3.3 19 July 2010 Mr Ted Mc Enery Clerk to the Committee of Public Accounts Leinster House Dublin 2 Dear Mr Mc Enery I refer to your letter of 15th July 2010 concerning the Committee's private session on that date and the items the Committee has requested the Department to furnish. I have enclosed a schedule of key documents in relation to the bank guarantee that were not released to the Committee. Also enclosed is a schedule of the DSG meetings that have been held since that group commenced in July 2007. Notes of most of the DSG meetings listed have already been provided to the Committee. I should note of course that in identifying documents as 'key' we have exercised a certain amount of judgement to avoid the necessity of producing a large volume of documentation of lesser importance to the deliberations of the Committee. The documents concern the 'run-up' to the decision to give a general Government guarantee, and do not include any record of the actual deliberations of Ministers in preparation of the Government decision or the subsequent process leading to the legislation a few days later, and thereafter. I think the Committee will see from the volume of documents provided that we are endeavouring to be as helpful as possible. Finally, attached to this letter is a note on the working of the DSG as a mechanism to facilitate information exchange between the relevant national authorities. Yours sincerely Kevin Cardiff Secretary General Attachment Domestic Standing Group on Financial Stability The EU Economic and Financial Committee (EFC) agreed in September 2006 and the Ecofin Council endorsed in October 2006, a list of measures that Members States were to implement with respect to their domestic financial stability frameworks. One of these measures was the establishment of a domestic standing group on financial stability. Under the agreed EU position the purpose of the national DSGs was to facilitate cooperation and information exchange between the relevant national parties with different roles and responsibilities with respect of the maintenance of stability. It was also envisaged that national DSGs would undertake the preparation of contingency plans and arrange and participate in simulation exercises. An Irish DSG comprised of representatives of the Department, the Central Bank and the Financial Regulator commenced meeting in January 2007 and agreed a MoU in July 2007 which sets out the principles for cooperation between the authorities. Formal meetings of the DSG began following the signature of the MoU in July 2007. The primary focus of the DSG following its establishment was to begin to strengthen financial stability planning arrangements in Ireland. This work intensified following the onset of the liquidity crisis in August 2007. While the MoU between the parties provided for a rotating Chair the Department of Finance called and chaired most of the meetings. The discussion at the DSG was generally recorded in the form of a Note to the Tanaiste/Minister for use at Cabinet, or a Memorandum for the Information of the Government. Matters raised at the DSG were considered important enough that the Minister was kept informed and speaking notes were sometimes prepared for his use at Cabinet if he deemed it appropriate. For this reason and to protect the confidentiality of discussions at the DSG, a separate set of additional meeting notes was not generally kept by the Department. Paragraph 8.7 of the Honohan Report on the banking crisis draws attention to the importance of good communication channels between the main public agencies dealing with financial sector matters confirming the different roles of the various agencies in Ireland:m o o The FR intended to have the best knowledge of the condition of each of the banks The Central Bank with policy responsibility for financial stability and decision making responsibility on the provision of emergency liquidity and the Department of Finance representing the Government interest in relation to the fiscal costs of a crisis. As discussed in paragraph 8.8 of Governor Honohan's report the Memorandum of Understanding establishing the DSG made clear that the role of the DSG did not impact on the legal responsibilities of each of the participants. Rather its primary focus encompassed the following matters:o ? D B the provision of information on market and regulatory issues contingency planning for crisis management participating in crisis simulation exercises principles for resolution of financial crises Reflecting the deterioration in the international financial environment and the dislocation in credit markets in particular from August 2007, the priority in respect of the work of the DSG as evidenced by the reports produced following its meetings in the course of 2008 was to provide the Minister and Government with an up-to-date assessment of the financial market conditions and to inform contingency planning arrangements. These reports were intended to fully represent the exchange of information at the meetings of the Group. Table of Key Documents not released to the PAC Date Tuesday 29/01/2008 Document Letter from the Office of the Attorney General to Department re Financial Stability Contingency Planning and Legal Issues Arising Comment Not released - the document is subject to legal privilege as it contains advice received from the Office of the Attorney General (AGO) Not released - Document was submitted to Tanaiste for use at Government meeting and is subject to Cabinet confidentiality Not released - the document is subject to legal privilege as it reveals AGO's advice. Consultation note enclosed with letter was released to Committee. [No. 32 on Bank Guarantee Documents schedule] Not released - document contains confidential institutionspecific information Not released - document contains confidential institutionspecific information on the funding position of a particular institution Not released - the document is subject to legal privilege as it contains advice received from the Attorney Not released - the document is subject to legal privilege as it reveals AGO's advice Tuesday 01/04/2008 Note for Tanaiste to update Government on Financial Market Developments Tuesday 29/04/2008 Letter from Department to the Office of the Attorney General re Financial Stability Contingency Planning and Legal Issues arising Wednesday 07/05/2008 Summary re Irish banks for new Minister Monday 19/05/2008 Note to Minister re Funding situation Tuesday 20/05/2008 Advice from the Attorney to Department re Financial Stability Contingency Planning and Legal Issues Arising Letter from Department to the Office of the Attorney General re Financial Stability Contingency Planning and Legal Issues Arising Advice from Attorney to Department re Submission to Minister re Financial Stability Contingency Planning (with associated e-mail of 21/07/2008) Internal e-mail re position of Heads of Bill Friday 13/06/2008 Sunday 20/07/2008 Not released - the document is subject to legal privilege as it contains advice received from the Attorney Not released - the document restates advice received from the Thursday 07/08/2008 1 Date 10.50 Document Comment AGO and therefore is subject to legal privilege Monday 08/09/2008 Letter from Office of the Attorney General to Department re Legislative proposals - financial stability contingency planning Letter from Department to Office of the Attorney General re Contingency planning Letter from Office of the Attorney General to Department re Financial Stability Bill Not released - the document is subject to legal privilege as it contains advice received from the AGO Not released - the document is subject to legal privilege as it reveals AGO's advice Not released - the document is subject to legal privilege as it contains advice received from the AGO Not released - the document is subject to legal privilege as it reveals AGO's advice Not released - the document is subject to legal privilege as it reveals AGO's advice Not released. The note enclosed with the letter was received separately by the Department directly from INBS and this copy was released to the Committee [No 8 on the Bank Guarantee Schedule Documents] Not released - the document is subject to legal privilege as it contains advice received from the AGO Not released - the document is subject to legal privilege as it reveals AGO's advice Not released - the document is subject to legal privilege as it contains advice received from the AGO Monday 08/09/2008 Wednesday 10/09/2008 Wednesday 10/09/2008 Letter from Department to Office of the Attorney General re Contingency Planning Internal e-mail re advice from the Office of the Attorney General Thursday 11/09/2008 14.42 Friday 12/09/2008 Copy of letter from INBS to the Financial Regulator dated 9 September with cover letter from Financial Regulator Friday 12/09/2008 Letter from Office of the Attorney General to Department re Financial Stability Bill Friday 12/09/2008 Letter from Department to Office of the Attorney General re Contingency Planning E-mail from Office of the Attorney General to Department re contingency planning Saturday 13/09/2008 17.32 2 Date Saturday 13/09/2008 Document Copy of letter from Anglo Irish Bank to the Financial Regulator Comment Not released -confidential material received from Financial Regulator Not released - the document is subject to legal privilege as it contains advice received from the AGO Not released - the document is subject to legal privilege as it reveals AGO's advice Not released - the document is subject to legal privilege as it reveals AGO's advice. The attached Memorandum for Government is subject to Cabinet confidentiality. Not released - Document was submitted to Tanaiste for use at Government meeting and is subject to Cabinet confidentiality. Redacted copy of associated background document was released. [No.16 on Bank Guarantee schedule] Not released - the document is subject to legal privilege as it reveals AGO's advice Not released - the document is subject to legal privilege as it contains advice received from the AGO Not released - Contains institution-specific information received in confidence. Sunday 14/09/2008 10.32 E-mail from Office of the Attorney General to Department re contingency planning Sunday 14/09/2008 17.48 Sunday 14/09/2008 19.10 E-mail from Department to Office of the Attorney General re contingency planning Internal e-mail re draft contingency legislation with attached draft Government Memorandum and draft Explanatory Memorandum 16/09/2008 Briefing for Minister in case required for cabinet meeting 17 September Wednesday 17/09/2008 00.23 Wednesday 17/09/2008 E-mail from Department to Office of the Attorney General re Contingency Planning Letter from Office of the Attorney General to Department re Contingency Planning Thursday 18/09/2008 E-mail from Financial Regulator to Central Bank and Financial Regulator forwarding earlier e-mail and attachment from Goldman Sachs Notes of Financial Regulator meeting with Anglo Irish Bank Saturday 20/09/2008 Not released - Confidential information received from Financial Regulator 3 Date Saturday 20/09/2008 Document Notes of Financial Regulator meeting with Bank of Ireland Comment Not released - Confidential information received from Financial Regulator Not released - Confidential information received from Financial Regulator Not released - Confidential information received from Financial Regulator Not released - Confidential information received from Financial Regulator Not released - Confidential information received from Financial Regulator Not released - Contains confidential institution-specific information received in confidence Not released - the document is subject to legal privilege as it contains advice received from the AGO Not released - the document is subject to legal privilege as it reveals AGO's advice Saturday 20/09/2008 Notes of Financial Regulator meeting with Allied Irish Bank Saturday 20/09/2008 Notes of Financial Regulator meeting with EBS Saturday 20/09/2008 Notes of Financial Regulator meeting with INBS Saturday 20/09/2008 Notes of Financial Regulator meeting with Irish Life and Permanent Sunday 21/09/2008 Draft Discussion Documents prepared by Goldman Sachs regarding strategic options Wednesday 24/09/2008 Letter from Office of the Attorney General to the Department re Contingency Planning Thursday 25/09/2008 12.12 E-mail and attached letter from the Department to the Office of the Attorney Genera re Financial Stability Planning E-mail from Department to the Office of the Attorney General re section 23 of the Central Bank Act 1997 Letter from Office of the Attorney General to the Department re Contingency Planning Thursday 25/09/2008 12.52 Thursday 25/09/2008 Not released - the document is subject to legal privilege as it reveals AGO's advice Not released - the document is subject to legal privilege as it contains advice received from the AGO Thursday 25/09/2008 Letter from Office of the Attorney General to the Department re ECB Consultation Not released - the document is subject to legal privilege as it contains advice received from 4 Date Document Comment the AGO Thursday 25/09/2008 16.52 E-mail from Office of the Attorney General to the Department re State Aid Not released - the document is subject to legal privilege as it contains advice received from the AGO Not released - the document is subject to legal privilege as it reveals AGO's advice Not released - release of document could impact on the effectiveness of the guarantee to maintaining the stability of the financial system and as such would be exempt from release under section 31 of the FOI Act on grounds of its possible potential negative impact on the economic interests of the State. Not released Contains confidential institutionspecific information received in confidence Not released - the document is subject to legal privilege as it reveals AGO's advice Not released - the document is subject to legal privilege as it reveals AGO's advice Not released - the document is subject to legal privilege as it reveals AGO's advice Friday 26/09/2008 09.03 Friday 26/06/2008 14.48 E-mail from Department to Office of the Attorney General re State Aid Internal e-mail forwarding NTMA email of 14.22 responding to Secretary General's query re issues for Ireland's sovereign ratings from a guarantee Friday 26/06/2008 22.19 E-mail from Goldman Sachs to Department forwarding an update on INBS prepared by Goldman Sachs. Friday 26/06/2008 23.18 Friday 26/09/2008 E-mail from Department to Office of the Attorney General re guarantees and ELA Letter from Department to the Office of the Attorney General re Financial Stability Planning Letter from Department to Office of the Attorney General re Financial Stability Planning - National Pensions Reserve Fund Friday 26/09/2008 Saturday 27/09/2008 Letter from Attorney General to Minister re State Aids and System Wide Bank Guarantee Not released - the document is subject to legal privilege as it contains advice received from the Attorney Not released - the document is Saturday Letter from Office of the Attorney 5 Date 27/09/2008 Document General to the Department re Financial Stability Planning - National Pensions Reserve Fund Extracts from PwC material re liquidity position Comment subject to legal privilege as it contains advice received from the AGO Not released - institutionspecific information prepared by PwC for the Financial Regulator Not released - institutionspecific information prepared by PwC for the Financial Regulator Not released - institutionspecific information prepared by PwC for the Financial Regulator Saturday 27/09/2008 Sunday 28/09/2008 14.54 Sunday 28/09/2008 15.04 Monday 29/09/2008 E-mail from NTMA to Department forwarding e-mail from PwC to NTMA re liquidity scenarios for banks E-mail from PwC to Department with attachment - summary of discussions on credit positions Letter from Attorney to Minister re State Not released - the document is Aid and Guarantee Issue subject to legal privilege as it contains advice received from the Attorney E-mail from Department to Office of the Attorney General with attachment re special share vs share transfer E-mail from Arthur Cox to Department re powers of Central Bank Not released - the document is subject to legal privilege as it reveals AGO's advice Not released - the document is subject to legal privilege as it was prepared by the Department's legal advisors legal privilege Not released - institutionspecific information prepared by PwC for the Financial Regulator Not released - the document is subject to legal privilege as it was prepared by the Office of the Parliamentary Draftsman Monday 29/09/2008 12.29 Monday 29/09/2008 15.00 Monday 29/09/2008 20.40 Monday 29/09/2008 22.38 E-mail from PwC to Department, NTMA and Central Bank re liquidity positions Draft contingency legislative provisions for Credit Institutions (Protection ) Bill The Central Bank provided a number of daily liquidity figures for the Irish institutions during September 2008. In addition, during September 2008 the Financial Regulator circulated 5 times per day deposit flow reports in relation to a particular institution. These were circulated in the Department but the individual e-mails have not been listed. They have not been released as they contain confidential institution-specific information from the Financial Regulator and the Central Bank. 6 Multiple earlier drafts of documents have generally not been listed. 7 DSG meetings No 1 2 3 4 5 6 7 8 9 10 11 12 13 Date of DSG meeting DSG 03/07/2007 DSG 31/8/2007 DSG 21/9/2007 DSG 03/10/2007 DSG 02/11/2007 DSG 16/11/2007 DSG 03/12/2007 DSG 11/01/2008 DSG 08/02/2008 DSG 06/03/2008 DSG 17/04/2008 DSG 22/04/2008 DSG 26/05/2008. Released Note of meeting Part redacted Released Part redacted Part redacted Part redacted Part redacted Part redacted Part redacted Part redacted Part redacted Part redacted Part redacted [An associated note on a particular issue not released] Part redacted Part redacted Part redacted Released Withheld from release Withheld from release Withheld from release Withheld from release 14 15 16 17 18 19 20 21 DSG 18/06/2008 DSG 08/07/2008 DSG 23/7/2008. DSG 17/09/2008 DSG of 09/2/2009 DSG of 27/2/2009 DSG of 16/04/2009 DSG of 06/10/2009 1 No 22 23 Date of DSG meeting DSG 02/11/2009 DSG of 12/11/2009 Note of meeting No note of this meeting Withheld from release 2 9M J ^OOS CONFIDENTIAL Financial Stability Issues - Scoping Paper 1. Introduction The purpose of this paper is to identify significant issues relating to the options available to the Irish authorities in the case of a systemic threat to financial stability, as well as consider any issues regarding the structures currently in place to oversee financial stability planning arrangements and also to manage a financial crisis. It examines the legal framework within which any crisis management operations must take place and any possible questions regarding the legal powers available to the Minister and the Central Bank and Financial Services Authority of Ireland (CBFSAI). The paper also includes some analysis of the recent difficulties in the U K financial system, following the experience of Northern Rock and any implications this may have for financial crisis management here. The paper examines these issues by reference to two key scenarios -- a financial institution that is solvent but is experiencing liquidity problems and an institution that is insolvent or heading towards insolvency. This paper focuses on the domestic framework for managing financial stability issues. Work is on-going at EU level on enhancing the effectiveness of the EU stability framework by clarifying the existing arrangements for resolving cross-border financial crises and their use, while stressing the primacy of private sector solutions and minimising moral hazards. Arising from F.U requirements there are a number of work streams that need to be addressed by our Domestic Standing Group on Financial Stability (DSG). These include developing a national contingency plan and carrying out a crisis simulation exercise. Ecofm Ministers recently adopted conclusions setting out further steps, at both EU and national levels, for the development of financial stability arrangements. The conclusions include common principles for cross-border financial crisis management and a roadmap for enhancing cooperation and preparedness and for reviewing the tools for crisis prevention, management and resolution. A new EU level MoU between supervisors, central banks and finance ministries will include a common analytical framework for the assessment of systemic implications of a potential crisis to ensure the use of common tenminology in assessing the systemic implications of a cross-border financial crisis by relevant authorities and common practical guidelines for crisis management to reflect a common understanding of the steps and procedures that need to be taken in a cross-border crisis situation. 2. Overall approach to crisis management - spectrum from constructive ambiguity to transparency At the outset it is important to draw attention to variety of approaches that can be taken by the authorities to financial stability planning and contingency planning arrangements for crisis management on a spectrum from constructive ambiguity to complete transparency. A policy of constructive ambiguity towards financial stability planning involves not sharing full information about public authorities' likely actions in a financial crisis, in order to minimise moral hazard. In such circumstances a financial institutions cannot be sure in what circumstances the CBFSAI will intervene and so they are encouraged to monitor and manage risks that might otherwise be ignored if an institution was confident that the CBFSAI would definitely intervene. Transparency regarding the preparations and preparedness of authorities for a financial crisis may help support public confidence in the event of a crisis but it may also constrain authorities' actions in any given crisis due to i i expectations of their actions. It may also condition or influence public perceptions of the likelihood of a financial stability event. The authorities in Ireland have practiced constructive ambiguity regarding financial stability planning to date. For the future it would seem appropriate to maintain this approach. However, the existence and ongoing development of the EU framework for crisis management on a cross-border basis provides an opportunity to communicate, as appropriate, the existence o f financial stability planning structures in Ireland in line with EU requirements in the interests of greater openness and transparency. 3. Scenario 1 - An institution that is illiquid hut solvent If an institution is experiencing liquidity difficulties and has exhausted any opportunities for accessing liquidity in the wholesale maket the first step should be for it to seek liquidity from the European Central Bank (ECB) in normal operations. This liquidity would of course require eligible collateral. In Ireland, a large proportion of banks balance sheets can be used as collateral for liquidity provision; through for example the use of mortgage backed promissory notes. Intensive use of eligible assets for liquidity under "normal" Eurosystcm conditions is likely to be noticed by the market. If this liquidity is not sufficient to restore liquidity to the institution, the institution may approach the CBFSAI for emergency liquidity assistance (ELA). The view of the CBFSAI is that the requirement for the ELA provision to an Irish bank would signify the existence of a serious threat to the long-term sustainability of the financial institution in question because of the 'stigma' that would attach to it. It is important to highlight, therefore, that ELA provision would be an interim measure while urgent consideration was given by all parties to the available options for rescuing the bank. 3.1 CBFSAI role in this situation The authority responsible for the provision of ELA to an illiquid institution is the CBFSAI. The CBFSAI is preparing a paper outlining the basis, legal powers and other considerations relating to the provision of ELA and this will form an appendix to this paper when completed. On account of the CBFSAl's statutory independence for monetary operations, on behalf of the ESCB, emergency lending would be at a national central bank's own risk and the CBFSAI would therefore advise the Department before providing such assistance. This would take place through, for example, the DSG or other official channels. As the CBFSAI is a member of the ECB, provision of ELA must be reported to the ECB, either ex post, or in advance if it exceeds EUR500mn. The ECB could prohibit the ELA provision if it is deemed to interfere with the single monetary policy. It is very important to note that the CBFSAI is prohibited from providing ELA to an insolvent institution. Therefore if there is any concern that a financial institution seeking ELA is insolvent, the CBFSAI would not be in a position to provide liquidity support without the question of some guarantee arising from the Exchequer. However, it is recognised that this type of assessment is very difficult in a situation of financial stress. The issues that arose in relation to the performance of the Bank of England's Lender of Last Resort function in the case of Northern Rock highlight a number of important issues requiring consideration in the context of the scope for ELA support. These are discussion at Section 3.6 of this paper below. For the purposes of this paper, illiquid/illiquidity is taken to be a situation where a financial institution is unable to convert its assets into negotiable instruments that can be used to meet its obligations. Also f o r the purposes of this paper, insolvent is taken to be a situation whereby an institution has insufficient assets to meet is obligations. 1 2 While it is not nccessary to make public immediately the provision of ELA, the support would appear on the C B F S A I ' s balance sheet without referring to the recipient and could therefore prompt unhelpful market speculation, which could exacerbate the financial situation of the individual institution or the market generally. In addition, it seems unlikely that information that an Irish bank was in receipt of ELA would not come into the public domain in any event. The requirement for a PLC to make a disclosure to this effect under Stock Exchange rules also n e e d s examination. 3.2 Department/Minister's role in this situation Traditionally, it would be considered that the Minister for Finance does not have a specific role when an institution is illiquid but solvent and there is no legal role for the Minister in such an event. However, following the impact of the provision of ELA to Northern Rock in the UK on public confidence in that institution and the financial system generally (see below), it is likely that if t h e provision of ELA came into the public domain the Minister and the Department would i n practical terms very quickly become involved in terms of the management of the potential broader financial stability issue. Therefore the Minister and Government could quickly find itself in a situation where there was pressure to give assurances that the State was prepared to support the bank in difficulty or provide guarantees to its depositors. Other guarantees which the Minister might consider giving include guarantee to banks regarding interbank lending to pre-empt overall withdrawal of market liquidity and guarantee to CBFSAI regarding losses that may occur on ELA. The broader issue of communication and maintaining confidence in the financial system raises the issue of whether the CBFSAI or the Minister / Government should take the lead communications o n financial stability concerns. Consideration needs to be given to the requirement to communicate with the public but also with the international financial community whose assessment of overall financial stability conditions would be expected to be critical to the broader systemic impact of difficulties in any individual financial institution. The important question also arises in this context what options may be available to the authorities to initiate actions to address its emerging concerns about the bank's liquidity, solvency or stability in advance of a crisis situation emerging into the public domain. 3.3 Impact of ELA provision on confidence in the institution As the recent liquidity difficulties at Northern Rock have shown, while an institution may be illiquid but solvent, the public perception of a requirement for ELA is that the institution is in trouble and at risk o f collapse. The announcement that Northern Rock wouia receive ELA from the Bank of England triggered a bank run which was only stemmed by the Chancellor's announcement of a 100% guarantee for deposits in Northern Rock. It may be the case that the question of such a guarantee would now arise in any similar situation in Ireland in the future to prevent depositors withdrawing their money once any ELA provision is disclosed to the market. In circumstances that there may be specific concerns regarding the position of the financial system as a whole in Ireland, on account, for example, of its dependence on property related lending, a further effect of ELA provision on confidence in the financial sector may take place in international wholesale markets, as other banks lose confidence in an 3 institution and are no longer willing to lend to it. This could lead to a general decline in confidence in the Irish financial sector as a whole - depending on the reasons for the ELA provision in the first place - and has the potential to cause a systemic issue even if the initial institution is still solvent and the position of the Irish financial sector is in objective tenns sound. As summarised above, in current market conditions, any difficulty in a significant individual Irish bank could be expected to raise very serious concerns regarding the stability of the Irish financial system overall. It is imperative therefore, that a successful resolution is secured at the earliest possible stage in the development of the crisis., and that, as much as possible any guarantee or interbank lending required would be in place in advance of any public knowledge of ELA provision. Importance of communication and media management strategy (Department and CBFSAI) The "Northern Rock effect" demonstrated thai communications re any ELA provisions and the deposit protection scheme in place would be vital in the case of a crisis. Statements by the FSA, the Bank of England and the Chancellor that the bank was solvent did not prevent depositors losing confidence in Northern Rock and large queues forming as depositors queued to withdraw their deposits, worsening the liquidity position of Northern Rock even further. The evolution of t h e Northern Rock crisis in the UK and the information that has subsequently emerged regarding conflicts between the authorities on the resolution of crisis, highlight the case f o r a swift pre-emptive response to difficulties at the earliest possible stage. The longer the crisis continues the greater the risk of contagion. A formal crisis communications procedure between the press offices of the three authorities should be established as part of the overall package of crisis management procedures to enhance the effective of public communications. A set of generic "Questions and Answers" documents and templates for media communication could be developed in advance to enhance any pre-emptive response. 3.5 Actions undertaken by the UK authorities following Northern Rock's difficulties Since Northern Rock difficulties began the UK authorities have taken a number of actions in order to maintain financial stability. These are: (C) The Bank of England provided ELA to Northern Rock and also announced that it would provide ELA at the same terms to any other institutions who ran into similar difficulties (R) Following the run on Northern Rock deposits the Chancellor announced that all current deposits in Northern Rock would be 100% guaranteed and it was clarified with the UK Treasury that the guarantee extended to Irish depositors and wholesale deposits, o The level of deposit protection was increased to 100% of the first EUR35,000 in any account o The Treasury guarantee was extended to all new deposits, including wholesale deposits, placed in Northern Rock (R) Northern Rock customers who withdrew from ISAs in Northern Rock were allowed to keep their tax benefits providing the money was redeposited in an ISA ( i n Northern Rock or another institution) (R) The guarantee was extended to a variety of exisiting and future unsubordinated wholesale obligations. 3.4 4 Arising from this legal advice is required from the Office of the Attorney General on the legal scope available to the Minister to provide an increased level of guarantee if required particularly at short notice (over and above DGS levels). 3.6 CBFSAI's assessment of issues raised by Bank of England that impeded its lender of last resort function The CBFSAI is currently examining the four legal issues identified by the Bank of England as impeding its lender of last resort function. These are: (R) The Takeover Code This legislation forces takeover bids to be disclosed and sets out a long procedure for takeovers - the Governor of the Bank of England, Mr Mervyn King, said that this prevented him from organising a takeover and presenting it as a "done deal" << The Market Abuse Directive > This defines what behaviour is considered insider dealing and provides for disclosures to the market -- Mr King said this meant that any lending operations to Northern Rock had to be disclosed. (C) The insolvency regime in the Enterprise Act 2002 This provides a framework for the winding up of companies -- for banks it means that depositors have their accounts frozen. Mr King said that this made it rational for people to queue for their deposits back (C) The Financial Services Compensation Scheme This sets out the rules for the limited guarantees on UK banking deposits -- Mr King said that the fact that this only covered up to ?35,000 made it more important for people to withdraw their money from Northern Rock.The Department may need to seek its own legal advice from the Office of the Attorney General in relation to these maters and any potential implications for the Minister/Department, to identify issues and possible options in resolving a financial crisis. 