Irish CEO says Boston insurer would not be keen on IBRC shares being moved to Nama
Liberty Insurance wants 100 per cent control over the former Quinn Insurance Group, almost half of which is held by the Irish Bank Resolution Corporation (IBRC), formerly Anglo Irish Bank.
Its chief executive in Ireland Patrick O’Brien, has told The Irish Times its Boston parent would like to acquire the 49 per cent shareholding in the business held by IBRC “sooner rather than later”.
Mr O’Brien declined to comment on how much IBRC’s stake would be worth.
However, he revealed the liquidation of IBRC took Liberty by “surprise”.
Liberty has been heavily promoting its brand in Ireland with a €1 million annual sponsorship of RTÉ’s Late Late Show . This, however, is coming to an end and the insurer has signed a five-year deal with the GAA to sponsor the All-Ireland hurling and camogie championships.
The Government put IBRC into liquidation in February and the special liquidators at KPMG are to value its assets and either sell them by August or transfer them to the National Asset Management Agency (Nama), which will dispose of them in time.
In November 2011, Liberty provided €102 million for a 51 per cent stake in the former Quinn insurance business. IBRC took the balance as part of a €200 million recapitalisation.
Mr O’Brien said IBRC’s liquidation took it by “surprise”.
“From a State perspective, I’m sure it was the right thing to do but from our perspective it was a little frustrating. We’d built up a good relationship with IBRC,” he said.
Given his role as head of the Irish insurer, Mr O’Brien is not directly involved in discussions with KPMG on the IBRC stake, which are being handled from Boston.
Mr O’Brien said it was “business as usual” at the Irish insurer but the uncertainty over IBRC was not helpful. “We’re a little unsure where the other shareholding will end up and we wouldn’t be keen to be in Nama,” he said.
IBRC provided €98 million as part of the recapitalisation of the former insurer, which had been placed into administration by the Central Bank. In theory, this was the value placed on its 49 per cent stake in the business
Draghi says ECB is considering buying asset-backed securities to support lending to companies- Irish Times
Move is among ‘variety’ of options to support lending to small and medium-sized companies
European Central Bank president Mario Draghi said the ECB is considering buying asset-backed securities (ABS) among possible options to support lending to small and medium-sized companies.
“We looked at a variety of things, one of which was this ABS,” Draghi told reporters yesterday after a Group of Seven meeting of finance chiefs in Aylesbury, near London. “We’re still looking at that, it’s one of the many options. We don’t have a position, certainly, on that.”
The ECB is keen to rally lending at banks, which account for about 80 per cent of corporate financing in the euro area, compared with less than 20 per cent in the United States. Lending to households and companies in the region contracted for an 11th month in March, and small and medium-sized companies, which account for the bulk of employment in Italy and Spain, have been particular victims.
“On the lending side, we see that the situation is still tight, especially in the periphery, but not exclusively,” Draghi said. Still, “the situation is in a sense getting less bad,” he said. “In other words it’s still tight, but it’s less tight than it used to be.”
ECB executive board member Joerg Asmussen said on May 8th that the central bank has discussed ABS purchases, while his fellow board member Yves Mersch said the same day that it was “looking at ways to restart the ABS market”.
Acquisitions in the ABS market are “not easy for the ECB to do because we’re in a completely different set-up from the US, where you have a capital market,” Draghi said yesterday. “So the ABS in this case would have to contain assets from the banking system of the euro system and you can understand what sort of moral hazard there is there.”
German finance minister Wolfgang Schäuble criticised Draghi’s plan to help some euro-area states by offering to buy securitized debt, Der Spiegel reported today, citing unnamed people who heard Schäuble comment at a government meeting on May 8th.
Schäuble said the ECB assuming 70 billion euro of Italian debt would amount to veiled state financing in violation of EU rules, according to Spiegel . Last month, the ECB governing council tasked technical committees at the central bank to investigate ways to stimulate lending to small and medium-sized businesses.
The ECB’s role in this is “going to be mostly catalytic because the ECB works with the EIB, with the commission,” Draghi said, referring to the European Investment Bank and the European Commission. “It’s going to be very much up to these actors to act, rather than the ECB. So European Commission, the EIB and national governments.” – (Bloomberg)
Deposits of over €100,000 are likely to be hit in the event of future European bank collapses, according to a proposal put forward by the Irish presidency of the European Council ahead of a key meeting of finance ministers next week.
