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Showing posts with label Central Bank of Ireland. Show all posts
Showing posts with label Central Bank of Ireland. Show all posts
Congratulations to my former colleague at TCD Economics, and my thesis supervisor from years back, Professor Philip Lane on his appointment. Here is a good summary of my view why the Irish Government has made a good choice, via Central Banking
Anyone residing in Ireland needs no introduction to the nearly boundless supply of stories from the Irish financial services sector that are just begging to be converted into a menacing thriller replete with villains and victims and clueless asleep-on-the-job 'enforcement' authorities.
Lest we forget, Islamic finance is one of the cornerstones of Irish Government strategy for stimulating inward FDI and growing the IFSC. Back in 2012, the Journal.ie asked a handful of simple questions about this new 'knight in the shining armour' riding into town to save us. You can see more up-to-date stats on this here: http://www.pwc.ie/asset-management/islamic-finance.jhtml.
I am more than open to comments on this topic, as I am not an expert on Islamic finance. I am also absolutely neutral to the Islamic finance just as I am neutral toward a bunch of other services I neither research nor consume... but... have we bothered to ask some core questions about all this Sharia-compliant financial engineering in Ireland before jumping into the waters we know little about?
Ireland has no practical or cultural experience in any of the basic tents of Islamic finance.
Ireland has a society rooted in ownership of assets and profit-extracting considerations of ownership - a notion that is directly contradictory to the principles of the Islamic finance.
Where are the skills sets required for conducting Islamic finance transactions coming from in Ireland? There are some training facilities now available, including those provided by law firms and financial advisories. But the programmes are nascent and hardly present a critical mass (or capability to deliver such in foreseeable future) of skills.
Where is the certification infrastructure on the ground (as opposed to offshore) to certify the Islamic finance products? Who are the Islamic scholars approving the products domiciled into Ireland? Who monitors them? Who are the requisite Sharia-compliant directors? How many of them reside in Ireland? Notice that per article in the Insurance Journal - there is a shortage of Islamic scholars necessary to provide cover for Islamic finance in one of the largest Muslim countries: Malaysia. But, obviously, not in Ireland.
Irish regulatory environment relies on low-burden of regulation (and in the past also relied on low-burden supervision, which is changing, but the process of change is not yet completed) applied across standardised sets of products (services). This conceptual framework is potentially not aligned with the highly regulated and regimented, Sharia-compliant structures of the Islamic finance, reliant often on specific judgements and decisions, rather than explicit processes.
Having contacted the Central Bank, I received a confirmation that
The Central Bank acts as a regulatory body overseeing all financial products domiciled into Ireland and in this capacity it also oversees Islamic finance products;
Islamic finance products are not treated differently from other products by the Irish regulatory frameworks; and
The Central Bank of Ireland has no relationship with IFR or the Islamic Financial Regulator (Ireland).
So here's a follow up question: Do you think it would be ok for, say, an average Joe to call himself a 'XYZ' Financial Regulator (Ireland) and then publicly market himself as such?
And now a follow up question: Should we be concerned with what is going on in the Islamic finance sub-sector in Ireland?
From the Opening Statement by Governor Patrick Honohan at the publication of the Central Bank of Ireland Annual Report 2012, 30 April 2013
"Two major elements of the Bank’s work during 2012 came to decisive junctures early this year – the liquidation of IBRC and related replacement of the promissory notes with marketable government bonds; and the introduction of an enhanced mortgage arrears resolution framework, which was announced in recent weeks. All of these measures are ultimately concerned with creating the environment for sustainable economic growth and reduction in unemployment."
It is my opinion that 2012 marked the year when the Central Bank has done the least to deliver on any meaningful reforms and change that can create or sustain "the environment for sustainable economic growth and reduction in unemployment". The bases for my opinion are:
In 2013, the Central Bank attempted (key word here) to introduce an enhanced mortgage arrears resolution framework. The new framework is 'enhanced' only to the extent that the previous framework was proven to be a complete failure. However, looking forward and setting aside the failures of the very recent past, the new framework is not consistent with the goals for either reducing unemployment or enhancing prospects for economic growth. Some of my criticism of the new framework in the context of these two objectives can be found here: http://trueeconomics.blogspot.ie/2013/04/1842013-legalising-modern-version-of.html
In 2013, the Irish Government has undertaken a swap of one financial liability (promissory notes) with another (government bonds). This transaction has been deemed by myself, many others, including the IMF, to have near-zero impact on debt sustainability when it comes to the Irish Government debt. The transaction was net positive for cash flow, albeit moderately, and hugely positive for PR. while th CB of Ireland did benefit significantly from improved security underlying the ELA, this benefit came at a cost to the rest of the Irish economy in the form of the conversion of the quasi-sovereign debt (promo note) into long-dated sovereign bonds.
