EU-IMF relax loan-to-deposit ratio deadline for Irish banks


THE EU authorities and the International Monetary Fund (IMF) have relaxed a tight deadline set in the bailout deal for the Government to establish “ambitious” new loan-to-deposit ratio targets for Ireland’s struggling banks.

The high loan-to-deposit ratios of Ireland’s banks, a legacy of imprudent property lending and declining deposits, are a key measure of their weakness.

The new targets were to have been set by the end of last year, according to the Memorandum of Understanding (MoU) the Government agreed with the European Commission, the European Central Bank and the IMF.

The troika is understood to have requested an open-ended extension to the deadline. But well-placed sources claimed there was no slippage in the bank reform process generally.

The establishment of new loan-to-deposit ratio targets is one of a series of actions to deleverage Ireland’s banks. This is a complex task, particularly so given the likelihood of structural reform in the sector. With this in mind, one source suggested that the initial deadline may have been overly ambitious.

The Central Bank fulfilled another obligation set by the MoU when it yesterday appointed external advisers to help bring about a major downsizing of the domestic banking sector.

The Central Bank confirmed yesterday that Barclays Capital, the Boston Consulting Group and Blackrock Solutions would help the Central Bank with various aspects of its efforts to assess, reshape and ultimately reduce the size of the domestic banks.

The bank did not detail the fees likely to be charged by the consultations but it is believed an upper limit of €20 million has been set for the overall bill.

Most of this work will be completed in the first three months of the year, with the bulk of the advisers involved already in place within the Central Bank. The project forms a key plank of the Government’s bailout agreement with the International Monetary Fund, the European Commission and the European Central Bank.

In a statement, the Central Bank said all three advisers would assist on two separate reviews specified in the bailout agreement.

The Central Bank has already said it wants the domestic banks to raise their Tier 1 capital cushion to 12 per cent and will apply a stress test of this under its Prudential Capital Assessment Review (PCAR) methodology in March. This could lead to further capital injections. A Prudential Liquidity Assessment Review will establish ways in which the banks can reduce their size and thus their reliance on ECB funding.

Specifically, the Central Bank said, Barclays Capital, the investment banking wing of Barclays, will advise it on “banking sector structure issues”, while Blackrock will assess the asset and data quality of the banks under the two reviews. The Boston Consulting Group will project manage the Central Bank’s work.

The consultants were appointed under an emergency tendering process, whereby the Central Bank invited various parties to express an interest in the business.

Bank of Ireland’s loan-to-deposit ratio was 160 per cent in November and the ratio at AIB, which was in effect nationalised just before Christmas, stood at some 159 per cent last September.