Central Bank risk?

DWCommuter

From the SBP

http://www.businessandfinance.ie/index.jsp?p=450&n=465&a=1764

A staggering €50 billion of emergency funding to Irish banks by the Central Bank of Ireland could pose a threat to the very solvency of the Central Bank itself, a report by Citi has concluded.

The report, which examines the €50 billion in emergency liquidity assistance (ELA) provided by the Central Bank of Ireland (CBI) to Irish banks, also concluded that ‘‘it is likely that the collateral offered (by the Irish banks) would not be accepted by the ECB’’.

Citi suggested there was considerable secrecy around the precise mechanism under which this €50 billion was lent out, and the Central Bank has declined to comment.

Without firm confirmation from the Central Bank, it appears that the €50 billion in emergency liquidity is in some way guaranteed by the Irish state.

If it were to be added on to the national debt, it would increase the country’s national debt profile by 31 per cent of GDP, according to Citi.

There does not appear to be a publicly available document which shows the Irish state has guaranteed this €50 billion.

Citi said that, if this money, provided to banks for their short-term cash needs, was not guaranteed and any prospective losses were not shared across the eurozone, then ‘‘the Central Bank providing it is at risk of insolvency’’.

The amount accounts for 24 per cent of the Central Bank’s total assets.

Any losses on these loans above the Central Bank’s €1.5 billion of capital would place it under extreme financial pressure.

Citi said that, even if the emergency loans were covered by the state, ‘‘some risk of insolvency of the CBI because of its exposure to ELA remains, in our view, because the solvency and liquidity of the Irish sovereign itself is not beyond doubt.

That raises the spectre that, should the guarantees be called, the Irish sovereign may not be in a position to indemnify the CBI against these losses.

‘‘The reluctance of the ECB and national central banks to discuss ELA suggests a certain uneasiness about the loss of monetary control and potential negative reputational and financial repercussions."

Under eurozone rules, national central banks can issue emergency liquidity assistance outside of the euro money system.

The ECB has the power to veto such a move, but it is available to central banks as an option.

They don’t have to have this funding in cash and the deposits can be created, but ultimately the bank or its national government is liable should the banks fail to repay.

Scaremongering or genuine risk?

ei.sdraob

Yeh we noticed something funny was up few months ago and discussed in this thread here

All of this funny money will sure make Ireland appear as an attractive investment...

JTMan

The Financial Times have been talking about the consequence of this 51 billion EUR recently as well. Their conclusion was that it could bring down the Irish banking system when crystallised as a loss.

With the ongoing deposit flight, one has to question how much more support the CBI can provide to the 6 Irish banks before deposit controls are put in place or the house of cards collapses.

DWCommuter

After reading the link above, I would have thought this was a pretty important issue. If it comes to pass we could be in more serious trouble. More opinions welcomed.

later12

Ironically enough, the provision of this 'indigenous' ELA would pose its greatest danger to the Irish state, and I mean the state instead of the banks, if we altered our banking policy by letting the banks fail.

The Eurozone's banking system has now pretty much normalised with the exceptions of the Portuguese, the Greek, and the Irish banks. We retain the so called 'addicted' banks who are entirely dependent on the provision of emergency liquidity as a sort of life support measure.
This is not a particularly good thing since (a) it means paying a higher rate of interest for liquidity, as is already happening and (b) it means that the ECB are likely to at the very least seriously consider bringing ELA to a close when its governors convene again in March. That adds some uncertainty and it would be complacent of the central bank and the Irish Government to deny that such further uncertainty is a worry for the capital market.

That doesn't concern the banks since they're effectively locked out of the capital market anyway and have no real hope of getting back in, but it ought to be a worry for the sovereign economy.