Archive for January 4th, 2011

I don’t pretend to be an expert on central bank financing, though I have touched on the subject academically at least twice in my lifetime (for a great basic overview of the subject I’d recommend you consult UCD Professor Karl Whelan’s selected lecture notes here) So the following will no doubt be deficient in some respects but I believe the central principles to be sound and that the information used is accurate overall.

Ireland is suffering from a decline in bank deposits. In recent weeks the portentous term “bank run” has returned (eg here and here) with a vengeance though we seem to have accepted the more benign sounding term “deposit flight” for a few months. Declines in deposits can simply reflect the usual ebb and flow of movement in funds or they can be triggered by specific events. And we have had a few specific events in the past few months – more severe NAMA haircuts causing bigger holes in banks’ balance sheets, the expiry of the original blanket guarantee and its replacement with a new guarantee, generally poor or anaemic economic outlook predictions and of course the arrival of the EU and IMF financial-recovery wallahs and the subsequent bailout. But with the  acceptance of the IMF/EU deal in our Dail which makes up to €35bn available to our banks (and it’s not needed claim the Central Bank of Ireland (CBI) Governor and our Minister for Finance – it’s simply additional firepower to bolster confidence) wouldn’t you think that the decline in deposits would reverse and indeed might attract a stampede of funds to Irish banks which have such massive capital firepower supporting them? Having undertaken the NAMA exercise on our banks’ land and development loans and additionally, shoveled massive amounts of State funding into them, shouldn’t Irish banks be more secure than counterparts in say, the UK or Germany? And as some helpful recent exchanges with our German friends have shown, deposit rates on offer in euro accounts in Germany are practically one half of those available here (these are two German banking comparison websites here and here). So why is no-one predicting deposits at Irish banks to have increased in December 2010 (eg here and here) and if they had increased then wouldn’t you have expected the Central Bank Governor, Minister for Finance or Irish banks to be shouting about them from the rooftops?

What we know –
(a) The ECB has provided €138.2bn of Emergency Liquidity Assistance to the Irish banking system to the end of November, 2010 of which €97.3bn was to the domestic Irish banking system (list of banks at bottom). The ELA is confirmed in the note at the bottom of page 4 of the latest CBI monthly report. Lending from the ECB is up from €80bn in April 2010 and at €138.2bn at the end of November, considerably higher than the previous era all-time high of €118.3bn in March 2009 when the Irish banking system was teetering following the nationalization of Anglo and the exposed €7bn liquidity holes in AIB and Bank of Ireland.
(b) The Central Bank of Ireland has additionally provided liquidity assistance of €44.674bn to domestic Irish banks to the end of November, 2010 up from €13.474bn at the start of 2010 and increasing by €30bn-odd in the three months ending November 2010.
(c) Some €70bn of deposits fled Irish domestic banks (the six State-guaranteed and some 14 others that provide domestic banking facilities) in the 11 months to the end of November, 2010.
(d) The six State-guaranteed banks had €198bn of customer deposits as at their last reporting dates (June 2010 save for INBS which was in December 2009). ECB funding has increased from €87.3bn to €138.2bn since June 2010. If all of this was to replace deposits in the six State guaranteed banks, that would still leave a potential requirement of €150bn from the ECB/CBI should deposits flee in their entirety.

What we don’t know –
(a) The up to date deposit position for the six State-guaranteed banks. The latest reporting which is a year old in the case of INBS (six months for the other five) is that these six banks had €198bn in customer deposits. Reporting for the six State-guaranteed banks is masked by reporting by the CBI and the Bank for International Settlements which either lump the six banks in with 14-odd other banks serving the Irish economy or with all banks including those which solely operate in the IFSC. Related areas of ignorance include the degree of assistance provided by the ECB to the six State-guaranteed banks (as opposed to the 20-odd domestic Irish banks) and deposit movement for those six State-guaranteed banks (a concern being that the €70bn deposit flight in the 11 months to November 2010 is intra-country, we don’t know if there have been substantial movements between the six State-guaranteed banks and the other Irish domestic banks).
(b) The practical ceiling of support that can be provided by the ECB and CBI. You would expect the ECB to be able to fulfill its role as lender of last resort to what should be a marginal member of the 17-country currency grouping. But Ireland’s domestic banking system ballooned during the boom and the ECB must surely be concerned about the quality of assets on banks’ balance sheets – our NAMA revealed significant unprovisioned losses in €70bn of loans but what about the provisioning on the remaining €250bn+ of commercial property, business lending, personal lending and residential mortgages? Would the ECB be prepared to pump an additional €150bn of funding into Irish banks to shore up fleeing deposits?

