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Irish State's liquidity exposure to banks still at record high

THE European Central Bank scaled back its liquidity exposure to Ireland's banks by €6bn in January, but the liquidity exposure of the Irish State remained at a record high.

New figures out yesterday showed that Irish banks were being propped up with €126bn of money from the European Central Bank's 'normal' operations at the end of last month.

The emergency liquidity pulsing through the Irish banking system remained virtually unchanged at as much as €51bn at the end of January -- money that was all 'explicitly' guaranteed by the Government.

The ECB is the first stop for banks that need to pawn assets, so they can draw down cash to run their businesses. It gives money for seven days and 90 days and demands high-quality assets to hold as collateral.

When banks have run out of assets they can give to the ECB, they then turn to so-called 'Emergency Liquidity Assistance' (ELA).

The ELA allows the Central Bank of Ireland (CBI) to continue giving banks money, even if they have run out of ECB-eligible collateral.

ELA has a higher interest rate -- typically between 2 and 3pc -- reflecting the lower quality of collateral being advanced, and it is 'explicitly' guaranteed by the State.

As banks' positions deteriorate, they have been running out of high-quality assets that can be pledged with the ECB and are increasingly turning to the ELA support that is channelled through the Central Bank of Ireland.

The ECB has committed to reducing the amount of liquidity it provides to the European system and is steadily tightening the rules around the collateral it accepts, in a move that could temporarily drive Ireland's ELA higher.

The authorities are also hoping to wean 'continuing' banks off ELA over the coming months, but banks that are run down may take longer to withdraw from the support.

Irish Independent