CANTILLON: INSIDE THE WORLD OF BUSINESS:THE REVELATION that Nama will carry out its functions via a special purpose vehicle (SPV) has raised the prospect of property developers, banks and pretty much every other bogeyman emerging cuckoo-like in the Nama nest.
The source of this concern is the requirement that the SPV be majority owned by unspecified private investors in order for the Government to be able to avoid including Nama’s €55 billion worth of debts in the National debt. Indeed, the real issue in all this is arguably the logic of relying on off-balance sheet accounting at a national level to solve what in part was a problem caused in the main by faulty off-balance sheet financing by institutions.
Leaving that aside, the fact that the Government decided in its wisdom not to disclose the SPV arrangement up front only feeds the paranoia surrounding Nama. The fairly limited information disclosed subsequently about the checks and balances that will operate to protect the public interest has failed to put the issue to bed.
In the Government’s defence it should be borne in mind that the more watertight they make the Master SPV, the less independent it becomes and eventually it will fail the tests imposed by Eurostat, who are the ultimate arbitrators in this issue.
And what has been decided to date is reasonably comforting: a veto over decisions affecting the national interest combined with returns linked to 10-year bond yields would be expected to ensure that only institutional investors come on board. Further limits may be imposed on who can invest and what size stake they can hold at a later date.
But there is no escaping the fact that private capital is being invited into the heart of the Nama process, albeit under the Government’s terms.
It adds a further element of risk to what is already a spectacularly risky enterprise.
Banks that will not lend
The latest European Central Bank data on bank lending cuts across the “open for business” rhetoric of the Irish banks. The truth is that the banks continue to tighten up lending criteria, with the resultant chicken-and-egg effect on demand.
More worrying is the indication that tightening is expected to continue in the fourth quarter here in contrast to the the wider euro zone, where some easing is anticipated.
The banks clearly remain focused on rebuilding their balance sheets as best they can in anticipation of Nama-related writedowns and associated injections of Government capital. Shrinking their loan books is the obvious thing to do and is arguably what is in the best interest – in the short term at least – of their shareholders.
It is, of course, the wrong thing for the economy right now. It also raises doubts about the underlying premise of Nama. Why should it be assumed that the banks will start lending once their bad loans have been bought off them and they have have been recapitalised?
The Government takes the view that they will see it as being in their interest to start lending on into the economy the fresh ECB funds they will receive as part of the Nama process. The alternative view is that they will simply replace existing ECB emergency funding with the fresh cash.
Yesterday’s figures indicate that a stick as well as a carrot might be needed to get the banks lending again.
Climate of opinion
The weather alone should be sufficient to dissuade anyone from swopping Nassau for Dublin. But, presumably the challenge of reforming the Irish regulatory system – and an as yet undisclosed salary – was sufficient to entice Mathew Elderfield away from sub-tropical paradise.
We know little of him, other than his curriculum vitae which is substantial. One thing stands out however. His two years as the head of the Bermuda Monetary Authority is no doubt very relevant when it comes to dealing with Ireland’s large and important offshore financial services industry.
But it is unlikely to have equipped him for dealing with the the domestic Irish banks which ran rings around his predecessor Pat Neary and sowed the seeds of their own destruction in the process.
And there is little to make one believe the banks have had much of a change of attitude, the current standoff with the Government over the chief executive’s job at AIB being a case in point.
We must look to his experience at the Financial Services Authority in the UK for pointers in this regard.
His roles there did include a senior position in the Major Retail Groups Division with responsibility for the supervision of eight banking groups, including Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland.
While the FSA also failed to curb the excesses of the British banks, at least it has not been left looking as utterly incompetent and weak as our own regulator.
Some grounds for optimism then that Mr Elderfield will take less nonsense from the banks.
Today:
The Irish Banking Federation will hold its annual national conference in Dublin this morning under the banner Rebuilding Confidence: Restoring Growth. The opening address at the sold-out event will be delivered by Minister for Finance Brian Lenihan. Topics for discussion at the event include the new regulatory environment, the future of international financial services in Ireland and new models for retail banking.
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