Bank recapitalization
and NAMA
Patrick Honohan
Professor, Department of Economics
and
Institute for International Integration Studies
Trinity College Dublin
Prepared for the Joint Oireachtas Committee on
Finance and the Public Service
6th May 2009
Recapitalization and asset purchase
They are separate
Goal of recap: Make bank financially self-sufficient with a cushion of
shareholder’s funds available to absorb future risks
Goal of asset purchase (NAMA):
Remove distraction of trying to recover on problem loans;
Separate loan recovery from the team that made them;
Replace assets of uncertain value with safe and marketable assets
Sometimes asset purchase at too-high prices is used as a covert way
of recapitalizing
A bad idea – non transparent subsidy for shareholders & unguaranteed
Govt has made it clear this is not their intention
But it could happen by accident if NAMA too optimistic in its pricing!
Recapitalization: Good and bad (1)
Flow approach: wait for banks to make and retain profits
over several years until they have recapitalized.
This is the “Do nothing” option. “Forbearance”. Wait-and-see
But
Banks are zombies while this happens
Tie up all their resources keeping bad borrowers afloat
May take reckless gambles
May never be enough profits
Evidence from 40 crises that this approach much more costly on
average
Recapitalization: Good and bad (2)
Standard stock approach: (Decisive, once-for-all)
a) Insists on aggressive, realistic, asset valuations reflecting true
recoverable value of assets.
b) Insist on banks raising new capital promptly from shareholders to meet
regulatory minimum.
c) Failing that, regulator seizes control and finds buyer for viable parts of
business. Puts remainder into wind down/bankruptcy
This the standard approach used by US in the past and recommended
by experts all over the world
But
Is resisted by shareholders (they lose everything if unable to raise
sufficient capital)
And by big debtors (as they will likely be dealt with more aggressively)
Recapitalization: Good and bad (2)
NAMA purchase claims to do this
Standard stock approach:
a) Insist on aggressive, realistic, asset valuations reflecting true
recoverable value of assets.
b) Insist on banks raising new capital promptly from shareholders to meet
regulatory minimum. Government may be the only willing buyer
c) Failing that, regulator seizes control and finds buyer for viable parts of
business. Puts remainder into wind down/bankruptcy
This the standard approach used by US in the past and recommended
by experts all over the world
But
Is resisted by shareholders (they lose everything if unable to raise
sufficient capital)
And by big debtors (as they will likely be dealt with more aggressively)
Asset management company experience
Rapid asset disposal type
Success: USA; Spain;
Failure: Mexico, Philippines,
Corporate restructuring type
Success: Sweden;
Mixed: Finland, China;
Failure: Senegal, Ghana
Sounds like NAMA is the latter; but if so would need its own capital
% Recoveries can be very low
Duration can be very long
Monitoring: need to avoid a property empire
(Obvious) requirements for an effective AMCs
Clear objectives
(including Rapid asset disposal vs corporate restructuring)
Robust governance (ideal private sector type)
& external monitoring
Operational independence from Government/politics
Transparency of operations
(more than banks)
Potential role of private managers
Strict cost control
Etc.
Can these be delivered for NAMA?
Distinctive features of NAMA
Will take on performing loans as well (why?)
But ignores non-property sectors
Size is unprecedented worldwide
(relative to economy)
(May be) buying from going-concern private banks
(this has been done before – Thailand, Malaysia etc.)
NAMA: Improving the risk-sharing
NAMA approach
But how to get this right
given ambiguities of
accounting rules, broken
market, etc.
Straight asset purchase at “appropriate” value
avoids the illiquid long-term
Bank gets safe marketable asset in return
low coupon bond trap!
NAMA/Govt assumes the risk (though mention was made of a
possible levy)
NAMA: Improving the risk-sharing
NAMA approach
Straight asset purchase at “appropriate” value
Bank gets safe marketable asset in return
NAMA/Govt assumes the risk
Better risk sharing (PH suggestion)
Two-tier payment
Bank gets safe marketable asset -- but less of it than in
standard approach
Shareholders get in addition an equity-type participation
in NAMA
Govt assumes less risk
If valuation results in negative shareholders’
funds…
Capitalist logic implies ownership control passes to creditors
If existing shareholders cannot raise new capital, they have little basis
for any residual claim
(Banking license is a valuable privilege granted by State, conditional on
injecting sufficient capital)
If bank is to continue, government must inject necessary capital
(May then sell to new shareholders)
In this way, NAMA process could well involve temporary nationalization
unless additional private equity injections can be found
State ownership
Large majority state share is certain; 100% a possible consequence of
NAMA process
?Temporary control by regulators
?Temporary ownership (in current market years rather than months)
?Permanent nationalization
Objectives of nationalized banks:
Most economists agree with this
Maximize shareholder value?
Seek national economic and social goals? Not at the cost of a huge additional
taxpayer liability
How soon to sell to private sector (foreigners?)
Even 5% or 10% private shareholding could help maintain the dialectic
between government and banks