INBS and the ECB

Today’s story about INBS issuing €4 billion in government-guaranteed debt effectively to itself (i.e. issuing it, then keeping it on the balance sheet to use for repo with the ECB) seems a bit strange. Indeed, normally the ECB doesn’t allow this kind of thing.  Page 39 of its eligible collateral documentation contains the following guideline:

Irrespective of the fact that a marketable or nonmarketable asset fulfills all eligibility criteria, a counterparty may not submit as collateral any asset issued or guaranteed by itself or by any other entity with which it has close links.

The INBS issue seems to be ok, however, because of the following qualification:

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 the government guarantee appears to be what allows INBS to do this.

38 thoughts on “INBS and the ECB”

  1. Well then surely the bond markets are entitled to look at the aggregate of all fundraising by Irish Institutions and to add them to the GGD.

    Thoughts.

    Have INBS redeemed any subbies in full at face value in this operation and then issued the scrip with what is a 100% permanent government guarantee ??

    Or were they rolling over different classes of paper, if so what ??

    Was that €4bn face or €4bn after ECB haircut ???

    Who approved this operation. ?

    The cabinet and later the Oireachtas is agonising over a €3bn cut to public expenditure while INBS clocks up €4bn of debt just like that. Should there not be an oversight committee??? ….ideally not one with Frank Fahey on it either 🙂

  2. What did I say? Promissory notes are the solution to all our problems. Even better than a government promissory note, write one to yourself. I am taking delivery of my ferrari today. I’ve promised myself I’ll pay for it tuesday and have crayoned up some debt securities (my daughter did the anti-fraud pictures on it).

    We, as a state, are descending into madness. The Greeks ignored their budget deficit by not counting what the state was spending. We are ignoring ours by promising ourselves miracles.

  3. I have the same question as 2Pack

    Who approved it?

    What exactly were the steps they followed to do this? The Irish Times article is short on specifics but raises more questions than answers. Karls post again raises a lot of questions.

    To put it very bluntly, did they have to get approval to effectively write themselves a cheque from the taxpayer or not?

    I’d really like to understand what is going on, so maybe someone who has a more positive view of the current events can explain?

  4. @ 2pack

    this refinances maturing senior debt, no subs involved.

    @ All

    this is a highly unusual operation – unless the bank is in a partial or full winddown mode (which it is). In that case you dont really care what conclusions the markets draw about your future or current funding ability, you just roll it over short term to get you through to D-day. Its unusual, but it makes sense given their circumstances, if you know what i mean. Markets raised an eyebrow, but then lowered it when they thought it through.

  5. Final Questions.

    Was any attempt made to ‘underwrtie’ and ‘roadshow’ this €4bn issuance like a normal commercial operation on the markets.

    If not who gave the INBS permission not to attempt to place the new issuance commercially and when was this permission granted ??

    Who were the seniors who held the €4bn of debt that waa redeemed ??

    Evidently once the decision was made not to so do then the state would have to cough on redemption date.

  6. Bond analyst quoted in Irish Times says the move “is innovative”. Guys and gals “innovative” is good, it is clever. And it is really oh so simple.

    In the next few months INBS will be awash with NAMA Bond collateral. Unfortunately it could do with that NOW. So, as a temporary fix, it has effectively created its NAMA Bonds in advance. When the real NAMA bonds arrive this temporary bridge will be dismantled.

    Comparing a funding mechanism with a budget deficit or even a recap is so off the mark.

  7. @BWII
    INBS may be awash with NAMA bond collateral, but it will have lost 70% of its other assets in the process (going on NAMA haircuts).

    There’ll be another few billion of these promises to itself.

    @Eoin
    You can’t seriously tell me that the news you gave yesterday of INBS ‘getting away’ 4bn, which turns out to be a crayon scrawl on a toilet wall is a sign of easing in bank refinancing?

    This is a promissory note in all but name.

  8. This isn’t a whole lot different from what other banks have been doing: issuing RMBS and retaining them on the balance sheet. They then repo with BoE, for example. But, now the focus is on exit strategies from SLS and ELG.

