Central Bank PCAR Statement

The Central Bank’s new PCAR statement hasn’t yet been linked to on the site so here it is.  This is the most detailed statement released yesterday in relation to the future of the Irish banking sector.

41 replies on “Central Bank PCAR Statement”

Raised my eyebrows at this:

“5. The PCAR will be enhanced by the inclusion of a detailed review, to be conducted by an independent third party, of asset quality in the participating banks. In addition, an independent third party will review the quality of the data banks submit for the PCAR. ”

An independent third party review of asset quality is only going to start NOW?! Why wasn’t this begun 1 Oct. 2009?

One thing that has me scratching my head is that for the Govt to improve its situation through taxation, eventual further wage cuts, etc; will result in a potential reduction in the quality of the Banks asset book.
I am not of the brain power to work out the permutations of this, but isnt it strikingly obvious that this is relevant to the mortgage book ala Morgan Kelly?

From the Technical Report:

Bank of Ireland, Allied Irish Banks, ILP and EBS will be subject, as previously announced, to a stress test in March 2011 under the Central Bank’s PCAR methodology.

Didn’t these guys in co-op with the ECB also carry out the last stress test and come up with the following findings?:

“The stress test results published today [23 July 2010 – CG] for Ireland’s two largest banks as part of a Europe-wide exercise follow the Central Bank and Financial Regulator’s own stress testing process earlier this year under our Prudential Capital Assessment Review (PCAR) framework. The PCAR stresses were set at a severe stress level and it is therefore consistent with our earlier exercise that the Irish banks have achieved the target level of capital in the EU process.“

http://www.finfacts.ie/irishfinancenews/article_1020221.shtml

Don’t stop believin’ …

What would have happened if shortly after the Guarantee PWC came to the Govt and the CB and the FR and told them the banks were screwed beyond belief??

@CG

We have had 26 months of the authorities saying they were sending people in to forensically examine the banks books.
We have got this spiel every 3 months as each previous piece of sticking plaster has worn off.
If they couldn’t do it in that so many iterations over this extended period, why should we believe they can do it now?

Am I naive, or isn’t the asset review of what is left? i.e. after passing to NAMA?? Even if it is I don’t think they’ll be worth a whole lot and should have been assessed in the stress test, fwi(w)w…..

Can somebody elighten me as to the purpose of recapping the banking sector to 12-14% core tier 1 when there is a) no lending demand for the medium term b) a deposit taking franchise that is seriously impaired c) a good portion of the risk taken off the balance sheet. If c) is not true we should not be putting more money in.
Disposing of assets at the bottom of the cycle also makes little sense.

We are constucting a light-house in a bog-it will look magnificent from miles away but serves no purpose.

On PLAR

In addition to work the banks undertake, the Central Bank will retain specialist advisors to identify further disposal or securitization measures.

CB is getting its own advisers to work on the banks?

“9. In addition to work the banks undertake, the Central Bank will retain specialist advisors to identify further disposal or securitization measures.”

Securitisation – has received much bad press, but has been a true form of risk transfer. No problem assigning losses to noteholders. Even German investors (banks & funds) have had to stomach US Subprime/CDO losses. (It’s a strange world where [US] AAA notes can pass on losses, but single-A senior bank bonds can’t. And better to forget Icelandic banks and highlight Lehmans).

The problem is it’s gone a bit expense. The 3-5yr (WAL) AAA Irish RMBS was about 600bps in mid-October (from Markit). This would have drifted out since then. If you were to securitise a pool of Irish mortgages and could find private investors, you’d be looking at ecb rate + 1000bps. (I actually think it would be more expensive).

So – how could you make it cheaper? Either by Credit Enhancement or find non-commercially motivated buyers.

Typical forms of Credit Enhancement are subordination, overcollaterisation and excess spread. Other forms, though not common in European RMBS, are bond insurance and mortgage insurance policies (either mortgage indemnity guarantees or pool policies). It is important to remember that these are comforts to potential investors and don’t necessarily make things cheaper for the issuer.

