Irish Mortgage Brokers Blog

In Ireland each staff member of the regulator costs 23% more than the international average, their cost to the taxpayer is 88% greater and yet they have responsibility - as a ratio toward population- which is only half that of other countries (to be exact its 96% less).

If that isn’t enough, our regulators deal with 15% fewer firms in terms of the number of actual regulated firms per employee, yet it is 26% more expensive to regulate a company in Ireland than elsewhere, and in terms of regulator staff to financial services staff they are dealing with 17% less than in other countries.

We are overpaying for under-service, in fact, in only one other country does the tax payer foot more of the cost of the bill than in Ireland, and for that we get the statistics above based on the figures below. Angry? You should be.

(the breakdown)

Cost per employee: In Ireland it is c. 23% more expensive for every staff member of our regulator than the international average

Cost per 000′ of population: The cost to our individual taxpayer is 88% more expensive versus the international average.

Population v.s number of regulator staff: Our Regulator staff have 96% less of a workload in terms of their ratio versus the general population compared to the international average, essentially they are responsible for half of the amount of people (per staff member) than regulators in other countries. For example, each French regulator has a national population ratio of 25,000 people to each of them, we have about half that amount.

Number of regulator staff per regulated firm: Our regulators deal with 15% less.

Cost of Financial Regulator per regulated firm: It is 26% more expensive to regulate a firm in Ireland (and we hope to grow a knowledge economy of which the IFSC is part of?!).

Ratio of people to Financial Regulator staff: Our Regulators cover 17% less people than their international peers.
Note: The Financial Regulator’s internal audit was the subject of an article by Charlie Weston of the Independent on the 7th of October, it was also covered in the Times today. We saw some of the figures from the report and thought it would be a good idea to put them in perspective.

The internal report was covered in a presentation on the 7th of September, this report is like kryptonite to any shred of faith many of us may have had in our banking and finance regulation.

Roger Bootle notes that markets do quite well at the end of a recession and at the start of a recovery by drawing the benefits of the future down into the present. Roger has a lot to say on the topic of banks, in particular that of banker bonuses - he states (and we agree) that when banks become ‘too big to fail’ they essentially are oligopolies and hence they are able to pay so well. From an Irish perspective the domination of AIB and BOI put some stock in this theory.

Yesterday the National Asset Management Agency (NAMA) legislation was brought out in the Dail (that’s the Irish Government buildings for our international readers) . We have put some of the developments into simple graphs to give an idea of the way NAMA will work and what the prices are as well as what they mean (for the pedants out there- they were drawn by hand to demonstrate the point).

So the total value of the loans is €68 billion, adding on €9 billion in rolled up interest - development accounts often had this factored into the end sale price, generally showing c. 15% profits (as a minimum) with the roll up included.

The €77 billion in loans will receive a 30% haircut (across the board) meaning the price paid will be €54 billion. It is important to note that different institutions will see larger haircuts than others, so it might be that BOI gets 20%, AIB 25% and Anglo 37% / INBS 42%, the 30% represents a varied pot in which individual loan sizes and haircuts will vary, having said that we know already that the biggest discounts will need to be applied to INBS and Anglo.

Brian Lenihan stated that the original value of these assets was €88 billion, of which the loans were €68 billion (before rolling interest was added on), an average LTV of 77% applied (which is over standard commercial lending levels so some more digging may be needed to see if there were cross-security/cross collateral considerations or cash flow producing securities for additional lending involved). These loans will being bought for €54 billion imply a 40% drop in the values of the assets on an economic basis (not today’s market price basis).

Each loan going to NAMA will have 185 queries/questions required on the property itself, and a further 300 on the loan, that means the diligence will be c. 500 questions that must be answered for each property. The staff of NAMA (c. 50) can’t cope and thus the banks are taking people out of credit and having them go to work for NAMA but on the bank payroll, so in essence NAMA has outsourced the work at no additional personnel cost which was a smart move (one of few).

The actual value of the assets in today’s market is (we are told) €47 billion, this means that there is an upfront shortfall of €7 billion, so no matter what happens there has been a potential tax payer cost of €7 billion at a minimum, obviously that is the market value though and not a long term value which assumes that prices will eventually rebound (the estimate is 10% in 10yrs), that point can be argued for and against, the issue will be (in my opinion) the ongoing cash flow to ensure loans are serviced. There isn’t any information put forward about expected default rates and that could easily skew the numbers.