Beyond the above two points, there has been very little progress on any tangible reforms in the banking sector in Ireland. We are still pursuing a duopoly model of the domestic banking market, and there is no effective discussion, let alone effective resolution of the problem of lack of new entrants and lack of restructuring of the existent lenders. We have no new models of banking and lending in the country emerging after six years of this crisis and, if anything, we are now consolidating the strategic space in our banking services to a singular model of low-quality, low-access services supplied at an excessive cost. Both AIB and Bank of Ireland are pursuing this model, leaving customers to pick up the tab for reduced access to services and increased charges on the remaining services. This hardly supports Governor Honohan's claim that the Central Bank is working on creating and sustaining environment for growth.
All banking sector performance parameters have been either not improving or deteriorating over 2012 within the directly state-influenced covered group of financial institutions.
Slapping ad hoc targets on the banks to reduce mortgages arrears and then introducing masers to give them power well in excess of that awarded to the borrowers is about as productive of a measure for dealing with mortgages crisis as giving hospitals management targets for reducing the number of trolleys in corridors while removing patients protection from malpractice.
The Central Bank-supplied 'framework' is thus simply not fit for purpose, neither by the criteria of dealing effectively and humanely with the debt crisis (by first removing the unsustainable debt in systemic, transparent and fairly-priced fashion, then by addressing future moral hazard), nor in terms of placing the burden of crisis resolution where the causes of the crisis rest (proportionally with both the banks and the borrowers), nor in respect of the Central Bank claimed objectives of delivering supports for economic recovery.
Updated: Central Bank of Ireland has made a claim of 2012 'profit' of EUR 1.4 billion. But wait, a business makes profit by taking investors' / equity holders' / lenders' or own funds, purchasing inputs into production, producing something and then selling that something to willing customers who pay for these goods from their own funds. Central Bank of Ireland took claims imposed by the Government of Ireland on consumers and taxpayers, gambled these claims on the banks, who were basically compelled to take 'as offered' these Central Bank-supplied 'goods' and then collected from these captive banks pay (which the banks promptly ripped-off their customers - aka consumers and taxpayers). The Central Bank subsequently relabelled these rip-off charges 'profits' and remitted them back (EUR 1.1 billion) to the Exchequer. So can anyone explain to me what Central Bank produced that someone voluntarily was willing to buy with their own cash?
On August 31, 2011 Irish Government committed €17.3 billion of our - taxpayers - money to underwrite banks recapitalization following the PCAR 2011 exercise carried out by the CBofI. Three "banks" - BofI, AIB and IL&P received the funds. Here is the official summary of how these funds were distributed. No comment to follow.
This is the second post of two covering Central Bank stats for April 2011. The first post (here) focused on Domestic Group of banks. This post deals with Covered Institutions (the IRL-6 banks that are on a life support from the Government).
First up - central bank and ECB lending to banks was broken down into:
Other assets held by the CBofI - aka lending by CBofI itself to Irish banks - declined from €66.7bn in March to €54.15bn, this mans that mom lending by CBofI fell €12.64bn (-18.93%) and year on year it is now up €40.5bn (+296.8%)
Borrowing from the Eurosystem (ECB) declined from €79.22bn to €74.23bn - a drop of €4.985bn mom or 6.29%. Relative to April 2010, borrowing increased €38.31bn which almost exactly off-sets increases in CBofI lending, suggesting a transfer of risk from ECB to CBofI
Total loans to Irish 6 from Euro system and CBofI amounted to €128.4bn in April 2011 down €17.63bn mom (-12.1%). Relative to April 2010, loans increased €78.81bn or 159%.
