Business Irish

Sunday 25 June 2017

NAMA II alternative to avoid more aid for banks

Experts suggest 'PaddyMac' scheme

Under the plan, AIB, Bank of Ireland, Irish Life & Permanent and EBS would transfer about €64bn worth of loans into a new vehicle which Glas Securities dubs 'PaddyMac'
Under the plan, AIB, Bank of Ireland, Irish Life & Permanent and EBS would transfer about €64bn worth of loans into a new vehicle which Glas Securities dubs 'PaddyMac'
Laura Noonan

Laura Noonan

THE incoming Government could avoid having to make another massive injection into the banking sector under a plan proposed by debt specialists Glas Securities.

The Dublin-based experts say the banks would own a new vehicle set up to work out their 'non-core' loans, rather than transferring them to a 'NAMA II' and taking huge losses which would require further recapitalisation by the taxpayer.

The solution also offers a way of diffusing a potential row between the new Coalition and the European Central Bank (ECB) about "normalising" funding for our banks.

The plan tunes smoothly with the new Programme for Government's commitment that "bank deleveraging must be paced to match the return of more normal market conditions and demand for bank assets".

Under the plan, AIB, Bank of Ireland, Irish Life & Permanent and EBS would transfer about €64bn worth of loans into a new vehicle which Glas Securities dubs 'PaddyMac' -- a play on the US mortgage provider Freddie Mac.

Targets

The transfers would help the banks achieve the "deleveraging" targets set by the bailout agreement with the EU/IMF and get the balance between their loans and deposits down to the target of less than €125 loaned out for every €100 on deposit.

Because the banks themselves would own PaddyMac, the prospect of massive losses on transfer to a State-owned Nama II is greatly reduced.

PaddyMac could also be structured so that it wouldn't have to sell the assets for years, reducing the prospect of fire sales that would destroy value.

The State would have to put some money into PaddyMac -- Glas suggests €4bn in capital to absorb losses plus some other supports -- but crucially the State's exposure would be capped at a given level.

Unexpected losses would be taken by the banks themselves.

The proposed PaddyMac would also help the Government achieve its ambition of replacing "emergency lending" to Ireland's banks without putting the country on a collision course with the ECB.

The ECB has been very reluctant to set up a tailor-made programme to replace the €50bn of emergency lending to Ireland's banks with the "official" and "affordable" lending envisaged by the Government.

But the PaddyMac plan suggests a structure that would allow the ECB to fund Irish banks in a more "regular" way, without requiring the ECB to make any special arrangements.

Under the plan, the vehicle would pay banks for their €64bn of assets by issuing 'PaddyMac notes', mirroring the way that Nama pays the banks for their toxic development loans.

The ECB already accepts Nama bonds in its regular operations, and Glas suggests it would be willing to accept PaddyMac bonds in the same way, until the banks are ultimately able to sell the bonds on in the market.

The structure of PaddyMac would also allow the banks to get more bang for their buck at the ECB, because complex securitisations would be unwound in favour of straight-forward arrangements that attract lower ECB discounts.

This would ultimately allow the banks to get more money from the ECB's normal operations -- which lend at 1pc -- so they would have to borrow less of the 2.75pc 'emergency' money.

Banking sources last night said that while the PaddyMac structure was "very clever", it was just one of a number of possible outcomes in the bank restructuring.

A final decision on the way forward won't be made until the end of March, and will require sign-off from the Irish authorities, the Central Bank, the ECB, the European Commission and the IMF.

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