Ireland Financial News – Mortgages & Banking

 The Government has finally released details its controversial bank guarantee scheme, more than two weeks after the plan was first announced.

Minister for the Finance Brian Lenihan said the new regulations would take the Government deep into the banking system.

Under the scheme, taxpayers will guarantee all loans and deposits in the country’s banks and building societies.

One of the key provisions contained in the Bill will be measures to prevent abuse of the scheme.

The Government will raise €1bn over two years from the banks covered by the State guarantee. If the guarantee is called upon the banks involved will eventually have to refund the money.

Up to two directors, representing tax payers interests, will be appointed to the board of each bank and building society covered by the scheme.

They will be drawn from a panel approved by the Minister for Finance.

A new committee will oversee bonuses and pay of directors and executives.

Bonuses will be linked to a reduction of risk and long term sustainability of the banks.

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 The Financial Regulator has revealed that the six main Irish banks have loans totalling €15bn secured only against property.

Giving evidence to the Joint Oireachtas Committee on Economic Regulatory Affairs, CEO of the Financial Regulator Patrick Neary said that banks will undoubtedly suffer some losses on these property exposures.

He also outlined some measures contained in the Government’s bailout package.

The committee heard that in total, the six Irish banks have speculative lending on construction and property development totalling over €39bn.

Some €24bn of that is secured by additional collateral or sources of cash, leaving €15bn secured solely on property.

Mr Neary said currently the Irish banks are above their regulatory capital requirements, with ratios three points higher than the EU average.

But he said the extent to which the banks’ future profits will able to sustain their capital levels depends on what provisions they have made for their exposure.

Regulator to hire bank supervisors

Revealing details of the Government’s bailout plan, Mr Neary said the Regulator will immediately recruit 20 senior banking supervisory staff who will work in the banks.

He said the scheme will also require detailed business plans and extra reporting from the banks.

Mr Neary said he did not think he should resign and would continue in his job as long as the Regulatory Authority wished him to do so.

He said nobody could have possible forecast the scale of the current global economic meltdown.

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 The EU Commission has approved the Government’s €400bn guarantee that covers six Irish-owned banks and five foreign-owned financial institutions.

The announcement came as Taoiseach Brian Cowen returned from Paris where EU leaders had agreed on a big funding programme for banks and businesses.

Under the programme governments can use taxpayers’ funds to put new capital into the banks, either by buying bank shares or debt instruments issued by the banks.

It is the biggest move yet by European countries to mount a co-ordinated, system-wide effort to beat the credit crisis and Eurozone countries have agreed that they can do virtually anything to prevent bank failures.

Countries can now invest in bank equity to improve tier one capital rations and can buy up, insure or guarantee debt instruments issued by banks.

Eurozone countries can now take ‘toxic assets’ as collateral for government bonds.

Governments have also encouraged the European Central bank to start lending directly to big businesses through a commercial paper market, hoping that if big businesses get finance they will use it to pay the small businesses that supply them, boosting the flow of cash.

They also want a suspension of the so called mark-to-market accounting rules to try and halt the slide in the value of bank assets.

It will be up to each country individually to decide on which measures, if any, are needed.

Elsewhere, the British government has announced a plan to buy shares in the country’s banks to help shore up their balance sheets.

Under the scheme the government will take a 60% share in the Royal Bank of Scotland, worth £20bn, and around 40% of the combined bank which will be formed by the amalgamation of HBOS and Lloyds TSB.

The amount of money the British government is putting into RBS and HBOS is more than they are currently worth after last week’s losses on the markets.

Barclays said it will not have to turn to the government for emergency recapitalisation and will be raising £6.5bn from investors but will not be paying a final dividend for 2008, saving the group £2bn.

Meanwhile, Royal Bank of Scotland CEO Fred Goodwin has stepped down as RBS looks to recover from the credit crunch

The Taoiseach will travel to Paris later today for an emergency meeting of leaders from the 15 countries that use the Euro.

The meeting is being held at the request of Spain.

According to French reports, the leaders may be asked to back a plan to invest taxpayers’ money in banks in order to recapitalise them, and guarantee their debts in the interbank money market.

This is similar to the plan announced by the British government last week and by US Treasury Secretary Henry Paulson on Friday.

Using taxpayers’ money to buy bank shares, effectively a part nationalisation, would be difficult for the Irish government, which is attempting to plug a €15bn hole in the budget on Tuesday.

It is believed that Ireland would argue for any such scheme to be voluntary.

The Government already provides a guarantee for some bank debts.

Germany’s Finance Minster has said it is time to stop rescuing banks on a case-by-case basis and to move to a comprehensive solution to the credit crunch.

Ten days ago the Dutch proposed a €300bn bank capitalisation fund for all of the EU, but this was rejected by Germany and other states.

The European Central Bank, US Federal Reserve and Bank of England have all cut their key interest rates by half a percentage point.

