EUROPEAN CENTRAL BANK VIEW:THE EUROPEAN Central Bank (ECB) has expressed concern that the model for putting values on the bank loans to be bought by the proposed National Asset Management Agency (Nama), could work to the advantage of the banks.
The ECB has also, however, welcomed the Irish scheme’s adoption of the guiding principle that the preservation of private ownership is preferable to nationalisation.
The bank responded yesterday to a request from Minister for Finance Brian Lenihan for an opinion on the Bill that will establish Nama. It said the detailed provisions in the Bill to do with the pricing of the loans or assets that are to be bought from the banks, reflects the fact that this issue “is likely to determine the overall success of the Nama scheme.”
It said it considered it important, in line with previous opinions issued by it to Spain, that the pricing of acquired loans or assets was “mostly risk-based and determined by market conditions”.
It said the preference expressed in the Nama Bill for the “long-term economic value of the assets, rather than the current market values, requires careful consideration in this context”.
“In particular, it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme.”
The opinion refers to earlier opinions issued to Spain in which the ECB said it was important that the pricing of assets was determined by market conditions.
The ECB said if Nama is successful in preventing bank nationalisations, this should help avoid, in the short term, “the high costs involved in nationalisations and, in the medium term, the risk of banks’ objectives being diverted from profit maximisation to alternative goals that might distort the market structure and jeopardise the level playing field”.
In relation to sharing risk between Nama and the banks, the ECB noted that if Nama does not recoup its costs, the Government intends levying the banks to recoup the shortfall. It said it believes a guiding principle of the scheme should be that there is an adequate degree of risk-sharing, that the right incentives are provided, and that there is a level playing field across participating institutions.
It said if the ultimate aim of any asset removal scheme “is to help restore an adequate flow of lending into the economy and, to the extent possible, avoid large- scale and expensive direct government ownership, it will be necessary to carefully monitor the institutions participating in the Nama scheme to ensure that their self-interest does not cause them to focus on preserving and rebuilding their equity, instead of lending into the economy.”
The ECB said the euro zone had identified seven guiding principles that should apply to all asset support schemes and that the Nama proposal was broadly consistent with these principles.