4.Scenario 2: An institution that is insolvent (or approaching insolvency) If a period of illiquidity continues it is likely that an illiquidity institution will move closer to insolvency. As referred to above, it is important to note that, from the outset, any major financial institution drawing on ELA will be in very serious financial difficulty and is likely to be in need of rescue. A situation that commences as one where an institution has difficulty in converting assets into financial instruments (cash, credit instruments) can deteriorate quickly (e.g. withdrawal of deposits by depositors, reluctance of lenders to provide credit facilities, ctc.). In circumstances that liquidity is not freely available, any sustained poorly managed mismatch between the short-term liabilities and the longer-term asset can quickly lead to a situation whereby an institution becomes unable to meet its obligations as they fall due, i.e. it becomes insolvent because of its illiquidity. Furthermore a perception that an institution is in difficulty can lead to the discounting of the value of its assets by the market such that the value of its assets falls below its liabilities. Where lending to the financial institution in question is secured over its assets, any deterioration in asset quality will give rise to increased financial demands from its creditors. Given the importance of the principle of the precedence of private sector solutions, the first decision is whether the State should take any action to assist an institution at risk of insolvency. Responsibility for maintaining the solvency of an institution lies with its Directors and shareholders should try to ensure that any institution they invest in is solvent 5 and will remain so for t h e foreseeable future in order to realise profits from their investment. The costs of insolvency should not transfer to the State simply because the institution in question is a bank (or other financial institution). The role of the authorities is to maintain financial stability and not to bailout shareholders of insolvent institutions. Thus the preferred outcome for an insolvent institution may be its failure and subsequent orderly wind-down. However, it m a y be the case that an institution is considered systemically important, ie the failure of this institution is believed to be likely to have a serious effect on the financial system in general and may thus cause financial instability. An institution of this nature is also described as "too big to fail" (TBTF). If a financial institution is considered TBTF, in order to maintain financial stability overall, it is likely that the State will intervene in order to prevent the failure of that institution. The intervention may take the form of assisting the institution until a private sector buyer can be found (as is happening with Northern Rock) or consideration could be given to taking the institution, or elements of it, into public ownership (See also Appendix 2) 4.1 Definition of systemically important institution (TBTF) A TBTF financial institution is defined as one whose failure is believed to be likely -- both directly through its impact on the real economy and indirectly through the risk that contagion effects will threaten the stability of other financial institutions - to provoke a systemic failure of the financial sector overall. Formally defining an institution as TBTF in advance of any difficulties is not a viable strategy for two main reasons: i) It would cause moral hazard as the institution expects that the State will intervene and it will be rescued if it should run into difficulties. ii) The systemic impact of the failure of an institution may vary depending on a number of factors, for example public confidence in the system in general or general financial market conditions. If public confidence is low, the failure of any institution could cause systemic problems and so in this case any institution may be TBTF. Another reason an institution may be systemic important relates to the type of difficulties encountered by the institutions. If there is a perception that this type o f difficulties (eg exposure to the property market) is likely to affect more than one institution this could also mean that its failure would have systemic consequences. The failure of even a small bank which is not systemically important in itself may not be acceptable in certain circumstances because of fear of contagion at a time of market uncertainty or for political deposit protection reasons. Thus the decision to classify an institution as TBTF, indicating that the State is likely to intervene, should be taken on a pragmatic, case-by-case basis in light of prevailing economic and financial circumstances. The information provided b y the CBFSAI to the Minister and the Government, assessing the nature and scale of a financial crisis and the importance of the institution in the financial system is of critical importance when designating a financial institution as TBTF. It also needs to be bome in mind that a further lesson from the Northern Rock situation is that the state of public confidence may be such that what, in objective terms, may not be a systemically important financial institution (i.e. one that is TBTF) may need to be treated as one on account of the potential impact of its collapse on public confidence in other financial institutions and t h e financial sector generally. 4.2 Role of CBFSAI if an institution is insolvent It is important to note that the CBFSAI is legally prohibited from providing ELA to an insolvent institution. As referred to above, it will be difficult particularly in a crisis situation to differentiate clearly between an illiquid and an institution at risk of insolvency. In any event an illiquid institution can quickly become insolvent. It is therefore essential that 6 there is close co-operation, co-ordination and communication between the three institutions comprising the DSG to ensure that the tools available to manage a crisis situation are effectively deployed in a crisis situation. The CBFSAI could continue to lend to an insolvent institution if it was given a guarantee or letter of comfort from the Minister / Government. The role of the CBFSAI in lending to an insolvent institution is thus defined by the actions of the Minister for Finance. There are, however, significant issues regarding the Minister's legal powers in this area (see below). It is also important to note that under Company Law it is the responsibility of the Board to determine whether an institution is in a position to meet its obligations as they arise or not. While the CBFSAI, in discharging its role as lender of last resort, would clearly be involved in intensive monitoring of the financial status of the bank to which it was lending, a decision that the bank had become insolvent and ongoing support required State involvement would take place at the point that the bank was being placed in administration. This highlights the case that early action is required to respond to a situation of financial distress in a bank with a view to achieving a market-based resolution. 4.3 Role/Legal powers of the Minister in this situation As outlined above, if an insolvent bank sought ELA, the CBFSAI would be legally prohibited from extending it. Flowever, if the bank was systemically important and the Government agreed to extend a guarantee to it liabilities, then this would turn it from an insolvent bank into an illiquid but solvent one (with the State guarantee backing up its capital), so that the CBFSAI could inject liquidity to prevent contagion effects in the wider financial system. In regard to guarantees, Public Financial Procedures (PFPs) provide that a guarantee may be issued only where there is specific statutory authority to issue such a guarantee. Statutory power to guarantee borrowing is provided under the State Guarantees Act, 1954 (which allows the Minister for Finance to guarantee borrowing by any body named in the Schedule to the Act or added to the Schedule by Government order) or under the specific legislation governing a particular body. The statutory power to guarantee, whether under the State Guarantees Act, 1954 or other legislation is normally subject to a cash limit above which guarantees cannot be given in respect of a particular body. The use of the State Guarantees Act for guaranteeing borrowing has diminished and the practice now more usually adopted is to provide borrowing and guaranteeing powers in the particular legislation which relates to a specific State body. "Letters of Comfort" is a somewhat loose term used to describe a form of written assurance to lending institutions or others in relation to borrowing or other financial commitments where there is no statutory power to guarantee or where guarantees up to the statutorily authorised level have already been given. PFPs state that such letters are objectionable as they may be interpreted as imposing a contingent liability on the Exchequer without Dail approval. Detailed instructions in relation to letters of comfort have been set out in Department of Finance Circular 4/84. The main principle contained in these instructions is that a letter which expressly, or by implication, gives a guarantee or undertaking not already authorised by legislation should not, in any circumstances, be issued. The CBFSAl's view is that a letter of comfort from the Minister to cover the CBFSAI's risks 7 would not be sufficient for the CBFSAI to lend to an insolvent institutions - a comprehensive guarantee would be necessary. The discussion above would seem to suggest that in order for the Minister to provide the CBFSAI with the guarantee it requires to assist an insolvent institution legislation is required. However, if this legislation is passed in advance the advantages of constructive ambiguity may be lost as it will be clear that the State may "bailout" an insolvent institution. Legislation may also require that the circumstance in which such a letter of comfort be provided are laid out which could cause moral hazard, as institutions would know when and how the State would intervene if they were in difficulty. The existence of such powers in the Statute Book could also compel the Minister to act to save an institution that would otherwise not be saved and reduce the flexibility available to the Minister to deal with any particular institution. It may be the case therefore that the solution is to prepare legislation ex ante of a crisis but only enact it if required. The difficulty this raised is that the time frame for dealing with a crisis may be quite limited and the Dail may not be in session when the legislation was required. In line with what has taken place in other jurisdictions the existence of explicit legal powers may not be required providing the Minister / Government is in a position to announce the intention to provide the required guarantee / support with the appropriate approval of the Oireachtas in due course either in relation to legislation or through approval for a Vote. The CBFSAI's view is that it would not be able to act on a "promise of a guarantee" given the prohibition on their lending to insolvent institutions. If the State is to intervene to support an institution it may choose to assist the institution to remain a going concern while a buyer is found, which would require liquidity assistance and the guarantee outlined above. However, another option which may be available to the State is to nationalise the institution. In these circumstances, the State may simply takeover the entire institution or takeover the part of the institution that is in difficulty (creating in effect a "bad bank"). The nationalisation of a bank would be likely to be a temporary measure. If the entire institution was nationalised, it might be then be sold on, after it had recovered from its difficulties. If a "bad bank" was formed then this bad bank might be run off or put in examinership. Any form of nationalisation may require legislation. A number of important legal / constitutional points are likely to arise vis-a-vis shareholders' rights under Company Law in respect of which legal advice is required. 4.4 Principles guiding public intervention A paper prepared by the Department of Finance in 2005 identified the following as important principles which should guide State intervention to resolve a banking crisis: * The support given is transparent and public ? The attractiveness and public funding needs of the programme shall be minimised. The economic responsibility of the owners of the bank receiving support should be realised as widely as possible - shareholders should not be protected against losses. (R) The terms of the programme should support the efficiency of the banking system and contribute to necessary structural adjustment. (R) The State should be afforded the opportunity to participate in any upturn in the fortunes of the rescued entity * The State should seek value for money ? The State's contribution to the rescue should be remunerated on commercial terms at least 8 (R) Stale support should be conditional - opportunities for exerting leverage from the support should be fully exploited. ? The rescue plan m u s t have a good prospect of success and have a high probability of returning to the State any funds provided over the longer term (C) Prompt intervention should reduce the cost of intervention and will promote efficiency (R) The impact of shareholder interests should be assessed. There will of course be a n inevitable tension between these desiderata and the risk (because of the delay associated) of failure to avert the crisis. An Ad Hoc Working Group on Financial Stability (ADWG) was established in September 2006 by the ECOFIN Council to explore ways to further develop financial stability arrangements in the EU. T h e Final Report was presented to the ECOFIN Council. The core of their Final Report, which fonned part of the Ecofin Council conclusion in October 2007, is a set of 13 policy recommendations, 9 principles and a detailed strategic roadmap for actions out to 2009 involving action mainly in two areas - extending the 2005 EU Memorandum of Understanding on cooperation in financial crisis situations and developing voluntary cross-border cooperation agreements. The principles, which are to be applied to cross-border financial crises, are listed below: Common Principles for cross-border financial crisis management 1. The objective of crisis management is to protect the stability of the financial system in all countries involved and in the EU as a whole and to minimise potential harmful economic impacts at the lowest overall collective cost. The objective is not to prevent bank failures. 2. In a crisis situation, primacy will always be given to private sector solutions which as far as possible will build on the financial situation of a banking group as a whole. The management of an ailing institution will be held accountable, shareholders will not be bailed out and creditors and uninsured depositors should expect to face losses. 3. The use of public money to resolve a crisis can never be taken for granted and will only be considered to remedy a serious disturbance in the economy and when overall social benefits are assessed to exceed the cost of recapitalisation at public expense. The circumstances and the timing of a possible public intervention can not be set in advance. Strict and uniform conditions shall be applied to any use of public money. 4. Managing a cross-border crisis is a matter of common interest for all Member States affected. Where a bank group has significant cross-border activities in different Member States, authorities in these countries will carefully cooperate and prepare in normal times as much as possible for sharing a potential fiscal burden. If public resources are involved, direct budgetary net costs are shared among affected Member States on the basis of equitable and balanced criteria, which take into account the economic impact of the crisis in the countries affected and the framework of home and host countries' supervisory powers. 5. Arrangements and tools for cross-border crisis management will be designed flexibly to allow for adapting to the specific features of a crisis, individual institutions, balance sheet items and markets. Cross-border arrangements will build on effective national arrangements and cooperation between authorities of different countries. Competent authorities in the Member States affected by a crisis should be in a position to promptly 9 assess the systemic nature of the crisis and its cross-border implications based on common terminology and a common analytical framework. 6. Arrangements for crisis management and crisis resolution will be consistent with the arrangements for supervision and crisis prevention. This consistency particularly refers to the division of responsibilities between authorities and the coordinating role of home country supervisory authorities. 7. Full participation in management and resolution of a crisis will be ensured at an early stage for those Member States that may be affected through individual institutions or infrastructures, taking into account that quick actions may be needed to solve the crisis. 8. Policy actions in the context of crisis management will preserve a level playing field. Especially, any public intervention must comply with EU competition and state-aid rules. 9. The global dimension will be taken into account in financial stability arrangements whenever necessary. Authorities from third countries will be involved where appropriate. While these type of guiding principles should clearly inform the decision making made in a crisis situation, it needs to be borne in mind that every crisis situation is different and that a rigid adherence to any one principle is unlikely to be consistent with effective and successful crisis management. 4.5 Company Law provisions and the interaction of these provisions and financial stability objectives -- difficulties, etc While it may be desirable to consider a special insolvency regime for dealing with banks this paper simply presents the three courses of action currently available under company law should an institution be insolvent or nearing insolvency. The Department produced a summary of these provisions which is attached at Appendix I. These three mechanisms are summarised below. The Court Protection route seems to offer the most advantageous approach to dealing with a problem financial institution, if intervention at this level is to be considered. Appointment of a receiver for all or part of the assets Receivers are usually appointed by creditors in respect of a charged asset once the conditions (default etc.) specified in the agreement creating the charge for the appointment occur. The receiver's main function is to realise the security for the benefit of the creditor. Appointment of a receiver to a financial institution would immediately erode confidence in its solvency, require supervisory intervention and probably precipitate a request for appointment of either a liquidator or examiner. Appointment of a liquidator (under three forms of winding up); There are three fonn of winding up: ? The members (voluntary winding up of a solvent company) (R) The creditors (voluntary winding up of an insolvent company) o The Courts (compulsory winding up for insolvency or other reasons). The functions of a liquidator are to wind up the affairs of the company and realise its assets for distribution. The appointment generally puts an end to the directors' powers The CBFSAI may petition for the winding up of a bank on four grounds: ? that it may be unable to meet its obligations to creditors e has failed to comply with a direction under S21 of the Central Bank Act (CBA) 1971 (C) has ceased to carry on banking 10 (R) in the interests of depositors. Liquidation has a number of practical effects: (R) It freezes the assets and the transactions of the company; o It freezes all actions against the company; o It terminates all contracts of employment; o Payments to creditors etc. would generally not commence until the liquidator has established the true state of affairs of the company The appointment of a liquidator is primarily intended to provide for an orderly winding up of a firm's affairs. However this would have serious implications for customers and other users of financial institutions, which are not contemplated in the normal framework for dealing with liquidation. There could be delay or uncertainty in relation to repayment of short term commercial deposits and settlement of other payment transactions. This would have knock on effects on liquidity for both in the payments system and commercial transactions (e.g. ,money held by solicitors and others towards the conclusion of contracts). Given the importance of confidence in the financial services sector, the appointment of a liquidator (or receiver) to one financial institution, would likely lead to financial stability concerns arising in the wider system. Appointment of an Examiner (Court Protection) The protection and examination procedure is designed to save all or part of the undertaking and to prevent it being wound up. Only the CBFSAI may apply to the Courts for examinership in the case of a credit institution which is supervised by it. Creditors' rights are restricted from the moment the petition is presented. An application to the Court should demonstrate that the company is insolvent or likely to become so (5 tests are provided) and satisfy the Court that there is a reasonable prospect of ensuring the survival of all or part of the undertaking. The immediate effect of court protection is to provide the company with extensive protection against creditors, claims, realization or repossession of assets against which security was given, liquidation and receivership, from the time of application. While this would freeze the company's transactions, the examiner can be given extensive powers to continue its operations pending the putting in place of the final rescue package. Examinership would mean the closure of the entity until a new owner or other solution is found. This could have serious implications f o r the overall payment system if the bank is amajor clearing bank. To realise the benefits of examinership a guarantee of deposits may be required. Where necessary, in order to secure the survival of the company, the examiner may certify liability in respect of certain transactions, thus making them an expense of the examination which would then have priority over other debts of the company. There also may be scope for using the Deposit Guarantee Scheme (DGS) to pay out deposits. It may be possible to maintain some essential banking services during examinership. Critical Banking Functions The failure of any bank could have negative impacts on critical banking services such as automated payments and direct debits that are now an integral part of payments systems on which the economy is reliant. It may be possible for certain critical functions to be taken on by another provider but this approach would of necessity be uncertain and ad hoc in nature. Mechanisms to maintain critical banking functions would be important from the point of view of protecting consumers and helping to maintain market and consumer confidence. The recent UK discussion paper 'Banking reform - protecting depositors - indicates there different approaches to resolving bank difficulties in other countries. The US has a distinct insolvency regime for banks involving wide powers for special administrators appointed to 11 carry out resolutions. These special administrators are generally answerable to the banking regulator rather than the courts. Bridge Banks involves either the transfer of the assets and liabilities of the existing legal entity to a new legal entity or the transfer of the existing legal entity to new openers. The new (bridge) bank would then continue to provide the critical banking functions while either a recapitalisation or a permanent transfer of business to new owners was organised. S o m e European countries have special arrangements for banks in trouble including provisions for authorities to appoint special or provisional administrators with discretion over the initiation of measures, including the ability to apply them to banks before they arc technically insolvent. In looking to the case for the reform of deposit protection and banking stability systems in Ireland, recent developments in the UK and the subsequent assessment of how the Northern Rock situation might have been better handled, highlight a number of issues for review and examination as follows: o Does Ireland need a new insolvency mechanism specifically for banks and other credit institutions? ? If it is dccidcd to maintain the legal mechanisms currently available under Company Law are there any refonns that would be desirable? (C) Is it clear that examinership is the best available winding down mcchanism if the aim of the State is to "rescue" the bank? (C) What mechanisms are available to ensure that essential banking services in circumstances that a retail financial institution is the subject of examinerhip or administration. 4.6 Implications of State Aid rules for any actions undertaken to assist an insolvent institution The EU framework for competition is laid down in Articles 81-89 of the EC Treaty. Article 87(1) declares that "any aid granted by a Member State through State resources in any form whatsoever which distorts or threatens competition...shall...be incompatible with the common market." The EU Commission is responsible for decisions on this issue and must be notified by a Member State of any State aid measures. The Commission's assessment of whether an action is state aid is based on the 'private investor test' - a State measure is State aid if a private investor would not be willing to provide the aid under similar circumstances. Article 87(1) does apply to the banking sector. However, liquidity support for solvent institutions is not considered State Aid. Article 87(3)(b) provides for a possible derogation for actions taken to "remedy a serious disturbance in the economy of a member state." Thus if measures to deal with a systemic crisis support the whole national financial system and do not duly distort competition and are limited to what is strictly necessary then these measures could be declare compatible with EU competition law. However the Commission takes the view that a crisis at a large bank does not automatically entail derogation. The conclusions of the Economic and Financial Affairs Council (ECOFIN) meeting 9 October 2007 invites the Commission to "endeavour to clarify when a major banking crisis could be considered by the Commission such as to provoke a 'serious disturbance of the economy' within the meaning of Article 87(3)(b) of the EC Treaty and state aid rules" and "to consider streamlining procedures focusing on how state aid enquires under such critical circumstances can be treated rapidly." The outcome of the Commission's work could have a major impact on the scope for Member States to take action to avert systemic crises. 12 State Aid and Northern Rock The European Commission is monitoring the situation regarding the provision of a State guarantee of Northern Rock deposits by the British government. In September a Commission spokesperson said it was too early to tell whether it has State aid implications. The spokesperson also said that the Commission is generally supportive of rescue efforts when there is a systemic risk of collapse and this type of support has a six-month limit and has to be granted on normal market terms so as not to distort competition with other financial institutions. If it lasts over six months, any official aid could not be considered as rescue support and would require a restructuring to be carried out. On 25 October the UK Chancellor of the Exchequer told MPs that the European Commission had raised no objections to the facility provided to Northern Rock. That suggests it is not being treated as State aid under European rules. The EU treatment of UK support for Northern Rock will be monitored closely to draw any lessons relating to the possible implications in the area of State aid for the provision of a government guarantee to the CBFSAI to support a financial institution in difficulty, to understand fully the extent to which the terms of any such guarantee are prescribed by the State aid rules and to assess the implications of any positions taken by the European Commission on the UK Government's guarantee of all Northern Rock deposits for any future measures undertaken in order to prevent a systemic crisis. 4.7 Deposit Guarantee Scheme: The UK public's reaction to the liquidity difficulties at Northern Rock and the UK Chancellor's provision of a 100% guarantee of all deposits in Northern Rock, which has subsequently been extended to include new deposits, has led to calls for a reassessment of the effectiveness of the deposit guarantee arrangements in the EU as a whole under the terms of the EU Deposit Protection Directive. The Ecofin Council, at its meeting on 9 October last, decided on a preliminary set of issues to be analysed and addressed following the recent market turbulence. These include reviewing possible enhancements of the deposit guarantee schemes in the EU. This review is to be undertaken by the Commission and the E U ' s Financial Services Committee on which Ireland is represented. This review is to report by mid-2008. The work carried out on this review and its conclusions will be important inputs to the process of ensuring that arrangements to safeguard financial stability in Ireland continue to conform to international standards. The legislation governing the Deposit Guarantee Scheme (DGS) in Ireland is the Deposit Guarantee Directive Regulations which came into force in 1995. Ireland provided the minimum level of protection - EUR20,000 or 90% of the loss, whichever is the lesser. This is significantly less than the 100% of deposits up to ?35,000 now provided in the UK. The UK Chancellor has also stated that he plans to increase this protection to ?100,000. However, the UK banking industry has already voiced significant opposition to an increase in deposit protection to this level on account of the funding implications. An issue arises as to how a payout of the scheme would be funded. Cunently the DGS stands at EUR455 million. However it is likely that the requirement to compensate depositors would be greater than this figure. There is a requirement in the Deposit Guarantee Directive Regulations on the CBFSAI to pay all eligible depositors. The CBFSAI have therefore concluded that it is implied that if the DGS is not sufficient to meet the loss amount the CBFSAI must meet the balance. The Regulations allow the CBFSAI to go back out to credit institutions and seek additional contributions. It is considered though that these contributions are limited to the initial amount in the fund. It is unclear whether, if more than 13 twice the current value of the fund was required, the CBFSAI could or should cover the balance. The question also arises of the pace at which participating credit institutions would be in a position to replenish the DGS fund and the implications for maintaining the attractiveness of Ireland a s an investment location for banks, since they can provide services from abroad on a broad basis. The speed at which deposits can be repaid may be extremely important in maintaining consumer confidence in an institution and may be something that should be examined in the review. The two possible uses of the DGS identified are: ? to assist illiquid and/or insolvent institutions ie could the deposit protection scheme be used to financially assist a (systemically important) institution? ? to service deposi tors during an examinership - as discussed above examinership may be the best insolvency proceedings option in the case of an insolvent bank. However, as all assets including deposits would be frozen, could the DGS be used to allow depositors to access (some of) their deposits during the examinership? The Directive does not seem to explicitly prohibit a fund from having additional responsibilities, so long as it offers that minimum level of protection. However, such an option would have to be considered in the light of State aid rules if its was to be introduced now and would require primary legislation, if it was found feasible to define a purpose that did not conflict with State Aid rules. This issue will of course require further detailed examination. In developing Ireland's position and contributing to the EU review, it will be necessary to examine what is the appropriate level of deposit protection in Ireland balancing 'moral hazard' and the requirement to maintain confidence in the stability of the financial system; the implications in the case of future financial stability events of the 100% guarantee of deposits in Northern Rock given by the UK Chancellor in order to restore confidence in an institution (or to prevent a 'bank run'); as well as the manner in which deposits are repaid, and particularly the speed a t which customers receive their compensation. Consideration is also required of the scope for the DGS to be used to maintain financial stability in ways other than simply repaying deposits in an insolvent institution. 5. Scenario 3: Unclear whether institution is illiquid or insolvent This paper details two scenarios: (a) bank is illiquid but solvent (section 3), and (b) bank is unequivocally insolvent o r unequivocally approaching insolvency (section 4). In periods of normal financial tranquillity, it may be fairly easy to distinguish between these two cases. A third case in which it is uncertain as to whether the bank is merely illiquid or is indeed insolvent may constitute a more realistic scenario. Banks are increasingly involved in financial markets activities either directly through proprietary dealing in financial markets, lending for the purpose of asset purchase by their borrowing clients or through off-balance sheet guarantees and underwriting for financial market participants. In a period of severe financial markets turmoil, it may be very difficult to determine the true worth of the bank's assets including its net contingent assets. A fortiori, it is much more difficult for a central bank or a financial regulator to know whether the bank is just illiquid or has become insolvent, especially in the light of the incentives a bank may have to disguise its true state of health from a central bank or financial regulator. 