Extension Needed on the Irish Banks Liquidity Target Date

In early 2009, the Irish domestic banks had three critical problems: insolvency, distress, and a liquidity crisis.  Only one of these problems, the liquidity crisis, was solved successfully at an acceptable cost, via ECB liquidity provision.  This massive liquidity provision was one key motivation for the Financial Measures Programme (FMP), which lays out a plan the banks must follow to become liquidity self-financing.  Now, through no fault of the Irish banks but because of the continuing financial crisis, the liquidity target plan in the FMP is looking much too optimistic and needs some adjustment. 

  • 1. The loan-to-deposits target date should be changed from 2013 to (end-of) 2015.
  • 2. The ECB should make clear that their liquidity assistance to Irish banks is for a longer period than originally envisioned.

Without these adjustments, the Irish domestic banks will be incentivised to continue to starve the domestic economy of credit over the next few years.

In 2009, the insolvency problem of the banks was that their assets (mostly loans) were worth much less than their liabilities so the implicit equity value of each and every individual bank, with the possible exception of Bank of Ireland, was negative.  This problem was solved by massive equity injections financed by the Irish state. I do not want to argue or discuss why or how this policy choice was/(wasn’t?) a mistake, but that was the solution effected at the time.

The distress problem was that all the banks looked to become zombie banks, playing no useful role in economic recovery.  An attempt at a solution to this problem was the setting up of Nama to remove a large bulk of problem loans from the banks.  Evidence is mixed-to-negative on whether this policy is working – see namawinelake for a running commentary.

The 2009 Irish banks’ liquidity crisis was that the international lending markets which had financed the growth of the Irish banks’ assets were no longer willing to lend to the sector.  The banks could no longer roll over their mostly foreign-owned institutional liabilities. They needed a new source of liquidity backed by their remaining good quality but illiquid assets (net of the government equity injection). This problem was solved by the ECB, which injected a truly massive amount of liquidity into the relatively small Irish domestic banking system.

The ECB/ICB should tweak the FMP slightly, lengthening the time that the Irish banks have to return to a more liquid asset/deposit ratio. The original plan to sell off foreign assets was always optimistic, and has become more so with the worsening European financial crisis. In current circumstance and under the current FMP plan, Irish banks have an incentive to substitute domestic asset shrinkage (or lack of growth) for unattainable foreign asset sales.

34 thoughts on “Extension Needed on the Irish Banks Liquidity Target Date”

  1. Title… “Extension needed….”

    article

    Now, through no fault of the Irish banks….

    … that was the solution effected at the time.

    An attempt at a solution to this problem was the setting up of Nama….

    The original plan to sell off foreign assets was always optimistic….

  2. Starving the economy of credit is a bad thing primarilly because bank credit is by far the main source of new money for the economy. We must be mindful that bank credit brings a corresponding debt to the economy also and so excessive bank credit can’t resolve the debt crisis by itself.

    Introducing a new source of money or the Government could resolve the debt crisi almost overnight. And controlling bank credit as a means of creating new money would solve any liquidity problems the bank may have forever.

    There would also be no need for deposit insurance and there would never be a bank bailout of bank run again. Expecting bank credit to be a sufficient source of money for the economy isnt feasible anymore also as noted in the post.

  3. “In current circumstance and under the current FMP plan, Irish banks have an incentive to substitute domestic asset shrinkage (or lack of growth) for unattainable foreign asset sales.”

    Very delicately phrased.

    But why accept deleverage as an objective?
    It is of no benefit to Ireland. It is doing untold damage. To whose advantage is it to damage this country with such a policy?
    Why should a deleveraging policy for Irish banks hold sway in light of a three year LTRO and unlimited liquidity assurances.

  4. Poor article with delusional aspirations to magic money to keep the full and proper correction to money supply needed in a banking system that must learn to keep lending in line with domestic deposits. Unless you have not heard let me inform you that the party is over

  5. @gregory

    Have you any comment on the developments in the IMF sixth review which indicates the targets for deleveraging will be changed, precisely to address the concerns you,ve expressed

  6. So I went to the European Central Bank
    To see what they could do
    They said son – looks like bad luck
    Got-a hold on you

    Chorus:
    The ECB’s too tight to mention
    What if I can’t get an FMB ex-ten-sion
    The ECB’s too tight to mention

  7. When Irish Banks became domestics again they found the domestic economy does not exist…..almost all “western” economic activity is diminishing claims on Saudi like high quality production / extraction.

