# Why did AIB put €300 million aside if simply reducing mortgages by 12%?



## zxcvbnm (18 Apr 2020)

Just digesting this new info.

So why did AIB put €300 million aside after the preliminary decision?  That implies some significant redress being paid out does it not? It averages at €50k for each of the 6,000 customers.

My understanding is for Karen, they reduced her mortgage by 12% plus an additional c. 4%.  That is, most of the AIBs hit will be from losing out on future revenue from mortgages due to mortgage write-down.
Why therefore put an additional €300 million aside?


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## Brendan Burgess (18 Apr 2020)

Hi Z

This is the calculation I did before they announced the €300m 

Average mortgage : €200k 
Average redress: €30,000 
Number of borrowers:  6,000 

Redress to be paid: €180m 
Admin costs:   €50m
Additional fine: €30m
Total : €260m 

I suspect that the average mortgage might be higher than €200k for this cohort as they borrowed in 2005 to 2008 , i.e. the peak of the market. 

But AIB may have other costs e.g. compensation for loss of homes as a result of this. 

So while the average might be €30k  for the normal redress, there will be a few cases who get a lot more due to stress.

Brendan


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## zxcvbnm (18 Apr 2020)

Ok. But my point is did aib actually put €300 mil in cash aside in some account in anticipation of using it to pay out? 

As I understand it, they are taking the hit largely by losing out on future revenue right? (Rather than paying out large sums now, with the exception of the c. 4%) 
In which case they don’t need to put that much cash aside if that is the case. 
Or am I missing something? 

Basically I’m just speculating as to whether we can expect some  significant redress paid out alongside the 12% mortgage write downs ? Putting 300 million aside in cash might suggest as much.


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## Brendan Burgess (18 Apr 2020)

zxcvbnm said:


> Or am I missing something?



Yes, unfortunately you are missing a basic understanding of finance and accounting. 

Let's say that AIB has on its mortgage book € 6,800 m worth of mortgages. 

Now they have to reduce the balance on those by €300m down to €6,500m


Their assets have been reduced by €300m and they must make a provision for this in their accounts.

Look at it another way, let's say you owe them €200k today.  And you switch lenders, you will give them €200k. 

But due to the Ombudsman's ruling they say you owe them only €160k.  When you switch lenders, they will get only €160k instead of €200k.

Brendan


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## zxcvbnm (18 Apr 2020)

Ah. Ok. Gotcha.


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