Tuesday 21 November 2017

New rules will ease banks' funding costs

Laura Noonan

Laura Noonan

THE Central Bank last night detailed an extensive list of new collateral it will accept for ''normal'' funding operations -- raising hopes that Irish banks could be able to unwind a crisis programme that saw them issue €12bn of bonds to themselves.

Bank of Ireland, Irish Life & Permanent and AIB began issuing the so-called ''own use'' bonds to themselves in early 2010 as a creative way of getting around new rules that made non-eurozone assets ineligible for mainstream Central Bank funding.

''Own use'' bonds were issued by a bank to itself and were covered by the Government guarantee. The guarantee meant those artificial bonds became eligible for Central Bank funding - but the banks had to pay a fee for this.

Yesterday, the Central Bank published a list of the criteria it will now accept for mainstream funding operations. The list confirmed that it would accept UK mortgages "on a phased basis" under certain conditions.

The Central Bank's collateral criteria also detailed extensive ''risk control measures'' to monitor the new collateral. Banks must not include individual loans that have a probability of default of more than 1.5pc, and the model for calculating this must be approved by the Central Bank.

"The haircut methodology applied will be rigorous and risk based," it said, adding that loans in sterling would be subjected to an additional discount to cover foreign exchange risk.

Davy analyst Stephen Lyons last night described the inclusion of the UK instruments as a "key development", and said the new rules could "see an end to the banks' self-issued bonds" and save them over €100m a year in guarantee charges.

The softer rules may also allows banks to reduce funding from more expensive "exceptional liquidity assistance" (ELA).

"It is not the purpose of this initiative to replace ELA (exceptional liquidity assistance), but rather to expand access to (mainstream) Eurosystem facilities with the aim of improving banks' ability to lend to customers across the euro area," a spokesman for the Central Bank stressed.

Irish Bank Resolution Corporation is believed to account for the bulk of the €44.5bn of ELA funding across the banks. Irish Life & Permanent has about €2bn of ELA, the Irish Independent understands.

Irish Independent

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