Lenihan Reveals NAMA Legislation

by Jason Gorringe, Tax-News.com, London

06 August 2009

The Irish Minister for Finance, Brian Lenihan on July 30 published the draft text of proposed legislation for the National Asset Management Agency (NAMA), which will be 'established on a statutory basis to deal with the negative impact on the economy resulting from deficiencies in the asset quality in the banking system'. On its publication the Minister stated:

“I am publishing the proposed legislation in draft format today so that Deputies, Senators and the public can have an opportunity to consider it prior to its formal publication as a Bill in September. The Dáil will return on September 16, 2009, to commence debate on the published actual Bill in the context of a wider debate on the future of our financial sector. The publication of the draft text today will facilitate an informed debate at that time.”

The Minister outlined the context in which the Bill is being published:

“The Irish financial system has been greatly challenged by the very significant downturn in the global and domestic economy, by events in the international financial markets, and by the excessive lending during the property boom here at home. These issues are so serious that they require concerted, determined and ambitious action by the government to ensure the protection of our economy and the welfare of our people. We must address the health and stability of our banking system – to ensure that the credit required by the economy is provided and that people’s savings are protected.”

“There is nothing in the proposed bill that will provide a ‘bail-out’ for borrowers, whether builders, developers or otherwise. Anyone who owes money before NAMA continues to owe it, and is expected to repay the full amount of the debt.”

“The government has decided to adopt the proposed approach based on the advice it has received domestically, the advice of institutions such as the IMF, and also the example of other countries taking similar steps. The government is convinced this response will ensure the safety, stability and capacity of the Irish banking system, all of which are key to supporting our economy.”

How will NAMA work?

Step 1

NAMA will buy loans from the participating banks at a significant discount – these loans will be from the riskiest part of the bank portfolios, the land and development loans, as well as certain associated loans.

This will take these riskier loan classes away from the balance sheets of the banks concerned and make the banks safer and more secure for depositors and investors.

Step 2

NAMA will pay the banks concerned for these loans. It will do so on the basis of valuations carried out by experts and in accordance with pre-defined valuation methodology. The banks’ book value of the loans will not be a factor and the banks will have to recognise a loss on their books at the time of the transfer for the difference between the book value and the amount paid by NAMA.

The payment for the loans will be in the form of government securities and/or guaranteed securities, and the principles of the valuation methodology are set out in the draft legislation and the Minister will be making detailed regulations based on these principles. The valuation methodology along with all other State aid aspects of the NAMA initiative will be subject to approval of the EU commission.

This method of payment will ease pressures on the banks arising from the tighter liquidity conditions that have prevailed for the past year or so, giving them access to cash or near-cash assets in place of the much less liquid property loan assets they had before. Again, this will make for more stable and secure financial institutions, better able to lend and support the domestic economy.

Step 3

NAMA will manage these loans, either directly or indirectly, so as to obtain the best achievable return from them. In the meanwhile, it will collect interest due and pursue debts so as to ensure its own income stream and to recoup the government investment over time.

NAMA in effect puts itself in the place of the bank that originated the loan, and will have all the same rights to pursue debts, where necessary. Borrowers who continue to meet their contractual obligations, of course, have no reason to worry – their rights are fully protected.

Implications for the Irish Banking Sector

Lenihan noted that intervention on this scale in the banking market "is bound to have considerable implications both for the institutions individually and for the broader structure of the banking system."

The Minister concluded stating that “the next few weeks will give market participants, public representatives and the public themselves an opportunity to digest the very detailed and comprehensive legislation that I have had prepared over the recent months. I intend that there will be a well-informed, broad-ranging debate on the financial system in September, that will aim to set the tone and direction for public policy for the coming years. I expect that all who participate in that debate will do so in a balanced and thoughtful way, having regard to the scale of our national difficulties and the necessity to address them carefully and comprehensively.”

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