One of the main reasons that banks do not want to write-off home-loans is because it will reduce their “book value”. If the banks reduce their book value too much, then they are technically insolvent. If they are technically insolvent, then they cannot do normal business (such as making new loans), or else the government must “recapitalize” (I.e. give money to) the banks.
Yes, it’s true that the banks have already given big write-offs to various parties. But in most cases, the banks have no choice: they must give write-offs because the party is a corporation (or other kind of fyrirtaeki), cannot pay, and will declare bankruptcy (or change kennitala) if no write-off is given. If the corporation declares bankruptcy, the banks get nothing, obviously. So the banks must give write-offs to corporations.
Individuals who can’t pay their mortgages do not have the option of declaring bankruptcy (i.e. permanent debt forgiveness), changing kennitala, or giving the house back to the bank and walking away with no debt.
Since the homeowner cannot escape the mortgage debt, the bank has no need to write-off any home mortgages.
This is one of the main advantages of the Zingales plan. It allows the banks to both give write-downs and to stay technically solvent, without receiving new recapitalisation money from the government.
We can argue over whether the banks will ever receive their future profits. For instance, if a home-loan is reduced 25%, from 200m to 150m, will the house ever sell for more than 150? But what is important is that the banks have an asset on their books with a fixed-value (at least 50 in this example).
Similar debt reduction plans are simpler and easier to understand and implement – just give a 20-25% reduction, with a 7m limit. Or something like that. The problem with such a plan is that as soon as the banks give the write-down, they must take an accounting loss, and if the banks give all eligible Icelanders the write-down, then the banks are officially insolvent and need to be recapitalised by the government (i.e. the taxpayers).
It may seem strange that it necessary to invent this indirect method of trading future profits for present money, just to satisfy some accounting rules. But these accounting rules matter. If a bank is technically insolvent, then creditors can sue the bank and force it into official bankruptcy. Gylfi M knows this and that’s probably why he doesn’t want the banks to give write-offs of the loan-principal and will only give temporary reductions and only on the interest.
I hope Vilhjalm doesn’t mind if I attract attention to his comment from Eyjan.is;
One of the main reasons that banks do not want to write-off home-loans is because it will reduce their “book value”. If the banks reduce their book value too much, then they are technically insolvent. If they are technically insolvent, then they cannot do normal business (such as making new loans), or else the government must “recapitalize” (I.e. give money to) the banks.
Yes, it’s true that the banks have already given big write-offs to various parties. But in most cases, the banks have no choice: they must give write-offs because the party is a corporation (or other kind of fyrirtaeki), cannot pay, and will declare bankruptcy (or change kennitala) if no write-off is given. If the corporation declares bankruptcy, the banks get nothing, obviously. So the banks must give write-offs to corporations.
Individuals who can’t pay their mortgages do not have the option of declaring bankruptcy (i.e. permanent debt forgiveness), changing kennitala, or giving the house back to the bank and walking away with no debt.
Since the homeowner cannot escape the mortgage debt, the bank has no need to write-off any home mortgages.
This is one of the main advantages of the Zingales plan. It allows the banks to both give write-downs and to stay technically solvent, without receiving new recapitalisation money from the government.
We can argue over whether the banks will ever receive their future profits. For instance, if a home-loan is reduced 25%, from 200m to 150m, will the house ever sell for more than 150? But what is important is that the banks have an asset on their books with a fixed-value (at least 50 in this example).
Similar debt reduction plans are simpler and easier to understand and implement – just give a 20-25% reduction, with a 7m limit. Or something like that. The problem with such a plan is that as soon as the banks give the write-down, they must take an accounting loss, and if the banks give all eligible Icelanders the write-down, then the banks are officially insolvent and need to be recapitalised by the government (i.e. the taxpayers).
It may seem strange that it necessary to invent this indirect method of trading future profits for present money, just to satisfy some accounting rules. But these accounting rules matter. If a bank is technically insolvent, then creditors can sue the bank and force it into official bankruptcy. Gylfi M knows this and that’s probably why he doesn’t want the banks to give write-offs of the loan-principal and will only give temporary reductions and only on the interest.
Related posts:
- The Icelandic Banks Question of The Day
- The Zingales Plan
- Zingales: Why The Government Does Not Offer A Debt Forgiveness
- Company vs. Individuals – An Unfair Advantage
- What Is Missing From The “Definite” Household Debt Solutions?
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