Davy stockbrokers predicted this morning they would breach adverse, but also suggested banks might get away with it if they can deleverage in time, thus reducing capital needs and putting cash raised from asset sales against the "extra" losses over adverse. I hope they're right.
Key Post How much more will mortgage defaults cost the taxpayer?
- Thread starter Brendan Burgess
- Start date
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"Ratings agency Standard and Poor's has said it believes Irish banks will need to raise additional capital......"
Honohan also said as much at the Oireachtas committee meeting yesterday.....
The problem with this type of debate is that we have to constantly remind ourselves of,what we're discussing.
From what I can gather, the OP is only referring to residential mortgages in this thread. He is ignoring Developers loans, Commercial Property loans, Business loans and unsecured Personal loans. He is zoning in on a particular 67 billion of bank debt at three specific named banks. It must be noted that this is only a fraction of the overall loan portfolio of these three banks and a very small percentage of the total loan book of all the banks
In my view,It is too simplistic to leave Bank of Ireland out of the analysis by saying it is 85% owned by private investors. You can be sure that the private investors will run back to Canada quickly if it transpires that BOI is in need of a further 10 billion of capital. In that type of scenario, BOI will be very much back "in the fold" with its hand out. He also leaves out the IBRC without too much explanation. And what about Irish Nationwide, although small, is riddled with high risk debt.
The analysis also seems to accept the published data on mortgage arrears, as verbatim. I think a lot of commentators are skeptical about the published mortgage arrears figures as presenting a much better face to the problem, than actually exists behind the banks doors. I cant say that I believe the published figures either. At best, the figures present the "most optimistic situation", at worst they are masking the truth so that the banks can survive the short term
I think the point where the OPs analysis becomes difficult to swallow is when he concludes that the three banks in question have already OVER provided for loan impairments in their books, with a total provision of 4.5 billion.
In my view,The main problem with this assertion is that it fails to see the potential risk to the banks of individuals who are currently in NEGATIVE EQUITY. Out of the 67 billion being examined here, 39 billion is in negative equity. The OP's argument is that the 31 billion in Negative Equity (and not in arrears) does not pose a threat to the banks and the debtors will just continue paying for the next 30 years. A Negative Equity mortgage does not trigger a loan impairment provision if it is not in arrears, and this is the real problem here, the proverbial "elephant in the room"
In my view all negative equity mortgages present a very real and substantial risk to the banks. In cases where the negative equity is high, 100K and above, its hard to imagine why people will continue to pay back loans which are no longer asset backed. All the evidence indicates that NE Debtors are waiting in the wings considering their positions and looking carefully at the UK bankruptcy option, trying also to envisage how the new Personal Insolvency Act will assist them. There are lots of reasons too why some of these individuals will not hang around to pay their NE mortgages for the next 30 years and we see examples of this popping up on this website every day.
1) The property is in the wrong area
2) The property no longer meets their needs
3) The property is too far from work / family/ friends
4) Relationships have broken down
5) a feeling that the negative equity has trapped them
6) a need for a fresh start
7) Disillusion and despair at the magnitude of the debt burden
8) Unable to sell or unable to get the banks permission to sell
The reality is that some 30% of negative equity mortgages could default in the coming years. Based on the figures above. If you assume that the average property value of a NE mortgage is 50% of the loan value, and if we predict that 30% of all negative equity mortgages will go into default then the resultant bad debt from the figures above is a cool 6 billion which is not provided for anywhere in the banks books, at present.
If you add to this 6 billion further losses in the other categories of loans and widen the analysis to the other banks that are not included here, then I do think it is likely that the banks will need a further 30 to 40 billion in the coming years. Peter Matthews, Fine Gael TD and bank expert has recently gone on record to say that the banks will need a further 60 billion. Standard & Poors announced yesterday that "Irish banks will need further capitalization. Further falls in property prices as recently predicted by Fitch is sure to exacerbate the situation.
This will not go away. Its there. Its real and we need to address it.
From what I can gather, the OP is only referring to residential mortgages in this thread. He is ignoring Developers loans, Commercial Property loans, Business loans and unsecured Personal loans. He is zoning in on a particular 67 billion of bank debt at three specific named banks. It must be noted that this is only a fraction of the overall loan portfolio of these three banks and a very small percentage of the total loan book of all the banks
In my view,It is too simplistic to leave Bank of Ireland out of the analysis by saying it is 85% owned by private investors. You can be sure that the private investors will run back to Canada quickly if it transpires that BOI is in need of a further 10 billion of capital. In that type of scenario, BOI will be very much back "in the fold" with its hand out. He also leaves out the IBRC without too much explanation. And what about Irish Nationwide, although small, is riddled with high risk debt.
