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Archive for November 12th, 2011

Those of you who are given to scrying tea-leaves or interpreting chicken entrails to foretell the future, might find some comfort in a recent batch of news which seems to be indicating that the worst may be over for the funding of Irish banks. Remember that since September 2008 our banks have been reliant on central bank funding, as a result of the usual market sources of funding – other banks, depositors and the bond markets mainly – ran for the hills. Unfortunately September 2008 was just the start of the funding drought and since then deposits have flown, and interestingly there have been suggestions from those who should be “in the know” in Ireland, that on more than one occasion including once this year, there was a danger of a full-scale deposit run. Inter-bank lending has also dried up, and as for the bond market for lending to Irish banks .…

But progress has been made since the start of this year, our pillar banks have been subjected to what appear to be the most rigorous stress tests in Europe, though the jury is still out on whether the scenarios were sufficiently adverse to accommodate forthcoming changes to the personal insolvency rules. We have capitalised our banks at vast personal expense to the nation, beyond European capital norms and in the most recent crisis summit in Europe in October, it was noteworthy that Irish banks were not expected to need any more capital despite other European banks being required to raise €109bn by July 2012. And of course Ireland has had NAMA which has assigned a clear and certain value to a large proportion of bank loans, and extracted those dodgy loans to a specialist agency which will manage them over 10 years. Our regulatory framework has also been improved with new legislation, and we’re being told that our central bank and financial regulator now have the right quantum and calibre of staff to adequately deal with the Irish banking sector. There is in addition, daily oversight by the IMF, the ECB and the EU as part of our bailout deal. Add to that, the fact that your euro savings will typically give you a better return in Ireland than in Germany and there’s a better state guarantee of savings in Ireland and you might wonder why deposits are not pouring into Ireland.

Well they mightn’t be “pouring” but the Department of Finance says that retail deposits in Irish banks “gathered momentum” in September 2011, Bank of Ireland said yesterday that deposits had increased by 3% in the three months to the end of October 2011, and yesterday also the Central Bank of Ireland produced its monthly consolidated banking balance sheet which shows that our banks have reduced their dependence on central bank funding (which comprises lending from the ECB and the CBI) by €5.1bn or 3.3% in October 2011 to a total of €148.6bn and indeed this is the biggest % decrease since April 2010. And there was no unusual recapitalisation in October which might explain the decrease in the funding reliance on the central banks, though it is unclear if the proceeds from recent sales of loan portfolios have had any impact.

Whilst the funding overall fell during the month, it is still at an elevated level and greater than in September 2010 when the crisis, which eventually led to the country needing an IMF bailout, was brewing. So the country’s banks are by no means out of the woods yet, and even if they were, there are such jitters in Europe that will prevent our banks recovering from their so-called addiction to central bank funding anytime soon. It is also noteworthy that reliance on ECB funding increased slightly in the month by €0.5bn from €100.4bn in September 2011 to €100.9bn in October 2011. It was the provision of funding by our own central bank, mostly so-called Emergency Liquidity Assistance or ELA, which reduced by €5.6bn from €53.3bn to €47.7bn in the month.

Here is the history of our banks’ dependence on central bank funding since September 2008 when the financial crisis first visited.

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