Irish banks are selling off their holdings of Irish government bonds ahead of potential European-wide regulations which could put limits on how much domstic debt they can hold.
In a report published Wednesday, ratings agency Fitch said that in the 18 months to the first half of 2015, Irish banks (AIB, Bank of Ireland and Permanent TSB) cut their exposure to Irish government bonds by about 11 per cent, at the same time as they increased their holdings of sometimes lower rated sovereign debt from the UK (+1%); Italy (+4%); Spain (+6%) and Belgium (+2%).
Irish banks along with those in Germany, Spain, Italy and Portugal, continue to have a stronger domestic sovereign bias, than those in UK or Sweden. More than 70 per cent of Irish banks’ sovereign holdings is in domestic bonds, figures from Fitch show, compared with about 30 per cent in the UK and about 65 per cent in Italy. Figures from 2015 show that EU banks had €2.3 trillion sovereign exposures of which 65 per cent was to the ‘home’ sovereign.
Fitch also warns that rebalancing, without relatively long transitional periods, could affect spreads.
“Market perception that the eurozone banks may be net sellers could cause some spreads to widen, although in a low interest environment, this could also stimulate demand for debt,” Fitch says in the report.
EU moves
European regulators are looking to subject EU sovereign exposures to capital requirements or to limit large exposures, in an effort to reduce banks'exposures to their own sovereigns, ahead of possible future proposals from the Basel Committee.
According to Fitch, Euro zone banks could be forced to raise up to €135 billion in additional capital to maintain solvency levels or to reallocate €492 billion of eurozone sovereign holdings to stick to new limits.
The impact of applying a flat 10 per cent risk-weight across eurozone banks’ EU sovereign exposures would be a “relatively modest increase” in capital requirements, Fitch said, of almost €12 billion to maintain capital ratios. However, an approach designed to penalise excessive concentrations could create requirements of €135 billion
The option then for a bank would be to either sell domestic sovereign exposures, or keep these and hold additional capital.
“Most likely, banks would gradually shift portfolios towards suitable substitutes, weighing up the capital carrying cost versus yield, assessing the impact on profitability and considering whether new securities are eligible for liquidity buffer requirements,” Fitch said, adding that this would see banks shift partly out of their home sovereign and into other eurozone government debt.
Central Bank figures
Meanwhile figures from the Central Bank published on Wednesday show that despite the trend to divest their Irish sovereign debt, the percentage of government bonds held by non-residents fell to 58 per cent in April 2016, the lowest since December 2014. Non-residents hold some 67.4 per cent of bonds set to mature within the next five years.
Overall, the value outstanding of government bonds fell by € 6.6 billion to € 120.7 billion in April 2016, mainly due to the maturity of a bond in mid-April.
Irish resident holdings decreased slightly to €51,059 million, with Irish credit institutions and the Central Bank of Ireland accounting for 93.3 per cent of the total. Irish pension funds continue to cut their holdings to Irish government bonds, down from about €4 billion in 1999 to €600 million in April 2016.
