8/1/20: Creative destruction and consumer credit

My new article for @TheCurrency_, titled "Creative destruction and consumer credit: A Fintech song for the Irish banks" is out. Link: https://www.thecurrency.news/articles/6150/creative-destruction-and-consumer-credit-fintech-song-for-the-irish-banks.

Key takeaways: Irish banks need to embrace the trend toward higher degree of automation in management of clients' services and accounts, opening up the sector to fintech solutions rather than waiting for them to eat the banks' lunch. Currently, no Irish bank is on-track to deploy meaningful fintech solutions. The impetus for change is more than the traditional competitive pressures from the technology curve. One of the key drivers for fintech solutions is also a threat to the banks' traditional model of business: reliance on short-term household credit as a driver of  profit margins.

"Irish banks are simply unprepared to face these challenges. Looking across the IT infrastructure landscape for the banking sector in Ireland, one encounters a series of large-scale IT systems failures across virtually all major banking institutions here. These failures are linked to the legacy of the banks’ operating systems."

"In terms of technological services innovation frontier, Irish banks are still trading in a world where basic on-line and mobile banking is barely functioning and requires a push against consumers’ will by the cost-cutting banks and supportive regulators. To expect Irish banking behemoths to outcompete international fintech solutions providers is equivalent to betting on a tortoise getting to the Olympic podium in a 10K race."

13/12/19: World Bank and WEF reports highlight relatively poor competitiveness rankings for Ireland

The latest World Bank "Doing Business" report rankings and the WEF's "Global Competitiveness Report" rankings show Ireland in a mid-tier 1 position (24th ranked in both tables) in terms of competitiveness - hardly an enviable position.

Ireland's position marks a deterioration from 23rd rank in WEF table, driven by relatively poor performance in ICT adoption (hmmm... Silicon Docks economy is ranked 49th in the World), macroeconomic stability (ranked 34th), product markets competitiveness (35th), and financial system (42nd).

Full WEF report here: http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf and full WB report here: https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf WB country profile for Ireland: https://www.doingbusiness.org/content/dam/doingBusiness/country/i/ireland/IRL.pdf.

A summary chart for Ireland from WB report:

Which, again shows poor performance in the area of credit supply, as well as trading across the border (correlated to the effective market size),  but also in access to electricity, registering property, dealing with construction permits, and enforcing contracts.

10/12/19: Irish Banks: Part 2

Continuing with the coverage of the Irish banks, in the second article for The Currency, available here: https://www.thecurrency.news/articles/4810/a-catalyst-for-underperformance-how-systemic-risk-and-strategic-failures-are-eroding-the-performance-of-the-irish-banks, I cover the assets side of the banks' balancesheets.

The article argues that "The banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what does not make sense to investors does not make sense to society at large." In other words, strategic errors that have been forced onto the banks by deleveraging post-crisis have resulted in the Irish banks becoming a de facto peripheral play within the Euro area financial system, making them unattractive - from growth potential - to international markets.

The key conclusions are: "From investors’ perspective, neither of these parts of the Irish lenders’ story makes much sense as a long term investment proposition. From the Irish economy’s point of view, the banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what doesn’t make sense to investors doesn’t make sense to the society at large."

10/12/19: Irish Banks: Part 1

Returning back to the blog after a break, some updates on recent published work.

In the first article on Irish banking for The Currency, titled "Culture wars and poor financial performance: examining Ireland’s dysfunctional, beleaguered banking system", I argued that "The financial performance of the Irish banks has been abysmal. Not for the lack of profit margins, but due to strategic decisions to withdraw from lending in the potential growth segments of the domestic and European economies." The article shows the funding side of the Irish banks and the explicit subsidy they receive from the ECB through monetary easing policies - a subsidy not passed to the end credit users.

In simple terms, high profit margins are underpinned - in Irish banks case - by low cost of funding.

Conclusions: "The implications of the lower cost of banks equity, interbank loans, as well as deposits for the Irish banking sector are clear cut: since the start of the economic recovery, Irish banks have enjoyed an effectively free ride through the funding markets courtesy of the ECB and the blind eye of the Irish consumer protection regulators. Yet, despite sky-high profit margins extracted by the banks from the households and businesses, the Irish banking sector remains the weakest link in the entire Eurozone’s financial services sector, save for Greece and Cyprus. If the funding side of the equation is not the culprit for this woeful record of recovery, the other two sides of the banking business, namely assets and regulatory costs, must be."

