The Mechanics of Buybacks

The Sunday Business Post reports the government intends to launch a buyback from Anglo bondholders (available here). 

The government is expected to launch a bond buyback for Anglo Irish Bank in the coming weeks, as part of a restructuring plan agreed with the EU Commission. 

The buyback, which will reduce the bill for taxpayers, will offer some bondholders in the new Anglo asset recovery vehicle the option of a bond, or a term deposit, in the new funding bank at a significant discount.

In the discussion of buybacks, or negotiating with bondholders”, it sometimes seems to be forgotten that the only way these negotiations succeed is that there is a credible threat that losses will be directly imposed on bondholders.   One particularly strange example was when the Minister for Finance took credit for the earlier round of Anglo subordinated debt buybacks, even though these buybacks only took place because of the lack of credibility of the governments policy of protecting bondholders.   The main reason the bondholders were willing to accept the buyback must have been the risk of a change of government.  

A good cop, bad cop routine may be going on at the moment, with the opposition parties being quite explicit about their intentions.   The Post reports,

Last week, Fine Gael leader Enda Kenny wrote to the EU competition commission saying there was, in his partys view, no sound legal or economic case for the Irish taxpayer to repay bond investors in Anglo Irish Bank following the expiry of the guarantee.

The letter made it clear that he was referring to those bondholders who invested before the September 2008 guarantee, both subordinated and senior debt holders. 

In considering what the threat point in buyback negotiations should be, I have also been surprised by the lack of curiosity about the details of the proposed Anglo split.   Most commentators have been content to repeat the mantra about the need for certainty on the cost and timing of resolving Anglo.   

It will take some time before these uncertainties can be resolved.  But surely we should be told now exactly how the mechanics of the split will work.   What will be the value of the claim that the funding bank will hold on the recovery bank?   Will this bond be guaranteed?   How will capital be divided between the two entities? 

On the last question, a number of reports make the point that the funding bank will only need light capitalisation given that it wont be making new loans.   This strikes me as a strange claim.  The main purpose of capital is to protect depositors from losses.   Surely a key objective of the split is to protect depositors so that they are willing to keep their funds in the funding bank, potentially weakening the need for guarantees of deposits or the bond issued by the recovery bank.   On the other hand, if the goal is to encourage the bondholders to accept buybacks, shouldnt the recovery bank be capitalised as lightly as possible?  Some harder questioning about the mechanics of the split seems warranted. 

50 replies on “The Mechanics of Buybacks”

John McHale says:

In the discussion of buybacks or “negotiating with bondholders” it sometimes seems to be forgotten that the only way these negotiations succeed is that there is a credible threat that losses will be directly imposed on bondholders.

There is a much more real concern for bondholders – the fact that the Irish sovereign may not be able to pay, over any reasonable time period – and raising interest on roll-overs has a law of diminishing returns – where the central government has to extract more and more out of the economy, thereby shrinking it, and reducing overall capacity to pay.

It depends on the position in which bondholders find themselve in too, I guess. If they are in a position where they are desperate to convert assets into short or medium term liquidity, then we really have a game in progress. Is the arrival of the Basle 2 agreements, in any way, going to drive markets towards this increased liquidity in the short to medium term? Maybe the bond traders reckon, that if they can extract liquidity from sources right now, whatever hit they have to take, will be more than offset by the premium they can charge for supply of the same liquidity to other customers. That is not beyond the realms of speculation at this point.

In the most peverse scenario of all, that I can think of – Ireland may end up saving money by imposing a hit on its bondholders at the moment – but have to pay back the same money, to re-acquire the same for liquidity under new Basle 2 legislation. There is some game afoot here in the market, I am sure, and my speculation is something along the lines I have described. A kind of two step shuffle, where the Irish sovereign can feel proud it has shared losses with creditors, but in reality, advanced one step and back stepped once again. The net outcome is the same. All that changes is the news headlines. BOH.

@ John

at the moment we have four major issues affecting the somewhat high value of buyback prices (ie clearly Anglo sub debt should be worth nothing, but trades in the market between 20-30 cents).

1. poor legal framework to transmit losses down the capital structure other than via outright liquidation
2. government fear that liquidation would endanger entire financial system and capital inflows
3. EU/ECB belief that banks not be allowed go bust via liquidation (trade purchases, with or without temp nationalisation, is the preferred route), and belief that capital losses should be limited on debtholders (ie subs maybe, no way seniors).
4. bondholders knowledge of all of the above

I agree that the good cop bad cop concept is probably the best way of approaching this – though i suspect the markets are too fragile (in terms of Ireland) right now to play this game. One for next year maybe.

