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News : EU Economy Last Updated: Feb 27, 2010 - 6:07:05 AM

European Commission approves establishment of National Asset Management Agency - - the State toxic property loans relief scheme for financial institutions in Ireland
By Finfacts Team
Feb 26, 2010 - 2:29:31 PM

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The site of the former Irish Glass Bottle plant, Ringsend, Dublin (within red contours). It was purchased at the peak of the boom in 2006 for €412 million, by a consortium led by developer Bernard McNamara. In the same year, Ireland's biggest bank AIB, sold part of its Dublin headquarters, the Bank Centre, to developer Seán Dunne.

The European Commission has approved the establishment of the National Asset Management Agency (NAMA), the State toxic property loans relief scheme for financial institutions in Ireland. The Commission says it is satisfied that the scheme is in line with its guidelines on impaired asset relief for banks that allow State aid to remedy a serious disturbance in a Member State's economy. The scheme will help address the issue of asset quality in the Irish banking system and promote the return to a normally functioning financial market.

Competition Commissioner Joaquín Almunia said: "Ireland's financial sector has been one of the most affected by the global financial crisis in Europe and the burst of the Irish real estate bubble has only compounded the problems. This impaired asset measure, which is specifically targeted at real estate assets, is therefore key to cleaning up Irish banks' balance sheets. This is an important step towards the overall restructuring of the sector and its return to a normal and responsible functioning of the market."

The EC said the purpose of NAMA is to restore stability to the Irish banking system by allowing participating financial institutions to sell to the agency assets whose declining and uncertain value is preventing the long-term shoring-up of the financial institutions' capital and, therefore, the return to a normally functioning financial market.

The scheme is open to all systemically-important credit institutions established in Ireland, including subsidiaries of foreign banks, with a 60-day application window that expired on February 19, 2010. Five institutions will participate: Anglo Irish Bank, Allied Irish Bank, Bank of Ireland, Irish Nationwide Building Society and Educational Building Society.

The assets targeted by the measure are all loans issued for the purchase, exploitation or development of land and associated loans. Following the bursting of the Irish real estate bubble, these constitute the riskiest parts of the participating institutions' asset portfolios. The EC says the Irish authorities anticipate that NAMA will purchase land and development loans as well as associated commercial loans with a nominal value of approximately €80 billion for an estimated purchase price of € 54 billion.

NAMA's main objective is to manage the assets expeditiously with a view to maximising their value and recovery prospects in the interest of the State.

Today's approval concerns only the NAMA scheme. The Commission said it will assess the compatibility (and, in particular, the actual transfer price) of the transferred assets when they are separately notified by the Irish authorities. These individual reviews will include a claw back mechanism in case of excess payments.

Finally, the Commission relies on a number of commitments from the Irish authorities to ensure that NAMA, whilst it performs its goal of maximising the recovery value of the purchased assets, does not lead to distortions of competition through the use of some of the specific powers, rights and exemptions granted in the NAMA Act. The Commission will also review individual restructuring plans to ensure that the participation of the financial institutions in this measure is followed up with appropriate restructuring measures to promote the return of those institutions to long term viability.

The Minister for Finance, Brian Lenihan today said: “I welcome the decision of the European Commission to give its approval to the establishment of the National Asset Management Agency, which is an important milestone.The process of transferring the eligible loans from the ownership of the designated credit institutions to NAMA will shortly proceed with the transfer of the first tranche which had an original book value of approximately €17 billion in respect of the ten largest borrowers. NAMA has advised me that the transfer of these loans will likely occur in March. Moreover, NAMA has also advised me that the transfer process remains on target for completion by the final quarter of the year.

The consultation with the EU Commission was very constructive and involved a detailed assessment of the complex NAMA process across policy, legislation and conformity with State Aid rules. The EU approval confirms that the NAMA valuation methodology is robust, and this will assist NAMA to achieve its objective of obtaining the best achievable financial return for the State.”

The Minister said that arising from the consultation, the valuation methodology set out in the valuation regulations will be amended to take account of the Commission’s decision. Within the valuation methodology a higher remuneration risk margin and higher enforcement costs will be applied. There will however be a reduction in the interest rates used for loan discounting purposes. In overall terms the proposed valuation methodology which the Commission has endorsed is broadly as originally proposed by Government.

The Department of Finance said it is not the Minister’s intention to perform another top down aggregate estimate of the potential haircut that the institutions will face. A better picture of the types of discounts that institutions face on their loan books will emerge as the amended valuation methodology is applied by NAMA to loans on an individual basis and these loans are transferred.

NAMA will also report to the Commission on an annual basis on the use of certain powers in the NAMA legislation. This reporting arrangement is a welcome addition which will reinforce transparency, bolster public and international confidence in the process and further confirm and provide assurance that the powers of NAMA will not be used in an anti-competitive manner.

The Minister explained: “The Government has at all times made clear that NAMA’s powers will only be used to ensure that NAMA achieves its purposes and does not put non participating institutions at a disadvantage. In this regard, we reaffirm our commitment to a code of conduct relating to NAMA’s dealings with non-participating institutions. This will be included in the codes of practice that NAMA will shortly submit for approval by the Minister.”

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