Aggressive competition prompted the banks to drastically lower their standards on security, writes COLM KEENA

THE FIGURES released by the National Asset Management Agency (Nama) on Tuesday can be seen as a measurement of how badly Irish banks were run during the bubble period.

The agency intended to transfer loans worth €17 billion belonging to the 10 largest property borrowers in the State. Instead, it transferred €16 billion, because its unhappiness with the security behind the rest was such that it was assigning a value of zero to them. The banks have been given a month to improve the security on the loans.

In percentage terms, this means 5.9 per cent of these mega-loans had significant difficulties with their security. That’s a strong indictment of Irish banks.

The second measure was the level of discount applied to the value of the loans transferred. The average was 47 per cent, but ranged from a high of 58 per cent for Irish Nationwide, to a low of 35 per cent for Bank of Ireland.

These figures are all above the initially forecast average of 30 per cent mentioned last September when details of the Nama project were being disclosed. That estimate came from the banks’ own views of the loan-to-value ratios, security, income streams, etc attached to the loans – in simple terms the banks’ understanding of the value of what they had.

Those understandings have now been shown to have been very wide of the mark.

In a scale from completely hopeless (100) to perfectly well run (0), the Nama discounts ascribe the following ratings to the various institutions: Irish Nationwide (58); Anglo Irish Bank (50); AIB (43); EBS (37) and Bank of Ireland (35).

The damage to the banks occurred during 2004-2008. The chairman of Irish Nationwide in this period was Michael Walsh, and the chief executive was Michael Fingleton. For Anglo, the equivalent people, from January 2005 were Seán FitzPatrick and David Drumm (Mr FitzPatrick moved from chief executive to chairman in January 2005). At AIB the relevant people were Dermot Gleeson and Eugene Sheehy (who took over as chief executive from Michael Buckley in June 2005).

A glimpse of how badly AIB was run emerged in the Commercial Court in January when Mr Justice Peter Kelly described as “astonishing” the fragility of the security AIB had against loans advanced to companies in Liam Carroll’s Zoe Developments.

The amount involved was €544 million. The security was letters of undertaking from solicitors for the Zoe companies to hold on trust for AIB the title deeds to a large number of properties owned by Zoe. Such a form of security was “a far cry from a legal mortgage”, the judge observed.

It is understood Nama is ascribing a value of zero to personal guarantees given by developers over bank loans given that most developers are now broke. It is also uninterested in security where the names on a loan application are not identical to the names on mortgage documents.

There was a widespread practice of developers presenting banks with documentation they, rather than banks, said was required to back loans sought. Such papers would include items such as solicitors’ undertakings and cross-security on other assets.

An insistence from a bank that it would dictate what security would have to be provided could result in the applicant moving to a competitor down the road.

Nama does not know yet the extent to which security difficulties with large borrowers will be replicated as it moves to valuing loans issued to smaller borrowers.

Anglo’s aggressive approach to winning business pushed AIB in particular to drastically relax its banking standards.

During the bubble banks lowered standards on security, issued loans for overvalued property and failed to conduct adequate due diligence. They also borrowed recklessly. Net foreign indebtedness of Irish banks in 2003-2008 grew from 10 per cent of GDP to more than 60 per cent of GDP.

A bank that grows by more than 20 per cent in a year is considered to be potentially out of control. In the nine years to 2007, Anglo breached this threshold eight times, and recorded an average growth rate of 36 per cent.

No one shouted stop.