McWilliams savages Irish banks

In his Sunday Business Post article, this morning, David McWilliams, savagely attacks the Irish banks in a manner which I haven't seen in the Irish media for a while. Those who have been reading McWilliams of late will be aware, it is he who recommended the bank guarantee scheme a couple of weeks before it was announced by Lenihan. He said, soon after that, the next necessary stage was for the Irish banks to come clean about their bad debts following the collapse in construction here - but this isn't happening to any great extent. The brunt of his piece is that he believes management of Irish banks won't release the true extent of the bad debts on their books because that will affect their tier one capital ratio, which will mean credit rating agencies downgrading the banks, which will call into question the position of the bank's management. Basically, he's saying management of Irish banks are covering their own ass rather than doing what they can to get the country out of the mess we find ourselves in, and what's worse, they are damaging our economy even more in the process.

"...The problem is simple: if the bank admitted that the problems were as bad as they were, the management and board would have to resign because they would need new capital. New investors would not trust the same people who got the banks into this mess in the first place. So we are experiencing a game of cat-and-mouse between the market and management and, all the while, share prices keep falling. For the sake of clarity, let’s cut to the chase and do some little calculations. The reason Irish banks are in difficulty is because they are stuffed with Irish - and, to a lesser extent, British - property that nobody wants to buy. AIB has development loans in Ireland of just over €18 billion, as well as €5 billion of development loans in Britain. In all property crashes, development land falls further in value than house prices. Let’s take a conservative view: that house prices will fall by just 25 per cent (it is likely to be far greater, but let’s be positive). This means that the development loan book of AIB will have bad debts of at least 30 per cent and, given a total development loan book of €23 billion, that means bad debts of about €7.5 billion. To date, AIB has provided for €1 billion of bad debts. So it is hardly surprising that the share price has fallen again.

...Our bankers are petrified of the following scenario. If they admit how bad things are and make proper provisions, their tier one capital ratio will fall. The reason for this is that the more bad loans there are on the books, the more these eat into capital adequacy ratios. If their capital adequacy ratios fall to, say, 5 per cent, when similar British banks have a ratio of 9 per cent, the game is over for the management. This means the banks will be downgraded by the rating agencies. Some of the banks will have to look for state help to recapitalise and the positions of the management, chairman and board will be called into question. So it’s simple: all this prevarication is about self-preservation. The banks are hoping to spoof now and recover their tier one capital ratios by reducing lending. This is what we do not need, because our economy will seize up without credit and we may face the Japanese long recession scenario, which is precisely what the guarantee was designed to avoid. Ireland’s financial Know Nothings - the lads who blithely brought us to the abyss - are trying to save their own skins and, in the process, are risking the future of the economy. This is the worst of all worlds".

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