The asset management agency will address lower-level property players in next phase

COMMON SENSE would appear to have prevailed in the debate about the scope of what is being called Nama 2 – the takeover of AIB and Bank of Ireland’s remaining property loans. To date, only borrowers owing €20 million or more have had their loans transferred to the National Asset Management Agency. But under the terms of the loans from the International Monetary Fund (IMF) and the EU, the rump of less than €16 billion is to transfer as well to further reduce uncertainty about the banks’ potential losses.

According to the legislation published last week, the new entity, subsidiary or whatever it ends up being will not operate on the same basis as its parent, Nama proper. The key difference is that it will not take over all the loans – good, bad and indifferent – associated with borrowers who fall within its purview. Instead, it will only take over their property loans. Any other borrowings they have will remain with the originating bank. The concession follows last-minute representations from the banks.

The rationale for the different approach is that many of the thousands of borrowers in question are what might be called part-time property developers. Many of them are, in reality, small and medium-sized business customers who dabbled in the market and used their businesses as collateral.

Thus if Nama 2 took them out of the banks in the same way that Nama proper took out the big developers, it would – according to the banks – also be taking the core of the business banking franchise of both banks.

This was problematic on several fronts. Not least because it would appear contrary to the latest strategy for the banking sector – agreed with the EU, IMF and European Central Bank (ECB) – which wants both banks to get back to the knitting: retail and business banking in Ireland. The future viability of the two banks would arguably thus have been further eroded.

The other problem is that the more loans transferred as part of Nama 2, the bigger the losses crystallised on the bank balance sheets and the bigger the capital injection required. If the haircuts of the full €16 billion of property and associated loans earmarked for Nama were in the same territory as those on the Nama transfers, the two banks could have been facing a €8 billion hit. The most likely source of this money would be the taxpayer who, in turn, would be drawing from the €65 billion of loans made available from the EU and the IMF. By only transferring property loans, the capital hit will be reduced.

While this may be good for the banks – and by extension the taxpayer as the source of capital – it is not great for Nama and thus the taxpayer as owner. The Nama model is predicated on the agency having control over all of its clients’ loans as this allows it to actively restructure their businesses and achieve the best outcome for the taxpayer.

What is now envisaged for this next phase of Nama is much more of a traditional bad bank, where loans are dumped after being written down. Nama’s ability to recover these debts is greatly circumscribed if the banks retain control of what might be termed the borrowers’ good loans and assets. The situation will not be black and white because of cross-guarantees and the like, but Nama will arguably have one arm tied behind its back. This may mean that Nama will not make as much money – or may lose more – than predicted.

In theory, the impact of the change is neutral for the State and the taxpayer. This is because the Government owns 92.8 per cent of AIB and will be lucky if it avoids majority ownership of Bank of Ireland. Thus whatever it loses on Nama it recoups as the owner of the two banks.

It is not quite that simple, however. The losses at Nama will be real and measurable, while the gains at the banks, particularly in terms of their viability, will be much harder to quantify. As a result, Nama 2 must be seen as more favourable to the banks and a significant concession. It puts a further onus on them – if one was needed – to deliver.

Central to the arguments they made to the Government regarding the structure of Nama 2 was the assertion that they are better-placed than Nama to help the thousands of fundamentally viable small and medium-sized businesses and the business people behind them, who are now crippled by property-related debts taken on in the boom.

Getting these businesses – which number in their thousands – back on their feet and their finances on a sustainable path is clearly integral to economic recovery and job creation. Some evidence that AIB and Bank of Ireland are following through on this promise will be required.