The Heirarchy in AIB (and any bank for that matter)

It is simple, and it is straight forward, there is a line of people who take the pain when banks encounter problems and it goes like this:

1. Equity Holders 2. Preference Share Holders 3. Mezzanine Finance 4. Subordinated 1 5. Subordinated 2 6. Lower Tier 1 7. Lower Tier 2 8. Senior Bonds & Depositors

So we don’t need to get caught up in taxpayer solutions because there is already people who are willing (by the nature of buying a risk instrument) to take the pain for us. I have mentioned this before when talking about the reasons for a borrower bailout not being likely.

I was impressed with Philip Boucher-Hayes’s podcast on this topic yesterday. And specifically the call to ‘Close AIB’ by Dr. Stephen Kinsella. Closing banks that are not up to scratch is something I have been advocating for years, perhaps the best public statement was on Newstalk back in January 09′. When I spoke about closing Anglo and the …

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The reason why mortgage rates don’t have to go as high as bond rates.

Dr. Peter Bacon made an interesting quote stating that he thought that

“The first is I think households are going to be more cautious about spending than is assumed in some forecasts. The second is I think the interest rate consequence of international certainty is going to be a deterrent to investment taking place.”

Earlier, Dr Bacon told the audience that Irish firms borrowing money would ultimately end up paying interest rates that were linked to the cost of Irish government borrowings.

“You can call it yourself as to where the risk premium on government bonds is going to go — where it goes there goes general interest rates for companies in Ireland. In the long term, the cost of finance will be 200 or 300 basis points above the cost of government borrowings.”

The difference between government borrowing and bank borrowing is that people don’t lodge money with the state at zero interest. We do pay taxes, and buy low interest state products via the post office, but on the whole, there …

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Central Bank Reform Bill 2010

We all want ‘tough regulation’, I would argue it doesn’t need to be tougher, rather it needs to be more pragmatic and enforced, and of those two criteria enforcement being the greater.

The Central Bank Reform Bill 2010 is going to give God powers to the Central Bank/Financial Services Authority of Ireland. Essentially it sets out a framework whereby they can call all of the shots, right down to how companies promote people.

In Part 3 s20(2) they can determine either by their interpretation of title or their interpretation of a persons role, whether they have any controlling function, and if so they require CB/FSAI authority in order to do their job, this is an additional layer of HR activity that will be injected into financial services companies.

Part 3 s35(i) states that a function requires pre-approval if the CB/FSAI deem it to be so on grounds of ‘size or complexity’, yet they don’t state any parameters for same, meaning a mom & pop shop could fall under these rigours based upon the …

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AIB Interest Rate Hike: How much? To Who? What’ll it cost?

Yesterday AIB increased interest rates for both existing and new borrowers. This comes as a huge blow to consumers, in particular given that the consumer is the same taxpayer who has done so much to bail out the bank. Do people have the right to be angry? Hell yeah they do!

The move has been coming for quite some time, we have been harping on about this for over a year, the most recent prediction was to put a time-frame and figure on the hikes, stating that it would start in Q1 of 2010 and in the course of the year we’d see c. 100 basis points or 1% of an increase across the board with a further 50 basis points or 0.5% in 2011. Today’s Independent has stated that we can actually expect all of it in 2010.

Why is this happening?

Simply put, the banks are not charging enough to cover the costs of loans that are not performing. In a way you …

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Why does a state owned bank subsidise depositors?

There is concept in finance of a ‘risk free rate’, and normally that is seen as being the rate of return on money by a sovereign entity (in our case it’s Ireland), so in a rational market it should always be the case that anything with an implicit state guarantee should pay far less than those without it, because those without it have to reward investors by offering more in order to attract them.

Oddly, in Ireland the institutions implicitly backed by the state are actually paying over the odds, and in effect that means a transfer is occurring from tax-payer to depositor, in short, we are being ripped off when our sovereign guarantee is not factored into pricing.

For example: Anglo Irish Bank are paying 3.1% for a demand account, this means you can take your money out whenever you want, BOI, AIB, INBS, NIB and many others are paying a mere 0.1% meaning that Anglo are paying a full 300 basis points or 3% more than competitors who …

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Taxing Banks & Taxing Risk

In the first clip, James Galbraith (son of the famous JK), economics professor at University of Texas, discusses whether a new tax on big banks is justified. Ken Bentsen, of the Securities Industry & Financial Markets Association, and Mark Calabria, of the Cato Institute, share their insight as well.

In the second clip Mark Walsh, of ‘Left Jab,’ and Dan Mitchell, of the Cato Institute, discuss taxing banks based on their risk to the system.

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Who gets the best deals on insurance? (depends who you ask!)

The Financial Regulator regularly does ‘cost surveys’ to help the Irish public determine what the best deals are on the market, it would seem that in some cases they are actually driving people directly to certain insurers because they don’t survey the whole market! Indeed, as this weeks Sunday Times article by Niall Brady shows, Brokers were able to beat the ‘best price’ quoted by the regulator in almost every example, and it wasn’t only by a few cent either! In one case it was about €500 per annum, and in many others it was €100 p.a. – now on the other hand, if a broker went and made a person pay that much more than they had to then they’d be lynched, but when the regulator does it’s just an ‘oversight’… Quis costodiet ipsos custodes? Click on the picture below if you want to see a larger more readable version of it.

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Banks are not competitive?

Roger Bootle notes that markets do quite well at the end of a recession and at the start of a recovery by drawing the benefits of the future down into the present. Roger has a lot to say on the topic of banks, in particular that of banker bonuses – he states (and we agree) that when banks become ‘too big to fail’ they essentially are oligopolies and hence they are able to pay so well. From an Irish perspective the domination of AIB and BOI put some stock in this theory.

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