# What will NAMA actually do for the retail banks?



## darag (1 Sep 2009)

One of the most important arguments for NAMA is that, once unburdened of non-performing loans, the banks will be free to shower credit on the Irish economy encouraging growth etc.

I don't see how this will be the case.

Currently the banks have a significant number of non-performing loans on the asset side of their balance sheets. Apparently many of these "assets" are producing no return to the banks (with interest often being rolled up).

NAMA will replace these "assets" with an equivalent notional value of Irish government bonds (although unlikely to be worth face value if sold). These bonds will earn the banks 1.5% interest apparently.

Let's say 90 billion by 1.5% interest is a net subsidy from the taxpayer to the banks of just under 1.5 billion a year.

Will this be enough to encourage the retail banking sector to lend more freely? I don't think it will.

Would this 1.5 billion a year be better used to directly fund tax cuts to stimulate the economy? I believe it would. Instead this 1.5 billion will have to be raised through taxation.

The other argument is that the banks will use the bonds to gain access to ECB cash via repo and that having access to this cash will allow the banks to lend more freely. I am unsure about this. Capital ratios still have to be maintained and with an economy contracting at a rate higher than any in western Europe since the 1930s, I'm not sure what opportunities the banks will see to lend money in order to make a return. Certainly the easy money of lending to developers in a booming property market is gone; the lending will be difficult and dangerous. I don't remember the Irish banks ever having much of an appetite for this sort of lending and I'm not sure how NAMA will encourage them to develop one particularly during one of the most vicious asset bubble bursts in decades.

I suspect that NAMA will effectively just refund shareholders and the various classes of bond holders the losses the would have incurred as well as protect executives and employees of the banks. I see no compelling case that it will increase credit supply in the economy or contribute to the economy at all.


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## sunrock (1 Sep 2009)

The government is giving billions to the banks through NAMA buying up their toxic loans etc.Basically the government is controlling the banks and calling the shots ... except we have a bit of smoke and mirrors goin on.
The government is telling us that it is recapitalising the banks with the taxpayers billions (present and future taxes), and one of the main reasons that this is being done is so that the banks will lend money to small and medium buisnesses and individuals for mortgages and the like....WRONG!!!!!!!!
This is just a bit of cheap public relations and spin.......the reason they are throwing billions at the banks is to save the banks from going bankrupt.
We can be sure that behind the scenes the government is instructing the banks to severely restrict credit and it makes sense.
In fairness the government is giving conflicting messages...they are after all telling the banks to be prudent in their lending and as the banks aren`t lending this must be the order getting thru`to the banks from the government.
We are adjusting to a period of higher unemployment and lower incomes so one can understand why the banks must severly restrict lending.We have massive overcapacity in small buisnesses,so if a certain amount of them have to go out of buisness ,there will be others to serve the shrinking market.


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## darag (25 Oct 2009)

David McWilliams makes this point (that NAMA is unlikely to lead to an increase in credit supply in the economy) [broken link removed].  He makes the case that the most sensible thing for the banks to do would be to buy Irish government bonds (which pay nearly 6% for the 15 year version) with the cash released by NAMA (which will cost about 1%) in order to earn the difference risk free.  I'm not sure it is risk free though as the repo rate from the ECB varies.  I think he is missing a trick though.  If I worked in the treasury department of a bank, I'd be buying back the bank's own bonds.  Why lend to risky businesses at around 10% or to the dead property industry at 5-8% when you can effectively earn 6-7% by buying back your own bonds?


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## ipxl (27 Oct 2009)

darag said:


> If I worked in the treasury department of a bank, I'd be buying back the bank's own bonds.  Why lend to risky businesses at around 10% or to the dead property industry at 5-8% when you can effectively earn 6-7% by buying back your own bonds?



I am just getting my head around this - bear in mind financial economics wouldn't be my strong point 

I assume that, post-NAMA, the banks will have a liability corresponding to the haircut applied on the purchase of the loans. Is there an obligation on the banks to immediately repay bondholders to an amount that is related to the NAMA haircut (original book value of loan minus the LTEV value used for NAMA purchase figure)?