    There is no internal capacity to call on withen so called open economies.
    Nothing of substance exists withen these jurisdictions / banking fiefdoms

    The consolation is that nothing much of substance exists anywhere – therefore as quality crude production declines the cutting off of Ireland like countries from the spice is a almost entirely artifical mechanism of rationing with the geographical isolation of Ireland and Greece from “core” activities very much a secondary factor.

    Ireland role is merely to transfer resourses previously burned to the core , nothing more – it is not a country with a still substantial internal capacity such as Iceland – it is a non place , a conduit.

    People wanted Ireland Inc and they got it with lumps on.

  8. @Rich

    The magic money that was created was a ~35 billion or so promissory note so that people who had lost already money in bank investments could get real money for their losses.

    The problem was that the magic money ‘created’ by the PN note has to be paid back with real money. And paid back people who had nothing whatever to do with the original money borrowed.

    The party is certainly over for some of those that were having a party.

    As you appear to be concerned with ‘proper money supply’, perhaps you could explain how QE magic money created to pay selected private bank creditors in 2010 and 2011, will magically improve ‘proper money supply’ when it is finally paid, or un-QE’ed in 2032.

    In relation to keeping lending in line domestic deposits, why not legislate to repatriate all those funds that have gone in ‘capital flight’ and that currently allow the banks in other countries to keep lending high despite their otherwise dodgy balance sheets.

  9. @John Maynard — What statement in the sixth report are you referring to? Do you mean the change from a loan-to-deposit target to a net stable funding ratio target? It still has an end-of-2013 target date, which is too soon IMHO.

  10. @John Maynard – Or maybe (after a bit of adobe-aided searching) you are referring to Item #4 in MEFP #5? Now that is “wonkish” as John McHale says. I take your point that a tiny element of slack is added to the deleveraging process in this way but this timid minor adjustment in the liquidity measure is not the right approach – a more direct relaxation of the target date is needed, and a longer-term liquidity commitment from the ECB to support Irish bank SME etc. lending.

  11. @ Grumpy

    While I would not be a great admirer of Barroso, in this instance he did well.

    It is a great pity that one can no longer link directly to th Sunday Times and the columns of Irwin Stelzer. I will quote instead;

    “Although exports have been contributing to to America’s recovery, we remain a nation not highly dependent on peddling stuff to foreigners. To the extent that we do, our leading customers are Canada and Mexico, not widely considered to be European countries. Last year, total exports accounted accounted for a bit less than 14% of our GNP, 22% of which went to the EU – 3.1% of GDP. Last month, the months of the miserable jobs report that the President wants to pin on the EU, that 11% drop in our exports to that troubled area came to to a mere 0.3% of our GDP. If anyone outside the White House believes such a trivial drop caused job creation here to slow, he has yet to emerge”.

    What can one say! “Peddlig stuff to foreigners”! “That troubled area”!

    All that is proven is that the G20 is a gabfest and little else. And that the US, unlike Germany, is not dependent on the vagaries of export markets, a lesson that Merkel would do well to learn.

    I normally do not have much time for Zerohedge but in this instance the commentary is on the money. One way or the other, European politicians will have to come to terms with the implications of creating a single currency before the conditions in which it could successfuly operate.

  12. @grumpy

    I won’t soil this blog by telling you what I think of this jerk. He’s also clearly been listening to ex-PM G Brown too. Do you remember his favourite line always used to be: “This economic crisis, that originated in America…..” whenever he spoke in Westminster and especially when he was talking about how he saved the world, er, I mean the banking system.

    I imagine an American told him he couldn’t manage a crisis having a booze up in a brewery so he used a public platform to get back. These people are just egos with arms and legs sticking out.

  13. @ Grumpy

    Apologies for the typos! Stelzer, of course, also undermines his own argument as the drop of 11% in exports to Europe is by companies that matter in Washington rather than Iowa.