I suppose anglo subbie holders might take the view that

1 They can only be defaulted on through a liquidation procedure ( although I think they don’t get their coupon via the commission)

2 If the bonds trade at 20c the money saved by the state by forcing losses upon them would be outweighed by the cost and risk of running the bank through liquidation. They might suspect that the state will in the end buy back their debt.

Can the commission stop the state buying back or paying out on sub debt as it constitutes illegal state aid? Where would this leave subbies? Could they get the central bank to wind up the bank? What about seniors?

The good bank/bad bank idea can only be wishful thinking. It supposes that you can concentrate junior bondholders into the bad bank, but somehow leave equity holders intact at least in part in the good one. That goes directly against contract law. It may work if the government allowed itself to be completely washed out of the ownership structure in the bank but if they do that, then how can they hope to a) influence the operations of NAMA and b) convince voters that their investment is good over time? I suspect that all of this are desperate attempts to play for time.

Chapter IV of the Central Bank Act 1989 appears to deal with winding up of banks

I’m not sure if it has been amended

Looks like a creditor can apply to have the institution wound up as well

With respect to examinership, looks like only the central bank can apply

So, unless this has all changed, it looks like a subbie or senior debt holder can apply to have a bank wound up

Chapter IV of the Central Bank Act 1989 appears to deal with winding up of banks

I’m not sure if it has been amended

Looks like a creditor can apply to have the institution wound up as well

With respect to examinership, looks like only the central bank can apply

Check statute book section 3 companies amendment act 1990

So, unless this has all changed, it looks like a subbie or senior debt holder can apply to have a bank wound up

Sorry for the multiple posts

Maybe the case is that Anglo subbies shouldn’t be paid because they have no credible threat to have the bank wound up. If they petitioned the high court for a winding up the high court it would be likely that the Court would exercise its discretion to refuse to grant the Order because the subbie/creditor was unlikely to receive anything out of the liquidation. Senior debt holders on the other hand would receive something out of the liquidation so their threat to have the bank wound up is credible.

@ Christy

fair point. However, given that the subs still have the power to petition the courts for a wind up, there is still a reasoned arguement out there that we will have to pay them something to negate that option. If nothing else, the uncertainty over the subs doing something along those lines may make it difficult for the bank to operate in the meantime.

On the seniors, BNP did a very good analysis over the likely payouts in the event of a liquidation of Anglo. They estimate that seniors would get 81 cents in the euro in that event (if you include all the govt capital so far, but not any more).

My opinion on this hasn’t changed since this post:

Anglo’s subordinated bonds don’t mature until 2014 at the earliest. Why do we need to do anything with them now?

As for “The buyback, which will reduce the bill for taxpayers” I think this reduction is relative to the case in which the government puts funds into the Recovery Bank to ensure that the subdebt is paid off in full.

Relative to the case where the Recovery Bank tells the subbies in 2014 that it’s broke and not paying out, the buyback increases the bill for the taxpayers.


To play devil’s advocate, as I understand it, one reason why we might need to do something with them now is that they are prospective creditors of the bank and, as such, they have the right to petition to have the company wound up, not just when their debt falls due, but also when the company is insolvent.

Their interest may complicate any reorganization of the company

Section 52 of the Central Bank Act 1989 envisages the making of rules of court for the purposes of Part IV of the same Act. However, I cant see any such rule in the Rules of the Superior Courts.

If such a rule doesn’t exist and was passed it might allow for a fast track liquidation procedure.

Its also entirely possible that , as I suspect has been the case all along, they havent a rashers what they are doing. Every time someone puts the hard word on them they sway to that side. Now we see mounting public anger and bond market concern with the cost of Anglo – so they swing to splits, buybacks, swaps etc. All of these of course could have been done 18m ago, but were deemed impossible/unwise/necromantic then.
Dont confuse following with leading.

Thanks for the comments. A few quick responses:


“at the moment we have four major issues affecting the somewhat high value of buyback prices (ie clearly Anglo sub debt should be worth nothing, but trades in the market between 20-30 cents).

1. poor legal framework to transmit losses down the capital structure other than via outright liquidation”

I can’t disagree. This is why resolution legislation is so urgent. This also goes to Christy’s point about bondholders being able to threaten to force liquidation. To the extent this right to impose destruction exists, it should be circumscribed in any legislation.

