ECB ROLE:THE EUROPEAN Central Bank (ECB) is understood to have resolved on Friday that it did not want to continue its growing funding of Irish financial institutions.
Members of the governing council, which includes the governor of the Central Bank, Prof Patrick Honohan, are understood to have discussed the matter during a teleconference.
Yesterday an executive board member of the ECB, Juergen Stark, said it would press on with scaling back its support measures for European banks in the new year despite the recent escalation of euro zone debt tensions.
“The phasing out of our liquidity support measures will continue after the end of the current quarter,” he said.
Irish banks have been relying heavily on ECB funds since September as the wholesale markets have stopped lending to them.
ECB lending to Irish banks jumped by €11 billion during the month to late October and is now estimated to be in the region of €90 billion.
Loans to Irish banks account for almost one-fifth of total ECB funding to European banks. The funding allows the banks to refinance loans due to be repaid to the wholesale markets.
In the past two months, the Central Bank has begun lending to Irish banks alongside the ECB, giving loans of approximately €20 billion in the period.
These loans are believed to be backed by assets that did not qualify as collateral for ECB purposes. AIB is believed to be among the banks borrowing from the Central Bank. Such a move would indicate the bank had run out of collateral that would qualify for ECB lending. A spokeswoman would not comment on the matter.
The pressure on the Irish banking system is also believed to be growing because of the withdrawal of deposits, which in turn creates an increased need for funding.
After the collapse of Lehman Brothers in the US in September 2008, lending by the markets stalled and the ECB made funding available to European banks. However, it now wants to wind down this form of activity and see banks return to the markets to secure funding.
One informed source said the ECB would be “disgusted” with the arrangement whereby Irish banks were getting funding from the Central Bank, though it would have agreed to the move. “That is an important point in this story.”
Another source said that the fact that the banks are getting finance from the Central Bank meant “the business model is broken”.
The ECB’s unhappiness with its increasing exposure to Irish banks is behind the push for Ireland to avail of the European Financial Stability Facility, sources said.
UCD professor of banking and finance, Philip Bourke said the ECB wanted to stop its exposure to the Irish banking system drifting.
He thought Ireland should not bet on the fund still being there in six months but should rather avail of it now when it was being invited to do so.
It was not certain that the upcoming budget and four-year plan would lead to resumed lending to Ireland by the markets.
“We have already lost face. The only issue now is the recognition of the loss of face.”
Associate professor of finance at TCD, Brian Lucey, said the need for funding arose from the fact that, 2½ years later, the Irish banking crisis remained unresolved. The Government had “consistently done too little too late”.
One source said the fact that the Central Bank was lending money to the banks meant it now owned “mortgages on soggy fields in Leitrim”.
He queried whether the money would ever be repaid.
A spokesman for the Central Bank had no comment.
