Ireland Said to Weigh Allowing Banks to Set Up Asset Warehouse
By Joe Brennan - Mar 18, 2011 5:20 PM GMT+0100 Fri Mar 18 16:20:33 GMT 2011
Irish authorities are considering allowing the country’s debt-laden lenders to set up a company to warehouse more than 60 billion euros ($84.8 billion) of loans that would be wound down or sold over time, according to three people familiar with the matter.
Some banks have sought to convince the central bank and government officials that this would be preferable to splitting their operations into core and non-core units, which is also being weighed, said the people, who declined to be identified because the talks are private. It would need approval from the
European Central Bank, which would be the most likely initial provider of funding to a warehouse vehicle, they said.
“Consideration of a range of options is ongoing in terms of reorganization of the banking sector in conjunction with the domestic and external authorities,” the Dublin-based
central bank said in an e-mailed response to questions today. It declined to comment further.
Ireland agreed as part of its bailout in November to
shrink its banks, as deposit outflows last year drove up their reliance on funding from the ECB. While Irish central bank Governor
Patrick Honohan said the ECB wanted to accelerate deleveraging, Ireland has “put in the condition of no fire-sale losses because the state cannot afford it,” he said.
Viable Banks
A decision on the approach to shrinking banks’ balance sheets will be made before the results of capital and
liquidity stress tests are revealed on March 31. So-called viable lenders, including Bank of Ireland Plc,
Allied Irish Banks Plc (ALBK),
Irish Life & Permanent Plc and EBS Building Society, need to cut their loan-to-deposit ratios to 122.5 percent, “which is acceptable to
Europe,” Finance Minister
Michael Noonan said March 14. The average loan-to-deposit ratio is currently about 170 percent.
Irish-based lenders’ had 116.9 billion euros of ECB borrowings at the end of February and were relying on the Irish central bank for a further 70.1 billion euros.
The central bank and
National Treasury Management Agency, which is overseeing bank restructuring for the government, previously said that splitting banks into core and non-core units is an option under consideration. Allied Irish Executive Chairman David Hodgkinson signaled in a staff e-mail in December the bank was establishing a non-core division.
Still, a single warehouse company, or special purpose vehicle, which can be separate from the banks’ balance sheets is the “preferred and most realistic route” to deleveraging the banks, analysts including Fergal O’Leary and
Michael Cummins of Glas Securities, the Dublin-based fixed-income firm, said in a note to clients on March 9. It would be “a more robust, transparent and market-friendly vehicle, than individual SPVs set up by each bank,” it said.
Foreign Assets
Officials from the NTMA,
Finance Ministry, Bank of Ireland, Irish Life, Allied Irish and EBS declined to comment.
Banks’ foreign assets and some residential home-loans that are priced to track the ECB’s key rate, would most likely be transferred to any such vehicle, said three of the people. Bank of Ireland, Allied Irish and Irish Life have more than 60 billion euros of U.K. loans.
None of the banks would own more than 50 percent of the new company, allowing them to remove it from their balance sheets, according to the people.
Assets would be transferred at book value, avoiding initial capital losses, they said. Still, they would have to be sufficiently stress-tested and the vehicle properly capitalized to convince investors that future losses will not ultimately end up back with the banks, they said.
The central bank is stress-testing against a 60 percent drop in
house prices from their peak in 2007, an economic contraction and rising unemployment for this year and next.
Depositors and wholesale markets would have more confidence in funding the core banks as a result, they said, adding that this would lower lenders’ reliance on central banks.
Irish banks have already sold 72.3 billion euros of risky commercial real-estate loans in the past year to the state-run National Asset Management Agency, the nation’s so-called bad bank. The loans were sold at an average discount of 58 percent, contributing to the country’s need to inject up 46.3 billion euros into absorb soaring losses in the banks.
Ireland Said to Weigh Allowing Banks to Set Up Asset Warehouse - Bloomberg