The debt is also predicated on Euribor and while Liam Carroll’s case was tossed out of court because it relied on low interest rates, we have pegged the NAMA on the same hopes! It tells me that this plan probably wouldn’t stack up if it was provided judicial oversight, then again, fairness was never part of the plan.

Having said that, of the assets going across c. 40% of them are cash flow producing assets - in some cases this is blocks of apartments that were retained by developers and let out or other commercial rents. The banks will have a big job ahead of them in the near future: they will have to raise some capital quickly to avoid dilution of their shares/potential nationalisation (or at least majority state ownership which is effectively the same thing), if today’s share price performance is anything to go by the appetite is back so this seems likely to be a working solution. NAMA isn’t about fairness, and in that respect it is a massive failure, it is about a plan with a chance and in that respect it has a better chance of success than the alternatives put forward.

There has been an interesting development in the area of repossessions in recent weeks in which a property can be taken back (repossessed) without a full court procedure having taken place. Today we will consider how this will work.

First of all, there are several things which tie in together in 2009 and they form part of reason behind the new ruling. The use of circuit courts to repossess a home used to be commonplace because the decision was set in a court depending on the ‘rateable value’, but the domestic rates system was discontinued in 1978, thus, the hearings started to default into the higher echelons of judicial decision making and today the common court for repossession hearings is the High Court.

The new rule means that a Registrar will decide what is seen or not by the court and a side effect of this is that a house can be repossessed without actually going before a judge. It is important to note that a registrar is not merely a random civil servant but often a former judge or at least at a level that can make judicial decisions where appropriate in deciding if a case is worthy of courtroom time. Does this sound like a bad thing? Is the possibility of a house being taken without a hearing by a judge in an Irish court of law a step in the wrong direction?

It depends on your thinking, in a case where a person is actively involved it would seem draconian, however, this isn’t the case, because the working elements of the system are such that this ruling will only affect people who don’t engage with the lender in any negotiations and who may have (often the case) left the country.

There have been several developments that tie in with this, firstly is the new ‘Code of Conduct for Mortgage Arrears’ which the Financial Regulator brought out earlier this year, then there are the re-capitalisation agreements with AIB & BOI on foregoing the repossession process for a set amount of time, lastly there is the IBF/MABS initiative.

How do these things inter-relate? As follows: The new code of conduct spells it out in simple terms - if a borrower engages with a lender then they are offered protection and certain rights, it basically put a statutory footing on what was previously a voluntary code, it means that if a person responds and corresponds with a lender when they are in an arrears scenario that they can’t just be turfed out or instantly have proceedings issued against them. Obviously, people in this group won’t have to worry about the new ruling as they will fall under the auspices of the Code of Conduct.

After that you have the AIB/BOI re-cap agreement where they have promised to forego any repossession proceedings for 12 months (obvious issue is the wave that will occur after Q1 of 2010), however, the code of conduct still applies and the borrower must correspond with the lender, again, people acting responsibly need not fear in this case.

Then there is the IBF/MABS agreement where every lender has agreed that if the client is working with MABS that they will not commence repossession proceedings, granted there are get out clauses but in every case where keeping the home is a possibility then it is likely to meet with success under one of the circumstances that protect the borrower as laid out thus far.

So who isn’t protected? Simple, the people who took out a mortgage and where refusal to pay is only part of the problem, many have absconded, left the country, moved elsewhere or they are totally ignoring the correspondence from the lender, and to be fair one must ask ‘why should a person be given any rights and protection when they are not a willing party to the process?’.

Thus, it means that the people who won’t receive the benefit of a judge in the decision to take a home are those, and only those, who’s biggest enemy is themselves, who are not engaging with lenders and have opted to bury their head in the sand, extending the privilege of protection to them (when there are so many resources at their disposal) would be irresponsibly public spending, and equally, involving high courts and the fees that go with it would be irresponsible process given the costs incurred. Why should litigation be forced when there is no counter-party?

Far from being punitive, the new ruling is pragmatic, and it is good to see a common sense approach towards addressing such a sensitive issue, protect the people who warrant it, and allow an absence of responsibility to be repaid in kind.