Read the full article here: https://www.thecurrency.news/articles/3833/culture-wars-and-poor-financial-performance-just-what-is-going-on-within-irelands-beleaguered-banks. 

16/10/19: Recalling the Celtic Tiger

Recalling the Celtic Tiger, edited by Brian Lucey, Eamon Maher and Eugene O’Brien is coming out this week from the series of Reimagining Ireland Volume 93, published by Peter Lang, DOI 10.3726/b16190, ISBN 978-1-78997-286-3.

The book includes 12 mini-chapters by myself and multitude of contributions from some top-level contributors. Wroth buying and reading... and can be ordered here: https://www.peterlang.com/view/title/71254.

7/2/19: S&P on Irish Banks Outlook

S&P on Irish banks outlook for 2019, with my comments included: https://www.spglobal.com/marketintelligence/en/news-insights/trending/wU14cpHw2NfouDi3MnHVQw2.

28/9/18: 10th Anniversary of the Irish Banking Crisis

Yahoo Finance's Edmund Heaphy on 10th Anniversary of the Irish Bank Guarantee: https://uk.finance.yahoo.com/news/destructive-goal-decade-irish-bank-guarantee-090447485.html with extensive quotes from myself.

19/11/17: S&P on Irish Banks & Tracker Mortgages

S&P Global article on the fate of tracker mortgages scandals in Irish banks (with comments of mine): https://marketintelligence.spglobal.com/our-thinking/news/irish-banks-face-higher-provisions-as-storm-over-tracker-mortgages-grows.

17/2/17: European Non-Performing Banks' Loans 2016

Latest Fitch data shows some significant progress achieved by Ireland in dealing with non-performing loans on banks' balancesheets:

According to Fitch, Irish banking system ranked 6th worst in terms of NPLs in the EU at the end of 2016. This is a significant improvement on second and third places for Ireland during the height of the Greek and Cypriot crisis. However, the above data requires some serious caveats:

1. Ireland has been the earlier starter in the game of repairing banks' balancesheets than any other country in the Fitch's Top10 Worst systems table above;
2. Ireland's performance crucially depends on the assumed quality of mortgages debt restructurings undertaken by the banks over recent years - an assumption that is hardly un-contestable, given that the vast majority of mortgages arrears resolutions involve extend and pretend types of measures, such as extending mortgages maturity, rolling up arrears into a new (for now cheaper) debt and so on; and
3. Ireland is compared here to a number of countries where the banks bailouts have either been much shallower or completely absent.

Still, for all the caveats, it is good to see that after 9 years of a crisis, Irish banking system is no longer in top-5 basket cases league table in Europe. At this speed, by 2026, me might be even outside the top-10 table... 

19/6/16: Irish Regulators: Betrayed or Betrayers?..

As I have noted here few weeks ago, Irish Financial Regulator, Central Bank of Ireland and other relevant players had full access to information regarding all contraventions by the Irish banks prior to the Global Financial Crisis. I testified on this matter in a court case in Ireland earlier this year.

Now, belatedly, years after the events took place, Irish media is waking up to the fact that our regulatory authorities have actively participated in creating the conditions that led to the crisis and that have cost lives of people, losses of pensions, savings, homes, health, marriages and so on. And yet, as ever, these regulators and supervisors of the Irish financial system:

1. Remain outside the force of law and beyond the reach of civil lawsuits and damages awards; and
2. Continue to present themselves as competent and able enforcers of regulation capable of preventing and rectifying any future banking crises.

You can read about the latest Irish media 'discoveries' - known previously to all who bothered to look into the system functioning: http://www.breakingnews.ie/business/report-alleges-central-bank-knew-of-fraudulent-transactions-between-anglo-and-ilp-740684.html.

And should you think anything has changed, why here is the so-called 'independent' and 'reformed' Irish Regulator - the Central Bank of Ireland - being silenced by the state organization, the Department of Finance, that is supposed to have no say (except in a consulting role) on regulation of the Irish Financial Services: http://www.independent.ie/business/finance-ignored-central-banks-plea-to-regulate-vulture-funds-34812798.html. 

