The Central Bank have released the April Credit, Money and Banking Statistics. They should that the reliance of the covered banks on central bank funding has fallen again.
The banks are using €74.2 billion of ECB funding down from €79.2 billion in March and the “Other Assets” category from the Central Bank of Ireland’s balance sheet fell from €66.7 billion to €54.1 billion. Total reliance of the banks on central bank liquidity is now around €127 billion. This is a big drop from the level of more than €150 billion recorded in February.
This appears to be a good thing but if we look to see what funds the banks are looking to replace the central banking funding the shine is knocked off this somewhat. Specifically we look at deposits from Irish residents in the covered banks as this explains most of the above drop.
The reason the covered banks have reduced their demand for central bank liquidity is because of a jump in deposits from government. The Irish government now has €21.3 billion on deposit with the covered banks. For most of the previous three years it had hovered close to €3 billion.
The increase is because the government has already received the money for the bank recapitalisation process from the EU/IMF. Over the coming months this money will be taken off deposit (which the government has to get back) and used as capital (which the government has no guarantee of getting back).
It does seem that the fall in private sector deposits in the covered banks seems to stalled and these deposits actually increased from €106.3 billion to €108.2 billion in April.
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Seamus, I posted this on Lorcan's blog (cornerturned) but it got stuck in a moderation queue or something:
ReplyDeleteSeamus, I meant to ask you about this earlier when we met, but here’s a good place too. You write:
” Once we provide the cash for these, the “banks” will use it to repay the ELA they are using.”
Why should they? What if they don’t? Aren’t you assuming an awful lot in that sentence?
Lorcan is only double counting if the two line items match exactly and are designed as such to do so. In practice I don’t see how they could be the same unless I’m missing something fundamental–and I’m open to being corrected on this issue. Can you elaborate?
Hi Stephen,
ReplyDeleteHopefully this outlines my position. I could be wrong but this is how I see it.
We can examine my view in two ways. Lets say Anglo gets €3 billion in cash from the Exchequer next March.
1. If they don't repay the ELA with the €3 billion what will they do with it? Anglo already has enough funding for its assets so this €3 billion would be on top of that. Would it just sit on the balance sheet? I think we can be fairly certain that they won't lend it out - we hope they won't anyway - so they would just have €3 billion on deposit. In theory they could use it pay down other liabilities but the net effect is the same. Next is why they have to repay the ELA.
2. The ELA has been issued on the basis of the collateral provided by the Promissory Notes. Once the €3 billion payment has been made the value of the Promissory Notes held by the bank falls by €3 billion. They either have to provide additional collateral to maintain the ELA at the existing level or use the €3 billion to pay down the ELA. Anglo does not have the additional collateral so it must pay down the ELA.
In my view, one payment on the Promissory Notes reduces both the outstanding amount on the Promissory Notes and the amount of ELA. Think of it this way if we had just provided €25 billion of cash for Anglo there would be no Promissory Notes and no ELA issued using them as collateral. If they were separate it would mean Anglo would have €25 billion from the Promissory Notes and €25 billion from the ELA for a total of €50 billion. Anglo is a black hole but it does not need €50 billion!
How did I do?
Hi Seamus, I guess I see where you're coming from but the example I'd look for would be AIB rather than Anglo, which you rightly say isn't a 60 billion black hole, no matter what.
ReplyDeleteSay we forget about the ELA for a second, and just give AIB 3 billion. It has myriad uses for this capital, only one of which is paying off loans it has undertaken for other purposes. So, say AIB get the 3bn. They are committed to deleveraging and to other activities--like more lending to SMEs, as well as balancing Tier 1 (and other Tier) capital requirements.
I'd say the AIB management would make a strong case that the 3bn should *not* be paid off their ELA bill right away, as it represents an alternative cost of capital. The disjunction is, I think you can see, the issue for me. There is only double counting in the special case you outline, and there I think you're correct. But in the case where the payments are asynchronous--the much more likely case--it makes sense to count them both as separate payments and uses of capital, indeed I think that's how AIB would see them.
Hi Stephen,
ReplyDeleteI think we have to distinguish between giving a bank capital and giving the a bank cash in return for some instrument. You are right to suggest that AIB should not use a €3 billion capital injection to pay than any ELA it is using. That is not the purpose of the capital injections.