The Main Purpose of the Bill is to:

•Identify and verify the identity of their customer and of any assets ultimate beneficial owner, and to monitor their business relationship with the customer;
•Report suspicions of money laundering or terrorist financing to the public authorities, usually, the national financial intelligence unit;
•Take supporting measures, such as ensuring proper training of the personnel and the establishment of appropriate internal preventive policies and procedures.

The 2009/Bill/Act will be applicable to Intermediaries – investment, mortgage and insurance and other investment/insurance businesses which are regulated by the Financial Regulator.  Going forward the term “Designated Body” will be replaced by the term “Designated persons”

The changes which the new Act will bring are:

•“Designated Persons” will be required to perform customer due diligence on a risk based approach. There will be 3 types of customer due diligence depending on the circumstances, (1) Simplified (2) Standard (3) Enhanced identification

•The following products are exempted from the requirements in relation to Customer Due Diligence:
- Life Assurance policies with an Annual premium of not more than € 1000 or Single Premium of not more than €2,500
- An Insurance Policy in respect of a pension scheme that does not have a surrender value and cannot be used as collateral.
- A Pension scheme providing for retirement benefits to employees where the rules of the scheme do not allow a member’s interest to be assigned.

Designated Persons must have special procedures when doing business with a foreign politically exposed person (PEP) a family member of a “PEP” or a close business associate of a PEP.   (A politically exposed person means an individual who is or was in the preceding year, entrusted with a prominent public function including a member of an administrative, management or supervisory body of a state owned enterprise, a head of state, head of government or any member of government, any member of court or on the board of a central bank or a high ranking official in the army) [sic: I guess the folks who send me emails from different basket case nations looking to 'hold money in my account' will need to further identify themselves! lol]

Designated persons must have systems in place (procedures & controls) to comply with the new requirements

Designated persons will now be supervised by the Financial Regulator for compliance with the new legislation and will be subject to the Sanctions Regime for any breaches.

Designated persons must comply with directions from the Garda not to carry out a service or transaction for a period not exceeding 7 days – this can be extended by the District Court.

Designated persons must continue to avoid the offence of “tipping-off”

Designated persons will still be required to report to the Garda Siochana and the Revenue Commissioners any knowledge or suspicion they have that a person or business is engaged in money laundering or terrorist financing.

Directors, Officer and senior managers will be liable for failures by the “Designated person”

The moral of the story remains somewhat the same, if you engage in any shady transactions then you will go down for it, and rightly so.

Sometimes I have to wonder where the blame-game changed course and the organisations with no commitment to societal well-being were burdened with that responsibility, while those with an inherent responsibility then moved into the realms of innocence in the whole fiasco.

Imagine if you will, a bold child being held responsible for eating all the cookies and spilling all the milk, that of itself is easy, and when you go to met out ‘blame’ you might focus on the child, but if this all happened while their parents stood idly by do you still focus on the child or do you apportion significant blame to those who have the responsibility of guidance and direction? Indeed, any person who understand the nature of a child will realise that they don’t really consider the wider costs of eating all the cookies and spilling the milk (such as depriving their siblings of same, no milk for the tea etc.).

So with this in mind I’ll turn to banking, commercial banks don’t have a moral code to fulfil, they don’t have an agenda set by what is good for the people of a country, they are not the gatekeepers of a faith, there is no implied benefaction, the truth is- they are barely good for anything really, other than acting as a conduit for money and ensuring they make profit [ultimately the value they provide goes to their shareholders]. If you understand that, then you have a good grasp of commercial/retail banking, if you don’t, and you think they owe society for any damage they had a role in then (while you are correct morally) you are missing the point, the banks, by nature, are not there to protect you, they are not there to make the world a better place.

On the other hand, central banks, and governments as well as regulators are (or at least they should be) there to protect you, they only exist because everybody knows that banks will inevitably hurt the society they operate in if left to their own devices, to think otherwise negates the actual need for a regulator!

To mix this up is to mix up the fundamental understanding of the difference between all of these. I like analogies, and on this one I would say that to expect a commercial bank to not pursue greed and profit at the expense of others is like expecting a Lion to stop chasing a Gazelle and instead opt for a nice bowl of vegetables, that doesn’t mean there should be no zoo keeper in place to maintain peace and harmony, indeed, a market place is often like a zoo, lots of competing entities in place who don’t go out and kill each other because the zoo keeper (state) won’t allow that kind of thing, they can compete, but within certain confines, murder is thankfully not being one of them.

