Funding of Irish Banks

According to S&P’s recent report on Irish banks wholesale funding accounts for between 46% and 48% of the needs of the banks equivalent to the European average. The reluctance of banks to lend to each other has caused the interbank interest rate to go well above the key European Central Bank rate. The Irish Banks have relatively small exposure to the troubled asset classes including the U.S. subprimes and the bond insurers (monolines). Irish Permanent and Anglo Irish Bank are more vulnerable than AIB and Bank of Ireland. 

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Ratings of Irish Banks

Standard & Poors ratings of Irish Banks last September stated that all Irish banks had experienced a rise in their wholesale funding needs, driven by a sustained period

of high credit growth leaving Irish banks with a relatively high reliance upon wholesale funding compared with most banking systems. S&P found that Irish banks were comfortably managing their liquidity requirements while loan growth was expected to slow. While term wholesale funding was scarce, access to interbank deposit markets was sound and there remains some access to most CP markets. Customer deposit inflows (both retail and corporate) were solid. In addition, the ability to pledge eligible mortgage assets with the Central Bank provided a further source of funding. And usage of securitization was more modest than in the UK. Permanent TSB and IIB Bank had the highest reliance upon wholesale funding

At that time average reliance on wholesale funding was 50% for French banks; 66% for German banks; 50% for Italian banks; 55% for Nordic banks; 49% for Spanish banks; 45% for UK banks and 55% for Benelux  banks.

In relation to Irish banks wholesale funding accounted for 44% for AIB, 46% for Bank of Ireland, 36% for Anglo Irish Bank and 65% for Permanent TSB. Customer deposits accounted for 47% of AIB funding, 41% of Bank of Ireland, 64% of Anglo Irish Bank and 35% of Permanent TSB.

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Irish Banking System

According to the Daily Telegraph of last week the Irish property slump is creating dangers for the Irish Banking system. Prof. Nouriel Roubini in an interview in the recent issue of Business & Finance magazine says we are potentially facing greater problems than the United States because our construction industry comprises a larger share of the our economy. Given that US Banks are now failing, what is the future for Irish financial services? An international banker interviewed in the Sunday Business Post states that although Irish Banks have a minimal exposure to the sub-prime crisis, what are regarded as Irish prime mortgages will be shown to be less than that given the 100% lending that was taking place and the fall in the value of property over the last 12 months. With the fall in the loan-to-value ratios and defaults coming on stream, banks will start taking hits. In addition because of the social partnership the Government will not allow the banks to repossess large numbers of homes causing further hits for the banks. All this conjecture leads to the question “are our banks going to fail”?

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