Monetary authorities seek new ways to fund banks

THE MONETARY authorities are working on additional ways of funding the Irish banks beyond drawing discounted loans from the European Central Bank or borrowing under emergency lending from the Central Bank in Dublin.

The ECB is continuing to allow the banks to draw emergency loans from the Central Bank on the condition that the Government agrees to increase the pace of the downsizing of the banks.

The banks must submit plans on asset disposals by April showing how they will shrink in size.

The authorities are assessing further ways of funding the banks as the lenders meet deadlines under the €85 billion loans package agreed by the Government with the EU, the ECB and the International Monetary Fund.

The banks are also being encouraged to improve the quality of ECB-eligible collateral such as covered bonds (IOUs supported by loans) in a bid to increase the sums they can borrow from Frankfurt.

When lending to banks, the ECB applies a discount on the collateral on the basis of its quality.

The Central Bank and the ECB do not comment on emergency lending drawn by the Irish banks.

The lenders can borrow from the ECB if they have eligible collateral, which the banks have already drawn on. Anglo Irish Bank, which did not lend residential mortgages, has limited amounts of eligible collateral, forcing it to rely more heavily on emergency loans from the Central Bank.

Frankfurt must sign off on emergency lending by the Central Bank and can limit such loans to banks.

However, the ECB has agreed to allow borrowing under emergency lending assistance (ELA) as the banking sector undergoes a radical reshaping to reduce this.

A surge in emergency lending to the banks – to €34.6 billion on October 29th from €21 billion on September 24th – prompted the ECB to press the Government into seeking the €85 billion EU-IMF aid package last month.

ECB borrowing also increased sharply, from €119 billion in September to €130 billion in October, the most to any euro zone country.

The loss of deposits over the two-year financial crisis has forced the Irish banks to turn to the central banks for their funding needs.

Shrinking the banks under the €85 billion EU-IMF package is aimed at reducing their loan books, bringing them closer in line with deposits so the banks can survive without central bank support.

This will be carried out in a “carefully balanced and controlled manner with the benefit of substantial resources available to the banks for their funding and capital needs”, the Government has said.