    The Irish govt is getting itself deeper and deeper into guarantees and any signs of exit strategies are a long way off. There should be a national competition to see who has the longest finger in the country, so there’s somewhere to put it all.

  9. @Hog

    This is bridging finance, simple yet innovative and clever. It in no way alters the already known exposure of the taxpayer to that corpse. It will not after the NAMA process has been completed need promises to itself. It will have enough promissory notes and NAMA bonds for all its solvency and liquidity requirements.

    This is a NON issue. If it was as bad as it reads at first blush then Joan Burton, Michael Noonan et al would be having a field day.

    It is rather sad when trigger happy opposition politicians are prepared to take pause for a second thought whilst some commenters on on this economic blog, who should know far far better, go immediately into knee jerk overdrive.

  10. @ Hogan

    eh, no, thats not what im saying at all. Im saying its a temporary measure to get them through to whatever ‘restructure’ is about to take place (the issue is 6mth tenor). The “real” banks that intend on being going concerns could not issue via this. I only noted it yesterday in terms of reducing the “wall of worry” that was alleged to be 25bn, was actually 12bn, and was 8bn after the INBS issue. Not an easing, just less to do.

  11. @BWII
    Bridging? It’s a bridge to nowhere.

    The point is not that promissory notes could be issued to cover the balance sheet gap and the liquidity gap, the point is that INBS are unable to fund themselves in the market, even with a government guarantee. The government is unwilling to increase the national debt further this year by issuing more promissory notes. The point is that banks now have the authority to issue government debt in all but name.

    They are promising your money…

  12. @BW2

    NAMA scrip coming to INBS for their €8bn property ‘loan book’ will have undergone a haircut of over 50% on nominal. This is because the collateral is dire, no paperwork etc.

    The NAMA scrip ( to my mind) cannot possibly be €4bn total , more likely in the €2bn-€3bn range.

    What ‘market’ or ‘support’ operation’ is covering the remainder of the €4bn post the NAMA scrip payout ????

  13. @ Hog

    See it that way if you like, and you do seem to like. As Eoin says, everybody initially raised an eyebrow, but on “mature reflection” saw it as a a mere temporary bridging device to the INBS endgame. This endgame, consisting of promissory notes for recap and NAMA bonds for liquidity/funding has not changed one iota.

    Continue to rail about “bridges to nowhere” and “promising our money” and “authority to issue government debt”. Then in a few days have a look around and ask yourself why Joan Burton, Michael Noonan, David McWilliams, Brian Lucey etc. etc. seem to be totally unruffled by this non issue.

  14. @2Pack

    I take your point, the figures don’t quite add up. I suppose the “normal” government guarantee will be expected to have filled the gap with retail/bank/corporate funding. But maybe not. Also what is going to happen on Dec 31st IF the guarantee is removed.

    It may be that Government Backed IOUs will have a more permanent role to play. But I stand by my ststement that this new debvelopment has not added to the exposure of the Irish taxpayer, though it may have changed its structural make up.

  15. @ All

    by the by, Greek banks have gone bid crazy on the shorter dated Greek government bonds (march n may 2011) over the last few days – yield gone from 10% last week to 5.5% today on the March. Seems like they are definitely not expecting a restructure this side of Summer 2011.

  16. @BWII
    All you are doing is making the case that all the debts of the nationalised institutions (Anglo and INBS) should be treated as government debt until otherwise proven.

    You can’t fill a hole on the asset side with increased liabilities (retail/bank/corporate funding).

  17. @ Hogan

    if they issued via the ELG to a market buyer, the exposure to the taxpayer would be no different. All this operation recognises is that INWS is about to undergo a radical restructure and that external buyers would not be willing to buy 4bn of paper that there was so much uncertainty over in terms of when or how it might become due.

  18. INBS had a loan book of €10.5bn in April, issued an annual report around then and wrote €2.8bn off leaving a ‘loan book’ of €7.7bn total.