On subordination: New Irish RMBS will have higher subordination required to get to AAA. Current loan to indexed market values will not be pretty.
On excess spread: without support, this will be negative. A lot of Irish mortgages are trackers with about ECB + 100bps.

Assuming that we can’t find non-commercially motivated buyers (i.e. the ecb), the NPRF/NTMA could choose to retain the lower rated notes. In all likelihood, this would need to be funded. Although this is expensive, it could be justified if you view expected losses to be lower than the market is pricing for. The reason to retain lower rated notes is that if the goal is to reduce the nominal funding from the ecb, flogging AAA is cheaper. The problem is we keep the losses.

It’s also worth mentioning that investors have become more sensitive to the legal definitions/risks in ABS. For example, what investor would take Irish mortgage risk without certainty/protection on future government policy on mortgage forgiveness etc.

There are a couple of structuring things we could do, but there’s no silver bullet. It is worth bearing in mind that even German AAA 3-5yrs RMBS is in the region of 200bps. A bit more expensive than tapping the ecb’s emergency liquidity.

This seems like yet another measure that will increase the aggregate public and private sector debt burden. So it’s another step in the wrong direction.

How are the banks supposed to be resuscitated given their exposure to tracker mortgages based on the ECB rate and the requirement for standalone funding which would be linked to sovereign rates which are currently above 8% ?

@Seafroid

I suppose the hope is that over capitilisation and balance sheet cleaning will allow the banks to access short term private funding.

I suppose the hope is that as there is now an implicit EU guarantee over what will be over capitalized and cleansed banks that private funding will return and the ECB can walk away

*HONOHAN: `BEYOND QUESTION’ THAT ECB IS UNDERPINNING BANKS
*HONOHAN: STRATEGY IS TO NOT EXPOSE TO US TO MORE RISK *HONOHAN: IF THERE’S BAD NEWS, WE’LL TELL IT
*HONOHAN: NO INDICATION THAT THERE IS A NEW BANK BLACK HOLE
*HONOHAN: ECB CONTINUING TO SUPPORT THE BANK SYSTEM *HONOHAN: WE’RE TALKING WEEKS ON ANGLO IRISH
*HONOHAN: ANGLO-IRISH IS HEADING TOWARDS WIND-DOWN *HONOHAN: ANGLO, NATIONWIDE DETAILS NOT YET SETTLED :
*HONOHAN: TRYING TO GET BANKS TO SELL SOME PORTFOLIOS *HONOHAN: WD BE DISAPPOINTED IF NEEDED CONTINGENCY FUND *HONOHAN: NEXT BANKS’ TEST TO BE FINISHED IN MARCH *HONOHAN: EU10 BLN FOR BANKS GOES IN OVER NEXT 2 MONTHS
*HONOHAN: INSURANCE SCHEME NOT AVAILABLE
*HONOHAN: EU SAID BETTER TO PUT MORE MONEY INTO BANKS NOW
*HONOHAN: MARKET IS FEARFUL OF TAIL RISKS,LARGE BUT UNLIKELY
*HONOHAN: UNGUARANTEED SENIOR DEBT 5% OF TOTAL BANK DEBT
*IRELAND’S HONOHAN: NO ENTHUSIAM IN EUROPE ON SENIOR BOND ACTION
*IRELAND’S HONOHAN: AID GIVES US CHEAPER FUNDING *IRELAND’S HONOHAN: WE GETTING ALTERNATIVE SOURCE OF FUNDING
*HONOHAN: LIBERAL ATTITUDE TO FUNDING OF IRISH BANKS

@Christy

Unfortunately, I don’t see that happening. Banks are going to have massively deleverage. The banks are not foing to reverse the huge outflows of deposits that they saw over the past couple of months whatever Tier 1 Ratio they end up with. We are going to see deleveraging and ECB funding for the forseeable future.

I am flatout whining at this stage but how do the AIB figures add up.

Before the plan they had a €10.4bn target, they raised €3.4bn of this from selling Polish and US assets. This reduced the amount they needed to €7bn.

