Advertisement
If you have a new account but are having problems posting or verifying your account, please email us on hello@boards.ie for help. Thanks :)
Hello all! Please ensure that you are posting a new thread or question in the appropriate forum. The Feedback forum is overwhelmed with questions that are having to be moved elsewhere. If you need help to verify your account contact hello@boards.ie

Property Developers have YOUR money!!

  • 08-10-2007 10:04pm
    #1


    http://www.ucd.ie/economics/staff/mkelly/papers/solvency.pdf
    http://www.thepropertypin.com/viewtopic.php?t=3797

    http://arandomwalk.com/forums/index.php?showtopic=121


    I recommend ANYONE who has a bank account to read ALL of the following.




    from the UCD paper:
    Just How Sound is the Irish Banking System?
    Morgan Kelly
    Professor of Economics, University College Dublin.


    While there has been a lot of interest lately in the possible risk to banks from sub-prime
    loans, nobody seems terribly concerned by the large and rapidly growing exposure of Irish
    banks to property speculators. Irish banks are now owed almost as much by builders and
    developers as they are by mortgage holders, and are now more exposed to commercial real
    estate than Japanese banks were when they crashed in 1989.
    While mortgage lending has slowed since the middle of last year, lending to builders and
    developers continues to grow rapidly and now stands at almost €100 billion, an increase of
    €20 billion on last October.
    To put these numbers in perspective, €20 billion is twice the market value of Bank of
    Ireland shares; while €100 billion is the approximate value of all public deposits with retail
    banks. Effectively, the Irish banking system has taken all its shareholders' equity, with a
    substantial chunk of its depositors' cash on top, and handed it over to builders and property
    speculators.


    In fact, if you leave out the quarter of mortgages that are for buy-to-let property, itself a
    small time form of property speculation, lending to developers is now €20 billion more
    than lending to people to buy their own homes.
    Back in 2000, lending to construction and real estate made up only 8 per cent of Irish bank
    lending, much like other European countries. Now it has risen to 28 per cent. By
    comparison, just before the Japanese bubble burst in late 1989, construction and property
    development had grown to a little over 25 per cent of bank lending.
    Increased lending for construction and development is driven by banks’ urgent need to
    meet earnings expectations, and is unavoidably risky. While most home owners will
    continue to pay mortgages even with negative equity, international experience shows that
    developers will walk when markets turn down, leaving banks, and often governments, to
    pick up the pieces.
    Diversification for lenders is difficult, moreover: when one developer
    goes bust they typically all go bust.
    While lending to builders, at €25 billion, is a good deal smaller than the €75 billion lent to
    real estate speculators, many of the loans appear to be in difficulty already.

    During the property boom of the last decade, a mutually profitable symbiosis emerged
    between banks and builders. Banks would provide lines of credit at a generous markup
    over wholesale interest rates for builders to buy and develop sites, and builders would pay
    off the loans once they sold the new property, which they were often able to do before a
    single brick had been laid.
    The arrangement between banks and builders was fine so long as sales of new houses did
    not slow, leaving builders unable to repay loans. Since the start of this year sales of new
    houses have not slowed, they have entirely collapsed.

    A Dublin estate agent told me that whereas last year they sold over 3,000 new units, this
    year they have sold fewer than 100. They are about to try to launch one of their new
    developments for the third time, the first two launches having netted exactly no buyers.
    While the market for secondhand houses still limps along, people have stopped buying new
    houses because they are afraid that developers will subsequently slash prices and leave
    them with negative equity. They are right to be afraid. My contact told me of one heavily
    marketed development where they have taken deposits on €750,000 apartments and are
    now anxious to get the buyers to sign contracts so they can cut the prices of the many
    remaining units to €600,000.

    It is ironic that the government’s decision to abolish stamp duty for first time buyers has
    allowed them to escape entirely from the new housing market. What was intended as a dig
    out for the building industry may turn out to be one of the last nails in its coffin.
    Given that nobody wants new houses, it is natural to ask who is going to buy the 80,000 or
    so units that will be completed this year, and the 60,000 that are on stream for next. The
    answer, although they may not know it yet, is the shareholders of Bank of Ireland, Anglo-
    Irish and other builder-friendly banks.

