How will risk sharing work?

[Brendan Burgess]

What do we know about it?
Where is it in the bill?

Risk Sharing
The Bill provides that the banks will share a portion of the risk associated with NAMA by receiving part of the payment for loans in the form of subordinated debt. This will enable NAMA to suspend certain payments to the banks in the event of a loss, and will help to incentivise institutions to work with the NAMA process in the best interests of all of us. The Bill will provide for the level of subordinated debt to be set by ministerial order.

So NAMA buys loans from AIB. It pays €25 billion in ordinary bonds. It pays €5 billion in "subordinated" debt.

This use of the word "subordinated" is confusing me. These bonds will be an asset on the balance sheet of the banks and will not be part of their capital.

They are subordinated from NAMA's point of view, not from the bank's point of view. So is it not really a meaningless word?

These bonds will not be as valuable as the ordinary NAMA bonds.
The ECB presumably won't take them as security for cash.
So the banks will have much bigger write-offs and will require more equity.

The idea is good, but I can't see how it works in practice. Unless the amount is so small, that it is not material.

Brendan

 

[Brendan Burgess]

[FONT=&quot]
[/FONT]

[FONT=&quot] 47.—(1) [/FONT][FONT=&quot]NAMA or a NAMA group entity may, whenever and so[/FONT]
[FONT=&quot]often as it thinks fit, create and issue subordinated debt securities of [/FONT]
[FONT=&quot]such class or type as it specifies—[/FONT]

[FONT=&quot](a) bearing interest at such rate as it thinks fit, or no interest,[/FONT]

[FONT=&quot](b) for such cash or non-cash consideration or deferred con-[/FONT]
[FONT=&quot] sideration as it thinks fit, and[/FONT]

[FONT=&quot](c) subject to such terms and conditions as to repayment, sub-[/FONT]
[FONT=&quot] ordination, repurchase, cancellation or redemption or[/FONT]
[FONT=&quot] any other matter as it thinks fit.[/FONT]

[FONT=&quot] (2) Subordinated debt securities issued under this section shall be[/FONT]
[FONT=&quot]used only for the purpose of providing part of the consideration for[/FONT]
[FONT=&quot]the acquisition of bank assets in accordance with [/FONT][FONT=&quot]section 89[/FONT]

[FONT=&quot] (3) To the extent that the terms and conditions of the subordi-[/FONT]
[FONT=&quot]nated debt securities (including the terms of subordination) are refer-[/FONT]
[FONT=&quot]enced to or based on a measure of financial performance, the[/FONT]
[FONT=&quot]measure shall be the financial performance of NAMA in totality and[/FONT]
[FONT=&quot]not any part or parts of the acquired portfolio.[/FONT]

[FONT=&quot] (4) Subordinated debt securities may be subject to different terms[/FONT]
[FONT=&quot]and conditions for different classes or types of those securities.[/FONT]

[FONT=&quot] (5) The total amount of subordinated debt securities issued under[/FONT]
[FONT=&quot]this section shall not exceed a percentage of the aggregate total port-[/FONT]
[FONT=&quot]folio acquisition value specified by the Minister by order. Such [/FONT]
[FONT=&quot]securities will be issued to the participating institutions [/FONT][FONT=&quot]pro rata.[/FONT]

[FONT=&quot] (6) Where the Minister proposes to make an order under [/FONT][FONT=&quot]subsec-[/FONT]
[FONT=&quot]tion (5)—[/FONT]

[FONT=&quot](a) he or she shall cause a draft of the proposed order to be[/FONT]
[FONT=&quot] ´´laid before Dail Eireann, and35[/FONT]

[FONT=&quot](b) he or she shall not make the order unless and until a resol-[/FONT]
[FONT=&quot] ´ution approving of the draft has been passed by Dail[/FONT][FONT=&quot] Eireann.[/FONT]

 

[Brendan Burgess]

This is very different from Patrick Honohan's proposal. He suggested that the shareholders in AIB would get shares in NAMA.

These subordinated bonds will be worth very little in the banks' balance sheets, so they serve no purpose at all.