One domestic consequence of default

With talk of “unsustainable debt” and “inevitability of default” growing ever louder I think the following graph from a previous post is important.  While much of the noise has focussed on the liability side of our ailing banks this looks at some of the assets they hold, and in particular assets issued by Irish residents. 

Irish exposure to Irish debt is getting ever larger.  The full implications of a banking- and/or sovereign-debt default need to be examined and this is something that those who are shouting loudest tend to ignore.  Here is the blurb that went with the graph.  This is a point that should not be lost.

The covered banks are holding more and more debt securities issued by Irish residents.  These have increased from €11 billion in January 2008 to €84 billion in January 2011.

Everything is going up.  The increase in “private sector” bonds here are mainly those issued by NAMA in return for the transfer of developer loans from the banks.  Bonds by “monetary financial institutions” are bonds issued by the covered banks themselves.  The almost vertical rise seen in January 2011 is because the banks issued €17 billion of bonds to themselves to use as collateral with the ECB.  As we saw previously, the remainder of this category is €15 billion of bonds the covered banks hold in each other.  Burning these bondholders will just mean more promissory notes will have to be issued.

I cannot really explain the rise in the holdings of “general government” bonds by the covered banks.  It seems unusual that at a time when the State was pumping billion to prop up the banks, these very same banks were using €11 billion to buy bonds issued by the State.  It appears they now hold about one-eighth of Irish government bonds in issue.  Guess who will be hit if there is a sovereign default??

Some insight into the banks’ buying of Irish government bonds is given in this May 2009 article from the Sunday Business Post.

Assets in the Covered Banks

We have spent a great deal of time looking at the liability side of the balance sheets of the covered banks (total liabilities here, bonds here and here, deposits here and ECB borrowings here). 

While the liability side garners most of the attention due to the State guarantees that have been given to certain banking liabilities, the source of banking crisis has been the asset side of the bank’s balance sheet.  In this piece we will briefly consider the assets of the six covered banks.  Here are total assets which show little change.

The book value of the Irish assets of the six covered banks have fallen from €665 billion in mid-2009 to €621 billion now.  This €621 billion is currently broken down as follows:

• 47.5% in loans to Irish residents,
• 20.5% in loans to non-Irish residents,
• 18.5% is accounted for by the promissory notes, NAMA bonds, government bonds and bonds in the covered banks themselves,
• 8.5% in debt securities issued by non-residents, 
• 5.0% in other assets including central bank balances.

Although the change in the total assets has not been substantial there has been significant changes in the breakdown by category.  However, looking at the three main categories of loans, bonds and other assets does not show this immediately.

Although there has been some decline in loans and an increase in debt securities held in recent months most of the action has occurred within these groups.  Here are the loans by residency of borrower in the domestic banks.

Again it suggests little movement, though we can see that loans to Irish residents make up the bulk of this asset.  Although it appears relatively flat, loans to Irish residents on the covered bank’s balance sheets have declined from €364 billion in June 2009 to €327 billion in January 2011.  We can breakdown this category further.

Finally we see some movement.  There is a very noticeable decline in loans to the private sector from the six covered banks,  which have fallen from €244 billion in June 2009 to €186 billion now.  This is not to say that we have paid off this amount of debt.  Instead, the National Asset Management Agency (NAMA) has bought some €68 billion of loans off the covered banks.  This money has been replaced on the banks balance sheets in two ways

1. To buy the loans NAMA has exchanged bonds with the banks of about 50% of the value of the loans.
2. To make good some of the losses on the NAMA transfers and other losses the state has recapitalised the banks with €46 billion so far.

It is because of the combination of these two transfers that the amount of assets held by the banks has remained largely unchanged.  In the previous graph above we can see the impact of item 2 above.

Loans to Irish residents from the covered banks under the heading ‘General Government’ increased from essentially nothing in February 2010 to €31 billion in January 2011.  This represents the Promissory Notes  used to pump money into the banks (mainly Anglo).  Like a loan, these promissory notes are a promise from the State to (re)pay money to the banks.  Instead of developers having this promise, the taxpayer has.  These promissory notes now account for about 10% of the loans issued by the covered banks to Irish residents.