I guess this then leaves the banks potentially under-capitalised.Since a good chunk of non-performing loans and performing ones will no longer be their concern (other than the fact that they will be paid for administering those loans by NAMA). 

Where does the opportunity arise for the banks to buy back their own bonds ? Surely for them to make a profit on buying back their bonds they would need to have further fresh capital aside from the amounts given to them as part of the NAMA transfer ?

or am I talking through my hat here ?


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## Duke of Marmalade (27 Oct 2009)

_ipxl_ you sorta got it The banks do not have to immediately pay back bonds, depends on their maturity term. 

Yes the "haircut" on the asset sales to NAMA will leave a capital hole which has to be filled. Buying bonds back at less than their book value is the reverse process, it is the banks repaying their liabilities with a "haircut" and this creates capital.


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## ipxl (27 Oct 2009)

Eloquently put, Duke !

One thing I'm still not 100% clear on.

If the banks apply a haircut on the purchasing back of their bonds does
this involve negotiation with the bondholders ? 

I know that NAMA had been designed to give minimal exposure to the bondholders and that this is a point of contention with many.




Duke of Marmalade said:


> _ipxl_ you sorta got it The banks do not have to immediately pay back bonds, depends on their maturity term.
> 
> Yes the "haircut" on the asset sales to NAMA will leave a capital hole which has to be filled. Buying bonds pack at less than their book value is the reverse process, it is the banks repaying their liabilities with a "haircut" and this creates capital.


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## Duke of Marmalade (27 Oct 2009)

ipxl said:


> If the banks apply a haircut on the purchasing back of their bonds does this involve negotiation with the bondholders ?
> 
> I know that NAMA had been designed to give minimal exposure to the bondholders and that this is a point of contention with many.


There are bonds and there are bonds. The Subordinated Bonds are quoted on markets and a price below par reflects a fear that some day, some way they will not be repaid. The banks can therefore simply buy them back at their market price. So whilst there is no direct negotiation between the banks and the sub bondholders you might say that the market has acted as a go between.

Now the Senior Bonds are quite a different kettle of fish, and there are far more of them. These are simply long term deposits held by other banks and institutions. They are not, so far as I am aware, traded on markets as they are regarded as the same as deposits and would indeed rank alongside deposits in a winding up.

You are right that there are those who argue that the banks should threaten bankruptcy and negotiate these seniors to switch their bonds into equity. The problem is these seniors know that they are entitled to the same deal as ordinary depositors and I don't see ordinary depositors accepting shares instead of their deposits, do you?


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## ipxl (27 Oct 2009)

Thanks for the very clear explanation, DukeOfM.

So, post-NAMA the banks can re-acquire their own issued bonds at firesale prices since sub bonds clear on a mark to market basis ? correct?

The banks were originally paying the coupon on those bonds. When they have purchased them back is that simply a case of repairing their balance sheets to reflect that they managed to write off their debts at a level much below the original book value of the loans (combining the proceeds from NAMA acquisition of the loans and the repurchase of their subordinated debt at discounted current depressed market rate ?). Or somehow do these buy-back bonds generate any continuous fixed income for the bank ?
I'm guessing not because the counterparty/issuer relationship is broken once they are purchased back by the banking institution?

--Ian


Duke of Marmalade said:


> There are bonds and there are bonds. The Subordinated Bonds are quoted on markets and a price below par reflects a fear that some day, some way they will not be repaid. The banks can therefore simply buy them back at their market price. So whilst there is no direct negotiation between the banks and the sub bondholders you might say that the market has acted as a go between.
> 
> Now the Senior Bonds are quite a different kettle of fish, and there are far more of them. These are simply long term deposits held by other banks and institutions. They are not, so far as I am aware, traded on markets as they are regarded as the same as deposits and would indeed rank alongside deposits in a winding up.
> 
> You are right that there are those who argue that the banks should threaten bankruptcy and negotiate these seniors to switch their bonds into equity. The problem is these seniors know that they are entitled to the same deal as ordinary depositors and I don't see ordinary depositors accepting shares instead of their deposits, do you?


