Central Bank Publishes new Strategic approach to Banking Supervision 

Press Release 21 June 2010

The Central Bank today publishes a new strategy on banking supervision in Ireland 

here

Both the (relatively short) speeches are enlightening

I thought I should just consolidate all of our references to the Irish Bad Bank and to the Irish bad banks (sic) on this page to create a single page reference center, as much for myself as for the users of this site. So here are all of our references to NAMA on this site and some related material also specifically about the progress through the last twelvemonth of Allied Irish Banks plc, which I regard as much more significant than other banking issues in Ireland. Here are the references first & then I will make a comment.

The Irish Banking System and the Bad Bank

The European Central Bank: Guiding Principles for Asset Support Schemes

Dublin roundup - its awful

The German Bad Bank Model

Logistics in Ireland - Making the Bad Bank operational

Allied Irish Banks - progress 2009 / 2010

Ireland has its problems and I sympathize, two once great institutions are collapsing before our eyes with all of the consequences that has. But there is a common denominator, a failure which is having a massive social impact in Ireland right now and its about mathematics and technology. Look at the process in Ireland over the last twelve months which is now documented here on this page, what is the common thread of which the AIB process is only a microcosm? 

Continually, the people in Ireland tasked with quantifying the risk exposure of the financial sector got the estimates wrong. The demand for state aid capital is only the inverse of what the estimate of loss (or risk) exposure is. Twice, three times, AIB and the people at Anglo Irish (even after it came under state control) got those estimates wrong; I don't mean they got a D or an F on their exam paper, they got the estimates catastrophically wrong, They used the wrong factors, they used the wrong models, they used the wrong technology. Why? Ireland has several great Universities and Irishmen all over the world are leading the way in thinking about advanced technology and statistics? Why is this happening? Well I think its related to issues I discuss more generally on asymptotix; that predictive analytics is just hard, the sums are hard, see for example here & if I am right then there are lessons here for banking management all over Europe and in the UK. You cannot be complacent about this issue anymore, you do as senior banking management; have a social responsibility as a consequence of the key position of banking in the allocation of resources in the economy, you are the pivot of the transmission mechanism, i.e. the flow of money from the state to its citizens (or subjects) and thus the maintenance of the circular flow of income and payments (this is first year undergraduate economics). All of you in banking in positions of responsibility in quantitative analytics have a responsibility not to just muddle through, these mistakes have serious social consequences. Best practice is being documented here on this site, there is no excuse anymore (and this applies equally in the UK) for making bad decisions in relation to quantitative analysis of risk. Quantitative Risk Management can no longer be stuck in a closet and paid lip service, banking needs to get to grips with it, the modern world is complex and requires complex responses, the generation behind us, will never forgive us if we don't get this right now.

Brussels, 01/03/2010 (Agence Europe) - On Friday 26 February, the European Commission gave the go-ahead to the National Asset Management Agency (NAMA), an impaired asset relief scheme for financial institutions in Ireland. The Commission is satisfied that the scheme is in line with its guidelines on impaired asset relief for banks, which allow state aid to remedy a serious disturbance in a member state's economy. EU Competition Commissioner Joaquín Almunia commented: "This impaired asset measure, which is specifically targeted at real estate assets, is therefore key to cleaning up Irish banks' balance sheets. This is an important step towards the overall restructuring of the sector and its return to a normal and responsible functioning of the market".

The purpose of NAMA is to restore stability to the Irish banking system by allowing participating financial institutions to sell to the agency assets whose declining and uncertain value is preventing the long-term shoring-up of the financial institutions' capital and, therefore, the return to a normally functioning financial market. The scheme was open to all systemically-important credit institutions established in Ireland, including subsidiaries of foreign banks, with a 60-day application window that expired on 19 February. Five institutions will participate: Anglo Irish Bank, Allied Irish Bank, Bank of Ireland, Irish Nationwide Building Society, and the Educational Building Society.

The assets targeted by the measure are all loans issued for the purchase, exploitation or development of land and associated loans. Following the bursting of the Irish real estate bubble, these constitute the riskiest parts of the participating institutions' asset portfolios. The Irish authorities anticipate that NAMA will purchase land and development loans as well as associated commercial loans with a nominal value of approximately €80 billion for an estimated purchase price of € 54 billion. NAMA's main objective is to manage the assets expeditiously with a view to maximising their value and recovery prospects in the interest of the state.

The Commission has found that the establishment of NAMA constitutes state aid to the participating institutions pursuant to Article 107(1) of the TFEU, but that this aid is compatible by virtue of Article 107(3)(b).

In a press release, the Commission comments: "The scheme and intended operations of NAMA are in compliance with the guidelines set out in the Commission's communication on the treatment of impaired assets as regards disclosure and ex ante transparency, eligibility of institutions and assets and the alignment of banks' incentives with public policy objectives. In particular, the Commission has found that the scheme includes an adequate burden sharing mechanism through the payment of a transfer price which is no greater than the assets' long-term economic value, and the inclusion of an adequate remuneration for the state in the rate used to discount the assets' long term economic cash flows". Commenting on this mechanism, Amelia Torres, spokesperson for Joaquín Almunia, told reporters on Friday that the burden will be shared by banks and, "unfortunately, also by taxpayers".

Friday's decision only covers the NAMA scheme. The Commission will assess the compatibility (and, in particular, the actual transfer price) of the transferred assets when they are separately notified by the Irish authorities. These individual reviews will include a claw back mechanism in case of excess payments. Torres commented that the price of the transferred assets will have to reflect their real value and the Commission will be keeping a close eye on which assets are actually transferred.

The Commission adds that it "relies on a number of commitments from the Irish authorities to ensure that NAMA, whilst it performs its goal of maximising the recovery value of the purchased assets, does not lead to distortions of competition through the use of some of the specific powers, rights and exemptions granted in the NAMA Act. The Commission will also review individual restructuring plans to ensure that the participation of the financial institutions in this measure is followed up with appropriate restructuring measures to promote the return of those institutions to long term viability".

This asset relief scheme is the second to be authorised by the European Commission, following a scheme submitted by Germany in May 2009 and approved in July 2009.