10bn recapitalisation of Irish Banks announced

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Why don't the AIB want the money? Wasn't it this bank and the BOI that went to the minister last month in desperation?
 
Desperation that if the other banks went down it would have taken the big two down with them?
 
PaddyW said:
Desperation that if the other banks went down it would have taken the big two down with them?
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Exactly. The banks were facing a liquidity crisis at the time and rumours were that one of the other large banks wouldn't survive another 24 hours and could have taken aither BOI or/and AIB with them. The issue of capital and solvency is a different albeit related one.
 
So why doesn't the government wind down the bad bank? And let the strong banks continue?
 
Bronte said:
So why doesn't the government wind down the bad bank? And let the strong banks continue?
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That's exactly what they are doing. The Government already knows the strong & weak players and is seeking consolidation in the market. It's a complicated process and can be a legal mess if there are unwilling parties
 
Bronte said:
So why doesn't the government wind down the bad bank? And let the strong banks continue?
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We for one the state guaranteed all of them and if it were to backtrack now the guarantee would loose all credibility.

Secondly, there may not be a strong bank. As far as I can see, Ireland only has weak banks and very weak banks. The 'strongest' Irish bank probably still needs additional capital even though it says that it does not.

I agree that the state should only back those banks that can (or need) to be saved. However, the government has tied its own hands with the guarantee. That is probably why it is trying to force through mergers.
 


Can you elaborate on this??

I don't see how the Guarantee has weakened anyone's position. The Guarantee has proved an effective instrument for allowing the banks to raise funds on the debt markets. If there is any problem with the guarantee is that 2 years is just not long enough and that banks are limited in how much more funds they can raise using the guarantee.

Furthermore, the guarantee doesn't cover loans but covers:

• all retail and corporate deposits,
• inter-bank deposits,
• senior unsecured debt,
• asset covered securities, and​
• dated subordinated debt (Lower Tier 2),

The Government hasn't tied it's hands at all. Even for the weakest of the banks, the consumer has his/her deposits protected which was a necessary move to prevent a run on the banks.

The Guarantee was a way to protect consumer/coroprate deposits, improve the interbank problem, and be a vehicle to raise debt.

Unfortunately, the guarantee hasn't done enough to solve the liquidity problem that the banks face, but it has not (and was never meant to) had any effect on the long term solvency or credit risk of the weaker banks.

If a bank is weak because it is over-exposed to commercial property. No amount of guarantee's or capital injections will save this bank you could argue. These banks need to be consolidated with a "stronger bank".

The state has already made clear it's intention to consolidate the market before it injects funds. A merger of some sort is imminent.

 
My point is that the government extended the guarantee to all the banks both the good and the bad so how does it now let any bank fail? On what grounds can the state allow one of the weaker banks to go under if it has guaranteed much of it's debt until 2010? Soon after the guarantee was announced the share prices of the Irish banks started to fall again as the investment community realised that this was a guarantee that could not afford called. It is telling that no other country has followed the Irish example. Even if the much talked about consolidation comes to pass, the taxpayer is still on the hook for losses (until 2010 at least).

I agree with you in that the term of the guarantee is probably too short but the government has pledged the taxpayer to cover liabilities that are in excess of 2x GNP. How can we hope to cover even a fraction of this guarantee? If the Irish banks were to suffer similar % losses on their property lending that the Swedish banks did as a result of their property boom then the cumulative cost of the boom could easily run into tens of billions of euros.

By the way, I appreciate the stronger bank argument but the fact is that the strongest bank we have has about 55% of all loans devoted to property and constuction, is inadequately capitalised and is overly dependent on wholesale funding. The others are even worse!
 
D.S. said:
That's exactly what they are doing. The Government already knows the strong & weak players and is seeking consolidation in the market. It's a complicated process and can be a legal mess if there are unwilling parties
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How do you know what the government are doing? Its all pretty hush hush as far as I can see.
 
JohnBoy said:
It is telling that no other country has followed the Irish example. Even if the much talked about consolidation comes to pass, the taxpayer is still on the hook for losses (until 2010 at least).
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Simply not true. Here is a list of other State Guarantee Schemes:

France: Up to 320 billion euros to be made available to guarantee bank lending. The fund will guarantee bank paper issued before Dec 31, 2009, and lasting up to five years.

Germany: The government will provide 400 billion in guarantees which will run until December 31, 2009.

Italy: The Treasury will guarantee new bonds issued by banks until Dec 31, 2009, with a maturity of up to five years.