On deposits side:
Total deposits in IRL 6 have increased from €224.17bn in March to €235.2bn in April an increase of 4.93% mom. Relative to April 2010, deposits are still down €14.07bn or 5.65%
However, the main driver for these increases were deposits from the Irish Government. Government deposits rose €12.743bn in April (+148.4%) mom and are up €18.566bn (+671.5%) year on year - the very same €18 billion mentioned in the first post.
Private sector deposits also increased, 1.81% or €1.93bn mom, but remain €20.92bn on April 2010 (-16.2%)
Loans to Irish residents fell €6.97bn (-2.2%) mom to €314.14bn. Loans stood at €27.97bn below April 2010 (a decline of 8.18% yoy)
Loans to General Government were marginally up €47mln to €28.3bn, which means that IRL 6 are the dominant players in lending to Irish Government (as asserted in the previous post)
Loans to other Monetary Institutions werte down €4.05bn mom (-375%) and
Loans to Private Sector fell additional €2.97bn (-1.61%) mom and €33.633bn (-15.62%) yoy to €181.71bn.
Lastly, loans to deposits ratios:
LTDs for all IRL 6 institutions improved by 10 percentage points to 133.56% in April 2011, which represents a decline of 4 percentage points yoy
LTDs for Private Sector lending fell 6 percentage points in April to 167.9%, an increase of 1 percentage point on April 2010.
In other words, deleveraging over the last 12 months has been led by Government and other financial isntitutions activities, not by private sector pay-down of debt to deposits ratios.
Ok, folks, with some brief delay due to computational complexities - here are charts on Irish banking sector health. These are aggregates from the CBofI monthly stats for April 2011.
This release is broken into 2 post. The first post deals with Domestic Group of banks (see note Credit Institutions Resident in the Republic of Ireland). The second post will deal with Ireland-6 Zombies... err... banks that is known as Guaranteed or Covered Institutions.
Headlines first:
Total Private Sector Deposits are now at €164.9bn or €1.93bn up on April 2011 (+1.18%) and still €19.65bn down year on year (-10.64%)
All of this increase is due to Overnight deposits which are up €2.09bn (+2.53%) mom and down just €1.52bn yoy
Deposits with maturity <2 years declined to €54.94bn in April, down €57mln (0.1%) mom and €13.64bn (-19.9%) yoy
Deposits with maturity >2 years rose €56mln (+0.52%) mom to €10.78bn, which still implies a decline of €1.71bn (-13.71%) yoy
Deposits redeemable at notice <3 months were down €162mln (-1.1%) mom to €14.5bn and down €2.77bn (-16.05%) yoy
Chart to illustrate: Now, take a look at total deposits by source:
Please note the above marking an increase in Government deposits as an important driver of deposits dynamics. Here are the details:
Domestic Group institutions saw their total liabilities fall to €712.72bn in April - a decline of €10.22bn mom (-1.41%) or a drop of €65.18bn (-8.38%) yoy (see chart below)
Deposits rose across the Domestic Group by €10.46bn mom (+3.7%) although they remain down €12.53bn (-9.63%) yoy
Clearly, as chart above shows, the increase in deposits was due primarily to Government deposits with Irish banks (well flagged before by many other researchers, this is really a transfer game whereby the Government mandated transfer of some €18bn of its reserves to Irish banks, increasing the risk to these funds, but creating an artificial improvement in the banks balance sheets). Government deposits rose €12.781bn (+143.6%) mom in April and are now up - yes, you;ve guessed it - €18.52bn (+586.2%) yoy
Another positive driver, albeit much smaller than Government, were Private Sector deposits, which rose €2.0bn (more accurately €1,999mln) or 1.32% mom, while still falling €21.85bn (-12.46%) short of April 2010 levels.
Monetary Institutions deposits with Domestic Group banks were down €4.325bn (-3.54%) mom in April and down €12.534bn (-9.63%) yoy.
Now, consider loans to deposit ratios: Thanks to Government deposits, the series are declining for overall Domestic Group:
Overall LTDs fell 7 percentage points mom from 136.76% in March to 129.67% in April, yoy decline is 9 percentage points
LTDs for Private Sector declined 4% mom to 155.15% in April, this was consistent with a 12 percentage points decline year on year.
