Friday, February 11, 2011

Liabilities with the ECB and Irish Central Bank – Is the hysteria fully deserved?

The liabilities of Irish financial institutions with the Eurosystem of central banks have been getting a great deal of coverage recently and there are lots of stories like this:

The latest data shows that Anglo Irish Bank and other lenders had borrowed €51bn (£43bn) from the Irish central bank by the end of December, under an obscure programme listed in the balance sheet as “other assets”.

This comes on top of €132bn in loans from the ECB itself, the figure normally tracked by analysts and itself 24pc of all ECB lending.

“This is a horror story: it shows the cataclysmic condition of the Irish banking system,” said Tim Congdon from International Monetary Research. “The banks have borrowed €183bn in total, or 110pc of Irish GDP. They have burned through all their capital and a lot of their deposits as well. This is going to end up on the national debt”.

People would want to be careful of the figures that are being thrown around.  The numbers are enormous but that does not mean that they have to be inaccurate.  We don't have a breakdown of the preliminary end-January figures reported on today which showed liabilities to the ECB declining to €126 billion, but we do have such a breakdown for the end-December figures.

Based on the end-December figures from the Central Bank, Irish banks had liabilities of €132 billion with the ECB.  Unlike, as has been suggested above, this is not necessarily a liability which could all fall on the State.  There are a couple of issues we must note.

First, we must make the distinction between domestic (Irish and Irish subsidiaries of international banks) and other (mainly IFSC banks and other banks who have operations or branches in Ireland).  The liabilities of Irish banks with the ECB was €94.5 billion.  Some €37.5 billion of the credit extended by the ECB to banks in Ireland was to banks who have virtually nothing to do with Ireland apart from having operations in Dublin 1.  Here is a graph we have used before.

Eurosystem deposits

Second, among domestic banks (of which there are 20) we must make the distinction between the six banks covered by the bank guarantee scheme (AIB, BOI, Anglo, IL&P, INBS and EBS) and the other Irish banks or banks with Irish subsidiaries which come under the heading of domestic banks.  A full list of the banks operating in Ireland can be seen here.  Unfortunately, the Central Bank do not provide data on this very important distinction, therefore we do not know how much of the €94.5 billion was consumed by banks under the guarantee.  We can assume that it is a lot, and maybe most, but we can do no better than that.

The same caveats also apply to the Emergency Liquidity Assistance (ELA) provided by our own Central Bank.  However, we have even less information about this (where did the get the money for a start?) and we do not even know the breakdown between domestic and non-domestic banks.  Also, we do not even know exactly how much ELA has been extended by the Central Bank.  Monies provided under this scheme are included under the catch-all heading of 'Other Assets' in Central Bank’s balance sheet.  This category has leapt up in recent months but we do not have a breakdown of it.  Again from a previous post.

Central Bank Assets2

We can see that the 'Other Assets' category was around €14 billion for the year up to August 2010 (though it was substantially lower before then). Since last August it has gone into a vertical ascent and jumped to over €50 billion.  Again it is likely that ‘lots’ of this is provided to the guaranteed banks, but in general we can only assume this.  However, from the financial results published during the week we do know that Anglo accounts for €28.1 billion of the ELA and that has justifiably worried some people.

Then, there is the national sport that has become estimating our 'National Debt'.  Much of this is ridiculous and sees numbers like €300 billion and more bandied about.  People are staggeringly selective in the figures they choose to include or exclude in these “sums”.

In most cased when adding the liabilities of the banks it is only monies owed to the ECB and Central Bank that are included? Is this some sort of special liability? And as we have seen the figures used are subject to some strong caveats that most people ignore.  Why are the rest of the liabilities of the banks omitted?  Total bank liabilities were €1,168 billion (€1.2 trillion!) at the end of December (or €742 billion if you limit it to domestic banks).  Do these creditors not count?  Of course they do, and like the other liabilities on our banks balance sheets there are assets, albeit of questionable quality in many cases, to match them (or some of them!).

Finally, the monies the banks have been taking from the central banks are not new liabilities.  They always had them, it's just that they owed them to someone else.  Since September 2008, Irish banks have shed €168 billion in deposits.  This has been driven almost entirely by a €152 billion collapse in deposits from monetary financial institutions from the rest of the world as shown here.

Rest of the World Deposits

The banks needed money to pay back these deposits and also bondholders as we will see in a subsequent post.  As they had no one else willing to deposit the money (or perhaps didn’t look too hard to get it??), they turned to the ECB banks for funding to repay these deposits and then to the Irish Central Bank when the ECB stopped accepting the collateral (them dodgy assets again) being offered by the banks.

The money borrowed from the ECB and under the ELA isn't a new liability being heaped upon our ailing banks, it's just the liability moving around.  Obviously, it would be better if our banks were not turning to the lender of last resort. We already knew our banks were goosed. Whether they owe the money to depositors and bondholders or the ECB is interesting and does have some importance.  It is a serious development and the ECB is a more serious creditor, but it does not merit the hysteria that inaccurate use of the figures generates. 

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