Are your deposits in Irish banks safe?

On Tuesday this coming week, Permanent TSB is set to unveil its financial results for 2012. At midnight two days later, the Government will withdraw the Eligible Liabilities Guarantee meaning depositors in PTSB no longer enjoy an unrestricted guarantee on deposits. PTSB is the weakest of the three state supported banks, but has been most at pains in recent times to claim and evidence that it has sufficient cash on hand to meet its liabilities. It has entered into funding arrangements with private banks whereby cash has been advanced to PTSB to meet two very meaty bond repayments, which together totaled €2.6bn, that were scheduled to be repaid in January and April 2013.

The latest PTSB results available today are for H1,2012 and are available here. The group made a loss of €600m for H1,2012 and the betting is that it has made a similar loss in H2.

PTSB has a large Irish mortgage book and appears to be suffering greater than average arrears compared to domestic banks, and it also has the largest proportion of tracker mortgages which are loss-making in Ireland and the UK where record low base rates of 0.75% and 0.5% respectively mean that PTSB is making a loss on such mortgages when its full cost of funding is north of 4%. Ireland is moving very slowly towards dealing with the mortgage crisis, with a new Personal Insolvency Act which is just awaiting the commencement order from Minister Alan Shatter and a newly announced arrears resolution scheme which is supposed to strong-arm the banks into dealing with problem mortgages, with the threat of the stick of being forced to write the value of loans down to the underlying security if they fail to get to grips with the problem.

What has this to do with the safety of your deposits?

PTSB had €17.3bn of deposits at H1,2012. It is facing into a very difficult environment where house prices are still declining, where unemployment is 14% with 8,000 jobs flagged to be abolished in the public sector in 2013, where disposable income is being hit with cuts to the childrens allowance, and where the new property tax and water charges will eat into net wages, and where gross wage growth is modest. If PTSB fails to meet Government targets for restructuring 50% of problem mortgages by the end of 2013, it must write down the valuation of its loans to the value of the underlying security.

PTSB, like AIB and Bank of Ireland has been recapitalized by the Government and at June 2012, was sitting on a healthy capital buffer, €3.077bn net equity, especially compared to European banks.

Before getting all catastrophic about Ireland’s deposits, we should remember that Irish banks are amongst the most probed and prodded in the world. We have the Troika of IMF, EU and ECB keeping close watch on the banks and their activities, with daily and weekly reporting. We have a central bank with a new ethos and staff, following the laxness in the 2000s which contributed to the financial crisis. We’ve paid €30m in fees for BlackRock, Barclays Capital and the Boston Consulting Group to examine the books of the banks in detail, to provide what has probably been the best stress-testing in Europe, and we have recapitalized the banks at significant public expense to cope with the bad business they had accumulated in the 2000s. So, of all the 17 countries in the EuroZone, you might expect Ireland’s banks to be amongst the strongest and best able to withstand a shock.

But having said all of the above, with PTSB facing a very challenging future with the prospect of large mortgage losses, might PTSB become insolvent, and if it does, might this Government “pull a Cyprus”

The deposit outflow continues in Ireland

There is no longer monthly tracking of deposits in Irish banks on here. Retail deposits from ordinary households and businesses stabilized in mid-2011 and since then there has been modest growth. By this measure, Ireland is off the critical list and that is why the tracking here was discontinued. But overall deposits in Irish banks are still falling. We found out recently in parliamentary questions that there was a 13% decline in deposits between December 2011 and December 2012, from €218bn to €190bn. Total deposits are still declining. On 12th March 2013, finance minister Michael Noonan said “in the table below, it is shown that at the end of 2012, the Central Bank held 379 million euro, which represented 0.2% of the 190 billion euro on deposit in Ireland at the end of 2012. It is true to say that this was down 12.9% from the 435 million euro held by the Central Bank at the end of 2011, which represented deposits of 218 billion euro. The decline in the DPA balance reflects the drop in deposits in Irish credit institutions.”

The deposit guarantee scheme

After the Eligible Liabilities Guarantee runs out at midnight this Thursday, 28^th March 2013, depositors will still be enjoy a €100,000 guarantee. But if a bank goes bust, who will foot the guarantee? The Central Bank of Ireland operates what it calls the Deposit Guarantee Scheme and the way it works, is banks which accept deposits in Ireland are required to hand over 0.2% of their deposits to the Central Bank every December. So if Bank A has €10bn of deposits at December 2011, it hands over €200m to the Central Bank. If deposits in Bank A increase to €11bn by December 2012, the bank hands over an additional €20m. If deposits in Bank A fall to €9bn in December 2013, then the Central Bank refunds €40m to the bank. That way, at the end of each year, the Central Bank is holding 0.2% of all Irish deposits in Irish banks.This is the table of the sums that the Central Bank has had on hand each December for the past six years. In 2012, the Central Bank extended the guarantee scheme to credit unions for the first time.

