ANALYSIS:ANGLO IRISH Bank's board and its audit committee were not informed about the back-to-back nature of the €7 billion deposit arrangement with Irish Life Permanent (IL&P) last September, The Irish Timeshas learned.
It is understood that Anglo Irish’s recently-appointed executive chairman Donal O’Connor, a director of the bank since June 2008, was only informed last month about the circular mechanism used to transfer the €7 billion temporarily from Anglo Irish to IL&P and back again to Anglo Irish.
He became aware of the nature of the transaction after requesting a report detailing any further risks facing the bank when he became chairman in December following the resignation of Seán FitzPatrick over the directors’ loans scandal.
Mr O’Connor received the report, which contained details of the arrangement, from the management team at Anglo Irish last month.
Around the end of last September, Anglo Irish placed deposits of up to €7 billion with ILP, which in turn placed €7 billion through a non-banking subsidiary, Irish Life Investment Managers, back with Anglo Irish.
The use of a non-banking IL&P subsidiary enabled Anglo Irish to categorise the loan as a customer or corporate deposit, rather than as an inter-bank deposit.
Customer deposits are regarded as a more secure or “sticky” source of funding in the banking industry. They are a key measure of financial strength closely monitored by stock market investors and analysts, and are assigned a higher standing of financial strength than inter-bank deposits.
The categorisation of the €7 billion as a customer or corporate deposit allowed Anglo Irish to prop up its deposit levels and mask the dramatic levels of deposit withdrawals from the bank during the the second half of September when the bank’s survival was in question due to the financial crisis.
The financial regulator and Anglo Irish’s Government-appointed directors are investigating whether the transaction – and its categorisation – artificially propped up the bank and gave a false picture of its financial health at a time when the financial institution faced potential collapse.
Some €4 billion of the deposit was placed with Anglo Irish on September 30th, the day its financial year ended and its auditors assessed the books of the bank.
The regulator and the Department of Finance became aware of the transaction last October in the PricewaterhouseCoopers (PwC) report into the six guaranteed Irish-owned financial institutions.
Minister for Finance Brian Lenihan was not told about the transaction until last month. He has said he did not read the PwC report in its entirety.
The regulator also discovered the transaction in September returns filed by IL&P and Anglo at the end of the following month.
Daily liquidity reports, showing deposit inflows and outflows at the six institutions, were submitted to the regulator in September and October, but these only showed the deposit levels in aggregate and did not specifically outline the Anglo Irish-IL&P arrangement.
The regulator and Central Bank encouraged the Irish banks to place inter-bank deposits with one another to ease the liquidity shortage during the financial upheaval in September as part of what became known in discussions as the “green jersey agenda” to protect the stability of the system.
On September 29th, the night before the bank guarantee was introduced, it is understood that AIB and Bank of Ireland were asked by the regulator whether they could inject liquidity in the form of inter-bank deposits into the Irish banking system.
Both banks said they could each provide €5 billion, but the money was ultimately not required as the Government introduced the guarantee, which led to a large inflow of deposits back into the system.
AIB and Bank of Ireland have each placed €3 billion on deposit with Anglo since the lender was nationalised last month to support the bank’s funding position.
