Category: Banking Crisis

Irish Times: “Overseas Deposits Increase Significantly”. Really?

The lead story in today’s Irish Times carries the headline “Overseas deposits at Irish banks increase significantly”. Well, here’s a chart showing non-resident deposits for the three definitions of the Irish banking sector published by the Central Bank: All Banks, Domestic Group (which excludes IFSC banks) and Covered Banks.

How many of you can see the series increasing significantly at the last data point, in the usual sense of the word, meaning a large increase? It appears the headline reflects the following wording provided by Dan O’Brien (who would not have written the headline): “The small but significant increase in deposits …” In other words, Dan is saying that overseas deposits didn’t rise significantly but the small uptick could potentially be a good sign for the future.

Beyond the headline (sub-editor screwups seem to be very common at newspapers) what’s odd about the story is that even though the latest data on overseas and resident deposits don’t show much more than a continuation of recent trends, the rest of the piece treats the release as though something interesting has happened, including the obligatory crowing from Minister Noonan:

The Central Bank statistics on deposits point to a stabilisation of the Irish financial system. Responding to the developments, Minister for Finance Michael Noonan said the “deposit figures illustrate growing national and international confidence in the Irish banking system. It is particularly impressive that the deposit position of the Irish banks has improved at a time of such global uncertainty.”

He described the cash inflows as an “an endorsement of the Government’s restructuring of the banking system. This restructuring has reduced the cost of the banks to the State and has also seen the banks beginning to access international money markets without the benefit of the State guarantee.”

For those interested in actually seeing what’s going on with deposits (yes I know the chart above is rubbish — I don’t know how other people get decent quality graphs up on this site!) here’s a Powerpoint presentation (also here in grimer PDF) with charts for total deposits, non-resident deposits, resident deposits, and private sector resident deposits. In addition to the Total/Domestic/Covered breakdown, I’ve provided charts for an IFSC/Domestic Non-Covered/Covered breakdown.

I surmise from these charts that the non-resident withdrawals have largely tailed off and that the trend for resident deposits in the covered banks remains a downward one.

Three (and a bit) Years on from the Banking Guarantee

Today is the third birthday of Ireland’s blanket guarantee of 6 banks’ assets and liabilities, and 64 billion euros later, let’s take the opportunity to reflect on all that has gone on in Irish public and economic life, to assess how much real change there has been within the institutions that helped bring about the crisis, and perhaps to look a little towards the future. So fire away in the comments.

One small(ish) point though, from something I’m working on with my UL colleague Vincent O’Sullivan. It is true that the late Mr Lenihan did guarantee the banks three years ago. It is not true that that is when State support for these banks began, and we shouldn’t mix the two up. Banks like Anglo were in trouble before that, and to a significant extent. These are not (well not yet anyway) historical curiosa, because we still need to understand and deal with the issues our Emergency Liquidity Assistance (ELA) raises.

To take Anglo, for example: The first mention of ELA which was the supported provided in March 2008 was in the interim accounts for 2009 of Anglo Irish Bank.  From note 20, page 46:

“These deposits include €13.5 billion (30 September 2008: €7.6 billion; 31 March 2008: €3.6 billion) borrowed under open market operations from central banks and €10.0 billion (30 September 2008: €0; 31 March 2008: €0) borrowed under a Master Loan Repurchase Agreement (‘MLRA’) with the Central Bank and Financial Services Authority of Ireland. The interest rate on this facility is set by the Central Bank and advised at each rollover, and is currently linked to the European Central Bank marginal lending facility rate.”

In the 2009 annual report the amount lent by the CBI has increased to €11.5 billion. Collateral pledged has fallen to €12.49 billion, implying a much lower haircut of €990 million on €12,490 million, or 7.9%. See (d) on page 91 and Note 37 on page 104.

The 2010 interim report shows the collateral posted by Anglo Irish bank becomes mostly promissory notes issued to that bank by the Irish government and that the ‘MLRA’ agreement has, for the most part been superseded by a ‘special masterloan repurchase agreement (SMRA)’.

For more background information on what happened, Simon Carswell’s book Anglo Republic is excellent and highly recommended, though it doesn’t go into the ELA detail.

Dan O’Brien on Burning Bondholders

Dan argues the ECB case for not burning Anglo bondholders in today’s Irish Times. I’ll quote the main argument at length

Apart from Ireland, nobody else in the euro zone has sought to make seniors take their losses so there are no cases to which one can point as evidence. But an immediate neighbour’s experience has been watched very closely. Denmark last year introduced the toughest bank resolution laws in Europe. These laws, which govern the winding-down of bust banks, are more similar to those in the United States than those across the rest of Europe. In the US, senior bank bondholders have traditionally got their just desserts if the institutions they invest in fail.

When two Danish banks failed earlier this year, their seniors were burned. This raised funding costs for the entire Danish banking system.

From the euro zone perspective, the ECB is obliged to consider that if a default precedent were to be set in the senior bond market, then at the very least funding costs for all banks in the zone would rise. The savings for Ireland of a few billion euro would be offset many times over by the generalised increase in funding costs for the already-teetering euro zone banking system.

That there is good reason – in the collective European interest – not to burn seniors does not lessen the injustice of having Irish citizens pay for European bankers’ losses (although the hugely subsidised bailout loan is a partial de facto spreading of the burden).

The point that burning senior bondholders may raise the cost of funding for banks is a fair one. But the relatively lower cost of bank funding obtained from a policy of supporting all senior bondholders is hardly a free lunch. The additional risk that the market would perceive as being attached to bank bondholders would have been transferred away from sovereigns.

Now one could argue that some sovereigns in the Euro area are in a position to take on this kind of risk in order to protect their banking systems. But others clearly are not.

My position on this is that there is no need for the question of burning senior bondholders to be a simple black or white proposition. As I discussed in this paper, the EU could adopt a policy that sees senior bondholders only incur haircuts if equity and subordinated bonds have been wiped out, the bank has been nationalised, and the state has incurred costs of x% of GDP to bring the bank back to solvency.

What x is could be a matter for policy discussions, and could evolve over time. But a policy that set x=5% would mean that the EU is only ruling out bailouts that would place enormous burdens on the state. Indeed, given the state of Euro area public finances, there simply isn’t room for another round of expensive bank bailouts so an approach of this sort may help to reduce the perceived riskiness of much of Europe’s sovereign debt.

This policy could see the remaining Anglo senior bondholders receive severe haircuts without implying a contagion effect for other institutions apart from those the market suspect to be severely insolvent and to which states should probably be reluctant to offer blanket liability guarantees.

But, of course, such a policy would tradeoff state and private sector interests in a balanced way and, as I argue in this paper, M. Trichet’s approach to the question of debt defaults has consistently been characterised by dogma rather than balance.

Feasta Conference: National Strategies for Dealing with Ireland’s Debt Crisis

Feasta (The Foundation for the Economics of Sustainability) are holding an interesting conference on Thursday and Friday of this week titled National Strategies for Dealing with Ireland’s Debt Crisis: Exploring the Options. The webpage for the conference is here and the conference programme is here.

TASC on Promissory Notes

TASC’s Progressive Economy blog has an interesting post by Tom McDonnell, Michael Burke and Michael Taft on restructuring promissory notes. I think it is important that there be more public discussion of this issue. With payments of €3.1 billion a year stretching into the middle of the next decade, these notes are going to impose a far greater burden on the Irish people than the remaining unsecured Anglo bonds which receive a lot more attention.