Next we turn to the debt securities held by the covered banks.  Like loans we saw from the second graph above that the total shows little movement but the breakdown of the category does as seen here.

The covered banks are holding more and more debt securities issued by Irish residents.  These have increased from €11 billion in January 2008 to €84 billion in January 2011.  There has been an offsetting decline in the holding of other Eurozone and Rest of the World bonds.  So what type of Irish bonds are the covered banks holding?

Everything is going up.  The increase in “private sector” bonds here are mainly those issued by NAMA in return for the transfer of developer loans from the banks.  Bonds by “monetary financial institutions” are bonds issued by the covered banks themselves.  The almost vertical rise seen in January 2011 is because the banks issued €17 billion of bonds to themselves to use as collateral with the ECB.  As we saw previously, the remainder of this category is €15 billion of bonds the covered banks hold in each other.  Burning these bondholders will just mean more promissory notes will have to be issued.

I cannot really explain the rise in the holdings of “general government” bonds by the covered banks.  It seems unusual that at a time when the State was pumping billion to prop up the banks, these very same banks were using €11 billion to buy bonds issued by the State.  It appears they now hold about one-eighth of Irish government bonds in issue.  Guess who will be hit if there is a sovereign default??

For completeness here is the breakdown of Other Assets since January 2009 which make up about 5% of total assets.

It is important to remember that these are the assets held in Ireland of the covered banks and so not necessarily represent the actual balance sheet position of the banks.  For example, the €17 billion of self-held bonds actually have a net balance sheet position of zero as there is a matching liability of €17 billion on the other side of the balance sheet.  The effect of the activities of the bank offshore activities is also excluded.  Again it could be that the assets are those of foreign-based subsidiaries of the banks which will be matched by liabilities elsewhere.

In an interesting development the Central Bank have also begun to publish a “consolidated” aggregate balance sheet of the covered six banks.  Although the details of the consolidation are unclear it is to account for issues like the two mentioned above.  This gives a more accurate representation of the third-party assets held by the covered banks.  Unfortunately, the Central Bank do not use the same headings and definitions as they do for the aggregate balance sheet data we used above.  The Consolidated Balance Sheet of the covered six can be seen here.

Bonds in the Covered Banks held by the Covered Banks

Earlier in the week we looked at the numbers relating to bonds issued by the six covered banks from the Central Banks’ Money, Credit and Banking Statistics.  This was a useful analysis, up to a point.  We now have a much better set of numbers released by the Central Bank that gives a detailed breakdown of the bonds issued by the covered banks. 

The original release is here and the key table is reproduced here with an additional total column providing totals for the individual banks.

The numbers are fairly self explanatory and we can see that there are €63.4 billion of bonds in issue.  The balance sheet data from Table 4.2 of the Money, Credit and Banking Statistics that were explored in the post linked above indicated that there were €79.1 billion of bonds issued by these banks.  The apparent discrepancy can likely be accounted for by again noting that the banks issued about €17 billion of bonds to themselves in January.  So that still leaves us with the question of who holds these €63.4 billion of bonds.

When the December figures were released we looked at the ownership of these bonds and concluded that “the proportion of bond held by Irish residents has been rising since the guarantee was introduced and now stands at just over 50%”.  This was for all domestic Irish banks. Since then we have got a breakdown for the six covered banks and the original conclusion remains unchanged.

Of course, what we could not say was who actually holds these bonds.  That did not stop some to extend the analysis beyond what it could really do – see 22 minutes into this clip where it was suggested that “half of these bonds are held by Irish credit unions and Irish pension funds”.  It is still true that more than half of the bonds are held by Irish residents, but it could be holding companies of foreign banks that are simply domiciled in Ireland, most probably in the IFSC.  This suggestion was made elsewhere – see 47.5 minutes into this clip.

Can we cast any light on this issue? Maybe.

Again using the Central Bank’s data on the banks’ balance sheets we see that on the asset side the six covered banks hold €31.8 billion on bonds issued by Irish financial institutions.  Now it could be that these are bonds issued by non-covered banks or banks in the IFSC.  If we look on the liability side we see that all banks operating in Ireland have issued €50.8 billion of bonds that are held by Irish residents.  Irish banks hold €31.8 billion of this (which includes the €17 billion of self-issued bonds).  Of the €50.8 billion of bonds in issue from Irish banks held by Irish residents, €50.2 billion has been issued by the six covered banks.