    While we can see banks starting to make a show of turning up the heat on smaller
    developers, they have lent too much to large builders to allow them to fail. It is one thing to
    chop a developer in Kilkenny off at the ankles if he owes you €16 million; it is quite
    another to admit that a developer in South Dublin owes you €160 million, let alone to force
    him into bankruptcy. Were any one of the several Dublin developers who are reputedly
    unable to service any of their large borrowing to be driven into bankruptcy the ripple effect
    on Dublin house prices and the value of other loans would be unpleasant.
    Along with the many loans to builders that are already in the non-performing category, the
    exposure to commercial real estate poses a grave threat to bank solvency, because of the
    large sums involved and the highly leveraged nature of the borrowing.
    Commercial real estate borrowing during booms follows the same pattern everywhere. You
    put up 20 per cent of the price of an office block or warehouse and borrow the rest. As
    prices rise, you use the equity gained in the first property as collateral for an 80 per cent
    loan on a second property, and so on as long as prices keep rising.
    In Dublin the 5 per cent rental yield allowed banks to charge a 5 per cent interest on
    commercial real estate loans so investors could use rental income to cover interest
    payments while they sat back and enjoyed double digit capital gains.

    With lending rates based on 5 year Euro swaps now risen to over 6.5 per cent and rental
    yields fallen to 4 per cent, new investors cannot cover interest from rent and are entirely
    reliant on capital gains from rising prices. With commercial property prices slowing rapidly
    and loans taken out a few years ago needing to be rolled over, there is a strong risk of a
    sudden exodus from the market, and a collapse in prices. Because real estate loans are
    collateralized mostly by equity in other leveraged real estate, they can rapidly become
    almost worthless.

    US experience shows that commercial property markets usually follow residential markets
    downwards with a lag of twelve to eighteen months, and the Japanese market shows how
    commercial real estate can fall in value by 80 per cent within a few years.
    The large exposure of Irish banks to property speculators does not mean of course that
    large losses are inevitable.

    What it does mean is that, if a crash occurs, or even if already
    nervous overseas bond markets cut off liquidity to Irish banks (foreign banks have over
    €400 billion on deposit with Irish banks, and hold another €200 billion of bonds), it will be
    very costly to fix, dwarfing the bailout of AIB in the 1980s
    .

    A partial bailout of Japanese banks cost their government 10% of national income, while
    re-floating Finnish banks cost its government nearly 15 per cent of national income.


    In Irish terms this would translate into a bill for taxpayers of €15 to €20 billion.


    Bankers are well known for getting carried away during bubbles which is why
    governments appoint central banks to keep an eye on them. You probably think that the
    fact that Irish banks have given speculators €100 billion to gamble with, safe in the
    knowledge that taxpayers will cover most losses, is a cause of concern to the Irish Central
    Bank, but you would be quite wrong
    .
    At a recent Irish Economic Association discussion of house prices, the Central Bank
    official in charge of financial regulation (whose publications with the ultra-libertarian Cato
    Institute strongly oppose any form of bank regulation: a real case of an atheist being
    appointed an archbishop) stopped the proceedings to announce that the view of the Bank
    was that, as long as international markets were happy to buy debt issued by Irish banks,
    there could be no problem with their lending policies.

    We can only hope that this insane logic is correct, and that the refusal on ideological
    principle of bank regulators to regulate banks does not lead to the same debacle here that
    occurred with Savings and Loan Institutions in Reagan-era America.


«13

Comments

  • Registered Users Posts: 14,952 ✭✭✭✭Kintarō Hattori


    I'm Joe Soap, I don't have a mortage, but I do have a bank account, what does it mean for me? I'm the lowest common denominator here, I don't understand for that means for us folk! Sorry!




  • Just keep your eye on the ball, the banks have overstretched themselves way too far now. Possible Northern Rock situations ahead.

    If the builders and developers dont shift the houses that they borrowed the money to build the banks lose their money. The banks are so overstretched they are at risk of going bust. The people at the bottom are the people who will end up paying in that situation.

    Take the time please to read the paper carefully if you do not understand it.


  • Closed Accounts Posts: 346 ✭✭A Random Walk


    It's the old saying that if you owe the bank 100,000 and can't pay you're in trouble, if you owe the bank 100 million and can't pay they're in trouble.


