NTMA ‘always sceptical’ of Anglo and INBS business models

The National Treasury Management Agency was "always sceptical" of the business models of Irish Nationwide and Anglo Irish Bank, particularly their heavy exposure to property lending and the limited distribution access of Anglo, its former finance director told the Oireachtas Banking Inquiry on Thursday.

“We had no credit limit for INBS so we did not do business with them and we restricted our credit limit to €40 million for Anglo Irish Bank even before the crisis started to emerge in 2007,” he said.

“However, from August 2007 we considered it prudent to reduce our counterparty credit limit exposure to the bank deposit market globally until a clearer picture would emerge.”

In relation to the bank guarantee, Brendan McDonagh, who is now the chief executive of the National Asset Management Agency, said there had been no "substantive discussion" involving himself or senior colleagues at the NTMA about a bank guarantee in the months, weeks or days leading up to September 30th, 2008.

He said the NTMA had “no involvement” in the actual decision to introduce the blanket guarantee, but it was the agency’s “strong view” that Anglo and Irish Nationwide should have been nationalised.

Mr McDonagh repeated previous evidence to the inquiry about being in Government Buildings, along with an NTMA colleague, on the night of September 29th, when the decision was made.

“We were not, as I have previously advised, made aware as to the reason why we were required or consulted or otherwise asked for input prior to the Government taking the guarantee decision,” he said.

Guarantee implications

“Once the Government had decided to introduce a blanket guarantee, my focus … was, you will appreciate, on the implications of that decision and its effect on the NTMA as the State’s debt manager and, most immediately, on how the NTMA would deal with the market and credit rating agency reaction to the decision at 7am that very morning.”

Mr McDonagh said the NTMA's engagement with the department of finance in the two weeks immediately before September 30th, 2008, had focused on three main strands: the provision of secured lending by the NTMA to the banks; input into draft legislation dealing with the possible nationalisation of two financial institutions; and the commissioning of Merrill Lynch on September 24th on behalf of the Minister for Finance to provide advice.

He said the NTMA had been engaged in discussions with the department of finance from April 2008 about the provision of emergency liquidity in circumstances where the Irish banks could not meet their funding requirements from the wholesale markets.

Mr McDonagh estimated that it had about €5 billion in liquidity available at that time across various mandates that could be lent for up to one year.

There had also been discussion about the NTMA accumulating a “war chest” of liquidity to deal with the emerging banking liquidity crisis, he said.

However, there was no appetite from longer-term bond market investors to invest on the scale needed to create a cash buffer to deal with even part of the potential fallout from the banks.

Mr McDonagh said the "first and only reference" to a blanket bank guarantee throughout all that engagement in September 2008 was an email that he received from William Beausang, assistant secretary at the Department of Finance, on September 26th.

The email sought the NTMA’s view on the potential sovereign implications of a guarantee.

‘Real exposure’

“I pointed out that the real exposure to the exchequer from the banking system had not yet been independently quantified and that would make any assessment of a bank guarantee extremely difficult,” he said.

The department’s email to him referred to a possible total funding requirement of about €100 billion for the two institutions expected to be nationalised, as estimated by Merrill Lynch, and also a wider guarantee for the other institutions.

“I pointed out that, in the event that such a major decision was made, the credit ratings agencies would be taken aback at the scale of State involvement,” he said.

In terms of placing deposits with Irish banks, the NTMA had made the decision around August 2007 to reduce existing counterparty credit lines with a range of global financial institutions and to stop placing deposits with any bank.

"The NTMA policy was to move maturing bank deposits back to the Central Bank of Ireland – we referred to it internally as 'safe harbouring' deposits," he said.

In mid-December 2007, the NTMA was invited to the latter stages of a Domestic Standing Group meeting with the department of finance and Central Bank to discuss the placing of deposits within existing credit limits with Bank of Ireland (€200 million), AIB (€200 million), Irish Life & Permanent (€50 million) and EBS (€50 million).

An existing deposit of €40 million with Anglo Irish Bank, with a maturity of one year, had been in place before the NTMA made its decision to cease placing deposits with the banks.

“The NTMA’s position at the meeting, which took place on December 12th 2007, was that, in the absence of a written direction from the minister, we did not intend reversing its policy of not placing bank deposits in financial institutions,” he said.

Following that meeting, the then minister for finance, Brian Cowen, wrote to the NTMA's chief executive Michael Somers on December 19th, 2007, directing the NTMA to place deposits with Bank of Ireland, AIB, Irish Life & Permanent and EBS.

Dearth of information

Mr McDonagh said there was a dearth of information and analysis available to the Government offering real insight on the financial state of the domestic banks.

It surprised him that there appeared to be only one or at the most two Financial Regulator staff engaged in close monitoring of each financial institution, even those institutions with balance sheets of up to €200 billion.

He said “considerable pressure” was applied in September 2008 for the NTMA to increase the amount of deposits placed with the Irish banking system as institutions began to lose liquidity.

The NTMA refused and advised that it was the role of the Central Bank to be the lender of last resort.

“This caused considerable tension but the NTMA maintained its position,” he said.