Wednesday 17 January 2018

ECB rate hike to hit banks for €300m a year extra

BANKS

Laura Noonan

IRELAND'S six bailed-out banks will have to pay an extra €300m a year to the European Central Bank if the Frankfurt powerhouse goes through with today's widely anticipated interest rate hike.

The latest rate rise means the ECB's annual income on the €120bn loaned to our bailed-out banks is up €600m since the start of the year -- an increase equal to about 15pc of the €4bn austerity package to be unveiled in the Budget.

The ECB money is loaned to Anglo Irish Bank, Irish Nationwide, EBS, AIB, Bank of Ireland and Permanent TSB. All the institutions, bar Bank of Ireland, have been effectively nationalised so their higher costs are ultimately borne by the taxpayer.

The banks are being propped up with €70.9bn of liquidity from the ECB's "main" operation, plus about €50bn in "Emergency Liquidity Assistance" administered by the Central Bank of Ireland and funded by the ECB.

The ECB was charging 1pc interest for the liquidity supports at the start of the year but that rate rose to 1.25pc after April's rate hike and is expected to increase by another 0.25pc this month.

Some of the ECB hike will be passed on to hard-pressed mortgage holders and other borrowers who have variable rate loans, but industry sources said the higher ECB rate would ultimately hurt Irish banks.

Banks won't be able to pass on the rate hike to borrowers who have fixed-rate loans -- about 14pc of all €98.8bn owed on home loans in Ireland according to Central Bank statistics from March.

Irish banks will also face particular difficulties achieving higher interest rate payments from struggling borrowers, experts said.

"If a loan is already in default, you can up the interest payments but you're not going to get the money, you'll just have a bigger amount in the arrears column," said one source.

"You also have to be mindful that upping the interest rate could push a borrower into default."

Funding

Ireland's banks are more dependent on central bank funding than any other banks in Europe, but financial market sources said it was "very difficult" to say whether the ECB hikes would hit Irish banks harder than their peers.

"Other banks could have bonds that are linked to prevailing interest rates, so they'd have to pay higher rates on those too once ECB rates went up," said one source.

Sources also stressed that while the interest rates charged by the ECB for its liquidity operations are rising, the ECB rates are still far lower than those that would be charged in the market.

Last autumn, Bank of Ireland agreed to pay a rate of about 6pc for a £500m bond. UK bank Abbey National raised a €525m four-year bond in June at an interest rate of 3.375pc.

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