Business Irish

Monday 23 October 2017

Banks face extra bill of €390m a year after rate hike

Anglo will be hit hard as reliance on 'last-resort' funds increases

Anglo chief Mike Aynsley faces extra €140m a year
Anglo chief Mike Aynsley faces extra €140m a year
Laura Noonan

Laura Noonan

IRELAND'S already-struggling banks will have to fork out an extra €390m a year to the European Central Bank (ECB) as a result of yesterday's decision to hike eurozone interest rates.

The significant cost comes because Irish banks are drawing down almost €160bn of short-term loans from the ECB -- loans that will now cost an extra 0.25pc a year to service.

Market sources stressed, however, that the interest rate the banks are paying to the ECB is still several percentage points lower than the amount they would be paying on the money markets in normal conditions.

Anglo Irish Bank will be the hardest hit, after its chief executive Mike Aynsley last week admitted the banks' reliance on last-resort central bank money had recently surged to €56bn.

That €56bn will now cost Anglo an extra €140m a year to fund.

AIB, Bank of Ireland, Irish Nationwide, EBS and Irish Life & Permanent make up the rest of the €160bn central bank drawings and will together have to pay an extra €250m to the ECB every year.

Almost €90bn of the central bank money flooding through the banks is sourced directly from the ECB at an interest rate of 1pc. The remainder comes through the Central Bank of Ireland (CBI) and carries an interest rate of 3pc.

The fragile sector will also face higher mortgage defaults as a result of the interest rate hike, though this phenomenon was factored into the latest 'stress tests', which made significant allowances for mortgage losses.


Irish mortgages are seen as being particularly vulnerable to interest rate shock, since more than 70pc of home loans are linked to prevailing interest rates, either through 'trackers' or 'variable rate mortgages'.

The third fear for the banks is that rising interest rates will cripple already-muted demand for new loans.

A survey from KBC and Chartered Accountants of Ireland yesterday said 73pc of companies expected to be hit by the interest rate increase.

While central bank lending to Irish banks is channelled through the CBI and the ECB, the Frankfurt-based ECB will enjoy all the profit of the rate hike. This is because the CBI essentially borrows the money from the ECB and then re-lends it on to Ireland.

The ECB has been publicly pushing to end this CBI funding, known as "exceptional liquidity assistance", or ELA, but the latest banking bailout stipulates that the support will remain in place for the next three years.

Irish Independent

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