UK: Government to guarantee about 250 billion pounds in short- and medium-term borrowing by banks.

Austrailia: The government said it will guarantee all new and existing bank deposits for three years all wholesale funding to Australian banks for five years.

Austria: Government has issued a blanket guarantee on savers' bank deposits, and put aside 10 billion euros to guarantee the deposits of small- and medium-sized companies. Up to 75 billion euros will be provided in guarantees for interbank lending. The guarantees will be given to a newly formed clearing house company managed by the banks.

I could keep going on but sufficed to say Bulgaria, Cyprus, Czech Republic, Denmark, Greece, Hong Kong, Hungary have all announced guarantee schemes of one form or another covering either deposits, interbank lending, debt raising.



The guarantee was put in place to protect the system. Yes that includes weaker and stronger banks but the same thing occurred in every other country listed above. There was a huge danger of people losing faith in the banks as a mechanism for holding and transferring money and the Governments had to first protect the banking system and attempt to get the cogs of credit going again. They achieved that partly.

You need to remember that the state is only out of pocket should something go wrong, and the state is collecting a hefty insurance premium from each participant who signed up. The terms of the guarantee fund also demand that for all those who participate, they must introduce measures to protect the weaker parties and produce detailed business plans as to how they will improve their position. Now this does not guarantee anything but does, if adminstered correctly by the government, provide a solid platform to work our way out of this mess.

You are perfectly right that weaker bank's deposits, interbank lending, bonds are protected. Is this necessarily a bad thing??? Yes the state is at risk of being out of pocket (but only if something goes wrong), but it means that the weaker bank is a least more attractive to a potential buyer or merger approach. It helps protect the jobs, funds, engagements & commitments of these banks from grinding to a complete halt.



A couple of things on the above..

The Government does not need to cover anything unless something goes wrong.

Should something go wrong I would argue the cost of funding the guarantee via exchequer borrowing far exceeds the risk to the economy, jobs, and stability if the government had left the banks to fend for themselves.

I agree the banks are undercapitalisd. But I get v apprehensive when I see people make quotes like 55% of exposure to the construction industry/commercial industry. Can you quote your source for this figure??

Also, do you appreciate that in the instance that your right and the figure of 55% exposure is correct or even higher - that the banks can recover a signigicant portion of these loans? Even if property prices have dropped, the recovery rates are usually adequate when you factor in items such as collateral on hand, the ability to sue counterparties who don't meet their contractual commitments etc etc. The banks would take a hit no doubt, but they would still come out the other end. It's the economy who would be the big loser.

I have spent some time looking at the tier 1 and tier 2 capital ratios of these banks. They are off no doubt, but I honestly believe the scaremongering, public witch hunt, and inaccurate reporting of the situation is actually leading us all into a self-fulfilling prophecy...
 
barryl said:
How do you know what the government are doing? Its all pretty hush hush as far as I can see.
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I agree it's hush hush but information has got out.

We know the Government knows the strong and weak players for several reasons.

1) Annual reporting - the markets know the strong and weak players based on this. So does the Government

2) PWC Audit - PWC have audited the banks and this report was provided to the Dept. of Finance weeks ago.

3) The Financial Regulator has placed regulators on site with all banks to monitor activity.

4) The state has had several meetings with all the heads of the financial institutions and has indicated on more than one occasion that consolidation of the market is important to safeguard the financial stability of the market. It's no secret that one of the bank's brought with them legal counsel to assist them with their discussions and that is widely seen as a sign that consolidation in the market is at least being discussed right now.

Personally, I also think consolidation is a no brainer for two important reasons:

- Consolidation is happending in almost every other market across the globe (UK, US, Germany, etc etc)
- This is not the first financial crisis we have ever been through. If you look to the financial crises in Hong Kong, South East Asia, and China, which occurred over the 80's and 90's you will see that the Government initiatives in these countries almost exactly mimic the actions of our Government, and more broadly the US/UK Governments in recent times. Guarantee Schemes were in the majority of cases introduced first, followed by market consolidation, followed by capital injection to the remaining players.

Personally, I would be v suprised if the government injected any capital before consolidation. It would not be a prudent use of funds.
 
Of the guarantees mentioned above, do any equate to two times (a shrinking) GDP? Lot of countries have guaranteed deposits (up to a certain level) and some have guaranteed interbank borrowing but have any guaranteed almost all of the liabilities of the banking system?


You need to remember that the state is only out of pocket should something go wrong, and the state is collecting a hefty insurance premium from each participant who signed up.