Please, note: the hedge funds, vulture funds, private equity firms and other shadow banking institutions today constitute a larger share of the financial services markets than traditional banks and lenders.  

Yep. Reforms, new values, vigilance, commitments... we all know they are real, meaningful and... ah, what the hell... it'll be Grand.

29/1/16: And the IBRC Interest Overcharging Ship Sails On...

Just after posting the Mick Wallace video link on Nama,  a knock on my blog door left this nice little letter at the doorstep.

Now, I obviously removed the names of people involved and other identifying information. Which leaves us with the substance of the said letter: IBRC are conducting an internal review into interest overcharging...

Why that's nice.

Let's recall, however, the following facts:

1. Anglo overcharging was notified to the authorities officially at least as far back as 2013 (see link here: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html)
2. It was known since at least 2010 in the public domain (per link above).
3. It was discovered in the court in October 2014 (see here: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html)

Add to the above a simple fact: IBRC Liquidators have at their disposal the entire details of all loans issued by Anglo, with their terms and conditions. They also have the entire history of the DIBOR and all other basis rates. In other words, the Liquidators have full access to all requisite information to determine if Anglo (and subsequent to its dissolution other entities holding Anglo loans, including Nama and IBRC Special Liquidators) have continued with the practice of overcharging established by the Anglo.

When you add the above, you get something to the tune of almost 6 years that Anglo, IBRC & Nama and IBRC Special Liquidators had on their hands to address the problem. And only now are they getting to an 'internal review', more than a year after the court has smacked their snouts with it? 

Meanwhile, as it says at the bottom of the letter, "Irish Bank Resolution Corporation Limited (in Special Liquidation), trading as IBRC (in Special Liquidation), is operating with a consent, and under the supervision, of the Central Bank of Ireland."

So we have an entity, supervised and consented to by the Central Bank that is 'looking into' the little pesky tiny bitty problem of years of overcharging borrowers on a potentially systemic basis and with quite nasty implications of this having been already discovered in the courts more than a year ago... It is looking into these thing by itself. Regulators, of course, are looking at something else... while consenting to the IBRC operations all along...

Does that sound like we have a 'new era' of regulatory enforcement and oversight designed to prevent the next crisis?.. Or does it sound like everyone's happy to wait for the IBRC to find a quiet way to shove the problem under some proverbial rug, so the Ship of the Reformed Irish Banking System Sails On... unencumbered by the past and the present?

3/12/15: Heard of Number26, yet?..

An interesting 'break-in' into Irish banking market via Number26 which uses:

• Fintech platform; and
• German license

to break the Central Bank of Ireland-led freeze on new entrants into the banking market here.

Details are here: http://techcrunch.com/2015/12/02/number26-launches-its-bank-of-the-future-in-6-new-countries/. Surprisingly low margin operation based on fees from transactions, rather than on direct customer charges. Presumably, accounts are insured by German system and are free from the Irish Government indirect tax extraction schemes, such as card duties etc... One, of course, will have to be compliant on Irish DIRT.

Of course, Fintech offers plenty of disruption potential in the sector that is inhabited by technology dinosaurs. Still, for all its promise, Fintech is yet to:

1. Achieve a significant breakthrough into traditional banking and insurance services (beyond aggregators and price optimising platforms) and
2. Deliver a viable (financially) margins model.

These two points mean that to achieve scale, Fintech offers today need deep pockets and customer bases of more traditional services providers, as I describe during this discussion: http://trueeconomics.blogspot.ie/2015/10/161015-financegoogle-2015.html.

24/11/15: Captured Economics and the Victim State

Per Simon Wren-Lewis: “…Perhaps the problem at the heart of the Eurozone is that economic policy advice in Germany has been effectively captured by employers' interests, and perhaps the interests of banks in particular.” (source here)

For one caveat: economics as profession has been largely captured by the state.

The European states are, of course, themselves have been captured by corporatist interests, including (but not limited to) those of big businesses and banks. One can make a similar argument about other (non-European) states too. Which makes the capture of economists by business only a part of that more corroded chain, and not an exclusive part. Otherwise, how can one explain that it is State-employed economists and State-aligned economists (with State boards positions and State research contracts) that so vocally defend the very same corporate welfare that Simon Wren-Lewis seems to correctly worry about?