“2. government fear that liquidation would endanger entire financial system and capital inflows”

Again, we should not be in a position where liquidation is the only option — legislation is needed. To the extent that the crediworthiness of the sovereign is maintained, I think explicit guarantees on new borrowing could be used to prevent capital flight. This underlines the need to draw a very bright line between sovereign obligations and non-guaranteed bank obligations.

“3. EU/ECB belief that banks not be allowed go bust via liquidation (trade purchases, with or without temp nationalisation, is the preferred route), and belief that capital losses should be limited on debtholders (ie subs maybe, no way seniors).”

This is a difficult one. But I doubt if the what Paul Hunt calls the “institutional EU” is as singleminded on the need to protect bondholders as your point suggests. The competition authorities for one do not seem to so unquestioning about bailouts.

“4. bondholders knowledge of all of the above”

Indeed, hence the need to focus on all the elements that change the threat point


Does this mean you are writing off the possibility of imposing any losses on seniors? By 2014 I assume all the legacy seniors will be long gone.

Even if realpolitik means that seniors get to walk, I think it also means that we have to recognise that the politicians seem to prefer to go the buyback route (renegotiation, even if backed up by a big stick, sounds relatively benign). Shouldn’t we then focus on making sure that the loss imposition is as large as possible if such renegotiation takes place? And this requires that we give attention to the factors that affect the threat point — the resolution regime, the details of the Anglo split, bright line between sovereign and bank obligations, the ability to use explicit guarantees to secure future funding, etc.

The reason for the buyback of sub debt is simple. From Anglos point of view, this is carried at 100 as part of non-equity capital, a buy back at say 40 will give an immediate boost to core tier 1 capital of the 60. Core equity capital is what they are short of and what the govt keeps having to throw in. From the holders point of view, he is also prepared to deal as
a) if he is marked to market, it’s an immediate ‘profit’ of 10-20
b) if he’s a buy to hold account, I guess he assumes he wont get repaid but offered some conversion to long term senior at an implicit discount, ie will repay at 100 but that implies a true haircut of x%.

As I said on another thread, it’s a certainty in my view that the EU will not permit a senior default and the idea that you can impose one and not hit depositors is questionable as under Irish law they rank pari passu. The Govt and EU know exactly what they are doing, this is the strategy for all EU banks, keep them liquid via ECB and fund the losses in time via internal capital generation. In basket cases like Anglo, they will be wound down but funded fully by the ECB until the wind down is complete. Remember, for all the criticism of Irish govt policy, Gtees, NAMA etc, it is EXACTLY the same as every other country is doing in reality. The Spanish cajas are issuing bonds to themselves since summer 09 to fund via ECB and are totally insolvent. Depfa, Hypo, Commerz, Dexia, KBC, all the Greek, all the Portuguese…technically insolvent but kept alive via liquidity gtees and state gtees, the UK ‘insured’ RBS and Lloyds/HBOS and set up the SLS to fund them, they have just kicked the can down the road rather than fund their own NAMA. No western state will allow a bank failure and that includes the senior debt plus depositors. For all the speculation, I cannot understand why anybody thinks any different, the printing presses will always beat the shorts in the market, and savers and the prudent get clobbered…’s always been that way.

One final point is that those who advocate a default, (morally and in isolation probably justified), are deluding themselves if they think it would not have a catastrophic impact on Irish debt both sovereign and bank. Neither would fund in capital markets for a generation, and the cost of that in human terms would be unthinkable. People need to get real if they think Ireland would be forgiven in time. 30 years after Japanese banks had their own crisis, with NO default, they still cannot fund internationally, Argentina & Russia both had to wait 10 years for even the sovereign to issue and it was at a 10% premium, no American bank will be able to fund overseas for years after puking on WAMU and Lehamn debt holders. What chance would we have ? It’s a disgrace and irresponsible of so called experts in the media and our numpty opposition politicians to make this populist call.

“no American bank will be able to fund overseas for years after puking on WAMU and Lehamn debt holders.”

I refuse to believe that this is the case. Are you saying that JP Morgan, Wells Fargo, Citigroup cannot issue in global capital markets due to WAMU & Lehmans?


“As I said on another thread, it’s a certainty in my view that the EU will not permit a senior default and the idea that you can impose one and not hit depositors is questionable as under Irish law they rank pari passu.”

