Debt relief without moral hazard.

I put on my thinking caps last week and drafted a paper called ‘Designing a Debt Relief programme with minimal moral hazard to address the Irish household debt overhang‘.

We were every happy with the write up it got in the Sunday Independent via Carol Hunt.

There is far too much talk of ‘moral hazard’ in the public debate to date, instead we should be also considering ‘separating equilibrium’ (which is kind of the opposite of moral hazard – it’s the ‘pain’ that comes with moral hazard ‘gain’).

To do this you have to create a programme which works within some of the parameters of the existing laws (new legislation must still take account of what exists before it), look at the operational aspects of the scheme (how it functions in real life), design a general algorithm of the process and most importantly have an ‘incentive alignment’ which means that neither party voluntarily makes an action to the intentional detriment of …

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The ‘Cost’ of Regulation

David McWilliams hit an interesting point in today’s piece in the Independent about having ‘too much regulation’, and how it may repel new banks from coming here.

in late 2009 I was picked as part of a team that approached PostBank with a view to turning it into an SME business bank – our proposal never even made it as far as board meetings because they were determined to close down rather than continue, we found the whole process perverse at best.

Instead the same investor group will be setting up in the UK, meaning SME’s in Ireland lose out on funding.

It isn’t that new banks don’t want to come here, it is that they are routinely put off from doing so via the Central Bank and the way in which we grant banking licences in this country.

The other regulatory issue is Basel III.

Asking a bank during a time like this to …

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What will come of it all? Eurobonds? Probably not…

If you look at the dynamic of the crisis to date you see the following flow (broadly but not exactly)

1. Sub-prime mortgages in the USA started to go under 2. Interbank lending froze as banks liabilities were unknown & collateral was of unknown quality 3. Interbank rates shot up 4. The crisis was not contained, culminating in the fall of Lehman which triggered a series of world events the most substantial aspect of which was a loss in confidence. 5. Markets fell rates were dropped to record lows in the EU, USA and Britain. 6. Recovery began with several bailouts in the majority of nations affected.

and then….

7. This is critical – bank and private debt effectively became public debt, in Ireland’s example this was via our banks, in other countries it was in the same manner or via quantitative easing. Across Europe the ECB was a key facilitator of liquidity.

The debt has now, in many countries become a public debt issue, in Europe specifically it is a Sovereign debt issue, the like of which the US …

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Mortgage Debt for Equity swaps

A popular idea that has been discussed in the past (and if Niamh Hennessy’s article proves correct may become working reality) is that of banks taking equity in the family home in exchange for reducing the debt on the property.

I’d like to go through this by looking at the differences in cost, the difference to the mortgage holder and to take a look at why it may not be a great idea.

The bank balance sheet currently looks like the picture to the right, the value of the asset (the loan) is based upon the amount of finance advanced, not the value of the underlying security.

Remember: When you put in your deposit, you are the first equity owner, if prices fall the owners equity is wiped out first which is why ‘negative equity’ is a talk about current value versus the mortgage secured and not just current value versus market value.

People who’s property fell 40% but who have no mortgage cannot crystallize …

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Repay Bond holders in full (with mortgages)

You can’t hope for isolated solutions in world where everything is bound together, which is the foundation for taking a more pragmatic look at a solution for Irish Banks and households, because one inherently is reliant upon the other.

That our banks were underwritten by all of our citizens (minus any consent in that debt bondage process) is a given, however, it would be a mistake to think that there can only be a one way flow of funds or solutions between the two parties.

The conundrum thus far is that the ECB don’t want to see any bond holders ‘burned’, while at the same time this nation should not be guaranteeing any facet of the securities markets any more than we should have protected bank share holders; and then we have the third and fourth legs on this table of madness, the IMF who (counter to the ECB) want burden sharing and an overly indebted society incapable of paying back the money they borrowed.

Somehow within this morass we …

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PTsb Overpayment form & is it good value?

There has been some coverage of people saying that the PTsb offer of a discount for overpayment is not good value, that the bonus should instead be in the region of 25%.

I don’t know where that figure has been taken from, having tried to work it out several times we just can’t make it stack up.

The form that you need in order to opt for this over payment is here.

Is the idea of an overpayment any good?

In the PTsb scheme you have to consider ‘net interest’ rather than just stating that it isn’t a great idea. The figures I have done are based on the clients position rather than what the bank may or may not make – in the same way that I don’t query the margin a shopkeeper gets on a Mars bar – which is where some focus has been on this.

Rules of scheme: you can’t pay more than 50% of your mortgage, every 5k gets a …

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