14 Given this uncertainty, the central bank may end up making one of the following two judgment calls. Firstly, it may lend to an institution which turns out to be insolvent. This is prohibited according to the general terms and conditions relating in the Documentation on Monetary Policy Instruments and Procedures (CBFSAI, 2005), which says that counterparties must be financially sound. However, the definition of soundness (i.e., subject to at least one form of EU/EEA harmonised supervision) is not especially precise or helpful. In any case, the risk associated with this judgment call may not be in any way damaging to the Bank since, in the case of bankruptcy of the counterparty, the Bank can always sell off the collateral. But the loss to the Bank is not the only consideration. An insolvent bank which succeeds in borrowing from the Bank will almost certainly be tempted to "gamble for resurrection" which could exacerbate the prevailing financial market turmoil and damage the banking system's financial reputation. The second potential risk consists of refusing to lend to a bank because it wrongly considers it to be insolvent when in reality it is merely illiquid. This is potentially much more serious. The refusal to lend may drive a sound bank into liquidation. This presumes that it cannot get liquidity in the private secondary money market (as many banks are currently finding it hard to do). If it is then unable to meet its obligations to its creditors then one or other of them could petition, successfully, for the winding up of the bank. So a bank could become insolvent under private company law when it is easily solvent under the total liabilities / total assets definition of insolvency relevant to the CBFSAI and IFSRA Urgent Next Steps (C) Seek legal advice from the Office of the Attorney General as a matter of urgency on the legal issues highlighted in this paper. ? Identify and discuss with the CBFSAI key issues that arise in dealing with the emergence of financial difficulties in a systemically significant Irish financial institution. o Complete preparations for and participate in the DSG's crisis management simulation exercise. (C) Prepare crisis management manual for the Department in line with EU requirements. (C) Review any specific issues arising to ensure that there is clarity as between the roles and responsibilities of all participants in the national DSG structure including in relation to communication. 15 Appendix I Company Law intervention Mechanisms 1 Company Law provides for three forms of external intervention in the running/affairs of an insolvent (or potentially insolvent) company. In ascending order of relevance to a financial institution these are: (R) Appointment of a receiver for all or part of the assets; (R) Appointment of a liquidator (under three forms of winding up); (R) Appointment of an Examiner (Court Protection). There are also various provisions for appointment of inspectors etc. but in the case of a financial institution, such an appointment would either follow or precipitate the intervention options above. Anyhow, the supervisory powers of the CBFSAI would probably be more relevant and confidential. Company and Banking Law also provide mechanisms for internal reorganisation, transfers of business and mergers, but these are either cumbersome or involve significant time lags. The Court Protection route seems to offer the most advantageous approach to dealing with a problem financial institution, if intervention at this level is to be considered. Appointment of a receiver 2 Receivers are usually appointed by creditors in respect of a charged asset once the conditions (default etc.) specified in the agreement creating the charge for the appointment occur. The receiver's main function is to realise the security for the benefit of the creditor. Such appointments do not need court sanction although the courts also have an implicit power to appoint a receiver e.g. where the security is put in jeopardy or there is a winding up. Where the security relates to all of the assets of the company the receivers powers can extend to the running of the company and the salvage of its viable parts. Appointment of a receiver to a financial institution would immediately erode confidence in its solvency, require supervisory intervention and probably precipitate a request for appointment of either a liquidator or examiner. The CBFSAI does not seem to have explicit powers to appoint a receiver to a credit institution, but receivership per se would not seem to offer any benefits as a form of supervisory intervention. However, some of the powers enjoyed by a receiver might be looked at in the context of any proposal to extend the Bank's supervisory powers to intervene in the direction of a financial institution. Appointment of a liquidator 3 A liquidator may be appointed for the winding up of a company by (R) The members (voluntary winding up of a solvent company) (R) The creditors (voluntary winding up of an insolvent company) (R) The Courts (compulsory winding up for insolvency or other reasons). The functions of a liquidator are to wind up the affairs of the company and realise its assets for distribution (S258 Companies Act (CA) 1963). The appointment generally puts an end to the directors' powers (completely so in the case of a Court appointment). The liquidator has considerable powers over t h e company's assets etc., but many, particularly in relation to settlement with creditors, must be exercised under supervision of the Company's members, creditors or the Court as appropriate. The winding up commences from the time the resolution is passed or the petition is presented to the court. All three forms of winding up are well publicised to creditors, public and authorities. Members and creditors voluntary winding up 4 The members (shareholders) may by special resolution appoint a liquidator to wind up a company (S251 CA 1963). In the case of a solvent company the only further formalities 16 arc a statement of solvency by the directors (independently verified), notification of the Registrar of Companies and a public notice. If the company is insolvent, an ordinary resolution is all that is required but there must be a publicly advertised creditors' meeting on the day the resolution is proposed to be voted or the following day. The creditors are entitled to appoint the liquidator and a committee of inspection to fix his remuneration and oversee the winding up. Neither course precludes application to the Court either on specific points of the liquidation or for a compulsory winding up. Ss 49 and 50 Of the Central Bank Act (CBA) 1989 provide that the CBFSAI is entitled to receive any documents etc. which are required to be sent to creditors and to be represented on any committee of inspection in any winding up of a license holder (i.e. bank) or former license holder. S 109 of the Building Societies Act (BSA) 1989 applies the company law and CBFSAI provisions to liquidation of Building Societies. Compulsory winding up under a Court appointed liquidator 5 The company, any creditor, the M/ETE (following an inspection report) and any member or contributory (a person liable to contribute to the assets in the event of its being wound up) may petition the Court for the winding up of a company (S215 CA 1983). The grounds on which the Court may order a winding up sets out in S213 CA 163 but the most common reason is inability to pay its debts (e.g. Revenue cases). This status is deemed to exist if a judgment order is returned unsatisfied or if a creditor owed more than ?1000 is unable to secure payment, security or compounding of the debt within 3 weeks (S 214 CA 1963). 6 The CBFSAI is entitled to prior notice and a hearing in relation to any petition to wind up a bank The Bank may also petition for the winding up of a bank on four grounds i.e. that it may be unable to meet its obligations to creditors, has failed to comply with a direction under S21 of the CBA 1971, has ceased to carry on banking, or in the interests of depositors. Where a bank is being wound up voluntarily the Bank may also apply on these grounds to have it wound up by the Court (S48 CBA 1989). The Bank has similar powers in relation to Building Societies (S 1 09 BSA 1989). 7 The court has wide powers in relation to the appointment of a liquidator and may terminate or vary the appointment and appoint a provisional liquidator (to secure the assets pending liquidation). The official liquidator is an officer of the Court and has extensive powers (subject to Court control). Usually the Court directs him to call a creditors meeting and to set a timetable for various phases of the winding up process. The appointment does not prevent the appointment of a receiver in respect of charged assets but it restricts the receiver's powers to manage the business or enter into contracts binding the company. 8 From a practical point of view a liquidation has a number of important effects: ? It freezes the assets and the transactions of the company; * It freezes all actions against the company; ? It terminates all contracts of employment; o It invokes the fraudulent preference rule in relation to certain payments, floating charges and other securities and transactions effected in the previous 6 months, o Payments to creditors etc. would generally not commence until the liquidator has established the true state of affairs of the company 9 In the case of a financial institution these practical difficulties would have important implications. There could b e delay or uncertainty in relation to repayment of short term commercial deposits and settlement of other payment transactions. The liquidity of the institution would also be affected by the triggering of cross-default clauses in long term debt instruments which would render them immediately repayable, while it would be unable to raise 17 funds on any commercial basis, thus increasing the level of uncertainty for creditors. This would have knock on effects on liquidity both in the payments system and for commercial transactions (e.g. money held by solicitors and others towards the conclusion of contracts). The value and nature of assets (loans, securities derivatives etc.) and liabilities (e.g. debt instruments) could both be difficult to determine and adversely affected by the appointment of the liquidator. Termination o f employment contracts could affect the availability of useful personnel to the liquidator (particularly in the areas of dealing with depositors and collection of assets/loan repayments from creditors). 10 While these adverse implications could be minimised by delaying liquidation until there had been an orderly run down of the business (deposit and lending bases) and/or its reliance on short term deposits, significant funding might have to be provided to replace the volatile commercial deposits. In those circumstances any transfer of property (or security given) in respect of that funding could be rendered void if this took place within the previous six months and the company was insolvent (i.e. unable to meet its liabilities as they arose) at the time (S286 CA 1963). T h e CBFSAI, as fonder would then become an unsecured creditor, whose dividend would depend on the outcome of the winding up. Any decision to provide financial support (other than temporary liquidity to an otherwise very sound institution) would have to have regard to the likely outcome of a liquidation. In the case of an institution with a strong retail deposit base would an intervention which effectively met 100 per cent of the liabilities of commercial depositors before liquidation either prejudice the use of the deposit protection scheme to meet the liabilities to small depositors, or give them grounds to claim unfair treatment? Appointment of an Examiner (court protection) 11 The protection and examination procedure is designed to save all or part of the undertaking and to prevent it being wound up. The Company, its directors, shareholders or creditors may apply to the Court to have an examiner appointed to the Company. However, only the CBFSAI may apply in the case of a credit institution which is supervised by it (this seems to exclude Building Societies). Creditors' rights are restricted from the moment the petition is presented. An application to the Court should: (R) be in good faith and factually accurate; (R) be supported by good reasons why the examiner should be appointed; ? be supported by a report of an independent accountant (although in exceptional cases the court may postpone this for up to 10 days); ? demonstrate that the company is insolvent or likely to become so (5 tests are provided); (R) satisfy the Court that there is a reasonable prospect of ensuring the survival of all or part of the undertaking. The CBFSAI do not consider that their supervisory data would be detailed enough/suitable to establish viability or to support the independent accountant's report to support its application as it would not reflect the difficulties the institution is experiencing, 12 The immediate effect of court protection is to provide the company with extensive protection against creditors, claims, realization or repossession of assets against which security was given, liquidation and receivership, from the time of application Shareholders and directors may continue to exercise their rights and functions but the Court may give directions in relation to the conduct of the company's business, including restriction of the directors' powers. The granting of protection and the appointment of the examiner must be notified to the Companies Office and the creditors ctc. and advertised within specified time limits. 18 13 The examiner has 2 principal functions: ? To examine the affairs of the company and to report back to the court (within 3 weeks of his appointment), and ? To seek to put together a scheme to ensure the company's survival to report back to the Court (within 6 weeks of his appointment). The Court may extend the above time limits. Also the Court, must be immediately informed of any irregularities in the company's affairs found by the examiner. If the conclusions of the initial report are adverse the Court may make such orders as it sees fit including a winding up order. If the conclusions are that all or part of the company can survive, that a scheme would facilitate this, and that to do so would be more advantageous than a winding up , the examiner prepares his proposed scheme for the survival of the company and presents it to the Court, and then to the various classes of creditors etc. Once the latter have agreed to the scheme the Court confirms it and it may be implemented. 14 In the case of a credit institution Court protection would offer a number of advantages. While it would freeze the company's transactions, the examiner can be given extensive powers to continue its operations pending the putting in place of the final rescue package. Where necessary, in order to secure the survival of the company, the examiner may certify liability in respect o f certain transactions, thus making them an expense of the examination which would then have priority over other debts of the company. These powers could presumably be granted immediately if the Bank's application were able to demonstrate the ultimate viability of the business, the availability of appropriate funding and measures to reduce or control the risks of prejudicing the position of other classes of creditor. Holders of subordinated debt instruments or long term deposits would remain restricted in relation to demanding immediate repayment e.g. under cross default clauses in their agreements. This could allow the repayment o f deposits and the settlement of payments as they fall when due, thus minimising the short term liquidity problems associated with a liquidation. Appointment of Inspectors o r intervention of the Director of Corporate Enforcement 15 The Companies Acts provide for various powers of direct or Court ordered investigations into the affairs of a company. However, their scope is confined to investigation of breaches of Company Law. Obviously, an inspection of this nature could not be ruled out if breaches of Company Law came to light during other interventions to rescue a financial institution. An early intervention of this nature would have the effect of damaging confidence in the institution and offers less scope for dealing with its banking business than a direction by the Bank (under S 21 CBA 1971). Interventions of this nature would not help directly in a rescue or salvage of a credit institution, although it may be a necessary accompaniment if public funds were being committed. Structural Changes to the Company 16 The vast majority o f structural changes to a company (e.g. reduction or issue of share capital, mergers, change of purpose and often sale of major assets require as a minimum the prior approval of the shareholders by special resolution. In the case of a credit institution which is a publicly quoted company the time scale for effecting such a change, and the need to obtain it to shareholder approval on both sides (or legislative authority in the case of the State), would to limit the scope for use of such mechanisms to restore confidence in its solvency, or to effect 19 urgent changes in its operations. Similarly, these requirements would seem to preclude an arrangement with whereby rescue funding would be provided (by the State or another company) in exchange for share capital. 17 The situation in the case of an unquoted or subsidiary company would be slightly better. The directors or owners could presumably take some remedial actions before the need for them became public. In some circumstances this might require a direction from the CBFSAI. In the case of subsidiary company, sale to a third party could also be agreed if it were within the powers of both sides (i.e. directors of the companies involved) or in the expectation of subsequent shareholder sanction. This course would not be without risk to the survival/reputation of the parent company, particularly if a clean break were not possible or a liquidation by the new owners followed immediately. It would still be dependent on a clear plan for dealing with the problems of the affected institution, and a contingency plan to support the parent if it were a financial institution 18 The course outlined at par 17 was followed when the State acquired the insolvent ICI from AIB in 1985 and put it into administration under the Insurance Acts, with funding effectively provided by AIB and the banking system under parallel and subsequent agreements. (Shareholder and legislative cover was given retrospectively.) Similarly, the State acquired a share holding in Irish Life in 1939 by facilitating the merger of a number of insolvent life companies and making up the deficit on policyholders funds (The Insurance Act 1939 provided for the Minister's holding and confirmed the arrangement) However, the relevance of these models to a credit institution is limited. Insurance liabilities are generally long term while most credit institutions are heavily dependent on short term deposits. Also, unlike non-repayment of deposits, delays in or partial settlement of insurance claims would have little or no systematic effects on payment systems o r liquidity in the banking system. Stock Exchange considerations 19 In the case of a listed institution, the Stock Exchange would have to be informed, by the affected company, of any development which would have a material impact on its share price. This greatly complicates any effort to rescue the institution from its difficulties. Any solvency or structural liquidity problems affecting the credit rating or borrowing terms of a credit institution would presumably have implications for the share price of the institution (or its parent in the case of a subsidiary) and would certainly have to be reported. While it is not clear if liquidity support alone would need to be reported, this is probably academic as the underlying problem (e.g. balance sheet exposure, management change) would still have to be reported. The 24 hours time limit for reporting these development would effectively set the time frame for putting in place support/remedial measures While it might be possible to empower the CBFSAI to override or grant an exemption from this reporting requirement, this would seem undesirable. The side effects could include downgrading the overall standing of CBFSAI shares relative to other companies, placing the CBFSAI in an awkward position as supervisor of the Stock Exchange, and accusations of providing excessive comfort for credit institutions. The current position of leaving it to the company to balance the risk of not reporting against the risk of prejudicing remedial measures may be the lesser evil. Some Tentative Assumptions and Conclusions o Intervention should only be considered where difficulties for the banking and/or payment systems are foreseen arising from serious problems likely to affect the long term liquidity or the balance sheet of a credit institution. 20 o Where the institution is substantially viable (or has a significant "goodwill value') a market solution (takeover or merger) may be the preferred option or the target of any short term intervention. ? Company law intervention would of its nature only from part of any package to assist a troubled financial institution, and would probably accompany or follow measures to support its liquidity. (R) The Court Protection (Examinership) procedure seems to offer the least difficulties and most advantages of all the procedures except possibly in the case of dire insolvency. ? If Court Protection is recognised as the most useful of the tools available there may be scope for fine tuning aspects of the legislation governing the initiation of the process (e.g. use of CBFSAI data) to render it more user friendly. (R) It is doubtful if an effective form of support or supervisory action (intermediate between short term liquidity support and company law intervention) could be devised which would enable a credit institution to continue trading in a normal or near normal manner. ? There is a need to explore further the nature of deposits as liabilities of a credit institution and the related question of when or if a liquidity problem affecting their repayment on time would constitute insolvency ( as in unable to meet liabilities as they fall due). 21 Appendix 2 Goodhart approach to deposit protection Charles Goodhart, Emeritus Professor of Banking and Finance, LSE, has recently advocated an alternative approach to the protection of depositors than the deposit protection schemes currently in place in the US and elsewhere. He argues that on receipt of evidence that a bank cannot meet its due commitments, or can do so only by persistent recourse to the Bank of England for Lender of Last Resort support, and on receipt of a letter from the Governor of the Bank of England to the effect that failure of that bank would probably have contagious consequences, the Chancellor should have the power to nationalise the bank on a temporary basis (with a maximum horizon of perhaps two years). Once it is nationalised, the Chancellor would be expected, but not obligated, to dismiss senior management. All deposits, irrespective of currency denomination, location or counterparty would be guaranteed but no dividends or interest on subordinated debt would be paid during the temporary nationalisation. At, or before, the two-year horizon, the Chancellor would be required to hold an open auction to sell the bank back to the private sector, although some potential bidders might have to be prevented on competition grounds. With the auction proceeds, the Government would first be repaid for any losses in making good on the guarantees and then the remaining creditors, debt and equity holders would be paid off in strict order of seniority. An advantage of this approach would be that no additional deposit insurance or extra regulation would be required. Crucially the scheme would penalise those who make the poor decisions: the bank managers and their shareholders. Professor Goodhart acknowledges the difficulty for governments in penalising shareholders for managerial errors, since they include charities, pensioners, voters and other worthy people. 22 Overview of Financial Stability Resolution Issues Department of Finance Friday, 8 February 2008 SECRET J Context o EU requirement for national contingency plans for crisis resolution o Report-back due for April ECOFIN (report to FSC in March) (R) CBFSAI 'Red Book' in place o Work has commenced on DoF operational manual based on o Scoping paper & CBFSAI comments o legal advice from Office of the Attorney General (C) Lessons from Crisis Simulation Exercise (December 2007) o Policy decisions required to finalise a number of key "resolution" issues highlighted by work of the DSG to date ' National Contingency Plans o Integrated and consistent national approach essential o Individual organisational plans will reflect different roles and responsibilities in effective crisis management and crisis resolution o Must be soundly based on rigorous analysis and research on o Legal consideration governing crisis management * Preferred solutions (national policy objectives) V Previous conventional wisdom Intervention only if institution considered TBTF Otherwise institution should be allowed to fail Request to CBFSAI for ELA provision from financial institution o inauguration of financial stability event o lead responsibility for crisis management during that phase residing with CBFSAI \ Department's direct involvement predicated on the emergence of 'solvency' as opposed to liquidity' issues Current viewpoint If confidence fragile then small institution could trigger systemic difficulties which suggests all institutions are TBTF (in current market environment) 'Market discipline' may not be useful tool as insolvency (let it fail) not practical owing to weaknesses in DGS Increasing consensus that a "support operation" likely to trigger wider systemic problem Also 'solvency assessment' could often be an abstract / contentious exercise reflecting such issues as information gaps and valuation uncertainties, shaped by strict accounting / legal definitions, influenced by market conditions and particular assumptions \ j Current viewpoint continued... o In identifying the way forward very important to differentiate between short- & medium- term actions / policy responses feasible o Current contingency plans must be designed around what is currently permissible under the existing legislative framework and what might be changed over relatively short timeframe o Unlikely that more fundamental structural reforms if concluded to be desirable (e.g. special insolvency regime for banks) could be achieved quickly Lessons from recent crisis management i Every crisis has unique characteristics but has common themes * There are risks from extrapolating too strongly from Northern Rock experience, but it would be prudent to examine particular lessons: A i (R) Announcement of BoE support operation triggered bank run in Northern Rock and risked systemic crisis (C) DGS did not maintain public confidence (R) Resulted in very substantial public exposure (BoE loans, HMT guarantees) o Highlighted the risk in those circumstances that to maintain financial stability the State is left with no option other than to provide open-ended 'guarantees' I Lessons continued o 0 Key question - could Irish financial system accommodate crisis resolution approach adopted by UK for Northern Rock? (e.g. would the scale of lending / State "guarantees" required be credible) With the benefit of hindsight, 'covert' private sector takeover presented as to market preferable approach Issue for financial stability planning in Ireland is whether covert takeover legally feasible If so, how financial stability planning can be designed to expedite / maximise the prospect of success fait-accompli I Proposed frai nework for ci <rgan, Ciara Manley, Michael 19 June 2008 16:22 Lonergan, Ciara FW: From: Sent: To: Subject: For file Sent: To: From: Manley, Michael 19 June 2008 16:21 'Buttimore, Jonathan' Subject: Jonathan, Apologies for pursuing you on this, but I hope you have had an any opportunity to consider the material in relation to the outline nationalisation Bill. Overall, it is not considered practical or feasible that the broad range of powers provided in the U K - especially those exercised through secondary legislation - should be included in the legislation which it is proposed should be drafted to effect the nationalisation of an Irish 7 k. Our policy approach is to have legal powers available to the Minister to take an individual financial institution into public ownership in certain circumstances rather than as is the case in the UK to create a broad policy framework to support the resolution of financial stability issues as they may arise across the banking sector as a whole. On account of the continued disruption of wholesale financial markets and the challenges this is creating for Irish banks in securing funding on an ongoing basis, it is considered essential as we previously discussed with you that draft emergency legislation is available to provide the Minister with the powers necessary to take, as a last resort, a distressed financial institution in to public ownership to support the maintenance of financial stability in the State. The disruption and its effects have gone on longer than anyone had forecast, with at least one commentator now suggesting it will extend well into 2009 and the scale of impact is now being talked of more than a trillions in terms of sub-prime alone. All of this lends both greater urgency and importance to what we are seeking to do and I would wclcome an opportunity for an early meeting. Re~ards. Michael Minister, ^U^ - See table below for the performance (over the last year and quarter) of the main Irish banking stocks vis-a-vis some of the weakest international performers -- graphs in respect of each comparison are also attached for information. In terms of the performance of the overall sector, the ISE index of Irish fmancials has experienced a decline of -63% since February '07 as compared to -45% for the UK FTSE financial index and -51 % for the US Dow Jones financial index (TAB A). 24 June 2008 cc Secretary-General Irish banks compared with HBOS, Royal Bank of Scotland and UBS Irish Banks Approximate % change 1 year -50 -60 -55 -50 Bank Approximate % change 3 months -30 -38 -25 -31 Allied Irish Bank Bank of Ireland Anglo Irish Bank IL&F Bank International Banks Approximate % change I year -70 -65 -65 Approximate % change 3 months -50 -36 -27 IIBOS RBS UBS Allied Irish Banks HBOS-1 year bee h chart A L L I E D IRISH BANKS HBOS - 3 month A L L I E D IRISH BANK5 tech chart Royal Bank of Scotland -- 1 year A L L I E D IRI5H BANKS tech chart Royal Bank of Scotland-- 3 month A L L I E D IRISH B A N K 5 tech chart 4.15 I 5 4 `gifd - - I . - f- . pf.gL;f4Q Fr I . i_ A 'Z??'i-jK.- isn? W- gi," - . raQiya- inits- lylrTi-.vegB a n k of Ireland HBOS-1 year tech chart B A N K O F IR.ELAN D HBOS - 3 months BANK OF IRELAN D tech chart +20% K Bd L lR -20% o40% IFSE.L -60% 14 2 ? 6 2 8 , Volume 0 C o c v r D h t 2oa7Vahool Ire. htto:/vTina nce.vahoo.com/ Royal Bank of Scotland -- 1 year BANK O F I R E L A N D tech chart Royal Bank of Scotland -- 3 month BANK O F I R E L A N D bach chart - --7..4?l7777 7***5-777 "*1*v`77 sr -. A 7-7E5-.. 5*.-7,rA_' - nr-177? 7..: 7o`iv..' . : ' o ' .Tun in .1 2 0 1 io 1 11 1 1 i 1 11 1 .f11 i ,i.l I.I . 0 Coovraht 2.0CT7Yah00l Ire. I i , ,.> . i i i x J ^ lJj.lJ.J III III K?o://fira nee vahoo.com/ 1 n.llll UBS-1 year A G O -F S _ A K N L I U HB N + 20% [ g CKL1.IR tech chart 0% j-^ -20% -40% UBSN.VX CocrvrCht 2.0CJ7 Yahool Inc. tt?D://Flra rce.vahoo.com/ tech chart UBS-3 +30% +20% +10% 0% months ANGLO-IRISH B*N K {{CKL1.1R s*^ YN V A -10% i -20% >> i 1 Ma\. 2 3 ; ' v . j a M n l o . : -30% 30 JJ Volume An MavOS M -v.' I : %o guarantee has been provided by the Minister to Xfi for the purpose of maintaining the stability of the financial system in Ireland 7 . (R) where the Minister has been notified by the Central Bank and Financial Services Authority of Ireland that it intends to use its powers under Section 3(2)(b) of the Companies Act 1990 to petition the Court to appoint an examiner, or under Section 48(1) of the Central Bank Act, 1989 to petition the Court to have the holder of a licence wound up. Provide that the CBFSAI must give advance notice to the Minister for Finance of any decision to petition the Court "Financial assistance" f o r the purposes of this Head would include any case where another person has provided financial assistance to Xfi and the Minister assumed a liability in respect of that assistance . "guarantee" for the purpose of this Head would include (i) Any case where the Minister for Finance has announced that the Minister for Finance would if necessary put in place depositor guarantee arrangements in relation to Xfi, and (ii) A guarantee under section x of ANOTHER Act 200X (See separate Head 'Guarantees in respect of credit institutions in distress') e 2 Advice from the A G ' s O f f i c e is that it would not seem necessary at present to provide a definition of financial stability which is self evident f r o m the ordinary meaning of the word. 2 Head 2: Transfer of securities Provide that by virtue of this head the securities [shares] in Xfi are transferred to the Minister for Finance and that the securities shares are transferred (C) free of any trusts, liabilities and encumbrances (C) together with all the rights, benefits and privileges which relate to the shares transferred. Provide the securities [shares] may be transferred to a nominee of the Minister, a company wholly owned by Minister for Finance or any other body public or private. Provide that the transfer of securities will be effective notwithstanding; (C) the absencc of any consent otherwise required (C) Any restriction otherwise applicable to the transfer Provide that any shares 'lent' or otherwise assigned, e.g. to a hedge fund, will on the transfer, transfer to the Minister or other public/private body. Provide that Xfi shall take all nccessary steps to ensure that the Minister is registered as the holder of the shares and that he is to have all rights and advantages of a member of the company pending registration (i.e. even while not yet registered). Securities [shares] for the purposes of this head may need to be defined widely having regard to the credit institution concerned but would be likely to include; (C) shares and stock, (C) debentures, including debenture stock, (C) loan stock, bonds, certificates of deposit and other instruments creating or acknowledging indebtedness; (C) warrants or other instruments entitling the holder to acquire such securities. 3 Head 3: Extinguishing of subscription rightsProvide in relation to X f i , for the extinguishing of (R) share options or other rights held by persons to subscribe for, or otherwise acquire, securities of Xfi, or any of its subsidiaries. (R) rights to shares arising from or in connection with a person's employment or office or provision o f services with or to Xfi or one of its subsidiary or connected entities Note This power is thought likely to be necessary to deal with a case where persons have an enforceable right to be issued with or otherwise acquire shares or other securities of Xfi or any of its subsidiaries. This power may be necessary depending on the financial institution involved as t h e existence of, and exercise of, such rights might frustrate the purposes of a transfer to the Minister or his nominee. 