Friday 13 December 2019

New sheriff leaves financial groups bruised and stunned

Joe Brennan and Thomas Molloy

MATTHEW Elderfield is a man on a mission. His detractors say that mission is to use his stint in Dublin as a stepping stone to a big job as regulator in one of the world's great financial centres, while his supporters see him as a fearless champion of the laws of the land who is prepared to stand up to the financial services industry and his political masters.

It is certainly difficult to imagine any other official in Ireland upstaging his finance minister by appointing liquidators to a group of companies as important as Quinn Insurance. The timing of yesterday's news, hours before Brian Lenihan unveiled his vision for the country's banking industry, is extraordinary, but not as extraordinary as the decision itself.

Less than three months after moving to Dublin from Bermuda, Financial Regulator Elderfield winded the financial community yesterday by appointing administrators to the country's second largest insurer as well as forcing the Government to spend billions of extra euro on 'bombproofing' the banks.

Elderfield belongs to the talk-quietly-and-carry-a-big-stick school of regulation. The 44-year-old Englishman's toothy smile and mild manner may have disarmed the 200-strong audience at his first speech in a Dublin hotel earlier this month but his contact with the country's top bankers since then has left them bruised and stunned.

The sector's new sheriff has dragged the banks kicking and screaming through intensive and rigorous stress tests of their non-NAMA loan books, while demanding that they reach much higher levels of capital to absorb shock losses in future.

The general view overseas is that banks everywhere should gradually be forced to have equity on their balance sheets equivalent to 8pc of their assets by 2012. Elderfield believes Ireland needs to be ahead of foreign banks if our banks are to regain the confidence of the global markets lost amidst a welter of revelations over the past 12 months.

It is for this reason that he is demanding that banks raise enough money this year to ensure reserves don't fall below 7pc as the economy hits rock bottom. In hard cash terms, this means the banks and building societies have to raise about €10bn more than expected this year.

It's little surprise that political sources have spoken in the last two weeks of deep tension between Elderfield and the Department of Finance over his onerous demands, which will suck even more money out of the State's coffers at a time when budget cuts are causing massive hardship and political unpopularity. Analysts say Anglo Irish Bank, Irish Nationwide and EBS have no choice but to turn to Upper Merrion Street to plug the holes in their balance sheets.

Allied Irish Banks has stood out as the lender with most to lose. The group's remaining €12bn of property and construction loans have come out badly from Elderfield's stress-testing scenarios. The bank has argued that it should be able to get away with a 5pc equity ratio at the bottom of the economic cycle and then slowly increase it to 8pc over the next few years through retained earnings.

Elderfield has not been for turning. Yesterday, he confirmed that AIB would need to raise €7.4bn of equity, and up to a further €1bn of additional funds. It is likely that the Government will end up converting its €3.5bn indirect investment in AIB by the end of the year into ordinary shares. Finance Minister Brian Lenihan said it was likely that the bank would end up in majority ownership of the State.

Bank of Ireland is being required to raise €2.66bn of equity, plus a further €250m of additional funds. It is believed that the State will end up owning as much as 40pc of the group by the end of this year.

Some observers have questioned the logic of Elderfield hitting the banks with a double-whammy -- making them stress test against Armageddon scenarios and, at the same time, move ahead of the global trends in terms of capital reserving.

The cynics argue that Elderfield took a pay cut to move here from Bermuda because the Cambridge-educated international relations expert has his eyes on other plum jobs, which will become available in the world's financial capitals in the years ahead. Anybody looking at his Linked-In page, a Facebook for the financial community, might be inclined to agree. It makes it clear that he is interested in career opportunities, consulting offers, new ventures and job inquiries among other things.

Whether this is the case, the Government here should not be surprised at Elderfield's actions because it won't be the first time he has stepped in to demand banks and insurers pull up their socks. In Bermuda, he forced one bank to raise its tier 1 ratio to 6pc. Elderfield was no less accommodating to insurers that he felt were in trouble, taking enforcement action last year to force the winding up of the Bermuda branch of the British American Insurance Company and the Emerald Financial Group.

Just as he has here, he also forced the island state's other insurers to draw up radical stress tests. "We have to look into the abyss and ask how bad could it get?" he said in late 2008.

Regardless of Elderfield's past actions and future plans, the truth remains that Irish banks now must set the pace because they have been behind it for so long. All the banks have had to hike their bad loan loss forecasts repeatedly over the past two years, leaving their credibility severely impaired. It could be argued that the higher levels of capital they must now carry is a direct result of this massive credibility gap caused by their reckless lending.

However, the question now is whether the size of the massive burden they must carry to reassure investors will finally kill off the patients who have been on life support for the past two years.

Irish Independent

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