Friday, April 29, 2011

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.

Central Bank Funding

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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