Plan aims to bring loans close to level of deposits

 

BANKING:AMBITIOUS TARGETS aimed at bringing loans closer in line with deposits at each of the banks will be established by the end of this month, under the agreement reached with the EU and the International Monetary Fund (IMF) in the €85 billion rescue plan.

Legislation dealing with failed banks and their restructuring, including the forced sharing of losses with subordinated bondholders, will also be introduced by the end of the year.

Further deals to share losses with subordinated bondholders where necessary at banks must commence by the end of March.

“Forced burden-sharing” with subordinated bondholders is possible through legislation being prepared, the agreement says. “A very deeply discounted” deal to buy back or swap debt – sharing losses with these investors – “might also be an appropriate option”.

Updated stress tests must be carried out on the banks by the end of March and the results published by the end of June 2011. They will ensure that the banks are recapitalised to at least 10.5 per cent capital-to-loans and 12 per cent in the case of Irish Life and Permanent.

Of €10 billion to be injected into the banks up front, some €7 billion will be in the form of equity capital, similar to shareholder funds.

The criteria to apply stringent stress test scenarios will be agreed by the end of the year.

A new special bank resolution regime will be introduced to give the authorities a robust set of powers to deal with failed banks.

Draft legislation covering this – to be introduced by the end of February – will allow the Central Bank to appoint a special manager where a bank’s condition has “severely deteriorated”.

The measures will allow the Central Bank to transfer a bank’s loans and deposits to other institutions and to establish “bridge banks”.

Reforms to personal bankruptcy and a new framework to deal with debt settlement and enforcement outside the courts will be introduced.

The new loans-to-deposits targets, set for each of the six banks, must be achieved by 2013.

The aim is to shrink the size of the banks so they can fund themselves from secure deposits and longer-term funding of more than a year to stand on their own.

A further €16 billion in loans will be moved to the National Asset Management Agency from AIB and Bank of Ireland, further reducing the size of the banks.

The bailout unveiled last Sunday said the Central Bank would carry out a new stress test – a Prudential liquidity assessment review – by the end of March, assessing the banks’ ability to survive certain runs on deposits.

New targets for loans-to-deposits ratios to reduce their reliance on cheaper European Central Bank funding must be established by the end of this month.

The banks have an average loans-to-deposits ratio of 165 per cent – a measure of reliance on external borrowing. This means that for every €100 on deposit, they have €165 out on loan.

Under the EU-IMF plan to reduce the size of the banking sector, the banks must reduce this to 100-120 per cent by selling off loans and “non-core” businesses.

They must also meet new banking rules showing a greater reliance on more secure deposits and funding of more than a year.

This will be agreed under the review process by the end of March and will be followed up with similar annual Central Bank reviews.

The Central Bank must provide weekly information on the banks, including detailed information on the level of loans and deposits.

Any legal procedures required to wind down Anglo Irish Bank and Irish Nationwide “will be set in motion under a precise timetable”. The plans to work out these “non-viable” institutions will seek to minimise capital losses.

Staffing levels at the Central Bank will be increased as needed.