  14. @JR

    Money supply was a significant marker of the bubble in the tiger years, Reinflating credit supply that is unsustainable is another can kicking exercise. Regarding PN’s these were agreed by the Irish government reflecting their and our own hubris, rowing back is a matter of debt forgiveness at this time. Continuous pontification on debt write downs is worthwhile once we understand the consequences, one of which will be further removal from credit markets that would provide the ‘magic’ you desire

  15. My opinion is that an emergency tax should be raised immediately on those that sold houses since the introduction of the euro, having already paid capital gains exceptions being those that have evidence to show these gains were reinvested in loss making property or Irish shares. The amount due would be based on the difference between sales price and those for similar properties based on the data held for similar sales by the cso in 2011. This would incentivise beneficiaries to declare in the current year as future years will no doubt show greater property price falls and thus larger tax due

  16. DOCM,
    whenever I hear the likes of Borosso defending the non decision makiing of the European Union on any topic, I am reminded of Milosovich. If it was not for Clinton and to a lesser extent the Brits, he would still be in power and slaughtering his neighbours.

    You would not send any of the leadership of the EU down to the local Centra to get a pint of milk.

  17. Tuff Times on Wall Street

    These are anxious days for American workers. Many, like Ms. Woods, are underemployed. Others find pay that is simply not keeping up with their expenses: adjusted for inflation, the median hourly wage was lower in 2011 than it was a decade earlier, according to data from a forthcoming book by the Economic Policy Institute, “The State of Working America, 12th Edition.” Good benefits are harder to come by, and people are staying longer in jobs that they want to leave, afraid that they will not be able to find something better. Only 2.1 million people quit their jobs in March, down from the 2.9 million people who quit in December 2007, the first month of the recession.

    “Unfortunately, the wage problems brought on by the recession pile on top of a three-decade stagnation of wages for low- and middle-wage workers,” said Lawrence Mishel, the president of the Economic Policy Institute, a research group in Washington that studies the labor market. “In the aftermath of the financial crisis, there has been persistent high unemployment as households reduced debt and scaled back purchases. The consequence for wages has been substantially slower growth across the board, including white-collar and college-educated workers.”

    [,,,]
    Things are much worse for people without college degrees, though. The real entry-level hourly wage for men who recently graduated from high school fell to $11.68 last year, from $15.64 in 1979, according to data from the Economic Policy Institute. And the percentage of those jobs that offer health insurance has plummeted to 22.8 percent, from 63.3 percent in 1979.

    http://www.nytimes.com/2012/06/19/us/many-american-workers-are-underemployed-and-underpaid.html?_r=1&partner=rss&emc=rss

  18. Don’t suppose there is any hope of a spot of ‘liquidity’ for labor! Looks like capital takes it all!

  19. @Rich
    The money supply and the bank credit supply are two very different things.
    We unfortunetly live in a world where goverments cannot spend money into existence without the nod of the all powerful bankers – that most important of monopolies rests with the slave masters of this world.

    If the money supply increased faster then credit during the boom there would be no debt problem as the debt would be extinguished.
    There would also be no boom (misallocation of resourses) and no bust (misallocation of resourses)
    What wealth we have not consumed would still remain – money is not wealth…it is primarily a means of exchange that holds some hypothetical value.
    This belief that money is wealth has destroyed real physical wealth potential.
    We are now left with a degraded Get Carter like world of diminished resourses and diminished people.

    http://www.youtube.com/watch?v=1yZ0GLpbtMs

  20. Reuters:

    “Bailing out the euro zone’s third- and fourth-biggest economies is not an option. That is why officials are quietly preparing to use the tools already at their disposal to protect Italy and Spain.

    In Los Cabos, Monti put forward the idea of using the bloc’s dual rescue funds – the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) – to buy the bonds of weakened euro zone members on the open market.

    Merkel has signaled in private that this is a step she would be ready to accept if the crisis deepens, although Berlin gave no assurances to Monti at the G20 summit, officials said.

    If EU leaders are able to send a convincing message on fiscal union at their summit at the end of the month, the European Central Bank could also step in to limit short-term turmoil with a third round of cheap long-term loans to banks – also known as LTROs – or a cut in interest rates.”

