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Time to Nationalise Banks?

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It is self evident that as the economy lurches into an ever deepening recession, every possible measure should taken to ensure that credit is readily available for viable projects and credit-worthy borrowers. It is just as evident that this cannot be done by a lame-duck banking system which is being pulled in several directions - to lend more, protect shareholder value, ration credit to improve ratios, hoard resources to cover future bad debts, and make guarantee and recapitalisation payments to the state. More ...

While the Minister for Finance views nationalisation as the "last resort", he should face reality. The two main banks are trading at a fraction of their net asset values as bad debts are expected to wipe out most or all the residual value. They only exist today because of State guarantees and they urgently need a massive injection of funds from the taxpayer to survive. In all likelihood bad debts will continue to rise as the full impact of the crisis and the forthcoming budget hit the economy and, if nothing is done, the banks will be forced to retrench even further and require even more funding from the State.

Just look at the figures. The two main banks are valued by the investment community at about a billion euro. This contrasts with the proposed preference share recapitalisation of €7 billion and taxpayers' guarantees covering €400 billion. Under the mooted "bad bank" solution, taxpayers will have to spent billions buying toxic loans from the banks and, as if this is not bad enough, they could then be exposed to a multi-billion hit if prices paid for these loans prove to have been too high when they are eventually unwound. In the meantime, the banks and their shareholders will emerge effectively unscathed and stand to make massive gains once the economy recovers.

The Government has an overriding responsibility to protect the national banking system, as distinct from either banking institutions or individual bankers and it is really hard to understand why it is drip feeding support to the banks when the economy needs a strong financial system with the capacity to help restart growth.

Instead, the Government should  "bite the bullet" and temporarily nationalise the main banks as part and parcel of the forthcoming budget. This would provide clarity, remove uncertainty, restore confidence and ensure that state funding is used exclusively to boost the economy rather than bale out bank shareholders. In addition, it would be less risky and costly for the taxpayer, and eliminate the need to price impossible-to-value impaired loans which, in all likelihood, will cost the taxpayer dearly.

Nationalisation could proceed along the following lines:

  1. Compensate shareholders with options to acquire new stakes when the two banks are re-privatised. Transfer their substantial problematic loans to a state-owned bad bank which would operate as a high-powered debt collector.

  2. With new boards and senior management teams and capital injections from the state to improve liquidity, the two good banks, once insulated from political meddling, would work exclusively in the public interest. They would have strong balance sheets and would be extremely profitable.

  3. The bad bank should aggressively pursue defaulters and, where necessary, take charge of assets pledged as collateral. Rather than engage in fire sales, it should accumulate these assets for sale once economic conditions improve.  At that point, the final deficit attributable to bad loans will be clear. This could be allocated between the good banks which should then be re-privatised to repay the state, grant equity to option holders and raise new capital.

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This page contains a single entry by Brian published on March 23, 2009 12:30 PM.

Sharing Economic Pain was the previous entry in this blog.

Why Nationalise? is the next entry in this blog.

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