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## Duke of Marmalade (27 Oct 2009)

Not sure I fully understand your query.  Banks have already bought back some of their bonds in the market at big discounts.  That is always available to them.  The discounts are there because the market doesn't trust the banks to ultimately deliver on the original terms.  

When banks buy back these bonds they simply cancel them and so are relieved of the future requirement to pay coupons and redemption amounts.  It's like you being able to buy back some of your mortgage at a discount, because your bank doesn't trust you to stay the original course.


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## ipxl (27 Oct 2009)

Ok. I see what you mean.

I was just trying to understand how buyback of the bonds at discount created capital. Following your answer , I guess it is because they are relieved of some of their liabilities and therefore their balance sheet is gradually repaired as they buy back these bonds.

--Ian



Duke of Marmalade said:


> Not sure I fully understand your query.  Banks have already bought back some of their bonds in the market at big discounts.  That is always available to them.  The discounts are there because the market doesn't trust the banks to ultimately deliver on the original terms.
> 
> When banks buy back these bonds they simply cancel them and so are relieved of the future requirement to pay coupons and redemption amounts.  It's like you being able to buy back some of your mortgage at a discount, because your bank doesn't trust you to stay the original course.


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## darag (27 Oct 2009)

That's pretty much it, Ian.  And it's not just subordinated bonds which are traded - senior bonds are also bought and sold, just generally not openly on markets and so can also be repurchased by the banks at a discount.


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## sunrock (28 Oct 2009)

The money the government gave to the banks via NAMA  was for the specific purpose of recapitalising the banks to lend prudently to viable irish buisnesses.
This money..courtesy of the taxpayer... surely must have stringent conditions attached.... and is not for speculating on bonds ...even the banks own bonds.Let the bonds run their course...after all the banks say they need the money.If they are in a position to buy the bonds back....then that is less money the banks have to lend to real irish buisnesses.And if they are considering spending taxpayers money..what next...I mean they could easily spend the money speculating on shares...even their own shares!


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## Kine (29 Oct 2009)

No-one has mentioned speculating on bonds? The discussion was based on one way the banks _may_ recapitalise themselves (simply by lowering their liabilities). In doing so, they reduce their interest payemnts thus having a knock on effect of increasing their free cash flow (which can then be lent to customers).


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## sunrock (29 Oct 2009)

Well,I think the money given to them by the government could be lent to viabe irish companies IMMEADIATELY.AsI said the banks can pay their bonds as they come due.This idea of the banks doing otherwise with the money makes me very uneasy.The banks could tell us that they found a superb investment oppurtunity that returns 10% and was too good to turn down.That kind of thinking is what got them into this big mess.


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## ipxl (29 Oct 2009)

Someone summarised it recently quite well with the phrase that
"Banks are not altruistic"

This is just a fact of life. As publicly quoted entities they exist primarily to give return to their shareholders.
Also, to be fair, they have minimal capital requirements to meet and given a choice between lending to risky/non-creditworthy businesses they will opt to repair their balance sheets. This will take a long long time according to the analysts who know. Then there is all the private debt that has to hit the fan.
The reality is that even with the NAMA bond transfer to the banks and the removal of a lot of the risky assets off their loan books they are going to remain zombie banks and there will be little credit easing to the real economy as a result of NAMA.




sunrock said:


> Well,I think the money given to them by the government could be lent to viabe irish companies IMMEADIATELY.AsI said the banks can pay their bonds as they come due.This idea of the banks doing otherwise with the money makes me very uneasy.The banks could tell us that they found a superb investment oppurtunity that returns 10% and was too good to turn down.That kind of thinking is what got them into this big mess.


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