# Bank solvency/Property Values/Pension scheme deficits



## FlyFishing (26 Jul 2008)

Has anyone here read the recent article in Business and Finance with regard to property valuations and banks. It is written by an ex government adviser. I can't go into the details as it is quite bearish on property values but what struck me what his view on the possibility of a bank failure.

Whilst that is a remote possibility, i do hold the view that the weakness of some Irish banks is their pension structure whereby retiring staff can get civil service type pensions. The money to fund ( high % )  this is in the irish stock market, and with the recent dismal performance of the iseq, i was wondering if this could be the achilles heel of some banks rather than mortgage defaults.

So, are the pension obligations of some banks a severe weakness and could it be argued that the risk is quite real ?


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## jpd (26 Jul 2008)

*Re: Current article in Business and Finance re Banks*

This view is already held by a lot of investors, foreign and domestic - at least this is what I deduce from the share price movements of Irish financial institutions over the last 12 months


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## Brendan Burgess (26 Jul 2008)

*Re: Current article in Business and Finance re Banks*

Hi Fly Fishing 

Thanks for respecting the Posting Guidelines. But just to clarify, it is ok when discussing an important subject like this to discuss the impact of a further fall in house prices. So you can quote the author "if house prices fall by a further 50%, some banks will go under". 

Pensions are very conservatively valued and I would be surprised if they would be the source of a bank collapse. AIB and Bank of Ireland have moved new staff away from the defined benefit schemes. I don't know the situation with Anglo. I think that the Irish Nationwide has a defined benefit scheme only for one director - the rest are on defined contribution schemes. 

Bank of Ireland had a massive surplus in their scheme at one stage, but I suspect that with payment holidays and share price drops, that is gone. AIB had a deficit, but it was small in the overall context things the last time I looked. 

Generous defined benefit schemes are a huge problem for big industrial companies which shrink in size dramatically. The pension liabilities can swamp the small company. This happened to a UK in the recent past, but I can't remember which one. 

Brendan


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## FlyFishing (26 Jul 2008)

Thanks Brendan. I have posted the article but feel free to edit it if it does not conform to the posting guidelines.

I am aware that new employees do not share the same benefits of the pension scheme but that overall would be a small %. I think AIB stopped the practice for new employees in the late 90's , early 2000.

The funds set aside for the pensions is an investment and to my knowledge that has taken a dramatic hit in recent months. I am not sure if they diversified away from the ISEQ but i would figure that it still where they have most of their funds. This is of course is only paper a loss but i dont see any recovery in the ISEQ in the near future. Any decision to reduce or cancel dividends in the near future will also have an impact.

I believe the major banks ( AIB, BOI ) are not highly exposed to the ppr property market in that they were not offering such generous mortgages as other banks were. However, they may be exposed to the buy-to-let market as many of their more established customers would have used equity drawn down on their existing property to finance buy-to-lets. Indeed , many of these customers may have more than one investment property. Should the values of these places collapse ( which would be of my opinion ), this may hit severely their customer base.

But, i would still contend that their pension structure is a higher risk than the overall property market. 



> *Central Bank's sweet talk
> 
> We can say our banks are well-capitalised, but this does not take into account their exposure to a possible house price fall of 50%*
> 
> ...


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## ashambles (28 Jul 2008)

It's a worry, but not their biggest problem. The pension deficit is limited to being a certain size. It's constrained by the number of employees and average salaries. Bad debts are limited by the size of the loan book (huge) and your degree of pessimism.

Also if it was to get to such a size as to threaten the bank you'd probably find the employees and unions amenable to finding a practical solution. (Well after they beg the taxpayer to sort it out.)


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## Duke of Marmalade (29 Jul 2008)

Could this experience of Sweden in the early 90's be repeated in Ireland? Interesting to note depositors were safe.



> Home prices more than doubled between 1981 and 1991. Commercial real estate followed suit. But a change in the tax laws in the late 1980s meant that consumers could no longer deduct interest payments on debt, effectively increasing the cost of mortgages. Thanks to rising inflation and no interest-rate regulation, the cost of borrowing in Sweden skyrocketed.
> 
> The bottom eventually fell out of the real estate market. From 1990 to 1995, commercial real estate prices fell 42 per cent in real terms and residential prices dropped 25 percent. People who had used real estate as collateral for loans became insolvent overnight. And banks' portfolios of nonperforming loans mushroomed.
> 
> ...


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## isaki (6 Nov 2008)

man this really stings a lil for a single reply i hafta do this many process huh :X


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## LDFerguson (6 Nov 2008)




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## kaplan (7 Nov 2008)

With 6 turkeys what do you do? Any combination just means a bigger turkey. The real game is how much the Government can afford to stump up in capital and which combination of turkeys to finance with the scare resource. 

Getting the ball rolling will take FR guts to insist the plug is pulled on some of the larger developer exposures - the ones over €1bn. 

Apart from bank failure keep an eye out for disenchantment with certain "private banking" operations and their common ownership schemes which are the next CFD riches to rags stories about to break.


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