Finance Minister Noonan tells us that we are sitting on a small pot if gold, called AIB bank, worth about €11 billion. He knows this because of an independent valuation. Without knowing the details of that valuation exercise it is hard to know how it was determined. But we can guess.
One way of testing any asset’s true worth is simply to sell it: that’s the verdict that really matters, what someone else will pay for it. I humbly suggest that nobody, today, would stump up €11 billion for AIB. If he was offered anything like this, I suggest the minister would think for about a nanosecond before taking it. I suspect that the advice he has been given goes something like the following.
If the Irish economy continues on its current path and the euro doesn't blow up again, AIB should be able, in time, to arrive at a clean enough balance sheet and a return to profitability such that investors will be happy to relieve the government of some of its shares. In this regard it is coming second in a two horse race with Bank of Ireland - but at least it gets to finish that race. On that happy day, the value of all the shares in AIB will be worth about €11 billion.
I am willing to bet that one thing not made explicit in that valuation exercise is the worth of TBTF subsidy. That is, the boost to a bank’s valuation from it being ‘Too Big To Fail’. There are lots of these banks scattered around the world.
The way this (implicit) subsidy works is via the comfort that investors and depositors get from the knowledge that the Government will not allow banks to go under in any circumstances. This means that equity investors will demand a lower return for their cash, bond holders and depositors a lower rate of interest. They do not demand a risk premium just in case the bank goes wallop. The banks themselves might be encouraged to do daft things, given they are not going to be allowed to fail.
We got a lot of stick for our infamous explicit guarantee: but this just brought into the open what everyone else is doing under the table. The one good thing about an explicit guarantee is that it can be quantified and charged for; a bit like an insurance policy. So we managed to make back a tiny fraction of the bank bailout costs by charging the banks for the guarantee.
When the explicit guarantee lapsed, so did the charge on the banks. But the implicit guarantee has not lapsed, it is still in full force but not quantified or paid for. Interestingly, the Bank of England has worked out what it thinks its implicit guarantee to UK banks is worth. In 2009, they reckoned it amounted to £109 billion, or about €2000 per citizen. That’s almost certainly a toppy estimate but it does give a sense of the numbers we are dealing with: they are large. There are quite a few economists who think that this establishes the size of the levies that we should impose on the banks. Every year. It will be a while before the Irish banks make any like this amount of profit - although, with a fair wind and a benign ECB asset quality review, they will get there one day.
But if we are to charge the banks for an implicit guarantee, would AIB be worth €11 billion? I think not. The only reason why we should not charge the banks for the guarantee is if it lapses. This would require them to become TSTC (too small to care) institutions. And the only way this could be achieved is via a large increase in the number of banks, a re-introduction of competition into Irish finance. But competition would lead to the end of monopoly profits. And it is those profits derived from a quasi-monopolistic banking sector that I suspect underlies the €11bn valuation.
That valuation of AIB does not, I wager, allow for the possibility of taxpayer revenge. There is an argument that the sins of the sector were a collective failure requiring collective punishment. Not until the sector has paid back all the costs of the bailout should they be allowed to pay dividends to shareholders. That means AIB and Bank of Ireland should pay back the costs of the Anglo bail out before they can resume dividend payments. It’s a point of view that I suspect will endear itself to a Sinn Féin finance minister on her appointment in 2016. It certainly is not a possibility allowed for in that AIB valuation.
Back in the real world, whichever way you look at this, the Irish taxpayer seems to be delighted to play Santa Claus, every year, either directly to the banks or to their shareholders.