Banks are greedy, that is what they do best, inasmuch as lion is a carnivore, and you can’t hope to change that unless you reinvent the whole banking system. And greed is relative, not absolute. That is why when Anglo’s balance sheet exploded upwards with lending others followed suit knowing full well that it was likely false economy, people didn’t speak out early and often. A rising tide lifts all boats equally, so it didn’t seem apparent to most of the people who could have actually done something. Equally, banks were happy enough to play a skewed game.

Why? Because shareholders demanded it! They were not about to sit idly by and see competing banks increase market share, gain customers, rake in profits and not get up to the neck in what it was believed were going to be highly profitable ventures, CEO’s were not willing to allow this to happen, they were all sitting at a table playing a high stakes game in full knowledge that the deck was rigged, but, at the same time afraid to pull out for fear of not making profit.

The bankers it seems, were not as smart as they like to think they were, nor as smart as we had hoped for either. They had and still have, swathes of bad investments, as institutions they are now in negative equity in a manner similar to a person who bought at the peak of the market. Blaming them doesn’t fix anything either, because at the end of EVERY loan was a willing buyer, hopefully a ‘next bigger fool’, and that pool of people is made up of everyday people, Joe & Jane Taxpayer.

While it is easily visible that the banks were fundamental to the economic collapse, it is also important to understand that they were acting as monetary conduits for the market, and the most irrational thing of all was the role of regulators and central banks.

Is it co-incidental that every serious doubter of the ‘new normal’ from John Hurley to David McWilliams was an ex-central banker? And yet where was the central bank when it came to stopping the astronomical explosion in lending, the very thing they had the ability to do? They stood by, issued a ‘warning’ but failed to fire a shot. They allowed the country to walk into a pen full of pit-bulls and their sole contribution was to say ‘careful now’. They never raised capital requirements (even the Spanish banks who have a market in greater turmoil than our own did a better job with dynamic requirements), or used any of the tools they have singular access to for the job the tools are intended for.

Why bother having an independent regulator if they won’t make painful decisions? Nobody wants to dive headlong into political banking but in effect that is what we had, cutting lending or slowing the market would have been politically unpopular and it wasn’t done, that can only imply that they were acting together. Political banks are what we are going to have in the future as well because the lines between the banks and the politicians are becoming increasingly blurred, indeed, there are ex-politico’s on the board in some examples.

If individuals acting independently, but aggregately in a certain fashion were not to blame, then surely there should be only a few select individuals with massive lending and everybody else who acted prudently is absolutely fine, but that is far from the case, instead, the public is the leveraged group in this crisis. Typically in any crisis there is somebody who borrowed too much, generally that is the Nation or corporations, but not this time, this time it is regular people, all indebted, and while the banks were absolutely facilitators they were not the people buying the property, rather, they secured debt upon property that willing buyers purchased. Of course, nobody wants to sign up to holding any responsibility on that front.

That banks were insanely greedy is beyond doubt, that people borrowed foolishly is a given, that people like me were part of the problem is also true, but the one thing that nobody wants to really pay attention to is the fact that political pressure and reliance on property oriented taxes resulted in a state windfall which was promptly blown to garner popular support, leaving nothing for a counter-cyclical policy when the inevitable crash came, and the whole song and dance was policed by a lame duck who was apparently meant to be our protector.

Quis costodiet ipsos custodes? Nobody it seems, until of course it is all too late, then we just play the blame-game until we feel better about being fools.

This is an insightful look into the financial crisis, looking at it from the view of how mass borrowing for residential real estate lead to a bubble, the political input into the causes as well as the packaging of these loans and how it ultimately lead to the closure of Bear Stearns and Lehman Brothers.

This is a great video set, surprisingly the Wall Street Journal are the makers of it, you don’t see that kind of departure from vested interests very often.

I was really disappointed to hear that Jack O’Connor of SIPTU and Sean Sherlock of the Labour party had brought the idea of ‘removing the state guarantee’ into the public arena regarding PTsb in retaliation to their 0.5% hike in the variable rate they are charging their customers. The outcome from a removal of a state guarantee could be catastrophic and in this post we hope to demonstrate this.