    Most of their loan book is not good enough for NAMA and the bit that is sufficiently collateralised for NAMA underwent a haircut of 70% upon transfer , that was only €500m of it.

    And we just gave them a €4bn float against that and we also got some genius bond market practitioner telling the Irish Times that this €4bn injection was “Innovative” 🙁

  19. I would like to second Garry’s vote of thanks, but isn’t this just another feint with the boot that is kicking the can down the road?

  20. Zerohedge has picked up on this new “Micro Quantitative Easing” policy and assumes it is an EU Wide initiative. You may take it that the Germans Do Know by now Geckko 🙂

    http://www.zerohedge.com/article/irish-nationwide-now-engaged-micro-quantitative-easing-it-issues-bonds-itself

    Zerohedge implies that sorting any ‘Micro QE’ amount of €4bn or less is an EU Wide policy. I don’t think it is myself. I would expect the ECB to clarify matters quite soon though !!!

  21. *ANGLO IRISH BANK WILL BE SPLIT, GOVERNMENT SAYS

    *ANGLO IRISH WILL BE SPLIT INTO FUNDING, ASSET RECOVERY BANKS

    *ANGLO IRISH RECOVERY BANK WILL BE SOLD OR RUN OFF OVER TIME

    *ANGLO IRISH DEPOSITORS TO BECOME CLIENTS OF FUNDING BANK

    *IRISH CENTRAL BANK TO DETERMINE CAPITAL LEVELS IN OCTOBER

    *ANGLO IRISH WILL NOT EXPAND LOAN BOOK

  22. @ 2Pack

    About 80% of INBS’ loanbook was in respect of commercial property and 455 of that was in the London area.

    The UK commercial market has recovered in the past year and if poor supporting paperwork is a problem for NAMA rather than the collateral, surely a civil action at least could be taken against Fingleton?

  23. Statement – Anglo Irish Bank

    The Minister for Finance today briefed his Government colleagues on the strategic options for the future of Anglo Irish Bank. The Minister conveyed to the Government the views of the Board of Anglo Irish Bank, the Central Bank, the National Treasury Management Agency, the Department of Finance, the EU Commission and his own assessment of the position.

    The Government decided that Anglo Irish Bank will be split into a Funding Bank and an Asset Recovery Bank. Anglo Irish Bank has not expanded its loan book since it was nationalised in early 2009 and this will remain the case. It is intended that in due course the Recovery Bank will be sold in whole or in part or that its assets will be run off over a period of time.

    The guaranteed position of depositors will be unchanged by the new arrangements and no action is required of them as a result of today’s announcement. The depositors will become customers of the Funding Bank which will be fully capitalized and continue as a regulated bank.

    In order to restore the reputation of the Irish Financial System it is essential to bring finality to the problem of Anglo Irish Bank – our most distressed institution.

    The Government’s primary objective in dealing with Anglo Irish Bank has been to minimise the cost of this distressed bank to the Irish taxpayer.

    The Board of Anglo Irish Bank submitted its preferred option to the Minister and to the European Commission at the end of May for consideration under State Aid rules. The board’s plan envisaged splitting the bank into an asset management company and a new good bank. The asset management company would have managed out over time the bank’s lower quality assets remaining after the transfers to NAMA. The new good bank would have managed the remaining share of the loan book, retained the bank’s deposit funding and sought new lending opportunities to grow the bank.

    The Minister acknowledges the good faith and hard work of the board in producing a credible proposal for the future of the bank.

    However, the Government has concluded that this plan in its current form does not now provide the most viable and sustainable solution to ensure the continued stability of the Irish banking system.

    Resolution Proposal

    In these circumstances, the Government has decided to opt for a variation of the board’s restructuring proposal. The Government’s decision does not affect existing guarantee arrangements.