I think your pari passu point is misplaced. Losses would be imposed on depositors but, since they are guaranteed, the state would step in and make them whole. As this would not prejudice the interests of senior debt holders, (because it wouldn’t increase their losses) they would have no recourse.

With respect to the EU point it’s not very clear what you are saying. Which EU institution would block it? What mechanism would they use to do so?

With respect to access to international bond markets I suspect the position is not as drastic as you suggest but I’d say others are in a better position to comment on that.

Well none have issued outside of US since Lehman, but it’s a fair point. I should have said the regional US banks which I am convinced will only fund domestically for years. I know for a fact that the major european banks have pulled all lines for US banks other than the Investment banks and thats because they need them to park their balance sheet risk whether int rate or fx.

Christy… If I was a bond holder I would insist on a wind up and any claim the depositor would have would rank pari passu with my own including any Govt top up. But as I said it’s ‘questionable’ and I dont think anyone knows for sure what the courts would say

on the EU, it’s the commission which is driving everything and they have significant leverage over the Govt whether it’s the deficit breach, the state aid to banks, the eligibility of NAMA bonds at the ECB etc. The risk of what might happen if a significant european bank defaulted on senior debt in terms of spillover into other states is too great, they just wont allow it. Trust me what is infuriating the EU right now is the massive haircuts being imposed by NAMA and the immediate capital shortfall and hence sovereign budgetary probs that creates. The EU cannot understand why we dont stick to the 40% we agreed with them and they fund the difference as long as needed via the bonds issued. If you dont believe me, look at the NAMA legislation, it contains a number of clauses that are completely unnecessary for Irish company law. Reason is that EU wanted a template for other countries and we’re the guinea pig. One of the fallbacks is NAMAs to be rolled out across the EU in next few years if the capital holes become too great.

An excellent analysis.

It is about time that this occurred. Bull from Chow Eoin and the rest stood in the way of a recognition of realities. The strong likelihood of default is true and fair.

The bondholders are given a way out. Fair. My only quibble is that the shills are so stupid, they seem to reflect the muddle that passes fpor policy!


Apart from the joy of going to court, famous lawyers have admitted in print that if someone sues, they will concede immediately, I agree that your post has great points.

The EU has individuals with great skills and who COME FROM IRELAND! No names, No pack drill!

So why should there be a communications problem????????

I mentioned this connection before???? We are blood relations in fact and the lack of communication evident is appalling! The only saving grace is that she would be talking to GFF and permanent civil servants who are all like frozen bunnies, zombie leaders in fact. I imagine she is quite hoarse?

There may be another layer to this that escapes me and the commentators here, but as it escapes me……..


I agree completely.

The threat to renounce debt is always a real one. It is based upon political realities that are mounting in Ireland. The delay in dealing effectively with these matters all related to banking and land is imposing further costs on Irish taxpayers and voters. They will react. The longer this is not resolved, the greater the likelihood that the reaction will be an overshoot. Your advice to this blog seems to be of the nature of what the blog must do, neglecting the powerless nature of this blog! I would welcome a more critical viewpoint from you. This may enable the policy makers who actually read this blog, to consider choices and nuances. There is no need to defend their choices, you do not appear to be a shill. They need policy options and a path through a tangled forest. They have been lost for some time but cannot say it.

@MPLT Your view of the EC Commission´s attitude to NAMA is hard to square with its actions. It was the Commission who insisted in a more robust analysis of the loans: this necessitated Lenihan having to issue revised Regulations in March, 2010 with a higher discount for legal, administrative costs etc. in calculating LTEV. Moreover, the Commission insisted as part of its provisional approval of NAMA (again March, 2010?) that NAMA not be allowed to use many of its statutory powers in terms of enforcement etc. because same would give it a competitive advantage over other credit institutions in breach of State Aid. Why would the Commission do this if they wanted NAMA legislation to be a template for other countries. Also it has to be said that Irish legislation is very different in style than that of continental Europe (civil law) so it unlikely to be used as any sort of template.

Whereas one can certainly criticise the Commission for worrying about State Aid issues given the real economic crisis, I find it difficult to agree with your claim that the Commission is frustrated that we did not stick with the 40% haircut mooted earlier.


“The main purpose of capital is to protect depositors from losses.” No, the main purpose is to prevent banks going insolvent. The capital requirement is calculated by reference to the quality of the assets, hence the term Risk Weighted Assets. The nature of the liabilities is irrelevant.