Before that though, it is vital to remember that there is no ‘price promise’ with a variable rate, the margin is not tied to the ECB - a mistake many borrowers made when expecting rate cuts as the ECB lowered the base. The margin on a standard variable rate is determined by the lender so this is case of the bank doing what it is entitled to do, they didn’t break tracker agreements or any loans that didn’t implicitly allow it, so on one hand the bank is acting within its rights.

The other thing to remember is the contradiction we see (mainly from politicians and union reps it seems) to the credit system, several weeks ago they were lobbying to allow people on fixed rates (who have a price promise in their fixed rate) to break out of it with no penalty, now several weeks later they want to see people on variable rates get ‘fixed’ style benefits, the utopian situation in credit simply doesn’t exist and it’s likely a case that many people are getting no advice in relation to their mortgage decisions on an ongoing basis which is why these situations occur.

Even with the 0.5% hike factored in the interest rate is still incredibly low and it is right that the people who borrowed from a bank should have to pay whatever the bank charges to remain profitable rather than every taxpayer via recapitalisation or nationalisation.

The basis of my frustration is that you can’t and should never consider, the removal of a state sponsored guarantee/covenant in the midst of its duration or it would send a clear message to credit markets that the Irish government ‘didn’t really mean it’, and in particular it would be a mistake to do it in retaliation to a rise in interest rates because doing so would politicise banking and put the power of credit into the wrong hands, rewarding those who shout loudest rather than those who might be making the right decisions.

That banks have made grave errors is a given, that the tax payer is saving their hide is as well, however, if the choice comes down to doing this in an effort to save and retain credit institutions then it must be recognised that banks are ultimately good for society and that to remain profitable they need to charge higher margins.

The IMF remarked on how low our mortgage rates were in their recent report on Ireland, banks are telling us via their upward move in rates (I say ‘banks’ plural because others will follow eventually) that this is what’s required in order for them to make money and not be bailed out.

Make no mistake about it the flow of events would be something similar to what I describe if you were to remove the guarantee from a bank prior to its expiration:

Share prices would tumble first as concern is raised in the markets about the viability of a company when its capital is now unprotected, PTsb’s reliance on money markets would mean they would instantly have issues rolling over that debt at whatever the next due date is, if it was overnight money then it would be instant disaster.

The fact that the state removed a guarantee would mean that bond holders in other guaranteed institutions as well as institutional depositors and investors would instantly lose any faith in the credibility of the state guarantee, seeing it removed for political reasons means no institution is safe, capital would flee the country, bond prices would nose-dive, capital reserves for every covered institution would dissolve in a matter of days, there would be runs on every guarantee covered bank and we would then have to nationalise the entire banking system at a cost to the taxpayer so impressive that literally three generations would have to pay for it, the IMF would come in, austerity measures would be put in place the whole system would collapse.

There is an interview on the Tom McGurk show on 4fm on the right hand side of this blog in which Sean Sherlock of the Labour party talks about the idea of removing the guarantee, my instant answer is that it is a lunatic idea, not because I like banks, but because I like a non-IMF controlled Ireland. We don’t need instant systemic risk thank you.

The fact that the idea of ‘removing the guarantee’ is even mentioned in national press concerns me, I can’t think of a single thing that would break the country faster and more effectively, it is just a sincere pity that union leaders don’t spend some time trying to understand the markets, time after time they demonstrate an inability to understand markets beyond populism or rhetoric, their appeal to the lowest common denominator often makes me wonder if their members see through such a plain ruse.  Most importantly, they should never try to gain public support for measures that would literally implode our whole financial system, it is careless, wreckless, and downright ignorant.

The IMF released their report on Ireland yesterday, here are some of the bullet points of the report.

Executive summary:

• Given our serious imbalances Ireland was especially vulnerable to the recent global shocks. Specifically, over reliance on construction, financial intermediation, and this was coupled with a loss of competitiveness. Our expected drop cumulative drop in GDP of 13.5% to 2010 is the largest amongst advanced economies.
• The decline in wages will need to be sustained to help redress our cost disadvantage.
• Rapid progress on bank restructuring is critical. Authorities have taken important steps towards stabilization through the blanket guarantee. ECB is providing vital liquidity.
• NAMA is potentially the right mechanism, but it requires realistic assessments.
• Fiscal consolidation has begun and must be sustained. A continued commitment is required to address sensitive expenditures including the public wage bill and the scope of social welfare programmes.

