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Emergency loans to Irish banks rose €19bn in February 2011 while the net increase was €10bn

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EMERGENCY LOANS to Irish banks rose by as much as €19 billion last month as the European Central Bank (ECB) changed collateral rules, forcing the lenders to borrow more from the Irish Central Bank.

The banks increased their borrowing under exceptional liquidity assistance (ELA) to as much as €70.1 billion at February 25th from €51.1 billion in late January. A further €116.9 billion was borrowed by the banks at the ECB, a decrease from €126 billion the previous month.

This brought the borrowings of the banks in Ireland from the central banks in Frankfurt and Dublin to €187 billion, a net increase of €10 billion during the month.

The gradual loss of deposits at the Irish banks over the past year has led to a surge in borrowing from the ECB and under ELA.

Reliance on central bank funding was €100 billion a year ago – €85 billion from the ECB and €15 billion from ELA. The Central Bank does not disclose the actual level of ELA by the banks but includes it on its balance sheet figures under “other assets”.

ELA, however, accounts for the bulk of this figure. More than half the increase in ELA related to the “collateral issue”, the Central Bank said. “A change in the euro system collateral rules led to some additional temporary reliance on ELA while relevant collateral was being reconfigured [by the banks] to restore eligibility.”

The ECB changed the requirements on credit ratings on asset-backed bonds used as collateral to borrow in Frankfurt on March 1st.

The banks had to have two eligible asset ratings for those securities to remain eligible for loans drawn from Frankfurt from the start of this month.

ECB drawings are expected to increase again by the end of next month as loans are swapped back from ELA following changes in the credit ratings of collateral.

Dermot O’Leary, chief economist at Goodbody Stockbrokers, said reliance on Irish Central Bank funding was “worsening”.

“It is a real sign of the self-help that the banks have had to do over the past few weeks because they don’t have access to funding markets and they don’t have the collateral to get loans from the ECB.”

Emergency overnight borrowings at the ECB by Anglo Irish Bank and Irish Nationwide to facilitate the sale of deposits surged by €17 billion during the month.

This figure dropped again as the loans were swapped back into the ECB’s longer-term facility and are included in the €117 billion loans.

Mr O’Leary said the ECB was “on the hook” to the banks for €187 billion on loans advanced by Frankfurt and Dublin. A long-term loan may have to be agreed with the ECB or the European bailout fund to finance the banks as they are reduced in size, he said.

The EU-IMF programme aims to wean the banks off central bank funding and to reduce their size through asset sales so that they can fund themselves.

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