Deposit flight continues unabated in December 2010, ECB data reveals

I see that it will be next Tuesday 1^st February, 2011 when the Central Bank of Ireland releases its data for December 2010 which will show how deposits fared since the announcement of the IMF/EU bailout at the end of November, 2010.

For those of you expecting a massive inflow of deposits in December as euro deposit holders finally found religion and became confident enough to leave their money in highly regulated, stress-tested on a ferocious scale, high interest paying Irish banks will be disappointed to see that data released by the ECB yesterday showed that deposits fell €6.8bn in December (compared with a fall of €5.9bn in November). So the rate of flight which was already at an elevated level increased. The ECB does not break its figures down between the five NAMA Participating Institutions (AIB, Anglo, BoI, EBS and INBS), the six State-guaranteed institutions (the five NAMA PIs and Irish Life and Permanent) or the 20 domestic institutions (including An Post, the credit unions and foreign banks providing domestic banking services) – we do know that it excludes the 430-odd IFSC companies (MFIs) who had an additional €459.2bn on deposit. So we don’t know if an internal flight from the six “Irish” banks to local foreign subsidiaries is ongoing as anecdotally suggested – I’d be willing to bet it was.

For information, the deposits in the 20-institution-strong domestic Irish banking system totalled €201.1bn at the end of December 2010 compared with €207.9bn at the end of November, 2010 and €213.8bn at the end of October, 2010.

Of course it is emergency assistance from the CBI and ECB which is replacing these lost deposits and we would hope to get a better picture on Tuesday next of what has happened to these but we already know CBI emergency liquidity assistance for December 2010 stood at €51.1bn, up €7bn from November. ECB short term funding is less clear though it was suggested two weeks ago that it had fallen by €4bn to €132bn at the end of December compared with the end of November 2010. It seems that there is a maximum of €201bn left in deposits in the Irish banking system. Has the ECB and CBI pockets deep enough to replace these deposits?

UPDATE: 30^th January, 2011. The Irish Examiner confirms the continuing flight of deposits from Irish banks, though to stress the point – we know the loss of deposits from the 20-odd banks that serve the domestic economy was €7bn in December 2010, but it may be that the internal loss from the six State-guaranteed banks has been much more than this (it could theoretically be less but that would be counter to anecdote). The Irish Times reports on the third phenomenon propping up Irish banks (the first two being ECB and Central Bank of Ireland emergency liquidity operations) – the State has just guaranteed the issue of €20bn of euro bonds created by Irish Life and Permanent, AIB, Bank of Ireland and EBS. I must admit that I read the Irish Times article a few times and still don’t know if this is €20bn of new guarantees or merely an exchange of guarantees on foreign currency denominated bonds to euro bonds.  Elsewhere Richard Curran at the Sunday Business Post reports on the unease towards the elevated levels of Emergency Liquidity Assistance (ELA) provided by the CBI (€51bn at the end of December 2010, up some €7bn from the end of November 2010 – will end of January 2011 show a further leap? We’ll find out on 11^th February, 2011 when the CBI publishes some of its statistics for January). Apparently a Citigroup report considers the €1.5bn capital base of the CBI to be at risk with the €51bn ELA exposure being secured by domestic bank assets which the ECB wouldn’t deem acceptable. And finally, Bloomberg report that it is Citigroup’s view that ELA should be added to gross national debt which Bloomberg put at €148bn and which excludes cash on hand at the NTMA. Let’s hope the rating agencies don’t come around to that view – otherwise with S&P’s view, for example, that our national debt should include NAMA bonds, Ireland’s gross debt including ELA would touch the €240bn mark (€148bn gross debt + €40bn NAMA debt + €51bn CBI ELA).

UPDATE: 1^st February, 2011. The Central Bank of Ireland has issued its Money and Banking Statistics report for December 2010 which confirms the continuing decline in deposits but also confirm a welcome reduction as expected in ECB special operations. The chart below shows (1) borrowings by Irish based banks from the Central Bank as part of Eurosystem monetary policy operations (2) borrowings by the 20-odd domestic financial institutions (State-guaranteed, An Post, credit unions, foreign banks which serve the domestic economy) and (3) Emergency Liquidity Assistance provided by the Central Bank of Ireland to the Irish banking system. In overall terms the increase in support from the ECB and CBI in December 2010 was minimal (€0.2bn) but that is likely to disguise the support given to the six State-guaranteed banks. Remember in December, the State shoveled €3.7bn into AIB and €0.5bn into EBS and God knows how much into INBS and Anglo. The deposit outflows confirm the ECB data from last week that deposits fell some €7bn during the month (€3bn Irish residents, €4bn non-Irish)

UPDATE: 2nd February, 2011. It hardly comes as a surprise that S&P has downgraded Ireland’s sovereign debt by yet another notch from A to A- with negative outlook and another review expected in April 2011. S&P say that Ireland is almost entirely dependent on the ECB at present. Well yes and Emergency Liquidity Assistance from the Central Bank of Ireland (to the tune of €51bn at end December 2010 and likely to be several €bn more at the end of Jan 2011 – will be confirmed on 11th February, 2011).  At A- we remain investment grade, for now.

