Business Irish

Thursday 8 December 2016

New proposals to wean banks off emergency support funds

Published 11/03/2011 | 05:00

THE new Government can keep its €50bn promise of weaning banks off emergency Central Bank supports, if it follows proposals tabled by finance experts this week.

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Debt specialists Glas Securities has drawn up detailed plans for how the banks can shrink their operations to a more manageable size without triggering massive losses that would have to be covered by the taxpayer.

Under the plan, AIB, Bank of Ireland, Irish Life & Permanent and EBS would put about €64bn of their "non core" operations -- the loans and assets that aren't crucial to their core businesses -- into a new company.

Because the new company would be owned by the banks and not the State, there would be no discounts or 'haircuts' applied when the assets transfer across, so there would be no immediate losses or 'fire sales'.

Senior banking sources last night confirmed that the plan could also see the four banks quickly weaned off the €50bn emergency funding that's being channelled through the Central Bank.

The banks have been driven to take the emergency support, known as ELA, because of the tight rules surrounding the ECB's "regular" lending operations where banks pawn assets for cash.

The ECB's rules mean that when loans worth €5bn are packaged together and pawned, banks sometimes get as little as €2.5bn in hard cash. The ECB refuses to accept certain kinds of assets, such as sterling loans.

When banks can't get enough money from the ECB, they go to the Central Bank of Ireland for emergency loans, which carry a more expensive interest rate.

The emergency loans also carry an "explicit" Government guarantee, unlike the "regular" ECB lending, where all euro countries share any losses from loans that aren't repaid.

Under the Glas plan, the banks would be able to use their existing assets to get much more money from the ECB's operations.

All the "non core" assets would be put together into the new company -- dubbed 'PaddyMac' by Glas in a play on famed US mortgaged lender Freddie Mac.

'PaddyMac' would then issue the banks with bonds in payment for the €64bn in loans, in the same way that NAMA issues banks with bonds now. The banks would then be able to present those bonds to the ECB and exchange them for cash with minimal discounts.

Senior banking sources last night said the structure could dramatically reduce banks' dependence on ELA, since they could get far more bang for their buck at the "regular" operations.

The plan tunes perfectly with the new Programme for Government, which envisages putting as little money as possible into the banks and paring back the controversial emergency lending.

Anglo Irish Bank and Irish Nationwide, which account for more than €30bn of the emergency lending, would still need the support unless the Government finds a new way of funding their wind-down.

Irish Independent

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