ECB support ‘is crucial’ to PTSB plan
However, it is believed the ECB is opposed to providing any sort of finance for legacy assets with a negative carry trade as it would create a precedent that would be used by other banks across the region.
The Department of Finance is responsible for proposing a restructuring plan for PTSB that will gain approval from the Directorate General of Competition at the European Commission.
The 99.8% State-owned bank has been loss-making since the financial sector collapsed in 2008.
The broad outline of the plan is to separate the PTSB into three divisions: a good bank; an asset management unit for the stressed assets; and a separate UK division.
Most of the stressed assets that will be transferred into the asset management unit will come from the bank’s €15bn tracker mortgage book. The main problem for PTSB is that its cost of funding is greater than the returns on these mortgages.
The biggest challenge for the restructuring plan is to put in place a funding mechanism for the asset management unit.
One source said the ECB would be the most appropriate body to provide funding for the asset management unit because it could provide liquidity at low enough rates to ensure that the division isn’t loss making.
The Government plan would see PTSB guarantee up to 20% of first order losses for its tracker mortgages. The Government would guarantee the rest of the book. It is believed that an ESM guarantee would also be sought in order to securitise these assets. A funding line could then be opened up with the ECB with these securitised assets used as collateral.
The ECB declined to comment. However, bank sources said that it is unlikely that there would be any support for this proposal.
When the Irish banks ran into huge difficulties from 2008 onwards, they relied heavily on emergency funding from the ECB.
The ECB funding was then used to finance the tracker mortgage books of AIB, Bank of Ireland and Permanent TSB.
The Department of Finance tried at the time to lock down this ECB funding for the lifetime of the tracker mortgages, but the Frankfurt headquartered institution was implacably opposed to such a move.
Over the past few years, the three domestic banks have paid back large chunks of the emergency funding to the ECB.
If the restructuring plan submitted by the department to the Directorate General of Competition fails to get approval, then it will be very difficult for PTSB to pass the ECB’s stress tests later this year, say sources.
The Department of Finance and the European Commission both declined to comment as negotiations are ongoing.
The Government’s cost of funding has fallen significantly since the country left the EU/IMF bailout programme before Christmas.
Sources speculated that the Commission might propose that the Government use its own balance sheet to raise money to finance the asset management unit. However, it would be politically very difficult for the Government to put any more money into the banking system.
A decision is expected by April.