The implication of this should be fairly clear.  Of the €63.3 billion of bonds in the covered banks shown in the above table, something in the region of €15 billion is held by the covered banks themselves.  As the €17 billion of self-issued bonds in January was excluded from this table it is likely that this €15 billion are bonds the banks hold in each other.

Finally, we can see that all banks operating in Ireland (covered, domestic and IFSC) hold €33.3 billion of bonds issued by Irish financial institutions (which is 99% from the covered six).  Domestic or retail banks hold €31.8 billion of these bonds.  This means that IFSC banks only hold €1.5 billion of bonds in the covered banks.

What do we conclude?

The covered six have €79 billion of bonds issued.  About €17 billion of these are guaranteed self-issued bonds which are being used as collateral with the ECB.  Another  €15 billion are held by the covered banks themselves.  Banks in the IFSC hold only €1.5 billion of these bonds.  That accounts for €33.5 billion of the €50 billion of covered bank bonds held by Irish residents. 

Who holds the other €16.5 billion? It could be “Irish credit unions and Irish pension funds”.  It could be IFSC-based non-banking institutions that do not appear in the Central Bank statistics.  We don’t know.   We do know that non-Irish residents hold €29 billion of bonds issued by the covered banks.  So we get the following table for the €79 billion of bonds in issue.

If the bondholders do get “burned” there will be yet another hole in the balance sheets of the nationalised and part-nationalised banks and they will need to be further recapitalised.  (Guess who?)  That leaves about €48 billion of bonds, with some unknown quantity up to a maximum of €16.5 billion Irish held, but at least €31.5 billion held by non-Irish investors.

It would be great if we had a breakdown of the holdings outlined here by the four categories used in the table at the top.  €40 billion of the bonds are either guaranteed by the State (€21 billion) or secured against collateral like mortgages (€19 billion).  That leaves €23.5 billion in play.  We could really do with knowing who holds these bonds.  It could be the banks themselves!

There probably is some scope for burden-sharing but maybe not as much as first thought and for substantial savings to be made attention will have to turn to the guaranteed and secured bonds.  There definitely is not as much to be saved as in August 2008 (the month before the blanket guarantee) when non-Irish residents held €82 billion of bonds issued by the covered banks.

Private Sector Deposits

We previously looked at the balance sheet position of deposits in Irish banks (all banks here and the ‘covered’ banks here).  While no one disputes that Irish banks are losing deposits, the actual rate of decline is subject to question due to the non-consolidated method the Central Bank uses when compiling the Banking Balance Sheet tables in the Money, Credit and Banking Statistics. 

This means that if an Irish bank moves deposits in an internal intra-bank transfer or between subsidiaries it could appear that it is losing deposits if this transfer is to a non-Irish subsidiary.  There have been suggestions that about 75% of the apparent €18.5 billion loss of deposits in the covered institutions that occurred in January is due to such transfers.  As we have noted most of the changes in deposits in Irish banks has occurred in the ‘Other Financial Intermediaries’. 

What we will look at here are private sector deposits of Irish residents.  This figures will be changed by the actions of depositors rather than the bank that holds the deposits.  First up, are total private sector deposits of Irish residents in banks in Ireland and these are definitely falling.

In August 2009, private sector deposits totalled €187 billion.  The January 2011 total is €167 billion.  The Central Bank breaks this down into deposits by four sectors:

• Households
• Non-Financial Corporations
• Financial Intermediaries
• Insurance Corporations

Deposits across all sectors are falling.  Here we isolate Household Deposits.  Between January 2010 and January 2011 these fell from €99.5 billion to €94 billion and are on a largely unbroken downward trend.

Across the different deposit options available to households we see that the decrease has been driven by a fall in long term deposits as we can see here.

Deposits in accounts that need more than 3 months notice and mature in less than two years have fallen from €37 billion in January 2009 to €28 billion.  This could be caused by falling interest rates but we do not see an increase across the other categories, so these deposits have not been replaced (in Irish banks).

On the business side we see a similar drop in deposits.

Again it appears to be long term deposits that are driving the fall in deposits.

