THE EXCESS loans in the banks should be moved to a special purpose vehicle (SPV) and losses on them shared over time by the banks, the State, certain bondholders and the European bailout fund, NCB Stockbrokers has said.
Compiled for the Government, a private report by NCB estimates that between €70 billion and €100 billion of loans must be taken out of the banks to make them viable but warns against fire sales as it would inflict further heavy losses.
Forcing sales of excess bank assets could add up to €25 billion in costs on top of the €25 billion bank contingency fund in the EU-IMF bailout, said Liam Booth, managing director of NCB Corporate Finance. “The problem in the banks has become too big for Ireland to solve on its own,” he said.
To make the two big banks, Bank of Ireland and AIB, fit for sale, Mr Booth said the excess assets should be moved to the SPV at face value following this month’s Central Bank stress tests and held to maturity or until they are sold in securitisation deals.
Senior unguaranteed unsecured and subordinated bondholders – owed about €20 billion by the banks – should be transferred to the SPV or offered a low cash-for-debt swap in repayment.
The banks would take the first 10 per cent loss on the assets, while any future losses would be covered by the EU-IMF €25 billion bank contingency fund.
The EU bailout fund, the European Financial Stability Fund, and the European Central Bank should fund the SPV as a form of “mezzanine finance”, NCB said.
Under this structure, the European authorities will hold the least amount of risk, said Mr Booth.
“The ECB is in the hole with us and the only way they can get out of it is to fund the hole,” he said.
The Central Bank’s stress tests, the results of which will be made public on March 31st, will determine how much more the banks will require beyond the €10 billion set aside within the EU-IMF fund.
This is on top of €46 billion already pumped into the banks.
The capital stress test, or prudential capital assessment review, will decide future loan losses. The liquidity stress test, or prudential liquidity assessment review, will determine how many assets must be offloaded so the banks can fund themselves.
NCB said a disposal of €100 billion of assets at current market a discount of 50 per cent would raise €50 billion to repay the Central Bank but would create a €50 billion loss – half of which would come from the EU-IMF fund and the other half from the State.