The analysis also seems to accept the published data on mortgage arrears, as verbatim. I think a lot of commentators are skeptical about the published mortgage arrears figures as presenting a much better face to the problem, than actually exists behind the banks doors. I cant say that I believe the published figures either. At best, the figures present the "most optimistic situation", at worst they are masking the truth so that the banks can survive the short term
I think the point where the OPs analysis becomes difficult to swallow is when he concludes that the three banks in question have already OVER provided for loan impairments in their books, with a total provision of 4.5 billion.
In my view,The main problem with this assertion is that it fails to see the potential risk to the banks of individuals who are currently in NEGATIVE EQUITY. Out of the 67 billion being examined here, 39 billion is in negative equity. The OP's argument is that the 31 billion in Negative Equity (and not in arrears) does not pose a threat to the banks and the debtors will just continue paying for the next 30 years. A Negative Equity mortgage does not trigger a loan impairment provision if it is not in arrears, and this is the real problem here, the proverbial "elephant in the room"
In my view all negative equity mortgages present a very real and substantial risk to the banks. In cases where the negative equity is high, 100K and above, its hard to imagine why people will continue to pay back loans which are no longer asset backed. All the evidence indicates that NE Debtors are waiting in the wings considering their positions and looking carefully at the UK bankruptcy option, trying also to envisage how the new Personal Insolvency Act will assist them. There are lots of reasons too why some of these individuals will not hang around to pay their NE mortgages for the next 30 years and we see examples of this popping up on this website every day.
1) The property is in the wrong area
2) The property no longer meets their needs
3) The property is too far from work / family/ friends
4) Relationships have broken down
5) a feeling that the negative equity has trapped them
6) a need for a fresh start
7) Disillusion and despair at the magnitude of the debt burden
8) Unable to sell or unable to get the banks permission to sell
The reality is that some 30% of negative equity mortgages could default in the coming years. Based on the figures above. If you assume that the average property value of a NE mortgage is 50% of the loan value, and if we predict that 30% of all negative equity mortgages will go into default then the resultant bad debt from the figures above is a cool 6 billion which is not provided for anywhere in the banks books, at present.
If you add to this 6 billion further losses in the other categories of loans and widen the analysis to the other banks that are not included here, then I do think it is likely that the banks will need a further 30 to 40 billion in the coming years. Peter Matthews, Fine Gael TD and bank expert has recently gone on record to say that the banks will need a further 60 billion. Standard & Poors announced yesterday that "Irish banks will need further capitalization. Further falls in property prices as recently predicted by Fitch is sure to exacerbate the situation.
This will not go away. Its there. Its real and we need to address it.
From RTE.ie: "The European Stability Mechanism could be used to provide further capital to banks in Ireland, according to IMF director Ajai Chopra.... He was speaking in Dublin at an event hosted by UCD and NUI Maynooth. Mr Chopra's remarks follow the publication by the Central Bank of a review which showed Irish banks had €26 billion of mortgages in arrears but only had €9 billion of excess capital."
I told you so........
Negotiator
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Interesting thread, I only came across it this morning!
Same old story though, the banks underestimating everything in the hope that it will just sort itself out eventually. Why can't they just bite the bullet once and for all and make one big final push to fully recapitalize themselves and cut the deals with debtors and get on with things. 5 years on and here we are still talking about bad debt provisions and needing more capital etc etc.
It's so frustrating when you have governments, bankers and indeed many professional advisers who just can't just face up to the reality of what's in front of them!
Head, bury, sand, ostrich, rabbit, headlights, delusional etc etc
Denial is a river in Egypt!!
Same old story though, the banks underestimating everything in the hope that it will just sort itself out eventually. Why can't they just bite the bullet once and for all and make one big final push to fully recapitalize themselves and cut the deals with debtors and get on with things. 5 years on and here we are still talking about bad debt provisions and needing more capital etc etc.
It's so frustrating when you have governments, bankers and indeed many professional advisers who just can't just face up to the reality of what's in front of them!
