Accountable banking is real no-brainer

Should banks, using taxpayers's money, be permitted to write-off billions behind closed doors?

The bankers’ siren-call “It’s a No-brainer” lured trusting customers to borrow €25bn to buy grossly overpriced “buy to let” properties. Flattered by their relationship managers’ soft sell, many parked their brain outside the door and borrowed without a seconds’ thought for risk.  

Not only did they flog developer client property deals to their customers, but bankers and their family members bought as well.

Convinced by the possibility of illusory profits, the probability of losses was consigned to Pandora’s box. Once opened it, sprayed red ink all over personal balance sheets. No one knows how many vacant houses, apartments and retail outlets are owned by insolvent amateur landlords or syndicates who bought into their banker’s, accountant’s and lawyer’s “no brainer” sales pitch.

As we can’t buy property unless our bank agrees to lend us the money, it’s probably the case that cheap abundant bank credit drove property prices during the boom. The more bankers cranked over their credit engines, the higher prices went.

Between 2005 and 2008, they fed €25bn in loans to frenzied investors, stoked up by vested interests’ marketing hype. Many loan proposals just didn’t stack up as their repayment depended on unsustainable rents and rising property values. Naïve investors believed they could limit risk by flipping properties - selling them on to realise a quick buck. No doubt they now think they were flipping mad to have invested in the first place. They should be, as they will have to repay every cent borrowed.

The vast majority of loans leveraged off small equity stakes, frequently derived from properties already mortgaged. Many people borrowed on interest only terms. Their loans may have performed as rents initially funded interest repayments. But with capital repayment holidays ending, investors are realising they were sold a pup. They are beginning to understand how bankers and developers drove a chaotic ponzi scheme to its ultimate destination – one of the worlds’ most toxic, credit fuelled property asset bubbles.

Today buy-to-let investors/landlords owe about €7bn each to Bank of Ireland, AIB and PTSB. The EBS is owed close to €2bn. How badly these banks €24.5bn in loans are performing is unknown. The Central Bank has not published arrears data as it has with homeowner loans. However, its bank recapitalisation loan loss estimates range from an optimistic €2.2bn to a pessimistic €6.0bn. The expected loss rates range from 9.5% to an eye watering 26.2%. This means there’s a whole lot of financial misery to be visited on investor balance sheets before considering foreign owned banks’ profligate lending.  

In the absence of any official numbers, using a sophisticated model, Morgan Kelly recently estimated that there are about 11,000 large mortgage loans over €500,000 and 2000 loans over €1m which are predominantly investor loans. In total he estimates large mortgages total about €10bn with the vast majority being interest-only property investment loans.

At peak issuance, such loans averaged €325,000. With banks inducing people to leverage off other equity on other mortgaged properties and with property values down at least 50%, the average frenzy-time investor is racking up about €127,000 in negative equity losses per loan. With banks increasing their interest rates and capital repayments kicking in and with rents softening, many investors are in quite serious trouble - particularly so if their income earning capacity is shot through by the recession.  

How will defaulting investor’s negative equity be recovered? One concern looms large. Left to their own devices, banks may act as they always have by favouring certain valued customer cohorts over others. For example bank officers and their extended families borrowed heavily to invest in property and are now insolvent. Will they be afforded a lighter touch?

There are other well organised cohorts such as farmers, the professional classes and others with insider influence who will look for soft deals.

With billions of taxpayers funds ploughed into banks to make them whole again who is going to ensure that loan write downs/debt forgiveness deals are fair and equitable? Surely billions cannot be forgiven behind banking’s secretive closed doors. It’s unconscionable to think that taxpayer funds will used by banks to write off property investor loans without any public oversight.

Without oversight by a publically accountable, trusted authority that ensures fair play, the future is likely to one of suspicion, resentment and anger as people will perceive that others are getting away lightly. It’s already happening as NAMA, one of the biggest debt forgiveness agencies ever devised, gets down to the job of doing deals behind a veil of unwarranted secrecy.

What’s required is an open, publically accountable oversight system that monitors and reports on the performance of an equitable and fair personal insolvency regime through which banks and their customers settle un-repayable debt. It must be fair, seen to be fair and believed to be fair. Anything less will amount to the perpetuation of the self-serving behaviours that created the mess we are now in.   

A shorter version of this article appeared in the Irish Examiner, Business Section, Monday 29th August 2011