Statement on Anglo Irish Bank restructuring capital costs  

Statement 30 September 2010

Following the proposal of the Government, which remains subject to EC approval, not to expand the Bank’s loan book and to split Anglo Irish Bank into a Funding Bank and an Asset Recovery Bank, the Central Bank has assessed the capital requirements and potential base and stress losses that could be incurred under the restructuring plan.

This statement presents an estimate of the total required to capitalise the two banks under a base scenario, to meet minimum capital requirements taking account of expected losses through the cycle. It also provides a calculation of the scale of additional loan losses that might arise under certain stress scenarios. The review of the financial projections for the new business model has been conducted in co-operation with the National Treasury Management Agency and is based on information from Anglo management and third party analysis commissioned by the public authorities and Anglo management.  

Base case estimates

The Central Bank has assessed the injection of capital required to meet minimum regulatory capital requirements under a base, or central, scenario taking account of expected losses through the cycle.

Capital requirements

In light of the particular nature of the Asset Recovery Bank, the Central Bank will not impose PCAR or CEBS stress regulatory capital requirements on this entity.  The Central Bank has determined that current Basel 2 minimum capital requirements, being 8% of Risk Weighted Assets, will apply immediately following implementation of the restructuring.

The Funding Bank will continue to accept deposits as a regulated bank.  Accordingly, the Central Bank has determined that in principle the PCAR capital requirement should apply.  The capital in Funding Bank will be influenced by the evolution of the funding markets and any expectations for a credit rating separate to that implied by State ownership.

The plan includes a capital amount of €250 million in order to meet the market risk and operational risk charges arising on its asset portfolio.  The capital base of the funding bank will be kept under review, but due to the risk profile and structure of the bank any increase would not expose the State to further losses.

NAMA losses

A principal driver of the projected capital costs for Anglo is the NAMA ‘haircut’ applied to property and development loans that transfer from Anglo to NAMA.  The process of transferring the remaining Anglo property and development portfolio is being accelerated.  Some €16 billion of a projected €35 billion in NAMA loans have transferred across to NAMA to date (in tranches 1 and 2).  The average haircut on these first two tranches was 58%.  Relying on advice from NAMA, the base case scenario capital cost projections use a haircut of 67% for the remaining tranches to transfer to NAMA. 

Non-NAMA losses

Assumed loss rates on the non-NAMA book have been calculated at the higher of  CEBS base case loss rates, Anglo loss estimates and the base case loss rates estimated by an independent third party, subject to review by the Central Bank.

The estimates

The base case capital requirement for the Asset Recovery Bank is € 29 billion.

The base case capital requirement for the Funding Bank is €250 million.

Note that €23 billion has already been injected by the Government into Anglo in 2009 and up to end-August 2010.

Stress cases

The Central Bank has also carried out an assessment of the additional losses that could be incurred by the Asset Recovery Bank under a severe hypothetical stress scenario.  The exact level of losses in a stress scenario will depend on economic circumstances, future funding costs and the effectiveness of management in realising value from the remaining portfolio over time.

The NAMA loan evaluation process has been accelerated and the 67% haircut used for the base calculation has been provided by NAMA to the Central Bank. It is based on a review of information provided by Anglo carried out by NAMA based on discounts applied to similar assets by type and geography. When final transfer occurs a reconciliation will be made which may result in a further payment to or from Anglo. NAMA has advised the Central Bank that this reconciliation is likely to be in a range of  +/ - 3%.  As a result, the stress calculation assumes a hypothetical 70% haircut on the remaining portfolio to be transferred.

The stress scenario is also sensitive to funding costs and therefore assumes elevated on-going funding costs based on the mix of funding sources proposed in the restructuring plan.

The other principal driver of the stress calculation is the level of losses in the non-NAMA portfolio under a stress scenario. The Central Bank has reviewed both Anglo and third party loan loss forecasts from an individual loan, bottom-up (micro) perspective and from a portfolio segment, top-down (macro) perspective.

A key element in the stress scenario is the assumed fall in commercial property prices. For the UK and US, double dip property values were assumed for both the micro and macro scenarios. 

The micro stress scenario assumed a peak-to-trough fall of 70% in Irish commercial property prices, with prices only recovering to 57% of their peak level out to 2020.

The macro stress scenario assumed that Irish commercial property prices fall to 65% off their peak values and do not recover out to 2020.

The stress loss estimate uses the more conservative of the micro and macro calculations.

The micro analysis includes a Central Bank review of impairment and IBNR forecasts for 2010- 2012 prepared with a view to recognising the losses that may be incurred over the life of the loans. This approach does not assume the loan will be realised or worked out in the 3 year period but that the losses are recognised.

The macro analysis, prepared by a third party and reviewed by the Central Bank, applies a methodology based on the hypothetical disposal of the entire non-NAMA portfolio in the period through to 2020.  It identifies recovery values for portfolio segments by reference to loan portfolio, geographic market, property price assumptions, recovery assumptions and portfolio disposal/ run-off rates. The non-NAMA portfolio includes assets in Ireland, the UK and the US, in business banking and other segments in addition to commercial property. Excluding a core portfolio of higher quality performing loans, the loss rates for the segments of the remainder of the non-NAMA portfolio ranged from 43% to 70%.  The loan loss levels in the stress scenario used is more conservative than the stress assumptions applied by the PCAR and CEBS.

Taking into account all these stress elements, the Central Bank estimates that an additional €5 billion of losses, above the €29.3 billion[1] base estimate, are possible under a severe hypothetical stress scenario. These estimates do not include any burden sharing with subordinated debt holders.

[1] €29.3 billion figure includes the Funding Bank capital costs