Head, bury, sand, ostrich, rabbit, headlights, delusional etc etc
Denial is a river in Egypt!!
Brendan Burgess
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This is a completely meaningless statement. In fact, it is so bad, I assume RTE is misquoting the CB review.
The €9 billion is not comparable with the €26 billion.
The following figures need to be provided
1) What are the expected losses on mortgages in arrears?
2) How much have the banks provided already for these losses?
3) How much excess capital in addition to the provisions made has been provided specifically for mortgage losses?
From the detailed calculations I have done, it seems that 2) and 3) are well in excess of 1)
But Shivvers you seem to be happy with a meaningless formula as follows:
€26 b of mortgages are in arrears.
Therefore the banks will lose €26 billion
They have €9 billion in excess capital
So they will need €17 billion.
As I said, this is meaningless.
Brendan- would you be willing to share your calculations?
Of course Brendan is right in saying that these figures are meaningless.You can't draw conclusions from them.
But one thing remains clear, the banks will need more capital and there is no escaping that. The new insolvency legislation will finally get all the unsustainable debt out in the open and it will need to be dealt with then.
Dealing with it will involve writing off billions of debt and diluting the capital bases of our banks (well below the provision levels.)
I am very familiar with the Cyprus situation and have had an account at Laiki bank (now collapsed) for the past fourteen years. There was a very similar pattern emerging in Cyprus over the past three years (although also quite different to the Irish case for a number of reasons) Lots and lots of denial and lots of statistics and figures to prove that the banks would pull through, but not to be.
My own belief is that we will lose either AIB or Bank of Ireland in the next few years and depositors will be called on to help fund a recapitalization of one of these banks.
To those who ask the question, why don't the banks just come clean and get it over with. They can't come clean. Coming clean will bust them like it did in Cyprus.
But one thing remains clear, the banks will need more capital and there is no escaping that. The new insolvency legislation will finally get all the unsustainable debt out in the open and it will need to be dealt with then.
Dealing with it will involve writing off billions of debt and diluting the capital bases of our banks (well below the provision levels.)
I am very familiar with the Cyprus situation and have had an account at Laiki bank (now collapsed) for the past fourteen years. There was a very similar pattern emerging in Cyprus over the past three years (although also quite different to the Irish case for a number of reasons) Lots and lots of denial and lots of statistics and figures to prove that the banks would pull through, but not to be.
My own belief is that we will lose either AIB or Bank of Ireland in the next few years and depositors will be called on to help fund a recapitalization of one of these banks.
To those who ask the question, why don't the banks just come clean and get it over with. They can't come clean. Coming clean will bust them like it did in Cyprus.
Brendan Burgess
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That is what this thread is - my calculations on how much more the taxpayer will have to put into the Irish banks.
Brendan Burgess
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Dr Debt, you make very broad assertions but you don't back up any of them with figures.
I went to huge trouble last year compiling the figures and making my estimates. They are very clear.
You, or anyone else, can check them out. You can point out any errors in the figures. Some are forecasts and you can put in your own forecasts where you disagree with mine.
But this all involves actual analysis and hard work.
Negotiator
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The banks and many others seem to completely overlook the issue of what's coming down the track which Dr. Debt posted so eloquently earlier. The issue of people in negative equity who will eventually get fed up and throw in the towel. These individuals can also be fully up to date with their mortgage and not even on the banks radar, yet they are bubbling up underneath the surface because they are paying every last cent they have towards their mortgage. To think that these individuals will continue this indefinitely is so incredibly naive.
Brendan put the question to PTSB 'What incentive do people have in surrendering their properties?' and yet the real question is 'What incentive do people have in repaying a mortgage for the guts of 20+ years with every last cent they earn and not living a meaningful life and still not having an asset worth more than they owe at the end of it?'
If you think people will continue like this just because others think it's 'the right thing to do' then I believe you are sorely mistaken. These are the numbers that are not reflected in any balance sheet provisions, recapitalizations, stress tests, government reports and bank chief's thick skulls!!
Watch this space!!
I agree with most of your comment, and in relation to the bit above, I've been feeling the tension on AAM in the last six months to have increased.
People are at the end of their patience. If this new insolvency doesn't start soon and start sorting out messes for people I fear a major blow out.