1. The Context

The problems in Ireland reflect the unwinding of critical imbalances, easy credit fostered a property bubble, bank exposure to property soared as did the use of wholesale funding (sic: too much leverage!).

The Eurozone has provided a safety net as we avoided currency pressures, that, matched with access to ECB  financing has been fundamental to the countries ongoing survival. As Ireland cannot devalue currency then we must continue to further reduce wages to restore competitiveness and growth prospects.

The Irish authorities have moved with resolve to counter shocks, that must continue (IMF pat on the back to Irish Government). Determined execution of plans is required.

We need to decisively restore the financial sector. Sustained fiscal consolidation underpinned by rules and accountability within which politically sensitive trade off’s can be made. There must also be pragmatic policy initiatives in the face of acute policy dilemmas, e.g.: Supporting banks increases the financial burden but addressing the deficit maintains market confidence.

Expenditure reduction is superior to raising taxes but if done wrong can hurt the most vulnerable.

2. Economic Outlook

Economic contraction began in 2008 and accelerated rapidly (GDP having grown 6% in 2007). The fall in construction activity will contribute to higher unemployment. The decline in exports is being partly matched by a decline in imports, but decreased exports will increase unemployment which is expected to reach 15.5% in 2010. Consumption is likely to drop sharply.

Authorities agree risks remain significant, a combination of slowing growth, financial sector stress, and the state of the public finances, we remain vulnerable to external shocks. Irish banks exposed to US and UK financial markets could face further losses. Global deleveraging could cause a sizeable capital outflow from Ireland by foreign banks who will move credit provision to their home countries. Ireland’s individual de-leveraging is not likely to be internationally noteworthy unless losses are far greater than expected.

The bleak short term outlook is in part a return to mean after the Celtic tiger years and as we move away from over reliance on construction and financial intermediation services. Inflation is falling, but our prices look set to decline quicker than the rest of the EU, while deflation is not a threat, we will pay higher real interest rates and this will dampen the next economic cycle. Fiscal offset is not feasible.

3. Competitiveness

In the past wage moderation supported the economy, but labour costs rose and output growth declined. A key factor in this was generous wage increases in the public sector. Our international market shares are in (and have been in) decline. Weakening sterling against Euro is also a factor.

Foreign direct investment has fallen rapidly, in recent years Ireland has become the most expensive location in the Eurozone (with the possible exception of Luxembourg). Competition for FDI is high, this will make it harder to attract (sic: the IDA will have a job in getting the kind of investment into Ireland that they did in the 80’s etc. that helped fuel the Celtic Tiger).

CGER methodology shows that our actual exchange rate is 20% above its long term average, eurozone entry at a favourable rate allowed several years of competitive strength.

Authorities in Ireland believe that nominal wage cuts point to our inherent labour market flexibility, there is also the resilience of our pharma/chemical exports. The competition authority should be used to support the process of price and wage adjustment.

4. Managing financial sector stress

These have been revealed in the sharp decline in Irish bank share prices relative to the overall index, there are three key points: firstly, domestic loan portfolio is concentrated in residential mortgages, construction, development land loans and commercial property. The sharp property correction is at the heart of the bank losses. Some banks also have foreign lending exposure.

Secondly, interest margins were low by international standards (been saying that here! and for some time!), margins have been under pressure with the sharp decline in lending rates. In the past profitability came from large volumes, reliance on wholesale funding increased (reflected in loan:deposit ratio).

Thirdly, the state guarantee to depositors and creditors and stabilization via capital injections have been an important stabilizing factor. The authorities ongoing extensive support has been vital to the maintenance of stability. The Guarantee was 200% of GDP an amount much larger than in other countries. Re-capitalisations are in line with those in other countries. NAMA is a significant step in the process of bank restructuring.

5. Bank Restructuring

Estimates of losses vary but are likely to be sizeable. IMF believe they could be €35bn to the end of 2010, the focus is on restructuring property development loans which has been rightly viewed as being at the heart of the banking stress. Losses may go beyond development loans and NAMA should be ready for that.

Making NAMA a reality is pivotal, more capital injections are likely, if well managed the NAMA assets may produce recovery value to compensate for the initial outlay. NAMA’s success is key for a safe exit from the government guarantee which may be drawn out if not aggressively managed.

