Brendan Keenan: NAMA will only dent the banks' loan books
Published 27/02/2010 | 05:00
GOOD timing, or bad? The appearance of the worst monthly credit figures so far, on the same day as the NAMA bank rescue scheme was given approval by the EU Commission, allowed both government and opposition to say: "Told you so."
Ministers can claim that the sharp fall in lending to business in January shows the need to get NAMA (the National Asset Management Agency) up and running, so that the banks' capacity to lend will increase. Opposition parties can say that, 18 months on, the Government has not been able to get credit moving, and NAMA won't make any difference.
Both have a point. Taking €80bn off the banks' lending books and sending it to NAMA does indeed improve the banks' theoretical lending capacity. But it will be negligible, because the remaining loans will still far exceed their deposits.
The debates around this have been extraordinarily difficult to follow, because at least three separate arguments are going on simultaneously. One -- which seems to be the main one -- is whether NAMA is a good idea at all. The second is how NAMA should work, and how it should deal with developers who are not servicing their loans. The third is what the effects will be, especially on credit.
The last -- credit -- is the one that will have most effect on people in the short-term, but the debate on it has been infantile. People who should know better have left the impression that the creation of credit is at the discretion bankers.
You would have to listen carefully to realise that credit is someone else's savings. In the case of the guaranteed Irish banks, the €170bn in ordinary deposits has long since been lent out in a total ordinary loan book of €370bn.
The €200bn difference is money the banks borrowed, which is what caused all the trouble in the first place when the lenders asked for their money back. They are still not in much of a mood to lend to Irish banks.
It is worth thinking about those figures for a moment before the cacophony starts again. The NAMA purchase of €80bn -- at a price still to be decided -- makes only a dent in the total loan book. And everyone knows there are more losses to come on the remaining €300bn as other businesses and homebuyers find they cannot repay what they borrowed.
The central dilemma is that efforts to restore the banks to healthy profitability run counter to efforts to increase lending. This is not just an Irish problem. Healthier banks need more capital and smaller loan books. But maximising credit for borrowers would require the banks to set less capital aside and maintain, at least, the size of their loan book.
Policies to supply credit will have to be devised separately from the NAMA issue. If there is to be some new source of lending for business, where will the capital come from, and will lending be backed by deposits or borrowings? Should such borrowings be guaranteed by the taxpayer? And so on.
The purpose of NAMA was to save the Irish banking system from collapse. Some think it will not be enough. Others say the confidence that would come from seeing it up and working well is just the thing to end the pariah status of Irish banks.
One thing we can be sure of is that the EU and euro authorities will be just as determined to prevent a euro banking system from collapsing as they are to prevent Greece from defaulting on its government debt. NAMA is now the chosen vehicle and it will be both watched and supported by Brussels and Frankfurt.
The European Commission's watchdog role should assuage some of the fears about NAMA: that it will be a bailout for politically-connected developers; that borrowers from the North or Britain would draw the short straw; that it would be used to support property prices.
The complaints will not go away, but it seems clear that the commission took a tough line by vetting many of the loans itself, checking on the price being paid for them and that they comply with strict rules on such asset relief schemes.
Beyond this, the commission has still to approve restructuring plans by AIB, Bank of Ireland and Anglo. Without that approval, the Government would not be able to assist them. The conditions are likely to be more onerous than those for NAMA. Many people find it hard to see how the nationalised Anglo can meet the EU test of being able to be commercially viable again.
A final twist in this endless tale is that the commission scrutiny means we will not know exactly what NAMA is going to pay for the loans until the loan transfer is finished late in the year. We will get indications as loans are transferred -- especially the €17bn of the "Big 10" developers.
But since the premium over current market value was the thing that most enraged economists, the absence of a firm figure just adds to the opacity of this riddle wrapped in an enigma.