The ECB and the ELA in the Covered Banks

In January 2011 Irish Banks had borrowed €126 billion from the ECB.  Of this €96 billion was borrowed by domestic banks with the remainder taken by the Irish operations of foreign banks.

Since October, other banks operating in Ireland have been reducing their borrowings from the ECB.  Borrowings for domestic banks have been oscillating around the record levels of €95 billion recorded for the past three months.

This month we have the added breakdown of this money taken by covered and non-covered Irish banks and we can see that nearly 97% of the money was taken by covered banks.

The borrowings of the covered banks with the ECB rose to a record €93 billion in January.  This is the money that replaced the outflow of deposits on the banks balance sheets.  Of course, this is less than the banks needed to cover the repayment of bonds and withdrawal of depositors. 

When the ECB began refusing the collateral the banks were offering, the banks turned to the Emergency Liquidity Assistance (ELA) of the Central Bank of Ireland.  This is included in the “Other Assets” category in the balance sheet of the Central Bank.  The money extended under the ELA makes up the majority of this total.

Although we don’t know which banks have drawn down this assistance we can pretty much take it as given that the covered banks have been the users of this facility.  We know that the banks have been issuing guaranteed bonds to themselves that the ECB will accept as collateral to try and avoid using the more expensive funds from the ELA.  Using the ELA is essentially further borrowing from the ECB but it is channelled through the domestic central bank (who also bear the risk of non-repayment).  For more details on the ELA see this recent article.

Deposits in the Covered Banks

The graph of total deposits in all banks operating in Ireland paints an alarming picture.

At first glance this would give rise to notions of a bank run.  We examined this in detail using last month’s figures and concluded that it was mainly due to a reduction in deposits from non-resident monetary financial institutions and about half of the decline could be attributed to non-domestic banks with operations in Ireland. 

It could be because these depositors have withdrawn their money from Irish banks or because Irish banks have not aggressively sought to extend these deposits, and instead have turned to the cheaper funding available from the ECB.  Most banks would prefer not be extensive and prolonged users of the ECB lending facilities because of the reputational damage this would cause, but the Irish banks have no reputation to lose.

Anyway, this month’s release from the Central Bank allows us to monitor the trends in deposits in the six covered institutions (AIB, BOI, Anglo, INBS, PTSB and EBS).

When looking at the drop in deposits that has occurred in domestic banks over the past six months we see that, by and large, this is a phenomenon that has affected the covered banks.  Almost three-quarters of deposits in domestic Irish banks are held in the six covered banks.  These banks had deposits of €414 billion last July.  By January, this had fallen to €319 billion, a drop of €95 billion. 

By contrast deposits in the non-covered banks (ACC, Barclays Ireland, Danske Bank A/S, Investec Bank (Ireland), KBC Bank Ireland, Northern Rock, Rabobank, Ulster Bank, Credit Unions) fell from €114 billion to €90 billion, a drop of €24 billion.  The proportionate drop in deposits in the covered institutions was 23%, with a 21% drop in deposits in the non-covered institutions.  Who has taken their money out of the banks?

Deposits from all sources have declined since August 2010, but the drop in deposits from non-eurozone residents (€59 billion or 40%) is greater than withdrawals by Irish residents (€25 billion or 10%) and other eurozone residents (€12 billion or 68%).

For total deposits in the Irish banking system the Central Bank provide a breakdown by depositor category for the above three groups.  These categories are monetary financial institutions, private sector and general government.  Here we update the graph for the deposits of non-eurozone residents in Irish banks. (Note that this relates to all banks operating in Ireland.)

It is pretty clear that it is other financial institutions who have undertaken the greatest reduction in their deposit holdings in Irish banks and that this has accelerated since the first guarantee expired last August.  What we do have is a breakdown of deposits by category for Irish residents.

General government deposits have been largely unchanged and hovered between €2 and €3 billion.  The €25 billion drop in Irish resident deposits in the covered banks can be split as €9 billion from financial institutions and €16 billion from the private sector.  For total deposits we get a breakdown of private sector deposits by household and business but this is not available for the private sector deposits in the covered banks.  Anyway, there has been some drop in Irish resident deposits in the covered banks it is not (yet?) at a rate to suggest a domestic bank run is underway.

