Central Bank and Credit Institutions (Resolution) Bill 2011

The draft legislation for a permanent special resolution regime for failing banks has been published (see here).   The proposed legislation would replace the much-criticised emergency Credit Institutions (Stablisation) Act passed in December.

From a quick reading, the legislation appears a significant improvement on what it would replace.   The Governor of the Central Bank rather than the Minister for Finance makes the decision to trigger the regime.   The new legislation has well-defined triggers (Section 8), though it appears to leave a large amount of discretion with the Governor and lacks quantitative targets.   There also appear to be reasonable provisions for creditor protection (e.g., the possibility to appeal to an independent valuer when forced transfers of assets or liabilities take place (Section 31)).  I would be interested to hear opinions on whether these protections are sufficient. 

Strangely, according to the Irish Times, the new legislation might not come into effect for domestic institutions until the end of 2012 (see here). 

The legislation will not immediately apply to domestic institutions but covers all other banks authorised in the State, foreign owned subsidiaries and banks operating in the IFSC.

Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Nationwide, EBS and Irish Life and Permanent are covered by the Credit Institutions (Stabilisation) Act which was introduced late last year.

The objective of the new legislation is to shift the Irish institutions falling under the Credit Institutions (Stabilisation) Act to being covered by the Central Bank and Credit Institutions (Resolution) Bill before the end of 2012.

Update: Some additional useful links:

Simon Carswell gives his reaction here.   Suzanne Lynch provided a good overview of special resolution regimes after the emergency bill was published in December.    As linked to many times on this site before, Peter Brierley provides an indispensible international comparison of SRRs, with a focus on the UK’s regime.   The original emergency legislation — which remains in effect until the end of 2012 — is available here.

Mortgage Arrears: December 2010

The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows a continuation of the steady increase in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 5.1% in September to 5.7% in December, in line with the previous increases over the past year.

For the first time, the Bank are also publishing statistics on how many mortgages have been restructured and the nature of these restructurings. In addition to the 44,508 mortgage accounts that were in arrears for more than 90 days, there are 35,205 mortgages that have been restructured but which are classified as performing and not in arrears.

Money and Banking Statistics: January 2011

The Central Bank has released the Money and Banking statistics for January here.

In a helpful development, the Bank are now publishing statistics for the six banks covered by the Government guarantee (ELG) scheme. The statistics are published both on a gross assets and liabilities basis and also on a consolidated basis, which net out all intra-bank transactions. For example, the gross balance sheets show assets of €623 billion in December. However, once intra-bank transactions are netted out, the consolidated assets are €455 billion.

Unfortunately, the new Table A.4.2. for the covered banks shows a pretty grim story in relation to deposit outflows. In contrast to some reports, deposit outflows from the covered banks in January were about €18.5 billion, about the same as the rate recorded in December.

Update: A contact from the Central Bank has been in touch with me about the calculation above on deposit outflows. As noted above, the Bank are releasing monthly figures on a gross unconsolidated basis and quarterly figures on a consolidated basis. The €18.5 billion figure that I cited is, as usual, from the gross unconsolidated figures. However, I have been informed by the Central Bank that approximately 75% of the decline in deposits reported inn Table A.4.2, is due to intra-group activities in the banks concerned, so that deposit outflows from the system in January were in fact considerably smaller than in December. I’m happy to pass on this as it is useful information. Still, it suggests that the next logical step is for the Bank to release the consolidated balance sheet on a monthly basis.

Moving Deposits

I am trying to get my head around the Anglo/Irish Nationwide “deposit sales”.   The collective wisdom of this blog might help set things straight.   (Useful reporting by Simon Carswell and Mary Carolan here and here.)

A few initial comments/questions:

First, I think term deposit sale (or selling the deposit book) creates a lot of confusion.   I think it is better to think of what is happening as asset sales, but where part of the price is taking on existing liabilities to depositors.   From the purchaser point of view, another perspective is that it is a purchase of assets that comes with a certain amount of pre-arranged funding (i.e. the deposits). 

Second, there seems to be a view that it is a good thing to retain the deposits in the Irish banking system.  But then there is also a view that Ireland needs to deleverage – essentially sell assets to reduce outstanding liabilities.   The ECB wants this to happen because it is afraid it will be further called on as lender of last resort if those deposits later flee.   What are your thoughts on selling the assets to (and retaining the deposits with) other Irish banks? 

Third, in terms of the total being exchanged for the deposits (mainly NAMA bonds and cash), what is the inference about how the bonds are being valued?   I’m sure someone has done these calculations.    Are the implied valuations related to the fact that the asset sales have been made to other Irish banks — one 92.8 percent State owned, the other privately owned?  

Comparing Iceland and Ireland

Dan O’Brien completes his excellent two-part comparison of the Irish and Icelandic economic crises in the Business section of today’s Irish Times.   Today’s instalment is available here; last week’s here.

Update: Paul Krugman responds here.

Some conclusions (it is important to read the articles for full context):

The first conclusion is that the size of the bubbles in the two economies – rather than anything that happened when or after they burst – was the main determinant in explaining the magnitude of the two calamities.

. . .

The second stand-out fact from a comprehensive comparison between the two economies – in this case since the bursting of the bubbles – has been the role of exports in contributing to recovery. . . . [T]here has not been a significant difference in export performance between Ireland and Iceland.

This is not at all what one would have expected. While being part of the euro protected Ireland from even greater instability during the worst of the crisis, the downside of being locked in to a single currency is that devaluation is unavailable as an option to rapidly regain competitiveness and make adjustment to the shock easier to deal with.

Iceland suffered all the downside of having its own currency, but far less of the upside. Iceland’s export performance has been nowhere near as strong as one would have expected following a 50 per cent devaluation, while Ireland’s has been better than could even have been hoped for.

And the absence of an export boost from exchange rate depreciation has not been confined to Iceland alone. Another neighbour has been similarly disappointed, as the chart illustrates. Despite the weakening of sterling, British exports remain below pre-crisis levels.

No currency regime is perfect and all have positives and negatives. Although things may very well change, at this juncture the benefits for Ireland of being part of a much larger single currency have been considerably greater than the benefits to Iceland of having its own currency.

But the most important policy lesson from all this, it would seem, is that policy actors must be far more willing to make calls on whether bubbles exist and to take measures to deflate them if they conclude that they exist. Of course, this is not easy as there is no way of knowing for sure whether growth is sustainable or mere froth. But given all that has happened, the case for pre-emptive pricking of suspected bubbles appears incontestable.