There were some entertaining media reports last week about the appearence of AIB and Bank of Ireland executives before the Oireachtas Committee on Finance and the Public Sector. I decided at the time not to comment on these reports because the full transcripts of these meetings eventually get put online and these are a better way to judge what was said.
The transcript is now online here. The most insightful aspects of the committee meeting were the exchanges relating to what the banks were going to do with the NAMA bonds given to them by the Irish government.
Anyone following the NAMA debate over the past few months will have regularly seen and heard members of the government explain how NAMA was going to get credit flowing: NAMA would take ownership of the banks’ property loan portfolios in return for government bonds, which the banks would then use as collateral to get repo loans from the ECB and then these funds would be loaned out to Irish firms and households.
The statements made at the committee meeting by CEOs Richie Boucher of BOI and Eugene Sheehy of AIB did not at all conform with this story. Indeed, the general tone of their statements was that there would be very little swapping of NAMA bonds for ECB loans. Instead, as illustrated by Sheehy’s already infamous “trickle-down” comment, the only benefit to getting credit going in Ireland would be a lower cost of market funding for Irish banks which might get passed on to customers.
I will pick out three passages from the transcript.
First, there was the following exchange involving Mr. Boucher:
Deputy Joan Burton: What does Bank of Ireland see itself doing with the NAMA bonds?
Mr. Richie Boucher: The NAMA bonds are a contribution to our funding. The proportion of the NAMA assets to the overall Bank of Ireland assets – whether €10 billion, €11billion, €12 billion, €13 billion or €7 billion – is a contribution to our wholesale funding. We mentioned earlier that as a board we took a decision that our colleague, Des Crowley, would have absolute access to funding. We provided funding into this market when we had much more straitened liquidity circumstances than today.
The Deputy mentioned the European Central Bank. Bank of Ireland took a deliberate decision, which has paid off but has been expensive for us, to have the minimal possible reliance on the ECB. It has cost us money to term out our funding and not rely on the ECB. At 30 September, we had net borrowings, not just from the ECB but from monetary authorities, of approximately €7 billion. For a balance sheet the size of ours, that approaches normal market operations, because there could be borrowings overnight and so on. That is a disclosed figure, but it should not be taken as reliance on monetary authorities. It approaches normal market operations for a bank of our size. It is not appropriate for a bank like ours, which we believe has a long-term future, to be reliant on monetary authorities for permanent funding. That is a broken business model. We have held to this discipline, although it has been a difficult discipline to adhere to over the past six to nine months.
The comments about NAMA, which is a swap of one type of asset for another, being “a contribution to our wholesale funding” seem a bit odd since NAMA bonds are held on the asset side of the balance sheet and wholesale funding is on the liability side. But certainly Mr. Boucher had the opportunity to state that the bonds would be used for repo loans from the ECB and instead went out of his way to talk about how he didn’t want to avail of further ECB borrowing.
Second, there is the following exchange involving Eugene Sheehy. Deputy Joan Burton asked the following question:
Deputy Joan Burton: It relates to the future of the bank. The bank is restructuring its lending side. The more important issue is whether it has a funding side to keep the lending going. What does AIB propose to do with the €16 billion or €17 billion in NAMA bonds? Will it hold on to them and use them at the ECB window or does it envisage selling them on the market? As Mr. O’Connor stated, the ECB is beginning to close the window. It seems that by January or February AIB will need a very large injection of further Government funding to square the circle which he was discussing.
Sheehy started on a long and rambling answer involving ATM fees and the international financial crisis and other matters. Eventually, he gets a bit closer to answering the question about the NAMA bonds:
Mr. Eugene Sheehy: In regard to whether the banks will offer more money to a customer who enters one of our branches the day after NAMA is established, that will not happen. Over time, we have a good prospect of reducing what we referred to in our paper as the funding premium. We deliberately identified this separately because we see it as a new lexicon which we and our customers have to understand. We left it as a cost so that customers can clearly see why it should be variable and demand that it be reduced as funding becomes cheaper.
Deputy Joan Burton: Is AIB proposing to hold or sell the NAMA bonds?
Mr. Eugene Sheehy: Our funding position, which is strong and diverse at present, will depend on the overall liquidity of the bank.
Deputy Joan Burton: Mr. Sheehy does not see a need for additional Government funding in the new year.
Mr. Eugene Sheehy: The fact is that we would not be able to repo the assets which are going into NAMA because of their quality and the uncertainty that surrounds them. The big advantage of NAMA is in its removal of uncertainty by replacing the assets with bonds. It thereby strengthens the perception and the reality of the bank’s funding position.
Deputy Kieran O’Donnell doesn’t seem to have been too happy with this response, so he continued with a similar line of questioning.
Deputy Kieran O’Donnell: The Minister has stated on numerous occasions that one of the main benefits of NAMA is that it allowed the banks to access the cheapest funding from the ECB. Is Mr. Sheehy telling me that AIB will not avail of that facility?
Deputy Kieran O’Donnell: I asked a direct question. Will AIB take the NAMA bonds to the ECB to get funding at 1% or will the bonds sit on its balance sheets to earn 1.5% annual interest from the Government?
Deputy Kieran O’Donnell: Why not go to the ECB with the NAMA bonds to get the funds at a reduced cost? When we looked at it, one of the main ideas was to provide a flow of credit. One of the reasons credit is not flowing is the cost to banks and customers. Banks were to function in an environment and pass credit to small and medium-size enterprises, in particular, at a reduced cost. Will AIB not go to the ECB with the NAMA bonds to get funds at 1%?
Deputy Kieran O’Donnell: They are being taken on the balance sheet of the banks, with the interest from Government bonds from the taxpayer, but they will not be used with regard to one of the main issues, getting cheap credit flowing again.
Deputy Kieran O’Donnell: From Mr. Sheehy’s statement, the bank will effectively sit them on its balance sheet. He is not answering the question. Does AIB intend to go to the ECB with the NAMA bonds to access to funds at 1%? Have the banks discussed the matter with the Minister for Finance? I would love to know his views on what the banks are saying today. This is the bank which is providing over 40% of lending to small and medium-size enterprises in the Irish economy. There is disconnect.
Mr. Eugene Sheehy: I do not see the disconnect. We are exchanging assets with the State for the bond and that bond will improve the funding position of the bank. It will improve our ability to fund money more cheaply.
It’s a pity we don’t have video of this exchange. Suffice to say, however, that Mr. Sheehy ended up being even clearer than Mr. Boucher about his lack of enthusiasm for using NAMA bonds for repo loans from ECB.