NAMA is probably best of a bad lot by Alamance


									Group Economics

NAMA is probably best of a bad lot
 Contact: Simon Barry                                                         
          Senior Economist
          +353 1 643 1553/ 086 3410142                                        

  Governments across the world are attempting to grapple with the problem of distressed banking systems.

  And it truly is an enormous problem, with estimates of the total losses to have hit the sector globally over the
  past two years now standing at some $1.1 trillion (€747m), and counting.

  Irish banks too have run up huge losses, largely related to over-exposure to overheated property markets which
  have slumped. This is a problem which, in the absence of significant countervailing intervention, would seriously
  jeopardise the prospects for an eventual revival in the economy.

  The aim of NAMA is to try to ensure that the banking sector is in a sufficiently healthy position to provide the
  financing required to sustain the economic recovery, when it comes. There can be little doubt but that NAMA is
  a significant initiative, resulting as it does in the removal of €77 billion of property loans, many of which are
  seriously impaired, from the balance sheets of the banks.

  The cleansing effect of this asset transfer is bolstered considerably by the ability of the banks to exchange the
  state-backed NAMA bonds which they will receive from the Government as payment for the loans for fresh
  liquidity from the ECB. The result will be a more liquid banking sector with a cleaner aggregate balance sheet.

  NAMA is not a perfect plan for sure. But the reality is that the perfect plan simply doesn’t exist. If such an off-
  the-shelf blueprint were available then governments the world over would be rolling it out.

  In this context, it is worth pointing out that different countries have indeed chosen different approaches. The US
  has tried to find private sector buyers for troubled assets by offering state support to finance the prospective
  purchases, while the British government has opted to go down the insurance route, whereby it provides
  protection to the banks in the event of further credit losses arising.

  All approaches struggle to deal with the poisoned issue of asset pricing and NAMA is no different.

  From a taxpayer perspective the key issue is whether property values recover by the 10% pencilled in by the
  minister from the current level which is assumed to represent the bottom of the cycle.

  While that may be a plausible scenario (the minister pointed to the fact that his assumption received explicit
  endorsement from the outgoing and incoming Irish Central Bank governors), that does not mean it is without

  While a substantial price adjustment has already taken place, many areas of the property market continue to be
  characterised by excess supply. Moreover, the economy is still in very poor shape, so important fundamentals
  such as employment are likely to continue to decline for some time to come. This points to the likelihood of
  further declines in property values.

  In turn, this argues for a greater degree of risk-sharing between the banks and the taxpayer than appeared in
  last week’s bill so as to allow for the possibility that NAMA may not end up realising the currently-assumed
  values for the adopted assets.

  It is also worth pointing out that a return to full health for the banks will require extra capital, possibly in
  substantial amounts.

  Capital is the difference between a bank’s assets and its liabilities – the all-important buffer which provides
  insulation against its assets (i.e. loans) going bad.

  Such a buffer is required by regulators to ensure that assets are far enough above liabilities so that both
  ordinary depositors and the wholesale funding markets can feel that their money is safe.
The issue for the Irish banks is that even after the various loan portfolios are transferred over to NAMA, their
capital positions will still be some way poorer than their European peers.

Thus, over time, the Irish banks will need to recapitalise further. It seems there is hope both within policy circles
and the banks themselves that initial steps can be made in this direction without further government assistance.

However, it remains to be seen whether this can happen on a scale and timeframe sufficient to ensure that
concerns about capital adequacy don’t prevent the banks from fully transmitting the positive impulses of NAMA
through to the real economy.

Overall, the NAMA approach represents a reasonable, though far-from risk-free, attempt to help restore the
soundness of the banking system, though it may yet need to be accompanied by further, potentially sizeable,
injections of state capital into the main banks.

Simon Barry, Irish Examiner, September 21, 2009

To top