Monday 18 December 2017

'Paddy Mac' banking fix is one option for Noonan

Moving non-core loans into new company could ease funding pain


Radical plans for a 'Nama II' published last week, and aimed at ending Irish banks' reliance on emergency Central Bank funding, are among a number of proposals under consideration by Finance Minister Michael Noonan.

All the Irish banks have submitted plans to the Central Bank on how to best to reduce themselves in size and move non-essential loans and assets, off their balance sheets.

A new report, released last week by debt specialists Glas Securities, proposed detailed plans on how the banks could shrink their balance sheets to a more manageable size without triggering massive losses that would have to be covered by the taxpayer.

Under the plan, AIB, Bank of Ireland, Irish Life & Permanent and EBS would move roughly €64bn of their "non-core" loans and assets into a new company.

The new firm has been dubbed "Paddy Mac", a play on the US lender Freddie Mac.

And because the new company would be owned by the banks and not the State there would be no discounts or 'haircuts' applied when the assets transfer across, so there would be no immediate losses or 'fire sales'.

As a result, such a plan could also see the four banks quickly weaned off the €50bn emergency funding that's being channelled through the Central Bank.

Mr Noonan's department said "all options are being considered at present," as how to reduce the size of the banks.

The banks have been driven to take the emergency support, known as exceptional liquidity assistance (ELA), because of the tight rules surrounding the ECB's "regular" lending operations where banks pawn assets for cash.

When banks can't get enough money from the ECB, they go to the Central Bank for emergency loans, which carry a more expensive interest rate.

'PaddyMac' would then issue the banks with bonds in payment for the €64bn in loans, in the same way that Nama issues banks with bonds now. The banks would then be able to present those bonds to the ECB and exchange them for cash with minimal discounts.

The structure is aimed at dramatically reducing the banks' dependence on ELA, since they could get far more bang for their buck at the "regular" operations. One government source said last night that some scepticism exists around the proposed "Nama II" model, as it would not conclusively deal with the problem of banks losses.

"Nama's purpose was to force the banks to realise their losses and start again. This simply parks the problem to one side and the markets wouldn't buy it," a government source said.

The new government has vocally questioned the role and the impact Nama has had on the Irish banks, and is seeking some mechanism to allow the banks to reduce in size without adding considerably the burden already on the shoulders of the Irish taxpayer.

New figures show that there was a big jump in the amount of emergency support given to Irish banks by the Central Bank last month.

Central Bank figures show that by the end of February it had lent just over €70bn to Irish banks.

This was a big increase from just over €51bn at the end of November.

The Central Bank said that more than half of the increase in the emergency lending was linked to a change in the rules under which ECB money is lent. The amount of loans to Irish banks from the European Central Bank fell sharply, standing at just under €117bn, a drop of more than €9bn from the previous month.

Sunday Independent

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