Frankfurt focusing on the optics of banks' dud loans
Irish banks and American 'vultures' are the wrong targets for public anger if mortgage books need to be sold off, writes Colm McCarthy
There were reports yesterday of objections from the Department of Finance to the European bank regulator's enthusiasm for selling on dud mortgages held by the Irish banks. The previous week had seen a virulent outbreak of banker-bashing directed mainly at Permanent TSB, which has announced plans to sell 18,000 non-performing mortgage loans to new owners. About 4,000 of these are landlord loans but 14,000 relate to individual private borrowers.
The outrage is driven by concerns that borrowers making an effort to deal with arrears, or genuinely unable to do so, will pointlessly be evicted from their homes and many of the 14,000 belong to this category. Alternatively the villains are not the banks selling on the dud loans but the purchasers, confidently presumed to be 'vultures' (and American) in advance of their selection.
Assurances that the legal rights of the non-performing borrowers will be unaffected are not enough to counter the universal willingness to believe the worst. As with any witch-hunt, the accurate identification of witches is the difficult part.
Most countries in Europe, after the 2008 banking collapse, inflicted heavy burdens on taxpayers to rescue bank creditors and the resultant pressure on national treasuries exacerbated the economic downturn. The banking bust in Ireland and the subsequent creditor bailout cost the public more than in any other European country. Taxpayers hold the bankers (and their inattentive regulators) responsible for years of austerity, and politicians have quite properly responded with tougher bank regulation. But an atmosphere has been created in which any and all measures designed to constrain bank behaviour are assured of a public welcome. The bankers have sinned and indefinite punishment is in order.
There is an alternative take on what has been happening. While closer supervision of banks might have prevented the epidemic of bank failures had it been put in place 20 years ago, none of the losses can be retrieved by over-energetic interventions after the event. The eurozone's main banks are now supervised by an organisation in Frankfurt called the SSM (the Single Supervisory Mechanism), a sister of our good friends the ECB, and the SSM has played a central role in what has been happening at Permanent TSB. The intervention by the Department of Finance confirms that the SSM should be the principal candidate for public odium and that the witches may be neither Irish nor American.
Of the three Irish-owned banks which survived the 2008 meltdown, PTSB has always seemed the one facing the biggest challenges. It is smaller than AIB and Bank of Ireland, has a loan book even more concentrated in residential lending and a high proportion of un-remunerative tracker mortgages. Interest rates on these loans are so low that banks make slim margins, even when the borrowers are up to date on repayments. The high proportion of non-performing loans on the books at PTSB is due in large part to the sale of its performing UK loans at the behest of the regulators. If you are required to sell off your best loans, the non-performance rate on the remainder will look worse without anything substantive having changed.
PTSB's management has cut operating costs, has sought to address the overhang of non-performing loans in Ireland within the legal and regulatory constraints and has raised capital. Some observers feel that PTSB has been less effective in dealing with defaulters than some of the other banks but the current controversy needs to be seen in the context of the long and slow process of rebuilding a functioning banking market in Ireland. Instead the political system, and most of the media coverage, has responded as if the only issue which arises is the plight of the defaulting borrowers, every one of whom is presumed to be worthy of protection.
Public sympathy for defaulting borrowers, only some of whom deserve it, has been translated into demands for protection all round. The unidentified purchasers of the loan book are presumed to be malevolent, summoned to action by PTSB and its majority shareholder, the Government. Ulster Bank and KBC Bank have also indicated their intention of selling on portfolios of non-performing mortgage loans and several other banks, including departing banks, have already done so.
The three banks now in the firing line are not insolvent, have cut their costs, hopefully begun to lend with greater caution and have been recapitalised. If they were to continue on their current path it would take them many more years to reduce the mountain of non-performing mortgage loans but they would not go bust.
In the specific case of PTSB, the most recent figures published, for the period to June last year, show that it has adequate capital, has made sufficient provisions against its (large) stock of non-performing loans and has enough liquid assets. If it was a worry to the regulators in Frankfurt and their Dublin agents, the Irish Central Bank, it would have been required to raise more capital. It is making modest profits again and appears to be compliant with the capital adequacy and liquidity rules. Left to its own devices, it would presumably have seen no need to sell the 14,000 householder mortgages in such a hurry.
As well as targets for capital adequacy and liquidity, the SSM in Frankfurt appears to have decided that there must be, for all banks across Europe, a maximum proportion of non-performing loans, even when the loans in question have been written down to realisable value.
From a solvency perspective, it does not matter that the nominal value of loans exceeds the realisable value, provided capital is adequate once sufficient provision for non-payers has been taken on board. In the case of PTSB, the bank's capital, the excess of written-down assets over liabilities, is enough (actually more than enough) to meet the SSM capital adequacy standard. The message from the Department of Finance appears to be that the SSM is pursuing some aesthetic targets for the appearance, rather than the substance, of bank balance sheets.
Of the €2.7bn in soon-to-be-sold PTSB householder loans, €700m represents the portion of the restructured debt of 3,500 borrowers who are meeting their revised repayment terms. About €300m due from these borrowers has been kicked into the long grass by PTSB. The entire €1bn is perversely classified by the SSM as non-performing and both the borrowers and PTSB are right to feel aggrieved. The €700m is not non-performing in any meaningful sense, a point made on Friday by KBC Ireland chief executive Wim Verbraeken - PTSB is not the only bank on the receiving end of what can reasonably be described as the supervisor's classification error.
The centralisation of bank supervision in Frankfurt is an essential component of banking union, without which the design flaws in the construction of the common currency will never be remedied. Ireland has everything to gain from the completion of the monetary union and from coherent regulation and supervision at eurozone level. But centralised supervision needs to focus on the solution of real, not cosmetic, problems. On TV3's Pat Kenny Show last Wednesday, the mortgage expert Karl Deeter summed it up: if you want more intrusive bank supervision, this is what it looks like.