It is non-eurozone deposits that have left the domestic banks and this €95 billion is the second reason that the covered banks have been turning to the ECB and Central Bank of Ireland for funding.  They needed the money to pay the bondholders and depositors back.

Bonds Issued by the Covered Institutions

When the December release of the Central Bank’s Credit, Money and Banking Statistics were released we examined the bonds issued by domestic banks in this post that garnered some attention.  The January release published today allows us to explore patterns in the amount of bonds issued by the six covered institutions.  This was previously not possible as a breakdown by covered and non-covered domestic banks was not provided.

Here are the total debt securities issued by the covered banks.  These graphs just give the total amount in issue by the covered banks.  It does not show the difference between guaranteed and unguaranteed debt.

After showing an alarming decline in the last six months of 2010, it seems that the amount of bonds issued by the covered institutions increased by about €17 billion in January.  Technically this is true but it doesn’t mean we have another €17 billion of bondholders to “burn”.

This see why, here’s a breakdown of who holds the €79.1 billion of total bonds in issue from the covered banks.

The big change is seemingly in holdings of covered bonds by Irish residents.   These figures now suggest that nearly two-thirds of the bonds are now held by Irish residents.  We estimated that this was just over one-half a month ago.  Have Irish residents suddenly got a new appetite for owning these bonds?

In general we cannot say who actually owns these bonds.  Some have tried to suggest that these bonds are owned by Irish credit unions and pension funds.  We cannot tell from the figures available.  However, we can make a fairly solid judgement on who owns the increased €17 billion in bonds that appeared in January.  It is the banks themselves!  See this report:

IRISH BANKS are issuing bonds to themselves under the Government guarantee to borrow cheaply from the European Central Bank and to avoid drawing more heavily on emergency lending from the Irish Central Bank.

Four banks issued bonds worth €17 billion to themselves last month under the Government’s extended guarantee, the Eligible Liabilities Guarantee, to use as collateral to borrow from the ECB.

All the bonds mature in April and May when the details of the banks’ plans to sell off assets and shrink the size of their businesses must be agreed under the EU-IMF bailout deal.

Bank of Ireland issued the largest amount, €9 billion, on four bonds on January 26th. AIB issued €2.63 billion on January 25th, Irish Life and Permanent €3.1 billion the following day and EBS building society €1.7 billion on January 28th.

So while this graph of the residency of the owners shows a huge jump in January it is due to some balance sheet acrobatics on the side of the banks.

One statistic that remains is the hugely reduced possibility of making external bondholders “share the burden”.  In August 2008 holdings by residents outside of the Eurozone (mainly London) held €68 billion in bonds issued by the covered banks.  The January 2010 figures show that this is now €19 billion – a reduction of €49 billion. Most of this money was repaid in full, including €750 million to bondholders in Anglo Irish Bank a few weeks ago.  The repayment of these bonds is part of the reason why Irish banks have turned to the ECB for emergency funding.  Next we turn to the other reason.

Balance Sheets of the “Covered” Banks

The Central Bank have released their Credit, Money and Banking Statistics for January.  We have looked at these before.  This month, however, for the first we are provided with a breakdown of some data for the banks covered by the Eligible Liabilities Guarantee.  The release from the Central Bank details this addition and some caveats about their interpretation.

In this release, a further subdivision relating to the six banks covered under the Government’s guarantee schemes, (described as the Covered Institutions) is presented for the first time in Table A.4.2. It is important to note that these Money and Banking Statistics cover banks’ operations within Ireland only. In line with the recognised international standards for Money and Banking Statistics - intra-group assets and liabilities, including those vis-à-vis group members both within and outside Ireland, are recorded in full, on a gross basis in these tables.

We present some of the new figures here.  First up are the total liabilities of the six covered institutions which are almost identical to the total when the original “blanket” guarantee was introduced in September 2008.

The next graph gives the breakdown of these liabilities by type and we see that they has been a change in the mix of liabilities on the covered banks’ balance sheets.

Deposits are by far the greatest liability the banks have but with the expiry of the original guarantee in August these have shown a rapid decline of nearly €100 billion since then.  We can also see the declining importance of Debt Securities (bonds) over the period, although there was a large jump in January (not shown on the diagram). 