4 Compensation for securities transferred Note 1. The UK Banking (Special Provisions) Act 2008 provides that the Treasury will develop a compensation scheme up to three months after the transfer of securities, i.e. (Sn5) "...the Treasury must...make a scheme determining the amount of any compensation payable by the Treasury to persons who held the securities immediately before they were so transferred [and for subscription] rights extinguished...". Broadly similar provisions are provided in relation to transfer of property (Sn 7) supplemented by Sn 9, which sets out areas to be covcrcd in compensation schemes manner and procedure of assessment, appointment of independent assessor, appeals, expenses, etc. Generally under Sn 5 the IJK authorities have 3 months within which to make a scheme of compensation in relation to the transfer of securities3. This approach has the advantage that there may be issues specific to a particular institution that need examination/analysis before a specific compensation provision can be drafted. However the Oireachtas may be less willing to approve a transfer of assets without knowing the terms on which people will be compensated. There may also be constitutional issues. 2. The approach in Head 4 which follows is to provide for payment of compensation to persons who held securities in Xfi immediately before they were transferred based on a valuation of the securities on the date falling before the day on which this Bill is passed. Advisory Counsel has advised of the importance of making express provision for compensation in the Bill to balance the interference with property rights stating " Heads providing for compensation must be included in the draft heads of the Bill . . . " An extensive provision is set out in the draft Head following, but it may be that a short provision stating the intention to make a compensation schcme and the principles for determining compensation would suffice. Notwithstanding the provision to enable the separation by up to three months, the Northern R o c k Pic T r a n s f e r Order was made on 2 1 February 2008 and the N R Pic Compensation Schcme Order on 12 M a r c h , 2008. 3 5 Head 4: Compensation for securities transferred Provide tiiat the Minister for Finance will by Order made under this Bill make within x months a compensation scheme for shareholders whose rights have been extinguished at heads 2 o r 3. Provide that compensation for sccunties transferred under head 2 or subscription rights extinguished under head 3 will be determined by a compensation scheme which will make provision: - for the appointment by the Minister for Finance of an independent assessor to determine the amount o f compensation to be paid by the Minister and make provision as to the remuneration o f the assessor, etc. that the assessor must, in assessing compensation payable by the Minister for Finance to any person i n accordance with Heads 2 or 3, assess compensation on the basis that at the date of announcement of the transfer of securities, Xfi -- (a) is unable to continue as a going concern, (b) is in Examinership and being wound up (c) that all financial assistance provided by the Minister for Finance to Xfi has been withdrawn (whether by the making of a demand for payment or otherwise), and (d) that no financial assistance would in future be provided by the Minister for Finance to the deposit-taker in question (apart from ordinary market assistance offered by the CBFSAI subject to its usual terms) (e) that any guarantee given under law or in any case where the Minister for Finance has announced that he would if nccessary put in place depositor guarantee arrangements in relation to Xfi, that such a guarantee has been revoked. Provide that the assessor is required to detennine the amount of any compensation payable by the Minister in accordance with the compensation scheme and communicate his determinations by means of "notices of assessment" which must include the reasons for t h e assessor's decision. Provide that where the Minister or any person affected by the determination of the amount of any compensation which is contained in a notice of assessment is dissatisfied with the assessment, they may require the assessor to reconsider his determination. Where t h e assessor is required to reconsider his determination he is required to issue a revised notice of assessment setting out, (a) the date on which the notice is issued; (b) either notification that the assessor has upheld the assessment; or notification that the assessor has varied the assessment; 6 (c) the amount o f any compensation determined by the assessor as being payable; and (d) the reasons for the assessor's decision. 'fhe assessor shall send a copy of the revised assessment notice to the Minister. Provide that where the Minister or any person affected by a determination of the amount of any compensation which is contained in a revised notice of assessment is dissatisfied with the revised assessment, they may refer the matter to the Irish Financial Services Appeals Tribunal for the assessment to be appealed. The assessor in these circumstances acts as a respondent in the Tribunal proceedings. Provide that where the Tribunal concludes that the decision as to the amount of any compensation shown in the revised notice of assessment was not reasonable, the Tribunal must remit the matter to the assessor for reconsideration in accordance with such directions (if any) as the Tribunal considers appropriate. I'he assessor must then reconsider his determination in accordance with any such directions. Payment of compensation Provide that the Minister will pay the amount of compensation determined by the assessor to be payable to a person in respect of a class or description of shares /securities. The Minister will not be required to make a payment in accordance with the foregoing until he has received a copy of the notice of assessment or revised notice of assessment or in the case of a reference to the Tribunal that the matter has been disposed of. Compensation assessment procedures Provide that the assessor may make such procedural niles in relation to the assessment of any compensation (including the procedure for the reconsideration of any decisions relating to the assessment of compensation) as he considers appropriate but that the procedure followed by the assessor must be fair. Provide that the procedures shall be approved by the Minister for Finance before being used. The drawing up of the procedural rules will be a matter for the assessor in the first instance but must cover such matters as communications between the assessor and interested parties, the handling of evidence, deadlines ctc. The assessor will also act as the respondent in any proceedings before the Tribunal. The assessor will be expected to act so as to facilitate the smooth operation of the appeals process. Remuneration of Assessor Provide that the assessor will be paid such remuneration and reimbursed such expenses as the Minister may detennine. 7 Criteria for a p p o i n t m e n t as assessor Provide that persons to be appointed as assessor should be able to satisfy the following criteria: Potential conflicts of interest: To be eligible for appointment as assessor persons must be able to confirm - they have no actual or potential conflict between any personal or business interests and functions as an assessor that could influence, or be reasonably perceived to influence, their judgement in performing functions as an assessor in respect of Xfi. - will not engage any staffs who, to the best of their knowledge having made reasonable enquiries, have any such actual or potential conflict. - they will take appropriate steps to ensure that, if appointed, neither they nor any staff arc placed in a position where there is any actual or potential conflict between any personal or business interests and their or their functions that could influence, or be reasonably perceived to influence, them or their judgements in performing their functions as assessor. - that they will disclose to former shareholders, the Minister and other interested parties full particulars of any such actual or potential conflict of interest that may arise. Knowledge and Experience To be eligible for appointment to the position of assessor persons should (a) have extensive professional financial company valuation skills. In order to be able draw on a range of professional expertise, including accountancy, investment banking and legal, the assessor should have a high standing and credibility in their profession. (b) be able to demonstrate that they have the capacity and resources to undertake the task of assessing any compensation payable and managing a compensation scheme in a timely and efficient manner; Termination of office The Minister may terminate the appointment of an assessor by notice in writing with immediate effect on the grounds of incapacity or serious misbehaviour. Where an appointment is terminated or vacated (howsoever arising) the assessor must provide free of charge such assistance as may reasonably be requested by any person appointed to the position of assessor to facilitate an effective and timely handover of all work then in progress. If an assessor vacates office other than in circumstances outside his control he will reimburse the Minister such amount as is reasonably required to provide for any additional costs arising out of the change of assessor. For the avoidance of doubt, an assessor moving to another firm, the identity of which, by reason of its involvement with Xfi or otherwise, prevents his continuing as assessor, will not be treated as circumstances outside his control. 8 Head 5: Removal from/ Appointments to (i) membership of the Board of Xfi and (ii) senior executive positions within Xfi. Provide that as sole shareholder in Xfi the Minister may remove persons from and appoint persons to: (a) the Board of Xfi including to/from the position of Chairman of the Board. (b) the positions of Chief Executive and Chief Finance Officer of Xfi: Provide that the directors of Xfi will hold office for such duration and upon such terms and conditions as the Minister may determine. Note Other key executive positions might be included depending on the staff structure of the particular credit institution involved. It may also be appropriate to include the position of Deputy Chairman again depending on the particular institution concerned. .9 Head 6 - Definitions Provide as appropriate for necessary definitions (for example for terms such as 'credit institution', guarantee, etc.) 10 HIGHLY CONFIDENT!AI, Head re amendment of the Competition Act 2002 Purpose The purpose of this Head is to allow in certain circumstances for a declaration by the Minister for Finance that a proposed merger or acquisition of a credit institution* is approved for purposes o f the Competition Act having regard to the need to maintain the stability of the financial system in Ireland. /* as defined in Regulation I of the European Communities (Deposit Guarantee Scheme) Regulations 1995 (SI 16S of 1995] but to include a credit union as defined in section 2 of the Credit Union Act 1997.] Head Provide in relation to a merger or acquisition within the meaning of section 16 of the Competition Act 2002 that involves a crcdit institution which does not affect trade between EU Member States, that the Minister for Finance may dcclarc that the proposed merger or acquisition is necessary to maintain the stability of the financial system in Ireland and the effect of such declaration will be to remove the power of the Competition Authority to make a determination as to whether the merger or acquisition would be in breach of the prohibition on anti-competitive agreements, decisions and concerted practices in sections 4 and 5 of the Competition Act 2002. Provide that the power of the Minister to make such declaration may be exercised only where it appears to him to be necessary for any or all of the following purposes: (R) maintaining the stability of the financial system in Ireland where the Minister considers that there would be a serious threat to its stability if the power were not exercised; (R) protecting the public interest in circumstances where financial assistance or a guarantee has been provided by the Minister to a credit institution involved in the merger or acquisition in question for the purpose of maintaining the stability of the financial system in Ireland. Note Section 4 of the 2002 Act contains the general prohibition on anti-competitive agreements, decisions and conceited practices. Section 5 prohibits the abuse of dominant position. Subsection 5(3) exempts from the prohibition mergers for which provision is made in Part 3 of the Act. Where the takeover, merger, etc of a distressed financial institution arises, the question of competition approval may arise under EU or domestic law. If the annual turnover of the combined business exceeds specified thresholds in terms of global and European turnover, the proposed merger must be notified to the European Commission which must examine it. Below these thresholds, the national competition authorities in the EU M e m b e r States may review the merger. The threshold most likely to apply in the case of a takeover of a domestic financial institution is aggregate worldwide turnover of 5bn and Community turnover of EUR250m (unless each of the businesses achieves at least two-thirds of its turnover within the same Member State). 1. Mr. Beausang ^ 2. Secretary G e n e r a l ^ / 3. Minister From Michael Man ley Re: Information Note financial market conditions and outlook lg of 3 September 2008 on^currcnt The attached note has been prepared provide briefing, if required, on current financial market conditions and outlook. 2 September 2008 f c CAr Note for the Minister's Information on financial market developments September 2008 Purpose of Note This note provides an update on current financial market conditions. An overview of the international and domestic situation is presented in the main note. A more detailed background note is attached as an appendix. International Situation (R) Financial market conditions remain extremely difficult and the international financial sector remains under considerable stress with credit availability restricted, the cost of funds elevated and no near tenn prospect of credit markets returning to their pre-crisis levels of activity. >> There are few real indications that any sustained improvement will be achieved in international financial market conditions for some time. The more optimistic commentaries characterise the current position as 'the end of the beginning'. (R) The concerns that led to the international credit markets seizing-up last August persist and there is evidence that in the US the delinquency problems that affected sub prime loans are spreading to the wider economy, reflecting the broader slowdown in economic activity. (R) Major financial institutions continue to disclose major write-downs and the IMF has estimated eventual losses at $1 trillion. ? International initiatives and in particular the activities of the US Federal Reserve and the ECB/Eurosystem have helped to stabilise financial market conditions at particular junctures. However recent comments suggesting a tightening of the availability of liquidity from the ECB and the prospect of major international banks having to roll-over an estimated $800bn in funding finance over the next few months have added to the negative picture. (R) International efforts to resolve the crisis (e.g. by promoting increased transparency or new valuation approaches) are ongoing but will in any event take some time to bear fruit in terms of contributing to a sustained improvement in financial market conditions. Irish Financial System ? Irish banks continue to meet all the conventional measures of relatively robust financial health - solvency, liquidity, profitability, asset quality. However, not surprisingly profit projections are down somewhat. (R) Though having very limited direct exposure to US sub-prime lending, the domestic Irish banks are subject to the funding pressures and weakness in investor confidence that is adversely affecting the international financial system. (R) However, Irish banks are subject to specific pressures and stresses - over and above those applying more generally internationally - owing to wide-spread international concern regarding their exposure to a declining residential property market in Ireland and weak commercial property market internationally. (R) Increased costs and reduced availability of wholesale funding on international credit markets, particularly for longer-terms has led Irish banks to tighten lending standards coinciding with the downturn in the real economy, driven by the necessary adjustment of the construction sector. 1 (R) There is little international investor appetite for investment in Irish financial institutions, which are perceived to be vulnerable to the real economy impacts of the crcdit crisis and correction in construction activity. The resulting very significant fall in the share prices of Irish linancials has outpaced those in other countries. The decline in the ISEQ financial index since Q2 2007 is 69% as against fails of 44% in the UK. FTSE and 47% in the US Dow Jones financial indices. o As mid-sized banks b y international standards, Irish banks are disadvantaged in terms of their credit ratings and access to and cost of wholesale funding; the financial position of some Irish financial institutions is particularly sensitive to the risk of credit ratings downgrades. (R) While international investors are clearly differentiating between the financial position of Irish banks (e.g. as demonstrated by Credit Default Swap (CDS) rates), it is likely to be the case that a problem in any domestic financial institution or an event such as the collapse of a major properly developer would be likely to give rise to a systemic difficulty in the Irish financial system affecting all the Irish banks. ? Another important indicator of investors' negative view of Ireland is that the yield spread of Irish Government Bonds over German Government Bonds now st ands at 47bps whereas before the financial market turmoil Ireland was nonnally at the low end of a 5 to lObp range over Germany. Conclusion 5 The international financial market background is one of major loses from subprime mortgage products, the collapse/rescue of major banks and the prospect of further difficulties. Irish banks have weathered international developments and the correction in domestic construction activity and property prices, but are under ongoing pressure. Wholesale funding continue^to be constrained and costly as compared to pre-crisis levels, putting pressuj|$b'n institutions to fund their lending activities with varying degrees of challeng^lff differenkinstitutions. The national picture is that the Irish banks continue to stress that they a r e " o p e n f o r business" notwithstanding "the tightening in standards / increased cost of credit that has taken place and the reduced appetite for borrowing in the economy. The case that lending is continuing is borne out by the available statistics. Private Sector Credit annual rate of increase in July was 13.3%. The recent IBF/PwC mortgage lending figures to mid-year also demonstrate the resilience of mortgage lending despite the adjustment to more sustainable levels of activity in the housing market overall. The Irish Banking Federation (IBF) is reported as stating the Government did not need to act to re-invigorate the mortgage market at this time. However, the supply of credit could be seriously disrupted by any significant financial shocks in the future. This would intensify the downturn in domestic economic activity and could potentially lead to financial stability issues. Key to sustaining the position of Irish banks this far has been the maintenance of confidence and overall financial stability despite the year long international credit crunch and negative investor sentiment. The endorsement of the financial health of the Irish banks by the Central Bank, OECD and international credit rating agencies to date has been important. However the maintenance of confidence will be challenging in face of continuing stress in international credit markets, the sharp downturn in domestic economic activity and. in particular, the property market.. The foregoing summary assessment underlines the importance of the Government's role in maintaining confidence in the financial system and sustainable fiscal policy. The CBFSAI continues t o monitor developments closely and the Domestic Standing Group (DSG) on Financial Stability is continuing to meet to coordinate information exchanges between the Central Bank, the Financial Regulator and the Department. A more detailed note is attached. 3 Appendix Financial Market Developments International International financial markets remain depressed reflected in very significant falls in bank share prices, little investor interest in financial markets and continuing elevated interest rates in the euro area and constrained liquidity. The generally held expectation is that the dislocation in financial markets, which has already spilled over into the real economy, will continue for at least another year. Over the last twelve months markets have received a succession of bad news: - US S u b - P r i m e crisis is now estimated by the IMF to be likely to reach SI trillion in losses (approx $500 billion already written off) which has massively impacted major international financial institutions which have had to bring these losses to book (e.g. UBS, Citibank, Lehmans, etc.). - Standard & Poor reported on 22 August that that mortgage delinquency rates on many better quality U S mortgages in July outpaced those on the sub prime loans that helped to spark the housing crisis. Total delinquencies on two categories of prime loans rose at rates of 7% and 9% from June while the rate for sub prime loans rose by 7%. - In the US, F a n n i e M a e and Freddie Mac 1 , which together own or guarantee $5.3 trillion in U S mortgages (almost half of the US mortgage market) have been badly damaged by increased mortgage default. Because of the losses from the worsening situation in the US housing market both companies have sought to raise funds but investors fear they m a y not be able to raise enough to cover liabilities as they have to pay out if homeowners cannot meet their mortgage repayments. This lead to recent heightened speculation that Freddie & Fannie would be nationalised. In light of the Bear Steams events in March, the market is waiting to see how they will be recapitalised and h o w this might impact on their share holders. The US Treasury Secretary announced in mid July that the US Government's primary focus was supporting the two firms in their current form, but continuing deterioration in underlying mortgages is focusing speculation that both will have to be rescued by the Federal authorities (re-nationalisation). - In Europe, collapse in the value of certain banks, leading to the nationalisation of Northern R o c k in t h e UK, rescue of SachsenLB and 1KB in Germany by other German banks and most recently the takeover of Roskilde bank in Denmark by a combination of the Central Bank and other Danish banks have left investors with little appetite for the financial sector. - Euribor with the 4.961%. much of rates - T h e interest rates in the interbank money market remain elevated, Euribor 3-month rate 0.711% above the ECB base rate of 4.25% at The spread between the Euribor rate and the Eonia rate indicates how the spread of the Euribor above the ECB base rate is due to the market Federal H o m e L o a n M o r t g a g e Corporation (Freddie Mac) and Federal National M o r t g a g e Association ( F a n n i e M a e ) - originally established as Federal authorities to ensure funding to mortgage lenders through the_secondary mortgage market, but subsequently privatised. 1 4 turmoil. This spread was approximately 0.6% at the start of August 2008. This is lower than its peak of 0.9% during this market dislocation, but far higher than the spread of only 0.07% before the onset of the turmoil in August 2007. Against the background of persistent bad news, markets have recently been contemplating two prospective concerns: - A key stabilising influence over the last twelve months has been additional liquidity made available by international central banks (ECB, Federal Reserve, Bank of England and Swiss Central Bank). However, recent public comments by the President and members of the ECB that banks must make greater efforts to return financial markets to some form of normality has led to speculation that such liquidity will become less available as the ECB tightens its lending criteria 1 . This would lead to greater pressure on banks, particularly smaller banks where these are perceived to be otherwise vulnerable (e.g. exposed to property markets) to find finance at an acceptable price. - B a n k s ' funding r e q u i r e m e n t s : It is estimated that financial institutions will have to pay off almost $800 billion in floating-rate notes (securities used to borrow money) and other medium-term obligations before the end of 2009, i.e. either find replacement funding in this amount or realise assets to pay off these moneys. By the end of this year, large b a n k s and investment houses such as Goldman Sachs Group Inc., Merrill Lynch & Co, Morgan Stanley, Wachovia Corp., and HBOS PLC must each redeem more than $5 billion in floating-rate notes. As banks compete for funds to pay off their borrowings, or sell assets to raise cash, these actions could exacerbate strains in financial markets. Banks that turn to shorter-term loans will have to renew their borrowings more frequently, increasing the risk that they won't be able to get money when they need it. The effects of past and anticipated events are reflected in major falls in share price indices across international markets especially banks (see graph at appendix 1), increased prices for Credit Default Swaps (CDS, i.e. the price at which a guarantee of repayment of loan in the event of default by a bonower can be bought - s e e graph at appendix 2) and spill-over into real economies with decline in consumer confidence and economic growth. Ireland Irish banks had little o r no direct exposure to the US sub-prime crises. However, original hopes that the consequences of those problems could be avoided if the crisis was short lived and spill-over into real economies avoided have not been realised. In the context of a general loss of confidence in the financial sector, the perceived vulnerabilities of the Irish domestic financial sector to high levels of exposure to the property and construction sector have come into sharp focus, amplified by the correction now underway in construction activity. M e d i a reports point to i n c r e a s i n g creativity of Banks in order to benefit from the I.;CB regime. The U K ' s Nationwide B u i l d i n g Society for example has announced plans to expand into Ireland to make u s e o f the eurozone's f u n d i n g opportunities. Spanish banks are reported to have scaled up their use of mortgage-backed securities to obtain f u n d i n g from the ECB as they cannot find investors for these securities. All of these h a v e b e e n unhelpful. 2 5 - As a small banking market significantly involved in property lending particularly in the commercial sector, Irish banks have been hit hard by negative investor sentiment. The decline in the ISEQ financial index since Q2 2007 is 69% as against falls of 44% in the UK FTSE and 47% in the US Dow Jones financial indices. - A further indicator of investors' negative sentiment towards Ireland is that the yield spread of Irish Government Bonds over German Government Bonds now stands at 47bps whereas before the financial market tunnoil Ireland was normally at the low end of a 5 to lObp range over Germany. - The share prices of individual financial institutions have been highly volatile, in general the share prices of individual banks are worth about lA of their price at the start of 2007, but have fallen precipitously at different times over the last year. - Irish banks are under pressure to maintain dividends, with media reports pointing to IL&P declaring a dividend of 22 cents per share for 111 2008 on an income of 12 cents per share in the same period. - Domestic Irish banks continue to state they are open for business and are interested in proposals that offer real opportunity for added value. However, there has been a decline in growth in lending; new mortgage lending has declined from EUR16.542 billion in the first six months of 2007 to EUR13,832 billion in the same period in 2008, a decline of 16%, and most banks have radically altered their loan product line and required increased equity input from prospective borrowers. Against this background there is little international investor appetite for investment in Irish financial institutions. Goldman Sachs recently issued a report pointing to likely increased impairment of loans by Irish banks, expecting Irish lenders to write off 3pc of loans to property developers next year alone and reducing by 34pc their earnings estimates for the sector between 2008 and 2010. While the extent of write-offs is significant, it is close to the forecasts by the individual institutions and Goldman Sachs expects the three main banks Allied Irish Banks, Bank of Ireland and Anglo Irish Bank to remain profitable. All of the Irish banks have stressed they are working closely with key borrowers to monitor developments and mange financing needs. Nonetheless, the overall assessment reinforces investor reluctance to support Irish banks. In the context of international concerns of growth in dependence by banks on liquidity from Central Banks, it should be noted thai while the overall level of ECB funding availed of by banks in Ireland has increased from EUR39.5 bn to EUR44 bn, domestic banks accounting for EUR1 5bn of the total. However this figure fluctuates over time. Financial Stability R e p o r t 2008 The CBFSAI's Financial Stability Report (FSR) for 2008 will be published in mid November. This arises from our membership of the European System of Central Banks which requires the ECB and national Central Banks to foster financial stability in the euro zone. The objective of the Report is to set out the CBFSAI's overall assessment of the stability of the domestic financial system; it does not relate to monetary policy matters. The FSR provides the CBFSAI's view on the economic 6 outlook generally and macroeconomic risks arising. It focuses on issues for the Domestic Financial System and its overall health. The overall conclusion of the FSR for 2007 was that the shock-absorption capacity of the banking system left it well placed to withstand pressures from possible adverse economic and sectoral developments. Clearly the extended period of dislocation in financial markets, spillover into the global economy and correction in the construction sector will be reflected in the FSR 2008. While it is too early yet to anticipate the content of the CBFSAI's report for 2008, the Department will liaise closely with the CBFSAI to identify key issues. September 2008 cc Secretary General, Mr Cardiff, Ms Herbert 7 Appendix 1 Daily percentage change in Irish, UK and US financial indices Daily % Change IE, UK AND US Financial indexes 13/04/2007- 29/03/2008(oib)! Value None j | 16 . . . . . . ,, . . . . ,, .. . . . . . . . . ,, . _ . . . Q2 2007 I Q3 2007 | Q4 2007 I Q1 2008 j Q2 2008 ! Q3 2008 [Delayed; j 8 Appendix 1 CDS spreads for AIB, Bank of Ireland. Anglo Irish Bank and HSBC and RBS Daily QBKIR5YEUAIV1=FN, Q A N G L 5 Y E U A M = F N , QBSCT5YEUAM=FN, QAIB5YEUAM=FN, Q H S B A 5 Y E U A M = F N 18/06/2007-03/09/2006(10^! Price None 18 02 | Jul 07 | Aug 07 | S e p 07 | Oct 07 | Nov 07 | Dec 07 | J a n 08 | F e b 08 j Mar 08 [ Apr 08 | May 08 | J u n 08 | Jul 08 | Aug 08 I 9 fj^ys- / 1. William B e a u s a n g ^ 2. Minister U0u M U ^ - s - U w o ^ 1 ^ u ' ^ * p o f ^ U / . .^A" o-^" ^ i ^ cVo ^ f ^ t - b r t S * ' : ,, Subject: Note for the Minister's information: ^ R a t i n g s agency (Moody's) downgrade of Irish National Building Society. ^ iM^^y M j ?P Key message Moody's, the international rating agency has announced a downgrade of its rating of Irish Nationwide Building Society (INBS) including for long-term bank deposits and senior debt from A3 to Baal - which we understand to be a 'two-notch' reduction in the rating which is considered a significant negative development by the Financial Regulator. All INBS's ratings remain on review for further downgrade. The report indicates the d o w n g r a d e would probably be greater except that Moody's anticipate t h e r e is moderate probability of systemic support to INBS in the event of financial crisis. (Copy Moody's release attached) Reasons for downgrade According to Moody's the downgrades reflect:(R) increasing exposure to commercial property and development (which now accounts for 80% of its loan book) ? the rapid deterioration in land and property values in Ireland and the UK (R) the Agency's expectation of weakening asset quality as the economic environment in Ireland and the US deteriorates. Moody's also note important concentration risks to its largest 20 borrowers. Implications of downgrade The downgrade will have implications for INBS's funding costs and will also cause difficulty for it in retaining corporate deposits in its Isle of Man subsidiary. INBS expects outflows of EUR200m on account of the downgrade in due course, which according to the Financial Regulator is considered manageable by INBS. Savings in INBS are tied up in term deposits, depositors would need to decide to break the terms of the account and suffer penalties to withdraw if they had significant concerns. Context INBS is one of only two remaining building societies in Ireland. INBS has grown by engaging in substantial commercial lending. Its 2007 Balance Sheet shows it having assets of EUR16bn making it one of the smallest of the 'big six' domestic financial institutions, with loans to the non-financial sector of EUR12.3bn (of which EUR9.7bn are commercial mortgages and EUR2.6bn are residential). INBS has been seeking to sell itself and de-mutualise for some time without success; in the current climate and with its inherent vulnerabilities, there is little prospect of this being realised any time soon. 'Monitoring and Next Steps The Financial Regulator is monitoring the INBS's position very closely and will continue to keep the Department informed of developments, particularly if there is any indication that outflows are significantly greater than expccted. The position of the INBS and other smaller more exposed domestic financial institutions in the ongoing stressed financial market conditions will be reviewed at the next meeting of the joint Department-CBFSAl Domestic Standing Group (DSG). 