Tánaiste wants to see a better return for money on deposit. A new equity SSIA?

[faketales]

Is this a different proposal to what is being looked at re. ETFs?

My concern is all this takes time, as someone who is 40 and open to long term investment (say 10 to 15 years min.) time is closing in.

Another 5 years of review and planning would not be welcome.

 

[ClubMan]

There also needs to be a examination of the word "risk".

Great point @Steven Barrett. And I'm probably guilty of conflating risk and volatility in some of my own posts. Mea culpa.

The difference between volatility and risk | RBC Brewin Dolphin

Confusing volatility with risk can cause stress and heavy financial losses. Here, we explain the difference between the two.

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[Duke of Marmalade]

Why would the borrower (State/taxpayers) offer higher rates on a loan, given that there are plenty of savers willing to lend to the State at current rates?

A good point' still it is a bit rich for a Tanaiste to give out about deposit rates when the NTMA has abandoned the traditional role of State Savings in keeping banks on their toes in terms of their rates.
In the UK the interest rate on Premium Bonds, for example, is flexed periodically to match the gilt rate, in other words to give retail investors the same terms as they borrow from the wholesale market.

 

[Duke of Marmalade]

Equities is 6 out of 7 in the ESMA ratings.

My understanding of ESMA ratings is that they model the worst 2.5% outcome. So while volatility is the statistical tool they use in this measurement they are actually focussed on the "worst" case outcome. Crucially they calculate this risk in respect of the Recommended Holding Period of a product. So maybe the typical RHP of a retail investment is 5 years.
If the methodology was applied to a term of say 30 years then equities would get the lowest risk ratings, but I think ESMA ratings are confined to products of much shorter duration.

 

[fistophobia]

Regina Doherty has issued a statement, saying that ETF rules are wrong and need to change. Does her opinion make any difference?

 

[Corola]

As one comment said “If only Regina Doherty had previously served as a government minister and could have suggested this when she sat at cabinet...”

 

[S class]

It's very simple Simon !

Your first move should be to reinstate a decent yearly exemption from dirt tax. I would suggest first 1k of deposit interest should be exempt.

Dirt tax should be reduced to 20%.

Share dividends should be exempt from income tax on the first 1k per year.

Simplify the ridiculously complicated tax rules for investing in unit funds.

Abolish the 1% stamp duty on Irish shares.

Abolish class K Prsi on investment dividends and deposit interest.

 

[Zion2022]

Your first move should be to reinstate a decent yearly exemption from dirt tax. I would suggest first 1k of deposit interest should be exempt.

Dirt tax should be reduced to 20%

Given the country already has an abundance of assets ‘invested’ in largely unproductive cash on deposit and the problem statement generally at government, CBI and EU level is - ‘how do we get people to deploy cash more productively for their own benefit and our economy’. I do not see any world where the recommendation is

‘Give cash significant tax advantages over other productive assets’

 

[letitroll]

They need to understand that in the long term, they will make money in almost all conditions...and that is the risk.

The biggest risk in life (& investing) is that you take no risk at all....many people in their careers, in their financial life do this.....they mistake prudence as a game in which you eliminate all risk. In doing so you cut off the left tail (negative outcomes) but so too goes the right tail (positive outcomes).

Your stat on 75% feels about right in this sub-optimal risk aversion bucket, another 15% probably take an optimal level of risk and the remaining 10% are taking excessive risk (some subset of them wildy winning and mistaking excessive risk for genius while the majority crash and burn).

 

[letitroll]

It's up to the government to create an environment in which banks will be confident to loan large amounts of savers deposits for projects in Ireland.

It's less about confidence - its simply that these lending catergories (development, SME) make little sense for the banks to do financially. Whats holding back Ireland's domestic banks post-GFC is the risk weights that Basel II / III attaches to certain types of lending. Put simply whole swathes of loan categories post-Basel became activities where the maths no longer worked for commercial banks....too much capital required to be put aside such that the RoE was poor.....in fact regulators made the RoE so poor that its outright foolish for banks to engage in certain lending at scale.

I've proposed the solution a couple of times and its that the Irish Government, in a targeted way, needs to provide SRTs (synthetic risk transfers) for lending deemed to be pro-social (SMB lending & property development being the obvious two). Its effectively tranche sharing of risk.

There is a cogent argument to be made that larger economies like the UK or US could absorb their banks withdrawing from certain credit lines because private credit sources would come in to fill the hole left behind (which is a function of their more developed capital markets).....however places like Ireland are especially hurt by it......we just don't have enough depth in our domestic capital market to step-in and capital markets union (such that EU capital would come in) is still a pipe dream really.

Time for the Government to engage in a little bit of entrepreneurial risk taking by actually enabling the private sector to do it via SRTs. There's a certain insanity to the Irish pillar banks returning effectively double digit shareholder distributions annually for the last number of years when there is so clearly numerous projects they could lend against that have excellent business cases attached to them but due to capital rules, as they stand, actually have poor return on equity profiles for the only entities in a position to manufacture the loans at the scale we need them. The regulatory tail is wagging the political economy dog!

 

[Duke of Marmalade]

Time for the Government to engage in a little bit of entrepreneurial risk taking by actually enabling the private sector to do it via SRTs.

Are you suggesting the Government should supply the SRTs?
Why can’t our banks access SRTs from international hedge funds etc.?

 

[ClubMan]

I presume that the taxes that you mention relate to dividends?

