THE BOTTOM LINE: ONE THING is certain: the Irish banks will need more capital to cover post-bailout losses; it's just a question of when and whether they can raise the money themselves, from profits.
Last year’s stress tests, led by the Central Bank and verified by asset manager Blackrock and other expensive outside consultants, determined that the banks required a further €24 billion. This pushed the banking cost to the State to €64 billion.
Increasing mortgage arrears, claims about strategic defaults by borrowers who can pay but chose not to and the uncertainty around the effect of the proposed personal insolvency law is feeding concerns that the mortgage losses have not yet been fully quantified.
Ratings agency Moody’s yesterday downgraded mortgage-backed Irish bonds, citing the proposed legislation as one reason.
Governor of the Central Bank Patrick Honohan said last week that his biggest concern was about trying to “get a better handle” on the state of Irish mortgage books.
He stressed, however, that the banks have received large injections of capital to take the losses on their books, so the task is to get the banks to start crystallising those losses.
This means pushing banks from forbearing on hopeless cases to either agreeing deals with co-operative borrowers with unaffordable mortgages or foreclosing on unco-operative borrowers in the same dire financial position.
Ahead of the new personal insolvency tools being introduced (whenever that might be), the banks are being forced to offer mortgage products set out in last year’s Keane report, commissioned to tackle the mortgage crisis.
This is an important step but the Central Bank is still concerned that the banks do not have the grey-hair expertise to tackle the problem on the proposed case-by-case basis.
A 15-year property boom has left Irish bankers woefully underskilled to deal with the type of hand-holding and hard decisions required to resolve problem mortgage cases. The most recent experience at the banks was giving out loans, not getting them back.
To help their staff, Permanent TSB’s new chief, Jeremy Masding, and Ulster Bank chief executive Jim Brown have recruited bankers from abroad who have experience cleaning up after property crashes in the UK and Asia.
The scale of the losses depends on how the banks tackle the problem and the operation of the personal insolvency regime. That is not to say that there isn’t a figure on total mortgage losses. Out of Irish mortgages of €98 billion at the domestic banks, the Central Bank said in the stress test results that it expected losses to be €5.7 billion over three years (2011-2013) and, in a worst-case scenario, €9 billion.
An ominous sign is that the banks are close or have already reached the expected losses after year one. Analysts believe the banks will reach the €9 billion figure, so once again in Irish banking base case becomes worst case.
Blackrock estimated that total losses over the life of the loans, which could mean more than 20 years on these loans, was €16 billion.
The €24 billion recapitalisation bill set by the tests covers the worst-case losses of €9 billion but only 56 per cent of the €16 billion. Bankers expect final losses to fall between the expected and worst-case levels.
There have also been better-than-expected results from deleveraging by the banks, which leaves some capital to play with and should keep them above target capital ratios at the bottom of the 2011-2013 cycle of loan losses.
But the stress tests assumed a quicker path to economic recovery, and the difficulty with knowing whether the banks have enough capital beyond 2013 – they are now flush with cash and the best capitalised banks in Europe – comes down to the complex problem of when they can make profits again.
The banks must generate their own capital after the bailout, from 2014, to cover regular losses and to meet higher requirements under the Basel III rules on bank capital by 2018.
That will happen by cutting costs – mostly by laying off more staff – raising the cost of loans and borrowing cheaper funding.
The banks won’t be able to borrow cheaply until the country can, and it’s not clear when this might happen. For banks that have only survived because of State support, higher loan rates will lead to pressure on politicians from struggling bank customers in their constituencies.
Solving the crisis involves an acceptance of difficult choices. And until the broken Irish banking model is fixed, the costs will keep falling on one party – the Irish public.