The liabilities that have taken the place of the deposits and bonds are Eurosystem Liabilities which were €93 billion in January and Other Liabilities of €82 billion which includes the Emergency Liquidity Assistance from our own Central Bank.  We will look at these liabilities in more detail in subsequent posts.

Bank Liabilities and “Big European Banks”

As of the end of December, domestic Irish banks had total liabilities of €742.5 billion.  Here is the list of banks included in this total.

ACC Bank plc
AIB Mortgage Bank*
Allied Irish Banks plc*
Anglo Irish Bank Corporation plc*
Anglo Irish Mortgage Bank*
Bank of Ireland Mortgage Bank*
Barclays Bank Ireland plc
Danske Bank A/S
EBS Building Society*
EBS Mortgage Finance*
ICS Building Society*
Investec Bank plc (Irish Branch)
Irish Life & Permanent plc*
Irish Nationwide Building Society*
KBC Bank Ireland plc
Northern Rock plc
Rabobank Nederland
The Governor and Company of the Bank of Ireland*
Ulster Bank Ireland Limited
Credit Unions

55% of the banks on the list are covered by the bank guarantee scheme but the Central Bank do not provide data on what proportion of the total bank liabilities are due by the guaranteed institutions.  It could be more than 55%, but we don’t know.  The only thing we can really say is that 100% of the liabilities in these figures are not against the guaranteed (and likely nationalised) banks. 

To give some insight into this at the time the blanket guarantee was introduced in September 2008, the total liabilities of domestic banks was €787 billion.  We know that that guarantee covered approximately €440 billion of liabilities.  This suggests that 56% of the total banking liabilities were covered by the guarantee.  We do not know what has happened to this ratio since then and the scale of the guarantee was subsequently reduced.

Here is a breakdown of the current €742.5 billion of liabilities on domestic banks’ balance sheets.

The money owed to the Irish Central Bank under the Emergency Liquidity Assistance programme is under ‘Other Liabilities’.  The smallest liability category is ‘Debt Securities’ which includes the much maligned bondholders.  Here is how total liabilities of domestic banks have changed over the past three years.

What is also important is who is actually owed this money.  First up we can divide it between Irish resident, non-resident and Eurosystem liabilities.

Of the total liabilities of Irish banks, 63% are now owed to Irish residents.  There has been a number of claims that the “Irish bail-out” has been orchestrated to save “big European banks”.  Looking at the above does suggest that it is non-residents who are getting out (unscathed?) from the Irish banking market, with liabilities to non-residents dropping from around €406 billion in October 2008 just after the guarantee was introduced, to less than €190 billion now.   But how much of this was owed to European creditors?

We can breakdown deposits and debt securities into holdings by Other Eurozone and Rest of the World residents.  We cannot do the same for the capital and reserves or other liabilities categories but these only make up €21.5 billion of the total of €189 billion of non-resident liabilities in domestic banks.  So how is the remaining €168 billion distributed?  Is this the money that needs to be paid back to rescue “big European banks”?

Erm, it appears not.

Of the liabilities included only 15.6% are owed to other Eurozone residents.  The greatest bulk of it is due residents from the rest of the world (€26.3 billion versus €141.6 billion).  Liabilities to Other Eurozone residents have dropped by €32.3 billion since the €58.6 billion that was outstanding at the time of the guarantee. 

This is dwarfed by the €182 billion drop in liabilities to rest of the world residents since October 2008 this stood at €323 billion.  The accelerated decline since August 2010 is once again noticeable.  The inclusion of the €21 billion of capital and reserves and other other liabilities for which the Eurozone/RoW breakdown is not available is not large enough to change this.

Of course, this is not a firm conclusion and the money could be arriving here from “big European banks” via international markets and placed under the Rest of the World category.  As London is outside the Eurozone and classified as Rest of the World this could be an important consideration.

Disappearing Bank Bonds

The vernacular has seen phrases like “burn the bondholders”, “take a haircut” and “ordered default” enter into common use.   We have given some time to tracking the changing patterns of deposits in Irish banks since the guarantee came into force.  Here we will give some consideration to the quantity of bonds issued by Irish banks.

