ANALYSIS: IRISH LIFE & Permanent's placing of up to €7 billion in deposits with Anglo Irish Bank before the bank's financial year ended – including €4 billion hours after the Government guarantee scheme was announced, on the day of Anglo's year end – shows how the bank scrambled to get money onto its balance sheet to strengthen its position.
The Financial Regulator and the Government-appointed directors at Anglo Irish are investigating the movement of deposits into the bank before its reporting year ended on September 30th and whether deposit inflows were used to artificially make the bank look financially stronger than it was.
The investigation will centre on whether this presented a false picture to prop up the bank at a time when there were concerns about whether it could survive.
The practice of placing short-term deposits is known in business as a "bed and breakfast" transaction because of its nature and duration. They are carried out to improve the finances of an institution.
Deposit levels are a key measure of financial strength and are closely scrutinised by stock market investors and analysts, so having up to an additional €7 billion on a bank's balance sheet would be hugely beneficial to the bank, improving its cash strength on the day the bank's financial year ended.
This was the day the bank's auditors, Ernst & Young, take a snapshot of the company's financial state for its annual report. Irish Life & Permanent withdrew the money within a week to 10 days later.
The €6 billion to €7 billion in deposits from Irish Life & Permanent at September 30th comprised 8 per cent to 10 per cent of Anglo Irish's year-end deposits from customers and other banks. Deposits from other banks at Anglo jumped from €11.6 billion at March 31st, 2008 to €20.5 billion six months later, while customer deposits dropped sharply from €54.5 billion to €51.5 billion.
In recent years, the bank consistently spoke of having long-term or "sticky" deposits. Despite the unprecedented movement of bank deposits in the market during the upheaval in world banking in September, Irish Life & Permanent's money helped Anglo Irish to show substantial deposit increases at September 30th compared with a year earlier when they stood at €7 billion. This would have reassured shareholders and analysts about the bank's strength.
Irish Life & Permanent said in a statement that it provided "exceptional support" to Anglo Irish during September 2008 and in particular on September 30th, the day the Government guarantee was unveiled.
Anglo Irish is the focus of the regulator's investigation into the deposit movements, though the regulator will have a significant list of questions for Irish Life & Permanent.
The company said last night that the deposits were "fully and appropriately accounted for in the books and records of Irish Life & Permanent and in our regular reports and returns to the Financial Regulator."
"During a period of unprecedented turmoil in global financial markets there was an acceptance that financial institutions would seek to provide each other with appropriate support where possible," said the company.
It would appear that Irish financial institutions were quick to assist one another at a time of unprecedented turmoil in international banking by placing deposits with one another.
This may have benefited Irish banks and the strength of Ireland Inc, but following a spate of controversies affecting the Irish banking sector in recent months it adds to the perception that there were cosy relationships between the banks.
This cosiness has damaged Ireland's reputation significantly after it emerged that Anglo Irish's former chairman Sean FitzPatrick concealed loans of up to €122 million by temporarily moving them off the bank's books to another domestic lender, Irish Nationwide Building Society, over eight years.
Banks in general were suffering heavy deposit withdrawals in the aftermath of the collapse of US investment bank Lehman Brothers on September 15th, 2008. Irish banks, and in particular Anglo Irish, suffered large outflows during the month, as concerns grew about whether Anglo would survive.
Last December Anglo Irish confirmed at its annual results presentation that the bank had lost €4 billion in large corporate deposits and deposits from other banks following Lehman's collapse.
The loss of deposits revealed the pressure the bank was under during the month and puts into context why Irish Life & Permanent injected up to €7 billion for a period of weeks than to bolster Anglo Irish's funding position.
However, it also raises the question that Anglo Irish had actually lost €11 billion in deposits during the month of September if the Irish Life & Permanent's temporary deposits of €7 million are excluded.
Anglo Irish said that €6 billion flowed back into the bank after the bank guarantee scheme as other depositors and banks took advantage of Anglo's high deposit rates and State guarantee. The inflow of deposits allowed Irish Life & Permanent to withdraw its €7 billion without having any effect on Anglo.
Sources at other banks expressed amazement at the size of the deposits placed with Anglo Irish and believe that such a large deposit could not have been lodged with the bank without the approval of the Financial Regulator and the Central Bank which had the industry under close scrutiny at the time when the worsening liquidity crisis threatened the stability of all institutions but particularly Anglo.
One senior banker said that most institutions would only be able to place a maximum deposit worth several hundred million euro with any single bank - even a bank with a very high financial rating.
It is also not yet clear whether Irish Life & Permanent charged a substantial fee for placing such a massive sum of money with its rival Anglo Irish.
To understand the mounting pressure on Anglo Irish last September it's also worth considering other moves by the bank to strengthen its financial position at a time when liquidity was drying up. At one point that month Anglo Irish floated the idea of taking over Irish Nationwide, a smaller lender. It also made a tentative overture to Irish Life & Permanent about a possible merger around the same time.
Merging with either institution would have given Anglo Irish easy access to discounted European Central Bank (ECB) funding under the Frankfurt-based bank's liquidity system, which kept most financial institutions afloat as bank funding dried up as the credit crisis worsened sharply.
Banks can only use residential mortgages as collateral to draw down ECB funding. Anglo Irish is predominantly a specialised commercial property and investment lender with no residential mortgages, while Irish Life & Permanent is the State's largest mortgage lender with a loan book of €40 billion and Irish Nationwide has a small residential mortgage book.
Both of Anglo Irish's merger ideas came to nothing, but around the same time Irish Life & Permanent was willing to support Anglo Irish with deposits of up to €7 billion for several weeks.
The deposits were crucial in keeping Anglo Irish's head above water at the height of bank funding crisis and painted a rosy picture of the bank's financial health on the day its accounting year ended.
The regulator and Government are investigating whether Irish Life & Permanent's deposits created a false picture of Anglo Irish and its effects on the bank's accounts, shareholders and corporate governance.
Volatility in deposits was one of the reasons that forced the Government to nationalise the bank last month, so the investigations need to establish whether this volatility was exacerbated by the substantial, temporary deposit movements between rival Irish lenders.