ECB has lent €69 billion to Irish banks

[Brendan Burgess]

The following exchange took place today in the Dail Committee


Mr. Patrick Neary: Deputy Varadkar asked about the level of European Central Bank borrowing. My colleagues in the Central Bank told me this morning that the total drawdown from the European Central Bank was €69.3 billion.
Deputy Leo Varadkar: Does this figure indicate how much the European Central Bank has lent to Irish banks?
Mr. Patrick Neary: Yes, it is the money drawn down into the Irish system.
Deputy Leo Varadkar: Does that take precedence over the taxpayers’ guarantee?
Mr. Patrick Neary: I am not sure about the ranking of borrowings from the European Central Bank. The guarantee has not been published and we must wait and see to what extent it-----
Deputy Leo Varadkar: In the view of the European Central Bank, any loans it gives to banks take precedence over anything else. In other words, those loans represent the most senior debt.
Mr. Patrick Neary: The European Central Bank would certainly have taken collateral against that exposure.
Ms Mary Burke: Until we see the details of the scheme, I cannot state specifically whether there are references to European Central Bank borrowing. The European Central Bank lends against collateral, that is, there must be European Central Bank-eligible collateral. The Central Bank would have the details. It is collateralised, secured lending.
Deputy Leo Varadkar: What type of collateral do Irish banks have to cover borrowings of €69 billion?
Ms Mary Burke: While I cannot list all the criteria, there is, for example, the mortgage-backed promissory note scheme, whereby certain residential mortgages can be used to collateralise the lending, depending on their loan to value ratio and performance, and provided they meet the ECB’s criteria.
Deputy Leo Varadkar: Effectively, were we not in the European Union, we would be in Iceland.​

 

[Brendan Burgess]

Deputy Leo Varadkar: It would include IFSC operations.
Mr. Patrick Neary: Yes, definitely.​

 

[barryl]

if the ecb gave irish banks 63 billion,why then do the banks need to be recapitalised?

 

[jhegarty]

if the ecb gave irish banks 63 billion,why then do the banks need to be recapitalised?

because there is never enough...

 

[barryl]

because there is never enough...

there must be more to it then this,has it anything to do with low share prices?

 

[Brendan Burgess]

The €69billion is a loan which needs to be repaid.

A large part of it is to international companies based in the IFSC.


Recapitalision is the injection of capital, i.e. shareholders' funds. This money is not repaid and is risk capital.

Banks can lend out around 12 times their capital. So if a bank has €1billion in capital, it can lend out €12 billion. If it has €2billion in capital, it can lend out €24 billion.

Banks are required to keep around 8% of their loans in capital so that they can handle bad debts. If their loans go bad, their capital is reduced and they are a much bigger risk. So they have to get recapitalise.

Brendan

 

[z109]

Brendan, there is no such 12 times leverage limit on banks in europe - that limit applies in America. The average limit of leverage of banks in europe is 35:1, with Germany leading the way at 52:1 and Ireland at 16:1 according to the Wall Street Journal.

 

[barryl]

The €69billion is a loan which needs to be repaid.

A large part of it is to international companies based in the IFSC.


Recapitalision is the injection of capital, i.e. shareholders' funds. This money is not repaid and is risk capital.

Banks can lend out around 12 times their capital. So if a bank has €1billion in capital, it can lend out €12 billion. If it has €2billion in capital, it can lend out €24 billion.

Banks are required to keep around 8% of their loans in capital so that they can handle bad debts. If their loans go bad, their capital is reduced and they are a much bigger risk. So they have to get recapitalise.

Brendan

Brendan,can the banks recapitalise themselves?If the government have to recapitalise the banks will new shares be issued by the bank ? or will they buy shares through the conventional route?and if they were fully recapitalised what effect would this have on share prices? (hope this is not in breach) thanks Barry

 

[jpd]

To recapitalise a bank, the bank needs to receive new money by issuing new shares. This has the effect of diluting the existing shareholders and reducing the value of the existing shares as future profit now have to be shared out to more shareholders. The usual way to do this is to issue new ordinary shares but in the UK, the banks are issuing preferential shares which have a prior claim on the company to ordinary shareholders.

I think you can safely say that the market has already assumed that this is going to happen and have marked the shares down as low as they currently stand.

If new shares, and particularly preference shares, are issued in a great quantity then it could be argued that even at the current low prices the existing shares are overvalued.

A lot depends on the state of the banks loan books and the information in the public domain at the moment is not very complete nor open with particular regard to the loans to developers.

Without detailed and verified information, it is impossible for an investor to evaluate the share price. Hopefully, the on-going investigation will shed some light on this, or else we will have to wait for the 2008 results due next Spring.