Obviously, if there was a complete failure at PTSB, then the Deposit Guarantee Scheme with €403m would be unlikely to meet the sub €100k claims, though it should be stressed we don’t have a split of the €17.3bn of PTSB deposits between those sub-€100k and €100k+.

Might the government reach into your deposit accounts for a levy?

Oh yes, in the past week Labour’s chairman of the Oireachtas finance committee Ciaran Lynch and Fine Gael’s jobs minister, Richard Bruton have both indicated that a levy on sub-€100k could be on the cards despite the existence of the sub-€100k guarantee. There seems to be a feeling that the guarantee only applies if a bank is allowed to go bust, but if there was an intervention before the bank was actually liquidated then all depositors including those with sub-€100k deposits would face “levies” despite the existence of the deposit guarantee scheme. Minister Bruton said on radio today that Cyprus imposing a levy on sub-€100k deposits was “in the remit” of the Cypriot government. The experience of this Government taking €1.88bn from private pensions between 2011-2014 to fund the Jobs Initiative (mostly the reduction in VAT on certain services), would also make you ill-at-ease that the Government would regard as sacred the guarantee for sub-€100k depositors.

Given that banks are built on the principles of confidence and trust, any talk of “bank runs” is unwelcome to bankers, and because of the necessity of banks to the functioning of the economy, such talk is also unwelcome throughout Officialdom. But with Cyprus sailing rudderless towards an exit from the euro with the re-establishment of an independent central bank, unfortunately for Officialdom, bank-runs are back on the agenda here. When the idiots in the room a week ago at the Eurogroup meeting allowed the Cypriot finance minister to leave with the proposal in his breast-pocket to levy all depositors, those finance ministers unleashed a toxic mixture which has undermined trust in Cyprus but which threatens to undermine trust across the EuroZone.

A consequence of last week’s fiasco is, Irish banks will remain under the spotlight, and the weakest will be most closely watched. It is a vicious circle because fear breeds mistrust which means people withdraw deposits which in turn undermines the financial stability of the institution and makes failure more likely.

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The Eureka moment – just when, over the next 24 hours, will Cypriot politicians realize that Plan B won’t work?

The story goes that in ancient Greece, Archimedes was in the bath when he realized that you could measure the mass of an irregular object (himself!) by measuring the displacement of the water when he got into the bath. To this day, we have an image of him running down the street in the nip, shouting “Eureka!” or “I have found it!”

In modern southern Cyprus, politicians have fashioned what they believe is a plan to solve their country’s funding needs and they believe it will be finalized today, and that tomorrow, the ECB will approve it and continue to provide liquidity to their banks, and that on Tuesday, the banks will open after a 10-day hiatus, and all will return to normal. Sure, there may be some panic withdrawals of deposits from Tuesday onwards, but the ECB is presently providing €9bn of liquidity in an economy with a GDP of €18bn and remember that at our peak need in Ireland, the ECB was providing €190bn or 120% of GDP so the ECB has some room for providing further liquidity to Cyprus. The politicians will have convinced themselves “Mission accomplished”

But politicians have been locked in their privileged environment for the past week, with economists and bankers shoveling advice into their ears. They’ve been subjected to tunnel vision where the only objective is to devise a funding solution. Politicians have the luxury of being in charge, and knowing that solutions are in their remit to devise and implement so threats to their livelihood have been theoretical and distanced. But here you have 56 politicians in a country of 1.1m, not any larger than Dublin, and their finance minister a week ago thought that a levy on all deposits of at least 6.75% was a good idea. They haven’t covered themselves in glory.

As they finally relax with having devised a solution later today, let us go then, you and I when the evening is spread out against the sky like a patient etherized on a table, and see what Cyprus looks like this Sunday evening. The banks are shuttered but they are usually closed on Sundays anyway, so no change there. There are lines outside most banks and people are withdrawing cash. The €260 daily limit is regarded as a target, not a maximum, but people are sometimes unable to even get this limit despite having funds in their accounts. On a Sunday evening, a politician might be tempted into a restaurant where they will find that trade is down 50% on a fortnight ago. They might see signs saying “no credit, debit cards or cheques” or “cash only”. In shops, they will notice perishable foods like strawberries being cut in price by 60% which should really set off alarm bells – people are not hoarding or panic-buying food which would drive up prices, they are hoarding cash. There are 8,500 employees at Bank Laika alone, most in Cyprus and most have not been at work this past week. The estimate on here is that 40,000 bank workers in a country with 1.1m have not been working in the past week. There have been no standing orders or direct debits since Friday 15^th March 2012. Most people are paid at the end of the month, but anyone else hasn’t had payment, and even if they had, they would have been restricted in accessing their wages. Credit cards are not being paid, large purchases are not possible. And of course, ordinary people don’t know what politicians will eventually devise; after all, a week ago, they were willing to take 6.75% of all deposits regardless of size or “guarantee”,so someone with a €10,000 balance faced losing €675.

