Business Irish

Saturday 21 October 2017

Urgently wanted: a completely new bank policy (bankrupt zombies need not apply)

WITH our bankrupt banks requiring at least a further €25bn of fresh capital, we need a complete change of tack. Pumping tens of billions more of taxpayers' euro into zombie banks that will never lend again is just throwing good money after bad.

This week, the Irish banking crisis entered its fourth year. It is now clear that the March 2008 "St Patrick's Day massacre" of Irish bank shares marked the beginning of the crisis.

Three years is a long time. But what has happened in the meantime to sort out the mess? The truly dispiriting answer is that we are still no closer to a solution than we were three years ago.

Now, the Government is proposing to inject up to €25bn more of our money into the banks. This would bring our total exposure to as much as €115bn.

That figure includes more than €25bn in capital already injected; almost €25bn in state-guaranteed IOUs that have been issued to Anglo and Irish Nationwide; the €40bn of NAMA bonds used to buy the banks' bad property loans and the latest €25bn.

That is the equivalent of more than 90 per cent of the value of goods and services, as measured by GNP, which will be produced by the Irish economy this year.

This is utterly insane. Just as the Irish-owned banks lied to us about the true state of their property-loan portfolios until the very last minute, it is now clear that they have been similarly disingenuous about their residential-mortgage loan books.

By the time the cost of loss-making tracker mortgages and soaring arrears are all added up, it's difficult to see how the Irish-owned banks can escape with a total write-down of less than €30bn -- and it will probably be closer to €40bn -- on their Irish residential mortgages.

And there are almost certainly other undisclosed loan losses. Between them, property lending and Irish residential mortgages represented less than half of the Irish-owned banks' peak loan book of more than €400bn.

What, in the fullness of time, will we learn about credit-card lending, personal loans, business loans, overdrafts and other unsecured lending?

All of which means that even if the Government does put another €25bn of our money into the banks, it will merely be throwing good money after bad.

With the total loan losses at the Irish banks now set to comfortably exceed €100bn, they are simply beyond saving. Any amount of money which the Government pours into these hopeless cases will be immediately swallowed up by further loan losses.

With the prospect that taxpayers will be asked to foot the entire bill, the escalating bank losses have effectively bankrupted the Irish State. We are now left with the worst-possible outcome -- an insolvent sovereign and bankrupt banks which are unable to lend to Irish businesses and consumers.

As he prepares for next weekend's crunch EU summit, Enda Kenny needs a completely new strategy to deal with the banking crisis. The time for sticking-plaster "solutions" is long gone.

After three years, it should now be crystal clear that the damage to the existing Irish-owned banks, both financial and reputational, is so severe that they are past saving.

Instead of trying to "rescue" these zombie banks, the Government should shut them down and transfer their deposits to new banks. The €25bn of additional capital which has been earmarked for the existing banks should instead be used to adequately capitalise the new banks.

With no legacy bad loans and sufficient capital on their balance sheets, the new banks would have no problem retaining the remaining deposits of the existing banks. They would also be in a good position to recover some or all of the deposits which have fled the Irish banks over the past year. In addition, these new banks would have the resources and the incentive to lend to their customers.

The new banks should also be mandated to buy loans from the existing banks on a case-by-case basis at current market value. This would provide a very necessary market-based mechanism for writing down Irish bank debt. Any such writedowns should be passed on to borrowers.

While the advantages of replacing the existing banks with new ones are very clear for Ireland, they appear less so for the EU and ECB. Our European "partners" could be forgiven for wondering why they should agree to a solution that leaves them with the mucky end of the stick.

Look again. Whether it realised it or not at the time, the ECB was putting itself on the hook for the Irish banks' losses when it lent them €70bn to repay senior bondholders in full.

It's time to get real here. The €117bn which the ECB has lent directly to the Irish banks and the €70bn which the Irish Central Bank has lent to them on the ECB's behalf is never going to be repaid in full. The best that the ECB can hope for is a solution that, over time, minimises its losses.

Which is where the new banks come in. By restoring depositor confidence and allowing a resumption of lending, they would help restore growth to an economy which now looks like shrinking for the fourth consecutive year.

Not alone would this greatly reduce the risk of an Irish sovereign-debt default, it would also reduce the writedown on the loans which the new banks purchased from the existing banks. This, in turn, would cut the cost to the ECB of bailing out the Irish banks.

Finally, an Irish economic recovery would greatly increase the sale price when the new banks are sold back to the private sector.

The current policy is no longer an option. Doing nothing is a recipe for disaster. It's time to be bold Enda.

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