  • Registered Users Posts: 5,563 ✭✭✭connundrum


    This isn't really news tbh, where does everyone think that the developers got the start up moneh?

    This is what happens when you make lending money as easy as it has been.




  • Actually it is news BIG news. The property crash will not affect just those who will go into negative equity but those who have NO mortgages, people with money in the bank.

    Just look at the figures in that paper! They are in a very precarious position. Unless the property market picks up again then the banks here are in serious trouble. And people with money in the banks may lose out big time!


    Who thinks we will have a northern rock style bank run here in the next 12 months?


  • Advertisement
  • Moderators, Entertainment Moderators Posts: 12,909 Mod ✭✭✭✭iguana


    What are the Irish protections on savings? Is it similar to the UK amount?

    Eta; Power of google. It appears to be 90% of the first €22,222k.

    Is that per person or per account? If you have several accounts with different banks and they all go under are you covered for each account or is it a personal maximum?


  • Closed Accounts Posts: 13,992 ✭✭✭✭gurramok


    Is per person, yes you are covered per bank

    Exception is that Ulster bank and First Active are part of same group hence don't have more than €11k in each bank.

    Irish protections are among the worst in europe, the run on Northern Rock was justified at the time as there were genuine fears as only first stg2k was covered and 90% of next stg30k(around this total) so the British scheme offers more protection than the Irish one and even more so recently with new legislation by UK parliament as it guaranteed the first stg35k, more than double the Irish one.

    Dutch(Rabo) is first €20k guaranteed plus 90% of next €20k. Danish(NIB) is first 40.2k euro(300,000 kroner) guaranteed.

    All explained here http://www.itsyourmoney.ie/index.jsp?1nID=93&2nID=96&3nID=145&nID=385

    And YES, the story is big news, we just don't know how exposed the Irish banks really are to big loans to residential/commercial developers, its certianly in order of billions, 100billion euro was floated around somewhere else as well.

    We'll know more over time as the credit crunch and severe housing\commerical affects Irish banks.

    If you trust the Irish banks to guarantee that milion euro you have in a deposit account, fair play to you for having balls :D


  • Closed Accounts Posts: 27 infinity&beyond


    Sorry guys but that UCD paper is so sensationalist that it's worthless. This professor is trying to make a name for himself and I feel I've got to make something of a stand. I don't work for a bank but my job involves analysing banks. And I have no axe to grind either way!

    OK, so basically this is how a typical bank works. It starts with say 100 of capital / equity. It gathers customer deposits through its branches, pays depositors interest, and then loans out that money to borrowers at a higher rate than it pays depositors. When the bank sees more lending opportunities than it has customer deposits, it borrows more money from other banks. Typically a bank will have around 20 times as much loans plus some other assets than it does equity, so in this case 2,000. This ratio is not set in stone (it depends on what type and how risky the lending is) but is monitored closely by the national financial regulator, who implements globally agreed upon limits.

    Now the reason for the bank's equity is to protect the above depositors in the event of borrowers not being able to pay their loans back. In the above example, if more than 5% of the bank's assets are totally wiped out then this has implications for depositors. This mightn't sound that much, but that would be a helluva scenario to envisage. From memory (I stand to be corrected!) in the UK in the early 90s (unemployment and interest rates well above 10%) the worst it got to was around 1% of loans written off.

    Now in case you hadn't noticed, Ireland has gone through a major build out in the last decade and more. This is mainly due to the unique (in the world) demographics in this country, where there was a bulge in the number of people in the household formation ages. Added to that there has been a big increase in migrant workers, who need to be housed. So why shouldn't we expect to see a larger share of developer loans on bank balance sheets? I mean, it's kind of obvious. I'm certainly no expert on Japan, but their demographics are awful, so definitely no obvious reason for a big residential build out in the 1980s. [Actually I would say most of the developer exposure there was speculative office construction, so when corporate profitability in Japan collapsed these buildings were never going to be sold, so loans were not going to be repaid].

