ECB and Nationalised Banks, Again

My former colleague, Mike Casey, wrote the following in this article in today’s Irish Times:

When Nama is up and running, the banks will be able to borrow far greater amounts from the ECB. Some of this money may be lent to the private sector (one hopes), but it is likely that substantial funds will be made available to the Government to finance the budget deficit.

This may be the main reason why the Irish banks were not nationalised. If they had been nationalised this transfer of funds could not occur, since the ECB cannot lend directly to government.

I’m afraid I have to disagree with this argument for why Irish banks cannot be nationalised.

First, as I have written here before, while the ECB is forbidden from directly lending to governments by the Maastricht Treaty, the treaty also states that this particular clause “shall not apply to publicly owned credit institutions.” So the ECB can, and does, lend to nationalized banks.

Second, there is an argument doing the rounds that, while the ECB can lend to nationalised banks, these banks cannot use government-backed bonds as collateral to secure ECB loans. One commenter on this website has justified this argument with reference to Page 39 of the ECB’s documentation “The Implementation of Monetary Policy in the Euro Area” which prohibits banks using as collateral any bonds issued by other institutions with which it has “close links” where close links are defined in terms of a percentage of cross-ownership. The purpose of this provision is clearly to prevent troubled banks from setting up SPVs which issue debt that the bank can then use as collateral for ECB repo loans.

In theory, this could rule out ECB lending to nationalised banks if it were not for the fact that the next paragraph after the description of the meaning of close ties states:

The above provision on close links does not apply to: (a) close links between the counterparty and the public authorities of EEA countries or in the case where a debt instrument is guaranteed by a public sector entity which has the right to levy taxes.

So that settles that.

Finally, the EU Commission has stated that there is no problem with nationalized banks using bonds issued by their government in repo operations. The Sunday Business Post recently reported

A commission official confirmed that, in its view nationalised banks could continue to subscribe for Irish bonds as long as they were not buying them on any kind of preferential terms.

It has been suggested that if the government nationalised the banks the state would lose them as potential subscribers for Irish sovereign debt. The commission spokesman has also said it would take a neutral stance on the ECB exchanging Irish Nama-type bonds with Irish banks if they were nationalised.

A commission official at the Economic and Financial Affairs Council (Ecofin) confirmed that ‘‘the commission would have no difficulty with the use of the securities in ECB monetary operations, irrespective of whether the bank concerned is in private or public ownership’’.

Finally, I’d note as an aside that I think highly of Mike and don’t enjoy disagreeing with him. But, contrary to what some people think, I won’t refrain from disagreeing with him just because we’re both economists and bump into each other at local events. To adopt that attitude would indeed reflect a mediocrity that I know Mike would certainly disapprove of.

22 thoughts on “ECB and Nationalised Banks, Again”

  1. @ Karl

    i agree with you that nationalising the banks wouldn’t stop the ECB repo facility from being used. However, in that it is still allowed is a bit of a fudge really, and should surely make the Ecostat fudge on the NAMA SPV even less surprising and less of an issue in my opinion. The only thing i find surprising is that people are surprised!

  2. @ Karl

    i’ll admit, for around a minute after i saw the decision i was a bit “Eh…?”, but on reading into it i dont see it as that different or unusual. I suppose i’d just point out that there’s an awful lof of scooby dubiousness out there when it comes to these type of fudges, particularly in the EU.

  3. This suggestion that there is a restriction on dealings by the ECB with nationalised banks is regularly cited against nationalisiation of the banks. No explanation is given, however, as to how the alleged restriction affects Anglo, which is already nationalised. If the alleged restriction did exist, would it not scupper Anglo’s participation in NAMA in that it (Anglo) could not benefit from repo by the ECB? Yet, there does not appear to be any special provision made for Anglo in this regard under the NAMA Bill, which tends to confirm that the alleged restriction is a red herring?

  4. @ Eoin

    I made this comment in another thread but it rather got swamped. The Eurostat initial view is incredibly amateurish. It states that it understands that the NPV of the SPV is €4.8Bn on the assumption property prices grow 10% in 10 years.

    Oh so wrong.

    1) The €4.8Bn requires far, far more than the asset acquisition/disposal break-even requirement of 10% growth, which is really an oft quoted irrelevance.

    2) I hope sincerely that the CSO assertion that the expected return to the SPV equity will be 45% is correct and not Eurostat’s interpretation that the full €4.8bn will accrue to this meagre €0.1Bn equity.

    I presume the CSO will correct the Eurostat misinterpretation as the view expressed has been caveated that they have been correctly informed.

    @ Karl

    You seem to have refuted MC’s assertion rather comprehensively.

  5. @ Brian W

    you say “amateurish”, i say “fudge”! Or at least “deliberately basic”.

    You say “amateurish” as if it cared what the result of NAMA will actually be. I say “fudge” in that all it cared was that it fit into the existing policy framework.

    At the end it says “Eurostat reserves the right to reconsider its view” but i imagine if there was anything they are particularly concerned about (which may make it change its view) the CSO and DoF have been informed and would seek to amend or clarify.

  6. Logic is in abeyance, so it has to be political will. That could of course be political will resonating from the centre – the EU – and enacted locally.

  7. The internal politics of the ECB with respect to the national private banks and the regional government owned banks has given rise to the perception that the ECB will not assist gov’t owned banks. The age old arguments of why am I paying taxes so as the regional gov’t owned banks can compete against me are reflected in right wing banker think which permeates the ECB. The failures and near failures of the major banks is changing the thinking in that any sound banking institution is now more than acceptable if it is a likely candidate for a successful resuscitation.

