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Peter Morrison (AP) / Gavan Reilly
Anglo Irish Bank

The Anglo break-up: the questions still to be answered

The announcement that Ireland’s nationalised bank will be split in two perhaps raises more questions than it answers. Here’s a few.

YESTERDAY’S ANNOUNCEMENT about the future of Anglo Irish Bank brought to an end months of speculation on the bank’s future shape, focus and structure – finally deciding on a compromise between the proposals for a long-term winding down, the favoured option of the Department of Finance, and a good bad-bad bank split as was advocated by the bank itself.

The announcement has, however, raised some more questions that have yet to be fully addressed. Here’s a selection.

How much is it going to cost?

The biggest question – and the one that most investors demanded to have answered before the international perception of Ireland was to improve – was what the whole exercise is going to cost.

And, in an arguably typically Irish way, that was the one question we didn’t get answered. The total amount it’ll cost is to be confirmed next month, once the scheme has been fully appraised by the Central Bank and the loan book of the new ‘recovery’ bank is fully examined.

Is the bank being wound up?

Officially, no. In practice, largely. The Department of Finance (in an FAQ document distributed to investors but not to the public) says the plan is a variation of the bank’s own plan to split into good and bad banks.

The fact that the recovery bank will take full control of the bank’s loan portfolio, however, and that neither bank will be engaging in any more lending for the future, essentially means that the focus of the new recovery bank is to dispose of the loan book as best it can so as to minimise taxpayer expense.

The government’s statement – that the recovery bank’s “dedicated focus will be on the work-out over a period of time of the assets not being transferred to NAMA” with the ultimate goal of selling it off – could leave anyone to conclude that the solution is a wind-down of sorts. Really it’s a combination of the long-term-winding-down and good-bad-split proposals.

Why are we setting up a recovery bank when NAMA is already there?

The Department says that the regulations about the setting up of NAMA mean that it can only take on assets (i.e. loans) with a minimum book value of €5m. Anglo’s loans over this amount will be taken onto the books of the national recovery agency anyway.

The costs of having to hand over the entire loan book of Anglo to the new recovery bank – which will, naturally, incur some significant set-up costs as well as everything else – are likely to raise the question of whether it would simply be cheaper, however, to hand over the entire Anglo loan portfolio (all of which is destined for the recovery bank) to the government-owned agency that already exists.

The chief argument against this is probably the government’s hopes that the recovery bank can be sold off – and may hope that the ultimate sell-off price could succeed the costs of setting it up. It’s a largely unaddressed topic.

How does the funding bank propose to make money or attract deposits?

Most traditional banks make their money by lending out the cash they have on deposit (or, more specifically, 10% of that amount) to earn interest which in turn can cover the cost of paying interest on savings.

In the new funding bank’s case, however, no lending’s going to go on. But in order to attract a decent amount of deposits, the bank will (presumably) have to offer a fairly competitive rate of interest. This will cost it money.

But how is the bank going to afford this? The government has declared that the activities of the two banks will be kept somewhat distinct – the deposits in the funding bank will be used to fund the asset recovery bank, but deposits are insulated from the loan values – and if loans do not perform, the government may have to foot the bill for the interest.

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