5 September, 2008 cc Mr. Kevin Cardiff, Secretary General, Ms. C. Herbert 1. Mr. Beausang 2. Minister Subject: Note for the Minister's information: Ratings agency ( M o o d y ' s ) downgrade of Irish National Building Society. Key message Moody's Investors Service is issuing a downgrade of its rating of Irish Nationwide Building Society (INBS). It has downgraded: - the long-term bank deposit rating and the senior debt rating of to Baal from A3 and - its subordinated debt to Baa2. The bank's financial strength rating (BFSR) was confirmed at C-, however Moody's believes that the bank is n o w more weakly placed within this rating category, and so has lowered the baseline credit assessment to Baa2 from Baal. The short term debt and deposit ratings were affirmed at Prime-2. All these ratings remain on review for further downgrade. The report indicates the downgrade would probably be greater except that Moody's anticipate there is moderate probability of systemic support to INBS in the event of financial crisis. (Copy Moody's release attached) Context INBS is one of only two remaining building societies, most of the others (e.g. Irish Permanent) having de-mutualised in recent years to become part of mainstream banking. INBS, while continuing to provide residential mortgages, has grown by engaging in substantial commercial lending. Its 2007 Balance sheet shows it having assets of 616 Billion, making it one of the smallest of the 'big six' financial institutions, with loans amounting to EUR14.45 Bn. Customer deposits, amounted to EUR7.25 Bn. INBS is vulnerable on two fronts: - its funding is very heavily reliant on financial instruments (circa EUR7 bn at end 2007), making it vulnerable to the dislocation in financial markets, - it is reported to have lent heavily to the commercial property/development sector, making it vulnerable to the downturn in economic and commercial activity. While noting that INBS has managed to contain operating costs, Moody's emphasise their ratings downgrade to reflect the significant risk inherent in INBS's commercial real estate portfolio (noting an important concentration risks to its largest 20 borrowers). Summary INBS (CEO: Michael Fingleton) has been seeking to sell itself and de-mutualise for some time without success; in the current climate and with its inherent vulnerabilities, there is little prospect of this being realised any time soon. .INBS, in advising the Financial Regulator of the downgrade expressed surprise, indicating they hadn't expected this news for some weeks (October), but the fact remains it will enter the public domain during the day. Outflows of up to EUR200m are expected on account of the downgrade, which is considered manageable by INBS A lot of savings are tied up in term deposits in Isle of Man accounts, so savers would need to decide to break the tenns to withdraw if they had significant concerns. The Financial Regulator is monitoring the position very closely. Michael Manlcy 5 September, 2008 CC Mr. Kevin Cardiff, Secretary General, Ms. C. Herbert Global Credit R e s e a r c h Rating Action Moody's Investors Sorvtca 4 SEP 2006 Rating Action: Irish Nationwide Building Society Moody's d o w n g r a d e s Irish Nation wi ings p l a c e d on review for d o w n g r a d e London, 04 September 2008 - Moody's Investors Service h a s today downgraded the long-term bank deposit rating and the senior debt rating of Irish Nationwide Building Society (INBS) to Baal from A3. The society's subordinated debt has b e e n downgraded to Baa2. The bank financial strength rating (BFSR) was confirmed at C-. however Moody's helieves that the bank is now more weakly placed within this rating category, and so has lowered the baseline credit assessment to Baa2 from B a a l . The short term debl and deposit ratings were affirmed at Prime-2. All these ratings are placed on review for further downgrade. Moody's said that the downgrade reflects: f:> 'he increasing exposure lo commercial property and development which now accounts for 80% of the 3ty's loan book; (ii) Ibe rapid deterioralion in land and property values in Ireland and the UK which is exacerbating the already high loan-to-value ratios on the commercial property and development loan book; (iii) Moody's expectation of weakening asset quality as the economic environment in both Ireland and the UK deteriorates. The C- BFSR rating reflects the society's niche position a s a commercial real estate lender in Ireland and the UK and to a declining extent its role a s a residential mortgage loan provider, primarily in the Republic of Ireland. The rating also lakes into account INBS's good earnings and high efficiency a s it continues lo operate with a low cosf b a s e despite a relatively large branch network. At the same time, the rating recognises INBS's high dependence on the higher risk commercial development business, as well as its growing dependence on wholesale funding resources. The decision lo place the ratings under review for possible downgrade reflects the significant risk inherent In INBS's commercial real estate portfolio, including important concentration risks lo its largest 20 borrowers, while being exposed to a rapidly deteriorating operating environment which could put further pressure on the bank's credit profile. The review will focus on the measures that the bank is taking to manage and potentially reduce these risks. " ' 8 S has been actively attempting lo sell itself. Moody's believes that this is unlikely in the current /ironment and therefore an important part of the review will b e the society's future strategic direction. Moody's noted that were a sale lo tako place then this would h a v e future rating implications depending on the potential acquirers risk profile and strategy for the institution. The Baal deposit and debt ratings of INBS reflect Moody's view that (he probability of systemic support for INBS in the event of a financial crisis is moderate and this results in a one notch uplift in the deposit and debt ratings from the Baa2 Baseline Credit Assessment. Due to the downgrade of INBS's senior debl rating to Baal, Moody's also downgrades INBS's Mortgage Backed Promissory Notes to A2. on review for further downgrade. The ratings of the Mortgage Backed Promissory Notes benefits from a two notch uplift from Ihe issuer's senior debl rating. Please refer to the "Framework Agreement in Respect of the issue of Mortgage Backed Promissory Notes" on www.moodys.com. Irish Nationwide Building Society, headquartered in Dublin, Ireland, had total assets of EUR16.1 billion al year-end 2007. London Johannes Wassenberg Managing Director Financial Institutions Group Moody's Investors Service Lid. JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 FINANCIAL REGULATOR PO .Box No 9138 CouibE GREEN, DUBLIN 2, IRELAND Rialtdir Airgeaclais T +353 1 410 4462 F +353 1 410 4899 www.financialregulator.ie Patrick Neary Chief Executive M r Kevin Cardiff Second Secretary General Department of Finance U p p e r M e r r i o n Street Dublin 2 10 S e p t e m b e r 2 0 0 8 Dear Kevin I r e f e r to o u r m e e t i n g this m o r n i n g a n d y o u r r e q u e s t for a f o r m a l r e p o r t f r o m the Financial R e g u l a t o r on current liquidity c o n d i t i o n s u n d e r the D S G F r a m e w o r k . T h e attached report reflects o u r a s s e s s m e n t a n d possible policy response. Y o u r s sincerely 1* \l."l i!')!o'I I - OUTLOOK FOR LIQUIDITY IRISH DOMESTIC INSTITUTIONS B a n k i n g Supervision Department 10 September 2008 2 1. Introduction This paper summarises the current liquidity position for the six indigenous Irish credit institutions ('banks') mid the outlook for three of the six. The paper starts by recalling the current state of play for Irish institutions with regard to the turmoil in financial markets. It then focuses on how the situation has evolved. In Section 3, it focuses on three of the indigenous institutions and assesses the liquidity position of each one in greater detail. Section 4 highlights the outlook for these three institutions and a The paper number of specific external factors which impact on their funding. concludes with Section 5 providing an overview of the Financial Regulator's regulatory engagement to date. 2. Background At the core of liquidity risk in banking is the maturity transformation function of banks (lending long and borrowing short). The Financial Regulator's liquidity requirements ('the Requirements') seek to address this risk by requiring banks hold enough liquidity to match infiows and outflows in the first time band (0-8 days) and seeking 90% coverage of outflows in the second time band (8 to 30 days). The turmoil in markets, which is the most prolonged (approximately 14 months) and widespread since the Second World War, has made banks' management of the maturity gap between assets and liabilities much more difficult. Bank assets (loans) duration has remained relatively unchanged. However, the duration of liabilities has shortened considerably as banks cannot issue medium and longer term funding instruments. Intense competition in the retail deposit market has made it difficult to grow the deposit base. Banks are also seeing the maturity of funding sources such as corporate deposits continuously shortening. The above trends are marked for Irish and UK banks that are perceived by international investors as having large exposures to property lending in economies that have gone into deep and rapid declines. The challenging funding conditions have been present since August 2007 and, as a result, many banks have adapted to the challenging markets and have amended their funding modus operandi. The table below shows the end-month liquidity ratios for the first two time bands, as per the Requirements, for the six indigenous banks for the last six months. ali .-.- La . A- ..-1 2 5. Regulatory Engagement Industry Wide The Financial Regulator's concern regarding banks exposure to property led it to introduce increased capital requirements for 100% LTV mortgages in May 2006. In December 2006, in the context of exercising national discretions under the Capital Requirements Directive, the Financial Regulator introduced higher capital requirements then other EIJ Member States for non- owner occupied residential property, higher LTV residential mortgages and speculative commercial property exposures. These initiatives recognised the higher risk associated with these Market exposures and required banks to hold additional capital against them. commentary and rating agencies assessments are that Irish banks are adequately capitalised. Interestingly, Moodys commented in a recent meeting with the Financial Regulator that they did not believe that a bank would fail because of capital. Liquidity, not capital, is the main issue in the current crisis. The Financial Regulator's revised liquidity requirements were imposed with full effect from July 2007. In October 2007, the Financial Regulator fonnally put all Irish licensed banks on a weekly liquidity reporting cycle to facilitate closer monitoring of liquidity positions. In the case of the six indigenous banks we have formal oral briefings on their liquidity position, movements, strategies and market conditions on at least a weekly basis. In the context of reinforcing the need for institutions to consider strategic direction and initiatives, senior management of the Financial Regulator, jointly with the Governor of the Central Bank, has had meetings with the CEOs of these banks and with the boards of directors. Future Options Given that the Financial Regulator "toolbox" does not include the ability to increase the availability of funding, an approach that restricts outflows must be considered. Banks have recognised the need to curtail lending given current market conditions. However, in order to conserve liquidity the Financial Regulator could go further and require banks to curtail lending significantly. While this would have serious broader economic consequences we do not at this stage see other options to protect banks' 13 liquidity positions. Given the potential for increased negative perceptions of Irish banks if such a requirement came into the public domain, the manner or its imposition would need to be carefully managed. In addition, such action would limit, if not remove, the ability of banks to work with any significant borrowers who may need additional support to work through the current market conditions. Any such action would need to be considered in a wider financial stability context and in consultation with the Central Bank. However, as stated above, in terms of tools available to the Financial Regulator we have very limited options. Banking Supervision Department 10 September 2008 w I I i> SCENARIO "PROTECTION" CONTROL GOING CONCERN BASIS PROPERTY RIGHTS ADDRESSED LEGISLATION REQUIRED RECALL DAIL AND SEANAD 3 STAGES DAIL SAME SEANAD URGENCY MOTION PRES SIGNS CAN BE FAST, BUT THERE IS A TIME FRAME PHASES OF ACTION DISTRESS PHASE 1 DAY ? ^ O^ ^ pressure on liquidity on mgt preparatory activity ACTION ON LIQUIDITY ACTION ON COMMS ACTION WITH MGT\STAFF ACTION\PREP RE OTHER INSTITUTIONS WORK ON OTHERXBETTER OUTCOMES "RED BUTTON" PHASE (E.G FRI -- MONDAY) DECISION TO GO INVOKE PLANS AND ADHUST AS REQ. TAKE CONTROL INCL. Subs. - n^sA START LEG PROCESS ( I r ) c l ^ COMMUNICATE DECISIONS I ww (C) c o o o (R) o o public depositors corporateand interbank mgt and staff EU bodies MOU counterparts 5 'c's < rWtSySC-fX~ coherent (jv j<>~c 0 WszA OOC _ v ,1 . (R) (R) (R) (R) o (R) (R) o o comprehensive credible consistent coming from all rescue parties - FR bank Min GIS Taois NTMA and, v. important, I N B S ^ r g , ^ ^ uj&V. internet mass media PR firms usual investor channels o irv >(O r ' J (R) direct contact - phones, branches email REGULATOR CONTROL PHASE - DAYS? Cbfsai POWERS AND INFLUENCE DIRECT ALL ACT IVITY THROUGH A TEAM PUT IN AND DIRECLY fc^M ACTION CONTINUES ON COMMS AND LIQUIDITY ACTION TO PROTECT ASSETS IF NEEDED - U ^ / u s s ** o s ^ t d o * A oU:u><<6 ACTION TO REASSURE MGT AND STAFF LEG PROCESS IN TRAIN NEED TO PLAN ALSO AGAINST CONTAGION - o W " l ^ U - ^ MINISTERIAL PROTECTION PHASE STARTS TEAM ALREADY IN SITU - ^ ^ ^ ^ W ^ VERY CLOSE COOPERATION WITH CB\FR\NTMA\MIN COMMS\LIQUIDITY\REASSURANCE CONTINUES ANTI-CONTAGIN ACTIVITY EXAMINATION OF STATU S T O C K T A K I N G CONSOLIDATE AND DIG-IN AGAINST "BACKLASH" KEEP MESSAGES POSITIVE -SOt^kJ^ sS^p ? OV^osl WORKPLAN REPORT BACK 3EV* ccuiJL U f * ^ ^ g -- o( CA Workstreams for Nationalisation Contingency 4. Market and investor |1. Legislation 2. Governance 3. Press/PRiConsumer Relations 5. ECB and EU is* 7. Supervision post 6. Liquidity nationalisation * o> (Advise on drafting of | legislation j Identify potential [candidates to chair inst With Chair, identify management needed and potential candidates Identify any changes required in existing |How wiil compensation management arrangements Design media strategy Precare Statements and Information packs for media & Consumers J V *3 J J f Identify potential areas o EU law that need to be addressed Identify liquidity requirements for initial business plan Identify sources of contingent liquidity to provide support as required What expertise is required within the Identify which supervisory requiremer shoulo be applied to 'nationalised entity V /o Identify external advisors on how to present to market Identify key information to be made available on how will the legislation be :nage r ed? Identify obligations in respect of ECB Identify any legislative amendments required Handle calls request. Identify market expectations of information to be provided/covenants to be addressed institution to manage liquidity? What collateral can be generated for market transactions? (if h any) oe determined? Identify any administrative notices affected/directions required Identify any foreign supervisors that would need to be informed Each team will be shadowed by an Authority Director Each stream will require administrative support for file searching, typing and photocopying/faxing "T Checklist Legislation in place Deposit maturity profile Debt Maturity Profile 7*" 4. cJL*jiLtyvt7 CJi.'- , ^ i ^ - Take full possession of A . fi-iivCltn-y C^-yet*"^ ^ - - - Management - new CEO \> kfcyvvx>.JL N e w Board ( 0 Depositors Debt holders Future o f INBS State Guarantee of INBS Liabilities Nationalisation (Vefc&jKo'x Profit\Losses - sharing of risk Legal Advisors Staff of INBS IFSRAVCentral Bank Setup Hotline and arrange P R Agency ^ 6. Contact m a j o r depositors in advance of media announcement? 7. Accountants KPMG 8. - uA> ^ K ^ Credit Ratings of INBS - advise C R A ' s 9. IV Credit Ratings of Ireland - advise CR A ' s 10. Appoint Corporate Finance Advisors tfll. Power of Attorney & appoint Legal advisors 12. Analysis of Assets & Liabilities 13. Overseas subsidiaries/ truskr^can we access all assetsUiabilities and information ^^^ Use of Loan Book: as collateral with Central Bank Refinancing Cash available at Branches Impact on other Financial Institutions, get them to also issue press releases . 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. INBS staff - who knows what? Cooperation of current INBS Senior Management Contact BCB Contact European Commission Central Bank support of other Financial Institutions - cash/assurance Role of Central Bank/IFRS A DOF role NTMA role XFI Protection Bill Protection of depositors and lenders by taking Xfi into public ownership. Maintain Xfi as a going concern Slate as owner to have to have all the powers, rights arid obligations of ownership Relevant prudential rules and requirements applied by the Financial Regulator to continue to apply Ensure that State's capacity to mange isn't inappropriately constrained by procedural rules Provision of fair compensation (if any) Minister enabled to provide guarantee/loan Misc - expenses Xfi Protection Bill 12 September, 2008 XFI Protection Bill o Head 1 - Minister given functions under (he Bill (after consolation with Governor) where t t i e Minister is of the opinion that o Tliere is of would be a serious threat to the stability of the Society K those functions are not exercised and o "I tie exercise of those functions is necossaiy. in the public interest, for maintaining financial stability in ttie State C B f S A I ' s functions in relation to t h e Society continued XFI Protection Bill Head 2 Existing shareholdings to become deposits Existing membership rights lo be extinguished Minister to become sole member Rights (of lenders or borrower) to acquire shareholding extinguished Procedural aspects of BS Act '89 (as amended) disapplied. Existing Society rules disapplied Ensure sufficient power of BS Act '89 (as amended) are maintained to ensure ordinary business can be carried on post transfer Provide power to amend, repeal rules of the XFI Protection Bill Head 3 - Power to remove/appoint o Directors o Chairman o CEO o Employees - Nominees 10 comply with Ministerial request XFI Protection Bill o Head 4 - Extinguishment of rights to acquire shares (by virtue of being an employee, director, etc.) at a future date - Extinguishment of rights to dividend arising out of any shareholding Head 3B - Directors to hold office for such d u r a t i o n and o n such terms as minister may determine. XFI Protection Bill o Head 5 - Appointment of Assessor - Minister required to appoint a s s e s s o r within X months to determine compensation (if any) payable in respect of membership/extinguished rights Assessor to be independent o Assessor to be paid s u c h remuneration etc as the Minister shall determine XFI Protection Bill o Head 6 - Determination of compensation a s if o Society cannot continue as a going concern (to be wound up] o No assistance/guarantee by the State - Further criteria for determination of fair and reasonable compensation - Process for consultation with Minister/those affected - Process for advising of outcome XFI Protection Bill o Head 7 o Scheme of compensation - Calculation of amount payable - Process of payment - Principles/policies of s c h e m e (Assumptions to be made, rules of procedure) o Scheme to bo laid before Houses of Oireachtas for approval; permanent unless motion annulling passed within 21 days XFI Protection Bill o Head 8 - Power for Minister to mage Guarantee/loan (incl. to do so on commercial terms/fee) - Provision for recovery, charging to Central Fund, reporting to Oireachtas XFI Protection Bill o Head 9 - Misc o Power for the minister to incur expenses XFI Protection Bill o Schedule - Powers of Assessor - To require giving of evidence and production of documents - Conduct of proceedings - Proceedings in private Offence of failing to appear - Offence of refusing to answer - Protection of those appearing before Assessor G O V E R N A N C E GROUP F r a m e w o r k for Action Issues for Clarification as soon as possible: (R) Current Goldman work - to examine any loan agreements for clauses in covenants that have a bearing in possible circumstances (R) Goldman also to examine Isle of Man structure to ensure no barriers to proposed action (R) Goldman to examine book for any potential very large difficulties (R) Advice from liquidation experts to ensure that all necessary actions have been listed (see in particular Directions below) ? Check powers to give Directions (see Directions below) and check language of Directions ? Consider and reach view as to what action is necessary from State Aids point of view and what longer term implications there may be (R) Communications to external parties: o o MOUs (check with whom and what obligations) UK Treasury (R) Communicate message politically: o DFA o IFSC Banks o Any others? Agree trigger points: (R) For approach to Government for decision and for approach to Chair (R) For initiation of legislation If first trigger point is reached: << Department of Finance go to government for decision (R) Department of Finance approach a potential Chair (list has been drawn up) o Department of Finance, in consultation with new Chair, approach individuals (from list?) to fill the following positions: ? COO plus (R) 3 directors, one to be a direct representative of the Minister of Finance (R) If second trigger point is reached, Department of Finance arrange for legislation to be introduced o * At the same time, Directions are issued to the firm (see below). v^P-tj >> members of existing Board are retained as advisers Directions to Board (To be cheeked by legal expert) Under the powers conferred on the Financial Regulator by Firm is hereby directed: the Board of the A. To appoint immediately on receipt of this Direction xx and xx as members of the management team of the firm and to co-opt them to the Board. B. To provide all assistance required by xx and xx to enable them to perform any duties that die Financial Regulator may require of them, to cede all necessary authority to them, to cooperate with them in every way, to provide them with all information sought and to provide them with access to all information sought C. To make no major contractual decisions, to sequester no assets, make no changes to the status of any agreements or covenants that the firm or its Directors or managers is party to without the prior approval of the Financial Regulator which should be sought through the Chair. D. To continue the business of the finn as usual and to honour all contracts E. To make no amendments to employment contracts of the Directors, Officers, management or staff of the firm without the prior agreement of the Financial Regulator F. To make no payments of redundancy or severance of any kind in favour of any Director, Officer, member of the management or staff of the firm without the permission of the FR. To take all measures to ensure that no documents, whether held in paper or electronic format, are deleted or removed. To ensure that Directors, officers, members of management and staff, including those in branches and agents will comply with all of the foregoing requirements. Xfi Strategy Document 1. - C u s t o m e r Access Point with Financial Regulator Helpline The Department has been asked to provide officials to assist in the manning of the overall Xfi Helpline, whose operation will be overseen by the CBFSAI. A list of Department officials who have worked in the Financial Services Division has been drawn up to play such a role. 2. C u s t o m e r Access Points with Department The three forms of communications for which the Department must be prepared to deal with are: << Website (R) Telephone (R) Walk-in Website A special website capable of handling millions of hits can be set up by CMOD within a number of hours. 'ITtis website could be linked to the Department website's and could also be linked with the other relevant parties; including the Financial Regulator, the Central Bank, and Xfi. The material on the website would include the Minister's Statement, Questions and Answer material, Deposit Protection Scheme (if relevant), and additional material on issues as they develop; i.e. proposed legislation, Dail speechesTasks Setup of Website - C M O D in consultation with Press Office Material for Website -- Taxation and Financial Services Division and Press Office Management of Website -- Press Office Telephone C M O D can put in place telephones, some computers (8 or 9 initially) and a call queuing and monitoring system in a number of rooms in Lansdowne House. Much of this infrastructure is from the R E A C H system. These rooms could cater for up to 30 officials to man the Department mainline or alternatively a separate telephone line could be set up. C M O D will require a full day to set up the phone lines and infrastructure. A list of officials to man the telephone centre is being drawn up. As far as possible, the officials will be drawn from areas with minimal involvement in the Budget. Also a related << o >> query sheet is being drawn up which will allow the tracking of basic statistics to inquiries: number of inquiries received, the questions being asked by customers, e are the inquiries related to other financial institutions (if volunteered), and (R) general reaction of customers, (see Appendix 2) Tasks Setup of Telephone lines, Computers, and Telephone queuing and monitoring CMOD Selection of officials to man telephone lines - Press Office in consultation with CSD Briefing of officials in advance of lines opening - Taxation and Financial Services Division and Press Office Draw up phone query sheet - Press Office Walk-in Customers Walk-in customers should be discouraged from coining into the Department. However if this occurs, it is essential that a queue does not form outside the Department. A possibility is to use the atrium of the new Finance building as a waiting area with some of the offices to the side as meeting rooms. Required staff to carry out this task could be drawn from the list of officials tasked with manning the helpline. Tasks Preparation of waiting area and interview rooms - CSD Preparation of staff to meet public - Financial Services Division and Press Office Appendix 1 D e p a r t m e n t Officials to Staff PhonelLnes Attached is a list of officials who could staff a Department Helpline. They are primarily drawn form sections with limited involvement with the Budget. The second list contains officials who have experience of the Financial Services Division and could be seconded to the Financial Regulator helpline. The key points that should be conveyed on the Department Helpline are the principal points conveyed in the Minister's statement: (R) The decision taken and its effects; (R) What does this mean for the company's customers; (R) Reason why this decision was taken; and (R) The remainder o f the financial system is strong and people should retain confidence in their financial institutions. Introduction to Phoneline Officials Administration issues: (R) Many thanks f o r your willingness to assist in this urgent and critical task (C) Importance that calm prevails, therefore: o Your involvement in tills Group should be treated with confidentiality so as not to encourage panic; o Constantly reinforce the need for calm actions by people; o Only mention Xfi, draw a distinction between Xfi and the remainder of the Irish Banking system; (R) Please fill out the draft questionnaire as far as possible. It has been divided into two parts: Firstly, questions that you should ask if the conversation goes that way, and secondly, questions that you should not ask directly but fill in the answers if the information is made available. (R) If questions are asked to which no answer is listed please forward the question to the Team leader who will seek out an answer from the policy section. Key messages: (R) The decision taken and its effects; (R) What does this mean for the company's customers; (R) Reason why this decision was taken; and (R) The remainder of the financial system is strong and people should ret ain confidence in their financial institutions. Role of Team leader: (R) Ensure that officials have sufficient information to deal with queries received. (R) When new queries arise, seek out an answer from Financial Sendees Division. (R) Overall management of staff resources within the call centre. Appendix D r a f t Query Sheet Is the person a customer with Xfi? 1 Yes / No Has the person already contacted the Financial Regulator's helpline? Yes / No If not, why? Was it taking too long to get through? Principal Questions (please tick if asked): Question What does the action mean? Is my money safe? W h y was this action required? There were rumours about the status of this financial institution; were they correct? Should I withdraw my deposits? Yes Do not ask the questions below but please complete if the information is volunteered. What financial institution is the customer concerned about? Will they be withdrawing cash? How satisfied does the customer appear to be? O n a scale of 1-5: 1 -- completely dissatisfied and withdrawing cash 2 -- dissatisfied and considering withdrawing cash 3 -- remain unsure of what course of action they will adopt 4 -- relatively satisfied and unlikely to withdraw cash 5 -- satisfied and will not be withdrawing cash D r a f t Contingency Public Communications Plan The scope of this part o f the plan deals with communications with the general public including customers o f Xfi and customers of other entities. There are two key parts to this plan - (i) the initial phase where it is important a clear message is delivered across all channels and (ii) dealing with the reaction from the public and having sufficient resources in place to deal with this. 1. Statement f r o m M i n i s t e r (Outline draft attached in Appendix I) A comprehensive clear statement to be issued by the Minister to address the following: . (R) What exactly will be happening o taking over ownership: << Why is this happening - to safeguard the interests of the members/customers, o to ensure that it is business as usual and to safeguard the wider banking and financial system. (C) Clear view on t h e cost associated with the takeover and the impact on taxpayers (indicating how taxpayers will be protected). << What are the implications for customers - to confirm that all customers money is safe because it will be owned by the Government and that it is business as usual. o What brought this about - market conditions, lack of liquidity available. Need to be clear why Xfi is different from other entities. o What are the implications for other institutions and the system -- need to be clear what the v i e w is on other depositior takers including credit unions and that people should have confidence because this action demonstrates that Government will act where there is a potential problem. o What are the Government plans for Xfi after takeover. (R) IIow long will the Government guarantee last for? Linked statement from Governor and Chair of Financial Regulator (R) Need for a clear linked statement to back up what the Minister is saying and to confirm regarding the soundness of the system and other entities. Media Briefing Just prior to the release of the statements key journalists from RTE and print media to be briefed to explain w h a t is happening and why. (Responsibility - Press Offices of D of Finance and 2. Communications w i t h Customers of Xfi It is proposed to establish a J o i n t Communications G r o u p (JCG) consisting of Press Officers from D of Finance and CBFSAI, Government Information Service (GIS), Consumer area of Financial Regulator as well as Xfi representatives. This group will need to coordinate messages and set out who is responsible for delivering CBFSAI) 1 the message and how. It will also be responsible for reviewing and monitoring ongoing communications. (Responsibility - - Press Offices) Ii is important that the n e w Chair and CEO of the Xfi commit to putting resources into communication with the customers including the possible appointment of a PR agency. (Responsibility Xfi) A Questions & Answers Document (Q&A) (draft in Appendix 2.) will be prepared to deal with specific queries which may or may not be covered by the statements. This will have to be issued at the same time as the statements. This Q&A will have to be updated at regular intervals as new issues arise. (Responsibility - Press Offices and Consumer Information Dept of Financial Regulator/CIS) Communications by Xfi A key channel for communication with the customers of Xfi will be through the Xfi itself. The effectiveness of this should help to reduce the volume of queries coming to the Department and CBFSAI. o Staff of Xfi to be fully briefed as soon as possible on the overall plan and what customers need to be told. Ideally this should happen just before the release of the statements and preferably by direct contact with them from Xfi. ? A customer communication needs to be issued directly to each customer in writing. (R) A customer communication needs to be put on the website of Xfi and in the branch network. (Responsibility -- Xfi with oversight by JCG) Communications by D of Finance e ? e o A copy of the statements to be put up on website immediately. A copy of any Q&A to be put on website immediately, Consideration needs to be given as to how customers can contact the Department with queries on the nationalisation, A public notice will be published in all national daily newspapers outlining what is happening and why and critically where customers can go for further information i.e. initially they should talk to the Xfi branches or helpline, consult the websites of D of Finance and Financial Regulator for info and any dedicated helpline established by Financial Regulator for customers seeking clarification. This public/consumer notice to be prepared jointly between the Department and Financial Regulator with the Financial Regulator placing the notices which can be done through the normal media buying channel of the Consumer Information Department. (Responsibility - D of Finance Press Office) 2 Communications by Financial Regulator/Central Bank (R) A copy of the statements to be put up on website immediately. (R) A copy of any Q & A to be put on website immediately. (R) Setting up a dedicated helpline with support from the Department to deal with queries. (Responsibility Financial Regulator Press Office and Consumer Information) 3. Proactive C o m m u n i c a t i o n with the Public/Consumers The public will have many concerns about the announcement particularly in relation to their own financial institutions. Key infonnation will need to be made available to address these concerns through the following channels: Media interviews to be given by senior personnel from D of Finance, Central Bank and Financial Regulator. (R) Websites of D o f Finance, Central Bank and Financial Regulator. (R) Setting up of a dedicated single helpline resourced by CBFSAI. ? Direct lines to D of Finance and CBFSAI. o Financial Regulator Information Centre. ? Reception areas of Central Bank and D of Finance. (Responsibility - D of Finance, CBFSAI, Financial Regulator including Press Offices, Consumer Information and GIS) 4. Dealing with response f r o m the Pubiic/Consumers It is important that we d o not underestimate the level of queries from the public which will arise. The effectiveness with which we deal with the volume of queries will help detennine the overall success of the project. All channels and services will come under serious pressure and resources from throughout the CBFSAI and D of Finance will have to be reallocated to deal with the volume. Appro x 60 staff will need to be identjfjed across the organisation to bejecandad-lQ_deal with potential high volumes of contacts (mainly calls). Xfi has over 190,000 depositors and if even 10% of these decide to contact the CBFSAI (within the first f e w days) the various contact points which will come under extreme pressure and could potentially be overwhelmed. The scale of contacts and our ability to manage it will depend on two key factors: (R) How well the messages are communicated via the various channels and in particular the media; and ? 