We should not be even slightly surprised at the extent of debt writedowns offered by AIB – and by other banks – to highly indebted customers. The world of economics operates on the basis of incentives, not fairness. And banks have been incentivised to clean up their loan books after the massive mess of the financial crash.
In recent years, the new financial regulatory regime run under the ECB’s control from Frankfurt has harried and hassled banks to do more in this area. Irish banks have had too many non-performing loans for the liking of the top brass, and they have been under heavy pressure to deal with this. Bad loans are seen to restrict future bank lending and leave them more vulnerable if fresh trouble hits.
A lot of what has happened flows from this. It means that when a person does owe a bank a few million it is, indeed, the bank’s problem because that is a big non-performing loan. Meanwhile, it has led to a push-and-pull in how to deal with ordinary mortgage borrowers. Banks sought to clean up their loan books but successive governments ensured they didn’t repossess family homes, or at least only after a long and tortuous process. This left many borrowers in a prolonged negative equity purdah after the financial crash, going through successive loan restructurings but never moving forward.
Are different types of borrowers dealt with the same way? Of course they aren’t. Smaller borrowers rarely get 90 per cent writedowns. We are told by AIB – and the other banks – that they have internal policies and everybody gets the same treatment. But in the same way as people paying their loans month after month after the financial crash looked at those who were not making repayments – with no apparent consequences – now people look at the €7 million debt write-down given to the former Kilkenny hurler DJ Carey and the 1,900 AIB borrowers given writedowns of 90 per cent or since 2015. And they wonder.
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Lack of transparency around individual deals is inevitable, given that people’s personal finances are in play. And banks never trumpet debt writedowns to smaller borrowers, because then everyone will want one. But the banks have a much bigger incentive to cut a deal with larger borrowers – and to let the problems of smaller ones slowly work their way through restructuring and out of the system.
Banks know that trying to repossess a family home is near impossible, while at least with high rollers they can try to grab some assets to sell and finally get a big chunk of non-performing debt off their books. The process of dealing with the big loan can be brought to a conclusion, but protections for homeowners mean that for smaller borrowers reaching finality is more difficult. Again, it is all down to the incentives. Personal insolvency legislation has helped, offering a framework for borrowers of all sizes, though many deals with big borrowers are concluded outside this.
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The revelations of big debt writedowns are going to throw petrol on one particular fire. Consider another groups of borrowers – those who were in trouble with their loans after the financial crash. These are the “ordinary” mortgage borrowers who were unable to make full repayments. Irish bank loan books were gummed up with large numbers of these borrowers, and this was particularly an issue for Permanent TSB, which – unlike the bigger banks – did not have a large business other than mortgages.
There were three distinct phases in how this was dealt with. First, there were the emergency measures to rescue and recapitalise the banks, move €74 billion in commercial bank loans to Nama – at a write-down of 57 per cent – and inject State funds to stop anyone going bust.
The second phase, from 2012, involved the Central Bank putting in place procedures for the banks to deal with troubled lenders. Phase three came after 2017, when the ECB’s regulatory arm started to put real pressure on banks across Europe to reduce non-performing loans.
The ECB did not tell Irish banks to sell off parts of their non-performing loan books. But the targets they set for reducing bad loans made such sales inevitable, with Permanent TSB to the fore. The borrowers whose loans were sold were mainly those who had experienced difficulties making repayments. The loans were largely bought by international players – the so-called vulture funds.
The Central Bank, the banks themselves and senior ministers all assured them that they would retain the same protection as they always had on their mortgage. Except now interest rates are shooting up, and the variable interest rate on these mortgages is being shoved up in tandem with ECB rates – which is fair enough for a tracker mortgage, which works that way, but across the market other variable mortgage rates have risen much more slowly. A group of borrowers now face interest rates of 8 per cent or more, and this could rise towards 10 per cent in the months ahead. The funds, even though they bought the loans at massive writedowns, are cashing in.
Because they generally have poor credit histories, other lenders will not take them on, and in many cases the funds that bought the loans do not offer an option to switch to a fixed rate. So many of these borrowers are uniquely disadvantaged. While more than 100,000 loans were sold, the Central Bank has estimated that some 38,000 are most exposed, paying high rates without the option to switch.
So the same drive to cut bad loans on bank loan books which led high rollers to get big writedowns (after due process, yada, yada) has left others who have had long-term debt problems stuck paying interest rates well above the market norm. Meanwhile, the bulk of people in the middle just keep paying off what they owe. Banks are following the incentives they have and the drive to cut bad loans. Why should we be surprised?