Appendix. The Irish Authorities’ Views on the Ex Post Evaluation1
The Irish authorities broadly agree with the main findings of the Ex-Post Evaluation (EPE) report. We welcome this report and note that the focus is to assist the Fund in learning from the experience of the Irish programme of external support and to enable positive lessons to be implemented in future programmes. We appreciate the IMF’s recognition that the programme implementation was strong, and particularly agree with main lesson learned that strong country ownership, setting and then meeting realistic and tailored targets were key for success. We would nevertheless like to comment on a number of issues related to our programme, and the commentary on these which is included in the report.
More than half of mortgages contracted during 2005-07 were offered at 100-125 basis points margin over the ECB refinance rate (so-called “trackers”). Trackers accounted in 2011 for almost half of the mortgages for owner occupied houses and almost two thirds for buy-to-let properties; see IMF Country Report No. 12/147.
This was noted, for example, in P. Honohan, The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008, May 2010; and K. Regling and M. Watson, A Preliminary Report on the Sources of Ireland’s Banking Crisis, May 2010.
While noting risks to financial stability “… there are several macro-risks and challenges facing the authorities… household debt to GDP ratios have continued to rise, raising some concerns about credit risks…a significant slowdown in economic growth, while seen as highly unlikely in the near term, would have adverse consequences for banks’ non-performing loans…” the report did not identify their magnitude and systemic nature:”…Stress tests confirm, however, that the major financial institutions have adequate capital buffers to cover a range of shocks.” Furthermore, the report was sanguine about the quality of bank supervision: “…good progress has been achieved in strengthening the regulatory and supervisory framework, in line with the recommendations of the 2000 FSAP.”See
Gross Domestic Product (GDP) and Gross National Product (GNP) are two common measures of the economy and differ in the treatment of net factor incomes. GNP is the total income remaining with domestic residents and differs from GDP by the net amount of incomes accruing locally to non-residents or received from abroad by domestic entities operating overseas (net factor income). Mainly due to the role of large multinational companies operating in Ireland and related net factor income flows, GNP in Ireland is less than GDP (84 percent of GDP in nominal terms in 2013). As it captures the net factor income of domestic residents, GNP may be a better measure of the domestic activity and demand conditions in Ireland.
The Credit Institutions Financial Support Scheme (CIFS) covered through September 2010 all retail and corporate deposits (excluding retail deposits covered by the deposit insurance scheme), interbank deposits, covered bonds, senior unsecured debt, and certain subordinated debts. The guarantee was equivalent to 240 percent of GDP.
See the exchange of letters between the ECB President and the Irish authorities at http://www.ecb.europa.eu/press/html/irish-letters.en.html
A brief reference to euro area issues was included in EBS/10/223, Supplement 2, op. cit.
It was agreed to defer the required completion of capital injections until after the General Election, to let the new government decide on the recapitalization. The recapitalization of the banks took place in July 2011, following the PCAR.
These reforms were subject to detailed structural conditionality under the EC Memorandum of Understanding. A summary was included in the Memorandum of Economic and Financial Policies with the Fund.
The patent cliff had, however, little effect on domestic resident income and average GNP growth was higher-than-programmed (1.5 percent per annum versus 0.2 percent projected at the time of the program request).
Even when adjusted for estimates of the output gap, Ireland’s current account position strengthened, also in comparison with some other countries in the euro area periphery; see J.S. Kang and J.C. Shambaugh, 2014, Progress Towards External Adjustments in the Euro Area Periphery and the Baltics, IMF Working Paper (WP/14/131).
The PCAR covered AIB, BOI and PTSB, labeled “intervened banks” in the rest of the paper, as well as EBS Building Society, which was merged with AIB in 2011.
Under European Union State Aid rules, banks were also required to undergo a forced restructuring and submit a restructuring plan within six months of receiving government support. While BoI’s and AIB’s plans were approved, approval of PTSB’s restructuring plan is still pending.
The 2011 PCAR loan losses and PLAR deleveraging plans were initially prepared with the assumption that a second NAMA was going to take place for larger land and development loans of less than €20 million. However, the authorities ultimately decided to have banks retain these assets. See Box 1 in PCAR 2011 Review: Analysis of PCAR banks up to end June 2012 Compared to PCAR 2011 at www.centralbank.ie.
The PCAR resulted in capital requirements of €24 billion, including a contingent equity buffer of €3 billion.
This number does not include the transfer of banking assets to NAMA, as these took place before the program started. Including such transfers would show a contraction in assets by more than one third.
The CBI indicated to banks that, effective January 1, 2014, if it found insufficient progress on meeting restructuring targets of NPLs on a sustainable basis, it would use its regulatory powers to impose Pillar II requirements, including holding additional capital or apply specific provisioning requirements.
Some €0.5 billion of additional fiscal measures were taken in 2012 to meet the deficit target, but were largely unwound by somewhat lower measures in 2014.
The CBI set up a separate loan workout resolution framework for SMEs. SMEs also had recourse to corporate insolvency proceedings where the legal framework was generally considered more effective.
For example, the insolvency framework in Norway (introduced in 1993 following a banking crisis and housing market bust) allows for both a voluntary and a compulsory court administered debt settlement where in the latter adjustments are made to reduce the loan-to-value ratio to a maximum of 110 percent (for further details, see Box 3). Denmark, Finland, and Sweden have broadly similar systems in place. For a broader discussion, see Y. Liu and C. Rosenberg, Dealing with Private Debt Distress in the Wake of the European Financial Crisis—A Review of the Economics and Legal Toolbox (2013), IMF Working Paper 13/44.
PTSB is weighed down by a large portfolio of low yielding tracker mortgages (some two-thirds of its total assets in 2013), which have remained on the bank’s balance sheet. Notwithstanding considerable improvements in its management, the government’s 2012 restructuring plan acknowledged that PTSB’s asset-liability structure offered little prospects for profitability over the medium term under reasonable funding cost assumptions.
A key objective of resolving a banking crisis is to create viable financial institutions. Recapitalization alone is not a sufficient condition to secure financial viability of a bank over the medium term. The bank restructuring plan should also address the underlying problems in the bank’s business practices that led to the weaknesses and its recapitalization needs; see IMF, 2002, Building Strong Banks through Surveillance and Resolution; and BCBS, 2002, Supervisory Guidance on Dealing with Weak Banks. Viability is also required under the EC’s Guidelines on Restructuring Aid to Banks, which requires that the government submits a restructuring plan that demonstrates how the bank will restore long-term viability without state aid as soon as possible.
It is notable, however, that the Irish banking sector is contestable for foreign institutions and, indeed, some foreign presence remains in the retail market and other foreign banks operated in Ireland in the past.
Subordinated debt was not fully written down, as some cash payouts were provided to subordinated debt holders.
See, FSB, 2011, Key Attributes of Effective Resolution Regimes for Financial Institutions.