3 (R) I low clear the question 'is my money safe' is answered by the Minister's statement and other communications. It is far from certain as to how customers and consumer will react. It needs to be reiterated that any perception that there is a chance people could lose money risks precipitating a run. Northern Rock will be the frame of reference against which people will determine h o w to react. We will need to be able to answer the question is this guarantee the same. The issue of An Post Guarantee Savings arid how this compares with the new scenario will also determine how customers react. (R) Websites of D of Finance, Central Bank and Financial Regulator o IT capability will need to be available to deal with problems arising, o All information will need to be kept up-to-date by a dedicated resource. (R) A dedicated Helpline will need to be put in place to be resourced by CBFSAI. o The existing call centre service in the Financial Regulator will be expanded to cater for this. o Resources from CBFSAI will need to be briefed to deal with calls, o Resource to be available from the Department and CBFSAI to provide a support structure to deal with queries not covered in the Q&A. a D of Finance and Central Bank to put resources in place to deal with calls to their main phone numbers. (R) Reception areas i n both the Department and Central Bank need to be fully trained and resourced. (C) Press Offices in both Department and CBFSAI to be fully resourced with possible outside P R agency assistance. (Responsibility -- GIS/Consumer Central Bank) Information/Services Areas in Department and 5r~O0mm nmcof romr ^Ttlrother^talv-eht) tders Other key stakeholders will need to be briefed as they will also be asked for public comment. They include: (R) Politicians (R) Industry and Consumer Panels (R) National Consumer Agency (R) Financial Services Ombudsman (R) Industry Rep Bodies (Responsibility -- Shared re Politicians, otherwise Financial Regulator for others) 4 Appendix 1 Minister DRAF T Statement The Government has taken a decision today to introduce legislation that will take Xfi into public ownersship-- This decision has been taken in close consultation with the Central Bank and Financial Services Authority of Ireland. The decision was taken to safeguard/the interest of the members and customers of Xfi and in the broader interest of the taxpayer. , / j ^v^s ) -THsimportHnt to~stress-thatXfi is sol v e n t e d is subject tojy&ffctl ongoing regulatory requirements. Due to the current international market turmoil, Xfi has encountered temporary liquidity constraints /This' mearis that" in the short term it has'been unable to raise-sufficient funds in the m a r k e t , ^ T ^ s ^ e ^ ^ p ^ ^ y ^ t i o n by.Government takerrto give certainty to customers and-the market about the-underlying-strcngth of o ^ ^ K' . fh The Government intends to appoint XX as Chairman of Xfi. He will lead a new management team, which is already in place. Xfi will remain in public ownership while die current market difficulties persist. I would again stress that this Government decision safeguards the future of Xfi. The bank will operate as normal and customers should continue to transact as normal. All customers of Xfi will be communicated with directly by the bank. The Government and Financial Regulator have established a telephone helpline to answer any queries or questions that people may have. This helpline will be open from tomorrow-rhoming. All information is also available on the websites of the Government, Central Bank, Financial Regulator and Xfi. JT*^ alc^t. " -ends-- v/ /J . ) J^i ^ - c ^ 1 ^ M - , / ^ v ; .-/s^fe- - > /J'. u JjJf'^rl C:\Docurnents and Settings\nwhoriskey\Local SettingsVTemporary Internet FiIes\OLK 14A\Q A Nationalisation Only.doc APPENDIX 2 D r a f t Q & A for Nationalisation Scenario: 13 Sept 2008 Q: W h a t is the G o v e r n m e n t doing? r^rJA: The Government is taking X into state ownership-. This means that it is the Government and not the members-tha^-own thc-seeiefey-aBd-it will appoint people to run X and to continue business as normal. Q: W h y did the G o v e r n m e n t need to do this? A: Global problems in relation to how banks and building societies are funded have lead to some difficulties in X. While X is solvent the Government decided to act now to protect the customers of X and to make sure that the society can continue in business as normal. Its nationalisation means that the State now owns X and will appoint someone to manage its business. [issue - nationalisation does not rule out the possibility of a r u n on X} Q: W h a t does it m e a n for me? A: This development will make no difference to how you interact with Irish Nationwide and you can expect your business to the handled as normal. X branches will be open as normal ( P O L I C Y ) and the staff there will continue to assist you with your banking requirements. If you have a mortgage or other loan you should continue to make your repayments as at present. Q: Is my money s a f e ? P O L I C Y - T H I S A N S W E R N E E D S T O BE C L E A R AND U N A M B I G U O U S . A: The Government has taken over X and will appoint people to operate it. Your savings will be protected under the terms of the Deposit Protection Scheme (see website for details) OR X ^ T ^ ^ ^ ^ ^ r : A. Hie Government has taken over X and will appoint people to operate itf. Your savingswitthc^s^^ ^ Q. W h o is X regulated by? A. X remains regulated by the Financial Regulator and it will continue to be subject to the nonnal pmdential and consumer protection rules. The Financial Regulator will work closely with the Department of Finance and the new management of X with regard to the running of the business. . (g&z^L Xfi' ^ Q . T h e r e were recent media reports tt-que-stiim-ed the cQ-lyency af-%1-- were these correct? ^ ; f A. No these were not correct, be*/" r d ^ r * * ^ * A-*^? * Q. The Financial Regulator stated that there was no basis to the Reuters report. W a s this correct? A. Yes --the Financial Regulators statement was correct. ^ , C:\Documents and Settings\nwhoriskey\LocaI SettingsVfemporary Internet FiIes\OLK14A\Q A Nationalisation Only.doc C:\Documents and Settings\nwhoriskey\Local SettingsVFemporary Internet Files\QLK14A\0 A Nationalisation Only.doc O . So what changed? A. It is important to re- iterate that X remains solvent and is in business as normal. The Government decision to act now was taken in light of continuing global problems that were impacting on the ability of X to raise funds and public speculation about X that exacerbated the issue for X. (NEEDS TO BE CLEARED / expanded on to make a clear distinction between this case and other institutions). Q : Is my money safe f o r e v e r o r is there a time limit to the Government o w n e r s h i p / state g u a r a n t e e ? A: Government ownership is temporary and is intended to steer the society through this period and ensure that the needs of its customers are met. ???? Is there are minimum length of time? When will this be reviewed??? P O L I C Y A : The deposit guarantee scheme will apply (NOW?) after the period of Government ownership ends Q : A r e there similar issues with other institutions? A: X has faced very specific problems in recent times. NEED SOMETHING ON W H Y THIS IS UNIQUE. Q : How was this allowed to h a p p e n ? A : N E E D AN ANSWER... Q : Did X's business model p u t it in greater risk? A: Q : Does the deposit g u a r a n t e e scheme apply to all customers -- retail and corporate? If the DOS applies: A : The Deposit Protection Scheme, where the limit is 90% or EUR20,000, applies to m'embe"fs"; ordinary customers and some others - see website for full details on who is covered. .*o-ooooo If there is a state guarantee: A ; AH clcposil^i-Xcomeunder.llie.-stale-giiarantee _ , Q : C a n I withdraw m y m o n e y immediately? A : You can continue to bank as usual with X under the normal terms and conditions of your accounts. P O L I C Y Will there be a handover closure f o r a period? oQ: Will. Xs branches r e m a i n open in the normal way? A : Yes - normal branch opening hours "will apply and it will be 'business as usual' f r o m customers perspective. P O L I C Y r . 1 Q : Will X be there to a n s w e r my calls and tell me w h a t is going on? A : Yes. The staff of X have been kept fully informed of the*changes and they should be able to answer all of your questions. Q: I have a mortgage, h o w will it be affected? A : You should continue to make your mortgage repayments to X in the normal way. There will be no change to your mortgage terms and conditions. C:\Documents and Settings\nwhoriskey\LocaI SettingsVfemporary Internet Fi Ies\OLK 14A\Q A Nationalisation Only.doc C:\Documents and Settings\nwhoriskey\Local Settings\Teniporary Internet Files\0LK14A\Q A Nationalisation Only.doc Q: X is trying to repossess my home - what will happen now? A: The Government will appoint people to take over the day-to-day operations of X and manage its assets and liabilities. Most processes in train are likely to continue as normal and X staff will continue to process transactions and business such as arrears and repossessions. You can continue t.o deal with your issues directly with X. Q: I am in legal action with X over a loan -- what will happen now? A: The Government will appoint people to take over the day to day operations of X and manage its assets and liabilities. Most processes in train are likely to continue as nonnal and X staff will continue to process transactions and business such as arrears and repossessions. Q: If I leave my money there will it still earu interest? A: It will be business a s usual and the terms and conditions of your accounts will be the same Q : If I lodge more m o n e y to my account is it safe/is it guaranteed? A: Depends on the nationalisation scheme and also the limits in the Deposit Protection Scheme. P O I J C Y Q: I am a member of the building society, how does this affect my membership? A: Under a nationalisation plan the members of a mutual society who currently own their society will no longer own the society.... the Department of Finance will appoint an assessor the value of any compensation that may be due for their loss of ownership?? O: I am a member of the building society, are my f u n d s covered u n d e r the DPS? A: Yes - they are Q: I am a member of the building society, will I get compensation and if so when? A: Department of Finance will appoint an assessor the value of any compensation that may be due for their loss of ownership?? This may take some time. Q: A: I work at X. W h a t does this mean for me? The Government sets out in. its nationalisation plan Q : I am a UK resident (any other non Irish resident), does the guarantee apply to my savings? A: There is no new guarantee covering savings with XX. Savings are covered under the Deposit Protection Scheme as set out above.... O t h e r Possible Q u e s t i o n s : For BSD/Finance: C:\Documents and Settings\nwhoriskey\LocaI SettingsVfemporary Internet Fi Ies\OLK 14A\Q A Nationalisation Only.doc C:\Documents and Settings\nwhoriskey\Local Settings\Temporary Internet Files\OLK14A\Q A Nationalisation Only.doc Q: Is my money safe in the other financial institutions? For Finance: How much will it cost? Does Government have the money to fund it? Will taxpayer have to f u n d this? Will Government put in people to r u n XX? Will Government put in people to r u n the main banks? List of XX Stakeholders: Members, Depositors, Mortgage Holders Other borrowers including commercials borrowers, Lenders to XX including institutions, Staff Pensioners - retired staff Service Providers C:\Documents and Settings\nwhoriskey\LocaI SettingsVfemporary Internet Fi Ies\OLK 14A\Q A Nationalisation Only.doc Appendix 1 Minister DRAFT Statement The Government has taken a decision today to introduce legislation that will take Xfi into public control. The decision was taken to safeguard the interest of the customers of Xfi and in the broader public interest. It will ensure the safety of deposits held in Xfi / an Irish financial institution. This decision has been tciken in close consultation with the Central Bank and Financial Regulator. It is important to stress that Xfi remains solvent and continues to be subject to ongoing regulatory requirements. Xfi has encountered particular liquidity difficulties. Tliis means that in the short tenn it has been unable to raise sufficient funds in the market to meet its obligations. This action by the authorities has been taken to give certainty to customers and the market. It enables Xfi to operate as a going concern and to continue to transact business in the normal way. All customers of Xfi c a n be assured that the full amount of their deposits and savings are fully safeguarded b y this action. They can also be assured that they can and should continue transacting w i t h Xfi as nonnal and there is no need for customers to take any particular steps as a result of this announcement. All customers will be communicated with directly by Xfi in t h e coming days. The Government and Financial Regulator have established a telephone helpline to answer any queries or questions that people may have. This helpline will be open from tomorrow morning. All information is also available on the websites of the Department of Finance, Central Bank, Financial Regulator and Xfi. Customers of all financial institutions can have confidence that the wider financial system in Ireland remains well capitalised and liquid and that the Irish authorities will be proactive to ensure that their interests are protected and their deposits are secure. The Government's decision relates only to Xfi and was taken only in the context of the specific short-term difficulties at that institution, [note: need for this last sentence?] The Government has prepared legislation to put this decision into effect. This will be presented at the next Dail sitting/tomorrow/Dai I recalled. The Government intends to appoint XX as Chairman of Xfi. lie will lead a new management team, which is already in place. Xfi will remain in public ownership while the current market difficulties persist. I would again stress that this Government decision safeguards the interests of the customers of Xfi and their deposits and savings. The bank will continue to operate as nonnal and customers should continue to transact as nonnal. -ends- Fennell J a c (GSD) ient: To: Cc: Subject: Prom: Beausang, William [William.Beausang@finance.gov.ie] 14 S e p t e m b e r 2008 08:51 Fennell J a c ( G S D ) Manley, M i c h a e l FW: Niall B r a d y Press Query - D C S Jac Could you include this update in the papers for revie w by the group today, thanks From: Beausang, William Sent: Fri 12/09/2008 19:15 To: niall.brady@Sunday-times.ie Cc: Meenan, Brian; Taggart, Michael Subject: FW: Niall Brady Press Query - DCS Niall - sorry for the delay in responding to you on this. Brian Meenan asked me to send it on to you. regards William Beausang Update on progress in review of F1U Deposit Guarantee Scheme - FJJ Finance Ministers agreed in October 2.007 to consider possible enhancements to the EU Deposit Guarantee Directive. -Ireland is participating in the EU review, xohich includes a consideration of the level of savings guarantee but also foci, n wider policy areas such as improving the speed of payouts, depositor information and cross-border interoperability. It is expected that the conclusions of this EU review will be reached by end-year. - 'The conclusions of the review will inform any clwnges required in the Irish Deposit Guarantee Scheme to ensure that savers in Ireland benefit from safeguards in line with F.U best practice. - The recent OECD Economic Survey of Ireland stated that Ireland's current deposit protection level is in the mainstream of European law and practice and should be sufficient to provide protection to the vast majority of depositors. Attention: This e-mail message is privileged and confidential. If you are not the intended recipient please delete the message and notify the sender. Any views or opinions presented are solely those of the author. This email was scanned by MailMarshal and has been certified l I IQUIDITY WORKS'TREAM Steps ahead of protection Outflows: - Closely monitor outflows: FR receives 4 liquidity reports daily Action threshold: When the aggregate outflows reach EURlbln A p p r o v a l to a c t : - Internal authority: Governor/Board Government guarantee: needed for liquidity action e.g., letter of comfort Amount of liquidity provision: - Worst-case estimate of deposit withdrawals: EUR4bln Form of assistance: Bank: - Bilateral asset swap: o euro-area government bonds provided in exchange for legal charge over mortgage book o written declaration from counterparty that charge1 enforceable o Haircut of 30% and 50% on residential and commercial mortgage loans respectively o term of swap 6 months (max) o interest rate - differential between GC repo fwhore.-we borrow cash against lending euro area government bonds) ai^i-UTTseuiired^ash r a t e : - YFI/ZFI to provide cash to XFI against receipt of euro area government bonds (because not useable by XFI with ECB or in market) NTMA: - cash secured in same way (charge, declaration, haircuts) 1 Floating charge must be r e g i s t e r e d within x days? LIQUIDITY WORKSTREAM External contact (outside of group) a. Goldman's quality/enforceability of loan book? - check bond documentation for events of default, e.g., following rating change and change of ownership - investor relations role (extent of role dependant on clarity of statement from Minister) b. XFI - sign Deed of Charge written declaration from XFI on enforceability of charge _ list of qualifying assets TiokI o f ^tJif&JCLf' f f a z u X f t BoAl c. YFI a n d ZFI - re asset swap (and agreement to be put in place with XFI) d. "V ECB? 2 tf U ^ / A ^ Bank X has cash of 63.3 billon as at close of business Friday, 12 September 2008. It suffers withdrawals o f EUR 0 . 5 billon on Monday 15 September and CO.5 billon on Tuesday 16 September 2008. Bank X Noteholders take no action. Action: CB does a ?2 billon asset swap with Bank X on Tuesday 16 September 2008 whereby CBK takes a charge on EUR4 billon of Bank X's commercial mortgages and CBK gives Bank X EUR2 billon of sovereign bonds. Bank X then uses these sovereign bonds with Bank A and Bank [5 to get EUR2 billon of cash. At close of business Tuesday 16 September 2008 Bank X has 64.3 billon of cash. Assuming withdrawals step up and 61 billon is withdrawn on Wednesday, Thursday and Friday, this would give the Steering Group time to finalise the inevitable solution over the weekend. Seenario 2: Probable but Manageable Bank X has cash of EUR3.3 billon as at close of business Friday, 12 September 2008. It suffers withdrawals o f EUR l billion on Monday 15 September and EUR1 billion on Tuesday 16 September 2008. Bank X Noteholders take no action. Action: CB does a EUR2 billon asset swap with Bank X on Tuesday 16 September 2008 whereby CBK takes a charge on EUR4 billon of Bank X's commercial mortgages and CBK gives Bank X EUR2 billon of sovereign bonds. Bank X then uses these sovereign bonds with Bank A and Bank B to get EUR2 billon of cash. At close of business Tuesday 16 September 2008 Bank X has EUR3.3 billion of cash. Assuming withdrawals tail off Bank X has sufficient liquidity. Scenario 3: Worst Case Bank X has cash of EUR3.3 billon as at close of business Friday, 12 September 2008. It suffers withdrawals of EUR 2 billon on Monday 15 September and EUR2 billon on Tuesday 16 September 2008. B2nk X Noteholders take no action. Action: CB does a EUR2 billon asset swap with Bank X on Tuesday 16 September 2008 whereby CBK takes a charge on EUR4 billon of Bank X's commercial mortgages and CBK gives'BanJc XEUR2 r bil!pn of sovereign bonds. Bank X then uses these sovereign bonds with Bank A and Bank B to get EUR2 billon of cash. At close of business Tuesday 16 September 2008 Bank X has EUR1.3 billion cash. Action: Steering Group has to get government to recall Dail and pass legislation. Minister for Finance has to instruct N T M A to advance money as required for daily operations to Bank X probably unsecured to keep Bank X operational until legislation is passed. T h e q u e s t i o n a r i s e s a s t o h o w m u c h c a s h N T M A w i l l h a v e to p r o v i d e j u s t t o c o v e r d e p o s i t w i t h d r a w a l s , m a y b e EUR3 b i l l o n . NB: Each of the above scenarios changes dramatically if the Noteholders take any action to try and set their loan notes repaid. This amount is EUR6 billon and depending on what action the Minister for Finance takes or does not take it could trigger an additional drawdown from the Exchequer for all EUR6 billon or part thereof.ie. The Exchequer could be called on to provide EUR7-EUR10 billion unless Noteholders can get assurance that their loans are secured. O V E R V I E W OF S U P E R V I S O R Y R E Q U I R E M E N T S for Xfi P O S T "PROTECTION BILL" 1. Building Societies Act, 1989 ('the Act') (as amended) Xfi remains authorised under the Act and will be required to comply with its provisions except to the extent that they are disapplied by the "Protection Bill". 2. Prudential Supervisory Requirements In the event that the Xfi is owned by the State, it would continue to be an authorised credit institution licensed and supervised by the Financial Regulator. The following identifies the key prudential supervision requirements under which Xfi would operate: 2.1 Capital Requirements Directive EU directives 2006/48 /EC and 2006/49 FC, collectively known as the Capital Requirements Directive 1 , are the directives relating to the calculation of the solvency requirements for credit institutions in the EU. XFI would be required to operate in compliance with the CRD and any associated Notices issued by the Financial Regulator. Solvency The directives require that the credit institutions should hold a minimum solvency ratio of 8% in respect of its credit risk and also hold sufficient capital to meet its market risk and operational risk capital charges. Xfi is cunently required by the Financial Regulator to maintain a minimum solvency requirement equivalent to 11%. Xfi is currently in excess of its current solvency requirements. Should Xfi be brought under State protection, and given the change in ownership of the entity to that of a state owned entity, it would proposed that the current solvency requirement in respect of credit risk is reduced to the minimum requirement under the CRD of 8%. Xfi would be required to comply with this requirement on an ongoing basis. Should the value of the owns funds of Xfi decline with the result that Xfi is not 1 SI 660 and SI 661 2006 t r a n s p o s e C R D into Irish law. 4ii C/:_LS.I LJL Y-i n v ^ o aLr ^iisst-A Z nf /z v| wn? in compliance comply with its solvency requirements, it would be in breach of the CRD and would be required to take the necessary actions or steps at an early stage to address the situation. Large Exposures Requirements E U directives 2006/48 and 2.006/49 also outline the limits on large exposure which a credit institution can incur to a single person or group of connected persons. current limit is 2.5%. requirements. The The CRD does not permit a general exemption from these If Xfi exceeded this limit this would represent a breach of the directive and the directive provided that Xfi would be permitted a limited period of time in which to comply with t h e limits. Discretion rests with the Financial Regulator as to the period of time involved and the acceptability of any plan to bring Xfi back in compliance with the C R D . 2.2 Liquidity R e q u i r e m e n t s The Financial Regulator has imposed its requirements for Management of Liquidity Risk ('the Requirements') as a condition on the licence of all Irish licensed credit institutions. They are imposed on Xfi under Section 17 of the Building Societies Act, 1989. The Requirements are based a maturity mismatch approach and include both 'Ihey also impose obligations to report to qualitative and quantitative requirements. the Financial Regulator; since October 2007 the frequency of such reporting has been increased to weekly. The quantitative requirements of the maturity mismatch approach involve credit institutions, assigning their cash inflows and outflows to various time bands based on their contractual residual maturity. Assets are to be assigned based on the latest possible date of receipt and liabilities based on the earliest occurrence of the obligation. A net mismatch figure is obtained by subtracting the outflows from the inflows. Mismatches are assessed on a net cumulative basis. Limits are set in the first two time bands; in the first time band of sight to 8 days, cash inflows plus allowable discounted liquid assets are required to be greater than or equal 100 per cent of cash outflows. In the second time band of over 8 days to 1 month, cash inflows including any net positive cash f l o w carried forward from the first time band, must equal at least 90 per cent of cash outflows. On the basis that Xfi is State owned but operating on a going concern basis it is proposed that the Requirements remain as a condition on its licence. To remove this condition could create an unfair advantage for Xfi compared to the other credit institutions authorised in the State. In the event of a plan to wind-up Xfi the Financial Regulator could consider whether the condition remained. In any event, it if a breach of the Requirements were to occur if would be at the discretion of the Financial Regulator as to what action, if any, it took. 2.3 Impairment R e q u i r e m e n t s The Financial Regulator has imposed its Impairment Provisions for Credit Exposures ('Impairment Requirements') as a condition on the iicense of all licensed credit institutions. They are imposed on Xfi under Section 17 of the Building Societies Act, 1989. The Impairment Requirements set out the Financial Regulator's requirements with regard to the policies to be adopted by credit institutions for credit loss provisioning. They contain qualitative requirements on credit risk management and impainnent provisioning and quantitative criteria, based on the IFRS 'incurred loss' approach, and quarterly reporting requirements. condition on the licence of Xfi. It is proposed to maintain these as a 2.4 Licensing and Supervision Standards The Licensing and Supervision Requirements and Standards for Credit Institutions ('the Standards') are non-statutory and are applied by the Financial Regulator as a supplement to the statutory requirements contained in or imposed under the Building Societies Act, 1989. regarding: 2.5 2.6 2.7 2.8 2.9 Acquisitions of and by credit institutions; Board and management of credit institutions; Internal controls; Funding; Lending. The standards include, inter alia, high-level requirements The Standards will continue to apply to Xfi post enactment of the "Protection Bill". 3. 3.1 C o n s u m e r Protection Requirements C o n s u m e r Protection C o d e The Consumer Protection Code which sets out requirements for Xfi's interactions with its customers. In the interest of consumer protection these will continue to apply to Xfi 3.2 M i n i m u m Competency S t a n d a r d s The standards set out the minimum qualifications and experience required by the staff of institutions which offer financial services to consumers. consumer protection, these will continue to apply to Xli. In the interest of 4.0 4.1 O t h e r Applicable Legislation Deposit Guarantee Scheme SI No 168 of 1995 SI No 468 of 1999 SI No 104 of 2002 Central Bank Act 1997 4.2 Investor Compensation Act, 1995 4.3 Criminal Justice Act, 1994 5.0 Conclusion The above list represents the key legislative, prudential and consumer requirements that are currently apply to Xfi and identifies those that Xfi will be expected to remain in compliance with post enactment of the "Protection Bill". It does not purport to represent a complete list of all requirements and legislation that Xfi and other credit institutions may have to comply with on an ongoing basis. It is the responsibility of the board of Xfi to ensure that it operates in compliance with any regulatory or legislative requirements are in Ireland and in other jurisdictions in which it operates. F e n n e l ! J a c (GSD) From: >nt: i o: Cc: Subject: Beausang, William [William.Beausang@finance.gov.ie] 14 S e p t e m b e r 2008 10:20 Fcnnell J a c ( G S D ) ; Whoriskey Nei! Manley, Michael; Cardiff, Kevin EU W o r k s t r e a m U R G E N T / C O N F I D E N T I A L fill and ernafional workstre; jac This is one of the chapters for incorporation into the document you are preparing for review by the group at Ham. I'm v sorry for Hie late submission. I would be grateful if you could acknowledge receipt so that I knoio you have i f . Ar-o vrobs please ring me at 086 173 1649 many thanks William Beausang #############<<######################################################## Attention: This e mail message is privileged and confidential. If you are not the intended recipient please delete the message and notify the sender. Any views or opinions presented are solely those of the author. This email was sc.anned by MailMarshal and has been certified virus free with the pattern file currently in use. This however cannot guarantee that it does not contain malicious content. i E U / i n t e r n a t i o n a l w o r k s t r e a m (includes S t a t e Aid issue) - . 