Irish Banks Aid Funding With Own-Use Bonds Amid Cyprus Woes

Irish lenders issued 8 billion euros ($10.2 billion) of bonds this week before the expiry of a government guarantee that allows them to be used as collateral with the European Central Bank.

Bank of Ireland Plc, the nation’s largest lender by assets, and Permanent TSB Group Holdings Plc printed 5 billion euros and 3 billion euros of the notes respectively this week, according to the National Treasury Management Agency website, before the government stops guaranteeing new liabilities today. The lenders will keep ownership of the notes, which they can exchange for ECB funding if needed.

“This is a very prudent move by the banks just before the guarantee expiry, giving them a collateral buffer, particularly after the uncertainty caused by the Cypriot bailout,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Cyprus has shown how things can flare up.”

Irish banks began issuing so-called own-use, or self-held, bonds in January 2011 to create collateral as they were locked out of public debt markets. Reliance on these notes, which must be backed by a government guarantee for them to be eligible with the ECB, has dropped to 3 billion euros in February from a peak of almost 18 billion euros before the state completed a 64 billion-euro bailout of its banks in July 2011, NTMA data show.

Unlike previous own-use bonds, which have matured after three months, the latest notes issued by Bank of Ireland and Permanent TSB won’t mature until March 2015, when the ECB is slated to stop accepting this type of collateral.

Shrinking Lending

The nation’s banks have relied heavily on ECB and Irish central bank emergency funding since they came close to collapse in September 2008 following the bursting of the country’s real estate bubble. Still, their dependency has fallen by more than a third since the middle of 2011, as lenders shrank the size of their loan books, won back some deposits and re-entered bond markets last year for the first time since 2010.

Deposits at Bank of Ireland, Permanent TSB and Allied Irish Banks Plc, the three government-rescued banks, have increased 11 percent to 155 billion euros from the 2011 recapitalization to the end of February, the most recent available figure. Their use of ECB funding plunged 37 percent over the same period, according to data published by the Finance Ministry on March 14.

Bank of Ireland will keep ownership of the bonds “for contingent liquidity purposes,” Anne Mathews, a company spokeswoman based in Dublin, said by phone today. A spokesman for Permanent TSB wasn’t immediately able to comment.

Permanent TSB Chief Executive Officer Jeremy Masding and Allied Irish CEO David Duffy each said this week that their deposit bases remained stable even as Cyprus started to inflict losses on customer savings.

Allied Irish doesn’t need to issue government-guaranteed “contingent liquidity support and incur the associated costs,” Niamh Hennessy, a bank spokeswoman, said by e-mail today. “AIB’s liquidity position is healthy.”

Before it's here, it's on the Bloomberg Terminal.