Eyes of Europe on our banks because the job is still far from done
Published 25/03/2014 | 02:30
Central bankers speak obliquely, saying a lot to a few people, and very little to the majority of those listening. Interpreting central banker-speak is actually fairly hard work. Those who snap to judge exactly what one central banker or another meant too quickly tend to be wrong in their assessments.
It is rare, then, for someone like the president of the ECB, Mario Draghi, to speak so plainly as he did on the subject of Ireland's banks.
Mr Draghi has said Ireland's banks have "outstanding issues" in a letter written to Fianna Fail's Michael McGrath, and that he had "some concern".
Mr Draghi used exactly, and I mean exactly, the same language in December 2013, the day after the Irish economy exited the bailout without a precautionary credit line as he used in the letter to Mr McGrath.
The message? The job's not done, lads and lassies. Fix your banks' balance sheets.
But the authorities know this.
What are these outstanding issues? Well, the problem of non-performing loans by category is central to the problem Ireland's banks face. Banks make their money from interest charged on money loaned to households, firms, and other banks. When they don't get the principal back, the loan becomes a bad debt, and the banks have to use other monies to make up the difference, which hammers their bottom line.
UCD's Professor Morgan Kelly's recent intervention highlighted the €23bn worth of outstanding SME-related debt within Irish banks, some of which will never be repaid. Add this SME debt to the construction-related debt, most of which is in NAMA, and the household or mortgage debt, and the banks are in trouble to the tune of approximately €135bn of non-performing loans in Ireland alone. Add in their exposures in the UK and that figure rises to €161bn, as measured by the Central Bank in its last Macro financial review.
This is not a pretty picture, but the banks are well-capitalised following earlier cash injections, and with some economic growth, some restructuring of these debts, and some forbearance, the calculation the authorities have made is that the Irish banks may just scrape through.
Ahem. Now enter Mr Draghi, who explained in his letter to Mr McGrath that the Irish asset quality reviews carried out by a private consultancy firm 18 months ago were not as stringent as the ECB's forthcoming asset quality review, and the stress tests of the banks' assets, will be.
In particular, these new review standards, as per footnote 41 on page 115 of the recently-released asset quality review handbook, will define any debt unpaid for more than 90 days as 'non-performing' and strict new provisions may pertain for banks with these types of 'non-performing' loans. In total, the impaired loans are about 25pc of the total loan book of the big banks, and there are provisions for about 50pc of those loans already.
But these provisions are not evenly spread. AIB, for example, had 22pc of its Irish residential mortgage book defined as impaired in June 2013, and had 38pc of those loans provided for. In other words, 38pc of those loans could go bad, and the bank would still be relatively stable.
Permanent TSB, on the other hand, doesn't have that kind of coverage. Bank of Ireland is lighter in other areas of its loan book, too.
In addition, the new Capital Requirements Directive will mean banks will have to hold more, and higher-quality, capital than previously. This capital will be expensive. This puts them under pressure to source funds from elsewhere. When the ECB's asset quality review stress testing comes calling, these banks may need to up their capital requirements, either by borrowing on the markets or by getting cash injections from the taxpayer. Not exactly an appalling vista, but not something either the Irish Government or the taxpayer want to see happening.
So why does Mr Draghi choose to intervene so publicly? Either the pace of banking reform has not been satisfactory – in which case we would have read the troika's admonishments in the quarterly memoranda of understanding – or something else is going on.
Mr Draghi may simply mean this intervention as a shot across the bow of the Irish authorities. Get the banks sorted in good time for the asset quality review, and make it snappy.
STEPHEN KINSELLA IS SENIOR LECTURER IN ECONOMICS AT THE UNIVERSITY OF LIMERICK