Brendan Burgess
Founder
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The Minister's Budget Statement
The Government has decided to bring forward measures to address the issue of asset quality in the banking system. A National Asset Management Agency will be established on a statutory basis, under the aegis of the National Treasury Management Agency. Assets will be transferred from the banks to the new National Asset Management Agency with the purpose of ensuring that banks have a clean bill of health, their balance sheets are strengthened and uncertainty over bad debts is reduced. This will ensure a sustained flow of credit on a commercial basis to individuals, households and businesses in the real economy. The Agency will have a commercial mandate and will have the central objective of maximising over time the income and capital value of the assets entrusted to it.
Because it is clear that the principal uncertainties in relation to asset quality in the Irish banking system lie in the banks’ land and development loans and in the largest aggregate associated exposures in the banks, these will be transferred to the Agency. These assets pose the main systemic risk to the banking sector in Ireland and the most significant obstacle to the recovery and restoration of lending by the banking system.
The Agency will purchase the assets through the issue to the banks of Government bonds. This will result in a very significant increase in gross national debt, to be offset of course by the assets taken in. The cost of servicing this debt will be offset, as far as practical, from income accruing from the assets of the new Agency. The debt will be repaid from funds raised through the realisation of those assets over time.
The potential maximum book value of loans that will be transferred to the Agency is estimated to be in the region of €80 to €90 billion, although the amount paid by the Agency will be significantly less than this to reflect the loss in value of the properties. In the longer term, if the Agency were to fall short of recouping all of the costs, the Government intends that a levy should be applied to recoup any shortfall.
All borrowers will be required to meet their full legal obligations for repayment. There will be a hardening of the approach to these borrowers – taxpayer’s money is at stake, and the Agency will be expected to protect it in a commercial way and with an independent remit.
It is important to note the State will not assume all of the risk in the acquisition of these assets. The assets will be valued on a basis which is sustainable for the taxpayer. This will entail an assumption of losses by the financial institution whose assets are removed. The State has already capitalised the Bank of Ireland for a 25% stake and is completing a due diligence of the Allied Irish Banks prior to capitalisation for a similar stake. If the crystallisation of losses at any institution requires additional capital the State will insist on participation by way of ordinary shares in the relevant institution.
This initiative will be developed and implemented within the common EU framework detailed in the European Commission Guidance on the Treatment of Impaired Assets, working closely with the European Commission to obtain prior State aid approval. By drawing on the best advice and experience available internationally, we are committed to ensuring that this very significant measure will be an example of best practice and meets all of the objectives that the Government has set for it.
The Government also intends in line with its previous indication to put a State guarantee in place for the future issuance of debt securities with a maturity of up to five years. Access to longer-term funding in line with the mainstream approach in the EU - consistent with State aid rules – will contribute significantly to supporting the funding needs of the banks and to securing their continued stability.
The Government has decided to bring forward measures to address the issue of asset quality in the banking system. A National Asset Management Agency will be established on a statutory basis, under the aegis of the National Treasury Management Agency. Assets will be transferred from the banks to the new National Asset Management Agency with the purpose of ensuring that banks have a clean bill of health, their balance sheets are strengthened and uncertainty over bad debts is reduced. This will ensure a sustained flow of credit on a commercial basis to individuals, households and businesses in the real economy. The Agency will have a commercial mandate and will have the central objective of maximising over time the income and capital value of the assets entrusted to it.
Because it is clear that the principal uncertainties in relation to asset quality in the Irish banking system lie in the banks’ land and development loans and in the largest aggregate associated exposures in the banks, these will be transferred to the Agency. These assets pose the main systemic risk to the banking sector in Ireland and the most significant obstacle to the recovery and restoration of lending by the banking system.
The Agency will purchase the assets through the issue to the banks of Government bonds. This will result in a very significant increase in gross national debt, to be offset of course by the assets taken in. The cost of servicing this debt will be offset, as far as practical, from income accruing from the assets of the new Agency. The debt will be repaid from funds raised through the realisation of those assets over time.
The potential maximum book value of loans that will be transferred to the Agency is estimated to be in the region of €80 to €90 billion, although the amount paid by the Agency will be significantly less than this to reflect the loss in value of the properties. In the longer term, if the Agency were to fall short of recouping all of the costs, the Government intends that a levy should be applied to recoup any shortfall.
All borrowers will be required to meet their full legal obligations for repayment. There will be a hardening of the approach to these borrowers – taxpayer’s money is at stake, and the Agency will be expected to protect it in a commercial way and with an independent remit.
It is important to note the State will not assume all of the risk in the acquisition of these assets. The assets will be valued on a basis which is sustainable for the taxpayer. This will entail an assumption of losses by the financial institution whose assets are removed. The State has already capitalised the Bank of Ireland for a 25% stake and is completing a due diligence of the Allied Irish Banks prior to capitalisation for a similar stake. If the crystallisation of losses at any institution requires additional capital the State will insist on participation by way of ordinary shares in the relevant institution.
This initiative will be developed and implemented within the common EU framework detailed in the European Commission Guidance on the Treatment of Impaired Assets, working closely with the European Commission to obtain prior State aid approval. By drawing on the best advice and experience available internationally, we are committed to ensuring that this very significant measure will be an example of best practice and meets all of the objectives that the Government has set for it.
The Government also intends in line with its previous indication to put a State guarantee in place for the future issuance of debt securities with a maturity of up to five years. Access to longer-term funding in line with the mainstream approach in the EU - consistent with State aid rules – will contribute significantly to supporting the funding needs of the banks and to securing their continued stability.