Lastly, let's consider loans to Irish residents within the system:
Overall loans to Irish residents fell from €386.3bn in March to €379.84bn in April a decline of 1.68% mom and 11.47% yoy
Loans to Monetary Institutions declined by €3.31bn (-2.84%) mom and are down €11.23bn (-9.03%) yoy
Loans to Government went up €45mln mom to €28.49bn (+0.16% mom and 150.75% yoy). Over the last 12 months Irish banks have revolved some €17.13bn worth of lending (bonds purchases) back to the State in what can only be described as a circular transfer of money from taxpayers underwriting banks to banks lending back to taxpayers to underwrite the banks
Private Sector loans meanwhile declined €3.21bn (-1.33%) mom to €238.2bn. This means that over the last 12 months credit supply to private sector dropped a massive 18.8% or €55.09bn. Roughly 1/3 of the annual GDP has been sucked out of the real economy by the banking crisis within just 12 months.
Update: Namawinelake blog has an excellent post on the lunacy of Government treasury management exposed by the CBofI's latest accounts - read it here.
On April 7, 1775, Samuel Johnson made his famous pronouncement: "Patriotism is the last refuge of the scoundrel". This statement caught the chord with many other illustrious thinkers. Ambrose Bierce's The Devils Dictionary: “In Dr. Johnson’s famous dictionary patriotism is defined as the last resort of a scoundrel. ...I beg to submit that it is the first." In 1926, H. L. Mencken added that patriotism "...is the first, last, and middle range of fools.”
Whether one can separate a scoundrel from a fool or the first refuge from the last, in recent years we have seen Government officials who have exhibited all four attributes of false 'patriotism'.
No doubt, the decision by the Irish Minister for Finance to instruct NTMA to deposit €10.6 billion of state money with the Irish banks were not supposed to be amongst one of them. However, motivated by a 'patriotic' desire to provide a temporary support for the zombie institutions, artificially increasing their deposits base, this was a significant mistake from the risk management point of view.
Irish banks are experiencing a severe liquidity crisis, as the latest figures from the CBofI clearly show (Table A.2, column E). Lending to Euro area credit institutions has risen from 30 April 2010 levels of €81.25 billion to the peak of €136.44 billion by the end of October 2010 and now stands at a still hefty €106.13 billion (April 29, 2011), down €8.37 billion on the end of March. That's folks - our banks debts to the ECB. As far as banks debts to the CBofI itself are concerned, these have declined by some €12.64 billion to €54.15 billion March to April 2011. Chart below plots combined ECB and CBofI 'assets' that are loans to the Irish banks. So the banks are still under immense pressure on the liquidity front.
As far as their solvency is concerned, BalckRock advisers estimated back in March 2011 the through-cycle expected losses in excess of €40 billion for just 4 out of 6 Irish 'banks'. Although these relate to 'potential' losses, the likelihood of these occurring is high enough for the CBofI to provision for €24 billion of these.
Either way, Irish banks are not really the counterparties that can be deemed safe.
There is an added component to this transaction - under the deposits guarantee, the Irish Exchequer holds simultaneously a liability (a Guarantee) and the asset (the deposit) when Mr Noonan approved the transaction. Before that, the Exchequer only had an asset. In effect, balance-sheet risk of this transaction was to reduce the risk-adjusted value of the asset it had.
Lastly, the entire undertaking smacks of the Minister directly interfering in the ordinary operations of NTMA which is supposed to be independent of exactly such interference.
So whether Minister's 'patriotism' of supporting Irish banks was the first or the last resort or the first and the last range, the outcome of his decision to prop up banks balance sheets with artificial short-term deposits was an example of a risky move that has cost NTMA its independence and reputation. The move achieved preciously little other than destroy risk-adjusted value of Government assets. Not exactly a winning combo...
Last week's ECB figures show that the Irish banks have managed to rake up €136bn worth of borrowing from Frankfurt as of November 26th. This is an increase of €6bn on end-October figures. Mysteriously little? Not really - Irish banks have also borrowed some €45bn from the Central Bank of Ireland - a rise of €10bn on October.
The reason for such a dramatic increase in borrowing from the CBofI instead of ECB is two-fold:
ECB is becoming increasingly reluctant to lend to the Irish banks, and
Irish banks have run out of suitable collateral to pawn at the ECB discount window.
Which, in turn, means 2 things.
