THE CREATION of a toxic asset company to remove bad loans from the banks could involve loan write-offs which match or are more severe than the banks’ worst-case scenarios under proposals being devised for the Government.
Economist Dr Peter Bacon has advised the Government to establish a bad debt company to take problem loans off the banks’ balance sheets to free up lending.
Dr Bacon was hired by the Government last month to work on a plan to remove bad bank loans. Working at the National Treasury Management Agency (NTMA), he has submitted a draft report on his plan to Minister for Finance Brian Lenihan.
A spokesman for the Minister said the report would “inform the Government’s ongoing considerations, involving the financial regulator, Central Bank, NTMA and its legal and financial advisers.”
The Government has already said it is considering “risk mitigation measures” for the banks.
The transfer value of moving the bad assets from the banks to the toxic debt company – described as “the national asset management agency” – is expected to involve sharp write-downs in property values that are equal to or even lower than the worst-case scenarios estimated by the banks.
This may force the banks to shoulder losses that are beyond even their worst-case scenarios on loans than previously estimated, putting their capital needs under greater strain.
Senior property valuers, who are believed to share Dr Bacon’s estimates on the declines in property values, estimated that residential development land in Dublin and other cities will fall by up to 70 per cent from its peak and by up to 90 per cent in regional towns.
Residential property is expected to halve in value from peak levels.
The value of commercial property development land is estimated to fall by between 50 and 70 per cent, while commercial property values will drop by up to 70 per cent from their peak.
These figures match or exceed the assumptions in the worst-case scenario of the State’s largest bank, Allied Irish Banks (AIB). The bank, which has the largest loan exposure to the development sector, estimated that, in a worst-case scenario, commercial property values would fall 50 per cent and development land would drop by between 70 and 80 per cent.
The bank estimated that, in its stress scenario it would have to write off almost €3 billion or 27 per cent of its €10.8 billion Irish residential development loans over the three years until the end of 2010.
AIB has said it will have enough capital to write off up to €8.4 billion of bad loans, primarily to developers, over three years by retaining profits and with the €3.5 billion State recapitalisation.
Dr Bacon declined to comment on the contents of his draft report.
One option linked to the transfer of the toxic assets to the bad property company from the banks could involve the State exchanging a Government bond with the banks at a value lower than the loans are currently worth on the banks’ balance sheets.
Analyst Emer Lang at Davy stockbrokers said valuing the toxic loans was the “key challenge”. “The level of writedowns the banks are forced to take will ultimately dictate the capital that is required to restore them to a healthy position where they can function as ‘good’ banks, helping to kick-start the economy.”