 

[S class]

They apply to dividends and also to bank deposit interest.

But it is relatively simple to reclaim some or most of the excess deposit withholding tax on platforms like Raisin.

If the EU seriously wants to set up an EU wide investment system, the first thing that needs to be done is to harmonise withholding tax at 15%.

Then ban countries from charging stamp duty on share deals.

 

[jpd]

Withholding tax in France is 12.8%, so below the 15%

 

[letitroll]

Are you suggesting the Government should supply the SRTs?
Why can’t our banks access SRTs from international hedge funds etc.?

Yes I am.

Hedge funds or even private credit funds are looking to write SRTs against a diversified basket of many many loans (think mortgage CLO of 1000s) - a development loan book is the opposite of this - perhaps a theoretical AIB or BOI at scale in the development space might have 80% of their book by value written against 30 mega projects being developed by 15 promoters. This is not SRT'able in the same way as a book of credit card debt.*

Also the nature of development loans (revolving facilities) doesnt really lend itself to commercial SRTs which work best against static loan books of longer duration say 3-5yrs - a development loan isnt static its flexes up and down intrayear....a classic example being a housing estate development where work in progress peaks midyear and the homes get handed to customer into YE.....not something the commercial SRT market looks to participate in.

Finally hedge fund backed SRT's even if they were available would be deeply pro-cyclical...think 2008 style overnight funding cyclical...leading to credit crunches & boom/busts. The story of building Ireland's construction capacity again (sustainably) is to try to restore stability through the cycle such that Joe Plumber 2.0 or Joe Electrician 2.0 isn't like his predecessors forced to move to Australia every 7-8yrs. That is not how you build an industry that can sustainably deliver 50,000 homes p/a against your demographics needs.

* the state as the originator of SRTs could help solve this by means of being an aggregator....and so likely the State itself could offload some diversified pool of risk.

 

[Duke of Marmalade]

@letitroll sounds like fairly specialist stuff. Would it not be beyond NTMA's pay grade?
A bit beyond my pay grade but it sounds to me that the powers that be (ECB?) would not be happy campers. If as you say the Basel constraints are too severe then it is because of a (over) reaction to the GFC when bank busts were socialised. Seems to me that what you suggest is getting round the rules and effectively socialising the next bank bust.

 

[letitroll]

sounds like fairly specialist stuff. Would it not be beyond NTMA's pay grade?

Not really - and nothing a competent investment bank couldn’t help them with.

The alternative….is the definition of complexity and unlimited financial exposure which is what we have - the myriad of state quongos (LDA, HBFI etc etc) and various schemes / grants….all desperately trying to ‘activate’ projects.

Seems to me that what you suggest is getting round the rules and effectively socialising the next bank bust.

Quite the opposite - SRTs define the quantum of exposure and limit it while leveraging private sector balance sheets to do the heavy lifting. Indeed the State would get paid to provide them.

Now think about about where we are. Go look at the level of funding being directed by the State to the Dept of Housing plus the myriad of schemes to activate and underwrite housing let’s call it direct activation including the demand side (HTB,FHS)….in some way or another because of the inability to drive private sector solutions….the State right now is actually ‘on the hook’ for a quantum of capital that actually mirrors bank bailout levels if taken cumulatively across say the next 4-5yr period….committing the State’s finances so extensively in the context of precariousness of the corporate tax windfall that underwrites it I think is the more risky strategy….and invites another bust in housing delivery if/when the States finances deteriorate and international bond markets aren’t so willing to lend to us.

 

[Duke of Marmalade]

@letitroll As I say above my pay grade so not really much more to offer. Still it looks like the State facilitating easing the Basel rules and if the reason the State are stepping in is because the private sector don't think it worth the risk that doesn't quite pass the smell test. Would it be a first if Ireland did this? The shinners might like if it comes with State intervention in lending policies.

 

[letitroll]

State are stepping in is because the private sector don't think it worth the risk that doesn't quite pass the smell test

Well as I explained above its not really that private sector doesn't think its worth the risk.....its rather the risk (by its revolver & entity level concentration characteristic) does not fit into the SRT framework and so the folks willing to write SRT against it are niche and if that weren't problem enough to the extent that it could be done in the UK or USA..... Ireland (as in a lot of things) is just too small a market to waste your limited resources and capital on.

Would it be a first if Ireland did this?

Nope! Our British friends figured it out!

How the ENABLE Build Programme works

The ENABLE Build programme aims to increase the availability of finance to UK SME house builders - learn how the programme works in our helpful explainer

www.british-business-bank.co.uk

Big picture the Irish government is using way TOO MUCH equity (i.e. State annual revenues) to deliver housing.....somewhat simplified but the below is pretty close to the truth:

Current Model - The State spends €100m via the LDA to build €100m of housing. (1:1 ratio)

SRT Model: The State guarantees €100m of risk tranches at the Irish banks to unlock €1bnm of private bank lending into the development space. (1:10 Ratio!.......which is not even accurate because broadly the expectation is that the value at risk out of that €100m is really much less one could argue the ratio of spend to outcome is 1:100).

I would be all for the State equity-tising housing delivery in a downturn....but you dont do that in the good times when your banks have the capacity both equity and deposit funding to do it...its dumb....and a misallocation of resources.

 

[Duke of Marmalade]

Nope! Our British friends figured it out!

That's good enuff for me.