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Shenanigans afoot as AIB lobbies Minister on NAMA loans policy?

Simon Carswell at the Irish Times bring us a story today which begs some basic questions about the future of Irish banking. He reports that AIB (that’s the zombie bank which we legally 49.9%-own at present but in reality we own 92%+) has recently lobbied the Department of Finance to change the policy on NAMA acquiring sub-€20m loans from that bank.

You’ll recall that up to last September 2010, NAMA was to take over all €5m-plus AIB land and development loans (and any associated borrowings). In September 2010 the Minister for Finance, Brian Lenihan raised the threshold from €5m to €20m but following the intervention of the IMF/EU in November, 2010 it was decided to not only restore the threshold but to encompass ALL land and development (and associated borrowings) at AIB, including the sub-€5m exposures.

It is reported that AIB has complained that NAMA taking over these loans will severely impact the bank’s operations and threaten its headcount (a sensitive issue in a country with an official 13.5% unemployment rate) and indeed the future of some branches. AIB claim that these loans will have substantial associated borrowings and encompass a sizeable proportion of Irish small and medium-sized business lending. AIB further claimed that NAMA didn’t have the wherewithal to handle these loans and even if they did, AIB would be better placed to work-out the loans. And lastly the bank was concerned that the transfer of these loans would create an even bigger capital hole for the State to fill with additional bailout funding.

I find this story a little sinister because (a) AIB will be paid the current value of the loans plus a long term economic value of some 10% so why should there be an even bigger capital hole – we know the formal accounting rules allow the banks to understate loan losses but surely the Financial Regulator has been getting accurate estimates of loan losses? (b) although NAMA is taking over the sub-€20m loans it is handing them back to the banks for day-to-day management so why would that mean a reduction in headcount let alone the closure of entire branches (c) it seems a little late in the day to claim that banks can manage the loans better than NAMA – after all NAMA has absorbed €71bn of loans at par value and these smaller loans at both AIB and BoI are understood to be worth less than €16bn at par value (d) AIB is a zombie that is effectively 90% + owned by the State and will depend on the State for a €4.7bn Core Tier 1 capital injection in 30 days time.

The Irish Times claim that “it is estimated” that these smaller loans will bring some 4,000 additional borrowers into the NAMA net (on top of the 850 €20m+ borrowers). These borrowers may represent the solid middle class spine of the country and many are understood to be “amateur” developers whose day jobs were in the professions. NAMA always claimed one of its prime advantages was its ability to deal impartially with developers absent the cosy relationships that had built up between local banks and long-standing customers and which contributed to reckless lending decisions and abysmal paperwork. NAMA has previously claimed that it will work to ensure the original credit officers are removed from dealing with the loans at the banks when the loans come under NAMA’s control – a Code of Practice in this area would be helpful. You would have to wonder if the true motivations of AIB in lobbying the Department of Finance have more to do with the protection of future careers at AIB or the protection of a sheltered segment of Irish society. At times like this, it is good to know the IMF will be involved in any decision-making, though I think even the IMF will be a little frustrated that it took the Department of Finance two months to draft an amendment to the NAMA Act to fast-track the absorption of sub-€20m loans and only then when the passage of the legislation was rendered impossible by political developments.

UPDATE: 31st January, 2011. Without naming sources or basis, John McManus in the Irish Times today writes as if the treatment of NAMA’s sub-€20m loans is a fait accompli. He claims that banks have successfully lobbied to keep associated lending.  He claims that the NAMA Bill published last week stops NAMA taking over associated lending – there’s no mention of a change in this area so God knows what the Irish Times is on about this time.

UPDATE: 5th February, 2011. Simon Carswell returns to the AIB-lobbying-NAMA-2 theme in today’s Irish Times where he claims that the Department of Finance conceded a vital point in what is being described by the Irish Times today as serious concerns about the plans to suck an estimated €16bn of sub-€20m exposures out of AIB and Bank of Ireland. The lobbying was led by AIB’s new executive chairman, David Hodgkinson (the former HSBC banker from the UK that took over last November 2010). The vital point which Simon Carswell claims was conceded was that associated borrowings by the same borrower whose sub-€20m loans are to be absorbed by NAMA will now not transfer. Remember that NAMA is supposed to apply the same discount (aka haircut) that it applied to the larger expsoures, to these sub-€20m exposures. So omitting the associated lending (that is, the non-land and development eg commercial property, share portfolios, fine wines, non-development residential property in Ireland and abroad) is likely, in my view, to reduce the value of core sub-€20m land and development loans. That’s why this reported concession is important. It will be examined by the next government so it would be helpful if the political parties could set out their stalls on the matter. Of course it will be the EU that examines any new valuation method but they don’t seem to be too bothered that NAMA stuck with the November 30th, 2009 valuation date or were acquiring loans using a 10-year bond rate that had skyrocketed – the EU are “big picture” observers it seems and may not change what the DoF has apparently decided.

 

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