The ECB interest rate now stands at 3.75%, the Bank of England rate is 4.5% while the US Federal Reserve’s key rate is down to 1.5%

The US Federal reserve said it cut the rate ‘in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.’

In a joint effort to stem losses coming from the financial markets crisis coordinated action has been taken by the world’s central banks.

The Bank of China, the Bank of Japan, the Bank of Canada, the Bank of Sweden and the Swiss National Bank have cut interest rates by 50 basis points or 0.5%.

The Governor of Ireland’s Central Bank, John Hurley, said the move was aimed at addressing the global lack of confidence in financial markets and institutions.

He said that, at a time of weakness in the Irish economy, the move should help to cut business costs and ease the repayment burden on mortgage holders.

He said it would also encourage investment and reduce strains on financial markets.

British banks have complained that the Irish legislation enabling a guarantee for Irish banks’ deposits would distort competition.

The British Bankers’ Association will deliver a letter to the Government later today.

It says the move has put banks in other jurisdictions, especially in Northern Ireland, at a competitive disadvantage.

Meanwhile, it has been reported that Britain’s Chancellor of the Exchequer, Alistair Darling, approached the Minister for Finance, Brian Lenihan, on the legislation.

The Guardian newspaper this morning quotes the British Treasury as saying that in two phone calls the Chancellor told Mr Lenihan ‘in no uncertain terms that the scheme was a problem for the UK’.

The Treasury says Mr Darling was given a sympathetic hearing and was told that Ireland was not seeking to undermine British banks.

Alastair Darling urged Mr Lenihan to open the guarantee scheme to British banks in Ireland and Mr Lenihan indicated that he would consider it.

In the course of last night’s Dáil debate, the Minister told the House that Ulster Bank had made an application to be included in the guarantee scheme, and said the Government would give careful consideration to that application.

British bank HBOS Plc, which is due to be taken over by rival Lloyds TSB Group Plc as part of a UK government-backed bailout, said it would apply to join the scheme.

HBOS has retail and business banking operations in Ireland under the Halifax and Bank of Scotland (Ireland) brands.

Savers in Britain have been moving cash into Irish banks since the Irish guarantee scheme was first announced, as well as into British post office savings accounts which are run by the Bank of Ireland.

The British Bankers Association is writing to the Government to complain about the distortion of competition caused by the guarantee package available to Irish banks.

There is now increasing pressure on Gordon Brown to follow Ireland’s lead and guarantee all British savers’ deposits.

The move would level banking competition but in theory could cost over a trillion pounds sterling.

The prime minister is setting up an emergency cabinet committee to take charge of Britain’s response to the financial crisis.

It is thought it will be on similar lines to the British government’s crisis management committee, known as Cobra.

News from RTE >>

The Seanad has passed emergency legislation giving effect to the €400bn Government guarantee to a range of financial institutions by 39 votes to 5.

The debate in the upper house began at 2.30am this morning, shortly after the Dáil overwhelmingly endorsed the plan.

There were some amendments to the Bill in the Seanad, so it now has to return for final approval in the Dáil when it resumes at 10.30am.

The Bill is expected to be signed into law by President McAleese around lunchtime.

The most important change is a stipulation that any agreement for support of a financial institution would have to be approved by both houses of the Oireachtas.

The Dáil sat until after 2am, the latest sitting in three decades, to debate the legislation, finally backing it by 124 votes to 18, with only Labour opposed.

In the course of the debate, Finance Minister Brian Lenihan confirmed representatives of the public interest will be appointed to the boards of institutions accepting the support. He said the State was gettng deep into the banking system, and must ensure that the taxpayer is protected.

He will also take action to prevent what he called excessive risk taking being rewarded in the remuneration of top executives.

The Minister confirmed the Government will consider applications for inclusion in the scheme from non-Irish banks with a significant retail presence here. Perhaps significantly, the only one he mentioned by name was Ulster Bank.

He told the Seanad that Monday night’s crisis meeting which led to the legislation was requested by the Chief Executives of the two main banks.

The legislation is being amended in the Seanad, so it will have to go back to the Dáil later this morning for final approval.

It is expected to be signed into law by President McAleese around lunchtime.

News from RTE >>

The Dáil has completed the initial stage of the emergency legislation giving effect to the €400bn guarantee the Government is offering to a range of financial institutions.

Minister for Finance Brian Lenihan said it was not a bail-out; the Opposition questioned aspects of the measure in a debate that will continue today.

Brian Lenihan opened the emergency debate by insisting that the measure was not aimed at protecting banks but at safeguarding the Irish economy.

It was not a bail out of the financial institutions concerned but was subject to terms and conditions, he said.

Mr Lenihan maintained that the exchequer was not exposed by the €400bn guarantee as in the final analysis the assets of the banks were worth €80bn more than that.

Fine Gael’s Richard Bruton said his party was supporting the bill because it prevented a potential run on the banks.

But it should provide for the Regulator appointing officers to sit on the banks credit committees so they did not take advantage of the guarantees.

He also questioned the criteria by which the six institutions concerned were chosen.