    Just to be clear, I'm not saying that house prices aren't falling or that developers won't get into trouble (some of them already are). But Irish banks have a sizable exposure to mortgages (VERY safe....again in the UK early 90s situation, mortgage loans written off were less than 0.2% of total). And lending to developers is not a total dead duck - the bank has the land as collateral, and the developer will have to put some money up front himself. So if the bank sells the land for say (I'm guessing) 80% of its appraised value, they'll probably get most of their cash back.

    Finally, just in case we all jump off a cliff in a state of depression, the Irish consumer is extremely robust right now. At least for now the residential construction problems look fairly contained, and slack is being taken up by infrastructure construction. Irish unemployment remains low, wage growth is strong and interest rates are low by historic standards. Yes, their will be casualties, but life will go on for the banks. That's their business model -- they write loans knowing that some of them will go bad.

    So all you depositors out there, you're a long way from needing to worry. Of course you can never say never....

    Just to clarify what went wrong at Northern Rock recently, it was not due to Northern Rock's loans going bad. In fact their loan book (90% mortgages) was top quality. Their issue for them was that they don't have much of a branch network, and had lots of mortgage lending opportunities. So they borrowed money from other banks and investors. Nothing wrong with that, except that the "duration" of their borrowing was short (they had to ask their a large number of their lenders for money every 90 days), yet they were giving their customers money for a 30 year mortgage. For years this strategy worked just fine, as there was no shortage of funds available. Then the US subprime mortgage problems emerged and banks globally were less willing to lend to other banks. Northern Rock was unable to roll the funding they had got 90 days previously, so they had to ask the Bank of England to bridge the gap. This got into the press, depositors got nervous and started to withdraw money.

    The Irish banks appear to be prudently funded, with a much better duration match between their funding and their customer loans. In fact they don't need to look for funding for the rest of the year.

    Hope this helps / clears up a few things. But I expect I'll be attacked by the end of the world-ers for my comments.


  • Closed Accounts Posts: 13,992 ✭✭✭✭gurramok


    No offence infinity&beyond, you sound like a certain Austin in what you just wrote:D
    Ah yes, professors in actual economics who lecture our future economic students in top universities don't know a thing while bank paid economists do?..ROFL

    No need to label anyone that disagrees with you as a 'end of the world-er', that just ruined any reputation your analysis had.

    Have you read the housing bubble thread at all???

    You had forgotten to mention that land values go down as well as actually build values of a residential\commercial dwelling, 80% is extremely generous considering there is a land value bubble as well, there goes that scenario of banks using land value to get their money back!

    The analogy with Japan on population don't hold sway, they have high densities, we don't. They went through what we're going through, victims of property speculation, their people ended up not affording houses.(sounds familiar) and their banks went bust due to dodgy loans.
    Demographics for the present and past house buying generation are fine there, its the next generation is where it plummets, irrelevalent to what happened there in the past.

    LOL at the demographics here, without sounding like a broken record, migrant workers bar a few Asians in thehealth service don't buy houses here, they send their money home. Some landlords got lucky in the BTL brigade but now as the downturn accelerates, migration will halt(as forecasted by numerous agencies) next year with some leaving, there goes the rental sector.

    "Residential construction problems look fairly contained, and slack is being taken up by infrastructure construction"...so all those brickie, carpenters, electricians, plasterers, builders, interior designers are going to build non-labour intensive roads and a few schools now? :D

    Depositors are not safe putting their money with an Irish bank, we are only guaranteed 22k back in event of bank failure(see other thread) nevermind their huge mortgage loan exposure to housing/commercial loans.
    And it will be better if we know who was exposed and who are not to restore confidence in the banking system here.

    To sum up, Ireland is NOT different, your post in misleading on the Irish parts, no offence by that.


  • Moderators, Entertainment Moderators Posts: 12,909 Mod ✭✭✭✭iguana


    gurramok wrote:

    Thanks for that. I'm trying to get my parents to move their savings but they've been with their credit union so long I think they feel disloyal about moving. Even if the banks weren't in potential trouble their annual dividend is pretty crappy anyway.


  • Advertisement
  • Closed Accounts Posts: 13,992 ✭✭✭✭gurramok


    iguana wrote:
    Thanks for that. I'm trying to get my parents to move their savings but they've been with their credit union so long I think they feel disloyal about moving. Even if the banks weren't in potential trouble their annual dividend is pretty crappy anyway.

