National Asset Management Agency (NAMA) - Questions and Answers

What is NAMA?

NAMA, the National Asset Management Agency is a Government agency set up to buy assets, i.e. loans, from banks. This will take the riskier loan classes away from the balance sheets of the banks and make the banks safer and more secure for depositors and investors. This is the best approach to ensure stability in our financial system and free up the banks to lend to businesses and households.

How will it work?

NAMA will buy loans from the participating banks at a significant discount. NAMA will pay the banks for these loans. It will do so on the basis of individual loan valuations carried out by experts and subject to EU Commission approval. The payment for the loans will be in the form of Government bonds. NAMA will manage these loans, either directly or indirectly, so as to obtain the best achievable return from them. In the meantime, it will collect interest due and pursue debts owed by borrowers.

Why is NAMA Necessary?

Given asset prices are depressed, owners of these assets will not sell until prices increase in an economic recovery. However the economy will not recover unless the banks are able to lend to businesses and households once again. Banks cannot access funds to lend money given the uncertainty of the value of loans on its balance sheets. This prevents prospective buyers from entering the market with the result that asset prices remain depressed. The Government must unlock this Catch-22 situation.

The replacing of property-related loans with Government bonds will remove uncertainty about the soundness of banks’ balance sheets. This will increase their capacity to access funds in the financial markets and, if necessary, from the ECB. This response will ensure the banking system’s safety, stability and capability to lend, all of which are crucial for economic recovery.

Is NAMA a Bail-out for Banks and Developers?

NAMA is not a bail-out for banks or developers. It is about getting the banks to a position where they can start lending to families and businesses once more. NAMA will buy loans from banks at a significant discount. Banks will thus suffer substantial losses on the sale of such assets to NAMA. It is not a rescue vehicle for developers or other borrowers – NAMA will expect to be repaid, in exactly the same way as a bank would.

Who has endorsed NAMA?

NAMA has been endorsed by the European Central Bank, EU Commission, International Monetary Fund, Organisation for Economic Cooperation & Development, as well as two former Fine Gael party leaders Dr Garrett FitzGerald and Alan Dukes amongst others. It is now clear that NAMA is the most effective solution to the issues confronting the banking sector and the economy.

How much will NAMA pay for Assets/Loans from Banks?

It is expected that NAMA will purchase loans with a book value of around €77 billion for approximately €54 billion. This is an estimated discount of 30%. The estimated market value of the underlying assets is €47 billion. This is based on certain assumptions and information about the property market including a fall in average property values in the State of about 50% since the peak in 2007. The current estimate of the allowance for long-term economic value is therefore €7 billion. Forcing banks to sell assets at distressed prices will not help the economy and won’t help to get our financial system back on track. It is estimated that NAMA will have to achieve an uplift of less than 10% over the current market values on its assets over ten years to break even. Let it be clearly stated – there is no assumption that peak property prices must and will be repeated in order for NAMA to succeed. Each individual loan will require a separate valuation once the Act has commenced.

Why use the Long-term Economic Value of Assets as the Basis for Valuation?

Some asset prices are artificially depressed because the banks are not in a position to lend to prospective buyers. In these circumstances, assets should be purchased at their long-term economic value, consistent with EU Commission guidelines, and not current values. That value will be determined on the basis of realistic and prudent assumptions about the recovery of asset prices over the next ten years. Every single loan will be assessed on its own merits.

What will be the Cost of NAMA to the State?

NAMA will buy the assets from the banks using government bonds. The cost of servicing this debt will be offset, as far as possible, from income coming from assets. The debt itself will be repaid through the repayment of loans from borrowers, or through the sale of the assets securing those loans. It is intended that a levy be applied if NAMA incurs any loss over its 10 year timeframe. At all times, the interests of the taxpayer will be protected. In the event that NAMA were to make a loss over the long term, which is not expected, then a surcharge would be introduced on the profits of the financial institutions.

Why don’t we nationalise all the Banks?

Nationalisation of the banking system would not of itself clean up the banks’ balance sheets. Anglo Irish Bank proves this point. NAMA is the best mechanism for repairing the banks’ balance sheets so that they can start lending again. However, the Government is prepared to take an additional, and if necessary a controlling, shareholding in the banks following the sale of assets to NAMA.

What is the risk to the taxpayer?

Firstly, the biggest risk of all is that we do nothing and our economy stagnates. Secondly, the risk associated with the price we are paying for assets is mitigated by a whole series of measures including:

• Part payment in the form of subordinated debt. This is the debt that is of lower priority than other debt. This means that this will only be paid if NAMA is making a profit.

• The level of State ownership: The State now owns 25% of Bank of Ireland and Allied Irish Bank, We own 100% of Anglo Irish Bank and the building societies are mutual societies. The State may end up owning larger stakes in the banking system. This is another form of protection, which reduces the risks of taxpayers overpaying bank shareholders for the assets, since taxpayers themselves are significant shareholders.

• Finally, there will be a surcharge on the profits of the banking system if NAMA makes a loss at the end of its existence.

The risks are balanced in the taxpayer’s favour in two ways:

• If NAMA makes a loss, then the measures above kick in to throw some of the losses back onto the bank. If NAMA makes a profit, the taxpayer gets it all.

• Subordinated debt is first in line to absorb losses. The chances of NAMA making a small profit or loss are much greater than the chances of making a large profit or loss. If a small loss is recorded (say €3 billion) then the taxpayer losses nothing because of the protection mechanisms. If a small profit is recorded, it accrues entirely to the taxpayer.

How will NAMA operate?

A more detailed business plan will be prepared by the NAMA Board once the legislation is in place. The key features of the draft business plan are as follows;

• The plan anticipates that a core team of 30 will be required on the establishment of NAMA to manage the immediate loan valuation and transfer process and that this will then rise to a core staff of about 75.

• Furthermore the plan confirms that the estimated recovery in asset prices required for NAMA to break even, taking subordinated debt into account, is 10 per cent over 10 years. This is achievable.

• The draft plan contains details on NAMA cash-flow projections, which show that NAMA, over the course of its lifetime, expects to generate a significant return for the taxpayer (€4.8 billion net present value). A separate part of the plan outlines how NAMA proposes to value and transfer loans in tranches up to the middle of next year.

What is a Special Purpose Vehicle and why is it being used?

A special purpose vehicle (SPV) will be established with capital of €100 million which will be responsible for the purchase, management and disposal of loan assets identified and valued by Nama. The objective here is to get Nama off the national accounts of Ireland so that it will not increase the general government debt ratio and neither will it directly affect our budget balance. This puts the treatment of the Irish asset protection scheme on an equal footing with bank support schemes in other member states, which are also being recorded off-balance sheet. The operations of NAMA will be treated in a similar way to the French scheme, which also uses a special purpose vehicle with majority private ownership. The NAMA representatives on the Board of the SPV will maintain a veto over all decisions of the Board that could affect the interests of NAMA or of the Irish Government.