Worrying amount of time to set up 'bad bank'

ANALYSIS: Establishing Nama and hiring key staff poses a major challenge for the Government

WHILE UNCERTAINTY persists over the cost of the bad bank plan to the taxpayer, concerns are growing over how quickly the Government can get the new National Asset Management Agency (Nama) up and running.

The Government has created Nama to buy €80-€90 billion worth of property development and related loans at a discount that has yet to be agreed.

Tánaiste Mary Coughlan told the Dáil earlier this week that the legislation to establish Nama would be drafted within the next few weeks and should be passed by the end of the Dáil’s summer season.

That is still some time away, and given the rapid deterioration in the loan books of the banks over the past seven months, yet more property loans could have soured by the time Nama is in full swing.

There are also the logistics of hiring Nama’s lending teams to monitor the acquired loans as the Government prepares to seek the repayment of the loans or to foreclose on the most heavily-indebted developers who are in default on their existing loan agreements.

Nama will operate as a commercial semi-State body under the governance, direction and management of the National Treasury Management Agency (NTMA).

The aim is to optimise the return for the taxpayer by actively managing the loans – essentially ensuring that they are repaid and if not, ensuring that the properties are seized and sold, or held until the market starts to recover.

The Irish Bank Officials Association has expressed concerns about the jobs of 2,000 staff in credit management departments at the banks and how their future employment will be affected.

It took the Swedish government about seven months to establish its bad bank in the early 1990s following the collapse of its financial system, and in that case the loans involved amounted to about a sixth of the value of the debts being bought from the Irish banks.

Nama will undoubtedly require a crack management team with seasoned lending professionals and experienced credit managers.

The task ahead is mammoth for the Government and the NTMA at a time when they are juggling record State borrowing and managing the sharp economic deterioration with emergency measures.

It is understood there were some reservations among officials about proceeding with the bad bank plan in Tuesday’s Budget.

There were indications late last week that the scheme was not yet ready and that there was much more intricate planning needed before Nama could be publicly unveiled.

The banks also attempted to make last-minute representations about an alternative plan involving risk insurance, which would have allowed them to write down bad loans over time, rather than up-front under the Nama scheme.

However, the Government pressed ahead, knowing that since last September’s guarantee the state of the economy and the health of the banking sector were inextricably entwined, and both needed to be urgently addressed.

Deciding the cost of buying the loans could take some time to negotiate given what is at stake.

Sweden wrote down its loans by 25 per cent before transferring them to the State bad bank. A similar write-down for Nama would involve “a hair cut” of €22.5 billion on €90 billion in loans, which would create a large hole in the capital reserves of the banks.

This would force the banks to turn to the Government for more capital and ultimately lead to majority or even full State ownership of the most vulnerable banks.

A lower discount, close to some brokers’ estimates of 15 per cent, would require less capital, but the the State would have to rely on the levy at the end of Nama’s life to recoup any losses. This would leave a large bill hanging over the taxpayer for an indefinite period.

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