    If a C.U. goes bust, you money ain't guaranteed. The C.U.'s themselves do have a rescue fund for fellow CU's, but that fund is dependent on how big it can rescue a collapse, in other words, it can only help small CU's.


  • Closed Accounts Posts: 619 ✭✭✭Afuera


    Anyone know if it's true that An Post savings accounts are 100% guaranteed by the State?


  • Moderators, Entertainment Moderators Posts: 12,909 Mod ✭✭✭✭iguana


    gurramok wrote:
    If a C.U. goes bust, you money ain't guaranteed. The C.U.'s themselves do have a rescue fund for fellow CU's, but that fund is dependent on how big it can rescue a collapse, in other words, it can only help small CU's.

    Hasn't the Credit Union Savings Protection Bill come into force this year? Besides that my parents credit union banks with Ulster Bank. So the credit union could be doing fine but if Ulster Bank had a problem the credit union could lose their profits, which would be the end of their savings.


  • Registered Users Posts: 98 ✭✭Western_sean


    Afuera wrote:
    Anyone know if it's true that An Post savings accounts are 100% guaranteed by the State?

    Savings Certs and Saving Bonds are state guaranteed savings accounts via the new an post / fortis setup would be subject to the 90% of the first 22k approx I think.


  • Registered Users Posts: 22,130 ✭✭✭✭Akrasia


    eo980 wrote:
    I'm Joe Soap, I don't have a mortage, but I do have a bank account, what does it mean for me? I'm the lowest common denominator here, I don't understand for that means for us folk! Sorry!
    If I were you and worried about the integrity of my savings I would put my savings into gold. There are online gold services like e-gold.com

    Basically, you wire a broker (like the london gold exchange) whatever amount of cash you want to exchange, they deposit e-gold into your online secure account. Then you have the choice of leaving your money as liquid electronic gold which can be exchanged into any currency or any bank account with minimum notuce (as fast as the banks can process IBANs), or of getting a delivery of the actual gold so you can hold onto it yourself. (minimum of one bar of gold worth approx $20,000)

    Keeping your savings in this format has a number of advantages.
    1. the value of Gold will rise the less certainty there is in the FIAT currencies. So this is an investment opportunity at present.
    2. Gold is universally accepted everywhere as a method of payment.
    3. E-gold is 100% backed up with real gold bullion, so, saving the greatest bank robbery in the history of the world, your savings are 100% secure)


  • Registered Users Posts: 1,852 ✭✭✭Glenbhoy


    iguana wrote:
    Hasn't the Credit Union Savings Protection Bill come into force this year? Besides that my parents credit union banks with Ulster Bank. So the credit union could be doing fine but if Ulster Bank had a problem the credit union could lose their profits, which would be the end of their savings.
    Ulster bank are the highest rated irish bank, if ulster bank have a problem, we're all fcuked!!

    Infinity and beyond, I agree that the report is basically a wee bit sensationalist, but that doesn't mean there's not some sense in it. What you seem to be neglecting is that whilst the irish consumer may be pretty robust, much of that consumer robustness is financed by those same bank mortgages that you deem so secure.

    If, as you acknowledge, house prices are dropping, how can a 100% mortgage advanced in the past 24 months be deemed secure?




  • Not sure if he is being sensationalist maybe it comes across that way because............
    Effectively, the Irish banking system has taken all its shareholders' equity, with a
    substantial chunk of its depositors' cash on top, and handed it over to builders and property
    speculators.

    ...........thats pretty sensational itself!!!

    Do whatever ye want boys and girls! But no property developer will be retiring in the sun WITH MY GODDAMN MONEY.

    If you want to ignore the facts then you can pay for their retirements!


  • Registered Users Posts: 631 ✭✭✭conor_mc


    Not sure if he is being sensationalist maybe it comes across that way because............

    Surely it should read.....
    Effectively, the Irish banking system has taken the equivalent of all its shareholders' equity, with a substantial chunk of its depositors' cash on top, and handed it over to builders and property speculators.

    ..... since alot of this money has actually come from German pension funds and the like?


