THE GOVERNMENT and Central Bank are considering allowing debt-laden banks to set up a company to warehouse more than €60 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 sources, 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 reorganisation of the banking sector in conjunction with the domestic and external authorities,” the Central Bank said in response to questions.
It declined to comment further. The Government agreed as part of the bailout in November to shrink the banks, as deposit outflows last year drove up their reliance on funding from the ECB.
While 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.
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 31st.
So-called viable lenders, including Bank of Ireland, AIB, Irish Life and Permanent and EBS Building Society, need to cut their loan-to-deposit ratios to 122.5 per cent, “which is acceptable to Europe”, Minister for Finance Michael Noonan said this week. The average loan-to-deposit ratio is currently about 170 per cent.
Irish lenders had €116.9 billion of ECB borrowings at the end of February and were relying on the Irish Central Bank for a further €70.1 billion.
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 was an option under consideration.
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. It would be “a more robust, transparent and market-friendly vehicle than individual SPVs set up by each bank,” it said.
None of the banks would own more than 50 per cent of the new company, allowing them to remove it from their balance sheets. Assets would be transferred at book value, avoiding initial capital losses. – (Bloomberg)
