Deposits in the Covered Banks continue to fall

Not surprisingly the level of deposits in the six covered banks continues to fall.  We have not got a recent update of the consolidated balance sheets of the banks so some of this may be due to transfers between subsidiaries of the banks but as we will see below this could only be a partial explanation.

Since last August there has been a €100 billion drop in the amount of deposits in the covered banks.  As the graph below shows most of this has been for residents outside the eurozone and is probably mainly money based in London.

The Central Bank does not provide a breakdown of the sectors of rest of the world deposits in the covered banks but can be seen from this graph of all banks operating in Ireland that this drop has been in deposits from other financial institutions, i.e. inter-bank lending.

Returning to the covered banks, the Central Bank does provide a breakdown of Irish resident deposits in the six banks.  It is pretty evident that Irish private sector deposits are leaking out of the covered banks.

This time last year the Irish private sector had almost €130 billion on deposit in the covered banks.  The most recent figure put this at €106 billion.  More and more private sector deposits are leaving the covered banks. 

We can get some insight into where they are going if we look at Irish resident private sector deposits in the non-covered domestic banks and other banks operating in Ireland.  In the last six months deposits in these banks have risen by more than €6 billion.

Where did the other €18 billion go?

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Whose problem is it?

Here is a pretty startling graph. It shows the liabilities of the six covered banks broken into three groups.

1. Irish residents
2. Non-Irish residents
3. The ECB

The patterns are pretty self evident.  The liabilities for the Irish and non-Irish residents are made up of four categories.  The numbers in this table give the change in each liability since the month of the blanket guarantee (September 2008)

Since the guarantee was introduced Irish resident exposure to the covered banks has increased by almost €110 billion.  Most of this has been through the ELA offered by the Central Bank of Ireland.  At the same time non-Irish resident exposure to the banks has fallen by almost €170 billion which huge drops in deposits and bondholdings by non-residents in the bank. 

The other player in all this, the ECB, has seen it exposure increase €14 billion in August 2008 to almost €80 billion now.  The drop in deposits and bonds from non-residents is the reason the banks have needed almost €150 billion of central bank funding.

In the immediate aftermath of the guarantee non-resident lending to Irish banks surged and rose by over €25 billion to €310 billion in November 2008.  This enthusiasm was short-lived and over the next few months non-resident lending to Irish banks dropped around €60 billion by March 2009.  It then remained steady at around €250 billion until August 2010 when the original blanket guarantee expired. 

Since then it has dropped at a remarkable rate and is now down to €117 billion.  The total drop since November 2008 is almost €200 billion.  It does appear that this is being isolated as very much an Irish problem.

Here are graphs for the above liabilities.  Every non-resident apart from the ECB is getting out.

   

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Central Bank Funding Falls (but is still massive!)

The reliance of the six covered banks on funding from central banks fell for the first time in a year in March.  Last April the borrowings of the covered banks from central banks fell from €52 billion to €47 billion.  In March it fell from €153 billion to €144 billion. 

It might have fallen for the first time in a year but it is also €100 billion bigger!  The six banks are borrowing the equivalent of 94% of GDP from central banks.  It will take more than one monthly drop to solve this problem.

The banks’ borrowings from the ECB have fallen for the past two months and are down to €79 billion from the peak of €93 billion in January.  The green line actually represents the “Other Assets” category in the Central Bank of Ireland’s balance sheet.  It is widely accepted that all bar about €2 billion of this is Emergency Liquidity Assistance (ELA) that the is being provided to the banks.

As the assets being provided by the banks were shunned by the ECB the banks turned to the ELA on offer from Dame Street.  This is generally at a rate about 2% above the ECB rate. 

The level of ELA first became noticeable following the nationalisation of Anglo in January 2009.  It then stayed between €10 billion and €12 billion between then the the expiry of the original blanket guarantee in August 2010. 

As soon as the guarantee expired it ballooned as the banks lost huge amounts of deposits (as well as paid off a few bonds) and did not have assets that the ECB would accept.  In just five months it went from around €10 billion to be near €70 billion.  In the light of those increases the falls this month are nothing to be getting excited about.

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Slight uptick in Retail Sales

The March Retail Sales Index has been released by the CSO.  Core retail sales are showing a slight improvement on the February levels.  Nothing huge, but both the value and volume series edged upwards.

As expected the annual changes remain negative as the first quarter 2011 figures are being compared against the short-lived “turning the corner” momentum of early 2010.

The volatility in the monthly changes continues.  The severe weather in December is a major factor in this but we can expect to be able to read more from these over the coming months.

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Evening Echo Article 22/04/2011

Here is the text of an article I wrote after this week’s publication of the Review of State Assets and Liabilities that was carried by Friday’s Evening Echo.

The Review of State Assets and Liability published this week identifies around €5 billion of assets which could be sold. The report was undertaken by a group of three, but it is the group chairman, UCD Economics Lecturer, Colm McCarthy who is associated by name with the report. The other members of the group were Alan Mathews, an Economics Professor in Trinity College and Donal McNally who is the Second Secretary in the Department of Finance.

The report gives a useful insight into the activities and outcomes of 15 commercial state bodies, including the ESB, Bord Gáis, CIE, An Post, RTE and the airport and port authorities. Some commercial bodies were excluded from the report. These were the VHI, NAMA and the now nationalised banks as these are all subject to separate processes.

The report makes some strong recommendations about how these assets should be used, but emphasises that an immediate sale of these assets should not be contemplated. The recommendations of the report are to be considered by government and it is only once their actions are announced that we will know what the outcome of this process will be. The report, though, does give us the information they will be using on which these decisions will be based.

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