My view on the subject was covered here: http://trueeconomics.blogspot.ie/2015/10/301015-why-economists-failed-whats-up.html.

In simple terms, enough whitewashing the State as a victim of business interests - instead, time to see the State as a willing participant in a corporatist system that allows capture of policy development and implementation mechanisms and institutions by vested interests that define the State.

30/10/15: Why Economists Failed & What's Up With Irish Banking Reforms?..

Earlier this week I gave a small presentation to a group of academics and researchers from Holland on two topics:

1. Why majority of economists did not foresee the Global Financial Crisis? and
2. What is the state of play with Irish banking sector reforms?

Here are my slides from the talk:

30/10/15: Repaired Irish Banking: Betting Your House on Corporate Deleveraging

I have not been tracking more recent changes in Irish banking sector aggregate balance sheets for quite some time now. However, preparing for a brief presentation on Irish banking crisis earlier this week, I had to update some of my charts on the topic. Here is some catching up on these.

Take a look at Central Bank’s data on credit and deposits in Irish banking system. These figures incorporate declines in both due to sales of loan books by Irish banks, so step-changes down on credit lines reflect primarily these considerations. As superficial as the numbers become (in this case, the aggregate numbers no longer fully reflect the true quantum of debt held against Irish households and companies), there are some positive trends in the figures.

1. Over the 3 months through August 2015 Irish households have reduced the level of outstanding debt by some 7.1% compared to the same 3mo period in 2014. Total level of household debt now stands at the average of December 2004-January 2005. This is a massive reduction in debt burden, achieved by a combination of repayments, defaults and sales of loans to non-banking entities (e.g. vulture funds). However, loans for house purchases have declined by a more moderate 4.5% over 3mo through August 2015 compared to the same period in 2014. This brings current pile of house mortgages outstanding to the average level of February-March 2005. Which is impressive, but, once again factoring in the fact that quite a bit of these reductions was down to defaults and sales of loans, the overall organic deleveraging has been much slower than the chart above indicates. Over the last 3 months (though August 2015), total volume of household debt declined, driven down by deleveraging in mortgages debt and ‘other debt’ against a modest increase in consumer credit. It is interesting to note that over the last 12 months (based on 3mo average), volume of ‘other loans’ has dropped by a massive 38%, suggesting that this category of credit is now also subject to superficial debt reductions, for example originating from insolvencies and bankruptcies. For the record, there are at least three highly questionable reductions in recorded household debt on record: November-December 2010 drop of EUR7.5 billion, September-October 2011 drop of EUR17.2 billion, and May-June 2014 decline of EUR4.1 billion. This suggests that the official accounts of household deleveraging may be overstating actual degree of deleveraging by upwards of EUR28 billion which could bring our debt levels back to September-October 2011 and signify little material reduction in total debt over recent years.
2. Over the 3 months through August 2015, loans outstanding to the Non-financial corporations in Ireland fell 19.4% compared to the same period average in 2014. Most of this decline was driven by the 19.5% drop in loans, with debt securities outstanding declining by only 5.7%. This marks 12th consecutive month of m/m declines in credit outstanding to the corporate sector. Current level of corporate credit brings us back to the levels last seen in 3Q 2003. Just as with households there are at least 3 episodes of significant declines in credit volumes since the start of the Global Financial Crisis, although the path for corporate loans has been more smooth overall than for household debt. This suggests that banks have prioritised resolving corporate arrears over household arrears, as consistent with 2011 PCAR strategy that also prioritised corporate loans problems. 

Total credit outstanding to the real economy (excluding Government and financial intermediaries) has fallen 12% y/y in the three months through August 2015. The official register now stands at EUR145.3 billion, a level comparable to the average for June-July 2004.The truly miraculous thing is that, given these levels of deleveraging, there is no indication of severe demand pressures or significant willingness to supply new credit.

As shown in the chart below, Irish banking sector overall has been enjoying steadily improving loans to deposits ratios.

