We need a clear view of the future in a nationalised banking structure

THERE is an unanswerable case now for the Government to publish a white paper on banking. The multiplicity of reasons for this needs to be chronicled.

Last Friday, Brian Lenihan outlined his broad budgetary strategy for 2011.

He specified in general terms where the €3bn of fiscal adjustment would come: through cuts in the capital programme, public service reform (as per the Bord Snip report), widening of the tax base through household water charges and a revamped PRSI/health levy regime.

This €3bn comes on top of €4bn adjustments in 2010. This €7bn is mere chicken feed in comparison to the exchequer sums that will be required to bail out Anglo Irish Bank and Irish Nationwide Building Society (INBS).

With each passing week, worse toxic news emanates from these two institutions. INBS needs €2bn to avoid insolvency. The market value reduction in their NAMA loan transfers is 50%.

For Anglo the loan files to be transferred are €4bn greater than was originally anticipated, increasing the total portfolio to €32 bn. An immediate €4bn will be required this year to recapitalise this failed bank.

It is not possible for these monies to come from the National Pension Reserve Fund because they are not viable investments and it has been nationalised.

Not one euro has been provided in this year’s budget arithmetic for what will have to be an exchequer repayment. It is absurd for the minister to articulate budgetary policy when the biggest item is not mentioned.

The public, and specifically taxpayers, need to have explained why a liquidator or receiver cannot be appointed to these institutions. They are completely insolvent. It is arguable whether they are systemic to the Irish economy. The glib assertion that it would cost more to wind them down because of debt default needs to be stress-tested.

A white paper on banking would establish future regulatory criteria for Irish banks and financial institutions. New capital adequacy ratios have to be put in place to prohibit banks from future excessive borrowing.

It is not clear whether or how quickly an adequacy ratio of tier-one capital of 8% will be implemented. This formula will ultimately determine what level of bank recapitalisation and liquidity will apply.

There is currently a policy vacuum in this vital supervisory sphere. There seems to be no joined-up thinking between the issues of bank restructuring and the ultimate environment in which they will have to operate. The needs of the three remaining institutions of the five covered by the state guarantee and NAMA have to be addressed. Visibility on their respective balance sheets only comes in small droplets of partial information.

This week’s AIB figures reflect a loan write-off of €5.35bn and losses of €2.6bn. A distressed sale of their 70% stake in the Polish bank WBK and 23% stake in American bank M&T would probably only yield around €3.5bn.

AIB’s current share price of around €1 reflects a total market capitalisation value of €870m. It has a pension fund deficit of more than €500m and must repay €280m on the state’s preference share coupon liability in May.

AIB has been reticent about its total recapitalisation requirements. Most market analysts assess AIB recapitalisation needs at €4bn. The inevitable conclusion is creeping bank nationalisation through majority state ownership.

Bank of Ireland faces, post-NAMA, a recapitalisation of at least €2bn. It has a total pension deficit of €1.5bn. Based on a share price of €1, its total market capitalisation value is around €1.2bn.

Irrespective of the reasons, the state acquired up to 15.7% ownership of BoI due to the non-payment of the €280m repayment on preference shares.

If this state investment of €3.5bn is converted into ordinary shares, then the Government already de facto owns more than 40% of BoI. Minor additional taxpayer capital will trigger majority state ownership.

Apparently talks are well under way between the Department of Finance and the EBS, Nationwide and permanent tsb. The legal procedures for a merger have been facilitated by EGMs. The provision for special shares to integrate the ownership of these institutions is in place.

The exclusion of Bank of Scotland Ireland as a participant has suggested the inclusion of Anglo to provide a corporate banking division. In this current policy vacuum, we are left with mere “mutterings” and speculation about a third banking force.

The footprint of the national retail network of such an institution has not been sketched out. Nor the consequent job losses. The recently-announced departure of Halifax and Postbank only add to the contraction of Irish banking and, consequently, competition. The key point for these five indigenous financial institutions is that there is no coherent Government strategy as regards nationalisation.

Brian Lenihan has repeatedly stated that he wishes to avoid it, but he has not ruled it out. This seems remarkably like making it up as you go along. This head in the sand approach to an utterly predictable situation seems shortsighted. Irish banking credibility in the eyes of the market needs to be restored. We have already overshot the runway of upsetting “commercial market sensitivities.

We need to know the end game. What will the future banking landscape and architecture look like? The Government needs to articulate a preferred choice of consolidation and competition. These issues engulf our entire macro-economic policy and restoration of stability in the public finances.

A GOVERNMENT white paper will have to be consistent with EU Commission and European Central Bank criteria. Previous pronouncements about NAMA at the outset last April and again in the Dáil debates in the autumn are now outdated.

The original objectives in relation to the loan transfer timetable – 30% haircut/discount on loans and the availability of bank credit to the real economy – are all partially redundant.

There seems to be no indication about how NAMA will ultimately dispose of these massive tracts of property which will overhang the market. No indicative time lines or targets have been set in this regard.

A future generation of taxpayers is being told to take on the burden of risk from bust bankers, reckless developers, negligent regulators and clueless politicians. They are at least entitled to a proper policy and regulatory framework within which this is to be carried out.

They should also be provided with the reasons why solutions based on market forces have been forsaken. The dismissal of a good and bad bank division within lending institutions needs to be justified – as this now seems to be part of the Anglo Irish Bank business plan.

The Irish economy will remain on zombie-watch until coherent answers are provided to these fundamental issues. The present “mushroom” information policy of keeping us in the dark and feeding us horse manure is unacceptable.

It will only create deeper resentment and antipathy towards politicians and banks, rather than acceptance of a new nationalised banking landscape.