European Commission finally publishes Bank of Ireland restructuring decision

Well it’s taken Senor Almunia nearly six months but finally yesterday the Decision N546/2009 approving the restructure of Bank of Ireland (BoI) was made public, having been initially communicated to BoI on 15^th July, 2010. The press announcement of the Decision last July 2010 is here.

Key points

(1) There are a considerable number of redactions (signified with “[…]”) which obviously blank-out both figures and text.

(2) The first BoI restructuring plan was submitted on 30^th September, 2009. It seems that the “Irish authorities” were not particularly prompt with responses to queries from the EC with an EC query dated 28^th September, 2009 not being answered at least until 5^th November, 2009. There seems to have been extensive correspondence between Brussels and Dublin on this plan – I count 18 requests for information plus two face-to-face meetings. The “final” restructuring plan was submitted to Brussels on 27^th May, 2010.

(3) BoI (including group companies) had 20-30% of deposits in Ireland in 2009 which made it the market leader, with AIB close behind. Does that position put BoI most at funding risk with a deposit flight?

(4) There is a statement at para (34) that ECB funding of Irish banks arising from “Eurosystem monetary operations” is not covered by the banking guarantee. Does that create an option for default?

(5) The restructuring plan has a five-pronged approach (i) deleveraging (ii) building up deposits – loan to deposit ratio is to fall from c160% in March 2010 to c120% in March 2014 (iii) strengthening the capital position and (iv) improving risk management (v) efficiency and cost management leading to greater profits

(6) Deleveraging will including divestment of the following (i) BIAM (done) (ii) New Ireland (iii) ICS Building Society (iv) its stake in the Irish Credit Bureau (ICB) (v) asset management business Paul Capital (vi) the foreign exchange services business Foreign Currency Exchange Corporation in the US (vii) run-off two UK loan books (a) Intermediary Mortgage Portfolio that BOI acquired through the acquisitions of BankAmerica Finance (renamed BOI Home Mortgages) and Bristol & West building society and (f) a Corporate loan portfolio (viii) sale of c€12bn of loans to NAMA

(7) Building up deposits will mean that BoI acquires €20bn of new deposits in Ireland and the UK between March 2010 and March 2014. Additionally the bank is to reduce short term wholesale funding

(8) Strengthening the capital position means debt-swaps and issuing more shares. And in the context of BoI’s precarious position teetering towards majority State-ownership, there is something quite scandalous about subordinated debt swaps that have taken place with discounts less than 50%.

(9) Interestingly the document claims the State owns 35.8% of BoI, not 36.5% as widespread-reported elsewhere (para (82))

(10) BoI is expected to seek a full banking licence in the UK, though there is a commitment (para (134)) not to make any major acquisition

(11) From next January 2012, BoI must make some of its infrastructure (eg ATMs ) available to smaller competitors at a reasonable cost and allow competitors market themselves to BoI customers. BoI must not advertise the support it is getting from the State. Although the government must make moving credit cards and current accounts easier, there is very little mention of moving mortgages.

(12) There will be more jobs with the creation of two new roles, Monitoring and Divestment Trustee, appointments for which the government must propose for approval by the EC.

(13) The government must make it easier for competitors including new competitors to increase their business in Ireland. And the State owned National Consumer Agency will promote information on switching banks. For those of you getting to grips with the news from PTSB and Ulster Bank today, you will alas find little in this document which will help you switch to a lower-cost alternative mortgage provider.

(14) At para (220) the Commission expresses the view that the State will “will receive an adequate remuneration for the capital injected in the bank”. It then goes on to say that “this assessment was carried out in the decision of 26 March 2009”. Surely the Commission considered a more up to date assessment but there is no evidence that it did.

(15) It is plain that this Decision reflects life back in the Summer of 2010 when politicians thought nothing of taking a three-month break. The continuing bank run, lowering of GDP estimates and increased NAMA haircuts have probably rendered the restructuring plan obsolete.