1 4 S e p t e m b e r 2008 Scope This workstream relates to contact with the European Commission, EU Member States (MS) (and other jurisdictions as appropriate) at finance ministry, central bank and regulator level as well as contacts with other relevant international bodies Overview These are key communication channels to maintain confidence in the Irish banking system international Communication will 'cascade' through these channels to the international political and financial system generally Critical balance must be struck between providing information and insight into events in Ireland and not exacerbating concerns regarding the robustness of the banking system (and the state of the economy and public finances overall) In designing message and trying to get it across important to be aware that level of 'interest' will differ between stakeholders and 'attention span' will in many instances be limited There is overlap with the communications and investor relations streams but clearly differentiated message required, in contrast to depositors, bondholders, etc. there is no direct financial interest involved. Information conveyed to key international stakeholders will be assessed sceptically to shape international views on prospects for maintenance of financial stability in Ireland. These people are likely to already have their own views on the situation here and will very quickly decide how what they are hearing fits into that framework. Key questions -- what would we want to know if roles were reversed? o What is the problem? o What steps have been taken to resolve it? s Are these measures expected to be successful? (R) Is this the only rescue that will be needed? * What are the possible knock-ons? (to possible worst case scenarios) 1 << What are authorities doing to manage these risks? Communication must he timely, clear, focused and realistic & must work through all possible follow-on issues in particular stability of the Irish financial system overall P r a c t i c a l issues & Differentiate between comprehensive briefings provided to key players internationally and that circulated 'for information' to HU e-mail contact lists (e.g. EFC, FSC, CEBS, ECSB etc) All communication must contain comprehensive contact list specifying who can provide information on what issues ? (C) Website communication (DoF, CB and FR) most effective way of informing broader international stakeholders Competition Law - No issue arises under protection regime (& no notifications required?) S t a t e A i d - this is a key i s s u e - selective (i.e. not available to all) State-backed loans and guarantees fall under EU State Aid rules - Commission draw distinction between rescue aid and restructuring aid - Rescue aid is temporary (6 month limit) and reversible assistance to keep ailing bank afloat for the time needed to work out a restructuring or liquidation plan but it can be extended if necessary on presentation of a restructuring plan - Rescue Aid must be limited to liquidity support and can normally only be granted in the form of loan guarantees or loans - Restructuring aid encompasses structural financial measures, for example, capital injections, debt reductions etc) but must be based on a feasible, coherent and far-reaching plan to restore a firm's long-term viability. - The restructuring plan must be submitted to the Commission within six months (otherwise the rescue aid has to be paid back) and must be compatible with (i) restoration of long-term viability (ii) avoidance of undue distortions of competition (iii) aid limited to the minimum - Cion will look for supports to be provided as much as possible on 'commercial' basis - MS are expected to contact the Commission as early as possible where rescue aid package arises but in practice other MS appear to have notified after the announcement of assistance 204 Actions Required 1. Explore full implications of the above in context of Xfi case. Requires detailed assessment of the state of the loan book - earliest possible briefing f o r DoF by GS essential (contact details) 2. E s t a b l i s h w h o w e will need to c o n t a c t in C i o n a n d w h a t w e will n e e d to be a b l e t o tell t h e m on t h e basis t h a t w e will c o n t a c t immediately after / before? announcement 3. Be p r e p a r e d t o c o m m e n c e p r e p a r a t i o n of n o t i f i c a t i o n of r e s c u e a i d i m m e d i a t e l y a n d p r o j e c t in p l a c e to notify r e s t r u c t u r i n g p l a n EU Detailed briefing ready for Commissioner (McCreevy) & Cabinet (Power & M u r r a y ) - n e e d to d e c i d e w h o w e w o u l d c o n t a c t a n d b r i e f in a d v a n c e a n d w h a t w e n e e d t h e m to do / w h a t d o w e n e e d to k n o w ? Also Cion (Internal Markt - David Wright) & other key Irish EU personnel in the Commi ssi on (e.g. Catherine Day) H i g h level E U C o m m i t t e e s - F S C / E F C etc - Case might be made for circulating information to members postannouncement? Against that should try to avoid drawing excessive attention to the measure. Germany, UK did not circulate any information following problems in their banking systems. Denmark mentioned Roskilde at FSC but didn't circulate anything. W o u l d s a m e o r d i f f e r e n t considerations i n f o r m interaction with C E B S a n d E C B / E S C B ? n e e d a d v i c e f r o m C B a n d F R on t h i s . Department of Foreign Affairs - Role of DFA crucial in informing and communicating approach internationally and to Dublin embassies (particularly in the EU MS and the US given links between Irish financial system and US). SG of DFA should be briefed early. - Ambassador to E U (Bobby McDonagh) and Permanent Representation including in particular Financial Services Attache are critical to effective communication of measure. Ambassador should be briefed early. I FSC - International banks based in Dublin could have important role in communicating information in informal way to their HQs - we need to try to ensure that the message is as positive as it can be in the 3 circumstances. Who should liaise with them to help manage the message - FIB I, FSI? Banks and representative bodies - Key role played by banks themselves and representative body IBF in communicating message internationally (as well as domestically) but need to decide how this process should be co-ordinated. MoU on crisis management - We are required to advise under MoS other MS of cross-border financial stability issues - Xfi not systemic in UK - but has significant commercial loan book in the UK - Important to advise HMT, BoE and FSA (and Isle of Man Regulator) at appropriate time particularly because of possible knock-on consequences - Is p l a n n i n g r e q u i r e d w i t h U K of c o n t i n g e n c y w h e r e l a r g e r i n s t i t u t i o n s in I r e l a n d ( a n d t h e U K ) a r e s e r i o u s l y a f f e c t e d by the announcement? EU Crisis Management List - Have contact list to hand & briefing prepared to respond to queries from other MS Deposit G u a r a n t e e Scheme (DGS) - Need to be able to explain how protection has pre-empted activation of DGS - However, announcement will generate strong focus on DGS - Need be able to give update on reform of DGS domestically - Key message is however this is not a DGS issue because there is no liquidation Don't forget EFDI-FDIC Conference (22 September 2008) - also overlap with Ecofin other international major speaking engagements Other public international stakeholders - IMF (Stephen O'SulIivan is Irish Executive Director - is there a case for bringing SOS in early so that he can act as contact point for US banks / stakeholders?) - DoF is Minister's representative on a number of international institutions (e.g. EIB, ADB) - officials attending meetings should be prepared to provide appropriate information - CB 1 FR international roles? 4 . .Lonergan, C i a r a From: Sent: To: Subject: Attachments: Beausang, William 16 September 2008 08:55 Manley, Michael Please s e e comments on this - could we discuss please Annotated Business plan Bills.doc .'V Annotated Business plan Sills... Business Plan Two strands A - Finalise BS Protection Bill B - Advance complementary Bank Protection Bill (-(-Guarantee Bill? - our next step is bank bill. We need to discuss how to expedite this. ) A - Finalise BS Protection Bill Text of Bill - Finalise text of already agreed provisions - DoF lead, but include OPC/AGO/FR/CB [we have final drafting changes.:... but C'K from the FR should review draft afresh and input into these - Clarify/resolve outstanding requirements o Year end (accounts/CRD) provision |vou saw mv email to MB...we are awaiting clarification of the position on this from hci] o Power of Minister to authorise/direct NTMA to restructure financing of society [NTMA have undertaken to come back to us on this! o Formal confirmation from the FR that the articles and memo of association of the IoM sub do not contain any provisions that would frustrate the transfer under the Bill (FR is to either check this directly this is my understand!rig or get their advisors GS to check this), o Formal confirmation from the FR that their advisors GS-McCann Fitzgeralds have checked the terms of the covenants associated with Xfi's wholesale borrowings to check what is the effect of any change of ownership and to check that they do not contain any unusual terms 11 am liaising with FR and NTMA on this. FR has raised questions on how this can be done] Once text agreed - seek high level clearance (in so far as this is possible at this stage) within CB / FR / NTMA of Bill before going to Govt? [As 1 understand it a trigger level of withdrawals has been agreed tor going to Government on this! Bill processes Prepare text of Explanatory Memo and Govt Memo - DoF lead with AGO/OPC input/clearance [Explanatory Memo and Govt Memo need to be ready to go - c ould we discuss logistics p]ease] Explanatory Memo - Key requirement, clarifying what the Bill sets out to do Memo for Govt - Format as set out on Cabinet procedures o essentially - Reason for Bill - Summary of what Bill sets out to do - Reason for urgency (might be covered at first point) - Need draft assessment from FR/CB for insertion - co ordinate with other strands) Practical arrangements f o r processing Bill through the Oireachtas (K Cullen preparing paper) (could you give m e an update on this] - Printing arrangements/procedures: (Separate checklist for these) - Contact with Bills Office (Whips Office?) latest time this can happen? - Speeches (Will vary depending on decisions in relation to how Bill is taken through, esp. 1 day or several days) - Committee Stage brief vital (will need to liaise closely with CB/FR If Dail and Seanad to be recalled this will require a request to the Cean Comhairle to issue recall notice (probably desirable to have ready a note from the Minister to Taoiseach on this) procedures Early Signing Motion - Check recent BUBA/Quinn direct motions (+ 1985 Special provisions Act) Briefings - Government ? - Opposition Leaders FR/CB involvement? - Media - link with FR/CB briefings to industry Question - extent of FR/CB/NTMA involvement B - Advance complementary Bank Protection Bill (+Guarantee Bill?) - PLEASE DISCUSS Text of Bill ( Significant input from Colm Breslin's side) - Recommence drafting of text based on original outline and matters learned from BS Bill - DoF lead, but again include OPC/AGO/FR/CB - Identify any additional issues o matters for disapplication? o Identify if there are Stock Exchange, Market abuse, takeover etc. issues? Once text agreed - seek high level clearance (in so far as this is possible at this stage) within CB / FR / NTMA of Bill before going to Govt? Bill processes Same as BS Bill? Briefings Same as BS Bill but greater attention to issues arising in share markets Minister RE : Background note for the Minister for Financed Financial M a r k e t Developments to 17 September, 2008~ on Note attached setting out background 1 Developments to 17 September, 2008. on Financial Market Michael Manley 16 September, 2008 Backuroimd note for the Minister for Financial M a r k e t Developments to 17 September, 2008 Q" Events in the USA Major events over the last ten days have seriously impacted international equity and financial markets: - On Sunday 14 September, Lehman Bros, filed for Chapter 11 protection (essentially a form of examinership in a situation of bankrupcy - reported exposures of $600 billion) - Merrill Lynch sold itself to Bank of America in an all-share deal (i.e. no new equity injected) - 8 September - US took Fannie Mae and Freddie Mac into conservationship, promising to pump in Sbillions, and with the likely loss of $10.8 billion in shareholders, stake These events reflect the working through US markets of problems with underlying sub-prime mortgages. Their scale is virtually without precedent (some commentators likening these to the 1929 crash), and have given rise to serious falls in world equity markets, a flight to quality (Govt, bonds) further tightening in credit availability (lenders even more reluctant to lend) and rises in interest rates. While difficulties in the banking sector have long been signalled, the sudden and unexpected approach to the Federal Reserve by the insurer American International Group (AIG) seeking $40 billion in short-term financing to stave off rating downgrades and shore up the capital of its holding company, has raised new fears. The most recent reports indicate the US authorities have appointed JP Morgan to lead efforts to have major financial institutions provide a market-based solution and of New York State permitting AIG to access up to $20 bn in its assets (insurance companies are usually strongly prevented from accessing their assets). I m p a c t on Ireland Events on this scale would inevitably extend to Ireland; largely in further tightening of the availability and cost of funding to banks and directly in employment and activity in institutions with operations in the IFSC (e.g. Merrill Lynch 650 employees; Bank of America 1,000 employees in a subsidiary MBNA). Irish banks have repeatedly stressed they have little or no exposure to the problems with US sup-prime mortgages. However, since February 2007, - Irish Stock Exchange index has lost almost 50% of its value, considerably outstripping US (Dow -18%) and UK (FTSW -18%) indices; with the Irish financial index falling 11% since 12 Sept as compared to 8% for UK and EU indices - Individual banks have seen very significant falls in this period A1B -70%), Bol -75% and Anglo -14%%. All Irish financial institutions saw major falls in their share prices in the last two days, e.g. AIB -15 % and Anglo -20 % up to mid morning 16 Sept. - Credit Default Swaps (CDS) for Irish banks (i.e. die cost of a counteiparty insuring lending to an Irish bank) has risen 30-37% since Friday, 12 Sept 1 i The Governor of the Central Bank and CEO of the Financial Regulator have stressed on many occasions that Irish financial institutions are coping well with the ongoing dislocation in international financial markets. Irish banks are well capitalised, are highly liquid and have built up good financial buffers over a number of years of strong financial performance. However, we have been advised by the Financial Regulator that recent developments have led to a marked deterioration in the financing environment f o r Irish banks. Investors and commentators perceive Irish financial institutions to be vulnerable to changes in property prices/adjustment in construction activity with ratings agencies adjusting downwards their ratings of Irish financials over the last year and generally indicating a negative outlook in tenns of bad debts. EU The ECB and other major Central Banks (UK, Swiss) provided additional liquidity to markets on Monday, 15 Sept. and the Informal Ecofin at the weekend reiterated the necessity to progress steps to restore confidence and maintain stability in global financial markets (i.e. implementation of the Roadmap dealing with transparency, progress on valuation standards, strengthened prudential standards and enhanced supervision of cross-border financial groups). However, additional liquidity provides temporary relief, while implementation of the Roadmap will only have effect over an extended time period. Summary The vulnerability to adjustments in the property sector and further tightening in the availability and cost of credit internationally has put Irish banks under increased pressure. This is impacting individual institutions differently, but all are under pressure, especially the smaller ones. Recent events in the US may be viewed as a necessary 'shake out', but it is generally accepted that markets will not begin to return to normal until property values in the US stabilise - no one has indicated this is likely to happen any time soon. International difficulties are therefore amplifying pressures in the domestic banking system. cc Secretary-Gcneral, Kevin Cardiff, Cathy Herbert - ..-. - (Y1 girlInuir? arfLa" ttqffBusiness Overview o A simple business model Lending - Senior secured term lending, emphasis on cash flow - Relationship based - Central approval of every loan Funding - Mostly customer funded - Wide franchise - 16 geographic markets o Highly capital accretive Balance sheet lender - "old-fashioned banking" Evolution of Anglo - 3 Decades SSIIfSSirSn aVa^V.Mi;,-' Three core markets - centrally controlled Lending Underwriting Model o Traditional Balance Sheet lender - no transactional o r ' b o u g h t 7 loans ? Strict focus on cash flows o Professional experienced well capitalised client base o All lending secured, cross collateralisecl with personal recourse We lend against cashflows not asset values Lending Organisation Structure Consistent'Private Banking' approach across all geographies .--.. - isGecgraphmal D1vers1f1cat10n Locatmn of Assets --Customers Lending Retail (IRL) Retail (UK) Corporate 7,000 120,000 140,000 10,000 (IRL; UK; USA) (IRL; UK; Europe; USA) -IIPeer Comparison - Balance Sheet Total assets - EURbri C u s t o m e r Funded Loan to deposit 101 62% 125% 197 54% 157% 178 53% 157% Peer Comparison - Profitability PBT - C m Employees Annualiseci profit per employee - EURk Cost to income - % ROE - % Market Cap - Cbn 1,400 1,850 750 19 26 7.1 1,933 16,026 121 51 21 8.4 2,508 23,797 105 52 22 11.8 Peer Comparison - Capital Position Tier 1 capital - EURbn Core equity Tier 1 Total capital 7.1 5.6% 8.7% 11.9% 9.4 5.7% 8.1% 11.1% 10.5 5.6% 7.5% 10.1% .. Current Market Issues life gji Strength and Diversity of Cashflows & Security Diverse cashflows from service o . . --------r---- economy Group Loan Book Metrics Average LTV Debt service cover Interest rate hedging 73% 1.34x 57% o LTVs indexed to current market o Continuing strong cashflows o Hedging provides certainty Loan book remains strong Irish EUR*bn Banks - Wholesale Funding AmgSo Total assets Total funding Wholesale funding Wholesale funding -% 101 98 39 40% BOI 197 175 83 47% AIB 183 173 76 44% 3CLP 76 42 25 59% INBS 16 16 7 45% Total 573 504 230 46% Lending Asset Quality 3 1 March 2008 Total loans - Cbn Impaired loans - C m Impaired loans as a % of total loans Total provisions - Cm Coverage 69.0 358 47% V EUR273m Provision 0.52 273 Collective 76% EUR144m >53% w r- Strong coverage notwithstanding strength of security held Asset Quality Outlook << Maintaining strong asset quality is at the core of our underwriting model o Impairment charges will increase in 2009 reflecting the weaker economic environment o 2009 consensus impairment charge 0.7% - a 4 - 5 fold increase on the forecasts 2008 charge (R) Even at this level the Bank continues to be highly profitable and Capital Accretive -- Funding o Longer term funding markets continue to be dislocated o Back to basics o Focus on protecting the balance sheet Simple Balance Sheet - 31 March 2008 Cbn 55 16 9 80 C b n A Liabilities C u s t o m e r Lending 69 || Customer Deposits I Term Debt 1 ' 1 Capital / Sub Debt i C u s t o m e r Lending 69 I 1 Permanent Funding 1 28 I j CP / Money Market 4 |1 o t h e r 101 j| Total Treasury Assets Other Total 18 3 101 Customer deposits of customer loans plus term market funding , ^ = a 116% Capital o Strong internal capital generation - FY 2008 retentions c.Clbn Core Equity - % * Sep 2008 core equity c.6% No requirement for externai equity capital Capital Ratios Core Tier Ones Anglo BOI AIB E u r o S e c t o r Av,, 6% 5>>6% 5.7% 6.8% (Sept 2008) (March 2008) (June 2008) All About Asset Quality Profits 2008 U n d e r l y i n g Profits Exceptional Charges EUR1.7 bn (EUR0.2 bn) EUR1.5 bn Bad Debts - Anglo - Analysts+ (EUR0.1bn) EURT.8 bn (EUR0.3 bn) ( EUR 0 . 2 bin) (EUR0.2bn) 2009 EUR 1 . 8 bn 2009 Higher Funding Costs i j R e p o r t e d P re-Tax P r o f i t s EUR 1 . 4 bn Cl.lbn Compelling Medium and Long Term Opportunity o Significant market shift to "Balance Sheet lenders" o Changed competitive landscape - exit of non-bank lenders o 25 years of performance through cycles - strong asset quality culture o Franchise strength with huge organic potential in existing markets (R) Long established m a n a g e m e n t team A GO NL IRISH BN AK -pr-; "'inl lii Note of Meeting, 18 September 200^ Minister NTMA D/Finance CBFSAI FR *for part John Hurley gave a report liquidity under great strain - potentially serious crisis considerations (a) what can w e do now? (b) specific bodies to focus on in next few days? Re (a) (R) Said Minister's reassuring statements had helped (R) Needs to be something quickly on deposit guarantees and a further reassuring statement on the financial sector o An 'all deposits' guarantee may be counterproductive. CB/FR not suggesting that now. (R) Proposal B DGS to increase to 100k K Additional statement from Minister H Liquidity provision structures to provide immediate liquidity may be required (with letter of comfort from Minister) -- a EURi 0 billion emergency fund should be available for a pressure scenario. Re (b) Michael Somers. John Corrigan. 13 McDonagh Kevin Cardiff*, David Doyle John Hurley, Tony Grimes, Brian Halpin Jim FarrelL Patrick Neary* ,.e Anglo, John Hurley said options if trouble continues include (a) nationalising (b) support it but take equity share as a price for that - then work it out over a period of time - State should give itself potential for upside. His conclusion (a) put liquidity facility in place asap and (b) look at how to deal with broader issues over next week or so. Jim Farrell stressed DGS should also apply to credit unions. Michael Somers outlined the Exchequer funding position; noted that a CU was seeking a facility to deposit with NTMA; raising large amounts of money takes time. Minister asked that Kevin Cardiff, Pal Neary and Brian Halpin draft a statement re DGS immediately. i 1 understand that tiie remainder oi meeting was principally stock luKing o not actions pom's Minister for Finance announces increase in Deposit Guarantee Limit - Department of... Page 1 of 3 G o v e r n m e n t of I r e l a n d - D e p a r t m e n t of F i n a n c e G o v e r n m e n t I n c r e a s e s D e p o s i t G u a r a n t e e Limit to EUR 1 0 0 , 0 0 0 p e r d e p o s i t o r 20th S e p t e m b e r 2008 T h e G o v e r n m e n t h a s d e c i d e d to i n c r e a s e t h e s t a t u t o r y limit f o r the d e p o s i t g u a r a n t e e s c h e m e for b a n k s a n d b u i l d i n g s o c i e t i e s f r o m EUR 2 0 , 0 0 0 t o EUR 1 0 0 , 0 0 0 p e r d e p o s i t o r per i n s t i t u t i o n . T h e c o v e r will a p p l y to 1 0 0 % of e a c h i n d i v i d u a l ' s d e p o s i t . T h i s g u a r a n t e e l e v e l will also a p p l y to c r e d i t u n i o n s a v e r s . A n n o u n c i n g t h e d e c i s i o n , t h e M i n i s t e r f o r F i n a n c e , B r i a n L e n i h a n T D , s a i d " I w a n t it to be k n o w n t h a t the G o v e r n m e n t is c o n f i d e n t a b o u t t h e s t r e n g t h and r e s i l i e n c e of the I r i s h financial s y s t e m . T h e G o v e r n m e n t is c o m m i t t e d t o the s t a b i l i t y o f o u r financial s y s t e m , so t h a t m o n e y p l a c e d w i t h a n I r i s h c r e d i t i n s t i t u t i o n w o u l d not be a t risk. As I s a i d y e s t e r d a y , t h e Irish G o v e r n m e n t w a n t s to p r o t e c t the w h o l e f i n a n c i a l s y s t e m , s e c u r e its s t a b i l i t y a n d e n s u r e t h a t all d e p o s i t s in Irish f i n a n c i a l i n s t i t u t i o n s are safe." T h e Minister a d d e d " t h e C e n t r a l B a n k a n d F i n a n c i a l R e g u l a t o r h a v e s t r e s s e d the s o u n d n e s s a n d s t a b i l i t y of t h e Irish f i n a n c i a l s y s t e m . T h i s m e a s u r e p r o v i d e s a d d i t i o n a l r e a s s u r a n c e to d e p o s i t o r s in I r e l a n d t h a t t h e i r s a v i n g s are s a f e . T h e new g u a r a n t e e level is n o w a m o n g the h i g h e s t in the E U . " T h e Minister a l s o c o m m e n t e d t h a t n o t w i t h s t a n d i n g the u n c e r t a i n t y c a u s e d by the t u r b u l e n c e in i n t e r n a t i o n a l f i n a n c i a l m a r k e t s o v e r t h e l a s t w e e k , it is e n c o u r a g i n g that t h e b a n k s h a v e r e t a i n e d t h e c o n f i d e n c e of t h e i r c u s t o m e r s . T h i s m e a s u r e has b e e n u n d e r c o n s i d e r a t i o n for s o m e t i m e , a n d the M i n i s t e r believes t h a t this is t h e a p p r o p r i a t e t i m e to m a k e t h e a n n o u n c e m e n t . Ends Minister {'or Finance announces increase in Deposit Guarantee Limit - Department o f . Page 2 of 3 N o t e s for Editors Legal basis to the D e p o s i t Protection S c h e m e T h e legal basis f o r the Deposit Protection S c h e m e in Ireland is the E u r o p e a n C o m m u n i t i e s ( D e p o s i t G u a r a n t e e S c h e m e s ) R e g u l a t i o n s , ^1995. These Regulations i m p l e m e n t e d t h e E u r o p e a n Union Directive on D e p o s i t G u a r a n t e e S c h e m e s ( 9 4 / 1 9 / E C ) . The I r i s h regulations w e r e a m e n d e d in 1 9 9 9 to provide for a m a x i m u m c o m p e n s a t i o n of EUR 2 0 , 0 0 0 . Legislation Legislation will be i n t r o d u c e d shortly by the Minister t o i m p l e m e n t the new g u a r a n t e e level but this n e w level will have affect from t o d a y following the G o v e r n m e n t ' s decision. EU Guarantee Levels T h e single largest n u m b e r of EU M e m b e r States c u r r e n t l y h a v e g u a r a n t e e t h r e s h o l d s of ? 2 0 , 0 0 0 - A u s t r i a , B e l g i u m , C y p r u s , G e r m a n y , G r e e c e , Ireland, L u x e m b o u r g , Malta, S l o v a k i a , S p a i n . O t h e r S t a t e s have thresholds v a r i o u s l y in e x c e s s of this - e.g. Finland and P o r t u g a l EUR 2 5 , 0 0 0 , Netherlands EUR 3 8 , 0 0 0 , D e n m a r k EUR 4 0 , 3 0 0 , UK EUR 4 8 , 5 0 0 e u r o e q u i v a l e n t of ? 3 5 , 0 0 0 ) a n d Italy EUR 1 0 3 , 0 0 0 . E U Review Ireland is p a r t i c i p a t i n g in the ongoing review of the E U D e p o s i t G u a r a n t e e S c h e m e s Directive. This r e v i e w includes consideration of t h e m i n i m u m level of the EU g u a r a n t e e b u t also f o c u s on w i d e r policy areas s u c h a s c o - i n s u r a n c e r e q u i r e m e n t s ( u n d e r w h i c h d e p o s i t o r s bore 10% of losses w h i c h is b e i n g a b o l i s h e d for the Irish s c h e m e ) i m p r o v i n g the s p e e d of payouts, better d e p o s i t o r i n f o r m a t i o n , the c a s e for gross rather than n e t c o m p e n s a t i o n (as at present) a n d c r o s s - b o r d e r interoperability of s c h e m e s . It is e x p e c t e d that the conclusions of this r e v i e w will be reached by endy e a r . In the c o n t e x t of the conclusions of the E U r e v i e w , a n y further c h a n g e s required in the I r i s h D e p o s i t G u a r a n t e e S c h e m e will be p r o g r e s s e d to ensure that s a v e r s in Ireland b e n e f i t f r o m s a f e g u a r d s in line with E U b e s t practice. Funding of t h e D e p o s i t G u a r a n t e e S c h e m e T h e level of c o n t r i b u t i o n required f r o m each credit institution is 0 . 2 % of eligible d e p o s i t s held at all b r a n c h e s of the credit institution in t h e E E A , including deposits on current a c c o u n t s a n d s h a r e a c c o u n t s with a building s o c i e t y , but excluding interbank deposits and d e p o s i t s r e p r e s e n t e d by negotiable c e r t i f i c a t e s of deposit. A m i n i m u m contribution of EUR 2 5 , 4 0 0 is required. Each c o n t r i b u t i o n is m a i n t a i n e d in a Deposit Protection A c c o u n t at the C B F S A I . As of 2007, t h e total a m o u n t held in Deposit Protection A c c o u n t s w a s EUR 5 2 6 million. A p p r o p r i a t e , m e c h a n i s m s will also be put in place, in c o n s u l t a t i o n with the financial institutions to i n c r e a s e the level of funds in the D e p o s i t P r o t e c t i o n A c c o u n t s over time but in the interim, t h e e x i s t i n g s y s t e m provides for t h e a v a i l a b i l i t y of additional funds f r o m the C B F S A I if r e q u i r e d . C o v e r a g e of t h e D e p o s i t Protection S c h e m e The Deposit Protection Scheme currently covers: Minister for Finance announces increase in Deposit Guarantee Limit - Department of... Page 3 of 3 o current accounts; o demand deposit accounts; o term deposit a c c o u n t s ; and (R) s h a r e a c c o u n t s w i t h b u i l d i n g s o c i e t i e s ( o t h e r t h a n s h a r e s w h i c h fall within the d e f i n i t i o n of o w n f u n d s ) held with b a n k s , b u i l d i n g s o c i e t i e s a n d o t h e r t y p e s of d e p o s i t - t a k i n g institutions ( o t h e r t h a n c r e d i t u n i o n s ) r e g u l a t e d by t h e F i n a n c i a l R e g u l a t o r . It is now being e x t e n d e d to i n c l u d e s h a r e a n d d e p o s i t a c c o u n t s in c r e d i t u n i o n s . EU Branches D e p o s i t s with c r e d i t i n s t i t u t i o n s a u t h o r i s e d in a n o t h e r E u r o p e a n E c o n o m i c A r e a (EEA) c o u n t r y and o p e r a t i n g in I r e l a n d on a b r a n c h b a s i s a r e c o v e r e d u n d e r that country's system. Credit Unions T h e Irish L e a g u e o f C r e d i t U n i o n s ( I L C U ) h a s s i n c e 1 9 8 9 , o p e r a t e d on an all-island b a s i s a s a v i n g s p r o t e c t i o n s c h e m e ( S P S ) for c r e d i t u n i o n s . T h e S P S has, to date, o p e r a t e d by p r o v i d i n g f i n a n c i a l s u p p o r t to c r e d i t u n i o n s t h a t get into difficulty and it h a s n e v e r b e e n n e c e s s a r y to m a k e s a v i n g s p r o t e c t i o n p a y m e n t s to individual credit u n i o n m e m b e r s . U n d e r t h e S P S r e g i m e no c r e d i t u n i o n h a s b e c o m e insolvent a n d no m e m b e r of a c r e d i t u n i o n h a s e x p e r i e n c e d a n y l o s s of s h a r e s o r d e p o s i t s . The R e g i s t r a r of C r e d i t U n i o n s in t h e F i n a n c i a l R e g u l a t o r is w o r k i n g c l o s e l y with I L C U to a p p r o v e a r e f o r m t o S P S . It is e x p e c t e d t h a t t h e s e d i s c u s s i o n s w o u l d conclude shortly. It is i n t e n d e d t h a t t h e g u a r a n t e e t h a t h a s n o w b e e n a n n o u n c e d for credit institution s a v e r s w o u l d act a s a b a c k s t o p to an a p p r o v e d S P S s c h e m e for c r e d i t u n i o n s . O p e r a t i o n of the D G S T h e D e p o s i t P r o t e c t i o n S c h e m e in I r e l a n d is a d m i n i s t e r e d by the C e n t r a l Bank and F i n a n c i a l S e r v i c e s A u t h o r i t y of I r e l a n d ( C B F S A I ) . Other compensation schemes T h e Minister will b e r e q u e s t i n g t h e v i e w s of c o n s u m e r interests, i n d u s t r y and other stakeholders regarding the implications of t h e announcement for investor c o m p e n s a t i o n l e v e l s a n d t h e c a s e for i n t r o d u c i n g a n i n s u r a n c e g u a r a n t e e s c h e m e for t h e life sector. Further Information F u r t h e r i n f o r m a t i o n o n t h e D e p o s i t P r o t e c t i o n S c h e m e in I r e l a n d c a n be found at the Financial Regulators c o n s u m e r information website www.itsyourmoney.je . A n y f u r t h e r q u e r i e s s h o u l d be a d d r e s s e d to the D e p a r t m e n t of F i n a n c e Press Office at 0 1 - 6 7 6 7 5 7 1 or Eoin D o r g a n . .a.. W h a t is your assessment of the Irish Financial situation? (R) There have been dramatic events in international financial markets over the past fortnight as illustrated by recent stock market volatility; and the unprecedented developments on Wall Street over the last week (R) Swift actions by international central banks, including the ECB, to provide major injections of liquidity and the US authorities' plan to rid US banks of troubled assets and shore up US financial institutions has helped stabilise markets internationally (R) The US financial institutions in the headlines are investment banks operating largely in wholesale markets and are very different to Irish retail banks o Irish financial institutions have no material exposure to the sub-prime securities which have created major losses for large investment banks ? The Governor of the Central Bank and the Financial Regulator have stressed repeatedly that Irish financial institutions are well capitalised and liquid with good quality assets. (R) They have proved resilient in dealing with challenging market conditions o Their access to liquidity from the European Central Bank on account of Ireland's membership of the euro zone is a major benefit and had proved a real strength in helping the Irish financial system to weather difficult financial conditions over the last year (R) Depositors in Irish financial institutions can be confident that their deposits are safe and secure. Should Irish Depositors be concerned? (R) The Financial Regulator has made clear that our banks have ready access to cash from the European Central Bank, that there are no difficulties in ensuring that our banks have adequate funds for depositors and that depositors can be confident that their deposits are safe and secure. ? The Minister for Finance has said that the Government will take whatever steps are necessary to ensure the stability of Ireland's banking system. (R) The message that I am giving this morning couldn't be clearer:- the Government puts the highest priority on ensuring the stability of our financial system and the safety and security of savings in all our financial institutions. Financial Regulator's decision on short selling? (R) I welcome the move by the Financial Regulator to prevent short selling. (R) It is essential to act in tandem with our international partners, namely the US and British authorities, so as to ensure that our financial market is not subject to destabilising financial speculation (R) Short-sellers have sought to gain from undermining confidence in our financial institutions Will the Government b e increasing the level of the Deposit Protection Scheme? (R) The Government has agreed to increase the existing statutory limit for the deposit guarantee scheme for banks and building societies to EUR100,000 per depositor. (R) The Government has also decided that 100% of each individual's deposit will be covered up to that limit. ? It has also been decided that this guarantee level will apply to crcdit union savers. (R) The decision will require legislation, which will be backdated to today. ? Given recent comments by Fine Gael and Labour I am sure they will be fully supportive of this decision. W h y is the decision o c c u r r i n g now? In line with nonnal arrangements for such decisions, it was made public outside of nonnal financial institution opening hours. This will allow people to digest and fully understand the importance of this decision in terms of providing a farther reassurance to depositors who may have been concerned by developments in financial markets and Wall Street earlier this week. ? The Government has always kept the Deposit Protection Scheme under review, participating in the EU review of the Deposit Guarantee Directive. Ill informed and misleading speculation about the stability of the banks and the guarantee scheme has caused concern to savers. This decision is being taken to stress that savers can be confidence that their savings are safeguarded and guaranteed. (R) It is always quite difficult to choose the right time for this decision to ensure that the reasons f o r it are fully understood. In light of recent developments and the uncertainty in the financial world, I believe the Government has acted at the appropriate time. (R) The key point is that the Government wants to protect the whole financial sector, and secure its stability. The Regulator has confirmed that deposits in Irish banks are safe. o Has this decision been taken in reaction to public panic? o No, this decision has been made in light of the ongoing review of the deposit protection scheme. Obviously, the recent turbulence has highlighted the need to bring consideration of this specific issue to and end and take the decision on what is the appropriate level of guarantee to emphasise the Government's commitment to looking after the interests of savers. (R) Indeed the Government has been impressed at the informed calm which the vast majority of customers have kept over the past fortnight. 2 (R) The key point is that the Government wants to protect the whole financial sector, and secure its stability. The Regulator has confirmed that deposits in Irish banks are safe. Are the Irish Banks in difficulty? (R) The US financial institutions that have been the headlines today are wholesale investment banks and are very different to the retail banks in Ireland. ? Irish banks have no material exposure to sub-prime securities (R) As the Governor of the Central Bank has stressed, they are well capitalised and liquid with good quality assets. ? Their strong performance over recent years has provided them with strong buffers to deal with the current market environment. o Ireland's membership of the eurozone and its access to BCB liquidity is a real strength (R) They have proved resilient and are weathering well current difficult financial market conditions. o Irish banks are continuing to go about their normal business in the challenging environment in which they find themselves and are working through the issues that they face. Will you comment on t h e rumours of takeovers? o I do not want to commcnt on any particular institution in the current climate as that would be unhelpful. 