IRISH LIFE & Permanent (IL&P) used an internal group transaction to generate €1 billion in liquidity for its bank, Permanent TSB, in the middle of last year.
One of the group’s subsidiaries, Irish Life Assurance, placed €1 billion in government gilts with Permanent TSB in return for €1.5 billion in securities backed by the lender’s residential mortgages, which it used as collateral.
Permanent TSB then used the gilts to raise €1 billion from two international banks in a repurchase agreement or “repo” deal.
The transaction was disclosed in IL&P’s 2008 preliminary report, published earlier this month, and was described as “a stock lending agreement” between Irish Life Assurance and Permanent TSB. The mortgage-backed securities carried a AAA-rating.
IL&P said the transaction took place in late June-early July 2008 and that the collateral was “monitored independently” to ensure it was maintained at 150 per cent of the value of the gilts, the limit assigned in such transactions.
The preliminary accounts show that Irish Life Assurance held €1.8 billion as collateral for the government gilts at the end of last year. A spokesman for IL&P said €1.8 billion was the nominal value of the mortgage-backed securities, while €1.5 billion was the assumed market value of the collateral for the gilts at the time of the deal.
The spokesman described the transaction as “very regular”, saying that it had been carried out as part of the group’s liquidity management programme. He said the Financial Regulator had been briefed on the transaction in advance and that the regulator raised no issue with it.
The gilts were held by Irish Life as shareholder funds, not policyholder funds. The use of gilts provided Permanent TSB with another source of liquidity at a time of financial stress when banks had difficulties sourcing funding.
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