Again the Central Bank data we are examining relates to the 20 domestic banks in operation.  When trying to infer the relation to the guarantee and liabilities of The State it is difficult to draw exact conclusions as we do not know how much of these figures relates to the six institutions covered by the guarantee.  We may not be able to draw exact conclusions but can infer fairly broad patterns as the guarantee covers the biggest of the domestic banks.

The graphs here are of debt securities issued by domestic banks.  Here is the Central Bank definition of debt securities which includes more than just bonds.

Debt securities issued comprise funds received in exchange for non-equity debt securities issued by the reporting institution. Such instruments are usually negotiable and traded on secondary markets, and do not grant the holder any ownership rights over the issuing institution. All non-equity bearer securities which have been issued by resident credit institutions are included here, e.g., all commercial paper, certificates of deposit, notes and bonds which have been issued.

A breakdown by the type of securities is not provided but we will work with the numbers as they are.  Here are the total amounts issued with the period after the bank guarantee to the right of the vertical dashed line.

Prior to the guarantee in September 2008 the quantity of bonds was beginning to decline.  This continued up until the summer of 2009 after which there was a stabilisation, and even a slight increase, in the bonds in issue.  By April 2010 there was €111 billion of bank bonds (actually €6 billion more than in September 2008), but by the end of 2010 this had fallen to €64 billion – a drop of over €47 billion.  Most of this money was fully repaid.

So who got the money?  The Central Bank breaks the total down by Irish, Other Eurozone and Rest of the World residents.

The biggest drop has occurred for bondholders from the rest of the world which stood at €74 billion in August 2008 and has dropped (or been repaid) by such an extent since the guarantee was introduced that it is now down to €20 billion.  A drop of €54 billion since August 2008.  As late as last August there were €41 billion of bonds held by rest of the world residents but there was a reduction of €17 billion in September.
 
Irish residents have seen their holdings of Irish bank bonds rise from €25 billion at the time of the guarantee to €45 billion in April 2010.  Since then, these too have fallen and were down to €33 billion by December.  The proportion of bond held by Irish residents has been rising since the guarantee was introduced and now stands at just over 50%.  Are we going to burn ourselves?

Since the guarantee holdings of Irish bank bonds by other Eurozone residents has fallen from €17 billion to €10 billion.  This would hardly leave a ripple on the European banking system.  This would similarly apply to the €20.5 billion held by residents of the rest of the world.  Non-payment of the €33 billion owed to Irish residents would be far more significant.

As with the fleeing deposits the money to repay these bonds had to be found.  Again it is likely that the banks banks turned to the ECB (€94.5 billion) and the ELA of the Irish Central Bank (c. €50 billion).  This a different sort of liability and one for which any kind of default would prove difficult.  As time progresses (and more bonds are repaid) the mantra of “burn the bondholders” or equivalent becomes ever less relevant.  It still has some scope to play a role but pretty soon it will be the country they are setting on fire.  All the other fuel will be gone.

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.

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.

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.

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. 

Loans from Irish Banks

After a look at deposits it wasn’t much of a stretch to run the same graphs for loans.  Here is the total amount of loans issued by all banks.

This has fallen from the highs seen towards the end of 2008, and although not like the regime shift seen in deposits there was an accelerated decline in the last few months of the year with a drop from €868 billion in October to €812 billion in December.

Of the loans issued by banks operating in Ireland, nearly 70% comes from domestic banks.  See list here. 

We can see that the greater decline in the last two months(€36 million versus €20 million) has occurred in loans from non-domestic banks, though over an 18-month period the decline in loans from domestic banks is greater.  Looking at who domestic and non-domestic banks have been lending to.

Nearly three-quarters of the loans from domestic banks are to Irish residents and all the decline of loans by domestic banks has been in this category.  The stand-out feature of the breakdown of loans by other banks is the volatility jump in loans to other Eurozone residents in the last few months of 2010.

The final set of graphs present a breakdown of loans to Irish, other Eurozone, and Rest of the World residents by sector.

Deposits in Irish Banks: A Bank Run?

The release each month by the Central Bank of the Money, Credit and Banking Statistics has seen a shift in interest from the surge in private sector credit that occurred during the false Celtic Tiger phase to the rapid decline in deposits in Irish banks.

