THE BANKS should not be subjected to too much financial risk under the National Asset Management Agency (Nama), Minister for Finance Brian Lenihan told the Seanad yesterday.
He said there was a balance to be struck between maximising the amount of risk shared and helping the economy and people by putting the financial system back on track.
“If too much risk were left with the banks, it could limit the extent to which they were freed to lend in support of economic development,” he added.
“It is imperative the banks are not lumbered with unnecessarily high contingent liabilities.” Mr Lenihan said that subordinated bonds were a method of sharing the risk associated with the agency.
“They put the banks at risk if Nama were to lose money, which is not our expectation, without giving them an upside concerning the gains.”
Opening the Nama Bill debate, which continues today, the Minister said the agency would purchase loans with a book value of €77 billion for €54 billion.
“This is a projected discount of 30 per cent, which will inflict significant losses on the banks and their shareholders,” Mr Lenihan added.
“The sum of €47 billion is the estimate of the current market value of these loans and the estimated aggregate purchase price includes a further €7 billion to reflect long-term economic value.”
He said that long-term economic value was an integral part of the valuation process to ensure the goal of stabilising the financial system was achieved and that, as a consequence, economic recovery could be supported.
“The approach strikes a balance between recognising and reflecting the long-term potential of assets transferred to Nama, while minimising any potential risk that the agency will make a loss,’’ the Minister added.
He said that the valuation methodology adopted was based on the European Commission guidelineswhich stated that the transfer value for assets would inevitably be above current market prices to achieve the real effect.
It had also stated, he said, that transfer values might reflect the underlying long-term economic value of the assets involved.
“Our approach reflects the fact that the market for these assets is distressed and likely to return towards normality over time,” said Mr Lenihan.
“I emphasise again that the success of Nama does not rely on a return to bubble prices in the property market.”