Firstly, Irish banks demand for borrowing is not abating despite Nama and other measures undertaken by the Government. Injecting quasi-Governmental paper into banks balancesheets has meant that the banks face immediate loss without any real means for covering it (remember, they can't really count on selling Nama bonds in the market without incurring an extremely steep discount on the value of these notes). Swapping nearly worthless paper for almost totally worthless loans is not doing the job and the entire banking system simply sinks deeper into debt.
Secondly, Irish banks have now uploaded some €45 billion worth of useless paper (that even ECB is unwilling to accept) into the Central Bank of Ireland. How much of this paper is loss-generative and are we, the taxpayers, on the hook for these losses, should the whole pyramid scheme go belly up?
Oh, and in case you wonder - ECB's equity funds are €5.8bn. It's lending side is over €200bn (it was €139bn total - banks lending & sovereign bonds inclusive - as of the end of December 2009), so as a bank, ECB's 2009 leverage was 24 times. Now, it is closer to 35 times. Lehman Bros territory, folks.
Brian Lenihan confirmed yesterday that the Government is now seeking an extension of the bank guarantee scheme by 3 months to the end of 2010 to coincide with capital requirement deadline set by the FR. The extension with cover new liabilities of 3mo-5 years and will not cover subordinated debt. This was expected, given the profile of maturing banks debt and the dire conditions in the funding markets where investors have been reluctant to extend new funds to Irish banks (based on the high risk perception concerning the sector and geography) and the interbank lending markets remain in elevated yields territory. Sovereign spreads reaching 313 bps for 10 year paper over the bund are not helping either, record levels, indeed.
Added uncertainty weighted on the banks is stemming from the rumors surrounding the issue of regulatory controls that the Central Bank is expected to impose on banks loans distribution across various sectors. It is expected that the CB will push (next week?) for specific maximum exposure ceilings on lending to property sector for banks. If so, this will require serious re-thinking of Irish banks models away from the traditional reliance on property-based collateral deals going to finance more property-related investments and in favour of more business and consumer oriented banking.
The winner - of the Big 4 - here will be BofI, which has a much more customer-oriented model of consumer banking than AIB (not to mention ptsb or Anglo). But all banks will find it challenging to bring in more consumer orientation in the environment where thy are trying to push up margins on existent paying clients. And even more importantly, all banks will find it difficult to enter serious business investment markets.
Meanwhile, on wholesale funding side, things are now so desperate that the EU - never the first to push for greater transparency - is being forced to publish the results of stress tests on the region’s banks. Expected before the end of this month, the tests are likely to be a hogwash - Merkel already stated that the 'EU has taken precautionary measures' in relation to stress tests results. Whatever this might mean, one wonders.
There's an excellent post on econbrowser blog (here) on the extent of the PIIGS banks problems and the expected size and geographic distribution of potential contagion. A chart below says it all: I mean, really, folks, we beat Greece and Portugal as a combination. And for UK banks, we beat all other 3 sickest puppies.
Before we dive into the issue of Systemic Risk Regulation, a quick note on travel industry troubles (those who would like to do so can skip down to the second topic)
Some of the readers of this blog and of my articles in press disagree with my assertion that high charges at the Dublin Airport and the travel tax imposed on passengers matter to our travel figures. I have wrote before about:
an independent Government group report calling for abolition of the tax, and
on an independent economic assessment from international transport economics consultancy linking travel tax to jobs losses and revenue collapse in the sector; and
evidence on routes closures and aircraft cut backs that were explicitly linked by the airlines (Ryanair, EasyJet and Aer Lingus amongst them) to the charges and taxes collected in Dublin.
Withdrawal of BMI earlier this year from Dublin, with a loss of 30 jobs and some 300,000 passengers was also not enough.
This was not enough to convince some. Sadly, many continue to insist that protectionist barriers to travel (trade) are an effective means for ensuring viability of Irish tourism and domestic sectors (see last Sunday Times letters page).
Now, Irish media reports that the DAA will be offering substantial discounts to airlines that launch new short and long haul services, amounting to 25-100% cuts in charges for the first five years of a route opening.
Of course, DAA had seen a 17% year-on-year drop in traffic in December 2009, while Cork saw a decline of 15.5% and Shannon – 29.9%.