A key aspect of this is the prices at which assets are bought. This is a challenge but if the price is too low then the upside can be shared, either with shareholders or the state depending on who takes the haircut, or the state can gain via shares. There are options. An industry wide levy may be considered to help support NAMA.

Two strategic economic uncertainties lie ahead. Firstly, if banks are not totally ‘cleaned up’ their return to normal function will be delayed, thus NAMA should not be restricted to development loans. Secondly, employment deterioration is a warning of other areas that may be affected.

The authorities noted these considerations in their ongoing deliberation of NAMA, piecemeal efforts could delay a return to health (Japanese experiences noted).

Nationalisation may become necessary, but should be seen as complimentary to NAMA. It may be the only option for a critically illiquid bank. There have been numerous examples of this (Japan, Sweden, US). If this happens shareholders are fully diluted (wiped out) to protect the tax payer, bad assets are removed but issue of pricing is removed. Nationalised institutions could be merged.

Authorities prefer private ownership of banks in order to keep market pricing alive. They disagree with the IMF view that pricing would be easier to assess under national ownership. They are concerned about negative sentiment regarding the integrity of the banks. A clear exit strategy would be necessary.

6. Supporting measures

Other supportive measures must be created, firstly a framework for bank resolution. Secondly enhancements to supervision.

A broader tool kit will allow for faster and less disruptive resolution of banks. Authorities are open to looking at a special bank resolution scheme (as exists in the UK when they adopted one in order to nationalise northern rock).

There are several supervisory and regulatory initiatives, from additional staff, and by the amalgamation of agencies. Authorities want to work towards identifying risks earlier. There will be a ‘related party’ disclosure requirement.

7. Achieving fiscal credibility.

Before the crisis hit the public finances had serious issues. Income taxes were lowered, expenditure grew (fastest of the OECD economies). Property revenues masked the structural deficit.

Gaining control over public finances is key, it will only work if confidence exists that a strong government reorientation is under way, if not the downturn could get worse. Government services must get more efficient, the tax base must be broadened while not impacting on labour costs.

Authorities have taken significant steps in revenue measures (c. 1% of GDP), the bulk comes from an income levy. Expenditure savings (c. 1% of GDP) via a public sector pension levy. The goal is to reach <3% deficit by 2013.

Thus far the focus has been on taxation, in particular middle and upper income earners, this has protected the most vulnerable in society, it also helps return taxation to normal levels. The next goal must be to focus on expenditure. The IMF thinks stronger expenditure consolidation must take place. Financing needs remain substantial in the near term, the NPRF has about €15bn in it and state has c. €25bn in cash (having issued €12bn in bonds YTD).

8. Consolidation strategies

The evidence is clear, fiscal adjustment must focus on expenditure cuts, in particular that of publi expenditure, the IMF and State both agree that spending cuts rather than increased taxation are better sustained.

Social welfare must better target the vulnerable, authorities recognise that it must move away from universalism to one that relies on targeting and incentives. Testing child benefit is under discussion. Earned income tax credits for working families is another, and changing the price basket benefits are weighed against. A more nuanced minimum wage would help competitiveness.

Despite recent reductions in the public sector wage bill further cuts are likely to be inevitable. Public sector pay lies above private sector pay in most areas. The ESRI in 2006 showed that the premium was c. 20%.  International comparisons confirm this. Consolidation on a further scale is not possible without further reduction to the wage bill.

A review of public service employment is necessary. From 2000 to 2008 total employment grew at 3% while public service employment grew at 3.7%, in health and education the figures are even higher. Greater efforts to obtain value for money are vital.

Broadening the tax base is a key challenge, there is mortgage interest relief with no ongoing property taxation. The proposed ideas would require robust institutional support. Done correctly fiscal rule can create the basis for public commitment to fiscal prudence.

9. Staff appraisal

Ireland is in the midst of an unprecedented economic correction which match the most severe in post WW2 history.

Risks remain significant, market sentiment has improved and lowered spreads on Irish sovereign debt, public and private sector wages are decreasing which will aid competitiveness.

On the two most important fronts the authorities have moved in the right direction, firstly in the proposed establishment of NAMA which will remove distressed assets from the banks, and in their multi-year plan to control the fiscal deficit.

The task ahead is formidable, determined execution is required. Clear objectives, benchmarks and transparency are required.