Discussions on the controversial bank resolution regime, which is likely to see savers with deposits over €100,000 “bailed in” as part of future bank wind-downs, are due to intensify this week in Brussels, ahead of Tuesday’s meeting, which will be chaired by Minister for Finance, Michael Noonan.
“We will try to get some guidance from Ministers about the possible design of the bailout tool,” one EU official said yesterday.
Under a compromise text proposed by the Irish presidency, uninsured deposits of over €100,000 would be bailed in in the event that a bank is resolved, but depositors would rank higher than other creditors in the event of a wind-down.
In this scenario – known as “deposit preference” – depositors would rank at the very end of the process, with other creditors first absorbing losses.
However, some member states have not ruled out the possibility that insured deposits, i.e. deposits under €100,000, would be forced to bear losses in the event of a bank collapse even though these deposits would be likely to be protected by the deposit guarantee scheme.
However, the explicit exclusion of insured deposits from future “bail-ins” could in fact be included in the final text, according to some sources, with some MEPs in particular keen to include such a provision.
Significant differences still remain between states on the issue, with some countries calling for greater flexibility as regards the application of the new rules on a national basis, including the possibility that individual countries could be permitted to exempt large depositors from losses if a bank fails.
The introduction of an EU-wide bank resolution process, which would govern how banks are wound down, is a key strand of the EU’s plan for a pan-European banking union, which was endorsed by EU leaders at last June’s summit.
However, the chaotic Cyprus bailout instilled the issue with greater urgency, with EU lawmakers now keen to provide clarity around bank collapses.
Moving the burden
This year Jeroen Dijsselbloem, head of the group of 17 euro zone finance ministers, said that losses on bondholders and depositors could form part of future bank bailouts as euro zone officials seek to move the burden of bailouts away from taxpayers – as was the case in the Irish bailout – and on to private investors.
The European Commission argues that this switch from so-called “bailouts” to “bail-ins” would result in an allocation of losses that would not be worse than the losses that shareholders and creditors would have suffered in regular insolvency proceedings that apply to other private companies.
While the inclusion of large savers in future bank bailouts is now widely accepted, significant differences still remain between member states.
While the new rules governing bank resolution were first intended to come into place in 2018, since the Cypriot bailout there have been calls from senior EU figures such as European Central Bank president Mario Draghi and EU economics affairs commissioner Olli Rehn to introduce the new regime as early as 2015.
The Irish presidency of the European Council is hoping to reach a common position by the end of next month.
Come June, there will be a curious dichotomy at play in the Irish mortgage market. Those with a standard variable rate mortgage from either AIB or EBS will see the cost of servicing their loan jump – with rates at AIB jumping by 0.4 per cent up to 4.4 per cent, and those at EBS rising by 0.25 per cent to 4.58 per cent.
On the other hand, thanks to last week’s decision from the European Central Bank, property owners with a much-valued tracker mortgage will see their cost of borrowing slide by another 0.25 per cent. This means that those lucky borrowers with a mortgage of as low as ECB+0.5 per cent will be paying just 0.75 per cent on their borrowings.
It’s an incredible differential, which means that €100,000 in borrowings will cost a person on a standard variable rate about €500 to service compared with just €310 for someone on the cheapest available tracker.
But if you are stuck on an unattractive variable rate, can an initiative from Permanent TSB help ease the burden?
Launched last week, its new loan-to-value (LTV) mortgage is aimed at first-time buyers, those looking to switch their mortgages and those trading up or down. Similar to a product launched by Danske Bank back in the boom years, Permanent TSB is offering a discounted rate of 3.95 per cent for those with either an outstanding or new mortgage that has an LTV of 50 per cent or less. This means that the loan on the mortgage must not exceed 50 per cent of the value of the property – so a mortgage of €150,000 on a property valued at €300,000 would qualify, for example.
The rate increases as the LTV does, so those with a LTV of 60 per cent will pay interest at 4.05 per cent, rising to 4.45 per cent for those looking to borrow up to 90 per cent.