Offering deep discounts is a funny thing to do, if the charges and taxes were not the problem with traffic in the first place. Unless, that is, people like myself have been all along correct in stating that high costs of services provided by the DAA (inclusive of travel tax – which DAA had nothing to do with) act as an impediment to sustaining tourism and business travel to Ireland.
It is a basic feature of international trade theory and practice – tariff protection does not work. Not in the short run, nor in the long run. Visitors to Ireland are price-elastic, while many of us, living here with families and connections (personal and business ones) overseas are less so.
Hike tax and foreign tourists will have a greater ability to avoid coming here, while domestic travellers will have to adjust their expenditure (abroad and at home) to cover the additional cost.
What the former means is that a Spanish person deciding on where to take a city break will be less inclined to chose Dublin or Ireland in general because of a higher tax/cost.
The latter means that an Irish person going to, say, Paris, will have an added incentive to shop there more (to generate greater savings over the comparable purchases in Ireland and thus compensate herself for extra costs incurred in travelling) or equivalently – to shop less in Ireland (to avoid incurring added cost). Both effects act in the direction of reducing total revenue to businesses based here.
Ann Siebert has weighed in on the issue of systemic risk regulation in Europe in today’s voxeu column (here):
"Any committee dealing with assessment of systemic risks “should be small and diverse. …ideally it should be composed of five people: a macroeconomist, a microeconomist, a financial engineer, a research accountant, and a practitioner. …As the size of a group increases so does the pool of human resources, but motivational losses, coordination problems, and the potential for embarrassment become more important. The optimal size for a group that must solve problems or make judgements is an empirical issue, but it may not be much greater than five. The reason for diversity is that spotting systemic risk requires different types of expertise. A board composed of entirely of macroeconomists might, for example, see the potential for risk pooling in securitisation, whereas a microeconomist would see the reduced incentive to monitor loans.”
Needless to say, these are not the principles taken on board by Nama and the Irish banks. Nor is it an approach even being discussed for the Irish Financial Regulator or the Government. Why? Why not?
“The committee should be composed of researchers outside of government bodies and international organisations; career concerns may stifle the incentive of a bureaucrat to express certain original ideas. It is of particular importance that the board not include supervisors and regulators. [Again, look at Nama – virtually the entire top management of this organization is composed of people unqualified to deal with the task of spotting structural risks]. This is for two reasons. First, it is often suggested that supervisors and regulators can be captured by the industry that they are supposed to mind, and this may make them less than objective and prone to the same errors. Second, a prominent cause of the recent crisis was supervisory and regulatory failures, and these are more apt to be spotted and reported by independent observers than the perpetrators.” [No illusions here - Nama is captured by the industry, and to boot - by the worst parts of the industry, not the best.]
"Finally, it is important that the board be made sufficiently visible and prominent that a member’s career depends on his performance. Given the importance of the task, pay should be high to attract the best qualified, and the members should not have outside employment to distract them.” [Good luck to anyone who thinks that Nama board or any of its risk structures will come close to these parameters, except one - they will be handsomely remunerated for their work].
Alas, this dreamy transparent and professionally sound proposal is too late, even in the EU case, for: “The Eurozone has already swung into action, creating the European Systemic Risk Board (ESRB), set to begin this year. Unfortunately, this board, responsible for macro-prudential oversight of the EU financial system and for issuing risk warnings and recommendations, is far from the ideal. It is to be composed of the 27 EU national central bank governors, the ECB President and Vice-President, a Commission member and the three chairs of the new European Supervisory Authorities. In addition, a representative from the national supervisory authority of each EU country and the President of the Economic and Financial Committee may attend meetings of the ESRB, but may not vote. This lumbering army of 61 central bankers and related bureaucrats is a body clearly designed for maximum inefficiency; it is too big, it is too homogeneous, it lacks independence, and its members are already sufficiently employed.”
This blog represents my personal views and is not reflective of the views or opinions held by any company, contractor, client or employer I work for currently or have worked for in the past. These views are not an endorsement to take any action in the markets or of any political position, figures or parties.
This blog represents my personal views and is not reflective of the views or opinions held by any company, contractor, client or employer I work for currently or have worked for in the past. These views are not an endorsement to take any action in the markets or of any political position, figures or parties.