Over the July-August, household loans to deposit ratios dropped to 99% - dipping below 100% for the first time since the Central Bank records began in January 2003. Loans to deposit ratio for non-financial corporates declined to 120% also the lowest on record. However, this indicator is of doubtful value to assessing the overall health of the financial sector in Ireland. To see this, consider the following two facts: household loans/deposit ratios have been below pre-crisis lows since October 2011, while corporate loans/deposits ratios have been below pre-crisis lows since July 2014. Reaching these objectives took some creative accounting (as noted above in relation to loan book sales), but reaching them also delivered practically no impetus for new credit creation. In other words, deleveraging to-date has had no apparent significant effect on banks willingness to lend or companies and households willingness to borrow.

By standards set in PCAR 2011, Irish banks have been largely ‘repaired’ some months ago. By standards set in PCAR 2011, Irish banks are yet to start their ‘participation in the economy’.

Meanwhile, take a look at the last chart:

As the above clearly shows, Irish banking system is nothing, but a glorified Credit Union, with credit outstanding ratio for household relative to corporates at a whooping 177%. This, again, highlights the simple fact that during this crisis, banks prioritised deleveraging of corporate debt and lagged in deleveraging household debt. Irish economic debt burden, thus, has shifted decisively against households.

Someone (you and me - aka, households) will have to pay for the loans write downs granted to companies over the years. And the banks are betting the house (our houses) on us being able to shoulder that burden. 

27/7/15: IMF Euro Area Report: The Sick Land of Banking

The IMF today released its Article IV assessment of the Euro area, so as usual, I will be blogging on the issues raised in the latest report throughout the day. The first post looked at debt overhang.


So here, let's take a look at IMF analysis of the Non-Performing Loans on Euro area banks' balance sheets.

A handy chart to start with:

The above gives pretty good comparatives in terms of the NPLs on banks balance sheets across the euro area. Per IMF: "High NPLs are hindering lending and the recovery. By weakening bank profitability and tying up capital, NPLs constrain banks’ ability to lend and limit the effectiveness of monetary policy. In general, countries with high NPLs have shown the weakest recovery in credit."

Which is all known. But what's the solution? Ah, IMF is pretty coy on this: "A more centralized approach would facilitate NPL resolution. The SSM [Single Supervisory Mechanism - or centralised Euro area banking authorities] is now responsible for euro area-wide supervisory policy and could take the lead in a more aggressive, top-down strategy that aims to:

• Accelerate NPL resolution. The SSM should strengthen incentives for write-offs or debt restructuring, and coordinate with NCAs to have banks set realistic provisioning and collateral values. Higher capital surcharges or time limits on long-held NPLs would help expedite disposal. For banks with high SME NPLs, the SSM could adopt a “triage” approach by setting targets for NPL resolution and introducing standardized criteria for identifying nonviable firms for quick liquidation and viable ones for restructuring. Banks would also benefit from enhancing their NPL resolution tools and expertise." So prepare for the national politicians and regulators walking away from any responsibility for the flood of bankruptcies to be unleashed in the poorly performing (high NPL) states, like Cyprus, Greece, Ireland, Italy, Slovenia and Portugal.
• And in order to clear the way for this national responsibility shifting to the anonymous, unaccountable central 'authority' of the SSM, the IMF recommends that EU states "Improve insolvency and foreclosure systems. Costly debt enforcement and foreclosure procedures complicate the disposal of impaired assets. To complement tougher supervision, insolvency reforms at the national level to accelerate court procedures and encourage out-of-court workouts would encourage market-led corporate restructuring."
• There is another way to relieve national politicians from accountability when it comes to dealing with debt: "Jumpstart a market for distressed debt. The lack of a well-functioning market for distressed debt hinders asset disposal. Asset management companies (AMCs) at the national level could support a market for distressed debt by purchasing NPLs and disposing of them quickly. In some cases, a centralized AMC with some public sector involvement may be beneficial to provide economies of scale and facilitate debt restructuring. But such an AMC would need to comply with EU State aid rules (including, importantly, the requirement that AMCs purchase assets at market prices). In situations where markets are limited, a formula-based approach for transfer pricing should be used. European agencies, such as the EIB or EIF, could also provide support through structured finance, securitization, or equity involvement." In basic terms, this says that we should prioritise debt sales to agencies that have weaker regulatory and consumer protection oversight than banks. Good luck getting vultures to perform cuddly nursing of the borrowers into health.

