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Wednesday 26 July 2017

New injection of cash won't end banking trouble, experts warn

Laura Noonan

Laura Noonan

A FRESH injection of cash won't be enough to restore order to Ireland's banking system, experts warned last night.

The commentary came after new figures showed Europe's banks borrowed another €186bn in short-term central bank money this week.

No country-by-country breakdown was given, but the borrowing was reportedly led by banks from Ireland, Greece and Portugal.

Banks typically borrow from the European Central Bank (ECB) when they can't fund their operations through deposits or by borrowing on the commercial market.

"At this stage, it's clear the main issue is funding, not capital (which could be solved by more state cash)," one analyst said last night.

He was speaking amid intense speculation the Government will accept EU money for another bank bailout, in an attempt to finally end the crisis.

Several experts and banking sources expressed extreme scepticism that this measure alone could end the banking crisis.

"Capital can't be the be all and end all of this," said a source close to a major bank. "What we need is access to funding."

The latest ECB borrowing was for a term of just seven days, so Irish banks are likely to have to ask Frankfurt for more money in a week.

At the end of October, more than €160bn of central bank money was in the Irish banking system, though this figure also included money borrowed by IFSC banks.

The Irish banks are loading up on central bank money because their deposits are falling and they have to pay back longer-term market debt that's maturing.

Deposits

Bank of Ireland last week confirmed it lost €10bn of corporate deposits in late August and early September, while AIB has reportedly seen similar outflows.

The banks have also had to repay billions of loans in recent months. Normally, these would be replaced with new loans, but investors are too spooked to give money to Irish banks.

The ECB has insisted there is "no question" about Irish banks' ability to fund themselves, since they have access to money from their local Central Bank and the ECB.

Market sources, however, say this is not a long-term solution.

"Central bank money was brought in as an emergency measure when the crisis hit," said one source. "Ideally you want to get that down to zero."

Analysts say it would be almost impossible to convince investors that Irish banks have enough capital, given massive uncertainties about things such as mortgage defaults.

Experts suggest a better solution would be to give Irish banks guaranteed access to longer-term funding than what is on offer from the ECB.

Several banks are also understood to be reluctant to take state money, since they believe they have enough capital to cover their future losses.

Irish Independent

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