The betting on here is that over the next 24 hours as politicians emerge from their tunnel vision, and at last examine the practical impact of the last 10 days on the banking system and its domestic and foreign depositors, that they will conclude – “in their waters”, at least – that Plan B won’t work. Being politicians, who stubbornly cling to a vision and agreed way of doing things particularly at supranational level, they will be reluctant to abandon their Plan B however, and you might expect a few days of experiment with draconian capital controls, before the inevitable happens and a Cypriot pound is introduced with a newly independent central bank of Cyprus. Economically and politically, it doesn’t make sense for Cyprus to abandon the euro, particularly if there is a funding deal in place and the ECB is continuing to offer support, but in a reverse of that Men-in-Black philosophy of “a person being smart, but people being dumb” in the Cypriot case, each household and business will act in its own interest based on what has been a traumatic 10 days, even if for Cyprus generally, it would be better for households and businesses to support the banks.

Just when will they shout “Eureka!” and run down the streets in the nip.

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Nice work if you can get it – six firms paid €8m in fees from a single bond issuance by the NTMA

Although Ireland slipped back into recession this week, it seems that some sectors of the economy are doing alright in the downturn. This week in the Dail we found out that six firms shared a payday of €8m between them when the NTMA sold €5bn of 10-year bonds earlier this month. The NTMA appointed so-called “joint lead managers” to sell the bonds on its behalf and Minister for Finance Michael Noonan, in a reply to a parliamentary question from the Sinn Fein finance spokesperson, Pearse Doherty said that the NTMA had paid six named firms a total of €7.79m and a further 11 unnamed firms were paid nearly €1m.

Minister Noonan said that the NTMA handed over 0.175% of the €5bn issued in fees to the 17 companies, with the six lead managers sharing 89% or €7.785m and the 11 “primary dealers” were paid €962,500.

Nice work if you can get it.

The parliamentary question and response are here.

Deputy Pearse Doherty: asked the Minister for Finance the fees payable to the joint lead managers, Barclays, Danske Bank, Davy, Goldman Sachs International, HSBC and Nomura, which have been mandated by the National Treasury Management Agency in respect of a recently announced issue of a March 2023 bond.

Minister for Finance, Michael Noonan: Ireland successfully issued a new €5 billion benchmark bond on 13 March at a yield of 4.15%. This sale was the National Treasury Management Agency’s (NTMA) first new 10-year issuance since January 2010 when €5 billion of the October 2020 bond was issued at a yield of 5.091%. The NTMA recognises seventeen Primary Dealers in Irish Government Bonds all of which are members of, and regulated by, the Irish Stock Exchange. Primary Dealers have obligations with respect to market-making in Irish Government bonds, an essential role in the provision of liquidity to investors. Primary Dealers have bidding obligations in respect of bond and Treasury Bill issuance by auction. They also advise the NTMA with respect to issuance and assist with the marketing process as well as producing research designed to assist investors.

The NTMA chose six of the Primary Dealers, Barclays, Danske Bank, Davy, Goldman Sachs International, HSBC and Nomura to be joint lead managers having significant roles in the new ten-year bond sale whilst the other eleven Primary Dealers were co-leads in the syndicate with lesser roles.

The NTMA has advised that the fee payable to the syndicate of banks was 0.175% of the nominal debt issued. This is the standard fee for the issue of bonds of a ten year maturity by syndication in the euro area sovereign bond market and is also, for example, the fee paid by the European Investment Bank, which has a ‘AAA’ credit rating, for its ten-year bond issuance. Based on the €5 billion issued, the total fee was €8.75 million. Of this amount 89 per cent is split evenly between the six joint-lead managers, with the remaining 11 per cent divided equally between the other eleven co-lead banks. The fee represents an annualised cost of 0.02 per cent over the life of the bond.

It is important to emphasise that the team of Primary Dealers chosen to manage the transaction assisted in building a strong order book, with some 400 investors submitting bids, including fund managers, banks, pension funds and insurance companies. The total bids received amounted to some €13 billion. This clearly demonstrates that Ireland has regained access to the international debt markets. The size of the order book and the broad investor interest is a strong signal of confidence in Ireland.

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