Central Bank 2010 Annual Report

The Central Bank’s annual report for 2010 was released today. Continuing his valiant service, Lorcan has read the report so we don’t have to. For those ELA-philes out there, Lorcan spotted the following lovely sentence:

In addition, the Bank received formal comfort from the Minister for Finance such that any shortfall on the liquidation of collateral is made good.

Anyone care to speculate on the legal value of “formal comfort”? For instance, relative to the guarantees passed in to law under ELG scheme, how does a formal comfort compare?

15 replies on “Central Bank 2010 Annual Report”

I think the formal comfort extends to instruments such as the Fidelity Deed which does not have any collateral backing it.

Without collateral, the loan cannot be backed by any ELG scheme instrument because there is nothing backing it.

Certainly would be interesting to see this one tested in court, but then, the idea of the Irish Central Bank suing the Irish Government is beyond even the level of farce that we have become used to here.

On a completely unrelated note, in reading page 58 of the report, I learned that the Irish Central Bank manages the Central Bank of Malta’s FX reserves, which was news to me.

With all these various bank assets pledged as collateral to central banks, in the event of a default you must wonder what sort of crap would be left to cover depositors. For those choosing to remain loyal to Irish banks, let’s hope the ‘overcapitalisation’ is adequate.

IANAL, but I’ve encountered “letters of comfort” many times. AFAIK they are practically worthless.


More and more bank assets are being pledged every day, to everybody Tom, Dick and Bini, who loans money to banks, except of course to depositors who loan money to banks.

As far as I can tell, we now have the ludicrous situation whereby the ECB could insist on payment of a mortage on a house that they have seized from a bank as collateral, while at the same time telling the owner of that house that he or she can sing for their life savings that have been deposited in the same bank.

Banks depositors have been so downranked that it is only their own ignorance of their situation that is preventing a full scale depositor revolt.

I think the wording used is central bankerspeak for a legally binding agreement. After all the learned Governor cannot be seen to have demanded same…hence the gentle phrase ” formal comfort”. No mention of letter.

It’s probably a bog-standard version of the letter the B of E got from HM Treasury for the loans to RBS and HBOS in 2008.

Among the ironies — had D of F been willing to give the CB such a letter at the same time to cover ELA loans, instead of the original Brianstorm guarantee, we wouldn’t need a very uncomforting comfort letter now.

“Formal Comfort” is usefully defined via google



less reassuringly:

but more convincingly given the Ken Clarke angle, here:

Surveying the list of hits more closely leaves me fairly convinced Michael Noonan has given Patrick Honohan a pair of old-fashioned shoes.

The market can therefore relax, unless Patrick starts dropping them sequentially.

Lads, ye missed out on the new ELA. I call this new liquidity operation the ESAC window or

“Exceptional Self Auto Collateralisation”

Page 119 ( in PDF terms)

“In January 2011, a number of credit institutions issued bonds which they retain for their own use. The ECB has authorised the use of these bonds in substitution for collateral that is no longer eligible in normal Eurosystem operations. Risks from lending to credit institutions where such bonds are used as collateral, should they materialise, are borne by the Bank (i.e. the loss sharing mechanism in place for other Eurosystem operations does not apply). Just as with ELA, credit risk to the Bank in respect of repo operations on these bonds is effectively mitigated by Government guarantee in so far as these bonds have been issued under the Eligible Liability Guarantee Scheme.”

OH! and the accounting treatment for ELA or ESAC operations is never disclosed in public. I wish I had auditors like that 🙂

@2pack But the Central Bank statement goes further than saying the bonds are guaranteed, which would mean they pay interest on due date and redeem at par.
The Central Bank seems to claim that if for some reason it decides to liquidate the collateral at some point the government has to pay the difference. this means that the Central Bank can pull the plug on the banking system at any time, giving it effectively dictatorial powers over policy.

@ David

where does it say the CBI can liquidate the collateral unilaterally?

Small accounting question:

Does the €671m, that the CB said it would be paying the Exhequer out of its profit for 2010, show up in the Exchequer accounts for 2010 already? Or is it likely to be entered into the May Exchequer returns?

@ Rob S,

In 2010 the Exchequer received €704ml from the Central Bank, with most of this arriving in June. This was the 2009 “surplus income”. The 2010 payment as indicated in yesterday’s report will likely appear in the forthcoming June Exchequer Statement. This non-tax receipt would have been allowed for in the DoF projections.

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