If however AIB got €3 billion from the State by cashing in some of its government bonds or got €3 billion from NAMA for its bonds then it would be like the scenario above. AIB would have to use this €3 billion to pay down the central bank funding it is using (in this case it would be the ECB) as the amount of collateral it has available would be reduced.
The six banks are using about €130 billion of central bank funding. The collateral used to obtain this includes:
- €28 billion of Promissory Notes
- €30 billion of NAMA Bonds
- €10 billion of government bonds
I don't know how much liquidity they are getting for this collateral but if we give them the cash in lieu of these instruments they will have to paydown the central bank funding or find additional collateral.
There are of course the huge concerns about the government-guaranteed "self-issued bonds" the banks have been using at the teller window of the ECB. These are truly scary and the banks could use these as additional collateral but my original belief still stands: if we give the banks €3 billion of cash in respect of some instrument (not a capital injection) why would they continue to need €3 billion of cash from the ECB?
Of the three items listed above, two form part of the GGD and one is an off-balance sheet liability. These form part of our national indebtedness. There are some justifications for including the central bank liquidity in a related category but including that liquidity obtained using the above as collateral is double counting (in my limited opinion).
Seamus/Stephen
ReplyDeleteIf I may intrude a little on this discussion:
I understand the ELA legal logic of the S Coffey point, but think that it is trumped by the common sense of the SK argument which will be made by the banks. And should be made by the State.
Does the ECB/ICB not have the same 'collateral' as an ordinary depositor?
There is in most customer bank leading the idea of a floating charge. Why not leave the cash injected as capital/promissory note in the banks, even if a 'floating charge' has to be placed on bank assets.
I have only recently become aware of the down ranking of the security of ordinary depositors as bank funding has changed from unsecured to secured over the past three years. With the ECB being first out with its hand for security.
It is long since time either to put in proper legal protection in the bank liability structure for depositors.
I am on the SK on this one, whatever the legalities. The money should be kept in the banks as liquidity.
Hi Seamus/Joseph, sorry to get back to you so late on this point, which I think is really crucial to get right, as it gets to the double counting argument as well as to the overall funding situation in the banks.
ReplyDeleteSeamus, you write "...but if we give them the cash in lieu of these instruments they will have to paydown the central bank funding or find additional collateral."
Why will the banks *have* to pay down the central bank? I still don't get it, I'm sorry for being obtuse. AIB is a licensed financial institution with a majority shareholder who happens to be the Minister for Finance, who can't compel them to hire a CEO he wants, let alone decide funding allocations. They have government bonds they wish to sell, or sell/receive NAMA bonds (which is obviously more likely these days) and they can do what they like (up to a point) with that cash. Why should they, or more pointedly, what can compel them, to exchange their new liquidity to paydown ELAs or anything else?
Again, apologies if I'm missing the wood for the trees. I just can't see the mechanism of compulsion in this case, and without it, I've no confidence these guys will be using money for purposes other than their own.
@Stephen
ReplyDeleteI am not qualified to give an explanation on the legalities of the "have" to pay back. I am a complete amateur in all this stuff.
I suspect that the only real *have to* is in the 'understanding' MOU agreement with the troika.
The ECB of course keeps banging on about its €150 billion.
When the €20 billion goes in as capital, the ECB will immediately demand it.
The money will be paid back. Ireland is afraid of the ECB bully. It is as simple as that. The minute they threaten 'no cash in the ATM's', we say 'How much do you want'.
Almost like a junkie. Only difference is that I would feel sorry for the junkie.
@Stephen
ReplyDeleteThe other *have* to of course is that the ECB money to the ICB is money loaned on a very short cycle, presumably under a so-called repo contract (I had to look up wikipedia finally on that one).
Technically the ECB could probably put the a receiver? into the ICB at any time. Ditto the ICB for the money loaned by the ICB to the banks.
It would be getting a bit messy at that stage. Because there is no legislation protecting bank depositors, they would be last in the queue.
I suspect a lot of European bank depositors would start queueing. The queue would stretch from Norway to Portegal.