HOW the risk-sharing mechanism will work:
NAMA will use bonds to pay for the loans which it buys from the banks.
A bond is essentially an IOU which delivers a fixed rate of interest until such time as it is paid.
NAMA will issue two forms of bond when paying for the loans.
The first will be immediately cashable at the European Central Bank or on the international money markets. This means the banks, upon receipt of the bonds, can swap them in return for cash, which they can then use to fund their day-to-day activities.
The second form of bond, known as “subordinated debt”, won’t be redeemable for 10 years, although interest will be paid in the meantime.
If NAMA makes losses on the loans within that period, it can withhold the interest or withhold the payment due at the end of the 10-year period.
Because the banks will get the second form of bond as part payment, it means they bear some of the risk – and will lose money – if things go wrong.
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