AIB and Bank of Ireland set to kill at ECB expense over €20bn in Covid loans

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The AIB and the Bank of Ireland are well placed to make a financial killing by depositing in Frankfurt a total of 20 billion euros borrowed from the European Central Bank (ECB) at extremely low rates while the rates of Official interest increases, unless officials can come up with a blocking mechanism.

The Financial Times reported on Saturday that officials in Frankfurt were considering ways to stop dozens of eurozone banks from earning billions risk-free by putting their cheap Covid loans on deposit in an ECB cash circular transaction.

The ECB fears reputational damage if it is seen as providing predominantly private banks with a windfall that boosts shareholder dividends and potentially even executive bonuses. However, nothing in the terms of the Targeted Longer-Term Refinancing Operations (TLTROs) can stop it.

If no solution is found, beneficiaries will include eurozone governments, who will receive a share of any windfall through the tax net and many of whom, including Ireland, are major shareholders in the banking system at the following previous bailouts.

TLTRO loans were one of several ECB stimulus packages in recent years, initially launched before the pandemic but adapted during Covid to give banks the confidence of a financial cushion to support customers during the initial period of uncertainty. The loans were conditional on banks not reducing all loans, but the conditions are generous.

TLTRO loans carry an interest rate of minus 1 pc.

According to analysis by Goodbody Stockbrokers, AIB had outstanding TLTRO loans of €10 billion on its balance sheet at the end of 2021 while Bank of Ireland had loans of €10.8 billion.

At least some of the cash held by Irish banks is already on deposit with the ECB, but is costing them money due to the negative interest rate on central bank deposits. This rate should go from minus 0.5 pc to minus 0.25 pc this month and at least zero in September. There is now an almost universal expectation that he will then move into positive territory.

Banks don’t have to repay TLTRO loans until 2024, so if no barriers are put in place, the trade will last for over a year.

The FT said the ECB would discuss the issue this week, although it would be difficult to make retrospective changes.

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