London: Stefan Ingves, the governor of the Riksbank, Sweden's central bank and an architect of his country's bank bailouts in the 1990s, cut an exasperated figure on the financial regulators' conference circuit after the crisis.
The medicine he administered during the Swedish crisis, and has prescribed ever since, is bitter: an immediate write-down of all bad assets and forced recapitalisation of banks, even if it means nationalising them. Few of today's patients have been willing to stomach it. Many have chosen more palatable cures in the belief the prices of banks' bad assets will recover given time.
Ireland was in this camp at first. Last year the government proposed to buy bad assets — most of them commercial property loans from Irish banks for about 30 per cent less than their face value, arguing this reflected their "long-term economic value". The worry was the government would overpay, enriching shareholders in the banks at taxpayers' expense.
On March 30 Ireland started taking stiffer medicine. The first pill was a steep cut in the price Ireland's newly-formed "bad bank", the National Asset Management Agency (NAMA), is paying for the assets it will take off the banks. It is paying little more than half the face value for the first 16 billion euros (Dh78 billion) in bad loans that will be transferred. Analysts are now raising their estimates of the discount, or "haircut", that will apply to the full 81 billion euros of loans NAMA will take.
Stress tests
The second pill is an increase in the amount of core capital banks need to hold against losses. The regulator wants them to have a cushion of eight per cent, of which seven per cent needs to be equity, the best form of capital. The authorities also published details of its stress tests on Irish banks, which include assumptions of total losses of five per cent on mortgages and losses of up to 60 per cent on loans backed by property developments.
As a result of the tests, the new capital requirements and the greater-than-expected haircuts on toxic assets, the regulator reckons Allied Irish Banks (AIB) will need to raise as much as 7.4 billion euros in equity while Bank of Ireland will require 2.7 billion. Anglo Irish Bank, which is already in state hands, may need more than 18 billion euros. The banks have 30 days to say how they would fill the holes opening up in their balance sheets, but are unlikely to manage without additional support from the state.
That would probably mean the government taking a majority stake in AIB. Shares in the bank fell by 27 per cent ahead of the announcement (bondholders continue to escape unscathed).
The reasons the government gave for applying a steeper haircut to the first batch of assets that NAMA has bought are hair-raising. Among them is the finding the "underlying security" of the assets is of "variable quality". This is likely to add fuel to talk some indebted developers did not own the land they had pledged as collateral for loans but that they had merely acquired a right to build on it.
Ingves, meanwhile, seems to be spending more time offering advice to those who appreciate it. He has recently been hosting web "chats" with consumers on the Riksbank's website, providing homespun advice on matters such as whether they should take out fixed or floating-rate mortgages and why they shouldn't mortgage their homes to 100 per cent of their value. More counsel the Irish could usefully have heeded earlier.
