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It could be because these depositors have withdrawn their money from Irish banks or because Irish banks have not aggressively sought to extend these deposits, and instead have turned to the cheaper funding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.

2010 External Trade Figures: Dipped in Chemicals

The CSO have released the preliminary 2010 External Trade figures.  They show a record trade surplus of €44.7 billion.  This is up on the 2009 surplus of €39.2 billion and nearly €20 billion ahead of the pre-crash surplus of €25.7 billion recorded in 2007.  If one was to report a positive economic indicator for the Irish economy, our surging trade surplus would be it.

The trade balance is significantly ahead of the levels recorded at the end of the export-led Phase One of the Celtic Tiger in 2002.  As the construction- and credit-fuelled Phase Two of the Celtic Tiger took hold from 2003 to 2007 the trade balance fell.  However, since the onset of the current recession the trade balance has gone into a steep incline and this has made a substantial positive contribution to our growth figures (though one that has been swamped by the collapse of some sectors of the domestic economy).

So the prospects of the much-claimed “export-led recovery” must be good, right?  Not quite, I’m afraid.  The trade balance is the difference between exports and imports.  If we look at these we see that the current increase in the trade balance is not due to the same factors that drove the increases during the Celtic Tiger Phase One.

The period from 1995 to 2002 was characterised by rising exports and imports, with the faster rate of rising exports increasing the trade balance.   Irish export growth stalled in 2002 (and has not recovered) and in the period 2003 to 2007 the trade balance narrowed as imports rose.  Finally, it is pretty evident that since 2008 the huge increase in the trade balance has very little to do with a stellar export performance (strong, resilient, and robust are popular descriptors).  Instead, the trade balance increased because imports collapsed.

Imports are now back to a level last seen in 1999 and while some might be crowing about our export performance, Irish exports in 2010 were lower than they were in both 2001 and 2002.   While a growing trade balance is good for growth arithmetic, it does not have a significant real effect on the economy if it is based on falling imports.  For an analysis of this see our post on Ireland’s import performance from back in January.  This gives a different insight to the otherwise positive spin that has been put on our trade figures and why this drop in imports is actually bad for the economy.

Here, we will continue with some analysis of the monthly trade figures from the CSO release.

The drop off in imports since 2007 is self-evident.  The performance of our exports has been relatively stable for the five years shown, though the slight decline that was seen towards the end of 2009 has been reversed and exports in 2010 (€90.0 billion) were very slightly ahead of the those from 2007 (€89.2 billion).  A “export-led recovery” will need a bit more than a 0.9% increase in exports to make any dent on our employment crisis.

Here comes the good news again but this time in monthly figures.  Our monthly trade surplus is now up to around €4 billion a month.

As per usual it is important to consider the key sectors in our merchandise exports.  Of course, in Ireland’s case it’s actually just one sector.  With only preliminary figures available for December, data by category until November 2010 has been published and this is shown in the following graph.

Nearly 60% of Irish merchandise exports are accounted for by one category – Chemicals and Related Products – and this category itself is dominated by one sub-category – Medical and Pharmaceutical Products.  See a previous post for the the impact of the chemical and pharmaceutical sector on the Irish economy using Forfás data.

Here are our pharmaceutical exports since 2005.

It would be great if employment in this sector was also close to doubling since 2007 but it is unchanged – the same workers are generating nearly twice as many exports.  In fact, workers in the chemical sector make up about 1% of the workforce and generate nearly 60% of our trade exports.

If we take out the capital intensive chemicals sector from out export figures and see what has happened across the other sectors we do not see the “strong, resilient and robust” performance that is frequently referred to.

 

In 2007, exports excluding chemicals were €43.6 billion in the first 11 months of the year.  In first 11 months of 2010 the equivalent figure was €33.6 billion – a drop of 21.1%.  Not much sign of strength here.  The “recovery” in 2010 has seen a rise of 0.6% in these exports on the 2009 figures.

Irish export figures are been masked by the dominating effect of the high value chemical and pharmaceutical sector.  If we take this sector our (which is “booming” but has added zero jobs) our export performance is scratchy at best.  If we take this one sector out of the trade balance what do we see?

Yikes.  For the first 11 months of 2010 Ireland had a total trade surplus of €41.2 billion.  Take the impact of chemicals out of that and there was a trade surplus of only €268 million.  The trade balance in the chemicals sector is equivalent to 99.4% of Ireland’s total trade surplus.  Any chance of an extension on those patents??

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.