ANGLO IRISH Bank lost £156 million (€174 million) on the sterling to yen exchange rate in the three months between the issuing of the State guarantee at the end of September and the bank’s nationalisation in January.
The losses, which were disclosed in the bank’s annual report on Friday, were incurred as part of a complex funding transaction rather than speculative currency trading. The bank was borrowing in yen to avail of low Japanese interest rates and lending to customers in sterling at a higher UK interest rates. Funding transactions of this nature are common and normally involve some sort of foreign exchange cover to protect banks against movements in the underlying currencies.
The report said Anglo did not use foreign exchange cover; instead the deal was structured so that “the potential downside from a foreign exchange risk perspective was mitigated by an offset on the group’s taxation line”.
The arrangement had “a positive impact on group profit for the year ended September 30th”, said the report. However, the precipitous decline in sterling against the yen and most other currencies since September resulted in foreign exchange losses, costing Anglo £156 million.
Sources familiar with the arrangement said yesterday the foreign exchange losses were and still can be used to reduce the tax bill of various UK operations. However, the foreign exchange losses have to be disclosed at this stage. The scheme was developed by the bank’s advisers and approved by UK tax authorities.
The report said Anglo decided last May to set up a deal where it swopped “a portion of its funding from a sterling basis to a yen basis. The arrangement was structured such that the group would benefit from the differential between sterling and yen interest rates.”
It makes clear that Anglo continued with the arrangement after the Government guaranteed its borrowings and those of the other commercial banks at the end of September. After this point the Government became responsible for repaying the underlying yen borrowings if Anglo Irish was unable to meet its obligations. The position was only unwound in early January. No date or reason is given, but Anglo was taken over by the Government on January 21st.
