Monday, March 7, 2011

Assets in the Covered Banks

We have spent a great deal of time looking at the liability side of the balance sheets of the covered banks (total liabilities here, bonds here and here, deposits here and ECB borrowings here). 

While the liability side garners most of the attention due to the State guarantees that have been given to certain banking liabilities, the source of banking crisis has been the asset side of the bank’s balance sheet.  In this piece we will briefly consider the assets of the six covered banks.  Here are total assets which show little change.

Total Assets in Covered Banks

The book value of the Irish assets of the six covered banks have fallen from €665 billion in mid-2009 to €621 billion now.  This €621 billion is currently broken down as follows:

  • 47.5% in loans to Irish residents,
  • 20.5% in loans to non-Irish residents,
  • 18.5% is accounted for by the promissory notes, NAMA bonds, government bonds and bonds in the covered banks themselves,
  • 8.5% in debt securities issued by non-residents, 
  • 5.0% in other assets including central bank balances.

Although the change in the total assets has not been substantial there has been significant changes in the breakdown by category.  However, looking at the three main categories of loans, bonds and other assets does not show this immediately.

Covered Banks Assets by Category

Although there has been some decline in loans and an increase in debt securities held in recent months most of the action has occurred within these groups.  Here are the loans by residency of borrower in the domestic banks.

Loans by Origin in Covered Banks

Again it suggests little movement, though we can see that loans to Irish residents make up the bulk of this asset.  Although it appears relatively flat, loans to Irish residents on the covered bank’s balance sheets have declined from €364 billion in June 2009 to €327 billion in January 2011.  We can breakdown this category further.

Irish Resident Loans in Covered Banks

Finally we see some movement.  There is a very noticeable decline in loans to the private sector from the six covered banks,  which have fallen from €244 billion in June 2009 to €186 billion now.  This is not to say that we have paid off this amount of debt.  Instead, the National Asset Management Agency (NAMA) has bought some €68 billion of loans off the covered banks.  This money has been replaced on the banks balance sheets in two ways

  1. To buy the loans NAMA has exchanged bonds with the banks of about 50% of the value of the loans.
  2. To make good some of the losses on the NAMA transfers and other losses the state has recapitalised the banks with €46 billion so far.

It is because of the combination of these two transfers that the amount of assets held by the banks has remained largely unchanged.  In the previous graph above we can see the impact of item 2 above.

Loans to Irish residents from the covered banks under the heading ‘General Government’ increased from essentially nothing in February 2010 to €31 billion in January 2011.  This represents the Promissory Notes  used to pump money into the banks (mainly Anglo).  Like a loan, these promissory notes are a promise from the State to (re)pay money to the banks.  Instead of developers having this promise, the taxpayer has.  These promissory notes now account for about 10% of the loans issued by the covered banks to Irish residents.

Next we turn to the debt securities held by the covered banks.  Like loans we saw from the second graph above that the total shows little movement but the breakdown of the category does as seen here.

Debt Securities by Origin held by Covered Banks

The covered banks are holding more and more debt securities issued by Irish residents.  These have increased from €11 billion in January 2008 to €84 billion in January 2011.  There has been an offsetting decline in the holding of other Eurozone and Rest of the World bonds.  So what type of Irish bonds are the covered banks holding?

Irish Securities held by Covered Banks

Everything is going up.  The increase in “private sector” bonds here are mainly those issued by NAMA in return for the transfer of developer loans from the banks.  Bonds by “monetary financial institutions” are bonds issued by the covered banks themselves.  The almost vertical rise seen in January 2011 is because the banks issued €17 billion of bonds to themselves to use as collateral with the ECB.  As we saw previously, the remainder of this category is €15 billion of bonds the covered banks hold in each other.  Burning these bondholders will just mean more promissory notes will have to be issued.

I cannot really explain the rise in the holdings of “general government” bonds by the covered banks.  It seems unusual that at a time when the State was pumping billion to prop up the banks, these very same banks were using €11 billion to buy bonds issued by the State.  It appears they now hold about one-eighth of Irish government bonds in issue.  Guess who will be hit if there is a sovereign default??

For completeness here is the breakdown of Other Assets since January 2009 which make up about 5% of total assets.

Other Assets Held by Origin held by Covered Banks

It is important to remember that these are the assets held in Ireland of the covered banks and so not necessarily represent the actual balance sheet position of the banks.  For example, the €17 billion of self-held bonds actually have a net balance sheet position of zero as there is a matching liability of €17 billion on the other side of the balance sheet.  The effect of the activities of the bank offshore activities is also excluded.  Again it could be that the assets are those of foreign-based subsidiaries of the banks which will be matched by liabilities elsewhere.

In an interesting development the Central Bank have also begun to publish a “consolidated” aggregate balance sheet of the covered six banks.  Although the details of the consolidation are unclear it is to account for issues like the two mentioned above.  This gives a more accurate representation of the third-party assets held by the covered banks.  Unfortunately, the Central Bank do not use the same headings and definitions as they do for the aggregate balance sheet data we used above.  The Consolidated Balance Sheet of the covered six can be seen here.

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