There is growing political disquiet about the effects of a mass sell-off of tens of billions of euro of mainly NPLs by Nama, IBRC and other institutions in large tranches and in almost all cases to large US private equity and so-called “vulture” funds.
Sales of mortgage debt in particular has become a highly politically charged issue, one that is set to escalate as vulture funds separately move to seize or sell the assets of SMEs and individual borrowers.
The department expressed fears that Irish banks face pressure to rapidly sell off bad loans, pressure that could have “implications broader than purely financial”, according to minutes of the April meeting of the so-called Principals’ Group.
The group includes senior officials from the Department of Finance, Central Bank and National Treasury Management Agency (NTMA).
Purely financial implications of an accelerated disposal would include forcing any bank that sells loans to realise losses in its financial results straight away.
It is understood the department feared the impact, on market dynamics, of the block release of loans and the reputational risks for banks from angry customers.
The European Central Bank is conducting a Europe-wide review of NPLs. That review is led by Sharon Donnery, deputy governor of the Central Bank of Ireland, who has said that the protection of vulnerable borrowers, including the prospect of increased regulation of non-bank entities “is one thing to be looked at” as the Government tackles a major housing supply crisis.
The Central Bank asked the Government to consider allowing it to regulate vulture funds as far back as 2011.
The ECB has made tackling non-performing loans, which are curbing a recovery in lending in the Eurozone, one of its priorities for this year and launched a review of how banks should deal with bad debt earlier in the year.
At the Principals’ Group meeting, it was noted that pressure to reduce bad loans may give rise to losses if large volumes are required to be sold.
According to the minutes, obtained under Freedom of Information, the Central Bank said speeches by Daniele Nouy, ECB chief supervisor, had set out the regulator’s plan.
The Central Bank said the ECB believes the negative interest rate environment requires an adjustment by banks of their business models.
It pointed out that the ECB, plans to give Eurozone banks non-binding guidance by the end of this year or early 2017 to cut their bad debt pile. considers Ireland a “good model for dealing appropriately with NPLs”.
“DoF are concerned that pressure to sell NPLs rapidly could have implications broader than purely financial,” the minutes state.
“NPLS are falling, but will take time to work through. It is important that SSM (Single Supervisory Mechanism) look at dynamics of the situation as well as the static quantum of NPLs.”