion into a new state-owned bank with no legacy assets, new staff and the establishment of sensible lending parameters.
The bank's mandate would be to make credit available for viable opportunities in Ireland and to generate profit. All annual profits, together with the capital value realised from the partial or full sale of the bank in future years, would accrue to the taxpayer.
One of the biggest systemic challenges is the inability, or unwillingness, of bankers to make new credit decisions due to a fear of making a mistake which could cost them their job or cause them to become the subject of ridicule.
I suggest introducing delegation authorities within the banks and Nama at certain senior levels in order to empower and encourage decision-making, which would lead to cash recovery and profit generation.
• Incentivise borrowers
Critical and worthwhile incentives can be agreed with borrowers and linked to borrowers' business plans. Measures here could include forgiven personal guarantees, which are worthless in many cases, or profit-sharing, once the banks have recovered the par value today of loans.
• Take the pain
Where loans are irrecoverable or bank losses are likely to deteriorate further, the sensible course of action, assuming asset liquidity is an option, is to sell, realise the loss and move on.
Recognising reality in terms of asset value and recoverability will enhance the confidence of international investors in the true value of the Irish banks.
• Development joint ventures
There are several development sites on the books of the banks which have the benefit of a current planning permission and strong rental prospects. These sites could be taken off the books of Nama and placed in a new SPV managed by a development specialist team reporting to the Department of Finance, offering project opportunities to overseas investors.
This would create a new and realistic rental and investment floor and thereby generate fresh activity and momentum. Nama's equity interest would be represented by the site contribution, which avoids the taxpayer having to commit further funds to progress development projects.
• Structuring and selling debt
We need Irish banks to continue to deleverage their property exposure where assets sales are not always viable.
Nama have recently introduced a new process for selling individual loans, rather than assets, in order to accelerate liquidity. This is being well received in the markets. In terms of loan portfolio sales, the success of Anglo Irish Bank recently in agreeing the sale of its US loan book to JP Morgan, Wells Fargo and Loan Star at a volatile time in global markets demonstrates the market demand for further debt sales.
This is a significant success for the taxpayer where the sale process was marshalled by the Department of Finance. The arrangement of new staple finance and splitting the portfolio into eight separate pools by the government's advisors at Eastdil provided much greater certainty to the process and more flexibility to the bidders. In the last week both Nama and Anglo have announced wider initiatives to accelerate debt portfolio sales and offer staple finance as part of asset or loan sales.
There comes a time in every economic catastrophe where we all have to move on and get back to generating profit. This requires strong and innovative leadership, both in government and within the financial services sector, from a breed of people who have the courage to make unpopular decisions for the right reasons in the longer term. This opportunity is now.
Kevin Beary is a co-founder of Beary Capital Partners
Sunday Indo Business