Labour’s Joan Burton suggested the pay of bank bosses who took advantage of the scheme should be capped at the level of the Taoiseach or Finance Minister.

Her colleague Pat Rabbitte said the bill might fall foul of competition law because of its exclusion of other institutions.

Fine Gaels Leo Varadkar said this was the only Tallaght strategy his party would extend to the government and woe betide ministers if a bank failed.

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No-frills bank accounts should be introduced to bring financially excluded people into the banking system, according to the State’s poverty watchdog.

The Combat Poverty Agency has urged the Government to abolish stamp duty on ATM and point-of-sale cards on these accounts.

It also says banks should train staff to be proactive in assisting people to open accounts.

According to the agency, 20% of Irish households lack bank accounts despite a proposal six years ago from the banks to develop a universal one.

It notes some recent progress with Postbank and some credit unions introducing products for low-income consumers.

It says Ireland has the fourth highest level of financial exclusion among the 15 long-standing EU states.

Doing without mainstream and appropriate financial services mostly affects poorer people, says the agency, and many turn to money-lenders.

Paying annual interest rates causes some families to accumulate debt, says agency director Kevin O’Kelly.

He recommends the new account should allow customers to withdraw up to €20 more than is available if necessary.

He also says bank staff should be trained in the variety of documentation that is acceptable for account opening, beyond a driver’s licence or a passport and a utility bill.

News from RTE Ireland >>

Minister for Finance Brian Lenihan has said that deposits in Irish banks are secure and that bank customers can rest confident in the knowledge that their money is safe.Mr Lenihan said that he is prepared to review the statutory guarantee limit for bank deposits, which is currently set at €20,000.

However, he said the question of an appropriate time to make an announcement about any changes to the guarantee still has to be decided by the Government.

Mr Lenihan said that he did not believe it was helpful to speculate about the legal size of the deposit guarantee in the current circumstances because the Government wants to ensure that all deposits are safe.

The minister insisted that deposits are not in any danger and said that people should not be going to banks to shift their deposit accounts on the basis of unfounded allegations made on radio programmes.

Mr Lenihan said that the Government will take whatever steps are required to ensure the stability of the Irish banking system and that nothing would stand in his way from ensuring that stability in the present circumstances.

He added that that the Financial Regulator had confirmed that, as of today, deposits are safe.

Short selling ban

The Minister also welcomed the decision by the Financial Regulator to ban the short selling of Irish financial stocks, which prompted a rally in bank share prices on the Dublin stock exchange this morning.
The regulator’s ban applies to AIB Group, Bank of Ireland, Anglo Irish Bank and Irish Life & Permanent.

The practice of short selling or shorting has been widely criticised for hastening and even causing declines in the share prices of many stocks in recent weeks and months.

Short selling is when a speculator borrows shares in a company from another party for a particular period of time and then sells them in the hope of buying shares in the same company again for a cheaper price.

The speculator then gives back the borrowed shares making a profit in the intervening trade.

While the practice has critics, others say the falling share values have little to do with shorting, and more to do with underlying very poor sentiment because of rising bad debts and falling profits.

Meanwhile, Anglo Irish Bank is reported to be in talks which may lead to a takeover of Irish Nationwide Building Society.

The development follows concerns about how the building society could be affected by the credit crunch.

It is understood that any merger would see Irish Nationwide branches remaining open.

Shares in Anglo Irish Bank rose by almost 29% to €5.60.

Management and staff at Irish Nationwide Building Society have been informed that the society has had no approach from Anglo Irish Bank in relation to a takeover.

Around 100,000 Irish Nationwide members would be eligible for a windfall in the event of a deal to compensate them for demutualising the society.

Until recent months, a figure of around €10,000 each was being mooted. However, that was before the financial crisis swept the markets and the deterioration in the economy.
Separately, Bank of Ireland has categorically denied reports that the bank is in any takeover talks or has received any approach from Spanish bank Santander or any other party.
World markets soar
Shares surged globally after intervention by financial regulators.

Irish banks rallied strongly with Bank of Ireland jumping over 37.5% to close at €5.20, while Irish Life and Permanent soared 20% to €6.13 and AIB added 19% to end of €6.23.

But despite today’s record gains, the ISEQ index of Irish shares is still below the 4,345 level it closed at last Friday.

Other European markets were up strongly, with the FTSE closing 9.3% higher at 5335.2, which is its biggest one-day gain.

In Paris, the CAC-40 jumped 9.27%, its largest one-day gain, to 4,324.87 points, and in Frankfurt, the DAX was up 5.56% at 6,189.53 points.
On Wall Street, the Dow Jones has gained 4% while the Nasdaq is up 3.7% as President George W Bush today pledged that the US government was acting to shore up the nation’s ailing economy.

The US government has unveiled a financial rescue package to increase confidence in the markets. The measures include buying billions of dollars of bad mortgage-related loans from American banks.

President Bush said the current economic challenges must be met with unprecedented action.

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