While Irish retail banks are salivating at the prospect of their bottom lines after the European Central Bank (ECB) raised its interest rates on Thursday for the first time in more than a decade, the opposite is case for the Irish institution to profit like nothing from the fallout from the financial crisis.
The Central Bank of Ireland has generated more than €23 billion of surplus income in the 13 years since 2008, driven by the response of central bankers in Dublin and Frankfurt to the imminent collapse of the domestic banking system and the euro, and a decade of anemic inflation across the euro zone (before the recent rise in consumer prices prompted this week’s rate action).
It was a period in which the Central Bank’s balance sheet sank from €50 billion to more than €200 billion as the Republic’s retail banks contracted sharply, as they sold off problem loans and unwanted assets. property, and households and businesses pay off debt quickly. after the credit bubble burst.
Some €18.4 billion – or 80 percent – of the Central Bank’s revenues have been transferred to housing over 13 years, easing the State’s finances while taxpayers have been forced to commit €64 billion to save the system. banking and successive governments have sought to reduce budget deficits. Indeed, the €2 billion-plus provided by the Central Bank in both 2018 and 2019 made all the difference in the only two years we saw budget surpluses following the crash.
The Central Bank’s income was driven during the height of the financial collapse by interest from domestic lenders, as they relied on the lender of last resort for scores of billions of euros in funding following a quiet run. on deposits – through computer clicks, rather than good. old queues in the streets.
Then came the 2013 restructuring of the nearly €35 billion bailouts of Anglo Irish Bank and Irish Nationwide Building Society, which, at the time, were merged and under the name Irish Bank Resolution Corporation (IBRC).
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Most of the aid given to non-lenders was not hard cash but through promissory notes – remember those? – that IBRC pledged to the Central Bank as collateral to obtain emergency loans.
When IBRC was put into liquidation in February 2013, the State gave €25 billion of government bonds to the Central Bank to replace emergency loans.
The Central Bank has been selling these bonds ever since, at a faster pace than previously planned to appease the ECB, which was concerned from the start that the restructuring of the promissory notes was dangerously close to funding the central bank of a government, which is prohibited in the EU.
The Central Bank has already sold €20.5 billion of government bonds at premiums as much as 65 percent above their normal value.
The massive gains were due to the ECB pushing market interest rates – or yields – over the past decade, initially with soothing words that it would do “whatever it takes” to prevent the euro from collapsing, but followed by multitrillion-euro bond-buying programs. As government bond rates have fallen over time – including a period in recent years when most of Ireland’s debt was yielding negative rates – this has led to an inverse rise in the value of the bonds.
Of course, the buyer of the bonds from the Central Bank was the National Treasury Management Agency, which had to borrow from the long-term debt markets to finance the transactions. But for governments making tough political decisions on budget days, the Central Bank’s gains in note sales are welcome.
Although interest income from government bonds fell when the Central Bank sold them, it has been making tidy sums in recent times from taking tens of billions of euros of excess deposits from to Irish banks and the Government.
AIB and Bank of Ireland, for example, now have around €50 billion more deposits than they need due to the shrinking of their loan books over the past decade and growth in household savings, which has been turbocharged by the Covid-19 pandemic.
Much of the excess liquidity has recently been stored at the Central Bank on behalf of the eurosystem, which attracts an annual charge of 0.5 percent under a negative rates policy the ECB began pursuing in 2014.
Last year alone, the Central Bank received €316 million in interest from commercial banks and almost €140 million from the Government for keeping their money – although some of this was partially repaid by interest costs on a special ECB credit facility with banks, which also carries negative rates and is designed to encourage lending.
The ECB’s move on Thursday to eliminate negative rates killed a good earner for the Central Bank.
Meanwhile, the Central Bank generated €244 million in interest income on bonds it bought on the market under ECB bond-buying, or quantitative easing, programs. The Central Bank held nearly €62 billion of such securities at the end of last year.
The ECB has halted net bond purchases under both its long-running QE program and a pandemic-related stimulus plan in recent months. This part of the euro zone’s central banks’ balance sheets – and income lines – will eventually be destroyed.
As the ECB unveiled a new bond-buying tool this week that will buy the bonds of European countries that have seen their market borrowing costs rise through no fault of their own, the hope, of course, is it need not be triggered in the case of Ireland. Even this, by default, will open a new line of income for the Central Bank.