Central Bank lends a record €70bn

THE Central Bank lent domestic banks a record €70 billion in special funding in February, a jump of €19bn, underlining the fragility of the sector and the state’s exposure to it.

The jump in handouts increased pressure on Taoiseach Enda Kenny to secure more support for the country’s lenders from eurozone leaders at a summit in Brussels.

Irish banks, at the root of the financial crisis, are dependent on European Central Bank (ECB) funding and the Central Bank after suffering deposit outflows and being frozen out of interbank lending markets.

Irish banks’ reliance on ECB funding eased to €116.9bn from €126bn at the end of January. Some of this ECB funding is to foreign lenders based inIreland. In January, they accounted for around a quarter of those funds, the ECB said.

Taken together, banks in Ireland borrowed some €187bn from the ECB and the Irish Central Bank, equivalent to around 120% of the country’s annual economic output.

The Central Bank said yesterday that over half of the increase in its special funding was due to the ECB tightening its rules on collateral for loans. It now requires hard-to-value asset-backed securities to have two ratings rather than just one.

“A change in Eurosystem collateral rules led to some additional temporary reliance on exceptional liquidity assistance while the relevant collateral was being reconfigured to restore eligibility,” the Central Bank said.

A spokeswoman for the Central Bank declined to say whether there would be a reduction in special funding from the bank this month.

Oliver Gilvarry, head of research at Dolmen Securities, said Irish banks would likely get a second rating on their asset-backed securities, which are usually based on complex packages of loans, but that still left a significant jump in demand for special funding.

“It’s not a positive. It’s still showing that there is pressure in the system, a greater reliance on the ELA (Exceptional Liquidity Assistance) but we don’t know who is (responsible),” he said.

Reckless property lending brought Ireland’s banks to the brink of collapse, forcing the country to request an €85 billion EU/IMF bailout last year.

But with property losses expected to keep rising, investors still fear that the banking sector will bankrupt the sovereign, putting the new Government under pressure to wring additional concessions out of Europe on dealing with struggling lenders.

Taoiseach Enda Kenny wants Europe to help the country recapitalise its banks, reducing the burden on the sovereign, once the results of fresh stress tests are published at the end of this month.