Tuesday 21 November 2017

Spike in ECB lending caused by banks here 'no problem'

Laura Noonan and Donal O'Donovan

IRISH banks were once again responsible for a sudden spike in overnight lending from the European Central Bank (ECB) this week, but market sources stress it is "purely a technical" issue and does not reflect any new problems in the banking sector.

Data released yesterday showed that the amount borrowed from the ECB's overnight facility surged from €2.2bn last Friday to €17bn by yesterday morning.

ECB board member Juergen Stark yesterday said the increase in overnight borrowing was due to developments in Ireland.

Local sources confirmed that the spike related to last week's deposit auction, which saw AIB and Irish Life & Permanent (IL&P) inherit about €15bn of Nama bonds from Anglo and Irish Nationwide. The bonds can be used as collateral for loans from the ECB.

AIB and IL&P didn't have the bonds in time for the ECB's regular lending operations last Tuesday, so they had to put them into the ECB's overnight operations on Friday.

AIB and IL&P are understood to be planning to switch the bonds into the "main" ECB operations today. Once that happens, the level of overnight borrowing will dip.

Yesterday marked the second "spike" in overnight lending to be triggered by the auction of Anglo and Nationwide's €12.2bn deposit book.

When the sell-off was first announced on February 8, Anglo and Nationwide had to take the Nama bonds that support those deposits out of the ECB's main seven-day operation and put them into the overnight category so that the bonds were available to transfer when the auction closed.

The subsequent spike triggered a raft of rumours across Europe, since overnight lending is more expensive than seven-day operations, so higher overnight lending can signal a sharp deterioration in a bank's access to normal credit lines.

The affected Nama bonds were pulled out of the seven-day operation by Anglo and Nationwide last Thursday.

The bonds did not transfer over to AIB and IL&P until Friday morning, so their first opportunity to pledge them with the overnight facility was on Friday.

Irish Independent

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