The Government may take majority stakes in Irish banks covered by the guarantee scheme if they need additional capital after loans are transferred to the proposed National Asset Management Agency (Nama), the Minister for Finance Brian Lenihan said this afternoon.
“Some institutions may need capital after they have transferred loans to NAMA,” Mr Lenihan told the Oireachtas Joint Committee on Finance this afternoon, although he ruled out a blanket nationalisation of the country's banks.
“This will increase the State’s ownership in these banks and in some cases that may result in a majority shareholding,” he said.
Mr Lenihan also said he expects Nama to contain a “risk-sharing mechanism.”
“I have from the outset said that, down the line should Nama be faced with losses, consideration would be given to the imposition of a levy or some equivalent measure,” Mr Lenihan told the Committee.
He said the success of Nama would not be based on any assumption of a return to the recent "bubble" prices for property.
He said an assumption that the banks would benefit commercially from the establishment of Nama was not correct, "and has never been proposed by Government".
Mr Lenihan said it was a "myth" that there is some intention that the amount Nama will pay will compensate the banks for a recovery in values back to the unsustainable peak property prices.
Such an outcome was the result of "a reflection of wishful thinking among interested parties", Mr Lenihan insisted, adding that this approach "would not be countenanced by Government".
“I expect Nama to make gains over its life but I am open to examining other risk sharing mechanisms.” He said any suggestion of a default on senior bank debt would be "catastrophic".
“Senior bondholders are guaranteed under the Government guarantee scheme and any suggestion that those parties should be invited to consider a reduction in the amount repayable to them would have catastrophic effects for the banking system and the funding of the Irish State,” Mr Lenihan told the committee.
Mr Lenihan added that Nama’s valuation process will require European Commission approval. He said Nama "will not be paying anything other than current market value for certain assets, where this is the appropriate approach”.
Developers would be the first to “suffer” as borrowers typically provided some 25 per cent of the purchase price and that in the event of repossession, prices would “have to fall by more than 25 per cent from the peak of the market before the bank makes any loss at all”.
Mr Lenihan said that this element was “lost in the commentary by some contributors" to the Nama debate. "Those who caused this problem and those who were involved and who failed to meet their obligations to Nama, they will not be able to return or re-enter this business," Mr Lenihan told the parliamentary committee.
Commenting on proposals that the Government should fully nationalise the entire banking system, Mr Lenihan said the “troublesome assets” would have to be dealt with “either way” and therefore would “not address the problems facing Irish banks.”
Mr Lenihan said full nationalisation would “inevitably” result in Ireland’s sovereign credit rating, which he insisted would be downgraded from AA. This, he said, would result in “increased debt service costs on the National Debt which the country can ill afford when it has so many other pressing calls on its resource.”
Outlining Nama’s valuation process, Mr Lenihan said independent valuers will initially value the security for the loan which he said “may often be more than the property purchased.“
He said this valuation will be “in accordance with recognised red book valuation standards, European valuation standards, or International valuation standards, as appropriate.”
Nama will then “adjust the value to reflect the fact that the market for this security is currently illiquid but will not remain so," he said. "This recognises that these assets are at crisis values and that the fundamental long term value having regard to cash flows and longer time horizons is appropriate.”
Labour Party spokeswoman on Finance Joan Burton claimed the Minister for Finance would be handed the most extraordinary powers ever given to a minister in the history of Irish state under the Nama plans.
Ms Burton said: “If Nama, as it’s proposed, goes through, you will in effect... be property tzar of one of largest property companies on earth”.
Fine Gael's finance spokesman Richard Bruton criticised a lack of any independent watchdog to protect the taxpayer.
“I think it’s very strange that we will be depending on an individual ministerial direction as the general protection of the taxpayer in this area,” he said.
Ms Burton also complained there was no clarity on what long-term values meant or any government explanation as to why taxpayers should pay over the odds for bad assets.
“I and practically every taxpayer in this country fear that long-term economic value is a way of overstating the value of the banks’ loans, thereby overpaying the banks,” she said.
“This is the core of the problem... this sounds like a phoney system.”