Tuesday 28 March 2017

Banks pay less than 3pc interest on €51bn of emergency funding

Laura Noonan

Laura Noonan

IRISH banks are paying an interest rate of less than 3pc on the €51bn of 'emergency liquidity assistance' (ELA) that has been sanctioned for them by the Central Bank of Ireland.

Several informed sources confirmed the interest rate in recent days, and also revealed that the ELA is typically for a maximum term of seven days.

The Irish Independent understands there is an "explicit" government guarantee surrounding all ELA lending, so if the banks can't repay the cash, the State will have to.

The news marks the first time any of the terms of the ELA have been made public.

All sources asked to remain anonymous, stressing the strict confidentiality surrounding emergency liquidity operations.

The Central Bank of Ireland has dramatically increased its ELA to banks in recent months, with the sums involved soaring from €14.4bn on August 27 to just over €51bn at the end of the year.

The liquidity was made available to the banks to help them cope with a flight in deposits, coupled with a raft of maturing bonds that had to be repaid.

While troubled institutions such as Anglo Irish Bank were the first to make use of the ELA, the support is now believed to be used by all major Irish banks including healthier institutions such as Bank of Ireland.

The ELA system essentially sees the Central Bank of Ireland assume the risk for some of the cash advanced from the European Central Bank (ECB) to Irish banks.

The Irish banks can't get all the cash they need from the ECB directly because they have run out of the high-quality collateral that Frankfurt demands to advance the liquidity.

While money that comes directly from the ECB is issued for terms ranging from seven days to 90 days, the money given out through ELA is typically granted for seven days.

"There's an understanding that it can be rolled over the following week, but there's no promise," said one source familiar with the system's operations.

Others pointed out that the "emergency" nature of the assistance meant it had to be "short-term, at least in theory".

Liquidity

"Seven days is at the longer end of the spectrum," one source said.

Banks that run short of liquidity within a seven-day period are also allowed to go to the Central Bank of Ireland and ask for overnight money to tide them over.

The interest rate paid by Irish banks on ELA is in the "ball park" of 2pc-3pc, informed sources said. The rate is based on the ECB's marginal lending facility of 1.75pc, plus a "penalty" reflecting the emergency nature of the aid.

The rate banks pay for ELA is significantly above the 1pc interest rate offered by the ECB's main seven-day auction, but is just half the amount Ireland will pay for its €85bn bailout, which carries a 3pc "penalty".

News of Ireland's €51bn ELA operations sent shockwaves around the globe, with some speculating that the manoeuvres could threaten the solvency of our Central Bank.

Several sources confirmed that all ELA money was covered by an "explicit" guarantee from the Government, minimising the risk to our Central Bank but increasing the risk to the taxpayer.

ELA advanced to individual banks is also backed up by assets that are pledged by the banks, usually at a significant discount to their original value.

"The first line of defence is that the bank does not fail because it has gotten the ELA," said one source.

"Then you have the collateral, the government guarantee and the banks' assets."

Irish Independent

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