Around 2002 the Irish Banks abandoned the fundamental Priciple of Fractional Reserve Banking. This resulted in irresponsible and dangerous creation of a credit pyramid evidenced by extremely bad lending over the last 5-6years (in total bad lending may amount to €100bn out of total balances on loans to customers now standing at about €400bn). At this point (16th Sept 2009) the Government has formally recognised €77bn of loans to Customers as Bad Loans.
These Bad loans should be written down to true estimates of recoverable amounts. Only then can it be seen what level of repacement capital the Banks need in order to stay in business and provide sufficient capital protection for their Customers’ deposits. Realistic up-to-date estimates by experienced analysts put this required write-down of Bad Loans at not less than €31bn. That, therefore is the amount of Replacement Capital (Re-Capitalisation) needed at the 6 Irish Banks and Building Societies. That means that to stabilise the Banking Sector the 1st Priority for the State is to make that level of additional stabilisation investment (above the initial investment already made of €10.8bn) into the Banks. It could do this by setting up a New Banking Sector Stabilisation State Investment Trust to properly re-capitalise and stabilise the Banks within a 5-6 years Banking Rehabilitation Investment period.
At the end of this 5-6 year stabilisation and rehabilitation period the State Investment Trust could exit its investments in the Banks by re-floating the Banks on the market or by selling them off. The Banking Sector Stabilisation State Investment Trust would be capitalised at €38.1bn comprising the initial investment in AIB and BoI of €3.5bn each and the initial €3.8bn invested in Anglo plus the €31bn write-down on the €77bn Bad Loans less €3.7bn (being 100% write-down of subordinated Loans on Anglo’s last balance sheet at €4.9bn less estimated discounted buy-backs on market in 2009). It would also be a pre-requisite to setting up the Banking Sector Stabilisation State Investment Trust that there would be entirely New Boards at all of the Banks. There would be no transfer of Bad Loans out of the Banks.
The written-down Bad Loans would be worked-out, realised and recovered in “fire-walled” Recoveries Divisions in the Banks under newly appointed expert, skilled, non-compromised management. The new Boards at the Banks would Report Quarterly, on a proscribed Format basis to the Board of the Banking Sector State Investment Trust (chaired by P. Honohan). The Banks’ new Boards would furnish Quarterly Results Reports on the Banks’ Traditional Lines Operations and Business as well as seperate detailed Progress Reports on the Recoveries and Realisations in their “fire-walled” Recoveries Divisions.
After 5-6 years operational banking rehabilitation, stabilization and successful recoveries on the written-down bad loans, the Banking Sector should reasonably be able to report a maintainable Annual Net Profit level for the Sector (6 institutions) of about €6.5bn (i.e. about 1.75 % net profit return on €369bn Total Customer Loans Balances, being €400bn – € 31bn write-downs). Applying an undemanding Prie/Earnings multiple of 6-7 times to this €6.5bn Net Profit p.a. level gives a Capitalisation Valuation for the Banking Sector in the range of €39bn – €45.5bn. This could be realised by re-Floating the State Investment Trust’s shareholdings in the Banks onto the Market or by direct sales.
This approach would be clearer and avoid the huge extra costs and Principal / Agency hazards in the NAMA proposal. It would ensure more efficient assets and property price corrections and market traction for economic recovery. The NAMA Proposal is not as transparent. The operation of NAMA would create “swamp” and “fog” uncharted conditions thus delaying market corrections and economic recovery.