The February release of the Credit, Money and Banking Statistics does not show too many new or surprising patterns (are we normalising the abnormal). The previous post looked at central bank borrowings which increased again in February. Here we will give a quick look at the bonds issued by the covered banks.
The amount of bonds issued by the 20 domestic banks and the subset of the six covered banks are virtually identical as the non-covered domestic banks issue virtually no bonds in Ireland. We can see that the amount of bonds outstanding fell dramatically once the original guarantee expired in August but has risen substantially in the past two months.
Who holds these bonds?
The trend of increasing Irish ownership of the covered bonds continues and it is only holdings by Irish residents that increased in February. What other institution resident in Ireland would be foolish enough to take on additional bank bonds? None.
It is the banks themselves that are holding these “bonds”.
The balance sheet of the covered six now includes €85 billion of bonds issued by Irish residents. There is €10.3 billion of government bonds, €39.3 billion of private sector bonds (75% of which are from NAMA) and €35.5 billion of bank bonds.
We know that the banks issued €17 billion of bonds to themselves in January. It is likely that the February increase of €3.7 billion was also down to these activities. That still leaves about €15 billion of bonds from Irish banks on the covered six balance sheets.
The covered six are the only significant issuers of bonds among all Irish banks. We have seen some instances of cross-holdings of the bonds by PTSB and Anglo but full picture of these cross-holdings has not emerged.
Finally it was presumed that these self-issued bonds would reduce the reliance of the banks on the ELA from the Irish Central Bank. As we have just seen that did not happen as ELA funding rose €20 billion and ECB funding fell €6 billion. Just what are these self-issued bonds being used for?
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I reckon they're being used to wind down cross-bank exposures - silo each of the banks so they can be easily dismembered.
ReplyDeleteI also note from the Anglo accounts that they appear not to hold derivative cash for losing contracts - previously I thought they held the cash themselves until the contract closed out. Could the downgrade of the Irish banks mean that they now have to exchange cash collateral rather than just reserving it? Presumably their counterparties are rated highly enough that they can hold on to their losing cash, so there isn't a matching inflow.