What we can suspect
(a) Although I think High Court judge, Ms Justice Maureen Clark deserves criticism for her decision to exclude journalists and others from the clandestine AIB hearing on 23rd December, 2010 and to disallow any appeal against that decision, it is likely to be the case that matters of serious importance to AIB not hitherto in the public domain were at issue. And the only issues I can think of that might be so important are insolvency (new loan losses or derivative exposures for example) or illiquidity (deposit flight). I would have said that loan losses could generally be drip-fed onto the balance sheet but derivative exposures could certainly be an issue, despite government mouthpiece John Curran’s “understanding”. But I would have said that a bank run was more likely.
(b) Despite the assurances that the €35bn of bailout funding earmarked for the banking sector won’t be needed and is merely firepower, there has not been a stampede to transfer deposits to Irish banks. C’mon, on the face of it our banking system is better capitalized and has access to more funding than gilt edged German banks. We have a State-backed guarantee of €100,000 or limitless compared with Switzerland’s €15,000. My suspicion is that decision- makers behind major deposits tend to believe the words of Anglo’s CFO and chairman that the €35bn will in fact be needed to cover losses rather than merely being auxiliary firepower.
(c)  The decision of Nationwide UK (not to be confused with our own zombie Irish Nationwide Building Society) to open its first deposit-taking High Street branch in the State in November 2010 might conceivably be driven by the belief that retail depositors are looking for perceived safer havens for their deposits.
(d) That the ECB has called a slowing halt to its funding of Irish banks, evidenced by the startling increase in funding from the CBI in the last three months to the end of November 2010. Are the assets on offer by Irish banks (loans principally you would expect) not of sufficient quality to pledge in exchange for ECB funding?

What’s the prognosis?
(a) We should find out from the CBI in the next week how deposits have performed in December, 2010.
(b) We should find out in quarter one the results of the bottom-up and top-down review of non-NAMA loans and off balancesheet exposures required by the IMF as a condition of providing the bailout
(c) We will find out in the next month if the ECB is continuing to expand its Emergency Liquidity Assistance.

When will matters come to a head?
Anytime – since we don’t have up to date deposit data or ECB/CBI assistance data nor do we know the practical limit to ECB and CBI assistance. We can hope that the flight of deposits decelerates or even reverses, in which case the crisis will be averted.

What happens if the ECB/CBI stop funding the banks and deposits continue to flee?
I have no idea but it is possible that there would be controls over the amount you can withdraw or freezing term deposit accounts, but this is all uncharted territory. It is worth pointing out that Irish State has extensive guarantees in place for deposits and you can see details here. And the purpose of this entry was to explore the issue of deposit flight without scare-mongering but at the same time acknowledging the facts.

Irish domestic banks are specified by the Central Bank of Ireland as


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At NAMA’s appearance before the Committee of Public Accounts in November, 2010 the agency confirmed that its core annual operating costs “including rent for the floor and all other overheads” were in the region of €25m and that “probably” 70% of this total represented salary costs. Translating this into hard numbers would mean that less than 100 people cost the agency €17.5m. This headcount will include the NAMA CEO who is reportedly paid €500,000 and presumably the higher salaries of the senior appointments to NAMA in 2010. Subsequent information provided to the Committee showed that the National Treasury Management Agency, the umbrella agency which includes NAMA (and four other state agencies) had confirmed some salary scales (presumably at November 2010) as follows:
– 202 NTMA staff earn up to €100,000.
– 65 earn between €100,001 and €150,000.
– 22 earn between €150,001 and €200,000.
– 16 earn more than €200,000

News today from Laura Noonan at the Independent citing unnamed “sources” (New Year, same old method of operation) that NAMA is set to increase its headcount by 50 in the next four months. The reason? Apparently to cope with the volume of work now that NAMA is taking over all €0-5m exposures at AIB and Bank of Ireland. For those of you now following this closely, below is a summary of the history of NAMA’s self-determined exposure thresholds:

So if the 50 new recruits cost NAMA an average of €175,000 per annum that will push NAMA’s costs up from €25m to €33.75m. Presumably the 50 will need to be accommodated and provided with all the services currently provided to NAMA staff and if that is pro-rata in line with existing staff then the core costs will go to €37.5m per annum. These costs appear to exclude the costs of service providers such as third party lawyers and valuers.

The Independent reports that the 50 staff will occupy “specialist roles such as portfolio management and credit control”. NAMA of course will  be directly managing 175 of the 1,500 ++ developers with outstanding loans at par value of €50bn. In addition there will be staff at the five Participating Institutions managing smaller scale developers and Capita is providing “master loan provider” services in respect of these smaller exposures.

150 staff still looks remarkably little for the direct management of €50bn of assets at par value and overall management for the remaining €40bn micro-managed by the banks. And the view from here is that NAMA will need increase its staff further still if it is to avoid delays and potentially disastrous decisions that might see assets disposed of below value.

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