The Irish Central Bank today released its annual report for 2010.
This blog has concentrated on the oddity that is the ELA provided by the Irish Central Bank for a while, so some of the comments made in the report are of interest.
Note 20 (page 105) on the financial statement deals with the ‘other assets’ column.
At the end of December, €49.4bn of the €50.3bn outstanding was accounted for by:
ELA advanced outside the Eurosystem’s monetary policy operations to domestic credit institutions covered by the guarantee
This, of course, is no surprise.
But there are two interesting things in the notes.
First, the Minister for Finance (and therefore the Irish Taxpayer) is fully liable for any losses that occur under this operation, by means of a ‘formal comfort’:
In addition, the Bank received formal comfort from the Minister for Finance such that any shortfall on the liquidation of collateral is made good.
So confident is the Irish Central Bank in this comfort that they carry no provisions on for any losses arising from the ELA operations it conducts:
At the Balance Sheet date no provision for impairment was recognised.
There are five different instruments used to access ELA:
(i) Promissory Notes issued by the Minister for Finance to specific credit institutions and transferrable by deed, (ii) Master Loan Repurchase Deeds covering investment/development loans, (iii) Framework Agreements in respect of Mortgage-Backed Promissory Notes covering non-securitised pools of residential mortgages, (iv) Special Master Repurchase Agreements covering collateral no longer eligible for ECB-related operations and (v) Facility Deeds providing a Government Guarantee
Taking them one by one:
(i) Promissory notes: Issued by the government to recapitalise Anglo Irish Bank and Irish Nationwide.
(ii) Master Loan Repurchase Agreements: Repos on loans for investment/development. I would imagine that the numbers here are fairly small as most of these loans have been moved to NAMA
(iii) Framework Agreements for Mortgage-Backed Promissory Notes: For more on Mortgage Backed Promissory Notes see http://blog.cornerturned.com/2011/01/03/the-irish-variant/
(iv) Special Master Repurchase Agreements: These seem to put an end to the ‘who is the lender of last resort argument’ in the ezone. It seems it is not the ECB, but rather the national NCB. If an instrument is no longer acceptable at the ECB, banks still can turn to their NCB to get liquidity. Therefore, the NCB is the lender of last resort.
(v) Facility Deeds. I have written about these before (see http://blog.cornerturned.com/2011/03/31/something-really-rotten-in-anglo/ ) A Facility Deed is an Unsecured Loan from the Central bank, guaranteed by the Minister for Finance.
All in all, it seems that any doubts that the Irish Taxpayer is fully liable for any losses on Irish Central Bank ELA have been banished by this document.
Let’s hope the CBI manages to unwind its position without incurring any losses on this portfolio on which it has no provisions…
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I must be missing something.
The Central Bank is a state institution without outside shareholders.
Any losses by ZB are therefore “taxpayers’ losses”, no ?
I meant to add:
Would it make any real sense for ZB to provide for the unfortunate event of its owner and major debtor turning turtle ?
Unexpected answers welcome
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“All in all, it seems that any doubts that the Irish Taxpayer is fully liable for any losses on Irish Central Bank ELA have been banished by this document.”
And, of course, this is why we are pouring €66bn into the banks, why subordinated debt is taking a €14bn haircut and the reason why equityholders have lost about €25bn. The banks have made, and are expected to make, huge losses. Without the monies above they would not be able to repay central bank funding from the assets they have (or senior bondholders or deposit holders for that matter).
We have no reason to expect the losses will be larger than those already accounted for through NAMA and the stress tests and support is being provided to cover these huge losses and allow the banks to pay back their liabilities.
Finally, we are going to help the banks pay down the ELA they are using through the €28 billion of Promissory Notes issued. Once we provide the cash for these, the “banks” will use it to repay the ELA they are using. We only have to make one payment to reduce the outstanding balance of Promissory Notes AND the outstanding balance of ELA. To suggest we could be on the hook for both is double counting.
Seamus, I meant to ask you about this earlier when we met, but here’s a good place too. You write:
” Once we provide the cash for these, the “banks” will use it to repay the ELA they are using.”
Why should they? What if they don’t? Aren’t you assuming an awful lot in that sentence?
Lorcan is only double counting if the two line items match exactly and are designed as such to do so. In practice I don’t see how they could be the same unless I’m missing something fundamental–and I’m open to being corrected on this issue. Can you elaborate?