The Funding Bank’s assets will all be government guaranteed in the form of NAMA 1 and NAMA 2 bonds. It will have no other loans. Hence the capital requirement should be very light. The Recovery Bank will have very dodgey assets and should therefore account for the lion’s share of any capital requirement.


Which would you prefer to have a deposit/bond with:

Bank A

100 Liabilities
100 Guaranteed Assets

or, Bank B

10 Equity
100 Liabilities
110 Dodgy Assets

Clearly Bank A as it is 100% safe whereas Bank B despite having a capital cushion may not be able to meet its liabilities.

The split of Anglo has moved depositors to Bank A and kept bondholders in Bank B. It has definitely weakened the bondholders position, hence the jump of 80bp in yields.

very interesting two way chat going on here, obviously one or two bond traders around. Here’s a question for the audience… have a ring fenced default. Anglo debt gone, state debt shored up and reassure soverign holders/buyers. Not legal? Why not? We are in crisis mode – time to break a few rules.

Given that you cite no source for your view that the EU is annoyed at the >40% haircuts, I am tempted to be sceptical. Ours is not a government that argues with Brussels – it can’t, for obvious reasons. But you may be correct – if so, what has so emboldened our leaders? Have the haircuts grown to 50-60% because they really should be 70-80%? Is somebody splitting the difference?


Why do you think regulators put capital requirements in place to avoid insolvency? They do it because depositors are guaranteed (so losses will be borne by the State) and because of spillover effects. The funding bank will have the depositors, hence the need for capital (though you could argue that capital and the guarantee is a belt and braces approach to making them feel secure). The recovery bank will not have depositors, though it will have legacy bondholders who are locked in for a period of time. If you want these bondholders to take losses on their bad investments, then you should not put in loss absorping capital. The details of the split really do matter for the potential for loss sharing.

@alan d.

We must be seen to avoid default if at all possible. Therefore, non-guaranteed debt must be the first to be torched. Defaulting before exhausting other options will devalue our reputation hugely.

The Minister for Finance seems to have signalled fairly clearly:
1. Anglo will be split.
2. There will be bank resolution legislation (scheduled for early next year).

The question is when the Anglo issue will be dealt with is at large. However, it seems form the DoF and MoF’s statements and actions to date that their preference is to deal with this early next year (after the budget has been dealt with, after AIB and BoI have secured their funding position and after depositors have been well prepared) but that it may have to happen sooner and they are keeping their options open in this regard.


Regarding your moralistic stand on not defaulting. Do you know our debt should be around 115% of GDP in 18months time. Our economy will not be able to withstand that pressure. the markets are hampering Ireland right now and the way things are going it is going to be crazy to borrow money on the markets as it will be too expensive. Remember Greece called in the IMF and their sidekicks the ECB when the rate went to 7%, so we are,nt too far off. So get off your horse. By the way the only people I read on this blog are the serious contenders who put their names to their views. the rest have,nt got the courage,probably all losers in the Dept of Finance.(only read yours as your CODENAME was so dumb) I am just a regular guy here who is concerned about the future of this country and my family.


I am speaking from some limited experience of how bank regulatory capital works. You are of course right in spirit that the main reason for wishing to prevent insolvency is to protect depositors. But believe me this is achieved not by assessment of the liability side of the bank balance sheet but by assessment of the asset side. Two banks with identical assets but one wholly funded by bonds and the other wholly funded by deposits would have the exact same regulatory capital requirement.

FB and ARB wil be capitalised according to the regulatory norms. It is not a question of FB has depositors so we should tilt the capital injections towards it. It is a question of having the correct regulatory cushion to meet asset failure. FB’s required cushion will be much less than ARB’s.

This is the only basis on which this Resolution Scheme can be defended. ARB’s bondholders will feel very exposed now that their “depositor hostages” are being evacuated but they can’t really complain because they are going to left in a properly capitalised bank.


You are of course right that in the normal course of events the requirement for (loss absorping) capital depends on the riskiness of the assets. In the present case, I believe this is relevant for the funding bank. For instance, whether the iou from the recovery bank is government guaranteed or not should affect its risk weighting and thus the necessary capital for the funding bank.

But I see the recovery bank as quite a different fish. I don’t think it is appropriate to apply the usual regulatory norms. If such a norm required putting in fresh State capital to absorp additional losses that should be borne by bondholders, then I would see that as perverse.