Here is a graph of the attention-grabbing trend.  Deposits in banks have been declining since early 2009 but there has been a marked acceleration in this fall since August 2010, with deposits falling by €200 billion in that time.

This measure of total deposits includes all credit institutions operating in Ireland, thus banks operating in the IFSC will be included even though they may have very limited links to the Irish economy.  The Central Bank allows us to break down the above total into domestic credit institutions and other credit institutions.  See this document which lists all credit institutions operating in Ireland.

When we break down deposits into those with domestic banks and those with non-domestic or other banks we see that the €200 billion drop since August has been pretty evenly split between the two groups.  Domestic banks have seen deposits drop by €95 billion since August.  We will have a closer look at the exit of this €95 billion.

Here we get a breakdown of the origin of the deposits.  It is evident that the fall in the deposit base of domestic banks is because of a huge withdrawal of deposits from rest of the world residents.  Since August these deposits have fallen from €193 billion to €121 billion.  As London is outside the eurozone it is likely that a lot of the deposits classified as rest of the world originated from here.

Deposits from Irish residents were largely static up to October, but in November and December there was a drop of €11 billion with deposits falling from €303 billion to €292 billion.  Like deposits from rest of the world residents, deposits from other Eurozone residents have been shown a steady decline since August and fell from €29 billion to €16 billion in the last five months of the year.

Deposits from Irish residents in domestic residents are down, but we know that the Irish savings rate is in excess of 10%.  Where are the existing and new deposits going?  If we look at a breakdown similar to the above for ‘other’ banks operating in Ireland we start to get an insight.

While both other Eurozone and rest of the world residents have been reducing their deposits in other credit institutions operating in Ireland, the last month of the year saw a fairly dramatic jump in deposits in this banks by Irish residents.  In December alone these deposits jumped from €35 billion to €54 billion.  This €19 billion increase in deposits by Irish residents in other banks is greater than the €11 billion decrease in deposits in domestic banks.

Although deposits from all sources are declining it is clear that deposits from rest of the world residents make up the bulk of the fall.  Since August these are down by €118 billion and the main withdrawer of funds have been monetary financial institutions who have taken out €99 billion since August and likely reflects Irish banks difficulties in obtaining funds from wholesale money markets.  This graph is for all credit institutions operating in Ireland. 

Here is a similar graph from deposits from Other Eurozone residents.  The series had been moving relatively steadily until October where there was a €78 billion drop in deposits from monetary financial institutions (more money market troubles?) and a €48 billion rise in deposits from general government (up from essentially nothing).  Since them monetary financial institutions have been remarkably stable and general government deposits have fallen back to €19 billion.

Of course, as we said above, most of the Eurozone deposits are held in non-domestic banks.  Of the €152  billion  of deposits that originated in the Eurozone only €16 billion was placed with domestic banks and this is down from the level of €29 billion recorded back in August.

Finally, we look at the breakdown of deposits from Irish residents. First up, households.

[Note the the break in the series in January 2009 is as a result of Credit Unions been added to the Central Bank’s banking statistics.  There is no other significance to this.]

For virtually the first 11 months of the year, deposits by Irish households were declining.  This largest fall was in November (down nearly €3 billion) but this was reversed in December which saw a €1 billion increase in deposits and likely placed in non-domestic banks.

Turning to the other categories of deposits from Irish residents.  All of these declined in December.

Virtually all measures of deposits in Irish banks have been falling in recent months.  Here is what has been filling some of the the gap.

And the Irish Central Bank has been doing its bit as well.  At a time when the policy is to make Irish banks smaller by reducing their asset base (loan books) here are the assets of the Irish Central Bank.

Since the start of 2008 the assets of the Central Bank have risen almost four fold.  Most of this increase can be attributed to two categories, though the surge in the  funds used under Main Refinancing Operations reflects the increased contribution by the Eurosystem of central banks rather than any unilateral action by the Central Bank of Ireland.

The surge since August can clearly be seen and this is the money that has been used to fund the outflow of deposits.  The notable category is Other Assets which is money the Central Bank has been ‘printing’  since Irish banks have seen huge reductions in their deposits from other financial institutions in the EU and the rest of the world. I hope we get it back.