At first glance, the product has its appeal. If you can afford to buy a new house and pay 50 per cent of it up-front, you will pay 0.5 per cent less in interest each month.
For example, if you buy a house for €500,000, and put up €250,000 in cash, your total interest payments over 30 years (at 3.95 per cent) will come to €177,083.
On the other hand, if you have to go for a 90 per cent mortgage at 4.45 per cent, that same property will cost you almost double that in interest payments – €366,024. The benefits of borrowing less and doing so at a lower rate are very clear.
The trick with getting the new rate is to have the funds to pay down the cost of the property at inception – if you manage to reduce the LTV over the life of the mortgage it won’t impact on the rate you’re paying. And that of course won’t be easy.
While banks such as AIB and Bank of Ireland also offer a discount for having a lower LTV, it’s not on a similar scale to Permanent TSB. However, it’s something we’re likely to see more of.
“It’s ‘once bitten twice shy’ in terms of the banks doing very high LTV mortgages. Now, they think ‘if we can get a good customer in terms of a lower LTV that makes a lot of sense to us as it’s a customer we won’t have a problem with’,” says Trevor Grant, chairman of the Association of Expert Mortgage Advisors.
However, the new products are unlikely to attract a large number of takers. If you’re in negative equity, you won’t be considered. And, given the difficulties in actually getting a mortgage, it may not appeal to a broad switcher market either.
“Whether there’s people out there with sufficient equity who would be justified in switching would be questionable,” says Grant.
Also, while the rates on offer are undoubtedly more attractive than headline standard variable rates, the discount is not as significant as might have been expected. After all, from a bank’s perspective, taking on a mortgage with a 70 per cent LTV is dramatically different from taking one on with a LTV of 90 per cent – and a differential of half a percentage point in the interest rate might not accurately reflect this different risk weighting.
“It’s not a huge premium; it’s an opening gambit to try and attract business,” agrees Grant, adding that Permanent TSB is probably looking to “make up for lost time when they weren’t lending”.
Margins have, of course, become key to the restructuring and resuscitation of the banking sector. Given that banks will be nursing the losses they took on their tracker mortgage books for some time to come, from their perspective it’s key that any new products they introduce come with an attractive margin.
It’s also worth noting that the new rates are variable – and so can be increased at the whim of the bank, which could leave you exposed. The new product won’t be made available to existing customers of the bank.
However, if you think that you have a low LTV and could benefit by switching, you could consider cancelling your existing mortgage and taking out another one with the bank.
Brendan Burgess, of askaboutmoney.com, has put a cost of about €800 on the legal fees involved in “switching” your existing mortgage with Permanent TSB to one of the new options.
The other question that might arise is whether or not you will even be offered the opportunity to switch.
“There’s no doubt that getting a mortgage is much more difficult than it was,” says Grant, adding, “if you’re applying for a mortgage now, you’ve really got to pre-plan and cut out habits that you might have such as overdrafts.
“There is more credit available now than there has been at any stage in the last five years but it’s difficult to get one because of the scrutiny applied. You’ve got to put a lot of thought into your application, and make sure that your income stacks up and you have to demonstrate you have a repayment capacity,” he advises.
If you don’t think you can benefit from the new product model, and you are on a standard variable rate, the only other option is to fix your rate. However, if this is not a more attractive option, you might take heart from Grant’s assertion that banks are unlikely to keep pushing mortgage interest rates up.
“Banks need to be very careful. Pushing rates up for new business is one thing, but for existing customers if you do that, how many more customers will you tip over the edge into arrears?”
Finally, if you are in the market for a mortgage, it might be worthwhile to consider this. Given that banks assess your suitability for a mortgage based on a stress test of +2 per cent or so above current rates, if banks push the rates up your affordability is likely to diminish. With trackers no longer available, all these stress tests are based on either variable or fixed rates, which are also far in excess of the rate determined by the ECB.
“In principal, if you got approved for €200,000 (before a rate increase), it’s possible that you’ll get approved for less afterwards,” notes Grant.
So, if you’re thinking of going to AIB to ask for a mortgage, it might be prudent to do so now, rather than wait until they add another 0.4 per cent to their stress test come June.