  • Closed Accounts Posts: 2,075 ✭✭✭BendiBus


    gurramok wrote:
    Danish(NIB) is first 40.2k euro(300,000 kroner) guaranteed.

    NIB is regulated by the Irish Regulator so it's the Irish Deposit Proection Scheme that applies to them isn't it?




  • Yeah and what happens when the banks go under then!


  • Advertisement
  • Registered Users Posts: 5,563 ✭✭✭connundrum


    Yeah and what happens when the banks go under then!

    The central bank kicks in a la Northern Rock.


  • Closed Accounts Posts: 13,992 ✭✭✭✭gurramok


    BendiBus wrote:
    NIB is regulated by the Irish Regulator so it's the Irish Deposit Proection Scheme that applies to them isn't it?

    Don't think so, it don't say specifically on their site what protection is offered, from here from http://www.nationalirishbank.ie/disclaimer & http://www.nationalirishbank.ie/personal

    'Danske Bank A/S trades in Ireland as National Irish Bank and NIB.'
    'Danske Bank A/S, acting through its Irish branch, trades as National Irish Bank and NIB. Registered branch in Ireland Company No. 905623 with office at: 3rd Floor, International House, 3 Harbourmaster Place, IFSC, Dublin 1.

    Danske Bank A/S is authorised by The Danish FSA, and is regulated by the Financial Regulator for business in Ireland. '

    In translation, it seems to be covered by the Danish FSA if they go belly-up but regulated by Irish regulator.

    Now Rabo and NR have smilar operations and wordings outlining protection for savers unlike NIB.

    There is no other Danish bank dealing with the public here and as to why the consumer website lists English/Dutch/Danish FSA's, one can conclude it is the Danish FSA that NIB is covered under especially when they link it to the Danish FSA website.

    Can someone with NIB verify this 100% if they are a customer?


  • Registered Users Posts: 22,130 ✭✭✭✭Akrasia


    connundrum wrote:
    The central bank kicks in a la Northern Rock.
    We don't have a central bank.

    Do you think the ECB will put the whole european currency at risk just to save Ireland?

    I wonder legally would the Irish exchequer be allowed to bail Irish banks out (competition rules and all that)


  • Closed Accounts Posts: 14,483 ✭✭✭✭daveirl


    This post has been deleted.




  • Akrasia wrote:
    We don't have a central bank.

    Do you think the ECB will put the whole european currency at risk just to save Ireland?

    I wonder legally would the Irish exchequer be allowed to bail Irish banks out (competition rules and all that)

    We pay for this one way or another.


  • Registered Users Posts: 17,825 ✭✭✭✭silverharp


    Akrasia wrote:
    We don't have a central bank.

    Do you think the ECB will put the whole european currency at risk just to save Ireland?

    I wonder legally would the Irish exchequer be allowed to bail Irish banks out (competition rules and all that)

    See what happens is Spain, should be a good test case for how the ECB may act

    A belief in gender identity involves a level of faith as there is nothing tangible to prove its existence which, as something divorced from the physical body, is similar to the idea of a soul. - Colette Colfer



  • Registered Users Posts: 4,748 ✭✭✭Do-more


    As we have seen from Northern Rock the biggest danger of a run on the banks comes from a public perception of a problem existing, rather than the need for that problem to actually exist.

    It really only takes the media to hop on this story to spark widespread hysteria, with every little old dear in the country down at her local bank looking for her life savings in a paper bag, large notes please!

    And in the same way as happened with Northern Rock people will be advised that the safest option is to withdraw their funds if they feel there is a problem.

    Cue Matt Cooper! ((I'm surprised he hasn't mentioned the paper already!) probably researching the story as we type!)

    invest4deepvalue.com



  • Registered Users Posts: 4,748 ✭✭✭Do-more


    Has anyone seen/heard this report mentioned in the media?

    With all the coverage of the Micheal Lynn affair I'm surprised that it hasn't been quoted....

    invest4deepvalue.com





  • Does anyone want to hazard guess on a time limit for when we see a bank run here?


  • Advertisement
  • Closed Accounts Posts: 556 ✭✭✭OTK


    Alice Easy Climber, why not put your money where your mouth is and short some Irish banks' stock or else take out a spread bet on them to fall? Then let us know how you get on.


Advertisement