Jury is still out on bank-aid schemes
The four large clearing banks in Northern Ireland in 2009 are estimated to have seen pre-tax results deteriorate by over £750m compared to the results recorded for 2008.
In the deteriorating conditions of the markets in 2008-9, the British, Irish and American authorities needed to act to prevent bank liquidations.
However, for Northern Ireland businesses, there is a real interest in the mechanisms which now exist institutionally to deal with outstanding loans or loans linked to |distressed businesses.
What the British and Irish governments have done, in contrasting ways, is to ease the pressure on the lending banks.
The British Treasury has introduced an Assets Protection Agency (APA) to help UK registered banks minimise the impact of non-performing loans.
In Northern Ireland, this scheme is important to the Ulster Bank where over £6.5bn may be eligible for this type of insurance. A simplistic estimate points to an obligation on the component units to carry about 20% of any loss. That could leave the APA financing over 70% of any ultimate default.
The British scheme, contrasting with the Irish, is best described as an insurance policy for the banks where there is a heavy initial excess charge on the bank and the rest of a write down loss falls on the APA. Non-performing loans remain with the original bank.
The Irish scheme, through the National Assets Management Agency (Nama), is relevant to land and development lending by the Dublin based banks in Northern Ireland: Bank of Ireland, AIB, and Anglo Irish Bank. The Irish legislation obliges these banks to register their outstanding lending on land and property and then to sell these loans to Nama at discounted prices to reflect the likely market value of the assets. A Dublin estimate of the value of this lending in Northern Ireland is for over £4bn.
The Irish scheme is more interventionist. The borrower will find that an outstanding loan is being managed by Nama, not the original lending bank. Nama will decide on how and when a defaulting loan is treated and the method of realising assets or security at an end point.
Will the UK’s APA treat borrowers more sympathetically than Nama?
In three respects the UK scheme may be less painful to the defaulting borrower. First, by leaving the loans with the original bank and using effectively an insurance protection for the bank, a bank may be less pro-active in formalising any wind-up. Second, the |relationship between a banker and the borrower may be an easier one than a relationship where the involvement of Nama raises perceptions that could be unhelpful.
Third, the banks may have an incentive to hold-on longer to avoid the excess charge from the insurance element.
At this stage, there is no easy way to assess which scheme will be more expensive, or even suggest the appropriate performance measure to assess the relative costs. Both schemes are in their early stages. The Business Alliance has shown a healthy interest in the impact of Nama for Northern Ireland businesses. Evidence on the effects of the Treasury’s APA will be less conspicuous.