Not surprisingly, given the nasty state of affairs in Irish banks, were NPLs to fall to their historical averages from current levels, there will be huge capital relief to the banking sector in Ireland, as chart below illustrates, albeit in Ireland's case, historical levels must be bettered (-5% on historical average) to deliver such relief:

Per IMF: "NPL disposal can free up large volumes of regulatory capital and generate significant capacity for new lending. For a large sample of euro area banks covering almost 90 percent of all institutions under direct ECB supervision, the amount of aggregate capital that would be released if NPLs were reduced to historical average levels (between three and four percent of gross loan books) is calculated. This amounts to between €13–€42 billion for a haircut range of between zero and 5 percent, and assuming that banks meet a target capital adequacy ratio of 13 percent. This in turn could unlock new lending of between €167–€522 billion (1.8–5.6 percent of sample countries’ GDP), provided there is corresponding demand for new loans. Due to the uneven distribution of capital and NPLs, capital relief varies significantly across euro area countries, with Portugal, Italy, Spain, and Ireland benefiting the most in this stylized example."

A disappointing feature, from Ireland's perspective, of the above figure is that simply driving down NPLs to historical levels will not be enough to deliver on capital relief in excess of the average (as shown by the red dot, as opposed to red line bands). The reason for this is, most likely, down to the quality of capital held and the impact of tax relief deferrals absorbed in line with NPLs (lowering NPLs via all but write downs = foregoing a share of tax relief).

Stay tuned for more analysis of the IMF Euro area report next.

19/7/15: Ireland's Commitment to Competition in Banking... It's Overwhelming...

Let's take three stylised facts:

Fact 1: Irish Government policy from 2010 on consisted of two contradictory objectives: sector consolidation in the hands of 3 Pillar banks, and rhetorical justification of higher lending margins as being necessary to attract new competition to the market.

Fact 2: In recent months, the only significant uplift in new lending to non-financial enterprises took place in the segment of larger corporates, larger loans issuance, consistent with lower risk lending.

Over the last 24 months (though April 2015), compared to 24 months through April 2013, quantum of new loans issued to households in Ireland fell 14.1%, while new loans issued to Non-Financial Corporates rose 31.2%. Within the corporate market segment,  larger (>1 million euro) loans rose 43.6% for loans with short rate fix, and 83.2% for longer rate fix. Smaller corporate loans (<1 12.2="" 44.2="" and="" by="" euro="" fell="" fix.="" fix="" for="" in="" lending="" longer="" million="" nbsp="" new="" p="" rose="" short="" term="" volume="">
Fact 3: In the segment of safest (lowest risk) new lending, Irish banks currently enjoy high margins compared to their euro area counterparts and compared to historical averages for their own market history.

So what is the outcome of the three facts above? Where did we get with this model of higher charges = greater competition when it comes to banking?

Now, remember, Ireland pursued the same model (higher charges on end-users in exchange for more competition) in energy sector under the CER regulatory remit for years. As the result, we achieved the exact opposite: no real competition and highest / second highest energy costs in Europe.

Just as in the energy sector, in Irish banking, the incumbents are enjoying pricing power protected by the State policy. Just as we talk about competition, markets and consumer benefits... Aptly, the degree of market concentration in the hands of incumbent banks in Ireland rose from the average of 0.0547 for 1997-2006 period to 0.0674 for 2009-2014. 

Just because we really, really, really 'want' competition for our banks...

16/7/15: Ah Shure, matey, de Banks were Solvent... and Still Are...

You know the meme... "Banks are/were solvent"... It replays itself over and over again, most recently - well, just now - in the Banking Inquiry hearings in Ireland.

Ok, so they are:

Source: http://www.valuewalk.com/2015/03/non-performing-loans-europe/

Yes, that is 4 years after Irish banks were recapitalised, more than 3 years after they passed 'stringent' stress-tests and over 2 years of 'rigourous' work-outs (with 'strict' targets being met) of NPLs.

22/6/15: IMF Review of Ireland: Part 2: Banks

IMF assessment of Irish banking sector remains pretty darn gloomy, even if the rhetoric has been changing toward more cheerleading, less warning. Here is the core statement:

"Bank health continues to improve, but impaired assets remain high and profitability low. The contraction in the three domestic banks’ interest earning assets continued, albeit at a slower pace in 2014." IN other words, deleveraging is ongoing.

