Who has given the CB 44 billion to give to the Irish banks for deposit withdrawls

Hi all,

I have been reading this forum with interest over the last few months. I have been trying to get my head around what is going on with deposits at the Irish banks at the moment. Can anyone answer the simple question ... Who has given the Central Bank in Ireland 44 billion to give to the Irish banks to cover the tidal wave of deposits leaving the Irish banks?

I understand how the ECB can print money but I don't understand where the Central Bank in Ireland have got 44 billion. Sorry if this is a silly question.

Thanks,
Ruth.

Not a silly questions. It is a good question. I have been talking to people about this very point in recent weeks.

Firstly, the 150 billion in ECB/ICB liquidity is not just to cover deposit withdrawals, it is also to cover the fact that Irish banks are still locked out of the inter bank market for day to day liquidity.

There are several possibilities as to what is going on:

1) Proxy ECB Money.
The Sunday Tribune previously suggested that the Central Bank of Ireland cash was merely ECB emergency liquidity re-dressed. In other words the ECB is wiring money to Central Bank of Ireland who are wiring the money to the Irish banks. This enables the ECB to not take the risk and for the Central Bank of Ireland to accept junk as collateral from Irish banks that the ECB would not accept.

2) More Promissory Notes.
The Central Bank of Ireland are giving Irish banks promissory notes rather than supplying 'cash liquidity'.

3) 'Cash on hand' is moving from the Central Bank of Ireland to the Irish banks.

So which is it? (or is something else going on?)

A five minute glance at the accounts of the Central Bank of Ireland would appear to discredit possibility number 3.

I have previously discussed option 1 with some knowledgeable people and they have all dismissed possibility number 1. The ECB would need to declare liquidity that it is providing to the Central Bank of Ireland.

This would appear to leave promissory notes as the potential source. This is worrying as there is no 'real cash' to back up the flows and it will exasperate issues if/when the 44 billion+ is crystallised as a loss.

I am happy to be corrected on this point. Does anyone else have knowledge of where the Central Bank of Ireland are getting the 44 billion+ ?

Brian Lucey just tweeted a link to this page:

http://www.irishelection.com/2011/0...mpaign=Feed:+Irishelection+(IrishElection.com

http://www.ecb.int/pub/pdf/other/ccbm201101en.pdf

This is may or may not be directly related the ICB liquidity to the Irish banks, but it would add weight to suggestions that some sort of promissory note scheme is going on behind the scenes:

The ECB has published their 2011 rules for the Correspondent Central Bank Model – this is the system that allows debt instruments issued in one country to be used in another country as collateral to get funds from that other country’s central bank.

It’s mostly a procedural document but it does contain a discussion of something called “The Irish Variant” (p12), which refers to how Irish Mortgage-Backed Promissory Notes should be handled. These appear to be a form of IOU which Irish financial institutions can write and have them backed by their pool of mortgages — but to be able to sell the IOUs to anyone else, they need to have them further backed by the Central Bank of Ireland so they will be taken by other Eurozone central banks for credit to whoever buys them.

This facility is no doubt useful for the Irish institutions during the crisis and it appears to be an additional channel of liquidity for them on top of the guarantee scheme and the NAMA bonds. But among the interesting points about the facility is that it is not new — there are mentions of it going back to at least 2002. Here for example is the Irish Central Bank’s annual report for that year –

In 2002 domestic credit institutions collateralised Eurosystem operations mainly through the use of Tier One eligible assets. Significant use was made of domestic Tier One collateral; in addition the use of Tier One assets issued in other member states continued to increase. The use of Irish mortgage-backed promissory notes which are included on the Tier Two list also increased, underlining their importance to the local market.

Click to expand...

From the ECB report:

THE IRISH VARIANT

Specific details of the procedure for Irish
Mortgage-Backed Promissory Notes
When initiating the use of the CCBM for this
type of asset the counterparty must arrange
with the original issuer of the promissory
note(s) to have them completed in the name of
the Central Bank of Ireland. As the promissory
note(s) are held at the Central Bank of Ireland,
the instruction to do so must pass from the
original issuer to the Central Bank of Ireland.
The Form of Authorisation which initiates use
of the model must be forwarded to the Central
Bank of Ireland. A non-resident counterparty
must enter into a mutual agreement with the
Central Bank of Ireland before promissory
notes can be mobilised. A counterparty which
is the benefi ciary of one or more mortgagebacked promissory notes already in issue may
enter into a Eurosystem credit operation with
another participating NCB, by instructing ...

Click to expand...

Thanks Ciaran. So it's invisible money via promissory notes. Does Bernie Madoff work for the CB ? Could this whole house of cards collapse?