So, if the CB says they now need an extra €5.265bn then how is the amount they still need to raise only €9.765bn overall?

@ Rob

this is total additional on top of original PCAR. So included in the 5.265bn is the additional 3bn announced on Sept 30. So starting point was 7.4bn, minus the 3.4bn from asset sales leaves 4bn. Add 3bn announced on Sept 30, and then another FRESH 2.265bn from this deal.

I think? Make sense/add up?

Yes actually, I believe it does.

Backpage of the IT today (the supplement) has a big €15.6bn beside AIB in their graphic though, seems like they assumed it would be €10.4bn PLUS €5.265 as the new requirement.

Still, what you said makes the most sense. Thanks, should keep my pedantic streak quiet for a day.

@ Rob

you’ve actually identified a big problem some in the markets have with us – we keep changing the requirements and moving the goal posts (some for good reasons in fairness), and are communicating this rather poorly (though the Gov’nor has been much better in recent weeks).

Why the volteface on €5-20m loan exposures at AIB/BoI that were NAMA bound upto 30th September 2010, then they weren’t because that was more “effective and efficient” and now 60 days later they are NAMA-bound again, together with €10bn par value sub-€5m exposures?

I fully expect NAMA to be given responsibility for laying grit on the footpaths next week.

@Jagdip

Conspiracies abound at the original decision to raise the minimum loan size from €5m to €20m in the first instance. I find it very hard to believe it was for administrative purposes now.

*HONOHAN: NO INDICATION THAT THERE IS A NEW BANK BLACK HOLE

No indication that there is any new cancer. The existing cancer will probably suffice.

Apart from the extra €16bn going to NAMA and €10bn(or €8bn if you like) going to the banks.

No new hole since yesterday anyway.

I think I’m going to start a national campaign of lawful disobedience and persuade everyone to move their current and/or savings account away from banks (and their bondholders) that are receiving all these billions.

@Jagdip – “I fully expect NAMA to be given responsibility for laying grit on the footpaths next week.”

They’re going to have to as my local council doesn’t appear to have a budget to do it themselves.

So the risk rally didn’t last long

http://www.ft.com/cms/s/0/ef8bffe2-fb8d-11df-b79a-00144feab49a.html#ixzz16gd6Xikt

1520 GMT: The positive impact from the EU’s bail-out package for Ireland was short-lived. The €85bn rescue briefly brought cheer to markets in early trading on Monday. But markets have quickly turned despondent as investor fears about the spread of the debt crisis to other European countries return.

It would make one wonder about those who trade in the mahkets over in Lahndan. Innit. I mean what did they expect this morning? AIB to reenter the debt markets? A view over the French Riviera ?

@ Jagdip Singh,

Any ideas where the money will come from to enable NAMA dispose of its Irish assets? i.e. Unless there are cash buyers for properties backing NAMA assets, the buyers will require credit. Where will this credit come from? AIB or BOI might have a couple of reservations extending sufficient amounts 😉

*IRELAND’S HONOHAN: WE GETTING ALTERNATIVE SOURCE OF FUNDING

Honohan exposed as Jamaican. Coat on the way.

All in a day

12.06 am

http://www.ft.com/cms/s/0/fbcb7732-fb3e-11df-b576-00144feab49a.html#axzz16gnXgdwQ

The question of imposing losses on bondholders was debated intensely leading up to Sunday’s agreement. While it would be politically popular in Ireland, European policymakers were concerned that it could again unnerve markets just as they are trying to reassure them and bring the crisis to a halt.
Mr Rehn said that the Irish bail-out “should decisively address the current nervousness in the financial markets”.

