Financial Regulatory Forum

Ireland gives “bad bank” wide powers

By Reuters Staff
July 30, 2009

By Carmel Crimmins and Padraic Halpin

DUBLIN, July 30 (Reuters) – Ireland unveiled a draft law on Thursday giving its “bad bank” wide powers to deal with the legacy of a devastating property crash, but investors will have to wait until September for clues on how much it will cost.

Ireland was the first country in Europe to propose a nationwide “bad bank” plan to deal with tens of billions of euros in risky property loans that brought its banking system to the brink of collapse, exacerbating an already severe recession.

“The need to clean up the balance sheets of the financial institutions in Ireland — that’s the underlying policy here,” Finance Minister Brian Lenihan told a news conference presenting the long-awaited 136-page draft bill.

The discount the National Asset Management Agency (NAMA) will demand from lenders in exchange for property loans and associated assets with a book value of 80-90 billion euros was not included in the document.

But details of how that discount will be calculated, along with an estimate of how much NAMA will have to issue in bonds to pay for the assets, will be given on Sept. 16, when parliament meets to debate the bill.

Such information and the possibility that the banks may be able to claim tax relief on the losses on their books is likely to boost shares in the country’s top two lenders, Bank of Ireland, and Allied Irish Banks, on Friday.

“It sounds like we will have a rough indication of what the system-wide haircut may be in September,” said Scott Rankin, banking analyst with Davy Stockbrokers.

“It puts the banks in a better position to make a call about whether they can actually raise money from their own shareholders.”

Shares in Bank of Ireland closed up nearly 2 percent at 1.80 euros and Allied Irish Banks finished 4.55 percent higher at 1.75 euros on Thursday.

Details of the draft legislation, which may be tweaked between now and September, were published after the market closed.

THE PICTURE WILL BECOME CLEARER

Lenihan stressed that NAMA would buy the loans at a price that reflected the assets’ longer-term economic value, which in most cases would be “significantly less” than the heady values Irish addresses commanded during the height of the “Celtic Tiger” property boom, which started to unravel two years ago.

The size of that discount will dictate whether Bank of Ireland and Allied Irish Banks will require more state funds on top of an existing 25 percent indirect stake in each lender.
“The picture will become clearer on September 16,” Lenihan said.

But the full capital impact will not be known until the end of June 2010, when over 10,000 loans are transferred.

At a nominal value of 80 billion euros, NAMA’s assets will dwarf the holdings of industry heavyweights GE Capital Real Estate and Morgan Stanley Real Estate, and give it unprecedented influence on property valuations.

Around a quarter of its assets will be based in the UK, mainly in London and Northern Ireland.
The discount on the assets, which will include luxury hotels, office blocks, half-finished projects and fallow former farm land, will be decided on a case-by-case basis.

Under the legislation, NAMA will have wide powers to purchase, hold and dispose of assets and will be able to seize collateral — including racehorses, shares and potentially the private residences of once flash developers, if necessary.

“Borrowers who continue to meet their contractual obligations, of course, have no reason to worry,” the finance ministry said in a statement.

PROPERTY BINGE
Lenihan said that over 50 percent of the loans were generating income but said it was too early to say what percentage were delinquent.

The agency will likely be formally created in October and will start taking over loans within weeks. NAMA aims to take over the assets of Ireland’s top 50 property developers, with a book value of around 30 billion euros, by the end of this year.

Removing the risky property loans will free up the banks’ balance sheets and, the government hopes, restore the flow of credit throughout the economy.

In return, the banks will receive government bonds they can cash in with the European Central Bank.
Lenihan said NAMA’s progress would be reviewed after five years, but economist Peter Bacon, who advised the government on setting up the “bad bank,” said it could take 10 years for the agency to deal with Ireland’s property binge.

“We will know the outcome of this at the end of the day, and the end of the day may be a decade away.”

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