Figures released by the Central Bank of Ireland (CBI) this morning show that in the month of December 2011, the reliance by Irish banks on central bank funding grew for the first month since June 2011. Overall central bank funding rose from €148.6bn in October 2011 to €151.4bn at the end of November 2011, a monthly increase of €2.8bn, the first increase since June 2011, and the largest monthly increase since February 2011. Central bank funding comprised funding from the ECB of €107.2bn, up from €102.9bn in October, and funding from the CBI understood to be Emergency Liquidity Assistance (ELA) of €44.2bn which is actually down from the €45.7bn in October.
What does this mean for Irish banking and the wider economy? If our banks are to return to some degree of normality, they will rely more on deposits from customers and lending from other banks. So today’s figures indicate (though don’t absolutely prove) that deposits and inter bank lending continue to decline as a proportion of overall bank funding. That’s not good.
On the other hand, funding from the ECB directly is understood to be cheaper than funding from the CBI, so today’s figures indicate that banks have access to more cheap funding at the ECB and are less reliant on more expensive CBI funding. That might ease pressure on bank interest rates very slightly.
Most of the increase in December 2011 is attributable to the ECB making nearly €500bn available right across the EuroZone for Long Term Refinancing Operations (3 year funding), and the decision by many banks to take up that funding.
We will get deposit information on Irish banks for December 2011, at the end of January. Deposit analysis for Irish banks for November 2011 is available here.
Depositors are fleeing because Ireland has become Lovecraftian nightmare for them.
– The GDP figures in December dispelled the delusion of growth led recovery in Ireland. The people of Ireland now understand–in their wallet of wallets–that more austerity and especially tax increases must now be implemented to save the state finances.
– The now confirmed certainty that there are no adults in charge of the eurozone has exacerbated this issue as people flee not only Ireland, but the euro as well.
– And the continued insolvency of the Irish banks is just the icing on the deposit flight cake.
Tax increases. Currency devaluation. Bank runs. Why would you keep your money in Ireland again?
Now, if people saw that the government was actually going to tackle these issues, things might change. But it honestly doesn’t seem like the Government is even in charge of anything anymore, so I don’t expect public policy to tackle any of these issue in the medium term. People will be doing more than shopping in Newry for a while to come.
So the 500B in additional Bank funding is now being used by European Banks to replace liquidity lost through reduuctions in deposits. Well there goes my expectation that this 500B would be used to purchase Gov Bonds and increase the lending capacity of Banks to the SME sector. Was I a little naive in my initial joy when this funding was announced?