ANALYSIS:Yesterday's EU approval of the bank scheme is significant, but Brussels will remain heavily involved in the process, writes ARTHUR BEESLEY
ANOTHER MILESTONE has been passed on a long, long road. More than seven months after Minister for Finance Brian Lenihan published draft legislation to establish the National Asset Management Agency (Nama), EU approval of the controversial scheme means the “bad bank” is now free to set about its work.
With restructuring plans from Allied Irish Banks, Bank of Ireland and the nationalised Anglo Irish Bank still under EU scrutiny, the decision to clear the way for Nama represents but one cog in a machine of many moving parts. Even though the green light stands as a decisive step forward, it remains the case that individual transactions made by Nama will have to be notified to Brussels for assessment case by case under its state-aid rules.
That will be the true test of the scheme and the pricing mechanisms that will ultimately determine the banks’ requirement for new capital. According to European Commission officials, the aim of case-by-case notification is to ensure that the transfer price realised by the banks is “not more than they should get”. The significance of yesterday’s decision is that the loan transfers can now begin.
Lenihan says no less than €17 billion in assets will go to Nama within the next month. That this represents the exposure of the 10 largest borrowers to only five banks is a stark – and dispiriting – illustration of the dangerous extent to which the main Irish banks concentrated risk in the boom times.
With a further €37 billion in assets going to Nama by the end of the year, the burden of that great folly now rests on taxpayers’ shoulders. EU competition commissioner Joaquín Almunia was not charged with assessing the fairness of that. Rather, his task was to determine whether Nama complies with complex EU rules on impaired asset relief for banks.
Notwithstanding a handful of amendments, he has ruled on the whole that it does.
The upshot is that Nama will proceed more or less as planned. This was always likely to be the case – Irish officials liaised very closely with their counterparts in Brussels when they were drafting the Nama legislation.
Almunia wasn’t exactly effusive on the question of whether the scheme will resolve the core problem it is designed to fix: securing the shaky foundations of the banking sector to ensure a resumption of normal lending. Nevertheless, he said Nama was “key” to cleaning up bank balance sheets.
“This is an important step towards the overall restructuring of the sector and its return to a normal and responsible functioning of the market,” he said. “The scheme will help address the issue of asset quality in the Irish banking system and promote the return to a normally functioning financial market.”
Taxpayers are clearly on the hook. So how does the commission respond to the complaint that the scheme’s sheer scale is disproportionately risky? “We took great care to ensure that there was an adequate burden-sharing mechanism through first of all the transfer price, which cannot be higher than the long-term economic value of those assets,” said the commissioner’s spokeswoman.
Needless to say, the determination of the long-term economic value of property in the middle of a full-blown market collapse is fraught with difficulty. At a general level, however, the scheme allows for “ex-ante transparency” on the value of assets transferred into Nama.
More particularly, the commission’s policy is to routinely publish decisions it makes under applications for state aid.
“The commission will assess the compatibility [and, in particular, the actual transfer price] of the transferred assets when they are separately notified by the Irish authorities,” Almunia said. “These individual reviews will include a claw-back mechanism in the case of excess payments.”
The commission, like the Government, places great emphasis on the claw-back, which is designed to ensure that the banks will have to make good any losses on the Nama enterprise.
Indeed, the commissioner’s spokeswoman said the mechanism will “allow the state to recover any subsidies that may have been unduly paid”. In two respects, the commission has also imposed changes which serve to lessen the price at which Nama acquires loans.
First, Almunia called on the Government to build in a higher risk premium in Nama’s valuation methodology. This essentially means the agency should pay less up front for assets whose value are likely to accrue over a longer period. Second, he has told Nama to build in allowances for higher enforcement costs when pricing loans. This suggests Brussels believes the agency will have a busy time of it seizing assets from defaulting borrowers.
In a third amendment, however, Almunia has called on the Government to be less aggressive when applying interest rates to discount the net present value of loans. This serves to apply upward pressure on loan valuations.
In practice, the third change may well offset the impact of the first two. “The effect of these changes in the assumptions is expected to be broadly neutral,” said Lenihan’s spokesman.
The accuracy of that assessment will only be gauged with time. It is much the same for the multitude of other projections – some of them in dire contrast to the Government’s positive spin – that surround Nama.
Backed by 26 other European commissioners, Almunia has determined that the scheme can now begin. Lax oversight by the Government and regulators over a coterie of zealous bankers and developers brought us to this place.
Nama will be here for some time yet.
Arthur Beesley is European Correspondent