Selling loans to vulture funds not a solution

If past is prologue, then this week’s 10th anniversary of anxious queues forming outside Northern Rock should serve as a reminder that in banking everything is fine until it isn’t fine.

Selling loans to vulture funds not a solution

However in our post crisis economy that seems to defy normal rules, this maxim does not appear to have been fully absorbed by the Central Bank. The recently published mortgage arrears figures confirm the Central Bank’s continued indulgence of the elevated levels of non-performing loans with only marginal improvement in the number of actual long term resolutions that involve any form of debt write down.

In the years before the crash it was one of the core components of the Central Banker’s rulebook that banks could not sustain double-digit levels of non-performing loans. However the Irish banking system as a whole is still burdened with high levels of non-performing loans that could lead to problems in the next economic slowdown.

Irish banks are still at the wrong end of the European league table when it comes to bad debts and this means that we are all paying some of the highest costs for credit in the eurozone.

The main reason offered for the delay in implementing a debt resolution programme is that debt forgiveness would offend a Victorian morality notion that borrowers should be required to honour their debts whatever the circumstances. Debt forgiveness, it is argued, would be unfair to the majority of borrowers who have managed to keep up to date with mortgage payments.

However, when borrowers do not have the prospect of ever being able to repay these debts then delay in resolving arrears comes at a cost, not just in terms of the increased cost of credit but also in terms of a dysfunctional banking system.

In the past five years the world stock markets have experienced the second longest bull market in history with many banking stocks leading the way. They tend to be the banks that have resolved their bad debt problems, such as the American giant JP Morgan, which has more than doubled its share price. In the same period Irish bank stocks have remained in the doldrums despite the apparent turnaround in their top line profits.

It is not a stretch to connect the dysfunctional Irish housing market to the slow pace of mortgage arrears resolution and, in turn, to make the case that the crisis of homelessness will not be substantially tackled until solutions are found for the very substantial number of families living with the threat of repossession.

Despite repeated attempts to make inroads into the arrears problem, Government-backed initiatives so far have not adequately shifted the needle in the rate of long-term sustainable outcomes.

Outsourcing the problem by selling loan books in arrears to vulture funds that generally have no stake in the long-term future of the country is not a solution.

To do so denies the fact that arrears cases are more than an abstract balance sheet transaction but are in fact our brothers, sisters, fathers, mothers, sons and daughters. It takes no account of the social, health or relationship consequences of leaving families in limbo.

Irish banks used to pride themselves on their relationship-banking model, which prioritised these issues and took a long-term view by looking after Irish families and Irish businesses through thick and thin. There is no future in selling loan books to foreign vulture funds.

Eugene McErlean is a leading expert on banking and corporate governance

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