AIB and BOI Oireachtas Submissions

Last week, I wrote a post about the appearance of AIB and Bank of Ireland executives before the Oireachtas Committee on Finance and the Public Service. A transcript of the appearance is available here. They refer to submissions that the banks gave to the committee but which are not on the Oireachtas website.

The Committee’s staff have kindly made these submissions available to me on request. Here is the AIB submission and here is the Bank of Ireland submission. The AIB submission is particularly interesting because of its focus on funding costs and margins. Somewhat depressingly it states that “Our pricing guidelines could lead to a customer being charged 4% to 5% over Euribor.”

11 replies on “AIB and BOI Oireachtas Submissions”

Quite a lot of waffle spliced with patriotism. AIB’s is a little more interesting. These banks are in an awful position. The ECB is set to tighten repo operations and the revised government guarantee will be more expensive. The ability of Irish borrowers to pay higher margins is reduced and there are foreign banks competing for Irish deposits. This is before we address bad loans.

Barring a lazarus^3 recovery in the domestic economy, Irish banks will require extremely large amounts of capital injected in order to access cheap funding. In all likelihood the minimum amount of capital will be supplied and these banks will probably need to shrink their balance sheets.

@ Karl

““Our pricing guidelines could lead to a customer being charged 4% to 5% over Euribor.” ”

I’ve seen some pricing guidelines a few per cent above even that.

I am sure I have made this point before some time ago – people are going to pay for this banking mess not just through NAMA and recapitalisation but also as customers – we are starting to see just how much.

Clearly the banks were allowed to grow far too big and now must contract. Welcome to the deflationary spiral!
Kondratieff winter winds do blow and will continue until the banks are about the size they were in 1988.

The DIRT bill of AIB was a years profits in 1993. In 2000, when the existence of the debt was at last revealed by the criminals running the bank, it was a month’s profit.

Shrink! Shrink! Ahhh I enjoy schadenfraude. The state had a chance, when I showed the collusion between it and the banks, to change its ways! But we got SSIA instead! And developers liberty hall.

Good decision? I think not!

@ DE

shouldnt hit mortgages as hard as business/commerical loans. Banks risk-weight residential mortgages far less than other loans, and so have to put up less capital against them. 2% margins should work for mortgages.

@Bond. Eoin
Yeah, this was true in the past, but will it be the same, going forward, like?

With 3% of securitised mortgages 90 days or more in arrears already, loss ratios are likely to be higher on mortgages than historical norms?

@ Dreaded Estate,

I wouldn’t agree with Bond Eoin’s suggestion of 2% margins. Risk weighting of assets relates more to capital than cost of funds. These are interrelated in that the greater your level of capital, the more confident investors will be in lending you funds. However, government strategy would suggest that such levels of capital will not be there. Equally the government may not be able to provide such amounts.

The key factors that spring to mind are:
1. Bank’s capital/ capital ratios (including realistic identification of loans at risk and loss severities).
2. Bank’s customer deposit ratios.
3. ECB repo facilities – are they willing to cause another crisis.
4. EU/Eurozone policy/strategy.
5. Cost of wholesale funds (sovereign credit rating will become an issue here) & guarantees.
6. Mix of lending sectors – SME, CC, Personal, Corporate, mortgage etc.
7. Extent of tracker mortgages – these would lower the w.a. spread on their mortgage book. To compensate SVR may need to be higher.
8. Expected future loss rates on mortgages.
9. Political sensitivities – significant at present.

Another effect of higher SVRs is a slight knock-on to higher defaults. This is by no means a comprehensive list, just what jumps out at me.

These numerous factors make estimating margins difficult. Prior to BOSI entering the Irish mortgage market, margins were 2.5%. Earlier this year some UK mortgage lenders were at 3+%. A 2% margin is on the low side. I can only see it for political reasons.

I hope you don’t have that on your ipod. Any song about zombies should be thrash metal.

What screams out from the banks’ submissions is the degree to which the cost of borrowing can be expected to rise.They dont even try to hide the fact that every loan being renewed can systematically expect a significant hike in cost while it will be ‘pick a number’ time where covenants have been breached.Not alone is little or no additional credit going to be made available but the cost of existing credit is going to balloon.If people knew this some time back the clamour for nationalisation would have been deafening.

In so far as the banks’ cost of funding gives rise to this rather than the ‘gouging’ (to be expected where less competition) we are back to the fundamental problem of inadequate capital.The longer the banks are allowed to limp along the more businesses will close,the more people will face ruin.To be at this point so long into the crisis is bitterly dissappointing,but then too many very serious errors were made in dealing with it.

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