Sunday 4 December 2016

Maeve Dineen: AIB's too-big-to-fail trick is wearing a little thin

Maeve Dineen

Published 02/08/2010 | 05:00

ALLIED Irish Banks will no doubt take the opportunity to update restless shareholders about the lender's plans to sell off units when it releases first-half results on Wednesday. It is time we got some solid news after months of rumours and speculation.

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The results themselves are unlikely to contain too many surprises; the bank has already given a reasonably clear picture of its finances as part of the stress-test process. We know, for instance, that income before loan losses would be €901m over two years under the Committee of European Banking Supervisors' adverse scenario. That seems to set some kind of floor on the losses the bank could suffer.

While the headline figures will be interesting, it will be even more interesting to watch for any answers to the great riddle of Irish business life right now: how much are banks lending to companies and individuals.

Last week, AIB senior executives were summoned to the Department of Finance by three government ministers -- Minister Lenihan, Minister O'Keeffe and Minister Ryan -- to explain how much the bank is lending to small businesses.

It is worth remembering that Mr Lenihan has ordered the bank to lend €3bn over the next two years. At the year's halfway mark, it should have already lent up to €1bn. We shall soon see if this happening.

While lending is vital to the economy, I will be looking closely at another measure which is again beginning to terrify the markets: the Irish banks' dependence on wholesale funding.

The Central Bank and ratings agency Fitch both warned recently that access to the wholesale markets could deteriorate further in the third quarter, which could in turn have a disastrous effect on the banks. So far, we have seen little evidence that the banks are reducing their dependence on this source of borrowing, despite the fact that it was precisely this sort of borrowing that helped dig the hole we now find ourselves in.

While indicators such as these will tell us whether the banking system has any hope of survival, most attention will probably be focused on the bank's plans to sell off its UK division, Polish unit and a 22.5pc stake in M&T Bank to raise the €7.4bn needed to meet new capital standards.

To raise more than seven times your market capitalisation is a feat almost no organisation in the history of capitalism has achieved. To succeed would be an almost heroic achievement, which would justify AIB's championing of Colm Doherty as the bank's de facto chief executive. To fail will spell the end of the bank's claim to be an independent organisation and leave the taxpayer with day-to-day responsibility for another complex mess.

Time is ticking away for the bank, which has just five months left to raise the money under European Commission rules. Despite the bank's repeated promises to save itself by taking decisive action, no result has been reported yet to make good on these promises.

This is not to underestimate the difficulties faced by Allied Irish; selling anything in the present climate is difficult but it can, and must, be done. Normally this wouldn't matter to anybody beyond the shareholders and the bondholders, but as the State will be left to pick up the pieces if the bank fails to raise the enormous sums needed to shore up its capital reserves, we will all be losers if the bank once again holds the country hostage with the too-big-to-fail trick.

Irish Independent

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