  21. @docm

    Stelzer is a bit GOP. Paulson selling same line. Not that that makes it untrue.

    That is why the US has generally, over several decades, been quite relaxed about FX rates.

  22. @Gregory

    Well I never. I never thought I’d see the day (not true of course) that a mainstream economist such as your goodself would finally submit to what I suggested on this site about an hour after the CBI released the FMP report on 31.03.2011. Amongst other things I suggested at the time that putting all the banks bets on Ireland Inc and forcing ongoing sales of banks businesses outside of Ireland to be another in the ever growing list of completely daft policy choices by our much lauded financial regulators. But no the crazy policies have continued and we’re how far down the road exactly?

    I suggest that this recent call for an extension date for the liquidity programme will be quickly followed by a request of derogation from the new Basel capital rules. Watch this space.

    How much longer do we have to wait to confirm the utter incompetencies delivered by the Matt & Pat show on Dame Street. It’s truly remarkable that the media eyes have been diverted away to focus on complete non-events such as the Mick Wallace sideshow and yet with every passing hour the basis of the FMP report crumbles away with barely a whisper and all the while the white knights that Messrs Elderfield and Honohan had expected to come racing over the hill to buy into the land of milk and ‘overly’ capitalised banks doesn’t seem to be working. Quell surprise. Mais non.

    No indeed no surprise this end at least. Have a look at the share prices of the ‘banks’ today versus prices at 31.03.2011. In addition it’s about a year ago since our American friends were duped into buying the recovery of the Irish story through BoI. Such tripe. I notice Wilbur Ross has been marked very much absent recently from his previously frequent appearances on CNBC to talk up the wonders of Ireland Inc. Things that make you go hmmm.

    Lets face facts there is no Irish recovery story until the household debt slate is wiped clean. All the rest is just avoiding the ever growing elephant in the shrinking apartment. If that means the covered banks fail (and likely it does) so be it. Anyone listening to the Keiser Report this evening will begin to get a feel of where this bank rescue nonsense is going. Nowhere and fast. So ongoing extensions will not make a jot of difference. Let them fail, place them into administration and hit the ctrl alt delete keys and start again.

  23. Could you answer me if the local bank operates under its own banking license.
    Hmm, might give the central bank a bell about that. It has nice implications if they have, or even if some of them have like the old M&L network.

  24. @ Grumpy

    I think the Forbes article is the most likely to be the accurate one (and Martyn Turner in the IT ie. EU will act manana!). There is also the fact that the international media doing the reporting have no grasp of what is going on internally in Germany, the most recent development being the latest decision of the constitutional court.

    http://www.irishtimes.com/newspaper/world/2012/0620/1224318256751.html

    Especially the quote;

    “Yesterday’s ruling tightens the reins on the government further, spelling out precisely when it is obliged to inform MPs: after cabinet has made up its mind and “before [it] has agreed any binding statements on EU legislative acts and intergovernmental agreements”.”

    Germany is rapidly approaching the position of Denmark in limiting the freedom of action of its government to act internationally. It is also, of course, a reaction to the mishandling of the euro crisis by Merkel ( a “schlamassel” as Steinmeier put it it, most accurately probably translating as a “right royal mess”; and she is not finished yet).

  25. @Gregory

    I haven’t looked closely at the changes but noted the change in target and wondered was it significant. You indicate you don’t think it is. However, previous IMF reviews have indicated that there is slack to allow delayed deleveraging to avoid fire sales etc, all the more likely in the event of European banks selling assets in the context of EBA etc

  26. @Yields or Bust

    So ongoing extensions will not make a jot of difference. Let them fail, place them into administration and hit the ctrl alt delete keys and start again.

    Is there nothing to be said for saying another mass?

    Or at least throwing another €4 Billion (or so) at the problem…

    I have a good feeling about this one! Okay, we’ve lost €60-odd Billion… but if this one works… Easy street baby!

    It seems the Irish plan, when in a hole, is to dig faster.

    Maybe this is why the Chinese are checking us out – for fear we might destabilise their foundations(allegorically and metaphorically)!

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