Time to stop listening to EU and restructure our banks and debts
Let’s put our problem into a global perspective. The total amount that global insurance companies paid out on all of the natural disasters around the world last year was €43 billion.
The amount of funds that taxpayers have committed to the six banking institutions, before yesterday’s PCARs, was already €500 million ahead of that figure.
Stress tests — PCAR — for four banks, excluding Anglo and INBS, will add another €24bn to that. Central Bank funding to Irish institutions will cost an additional €6bn over three years.
Anglo will require, by its own senior management’s admission, around €15bn more and INBS will swallow another €3bn-4bn.
After yesterday’s announcement, the banking fiasco bill stands between €93bn (using the Central Bank stress tests estimate) and €104bn (using estimates of the tests authors, the BlackRock).
More than a year ago, I predicted that the total bill for rescuing the banking sector will come to between €95bn and €105bn. For the first time in three years, the Government is finally getting close to the real figures.
Back in 2008, the entire banking sector was worth no more than €3bn. We are about to spend some 35 times that value on rescuing it.
In other words, the Irish banks are a screw-up of historically unprecedented proportions.
And the saga of our financial meltdown is not over yet. Stress tests were based on the assumption that the banks will be able to raise their own capital to reach the Core Tier 1 target of 12% from 10.5% levels covered by the stress tests. This is wishful thinking.
No insolvent institution can hope to raise private capital. By this benchmark, AIB, IL&P, EBS, INBS and Anglo will all require further state interventions over and above the amounts determined by the tests.
PCAR tests were also based on benign assumptions concerning inflation, which in turn drove benign assumptions on the interest rates. Coupled with relatively modest assumptions for the projected declines in personal disposable income through 2013, this means that the tests failed to fully capture the effects of rising interest rates on currently performing mortgages.
Last, but not least, there is a sticky point of banks deleveraging.
PCAR exercise aims to drive banks assets from the current ca 160% ratio of loans to deposits down to 122%. This, in itself, is a massive undertaking. Should the deposits remain fixed, the banks will have to sell 24% of their existent assets.
Should deposits drop further by 10% (roughly half of the decline in deposits base so far in the crisis), the banks will have to shed over 31% of the current assets to reach 122% ratio.
Volume-discounts on sales will push asset sales above 34%-37% of the entire loan book of the six banks. One is left to wonder, if Irish banks even have so many assets that anyone would want to buy in the first place.
On the positive side, PCAR painted a more realistic picture of the banking sector. In addition to unsalvageable Anglo and INBS, we now have an insolvent trio of AIB, EBS and Permanent TSB.
Bank of Ireland is the only institution that currently stands out as being just comatose, as opposed to being completely dead — a feasible target for future recovery.
In the light of the tests, it is imperative that the Government develops a comprehensive banks’ resolution plan that will set a realistic approach to restructuring the entire banking sector. In my view, such a plan will first require an outright nationalisation of the five zombie banks.
In step two, the Government should carry out a full consolidation of the performing assets of the six banks into two — Bank of Ireland and a smaller entity derived from Permanent TSB. The consolidation should be aided financially by a debt write-down and debt-for-equity swap leading to a dilution of the Government shares.
Other banks should be wound down over the three to five-year horizon, following robust writedowns of their debts both with the central banks and with private bondholders.
In their place, the Government should actively encourage new entrants to come into the retail and business banking market both from the ranks of existent global banks and from the start-ups based on prudentially conservative business models.
This, of course, will require putting in place some significant long-term incentives in forms of tax offsets and retail deposits guarantees.
Time to stop listening to the EU and ECB, and an army of domestic ‘Yes, Minister’ men. Time to start restructuring our banks and our debts.
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