A different question arises in relation to the current capital in Anglo (post promisory notes), assuming there is any left after the regulator does his examination. How this capital is divided between the two entities is important in terms of protecting the legitimate property rights of all involved.

Commenter Gadge has made some important observations in relation to the previous injections of capital, where these injections only took place due to the emergency situation. He has noted a UK precedent that this capital was disregarded when identifying the compensation due to the previous shareholders of Northern Rock post nationalisation. I would tend (weakly) to the view that the the reason for why the capital was put in to the bank is not relevant when it comes to how that capital is used to absorb losses among creditors. If Gadge is following this thread he might want to weigh in.

I haved mentioned this before but the fact that the Sate’s money is higher up the capital structure (had to be to qualify as Tier 1) seriously compromises any attempt to inflict pain on bondholders.For starters,their coupon cannot be withheld if the State is to gets its coupon. The State could decide to do without (suppose it is more or less paying itself ) and use the prospect of no coupon for several years to force bondholders to engage with a buy-back.As other posters have observed there is a serious problem in terms of actually passing the pain through without an actual wind-up.It is very hard to see how pain can be inflicted on bondholders without chewing up the prefs in the process.

@Paul M

The Government money is gone so there is no need to be worried about trying to protect the State’s investment in trying to inflict pain on bondholders. There is too much uncertainty to really comment on what is likely to happen. We will know more after the report from the regulator.


In normal circumstances, the capital of the sum should be the same as the sum of the capital of the parts and therefore the divvy up of capital would be in proportion to RWA.

Presumably FB will be capitalised to meet regulatory norms i.e. 8% RWA but with RWA next to nil there may only be a de minimis requirement.

I am presuming that ARB will also need 8% RWA capital and in its case that will be fairly significant. Otherwise ARB has no chance of ever being self funding.

That is the main medium term goal as far as the EU is concerned, for Ireland’s banking system to be weaned off the State aid of a government guarantee on any liabilities.

Interestingly a guarantee on assets is not regarded as State aid and you can see why. It is open to any bank to simply invest in sovereign debt so FB won’t actually be at an advantage in that respect. How FB is going to pay any sort of interest on its deposits if it is only earning Euribor on its assets is another day’s work.


The Governor addressed our issue in his speech today. I’m not sure how far it goes to providing the answwer, however. You seem to be right that the immediate intention is to apply the standard regulatory capital requirement to the the recovery bank, though there is also a note about changing the regulatory status. I must admit that it is not very clear, at least to me.

Relevant paragraph:

The Government has asked the Central Bank to determine the appropriate levels of capital needed in the two institutions into which Anglo is being split. There are some technicalities involved, and, while I don’t want to anticipate the exact numbers to be published, it may be worth explaining that the type of capital assessment we are doing for Anglo is different from those we have already conducted for the other Irish banks, due to the nature of the split bank structure, the goal of working out assets and of derisking the balance sheet and the prospect of a change in the regulatory status of the asset recovery entity over time. Our analysis of base capital calculations will therefore focus on the amount required to ensure the new structure is capitalized in accordance with current Basel capital requirements in light of existing provisions and immediate expected losses. We will also be publishing a stress assessment of the potential future losses taking account of stress funding costs as well. Thus, recognizing that losses may exceed the base assessment over time, by setting out a stress case we aim to provide as much certainty as is reasonably possible as to the potential exposure presented by Anglo under a severe hypothetical stress scenario in the run off of its book.


I don’t see why this guarantee would work any differently than a standard deposit guarantee in a winding up. If you think this is ‘questionable’ please explain why.

I think it is the ECB that decides whether NAMA bonds are eligible as collateral – I don’t think the commission has any role to play here. (I suspect they ECB independence precludes them having a role).

The commissions role with respect to deficits, while it could conceivably be used as a stick, has been so weakened by the regular flaunting of the rules that I don’t it would be politically possible to single out Ireland for special treatment. Moreover, the only punishment mechanism is fines. they couldn’t block policy decisions with respect the bank restructures using this mechanism.

The commission’s role with respect to state aid, and their actions, run counter to an attempt to force the state to give extra aid to banks.

I still can’t see how the commission would block a restructuring.

I agree with what you’re saying up to this point:
“FB’s required cushion will be much less than ARB’s.”