Its not possible to back the assertions up with figures because there are no figures that support a view that the Irish banks are doomed. I can tell you that I am very close to this situation on a daily basis and my conclusion, and also that of my colleagues around me is that the situation is far worse than has been ever reported or provided for or stress tested for.
You can play with all the "reported" figures as much as you like and you are entitled to do that and draw conclusions from that data but that is all worthless if the data itself is not correct.
Let's look back on this in a couple of years. I stand over what I say here in each and every post and I am willing to wipe the egg off my own face if that's appropriate.
You can play with all the "reported" figures as much as you like and you are entitled to do that and draw conclusions from that data but that is all worthless if the data itself is not correct.
Let's look back on this in a couple of years. I stand over what I say here in each and every post and I am willing to wipe the egg off my own face if that's appropriate.
That's a very strong statement Dr.Debt?
Brendan Burgess
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Well you can start off with the figures issued by the Central Bank for the total number and amount of mortgages?
You can then work out what the state owned banks have between them and you can check this with their accounts.
You can look at the provisions already made.
You can look at the additional capital put in.
The only figure missing is the estimate of the losses. I have come up with one figure. You are perfectly entitled to come with a much higher figure. It is an estimate and no one knows for sure.
But you can plug your estimate of the losses into the known figures and work out how much extra the banks need.
That is a far more meaningful exercise than simply asserting " Dealing with it will involve writing off billions of debt and diluting the capital bases of our banks (well below the provision levels.)" You might be right. You might be wrong. But you can see my figures and point out where you disagree with me. You have given no figures, so I can't challenge your assertion.
Brendan
Brendan Burgess
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There could be a change in borrower behaviour.
It has been argued elsewhere that the increase in arrears over the past year has not been due to any underlying decline in the economic situation, so it must be due to strategic default.
But I am constantly amazed by people in serious negative equity who would be better off handing back the keys and going bankrupt, but who really will do everything to hang onto the house.
If people believe that house prices are no longer falling, then they will have an added incentive to hang onto their home.
However, human behaviour is very difficult to understand and very difficult to forecast. I don't think that there will be a massive strategic default on home loans, but I could be wrong.
Negotiator
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But isn't this the one single figure that has always been underestimated right from day 1. All the figures seem to be based current levels of 'mortgages in distress' and totally ignore the many 10's of thousands of others who are servicing their mortgages 100% within their terms but could also be deemed as 'distressed' in a slightly different form. This is the category of borrowers I believe will take everyone by surprise some day, it won't be today or tomorrow but some day and probably not much longer to go now.
When the insolvency process starts to gather pace, these borrowers will slowly start to come out of the woodwork and seek advice and this will prompt them into action as they will be advised not to continue crucifying themselves paying off debt with nothing to show for it after 20 odd years, and rightly so, they deserve to get their lives back!
Brendan Burgess
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Negotiator
The CB arrears figures are all there.
The gross mortgage figures are all there.
The existing provisions and additional capital figures are all there for each bank.
You can estimate how many of the existing borrowers who are not in arrears will go into arrears and later default.
Do your own estimate of the loss figures. It's not that difficult to do an estimate.
All I am asking people to do, is to put numbers on their assertions.
The CB arrears figures are all there.
The gross mortgage figures are all there.
The existing provisions and additional capital figures are all there for each bank.
You can estimate how many of the existing borrowers who are not in arrears will go into arrears and later default.
Do your own estimate of the loss figures. It's not that difficult to do an estimate.
All I am asking people to do, is to put numbers on their assertions.
I disputed your figures last year. It's all there on the thread for people to read. I thought the calculations were nonsense then, and I think they are even more nonsensical now. No personal offence - I'm playing the ball here and not the man. But what you came up with was just bad analysis, woefully flawed. It is misleading people, and it's rational and fair to call you out on it. You chose to put those calculations in the public domain. So the public are entitled to give their opinions on them.
As I said last year, there's no point in analysing the figures in the way you have done. They are too fluid and too unreliable. All you have to do is estimate whether or not the banks will breach the worst case scenario outlined in the last PCAR. As has become apparent (it was apparent early last year) they will smash the worst case scenario out of the ballpark. The trajectory is clear. And when they breach worst case, they will need more capital - it cannot be any other way. They might not need it this year if they keep their heads buried in the sand, but they will need it soon.
The IMF knows it, too. Why else do you think Ajai Chopra said what he said this week?