Cliff Taylor: Inquiry will highlight how banks deal with big debtors versus the ‘little people’

The political debate arising from the IBRC controversy has focused on the detail, including the Siteserv sale, the Dáil statements about Denis O'Brien's borrowings and those familiar questions: who knew what and when did they know it?

However, I suspect that the most significant fall-out will be the laying bare of details about how banks deal with big deals and big borrowers – and how this contrasts with how they have dealt with “ordinary” customers since the bubble burst.

You could argue the rights and wrongs of this all day long, but you can’t dispute one fact: most of the big debts in the banking system have been dealt with much more quickly and, in many cases, more realistically, than debts for smaller borrowers, including homeowners.

Almost seven years after the crisis broke, Nama is nearly finished its work and the IBRC wind-down is almost complete; in other words, the job of dealing with the big debtors is well advanced. We will be dealing with household mortgage debt for years to come.

Some progress has been made in the last two years, but there are still almost 105,000 homeowners in default. While 117,000 mortgages have been restructured in some way, almost one in five of these is a temporary solution and in another one in four cases the arrears have been capitalised, which will not deal with an ongoing affordability problem.

Business debt

Contrast this with how business debt has been restructured. Take Siteserv. As part of its sale, some €119 million of the company’s €150 million debt was written off by IBRC. The commission of investigation will examine whether a higher price – and thus a lower write-off – might have been achieved. But remember: IBRC had already written the loan down by about €109 million in its books, meaning it expected to lose that amount.

At an Oireachtas committee meeting in late 2012, IBRC executive Richard Woodhouse, who was in charge of big business borrowings, said the goal in such deals was to "right-size" the debts of a business which had run into trouble and was being sold off. The bank got as much as it could back and the business survived.

With €18 billion of its €25 billion loan booked impaired in some way as of late 2012, IBRC had a lot of this restructuring to do. In the same way as it was clear when Nama was set up that a lot of the original loan value would never be recouped, IBRC was also cleaning up a mess.

Restructuring is the way banks – and Nama – deal with big debts. The pity has been that the banks have been so slow to do the same for smaller borrowers, particularly homeowners. The first few years of the crisis saw delay after delay in the development of a coherent approach to dealing with domestic mortgage arrears, even though it was clear – as it was with developer and business loans – that much of it would never be repaid.

Slow progress

Borrowers were given repayment holidays and the like, but there were few long-term solutions. With the banks in a bad state, the Government, the Central Bank and the banks were happy to let it all slide along, even if they said otherwise.

Since then, and particularly after new guidelines and legal change in spring 2013, there has been some progress. But it will remain slow, due to the complexity of what has to be done and the consensus that homes should only be repossessed in the most extreme cases, meaning that many cases are drifting on through the courts. In the meantime tens of thousands of borrowers cannot get on with normal lives, at least in an economic sense.

The IBRC controversy opens a window into the way big borrowers deal with banks – a world in which terms are negotiated and loans are restructured. Whatever the reality of “deals” on offer to big borrowers, it is very different from the structured way in which most of us deal with “the bank”.

You could say that this is just the way it is, that banks have always had a different relationship with corporate and big borrowers . But with standard variable mortgage holders still suffering from high rates, any evidence of favourable treatment for those with big debts would be political dynamite.

Part of the issue here is transparency, of course. We simply do not know what arrangements IBRC had with its borrowers – even some of the detail of the Dáil revelations is disputed – or what terms Nama struck with the developers who are now starting to “exit” its grasp.

I suspect the inquiry won’t satisfy the demand for full information in relation to IBRC, which will only go to deepen the public’s suspicion that there really is one rule for the rich – and one for the rest of us.

In fact, I think a lot of what it will examine will be commercial judgments made in relation to deals and relationships, where – even if it feels things might have been done differently – it will only be able to use that phrase beloved of schoolteachers: could have done better.

Twitter: @CliffTaylorIT