ECB liquidity in Irish banks increases

IRISH BANKS’ reliance on European Central Bank funding crept up in June, increasing to €103 billion from €102.3 billion the previous month, according to figures from the Central Bank.

The increase in short-term ECB liquidity, though marginal, was the first rise in six months. Irish banks have benefited from a temporary deposit from the National Treasury Management Agency since January.

The debt agency has lodged about €21 billion earmarked for recapitalising the banks with AIB, Bank of Ireland, Irish Life & Permanent and EBS, thereby reducing their reliance on ECB and Central Bank funding.

However, this is now being withdrawn in preparation for the €24 billion recapitalisation of the Irish banks, due to be completed by the end of this month. On Thursday, ECB president Jean-Claude Trichet dismissed the possibility of the ECB replacing its short-term lending to the Irish banks with a medium-term lending facility. The Government and the IMF have called for such a move.

Yesterday’s data from the Central Bank – which covers both domestic institutions and international banks with operations in Ireland – also showed Irish banks continued to draw heavily on emergency liquidity assistance from the Irish Central Bank itself.

Some €55.6 billion was provided to banks in the form of “other assets” in June – the bulk of which refers to emergency liquidity funds – almost €2 billion more than the €53.7 billion on loan to banks in Ireland on May 27th.

In total, bank borrowings from the Central Bank in Ireland and the ECB stood at €158.6 billion, up slightly from just over €156 billion at the end of May.

While euro zone countries have been reducing their dependence on ECB funding, banks in peripheral countries such as Greece, Portugal and Ireland have remained dependent on liquidity support from the ECB.

The gradual loss of deposits at the Irish banks over the past year has led to a surge in borrowing from the ECB, which reached a peak last November, when banks here were in receipt of €136.4 billion in funding.

Central Bank figures published last week showed that deposits continued to flow from Irish banks in May, with €752 million worth of household deposits leaving the Irish banking system during the month.

On Thursday, the ECB signalled a further easing of the collateral requirements for lending, when it announced it was to suspend its minimum credit-rating threshold on Portuguese bonds after Moody’s downgraded the nation’s debt to junk. The suspension will be maintained until further notice.

This follows the waiving of minimum thresholds for Greek and Irish bonds.