€12.2bn transplants step one of major surgery

ANALYSIS:CUT OUT the good from the bad and give it to help others.

This is the Government’s strategy when it comes to saving the banking system. Yesterday, the first transplants took place in what will be a long and complex surgery.

The Minister for Finance secured court approval to transfer deposits of €12.2 billion out of two dying lenders, Anglo Irish Bank and Irish Nationwide Building Society, and into two ailing banks.

The transfer of €8.6 billion from the nationalised Anglo to the almost fully nationalised AIB and €3.6 billion from Irish Nationwide to Irish Life and Permanent marks the beginning of the end for Anglo and Nationwide and a big fillip for the other two.

The primary aim of the EU-IMF bailout is to make the banks smaller so they can fund themselves. The transfer of the deposits, kick-starting the gradual wind-down of Anglo and Irish Nationwide, is part of this plan. The next step is to merge the remaining shells of these two.

The transfers will help the funding of AIB and Irish Life and Permanent and lower their loans-to-deposits (LTD) ratios, but they must also reduce loans. The two are still some distance away from the 120 per cent LTD ratio targeted under the EU-IMF deal.

The deposits will lower AIB’s ratio to about 150 per cent (€1.50 on loan for every €1 on deposit) from 159 per cent last September.

Irish Life and Permanent is one of the worst-funded banks in Europe after borrowing heavily in the international markets to fuel boom-time mortgage lending. The €3.6 billion in deposits will lower Irish Life and Permanent’s LTD ratio from 249 per cent at the end of last year to about 200 per cent.

While the lender has avoided a Government capital injection, it has much further to go than any other Irish bank to bring €38 billion in loans closer in line with deposits of about €19 billion (including Nationwide’s deposits).

Irish Life and Permanent has not sold any loans to the National Asset Management Agency but it will receive State-backed Nama bonds for the first time as part of the deal with Irish Nationwide. AIB will get Anglo’s Nama bonds with a face value of €12.2 billion.

Irish Life and Permanent and AIB can use these bonds as collateral for further borrowing from the European Central Bank.

This will help AIB reduce its loans drawn through higher-cost emergency lending assistance (ELA) at the Irish Central Bank.

The strategy would appear to be to leave the bad banks on ELA and help the other banks reduce their ELA exposure by giving them more ECB-eligible assets.

The Government told the court that the EU-IMF-ECB troika were pressing very strenuously for the transfers to be completed immediately.

This is no surprise. The Anglo-Irish Nationwide deposit transfers caused a market-stirring spike in emergency borrowing last week.

The two lenders withdrew the Nama bonds from the normal week-long ECB borrowing facility and swapped them to draw overnight to pave the way for a quick sale. The ECB will want the new owners of the Nama bonds to swap them back for longer-term loans at the next auction on Tuesday to get the overnight loans figure down.

These are major transfers. Some 120,000 customers at Anglo and 160,000 at Irish Nationwide are moving. Almost 450 staff at Anglo and Irish Nationwide will be moved to AIB and Irish Life and Permanent.

Their future employment must be in doubt if there is duplication of roles given that Permanent TSB is already cutting 280 jobs and AIB plans 2,000 to 3,000 cuts.

The remaining 1,040 jobs at Anglo and 240 at INBS will reduce dramatically as the remaining €38 billion in loans at the combined bank are run down.