ECB keen for State to draw up to €80bn stability loan

FUNDING CRISIS:THE EUROPEAN Central Bank is said to be keen for the Government to draw emergency loans of up to €80 billion from the European Financial Stability Facility.

ECB vice-president Vitor Constancio said yesterday that Ireland could use the funds to support its banking system and reduce its reliance on the ECB, leading to expectation that the Government will pursue this option when Mr Lenihan meets fellow finance ministers in Brussels today.

The Irish Central Bank has supplied billions of euro in exceptional liquidity assistance to the banks in recent months, a spokesman has confirmed.

The funding is in addition to the tens of billions being supplied by the Central Bank which is backed by the banks’ assets.

The exceptional assistance from the Central Bank is lent against assets not considered acceptable by the ECB, and comes from its own resources.On October 24th the Central Bank had lent against €34.6 billion of such assets, this figure having been €21.2 billion in late September. In late August the figure was €14.4 billion.

Asked to comment, a spokesman for the Central Bank said it supplies exceptional liquidity assistance to banks when that is judged necessary. “This facility is not part of regular monetary policy operations. The bank does not, however, comment on these operations.”

The banks put up qualifying assets as collateral for ECB loans, including National Asset Management Agency (Nama) bonds. A lesser form of collateral can be used for Central Bank funding. Such funding was “not normal” and “best avoided”, NCB banking analyst Ciaran Callaghan said.

A spokeswoman for AIB would not comment on whether it had received funding from the Central Bank. In its interim report to the end of June, Anglo Irish Bank said it was replacing falling deposits with increased funding from the European and the Irish central banks. It said it had borrowed €11.6 billion from the Central Bank.

Central Bank statistics show that ECB funding to Irish banks, including IFSC banks, jumped to €130 billion at the end of October, from €119 billion in September.

Although there is no breakdown available yet between domestic and IFSC banks, Mr Callaghan said it was “probable” that the €11 billion rise was due to increased funding for domestic banks. He estimated the domestic banks accounted for approximately €90 billion to €100 billion of the ECB funding.

This would be the equivalent of approximately one-fifth of the €510 billion an ECB spokeswoman said was currently on loan to all European banks.

Mr Callaghan yesterday downgraded his advice on Bank of Ireland because of the fees it must pay for the government guarantee, which he estimated would exceed half a billion euro next year. He said the fees were eating into the bank’s profitability and its ability to accommodate loan losses while retaining its capital levels.

Stephen Lyons of Davy Stockbrokers said Bank of Ireland had collateral to borrow a further €12.5 billion in loans from the ECB, though other factors could increase that figure to €20 billion.

This gave a sense of confidence in the bank’s ability to continue to fund its needs, though “you don’t have the same confidence for the rest of the system”. AIB is to release an update on its financial position later this week.

Bank of Ireland suffered an estimated €10 billion in deposit outflows in its capital markets business in the period to June, though retail deposits were stable. The outflows are believed to have occurred in the bank’s UK business. Mr Lyons said he suspected AIB had suffered €10 billion or high single digit outflows also.

The governor of the Central Bank, Patrick Honohan, has speculated that “over-capitalising” of the banks could restore confidence in them.