"Nonetheless, operating profitability doubled to 0.8 percent of assets on foot of lower funding costs as well as nonrecurrent gains from asset sales and revaluations (Table 8). Led by the CRE and SME loan books, there was a sizable fall in the stock of nonperforming loans (NPL), by some 19 percent in 2014, although NPLs are still 23 percent of loans." Note, at 23% we are still the second worst performing banking system in the euro area, after Greece.

"This fall, together with rising property prices, allowed significant provision releases while keeping the coverage ratio stable. Profitability after provisions was achieved for the first time since the onset of the crisis. Together with lower risk weighted assets, this lifted the three banks’ aggregate core tier 1 capital ratio by over 1 percentage point, to 14½ percent."

Now, take a look at the chart above: loans volume fell EUR6.5bn y/y (-3.6%), but interest income remained intact at EUR7.9bn. While funding costs fell EUR3.7bn y/y. The result is that the banks squeezed more out of fewer loans both on the margin and in total. Give it a thought: loans should be getting cheaper, but instead banks are getting 'healthier'. At the expense of who? Why, the remaining borrowers. Net trading profits now turned losses in 2014 compared to 2013. Offset by one-off profits.

Deposits also fell in 2014 compared to 2013 as economy set into a 'robust recovery'. It looks like all the jobs creation going around ain't helping savings.

A summary / easier to read table:

Notice, in addition to the above discussion, the Texas Ratio: Non-Performing Loans ratio to Provisions + CT1 capital (higher ratio, higher risk in the system). At 108, things are better now than in 2012-2013, but on average, 2011-2012 Texas ratio was around 104, better than 2014 ratio. And that with 51.7% coverage ratio and with CT1 at 14.5%. Ugh?..

On the other hand, deleveraging helped so far: loan/deposit ratio is now at 108% a major improvement on the past.

Net Stable Funding Ratio (NSFR) - a ratio of longer term funding to longer term liabilities and should be >100% in theory. This is now at 110.5%, first time above 100% - a good sign, reflective of much improved funding conditions for all euro area banks as well as Irish banks' gains.

Liquidity Coverage Ratio (LCR) - monitoring the extent to which banks hold the necessary assets to cover any short-term liquidity shocks (basically, how much in highly liquid assets banks hold) is also rising and is above 100% - another positive for the banks.


Still, the above gains in lending margins - the rate of banks' extraction from the real economy - are not enough for the IMF. "Lending interest rates must enable banks to generate adequate profits to support new lending. While increasing, Irish banks’
operating profitability remains relatively low. Declines in funding costs aided by QE will assist, but there are also drags from the prevalence of tracker mortgages in loan portfolios and from prospects for a prolonged period of low ECB rates. However, with rates on new floating rate mortgages at 4.1 percent at end March, compared with an average of 2.1 percent in the euro area, political pressures to reduce mortgage rates have emerged. The mission stressed the importance of loan pricing adequate to cover credit losses—including the high costs of collateral realization in Ireland—and to build capital needed to transition to fully loaded Basel III requirements in order to avoid impediments to a revival of lending."

Here's a question IMF might want to ask: if Irish banks are already charging almost double the rates charged by other banks, while enjoying lower costs of funding and falling impairments, then why is Irish banks profitability a concern? And more pertinently, how is hiking effective rates charged in this economy going to help the banks with legacy loans, especially those that are currently marginally performing and only need a slight nudge to slip into arrears? And another question, if Irish banks charge double the rates of other banks, what is holding these other banks coming into the Irish market? Finally, how on earth charging even higher rates will support 'revival of lending'?

Ah, yes, question, questions… not many answers. But, per IMF, everything is happy in the banking sector in Ireland. Just a bit more blood-letting from the borrowers (distressed - via arrears resolutions tightening, performing - via higher interest charges) and there will be a boom. One wonders - a boom in what, exactly? Insolvencies?

21/6/15: BankCheck Report into Anglo / IBRC Overcharging

So here, as promised, the full BankCheck report on Anglo/IBRC overcharging. I provide no comment. You can click on each individual frame to enlarge.