  8. What proportion of each new issue of government debt is being bought by the banks?

    Once the banks have a balance sheet full of NAMA/gov bonds, will they continue to buy the same proportion? (Will they buy more due to interest spread?)

  9. This looks like an innocent repeat of a Nama spoofery. I would not be surprised if this particular spoof originated with our minister. After the Nama debate is over there is going to have to be an entire truth commission devoted solely to Brian Lenihan. In the mean time, fans of the Minister like myself will not be surprised by the appearance of negative information about public sector workers. He is the dirtiest political street fighter Ireland has ever seen. And all with a smile on his face and a twinkle in his eyes. As one of your contributors said after a previous spoof: Falsus in unum, falsus in omnibus (false in one thing, false in many). I would delete the first part and make the second the ministerial motto.

  10. Perhaps someone could clarify Mr Caseys status as the byline in the IT is not always consistent. Currently it states – “Michael Casey is a former chief economist at the Central Bank and board member of the IMF” but on 24th August had “Michael Casey is a former chief economist with the Central Bank and former board member of the International Monetary Fund” it has flipped between the 2 over the past while.

  11. @Karl D
    “well, I guess the 6 million dollar question is: why didn’t they nationalise the banks? we have an explanation that may not be the answer, so what is?”
    Ideological reflexive neo-what–i-think-thatcher-would-have-doneisim in dof plus a desire not to upset powerful figures at a political level.

  12. Lads

    the reason why the 2 systemically important banks were not nationalised was three fold.
    *In this crisis, international custome and practise is to maintain banks in the private sector if possible. The ECB in particular seems not to want banks in the public sector-read the opinion on NAMA
    *they did not have to because liquidity conditions improved thanks to the ECB.
    *asset quality may have begun to improve in the UK boxing off one particlar problem
    Now the question of NAMA, overpayment, liquidity, reform of the managment and injecting more capital into the banks to get them to lend again is unresolved

  13. @Brian
    From what I have read of political biographies what they usually say about giant policy mistakes is:

    1. We were badly advised.
    2. It was an unprecedented, emergency situation. We had to act quickly.
    3. If we had known the full facts when we were making the original decision we would of course have acted differently.
    4. The original decision was widely supported.

    I would expect many references in the future to the public and the critics not realising the scale of the crisis.

    You know who will probably say, “It was Nama or Iceland,” or even, “It was Nama or being unable to borrow. No pensions, No wages…”.

    To sum up they didn’t nationalise because they were badly advised, were in a time of crisis, had only partial knowledge, and believed they were right because of the wide support they received.

    That is more than enough to explain a large war, so it should certainly explain the decision not to nationalise the banks.

  14. “well, I guess the 6 million dollar question is: why didn’t they nationalise the banks? we have an explanation that may not be the answer, so what is?”

    Perhaps the losses and recapitalisation requirements which appear to be coming down the line will be so vast as to make it expedient for the state not to own wholli the banx.

  15. On a tangent, an article in the FT suggests that AIB and BoI may be able to raise capital to preserve their freedom from the Govt whereas it will be much harder for Anglo to do the same:

    http://www.ft.com/cms/s/0/949eda6a-c299-11de-be3a-00144feab49a.html

    “Analysts predict that the likes of Commerzbank, Allied Irish Banks and Bank of Ireland will lead the next wave of cash calls. “Sitting in Ireland or Germany, you should be encouraged by what has been going on in other European countries,” says Goldman’s Mr Westerman. But at JPMorgan, analyst Kian Abouhossein cautions: “It’s much more difficult for banks like these because of the high level of government involvement.” Commerzbank, for example, has €16.4bn alone in so-called silent participations from the state – a form of preference shares – dwarfing its market capitalisation of some €10bn.

    Tougher still will be the fightback to normality for groups that were fully nationalised in the crisis – including the Icelandic banks, Ireland’s Anglo-Irish and Northern Rock in the UK. Even part-nationalised Lloyds and RBS have a slim chance of ditching their government money any time soon, despite their cash call plans.”

  16. @ jl

    Sorry for the late posting, but only just saw your comment. Fannie Mae, Freddie Mac AIG, all were nationalised precisely because they were and remain systemically important. FDIC reports over 100 banks been allowed to go bust in US, presumably because they were not systemically important. Fortis was effectively nationalised before being broken up also.

    Contrary to receieved wisdom here, the nternational custom has been to preserve institutions which are systemically important, and by nationalisation if needs be.

  17. @Karl Whelan

    Re that Vincent Browne Show … earlier tonight …

    & Laura’s Oscar TINA performance …. this level of either ignorance or propaganda is frightening …….. or maybe it’s the vichy_financial equivalent of stockholm syndrome ……… or the scarletti inheritance revisisted ?

    ……… spose Dinny O’B must have a few shares in a few other pillars ….

  18. @Karl Whelan

    Any chance you could explicitly refute some of the statements Laura made? Particularly, why default on state guaranteed anglo bonds could impact on other state guaranteed bonds? Even this is untrue spinning by DoF mandarins, presumably this diktat comes from somewhere. Would be very curious as to what your view is on such a statement.

    Promissory note call in sounds insane but equally, it is conceivable that the ECB have threatened the Irish state and by proxy, the Eurosystem, that if Ireland were to renege on promissory note scheduled payments, then they would call in all of the ELA immediately and discussions would have to begin as to how the Irish state in consultation with their partners in Europe proposed to pay back the ELA.

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