With the general Elauction underway we can expect the minds and energies of our political leaders to be focused elsewhere for the next month or so. However, the world doesn’t stop when the posters go up. Neither, to be fair, does the government or administrative policy making, but it slows. In the context of BREXIT, this may be problematic
There is an interesting opinion piece in the Irish Times today, by Michael Noonan, the finance minister. It is being spun as “were going to get our money back from the banks”. This is not the first or second time of course we have heard that we are going to get the money back, and it will not be the last. We need to take enormous caution when interpreting what politicians say, especially when they talk about banks, and especially when they talk about banks in the run-up to an election. Continue reading
This is a horrific snapshot. Its taken from a brand new paper by Thorsten Beck, presented to a conference on the Irish economy today. It compares the Irish banking system as of 2011 to a broad set of international benchmarks. It suggests, in other places that Irish banks need to delever (reduce credit) by about another 20% and that mortgage lending might contract by the same.
Good job we turned that corner eh?
This is a really interesting chart from the European Banking Association Transparency exercise report published yesterday
RWA are risk weighted assets (loans) and Capital Effect is the trend in the core capital of the banks
From the report (my emphasis and comments in brackets)
13. An analysis has been carried out to further investigate the driver of the Core Tier 1 capital ratio evolution and to decompose its variation into capital and RWA components. Chart 5 illustrates the relative importance of the Core Tier 1 (numerator) and RWA (denominator) effects on the EBA Core Tier 1 ratio by jurisdiction, which helps to explain whether capital increases have been driven by injections of new capital or by de-risking and deleveraging. The main results of this analysis are:
a. The improvement of 170 bp (from 10.0 to 11.7%) recorded over the 18 months ending in June 2013 has been the result of both an increase in the EBA Core Tier 1 capital (80 bp) and a reduction of RWAs (90 bp). [overall banks are healing]
b. In one country (IE, area Q4-b) there has been a reduction of EBA Core Tier 1 capital ratio, due to a decrease of capital, partially offset by a reduction of RWAs. [irish banks shrinking but capital shrinking faster than assets. this is not good…]
c. In eight countries (Q4-a and Q1-a – AT, BE, DE, DK, GB, IT, NL, SI), whose banks account for around 56% of the total, the improvement in the EBA Core Tier 1 ratio has been mainly driven by a reduction of RWAs. [in the main the improvement comes from deleveraging – smaller banks]
d. In six countries (Q1-b – CY, ES, FR, HU, NO, PT, 35% of the total) the impact of higher EBA Core Tier 1 capital has been larger than the impact of the decline in RWAs. [these are in effect recapitalising]
e. In six countries (GR, FI, MT, PL, SE and LU – area Q2-a, 7% of the total) the increase in the EBA Core Tier 1 capital has been partially offset by an increase of RWAs.
A small amount say Fitch. But thats based on tales from the banks.
The agency expects loan arrears to peak in 2014, and that 40 per cent of loans that are more than 90 days in arrears will begin to “reperform”. Another 40 per cent will be the subject of some type of writedown, with 50 per cent of the debt in this category being written off. The final 20 per cent of loans will see the associated properties being repossessed.
Overall, the agency believes 4.8 per cent of outstanding mortgage balances (ie, €2.2 billion) could be lost by the banks.
As of September 2013 we had 99189 cases over 90 days, with 18.8b in mortgage loans outstanding. 40% of that is 7.5b and if they lose 50% of that book its already 3.75b. Then if we repossess 20% of the cases and presumably sell they will also lose at least 50% . Thats another 1.8b. So we are at 5.6b losses. Then we have the remaining 40% which will re perform..fully it seems.
Unless only really really good houses with high LTV remaining are going to be repossessed im not sure where the Fitch figures are coming from. Add into the mix the catastrophic figures on Buy to Let (7.7b over 90 days , presumably most should be repossessed and sold at a 50% plus loss, another 3.35b.
Rather than 2.2b in mortgage related losses, which seems low, we could (but hopefully wont) see closer to 10b in mortgage related losses yet to be seen by the Irish banks. No wonder Mario Draghi is concerned
but dont worry… tis but a scratch
This paper, with Michael Dowling of DCU, takes a look at the behavioral aspects of Irish banks over the crisis period. It is forthcoming in Journal of Risk Management in Financial Institutions, next march. A final version can be downloaded from the link.
“The collapse of the Irish economy, still ongoing after five years, has its roots firmly in the banking sector. Lax risk management, aided by poor board oversight and behavioral biases among senior executives, is now viewed as one of the primary causes of the over- lending during the ‘Celtic Tiger’ years which fueled the excessive growth in credit and subsequent banking implosion, eventually resulting in all Irish banks ending in state ownership. We approach the causes of the Irish banking sector collapse from a behavioural perspective of the role of Boards of Directors in bank risk management, and then proceed to explore the likely presence of behavioral biases among senior executives in Irish banks. The Irish context provides a pertinent case study of what can happen when hubris and associated behavioural biases take control of a bank’s risk management strategy.”
There is an interesting op-ed in the Irish Times today, from Stephen Flood of Goldcore. This is on foot of a research note which they have produced (introduced by yrs trly) on the state of play on Bail Ins (where depositors become part of the solution to bank recapitalization, a la Cyprus) across europe.
The risk of such bail-in in Ireland is low. But then so too are interest rates. It might be useful for people, in saving, to consider not just yield but also liquidity risk. Irish banks are well capitalised – but then we have heard that before.