Thursday, September 1, 2011

Recapitalising the banks

We can see the effect of the recent State recapitalisation of the covered banks in the Money, Credit and Banking Statistics.  Here are Irish resident deposits in the covered banks.  Our focus here is on government deposits.

Irish Resident Deposits in Covered Banks

After being below €3 billion for several years, government deposits in the covered banks jumped to €21 billion in April.  This was the money liquidated from the NPRF and borrowed from the EU/IMF that would be used to recapitalise the banks.  This was to be done in March but was delayed until after the general election.

Government deposits stayed above €21 billion until June and in July dropped to €2 billion.  Where did the money go?  The capital and reserves part of the balance sheet shows us.

Capital and Reserves

The fall in deposits from government is offset by the rise in capital in the bank. Our capital.  The covered banks have more capital in them that at any time since 2003.  By any measure the covered banks have “lots” of capital.  Loss losses and write-downs will consume some of this.  How much is the subject of much debate.

There has been some suggestions that the banks have been using this money to buy Irish government bonds.  Here is an extract from this article in the Sunday Business Post discusses the recent falls in Irish government bond yields.

Some caution is required, for a few reasons. It appears that among the buyers of Irish bonds in recent weeks have been the Irish banks themselves.

Following state cash injections under the recapitalisation programme agreed with the EU and the IMF, Irish government bonds have been seen as an attractive place to put some cash, while also supporting the ‘‘home team’’.

It is impossible to say how significant this has been - a number of market sources say it has contributed, but that the international re-rating of Ireland has been more important.

The data do not really support this thesis (yet).

Irish Securities held by Covered Banks

Holding of bonds issued by the government increased from €9.4 billion to €9.6 billion in July.  The covered banks hold about 10% of Irish government debt. 

With volumes low, €200 million may have been enough to have some impact on bond yields.  It is also possible that more significant purchases may have taken place towards the end of July and after the reporting date for the above data.  It will be interesting to watch this number in the August release.

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