15.20 pm

http://www.ft.com/cms/s/0/ef8bffe2-fb8d-11df-b79a-00144feab49a.html#axzz16gd5EKow

The euro has fallen more than 1 per cent, yields on government debt in Spain, Portugal and Italy have spiralled higher and US stock markets have opened sharply lower. The Dow Jones Industrial Average is down 1.2 per cent, comfortably back below the 11,000 mark.
This unwelcome reception from investors is in sharp contrast to the announcement earlier in the year of the bail-out deal for Greece, which cheered stock markets and sent yields on Greek government debt spiralling lower.Some leading commentators were downbeat on the bail-out deal with Mohamed El-Erian, chief executive of fund manager PIMCO, insisting the package was not a “game changer” for Ireland. Speaking at a conference in Prague, Nouriel Roubini, an economics professor at New York University, warned that a bail-out will be needed for Portugal and that official funds may be insufficient to bail out Spain if it requires support. Analysts said the finer details of the bail-out indicated that hardliner members of the eurozone such as Germany were proving more reluctant to support full-scale bail-outs. There were “signs that some policymakers are trying to discourage other governments from applying for a bail-out,” said Ben May, European economist at Capital Economics. “In particular, at around 5.8 per cent, the rate of interest is higher than the 5 per cent or so that the Greek government has to pay for its loans.”
Analysts said the deal meant that Ireland would not have to tap bond markets for about two years.

http://www.ft.com/cms/s/0/435ea0f6-fb1c-11df-b576-00144feab49a.html#ixzz16fZA6pMl

A second bondholder group has claimed to hold a stake sufficient to block part of Anglo Irish Bank’s efforts to bolster its capital – raising the prospect of the bank’s restructuring being delayed.
The bank’s battle with its bondholders is being closely watched for what it might imply for Ireland’s ability to inflict losses on junior creditors in its ailing banking sector. Anglo Irish has offered its junior, or subordinated, noteholders just 20 per cent of the face value of their holdings.
Frank Scheunert, who runs Exchange Investors, a distressed debt specialist fund, told the Financial Times that he represented a group worth more than a quarter of the bank’s bonds known as the 2014s – one of three bonds targeted in the deal.

Enda F
We know the appraisal value from Prof L is 20billion but where is the bid. My guess is two packs of salt and vinegar and a Kit kat

@Ahura

“Any ideas where the money will come from to enable NAMA dispose of its Irish assets?”

Remembering that most NAMA property is commercial (including residential developments that would be offloaded in one job lot) there are literally 100s of funds with their wallets at the ready – the problem is that they will pay a price corresponding to the highly distressed nature of many of NAMA’s assets.

Mr Rehn said that the Irish bail-out “should decisively address the current nervousness in the financial markets”.

The graph on Bloomberg is interestingly going north again with 10yr now 9.27% just off the high for the day.
Ollie talks bs just like our guys and bond dealers don’t listen to this rubbish.

Olli seems to be way out of his depth as well.

The bond markets appear to be looking for some tough love. They want someone to stick it to the bank bondholders and are looking forward to the crack of the whip. Perhaps.

The bond markets are not looking for the authorities to get tough with them. The bond markets are looking for evidence that the entire euro project is sustainable. Spain and more worryingly Italy came under pressure today. Still a lot to play for despite what politicians think. Ireland is nothing but a pawn in a big game of chess.

Until the EU accepts that forex risks have been replaced by credit risk it can never survive.

Bizarrely the only way to calm the markets is for significant debt restructuring not debt protection.

@D_E
“the only way to calm the markets is for significant debt restructuring not debt protection.”
I would add a codicil – “and for it not to be a problem because the authorities take care of it”. The Fed and the US Treasury won the fight in the US because they wrote blank chequest to banks good and bad.

@Dreaded_Estate; hoganmahew

Thus, we are presently ‘Taking One for the Gipper’, which is the ECB. And, like Godot, waiting for the ECB to act …

The bailout package and its timing was a hamfisted political solution to a fiscal and monetary problem.
The surprise is it took until early afternoon before the markets realised they were being goosed by the beaurocrats again.
Nigel Farage delivered a searing speech last thursday in the cradle of EU fascism ,the EU parliament ,and nailed these beaurocratic fanatics for what they are.

How are we recapitalising the banks with €8bn immediately, yet giving them 3+ months to raise it?

Just kind of dawned on me.

Comments are closed.