Regarding NAMA, risk sharing structures should be considered to address the well known pricing problem. Pricing can slow down the transfer to the troubled bank, risk sharing can create better incentives for managing the assets, they also guard against the risk the taxpayer undertakes, so that they don’t bear a disproportionate burden of the cost of cleaning up the banks.

NAMA must have a flexible design, an early focus on development property may be right, but other asset classes may need to be considered, without this banks might remain hobbled.

Where a bank is economically insolvent the only real option is temporary nationalization. If that were the case price transfers would be less of an issue, it could also be used as a step towards mergers and sectoral restructuring. The nationalized bank would need transparency, commercial objectives, and be under the same regulatory/supervisory regime as private banks. A clear exit strategy would be required.

Accompanying the crisis management there are several important supporting measures required: A broader tool kit for banking intervention. Better identification, observation, and surveillance of systemic risks in the making, related party lending, and macro-prudential regulation.

The authorities have laid out an ambitious fiscal consolidation plan, the first part focused on taxation, the next part must focus on spending cuts. Steps must be taken to ensure the plan is executed, but several principles should apply:

1. More targeting of the vulnerable and greater reliance on incentives for efficient use of public resources.
2. Further ratcheting down of the public pay structure and employment levels.
3. Broadening the tax base

It is worth noting that the constant calls for ‘Regulation’ are partly flawed, on one hand we do need more regulation, such as regulation of our Government agencies who can’t control their spending, regulation and accountability of our regulator, and of course (most importantly), some regulation of central banks who’s ability to keep rates too low and aid in the creation of money is closely linked with every major boom/bust in the last 100 years.

However, further regulation on financial services companies, and in particular small financial companies is not going to achieve the very aim it sets out to do, namely that of protecting consumers. It would be far better to have an ombudsman and regulator with teeth than to look for more laws that can be broken without retribution [in this respect banks have broken strict rules with almost total impunity].

Financial services are also a zero VAT business, this means that while we pay 21.5% VAT for everything we receive, we cannot charge VAT to our clients, thus, all of our supplies are over a fifth more expensive to purchase than they are for almost any other firm! While many feel financial services firms might overcharge, the reality is that we are, in effect, overcharged 21.5% by our suppliers!

Then there is the levy which industry must pay, 50% of the funding for the financial regulator comes from industry, clearly this money was not utilised correctly or we would have (at least to some degree) avoided the worldwide financial crisis to at least some degree, I don’t think financial firms mind footing half the bill but when the budget is blown and no value returned for it, the cost of funding said agency in return for being considered the root of all evil is a bitter pill.

For instance: proper reform in banking in a timely manner (in particular leverage rules) would have done much more to ease the pain than any kind of stimulus plan that we don’t’ have the money for. The very existence of the Regulator becomes a cost which cannot be avoided, therefore it translates into a tax on a financial services company for merely existing.

Sadly, the cost of regulation has risen to the point where it is a tax of its own, and this is happening while large banks are being bailed out,  they have acted in a manner that doesn’t guarantee business survival, this has been rewarded with billions of Euro (and yes that comment is intentionally populist!), those who have not run businesses recklessly are meanwhile left to struggle on without help, and this is happening while the very companies that have done wrong are kept going with taxpayer money.

As a practitioner there is a fear that ‘new’ regulation will really be punitive in nature without having any actual benefit to the system, nor indeed to the client, in fact, the market would likely work in certain spheres, far better with less regulation and instead a further emphasis on vetting existing firms as well as applying higher standards towards new entrants as well as creating an efficiency test for grand-fathered applicants (those who got regulated as part of the grandfathering system).

Our regulator has a track record of being heavy handed with small firms but treating the larger ones with kid gloves, certainly, if you look at the percentage of any fines v.s. annual turnover of any firm you will quickly see that this is the case, it is an error, and should discontinue.

A Regulator can put as many paperwork barriers in the way as they like, an interesting analogy I heard recently from Stephen Kinsella (who incidentally keeps a great blog) said that a regulator should press up against industry, in effect try to find ways of closing them down. While I don’t agree with that concept implicitly it would be nice to see people who fudged balance sheets with intent go behind bars, even for a few days. It would be better again to see an equally heavy hand delivered across all sectors of the financial industry and not the difference we currently see.

Less time writing rules, more time carrying out audits. Far from needing more ‘process’, offices, rules or sub-divisions the Regulator just needs to quit barking and actually bite.