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Or, honest Irish central bank governor vs. dishonest Irish banks.
Bank of Ireland and Allied Irish Banks shares plummeted on Tuesday:
And we wonder if a speech by Governor Honohan helped cause this. It’s probably unlikely, but at the very least, his remarks ought to refocus attention on what Ireland’s â?¬90bn-or-so bailout may eventually cost its banks (and vice versa).
Honohan was actually talking to a bunch of Irish accountants on the nuances of Ireland’s bad bank, Nama, plus on capital requirements:
The lengthy process of determining the NAMA-related loan losses and the time taken in some cases to meet the Central Bank's capital target set out in the Prudential Capital Adequacy Review PCAR announcement of March 30, 2010, and revised at the end of September, has tended to muddy communication around the capital adequacy of the Irish banks. There is market concern about tail risk in the banks' portfolios…
But it’s from that ‘tail risk’ that Honohan moves very quickly onto the third rail of Irish banking losses — potential huge defaults in residential mortgages, which have so far failed to materialise alongside the smash facing commercial property in Ireland. (In fact, many Irish mortgages have been restructured ahead of actually defaulting. So far.)
It’s a very sore point, first because it destabilises the bits of the banks’ portfolios that remain outside Nama. That secondly increases the risk Nama will have to accept distressed residential loans for the first time, which will in turn ratchet up contingent liabilities for the state.
Note, for example, that Barclays Capital recently estimated a ballpark figure of â?¬22-37bn of Irish bank recapitalisation costs, based on them avoiding heavy residential losses. That’s starting to look optimistic.
Anyway, enough digressing. Back to Honohan:
I have already railed elsewhere against the backward-looking loan-loss provisioning practices encouraged by International Financial Reporting Standards (IFRS) and still all too pervasive in the reporting by most of the Irish banks. I find it unsatisfactory that expected losses in many parts of the portfolio are clearly higher than the provisions already taken, because I fear that this evident and in some cases explicit discrepancy may awaken doubts in the minds of investors as to the relevance of other aspects of the reported accounts…
Strong stuff. Loan-loss provisioning by Bank of Ireland and Allied Irish Banks is already eating into their capital buffers with gusto, so pressure for more provisioning reporting is interesting. While as Honohan adds:
There is a lot of information that could be provided. For instance, for the residential mortgage book, which has been much discussed recently, one could imagine much more extensive disclosures about the size distribution, broken down into a variety of sectoral and other classifications. Information on the aging and migration of loans between different performance buckets would also help. Bottom line: the banks might do well to call in the leading credit analysts and find out what information would be of greatest use to them in identifying and quantifying tail risks. And then provide it.
The ‘leading credit analysts’ who have actually been brought in are the IMF themselves, however. And this key story by the Irish Independent shows, they seem to be very interested in what the residential loans are doing to Irish bank health:
THE transfer of mortgage loans from the banks to NAMA is being discussed by government representatives and the IMF/EU, the Irish Independent has learnt…
Among the ideas being explored are:
- Moving loss-making tracker mortgages off bank balance sheets into NAMA.
- Moving distressed mortgages in arrears for 90 days-plus into NAMA.
- Moving impaired SME loans and smaller corporate loans into NAMA.
- Reversing the recent decision not to move loans below â?¬20m into NAMA and admitting thousands of smaller property loans…
As Nama Winelake points out, the rate of Irish mortgages going into arrears for more than 90 days is creeping up — though the financial regulator insists that this is within expectations.
Of course, this is the same regulator who just admitted that his stress tests of Irish banks failed.
More honesty to come, please.
Related links: The restructure of the Irish banking sector – Nama Winelake To rebuild an Irish banking system, parts one and two – FT Alphaville The likely cost of Ireland’s bank bailout – FT Alphaville
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