Splitting bank in two looks ever more dangerous
Published 30/04/2010 | 05:00
IT was always going to be a tough sell, proving to Brussels that there is something salvageable in Anglo Irish Bank.
But the pace at which bailout costs for the nationalised lender have ballooned over the past six months makes it all the more difficult.
Back in November, when the group's new management team filed a restructuring plan with the European Commission, they argued that splitting the group into a 'good bank' and 'bad bank' was the least costly option available of dealing with the mess.
Chief executive Mike Aynsley's plan is to carve a viable lender -- or a 'good bank' -- out of the cesspit, while a large chunk of the loan book is dumped into an internal mini-NAMA and wound down over time.
It was estimated at the time that the State would require a further €4bn to €6bn of capital -- in addition to the €4bn that had been pumped in last summer.
The aim was that a 'good bank', following a massive rebranding, would become a viable lender to small business, capable of repaying the State over time.
But then the numbers started to mount.
A month ago, it emerged that Anglo had lost €12.7bn in the 15 months to the end of September -- an ignominious Irish corporate record, as the bank wrote down €15.1bn of bad loans.
The disastrous figure was arrived at as Aynsley and his new finance director Maarten van Eden wrote down a large chunk of the €35.6bn of risky property loans Anglo is sending to NAMA.
But the initial haircut of almost 50pc which NAMA is applying to the first loans it is taking over from Anglo doesn't bode well for the rest of the book.
And the fact that the Financial Regulator is demanding that all lenders hold more capital in reserve adds to the headache.
As a result, Finance Minister Brian Lenihan has signalled that Anglo is likely to require a further €10bn in the future -- bringing the full size of the bailout to €22bn.
The prospect of taxpayers getting anything near most of the money back is remote, to say the least.
Aynsley has credibly argued that splitting the bank in two is the least expensive option for us.
Last month, he put the figure at up to €22bn of capital and less than €15bn of Government funding, based on the work of a host of consultants, including KPMG, global consultants Bain Co and investment bank JP Morgan.
A 10-year wind-down would cost between €19bn and €30bn in capital, plus €30bn in government funding, according to the estimates.
An immediate liquidation would require €35bn of capital to absorb losses and funding of up to €70bn to cover depositors and senior bond holders.
It has now emerged that Brussels has strongly criticised key elements of the good bank/bad bank split option contained in the original plan.
Anglo and its advisers are working round the clock to address the issues in a second version of the plan, due to be filed in the second half of next month.
They are also updating and cross-checking estimates relating to the other two scenarios: an immediate liquidation and a winding down of the bank over 10 years.
But news that the costings of a 20-year run down is being looked into is telling -- at a time when the EU is making strong noises about the dangers of supporting zombie banks.