And the state is paying a premium over almost every other Eurozone country for issuing debt as a consequence. Last week the German federal government had trouble selling bonds - how do you think investors will now see Ireland?

You are perfectly right that weaker bank's deposits, interbank lending, bonds are protected. Is this necessarily a bad thing??? Yes the state is at risk of being out of pocket (but only if something goes wrong), but it means that the weaker bank is a least more attractive to a potential buyer or merger approach. It helps protect the jobs, funds, engagements & commitments of these banks from grinding to a complete halt.

The weaker banks are only attractive as long as the state guarantee is in place. And more to the point something IS going wrong with the banks. The economy is shrinking at a 5% annualised pace and we have private sector credit equal to twice our GDP (higher if you compare to GNP) yet we are to believe that our banks are only experiencing modest loan losses?


Should something go wrong I would argue the cost of funding the guarantee via exchequer borrowing far exceeds the risk to the economy, jobs, and stability if the government had left the banks to fend for themselves.

Very true but we have signed a blank cheque. Public finances are sinking deeper into the red. Our budget deficit will equate to at least 5% of GNP this year and perhaps even 10% next year - and this is without an Obama-style fiscal stimulus. This is simply because tax revenues have collapsed whilst public spending has not.

I agree the banks are undercapitalisd. But I get v apprehensive when I see people make quotes like 55% of exposure to the construction industry/commercial industry. Can you quote your source for this figure??

Actually I was wrong on 55% for the best bank. It is actually 60% exposure to property for the 'strongest bank' (AIB). Page 119 of the 2007 annual report. It also has a loan/deposit ratio of about 150% too.

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Also, do you appreciate that in the instance that your right and the figure of 55% exposure is correct or even higher - that the banks can recover a signigicant portion of these loans?

I appreciate that but they will still make significant losses! I don't expect every loan to go bad, but their property exposure is so large (and geographically concentrated) that large losses are inevitable.

Even if property prices have dropped, the recovery rates are usually adequate when you factor in items such as collateral on hand, the ability to sue counterparties who don't meet their contractual commitments etc etc. The banks would take a hit no doubt, but they would still come out the other end. It's the economy who would be the big loser.

What do you mean by adequate? What type of collateral do you think that the bank have for lots of their property lending. For mortgages and BTL it is property. For development and commercial it is probably buildings and land too. On the last BOI conference call I listened to I heard that development land had fallen in value by up to 50% in some cases; residential and commercial property prices are down by at least 20% and rents are falling! The situation could not be worse. How can the bank not make large losses on their property lending in this environment?
 
yoganmahew said:
Fair enough - it would finally be some good news for shareholders.
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Oh dear, Yog seems to be right, the sunday papers are speculating that AIB and BOI shareholders are going to be compromised by preference shares given to government with no right of first refusal.
 
D.S. said:
You need to remember that the state is only out of pocket should something go wrong, and the state is collecting a hefty insurance premium from each participant who signed up.
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Something already has gone wrong.

Hefty? At 0.12% of assets covered? The CDS on Irish banks would suggest the market puts a premium of 200 times this rate (at a CDS of 240bp).

With regard to the guarantee of debt schemes, they mostly relate to future borrowing, i.e. borrowing from the guarantee up to some specified date, not borrowing that was in the place in the past. This is the appropriate guarantee in my view - the state will support new borrowing by the banks, but existing borrowing stands on its terms. Capital infusions and new guaranteed borrowing to be used to pay off the old borrowings as they come due.
 
Duke of Marmalade said:
Oh dear, Yog seems to be right, the sunday papers are speculating that AIB and BOI shareholders are going to be compromised by preference shares given to government with no right of first refusal.
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Bother. I feel both for existing small shareholders, who have been royally stuffed by this whole affair and for people like me who would be prepared to invest at a reasonable premium for the risk involved.
 
Re-capitalisation was always going to hurt existing shareholders. This is very unfortunate and I feel for investors - large as well as small but when re-capitalisation is required it generally means that the businesses involved are worthless as they stand. Thus existing shareholders hold an entitlement to a share of nothing. Such is the nature of public limited companies.
 


Anglo have a loan book of 79 billion - almost all commercial. How much of that is going to be toxic - half? three quarters??.
The cost of nationalizing something with large debts is going to be a lot more than the 300 million stock market valuation.
Any donation to this bank will keep it breathing in anticipation for a hoped for rise in the economy in the future.
Impossible to nationalize, and the state will lose every which way because it has guarenteed the losses.
 
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