    Under the restructuring plan, the Funding Bank will be a Government-backed/guaranteed specialist deposit bank which will contain the bank’s deposit book. It will be a stand-alone, regulated bank, completely separated from Anglo’s loan assets and it will be owned directly by the Minister for Finance. This bank will not engage in any lending, but will provide a secure home for Anglo’s depositors and any new customers who wish to deposit their funds with it. Depositors with the Funding Bank will be completely insulated from the future performance of the rest of the current Anglo Irish Bank loan book.

    The Asset Recovery Bank will also be a licensed regulated bank. Its dedicated focus will be on the work-out over a period of time of the assets not being transferred to NAMA in a manner which maximises the return to the taxpayer.

    Costs

    The Government believes that it is essential to identify, with as much certainty as possible, the final cost for the restructuring and resolution of the bank. This will underpin international financial confidence in Ireland. Accordingly, the Central Bank will determine the appropriate levels of capital needed in both institutions. Its decision will be announced by October.

    EU Commission

    The Department of Finance has conducted intensive discussions with the EU Commission in recent weeks about the future of Anglo Irish Bank. The Minister for Finance met Commissioner Almunia last Monday to discuss the issue. A formal detailed plan is being prepared for submission to the Commission for approval.

    The Minister said:

    “Today’s decision by the Government will provide certainty about the future of Anglo Irish Bank. Resolution of this, our most distressed institution, is essential to the promotion of confidence and stability in our financial system.”

    8th September 2010

  24. @ Finfacts

    Nama will never sue Fingleton for a loan it never took over in the first place Michael.

    A lot of the ‘commercial’ in London is ‘investor syndicate’ funding and the lack of paperwork would be the likes of personal guarantees, joint and several liabilities and the normal highly structured recourse trail one expects to underpin a high LTV loan.

    Of the €2.8bn impairment charges in the annual report only €0.1bn related to Irish Residential Mortgages ……emmm HeellLLLOO! to the auditors !!!!!

  25. Seriously folks, you’ve had about 14 mins to respond! Any thoughts on how this works, what assets does the Funding Bank have – irish interbank depos, irish government debt? Markets tentatively like it, spreads and cds moderately in.

  26. @Eoin,

    Many thanks for the heads-up on this. I was waiting for the ‘experts’. I had exactly the same question as you have – plus what about the funding gap in the recovery bank when you pull the deposits out? Will the funding bit buy new government bonds that will be used to plug this gap in the recovery bank?

  27. So effectively Anglo going to be wound down but no timeframe is being given. What do you call a bank that takes deposits but doesn’t lend? A FUN-ding bank! Fun that is paying depositors an interest rate when you don’t lend!

    The CB is responsible for finalising the cost in October. So Patrick Honohan’s reputation is being whored around the place again. Will he stick with his €22-25bn estimate or will be closer to S&P’s €35bn?

  28. Apologies for grammar above and for poor humour – the correct answer to the question what do you call a bank that takes deposits but doesn’t lend is of course a post office.

  29. @Eoin

    Exact same query as you. What are the assets? Must be government bonds. This looks like a jolly good bank for placing your deposits.

    What about those subbies??

    Will the Asset Recovery Bank have any liabilities?

  30. @Jagdip

    I think the deposit bank will indeed look very like the post office bank. It looks like simply being a device for preventing a run on the deposits and it should work.

    If the Asset Recovery Bank has no liabilities then it should have value and could turn out to be saleable. Surely the subbies are in here and they should be happy.

    It sounds clever, but I reserve judgement until I see more detail.

  31. If the business model of the Funding Bank is separate from Anglo’s loan book, why not simply transfer the whole shooting match to NTMA State Savings? The only reason I can think of for the massive duplication that is the Funding Bank is to dangle in front of Santander or a Canadian Bank as an easy in to the Irish market.

  32. @Brian

    Well, subbies are with the other bank, right?

    Lenihan did say that the ARB (I’m Acronym-ing it) would be free to renegotiate a debt buy back at a discount once the guarantee ends).

    A billion and change is better than nothing I guess.

    It will indeed be interesting to see what sort of operationa the FB gets involved in with the deposits and if the current rate offered by Anglo will be enough to keep people there / attract new people.

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