Irish Banks - do they really need new capital?

[mollox]

Do the Irish banks actually need recapitalisation? Do we really need consolidation in the financial services market in Ireland?

In Friday’s (5th) Irish Times, Michael Casey, former chief economist with the Central Bank and a former member of the board of the International Monetary Fund, wrote an interesting opinion piece.

Establishment needs to set record straight about banks - The Irish Times - Fri, Dec 05, 2008

Casey basically posed the questions outlined above. He pointed out that PWC inspectors have done a detailed examination of the loans books of each bank and given their individual capital adequacy levels a clean bill of health under current levels of loan impairment and, indeed, under a number of increased stress tests – albeit the levels of additional stress have not been publicly quantified.

He also pointed out that capital adequacy will, or should, not lead banks to make bad loans to companies struggling in a recession. The UK banks have been significantly recapitalised by the UK taxpayer, yet the SME & mortgage markets there continue to complain about the willingness of banks to lend.
Casey poses the question: “Is it conceivable that the Government wants the banks' capital to be more than adequate, as is now the case in the UK? What does "more than adequate" even mean? Is there a belief that additional - and unnecessary - capital is required to restore investor confidence in the banks?” This appears to be the perceived wisdom among the business commentariat in our media (much of which is woefully underqualified to comment).

He also concludes with, what I regard as, a perceptive comment: “In short, the consultants, Central Bank, Financial Regulator and the entire establishment, including the banks themselves, have now told us that there are no problems of liquidity or of capital. Why then are the meetings with the Government continuing? Either the good news is not quite so good or is there something else we are not being told about? It may all simply reflect a natural human desire to be seen to be doing something.”

Co-incidentally, (also on Friday 5th Dec) Goodbody Stockbrokers published a briefing note which reported that Standard & Poors (S&P), one of the major international rating agencies, “produced a report, which highlights “significant inconsistencies” in how banks account for risks and how much capital they hold under Basel II, making it very difficult to compare banks capital adequacy levels.”

Goodbody Stockbrokers - News and Comment - Morning Meeting Wrap

It seems that S&P surveyed c.50 European banks and found that various interpretations of the Basel rules regarding capital adequacy can produce “four-fold differences in risk weights for the same underlying risks”. In other words, banks in the UK, Spain and some Nordic countries have used less conservative estimates of risk than those applied by the Irish banks and a direct comparison between stated Irish and UK capital adequacy ratios is probably invalid.

The Goodbody briefing note concludes that “although the market undoubtedly now requires banks to hold a higher level of capital, it seems unfair that they would also be expected to increase their capital ratios to the same extent as their UK peers.”

Meanwhile, the private equity sharks are cruising while the politicians, the media and the populace are all demanding that the bankers get in the water. (Indeed, the politicians are delighted to have the bankers as a lightning rod to deflect blame for our current economic problems. No mention is ever made of the fact that every budget is the past 10-15 years has contained measures to encourage developers, investors and, particularly, first time buyers to get into the property market.)

Perceived wisdom can be the most dangerous, least informed thought process with the greatest capacity for long-term, perhaps terminal, damage.

If the Irish banks are, in haste,
(a) forced into the arms of private equity at knock-down prices, or
(b) forced into unnecessary consolidations which make the market less competitive
we may all live to regret it at leisure.

[cyberianpan]

Indeed CAD & Basle were put together by a bunch of ivory-towered Eurocrats. They are nearly impossible to interpret and make have limited use.

Basle asks you to quantify Operational Risk (which is by definition unquantifiable).

The root of this current crisis lies in poor regulation : fuzzy, vague regulations imposed by people who have a poor understanding of financial markets. It is time that we asked for our best & brightest to work in regulation - the current crop are atrocious.

cYp

[mollox]

The root of this current crisis lies in poor regulation : fuzzy, vague regulations imposed by people who have a poor understanding of financial markets. It is time that we asked for our best & brightest to work in regulation - the current crop are atrocious.
cYp

Well that rules out all our politicians and almost all media commentators, particularly those working for RTE & the Sindo.

Anyone ever hear anything as hesitant as the opinions of RTE's David Murphy or as populist as Senator Shane Ross. Pity he's not as forensic on the business acumen of Sir Anthony - Waterford Wedgewood shares now worth one-tenth of one cent each - from a high of €1 about 10 years ago. But never a peep from the bould Shane!

I've been polishing this joke for years and am determined to get it into wider circulation, so apologies if I repeat myself on several threads:
"While it's only a myth that Caligula appointed his horse as a consul, Trinity College has indeed managed to make a senator of a complete horse's arce!"

[Right is right]

The reason banks aren't lending is confidence in companies surviving is falling so why would banks lend under these circumstances...

[HanleyS]

Nobody believes either the banks or PWC. Share prices are evidence enough of this.

[mollox]

Nobody believes either the banks or PWC. Share prices are evidence enough of this.

That's obviously true, but it's entirely possible that this "perceived wisdom" is wrong. That's the point of my original post.

[HanleyS]

That's obviously true, but it's entirely possible that this "perceived wisdom" is wrong. That's the point of my original post.

It's possible. If there were not a glimmer of hope then the share price would be a lot lower. Realistically though it's a very long shot.

[Rebel CNC]

That's obviously true, but it's entirely possible that this "perceived wisdom" is wrong. That's the point of my original post.

Fair point although the the fact (that you did point out in first post) that nobody's rushing to publish the details of the PWC analysis and testing is a worry.

The Central Bank has also gone very quiet, in contrast to their position of a couple of months ago that all was fine.

Aricle on page M3 of SBP very dismissive of Anglo's attempts to be bullish.

[mollox]

Fair point although the the fact (that you did point out in first post) that nobody's rushing to publish the details of the PWC analysis and testing is a worry.

The Central Bank has also gone very quiet, in contrast to their position of a couple of months ago that all was fine.

Aricle on page M3 of SBP very dismissive of Anglo's attempts to be bullish.

Presumably the PWC analysis would be highly market sensitive information. It was never likely to be published, other than as an overall summary.

Anglo seems to have alarmed the analyst community by reclassification of its loan book – now 23% categorised as Development (i.e. highest risk) v. 15% previously reported.

The “white knight” move, fronted by IAIM, by some of the long-term institutional shareholders to put together an alternative capital injection is welcome.

These shareholders are clearly not happy to allow Private Equity take a controlling stake at current knock-down prices, significantly diluting the value of equity held by existing shareholders.

This move suggests that they don’t believe the current market capitalisations of the banks represent their fair value – at least some of the banks. I suspect they’re right.

[Ono Kyoto]

I wouldn't say market valuation has much credibility. More often than not they either over-sell or over-buy. You could make the comparison to the proverbial stopped clock. They only represent true value briefly and in passing on the way up and again briefly and in passing on the way down. The positive feedback effects mean market valuations are seldom stable.