That, surely, depends on the quality of its assets (i.e. the risk weighted value). If the loan to ARB is guaranteed, it will be lower. But then the point of having the funding bank at all becomes uncertain – it neither lowers the size of the guarantee nor increases the efficiency of the Anglo resolution. The distortions to deposit rates in the eurozone will continue; I can’t see how the EU won’t take a dim view of this?


The “change in regulatory status” motif would put the fear of god in me if I was a legacy senior or a subbie. This seems to be part of the game of poker being played out as your opening comments allude to.

@ Hog

The ARB bond has to be guaranteed or else that comment about FB’s depositors being completely isolated from ARB is a porkie.

The plan, I presume, is in time to remove the government guarantee on deposits/bonds. Then FB’s depositors will have the constructive guarantee of knowing FB’s assets are guaranteed, whilst funders of ARB will have no guarantee other than the normal security provided by the capitalisation of the company. It is definitely a step towards restricting the (implicit) guarantee to depositors whilst letting bondholders fend for themselves. This is not legally possible whilst they are both pari-passu funders of a single entity, as is the case today.

If eventually things get so bad that ARB has to be liquidated then its senior bondholders will be sharing the pain with only the ARB backed element of FB’s deposits. Currently they would share the pain with all of the deposits.

“Then FB’s depositors will have the constructive guarantee of knowing FB’s assets are guaranteed,”
Assets are not guaranteed, liabilities are.

Either the guarantee remains on the loan that FB gives ARB, or it no longer funds ARB directly – those are the only two options for FB to be isolated.


Absolutely, the guarantee on ARB loans from FB remains. If ARB goes belly up its assets are divided between bondholders and ARB loans from FB. The government then makes whole FB for the losses it has taken on the ARB loan.

I understand the mechanism.

What I don’t understand is the benefit of running two banks (a cost, you’ll have to admit), paying the highest deposit rates in Europe, having two bad banks, two CEOs, two boards, a constant stream of bad news (is it really going to stop?). Better to cut it off totally. Pay off the depositors as they come due, NAMA ARB at face value and take the losses in the CB (which the state is liable for) and NAMA.

Not only is this cheaper, less newsworthy (on an ongoing basis), all the bad news in this year (it’s going to be horrible anyway), but NAMA will be able to claim it would have made a profit if it wasn’t for Anglo…

@ Hog

Your last post is somewhat off topic and I will not be sucked into it.

Earlier you said:

“Assets are not guaranteed, liabilities are.”

I don’t know what semantic point you are making here. Government bonds are guaranteed. NAMA bonds are guaranteed. The ARB bond will be guaranteed.

One man’s liability is another man’s asset. Take a NAMA bond. It is a liability of NAMA but an asset of its holder. FB will have its assets guaranteed but in time its liabilities will not be directly guaranteed but will be implicitly guaranteed as they are backed by guaranteed assets.

This all seems so obvious, I must be missing some subtlety in your statement.

Apart from the semantics, it is the point that the FB to be linked at all to ARB can only give loans (in whatever form) to the ARB that are guaranteed if it is to retain the firewall between it and ARB. So your earlier comment:
“The plan, I presume, is in time to remove the government guarantee on deposits/bonds. Then FB’s depositors will have the constructive guarantee of knowing FB’s assets are guaranteed, whilst funders of ARB will have no guarantee other than the normal security provided by the capitalisation of the company.”
does not seem to apply.

Either the bonds (liabilities) of the ARB are guaranteed or FB will not be funding it. Otherwise FB will be exposed to ARB.


I hope you are not being deliberatley difficult. When I say in time deposits/bonds will not be guaranteed, I meant of course new deposits/bonds as this is what constitutes in the EU’s mind state aid. Government Bonds are guaranteed to their maturity. Similarly NAMA bonds. These guarantees will not be removed. Now some say the guarantees will be defaulted upon but that is a different matter.

No, we are clearly talking at slightly cross purposes.

ARB bonds are not government bonds, they are government guaranteed bonds.
The FB will purchase or repo these from ARB using its deposit funding (which is covered up to 100k by the deposit protection scheme and over that by ELG for qualifying deposits).
These are the mechanisms by which the FB is insulated from the risk of the assets of ARB.

If the deposits/bonds cease to be guaranteed (except for the 100k deposit guarantee which will remain), FB is exposed to ARB.

The point is that ARB bonds are neither sovereign bonds, promissory notes nor NAMA bonds.

there is a little pot. Some observers here seem to reckon the law will dictate who gets what. The pot is really small

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