3 Irish L i f e & P e r m a n e n t Discussion Materials 20 S e p t e m b e r 2008 Morgan Stanley 249 Irish Life & Permanent IL&P Balance Sheet Overview IL&P has the highest loan / deposit ratio of any Irish or U K bank (absent Northern Rock) UK and Irish Banks Loan to Deposit Ratio Latest Available % 330 250 200 286 IL&P Balance Sheet Overview a MM 1H07 Bank Loans & Deposits Customer Loans Cash Balances Value in-Force 4,041 36,724 256 696 36,691 78,408 2007 2,528 39,120 253 717 37,444 80,062 1M08 2,358 41,005 141 696 31,930 76,130 103 5C Other Assets Total Assets L'oyds Anglo Ba'days Source Company Reports Bank Deposits o/w ECB 2,018 - 10,011 5,333 2,322 13,576 3,090 1,599 49,143 77,419 11,801 3,900 n/a 14,597 2,820 1,661 42,597 73,476 European Banks Loan to Deposit Ratio Latest Available o/w "Real" Deposits Customer Deposits Non-Recourse Subordinated Liabilities Other Liabilities n/a 14,429 3,534 1,650 54,287 75,918 % S 4 Mia s(R) Iras Sw< Liquidity Portfolio by Rating (% of Total Assets) Total: EUR2.3 Bn % Liquidity Portfolios Across Peers (1H 08) EUR Bn 30 26 <8 >> 2V: 28.0 m i 20 15 10 5 0 Anglo Irish Source Company Informatics mm, ILP Source Company Information 2.3 Note Morgan Stanley 252 1. Includes liquid treasury a s s e t s for Anglo, Treasury a s s e t s in the trading and AFS portfolio for AIB and AFS liquid a s s e t s for Bol as per company presentations Irish Life & Permanent Ratings Sensitivity M a i n i s s u e s c o n c e r n i n g rating a g e n c i e s Both rating agencies have H P ' s ratings on negative outlook Main driver is IL&P's constrained funding position and its impact on profitability A s s e t quality also a potential concern, but so far resilient After deduction of insurance capital, S & P sees bank capital as low W e see a key short-term risk as increased asset encumberance driven by increased reliance on secured funding, either E C B or bilateral Summary of Main Rating Agency Concerns Constrained funding profile is main driver of negative outlook High loan/deposit ratio of 281% (6/08) Disruption to unsecured funding h a s led to a reliance on secured funding and an increasing encumbrance of a s s e t s Shortening maturity profile o Hign reliance on market funding is main oriver of negative outlook o Significant eligible collateral for ECB ; o Relatively high u s e of ECB repo (12% of i total funding) o Liquidity ratio weakened to 23% at YE07 o Low liquidity score of 'D+' in scorecard Profitability under pressure a s a result of higher funding costs 2008 expected to deliver a low NIM of <100bps Increasing provisioning will also constrain profitability High reliance on market funds expected to lead to a lower level of profitability Irish mortgages so far resilient, although recent vintage high LTVs a potential issue Concerns over CHL and Irish consumer finance books Relatively high exposure to BTL sector in UK and Ireland Deteriorating environment in Ireland Lending at high LTVs up to mid-2007 Strongly capitalised on a stand-alone basis, but S&P looks at ratios will 100% and 50% deductions of insurance capital On this basis, capital looks low Moody's d o e s not adjust for insurance capital and therefore s e e s capital a s acceptable Morgan Stanley 253 IL&P Funding Overview A s at 30,!1 June Irish Life & Permanent's funding profile consisted of 39% customer deposits, with the remaining 61% wholesale funding - Although a significant proportion, c. 60%, of customer deposits are corporate Funding Mix 30 June 2008 Excerpts From Balance Sheet Liabilities EURM M 3(KJuiv2008 31-Dec-2007 Long-Term 29% ik-S-W ! 'CHango* ' | m 30-Jun-2007 > '-.'Cfunoo | mm Customer Deposits 39% Deposits by banks Customer accounts Debt securities in issue 11,801 10,011 ? o ' . 2,018 , + 5?5%.; 14,597 13,376' +Q%' 14,429 +1% o 11,744 1,661 15.371 1,599 +4%; 20,233 1,650 f -12%: o+1% Within the last year debt securities in issue has d e c r e a s e d significantly (-42%). Consequently IL&P has increased deposits by banks by more than five times Short-Term 32% Subordinated liabilities Source \ Source Company 2038 Interim Report Company Annual Report Irish Life & Permanent Liquidity Position YE 2007 EUR Bn 20 "In respect of margins, higher funding costs will impact the full year net interest margin in the bank with an expected outcome for the full year of between 98 bps and 100 bps." IL&P 2008 Interim Report 16 j ! 1 2 8 4 o o BBsaaaii Up to 1 month Deposits by banks 1 - 3 months M H r a (R)M?I 3 o 6 months Customer accounts 6 - 1 2 months <3515 1-2years feslii Over 2 years Debt securities & subordinated liabilities Source Company Annua! Report Morgan Stanley 6 IL&P's US C P and E C P volumes have progressively decreased throughout the year (note that data beyond June-08 is unavailable from public sources) IL&P's US C P roll dates are unavailable from public sources, but a table of the E C P outstandings is shown to the right - IL&P's total E C P outstandings according to the database 'CPWare' are $1.74 Bn - the weighted average maturity of IL&P ; s E C P outstandings is currently 50 days CP Volumes Outstanding U S D Equiv. B n 7 5 5 ..... ill mesmm Source km ,; :o USCP ECP Moody's Current ECP Outstandings for IL&P I s s u e Date 06-Mar-08 03-Sep-03 28-Auj^OB 04-Aug-08 3i-jui-ce 30-Jul-C6 22-Jul-38 21-A?r-03 17-jui-oa 11-Sep-OS li-Jul-08 08-Aug-08 07-JUI-08 03-Jjl-C8 0i-Se>08 30-Jun-08 29-Aug-08 15-Aug-OB 26-Aug-OS '.C-Sep-08 21-A'jg-OB 20-Aug-08 22-Aug-08 Currency GBP USO EUR EUR EUR JPY EUR EUR EUR EUR JPY EUR EUR 'JSC GBP CHF EUR EUR EUR USD EUR EUR GBP Nominal Amount, MM 4.0 '2.0 15.C 50.0 48.C 6.500.C 30.5 12.5 27.5 150.0 6,000.0 15.0 14.0 11.C 33.0 35.0 200.0 25.0 150.0 30.0 200.0 20.0 67.0 Total USD E q u i v . , M M 7.1 12.0 21.3 70.9 58.0 60.6 43.2 17.7 39.0 212.6 55.9 21.3 19.8 11.0 58.9 30.9 283.5 35.4 212.S 30.C 283.5 28.3 119.6 1,743.35 Weighted Average Maturity M a t u r i t y Date 22-Sep-08 22-Sep-08 22-Sep-08 24-Sep-08 26-Seg;08 29-Se?-08 29-Sep-08 30-Sep-08 01-0=1-08 06-0ct-08 07-0ct-08 i i-0c:-08 M-Gcl-08 14-0cl-08 21-OCI-C8 21-OCI-G8 22.0cl.08 30-Ccl-08 31-0cl-08 04-NCV-08 28-NOV-08 08-Deo-08 05-Mar-09 60 d a y s ISIN XS0351874218 XS0387279855 XSC38555626C XS0381760130 X3038I248976 XS03802857C9 XS037880C195 XS0359913950 XS037802S721 XS0387958308 XSC376583240 XS0382585833 XS03754C0487 XS0374355203 XS0386005754 XS0373976108 XS0385578827 XS0383773883 XS0385078182 XSG387857294 XS0384664610 XS0384359146 XS0384827936 Morgan Stanley Source CPWare. Dealogic Irish Life & Permanent IL&P Current Redemptions Irish Life & Permanent Current Redemptions o B a s e d on public information it is quite challenging to ascertain the weekly redemption profile of IL&P - However the E C P and term debt redemptions that are publicly disclosed indicate that last week w a s particularly significant Maturity Date Market o Issue Date W 27-Aug-2004 18-Mar-2007 30-Nov-2005 USD EUR USD Currency (R) 1 1 Last Week (Week Commencing -15 September) r. 19 th 1 } A m o u n t (Local Currency, MM) September Term Debt Term Debt Term Debt 268.0 75.0 760.0 19" September 19 lh September This Week ( Week'Commencing 22(TM) September) 22 M September 22" September 22"? September 22 nd September 24 [n 1 oH-A'i-iii:: 22-Mar-2007 06-Mar-2008 08-Sep-2008 28-Aug-2008 04-Aug-2008 23-Mar-2004 31-Jul-2008 EUR GBP USD EUR EUR USD EUR 175.0 4.0 12.0 15.0 50.0 5.9 48.0 Term Debt ECP ECP ECP ECP Term Debt ECP ' ECP ECP Term Debt ECP ECP Term Debt October ECP ECP Term Debt ECP September 26 : " September 26'" September Week Commencing 29 : , v September 29 lh September 29 ;h September 30'" September 30'" September 1 sl 30-JU-2008 22-Jul-2008 29-Mar-2007 21-Apr-2008 17-Jul-2008 02-0ct-2006 JPY EUR JPY EUR EUR EUR ' .'o.o.i.'V-...''o.'oo' ' " . ' o-- o '. : c. : . . .o -.' 6,500.0 30.5 10,000.0 12.5 27.5 5C.0 :, 4 150.0 55.9 6.3 15.C October 2"d October Week Commencing 6 " October 7'" October 91* October 11" October 11-Sep-2008 11-Jul-2008 07-0ct-2003 08-Aug-2008 EUR JPY USD EUR Morgan Stanley 8 Irish Life & Permanent IL&P Term Funding W e anticipate that term funding markets for banks rated below A A will remain dislocated with periods of significant volatility and continued high spreads in the coming months IL&P's senior C D S has widened considerably in recent months and is currently quoted at 330/370 in 5 years IL&P has a EUR15 B n Euro Medium Term Note Programme, but unlike the other large Irish banks it does not have a c c e s s to the U S markets for term debt via a debt shelf Irish Banks CDS Spreads 5-Yea r Senior Unsecured Mid, b p s 6DC <00 Irish Life & Permanent Term Debt Redemptions IL&P CDS Performance Last 12 Months Bps E R Equiv., B U n 2.C 1.6 1.2 0.6 0.1 0.0 1 1 m I 1 soo 40 0 3C0 200 100 i $ I Bp H S3 V;| 111 fis tej i m r /LA 21-,,an-oe o-- HBOS a V\\ f.'^y'' JA 19-Sep-Oe I 22-Sep-07 SSfel Notes 2- a-8 1M y0 Term debt maturities Bloomberg. Securtlsaticns are not included Source IL&P l.'a'ki! as of ' 9 Seolember 2C0B. Morgan Slamey Trading Irish Life & Permanent Public Term Debt Issuance" EUR Equiv.. Bn 2.5 Irish Financial Institutions' Historical Debt Issuance Volumes 20C5-2008 YTD 1.5 525 325 37 iS' & IL&P 255 I 1 200 0 Source vest 1 y&a l Ag 07 u 1 2 1 J - !i Sol A IB as(R) Current 2CCS 2008 YTO 06 07 03 IL&P Source Daaloglc 0 6 0 7 08 EM Source RMBS SEB3 UT2 Morgan Stanley, Oealcg c Irish Nationwide Notes 1. 2008 reaemptions remaining a s at 20 " September 2. USD 250mm equivalent or greater 3. IL&P CDS data from Markit, adjusted per Morgan Stanley Trading data a s of 19 S e p t e m b e r 2008 ! M e g a n Slants/ as cf *9 September 2CC8 Morgan Stanley 257 Irish Life & Permanent Debt Investor Commentary European Term Debt Investor Feedback on Irish Banks In late August we received detailed investor feedback on Irish bank names from the Morgan Stanley sales team Whilst some investors would be able to look at the larger institutions ; in general there is limited appetite for new issues from Irish banks As of 22 August No lines for Irish banks. Highly sceptical on Irish banks. No to Irish banks. Ok on Irish names, but only for small size portfolio diversification. Only in fixed rate Euros. No interest in Irish r.ames. Have a line for several Irish names, but have a natural bias tcwaros AA rated issuers. Prefers 3 - 7 year maturity and EUR but can look a t G B P . Full on Irish banks. No :nterest in Irish banks. Generally interested in AA rated r a m e s . Have a line for AIB/BOI. Angio Irish / IL&P rating too low. No interest in Irisn banks. Will look at Irish banks on a name by name basis. Have a line for AIB, but are full on BOI. Main interest in 2 year Euro FRNs. No interest in Irish names unless spreads are very attractive. Generally look at 2 year Euro FRNS. Bought the Bank of Ireland 2yr Euro FRN, but the bond underperfomied. Not fully opposed to Irish names, but not buying short dated senior currently. Negative on Ireland. Doesn't like Irish names. Name speciric. No interest in Anglo Irish. AIB and BOI - no interest right now but there will be a time when they will look at them again. Not keen on Irish names. Not keen on Irish names. Doesn't envision not getting money back, but their credit department probably won't approve for time being. No iines for Irish banks. No to Irish banks. Morgan Stanley Source Morgan Stanley Sales 10 Irish Life & Permanent Private Placement Market o 2008 Y T D has s e e n significantly reduced private placement volumes across all of the Irish banks - D e m a n d for structured notes in the market generally is significantly reduced - Vanilla private placements are being issued at spreads similar to the public markets Irish Banks' Total Private Placement Issuance Levels 2005 - 2008 YTD EUR equiv,, Bn 5 iBsa, ,,,,,., ois. AIB Anglo Irish 2006 O t 2007 H i Bol 2008 EBS IL&P Irish Nationwide * Even though IL&P is highly flexible in the kinds of structures it can issue in M T N format, unfortunately due to reduced credit appetite and an inability to issue covered bond private placements 2008 volumes have significantly reduced 2005 Source i m M T N Ware. Oeaicgic as at Iff11 September Irish Life & Permanent's Ability to Issue Private Placements o Irish Life & Permanent is the most flexible private placement issuer in Ireland in terms of size, structure and maturity and has in the past been able to raise a large proportion of their annual funding needs through structured notes. However, in the recent market dislocation investors have become much more aware of counterparty risk and have been less willing to invest in Irish credits, particularly those with weaker ratings. o Other Irish issuers have counteracted the fall in senior unsecured private placements through short-dated covered bond private placements to some extent. Irish Life & Permanent does not have a covered bond programme and could therefore not compensate for the shortfall in senior unsecured through covered bond issuance. o Generally, the conditions for private placements given the current market environment have deteriorated as investors are less inclined to buy illiquid paper. Investors only consider private placements 1) if the issuer pays a generous new issue premium to secondaries or 2) if the particular maturity is not available in the public markets (e.g. lyr paper) or 3) if they want a tailormade currency / structure. Morgan Stanley 11 Existing IL&P Securitisations IL&P currently has 8 R M B S transactions outstanding under its two securitisation programmes The deals are e a c h structured as stand-alone transactions and IL&P's ongoing obligations are clearly defined - For example, in most structures, IL&P performs various functions (including swap provider) which are subject to ratings downgrade triggers Bonds which have been issued since the onset of the market dislocation have been retained and can be used a s collateral for the E C B facility if required From February 2009, the terms applicable to the E C B R e p o Facility will become more onerous - Will require third party involvement to utilise U K mortgages under crosscurrency I close association rules Irish Life & P e r m a n e n t Existing Securitisations Vehicle Principal Amount Expected Maturity Publicly Issued Retained for ECB Auburn Securities 3 pic. Auburn Securities 4 pic. Auburn Securities 5 pic. Auburn Securities 6 pic. .uburn Auburn Securities 7 pic. Fastnet Securities 2 pic d Fastnet Securities 3 Ltd Fastnet Securities 4 Ltd ' ?400 MM ?1,000 MM ?450 MM EUR4,150 MM EUR2,360 MM EUR2,1501 EUR8,000 MM J. V EUR6,500 MM November 2009 October 2009 November 2010 November 2010 August (t) Yes Yes Yes I No No No Yes Yes June 2012 : .November 2049 { , ) ' o June 2013 / o . ' Yes . No oo ' o No " , ooo--oo ' No Yes o Yes Morgan Stanley Notes 1. No coupon step-up 12 Securitisation Funding Considerations IL&P has already securitised a large portion cf its mortgage book and is holding the bonds in reserve This may help to address immediate liquidity concerns in the short term However, E C B funding is available for a maximum of 6 months only and must be rolled on maturity with pricing set by way of auction Existing deals will be subject to the new regime which applies from February 2009 At present we estimate that IL&P has up to c. EUR26 Bn of E C B eligible collateral, a n d the potential to create an additional c. EUR6 Bn - Of this we believe that approx. EUR11 Bn has been utilised, excluding increased E C B drawings since 1H08 - A s domestic, non-clearing institutions increased their drawings by 25% or EUR5 Bn in July alone, we expect IL&P to have used some of this capacity o The securitisation market remains largely closed to new issuance. Accordingly, IL&P would need to access either the ECB Refinancing Facility or market counterparty repos in order to fund their residential mortgage assets o The terms attaching to market repos have become increasingly onerous since the onset of the credit crunch. On this basis, we would expect IL&P to continue to lean towards the ECB Facility o At 3 l December 2007, IL&P had available to it ECB Eligible Collateral of EURl 7.2Bn (EUR20Bn nominal collateralised asset pool) against which drawings of EUR5.3Bn had been made (reduced to EUR3.9 Bn at l H08) - IL&P has since issued and retained a further EUR8.9Bn of ECB Eligible Collateral - On this basis, and assuming that the residential mortgage book balance is EUR36.5Bn, we estimate that IL&P has an unencumbered residential mortgage loan book of approx. EUR6.5Bn against which it should be possible to raise in the region of EUR4.5-5 Bn of ECB Eligible Bonds o IL&P also has a commercial loan book of approx EUR2Bn; we estimate that it may be possible to raise a further CIl.5Bn of ECB Eligible Collateral against these assets (assuming a rating of less than AAA) o Offset against this is the extent to which assets have been pledged by IL&P in relation to its announced EUR3 Bn term funding issuance in June / July - potentially c. EUR4 Bn o It is important to note that, with effect from February 2009, the eligibility criteria applicable to the ECB Refinancing Facility will become more restrictive: - IL&P will not be able to act as cross currency swap counterparty on a securitisation of its own Sterling denominated UK Loans and would need to appoint a third party swap provider (making funding more expensive) - The applicable haircuts will increase significantly (up to a maximum of 16,4% from c. 2%) o Although the changes will enter into force on 1 February 2009, there is no reference to existing arrangements being grandfathered and so, while it is not clear, it appears that the changes will apply to all collateral and counterparties (existing and new) as of the effective date Source l l & P investor Reports: E C B Elij.;b!li:y Hardback Morgan Stanley 13 Key Funding I Liquidity Pressure Points Key Pressure Points Instrument/Source Amount I Data Point Risk I I s s u e Bank Deposits (ex. ECB etc.) EUR2.3 Bn at FY07 >> Stripping out E C B and secured repo funding from bank deposits, IL&P suffered a EUR1.76 Bn outflow in bank deposits in 2007 ? With IL&P's credit rating downgrade since then, this funding source is vulnerable Other "Bank" Deposits EUR2.4 Bn non-ECB secured at FY07 EUR3.9 Bn ECB at 1H08 (EUR5.3 Bn at FY07) o This secured funding is relatively secure, with the E C B funding dependent on continuing provision of existing facilities and non-ECB secured funding primarily a function of price (at least EUR2 Bn term secured in 1H08, at 115bps spread) ? The pressure arising from this funding source is the reduced position of unsecured creditors, which has been commented on by rating agencies in a number of previous situations (e.g. B&B downgrades) IL&P increased customer deposits by EUR1.0 Bn in 1H08, but signalled that this was achieved with significantly stronger growth in corporate deposits than retail deposits Corporate deposits, based on UK experience, are highly sensitive to ratings actions / other events due to internal treasury policies etc., and typically short-notice (e.g. B&B lost c. 30% of non-retail deposits in 1H08) Retail deposits are typically more resilient, but can still react suddenly to negative newsflow, with direct access (i.e. internet and telephone) accounts most vulnerable Customer Deposits EUR14.6 Bn at 1H08 Debt Securities Term Funding EUR11.7 Bn at 1H08 c. EUR9 Bn at 1H08 ? This has reduced from EUR20.2 Bn at YE07 o 2H08 is a period of significant pressure for IL&P's term funding, with c. EUR1.95 Bn of maturities, and minimal issuance possible o Late September is an exceptionally challenging period, withe. EUR1.15 Bn of maturities from 12 September to 22 September o IL&P's CP access, both USCP and ECP, has been contracting steadily since the onset of the credit crunch, and the maturity has been shortening Commercial Paper c. EUR2.5 Bn at 1H08 14 Irish Life & Permanent Potential Options Available In the event of IL&P encountering difficulties, there are a range of possible actions that the Government could undertake to lend support T h e s e would have to be measured against the capacities and objectives of the Government, e.g. - Sector stability requirements - E U state support rules - Financial capacity of State Precedents Potential Options Action Decsription Advantages Issues Provision of Equity Capital Underwriting of rights issue by State Explicit support for institution / sector Primary responsibility remains with existing shareholders Relatively small commitment ? Does it address liquidity / funding challenges? o Issue of State support / involvement may alter behaviour o State takes on credit risk o Acquisition of book at a discount may exacerbate concerns / capital impacts ? Equal treatment calls from other institutions o State takes on credit risk << Does it prejudice other instruments? >> Precedent for other institutions o Will funding be available for term longer than guarantee? << Does State bear credit risk first, or subordinate existing funding? o Risks of cross-contamination within sector << Will merged entities address funding challenges? o State bears credit risks o Asset acquisition prices may create capital issues Acquire Loan Books Purchase mortgage assets direct from IL&P Addresses loans to deposits ratio and reduces funding pressure Also underpins confidence in house prices - Moral hazard Specific Instrument Guarantee Guarantee new funding to market,e.g. covered bond Funding comes from market, not State Underlines State support and confidence >> Removes immediate liquidity risks ? Provides breathing space for restructuring o Creation of stronger institutions better positioned to address current environment o Leaves issues primarily with private sector Funding Guarantee Explicit promise by State to provide all necessary funding for a period (e.g. 2 yrs) State support, funding or equity, for bank mergers (e.g. Anglo) Merge Banks Good Bank/ Bad Bank Statewide institution to acquire problem assets o Provides clarity for sector I institutions ? Allows normal lending to resume in economy Morgan Stanley 15 twYigz -Irish Life & Permanent SUPPORTING MATERIALS Broker Views (1/3) Equity analysts less worried about IL&P's ability to fund than the margin implications, but recognise significant structural issues difficult to address Funding. .. "Around a third o f l L P ' s funding or EUR14bn (32% of total funding) rolls on average every two months in wholesale funding markets. With the 3M Euribor currently at 496bps and H P ' s 5 year CDS trading at 221bps, we continue to take a cautious stance." (KBIV29 Aug 08) "Concerns for the availability of funding centre on: Reliance on the ECB at the short-end, The capacity to roll over the medium term funding as it falls due. (...] There may be a need to re-jig the collateral placed with the ECB [ . ] but we see little risk to the availability and price of this funding." (Cili 12 Sup OS) "Irish Life is unlikely to suffer a direct liquidity problem, in our view, given the group's substantial book of mortgages [...]. Note also that 62bn of term debt has been rolled this month notwithstanding the credit crunch Nevertheless, in the medium to longer term, we believe the requirement to rollover the cEUR10bn of wholesale term debt (23% of total funding FY07A) will continue to heighten perceived liquidity risk until either: i) the credit crunch eases, ii) the customer deposit base (614bn, 34% of total funding FY07A) grows sufficiently to replace a significant portion of the term debt, or iii) assets are reduced through maturity or asset sales." (RBS 23 Jul OH) "A major concern, in our view, for much of 2Q08 has been the bank's ability to refinance EUR3bn of short-term, inter-bank deb! that needed to be in place for 3Q08. This was unwise because two things were, or should have been clear. First, the new short-term funding would be more expensive lhan the money it replaced. Second, there really was no question of new funding not being available. It seemed to us that some market participants believed that the funding could not be rolled over and replaced." (INC Aug 08) Margin "The group is facing significant margin pressure over the near term in the bank. Much of this pricing pressure comes from the structure of the balance sheet 37% of the bank's lending is based on tracker products. (...] The group is borrowing off the Euribor rale while lending on the base rate and is incurring a mismatch which is hurting margins." "The net interest margin fell to I08bp in IH, however the group is pointing to a full year margin of 98bp. This implies a 20% fall in the margin in the second half alone. We are now forecasting the bank to be loss making from 2H09. We believe the key area of pressure going fonvard is likely to be the increased cost of deposits." (UBS 29 Aug OS) "The group's loan book is heavily biased to mortgage lending. [ ..] Unless the group is able to re-price its book, there is little scope to raise the yield on the loan portfolio. Changes in the mix of the portfolio, particularly as some of the two year fixed term deals in the Irish residential market roll off in 2009, may lift the portfolio yield marginally (3bps)." (Cili 12 Sep OS) Morgan Stanley 17 Irish Life & Permanent SUPPORTING MATERIALS Broker Views (2/3) Capital Capital position and asset quality not viewed as major challenge by brokers, although dividend cuts are being forecast - Significant comfort taken from Basel II introduction, which will reduce R W A s ISiy "Looking at the group's capital position on a 'comparable basis' we find that under our base-case earnings scenario, Ihe group has entirely adequate levels oi'capital with an adjusted TCE in excess of 8.3% (Basel 2) every year from FY07-FYI0F. til oar bear case, (which includes a 33% dividend cul), this adjusted TCE would drop to 6.9% FY10F, which we think would still be sufficient given the economic recovery we would expect to be underway by then. In addition, if required, we believe the group has the ability to create EUR50-et00m of solvency capital annually via new business funding within Ihe Life business (equivalent to 0.2%-0.4% of RWAs)." (RBS 23 Jul 08) "On our base case, the group should be able to self fund itself to the end of 2010. With a relatively low risk mortgage portfolio and the capacity !o release up to E525m of capital from the life company, 1LP should not have lo re-capitalise even under a 'worst case' impairment scenario " (Oil 12 Sep 08) "Going forward, Ihe group's organic capital ratios are clearly dependent on reported earnings, balance sheet growth, dividends and the impact of Basel 2 We are assuming a 20% reduction in RWAs in 2008 due to Basel 2 " (RBS 23 Jul 08) "(.. | One might point lo Ihe substantial medium term capital releases possible from Basel II (an additional EUR250 million) and Solvency II (EUR1 billion) " (Cili 12 Sep 08) "As of December 2007,1PM was solidly capitalised with an equity tier 1 ratio of 10.4% (Basel I) as measured by the Irish Regulator, we estimate She adjusted equity tier 1 ratio was a respeclable 7.0% FY07A (Basel 1) These ratios are consistent wilh Moody's recent BFSR 'A' raling for capilal" (.RBS 23 Jul 08) "For the full year 2008, the group predicts 6bps of loan loss provisioning though the P&L account. However this is a fast moving and fluid situalion and Ihere is likely to be material delerioration in the next three years. [...) Whatever one's view of the quality of the book, the arrears position looks set to deteriorate and this will most likely end up in significantly higher P&L chatges for bad debts." (Cili 12 Sep 08) "One can see a slightly more aggressive lending stance taken through the period up to 2006 -- on the prime book, average LTVs rose from 67% lo 72% before being reined back to 68% in 1H08. The more aggressive stance is also reflected in a three point rise in market share (from IS% to 22%) of new lending in 2006, a share thai the group held onto in 2007. Unfortunately the group has not given the spread of LTVs posl 2005. Nevertheless, we would be surprised if more :han 40% of the book was lent on LTVs above 90% in 2006 and 2007 and would expect that this type of lending has been reined in Ihis year The generally conservative underwriting stance is reflected in a low rate of arrears Indexed to current house prices, the LTV on the book stands a: 43% -- house prices have to fall materially for the equity to be threatened " (Cill 12 Sep 08) "The company has not seen crcdii quality problems yet, although i! expects bad debts to rise. Our suspicion is that it would not expect them lo rise as much as our estimate; we view this as very conservative In this regard, we believe it is a critical differentiating factor for Irish Life & Permanent that 88% of its bank lending is residential mortgages and 98% of all of its loans are secured." Morgan Stanley ING (13 A us 08) Irish Life & Permanent SUPPORTING MATERIALS Broker Views (3/3) Brokers forecast increasing impairments that are more comparable to company stress test of cumulative 60-80 bps Severe stress analysis more in line with 90s U K experience would imply on avg. 136 bps or EUR564 M M impairment charge for 'worst case year' Impairments: m II bps Broker Impairment Charges'^ 2008 2009 24 ' 30 18 1C Cumulate 2010 39 50 25 40 40 2011E \ . - 24: 30 18 2008-10 2009-11S 72- " :o : : 86 88 52 70 79 o 137 ' , 138 "On our base case, we are forecasting aggregate impairments equivalent to 110bps of loans lover 2009-11), materially higher than the 60-80bps range postulated by the company. This gives rise to pre-tax losses of EUR458 million over the three years (6400 million net of tax). This is equivalent to 1.6% of risk weighted assets." "Our 'worst' case year is informed by UK experience in the early 1990s. This could throw up losses of 7.0% of loans on the commercial mortgage portfolio and 5.0% on the consumer book. On the residential mortgage portfolios, we have the impairment data for around 45% of the industry stretching from 1990 to 1996 This shows a peak year of62bp of impairments and aggregate impairments over the three worst years of 138bps. On the basis of our 'worst' case year, the group could suffer impairments of ?564 million pre-tax (?494 million net), equivalent to 2.0% of risk weighted assets." (Cili, 12 Sep 08) "We estimate thai peak net wrile-offs or. mortgages will be 30bps in our base case. We adc on an additional 7-10bps of credit loss reserve rebuild. Accounting for the other 12% of the loan book gives a base case peak impairment charge of 40l)ps." "We estimate that peak net write-offs or. mortgages will be 50bps in our bear case. We add on an additional 7-10bps of credit loss reserve rebuild Accounting for the other 12% of the loan book gives a bear case peak impairment charge of 70bps" (RBS. 23 MVS) Base V ' Citi KBW 'JBS RBS Sea-. ~ -.o. oo.oo..',...: -10 110 61 2C 27 20 27 80 94 \ v 12 ' RBS 13 53 70 136 'Worst C a s e Year' Loans EUR Bn Impairments ops 66 e MM Broker Pre-Provision Profit bps 2008 Citi KBW UBS RBS Average 262 311 304 265 .oo'o 286 o .... o ; 2009 431 538 431 524 481 2010 443 576 417 584 - 505 . "We have significantly increased our impairment assumptions for Irish Life The group stated that when stress testing its book it used a 60-80bp cumulative charge for impairments over three years. Given recent moves in house prices in Ireland and deteriorating arrears rates in UK Buy to Let portfolios we believe this is a sensible approach. As a result we have impairments peaking at 40bp in FY10. This results in the bank making a loss in FY10 of681 million." (UBS. 29AugOH') "In its Irish residential mortgage book, we are pencilling in [18]bps for 200(9| and 25bps in 2010 noting that a more conservative stance could be warranted given the adverse developments in the Irish housing market." (KBW. 29 Aug 08) ROI Resi ROI Commercial ROI Consumer UK Resi Total Source 27.7 2.4 2.5 8.8 183 168 125 88 564 700 500 100 ' 36(R). . ; RBS Broker estimate 41.4 136 o Morgan Stanley Note 1 2011 impairment charge estimated based on 2009 reported (except for Citi who provides 2011 estimate) 19 Note of Meeting with Goldman Sachs, 21 September 2008 (Sunday) DSG Goldman Sachs: KC. CH. BOTI. MO'I.) (for part). PN (for part) Geoghegan + 1 Basic points (R) Have examined INBS top 30 loans Ireland and top 30 loans UK (R) Lot of reassurance in those that there is real value there (R) But based on management discussions (R) Some of book could be securitised for liquidity purposes, but slow job , even with advisers - would need new specialist staff of their own in house (R) Riskiest part is not UK but Irish book o Very few loans above 250m. Irish bank well diversified ^ (R) Will be difficult to get 100% recoveries for some loans. UK book - profit sharing ventures in reality - some profit shares will pay this year ? KPMG are looking through a worst case scenario (R) So far, could see hits eat through capital, but nothing to suggest it would go further than that s ? To provide greater ahalysi Auditors do not see perfor ;al estate, legal and accounting person >> worst than anywhere else (R) Management's central case assumption is loss of a few 100m (R) Essential to retain knowledge of management. ? Liquidity a big issue - at current rates reaches limits in 11 days, but real danger of acceleration. Loans are assignable (per McCanns) but would take lime to package them - work on assets continues (R) Convinced help from authorities will be required - soon ? Suggested range of options for discussion with pros and cons (1) Nationalisation (2) Stand alone with liquidity support (3) Break up >> Mark to market value right now maybe 50/60% but lot of value in loans if worked through Note of Meeting, 22 September 2008 NTMA D/Finanee CBFSAI Oliver Whelan, John Coirigan Kevin Cardiff, William Beausang Tony Grimes Subject: Liquidity and how to provide a Svar chest' Tonv Grimes with danger that each will need the Considerable outllows continuin o ECB marginal facility today (later phone call said this was averted). Strong view at CBFSAI Board on 21/9 that liquidity pool of authorities needs to be bigger and we need to look again at this - Anglo already requesting 7bn facilities, and want to activate a swap with CB. who will not do so unless absolutely necessary - could be in next day or so. Oliver Whelan Advice is not to go into bond market at present - simply no appetite Would do a bond issue if it could be done, meanwhile issuing CP as long-dated as possible. Conclusions: (A) Liquidity 'available' is as follows: Cash Exchequer 8 billion SIF 3.3 billion NPRF 1.5 billion Portfolio Bonds CB 9 billion NPRF 2.5 billion Allowing for holding back 2bn for day to day needs, this totals about 18 billion excluding NPRF where legal issues greater. (B) (C) (D) Legal advice to be sought re S. 157 powers of NTMA CB to show floating charge documentation to NTMA Consideration required as to whether possible to tranche Government bonds for direct swap with institutions if required. f tjr l M * U/4U* ? TO - pr -^ o a-jr 4c INBS Options n/1 There are four options available in relation to the INBS. These are:1. 2. 3. 4. Do nothing. Ensure an orderly run-off of INBS Break-up of INBS Merge INBS with another institution. 1. Do Nothing. Prior to the current issues INBS was seeking to undertake an orderly run-off so as to realise maximum value for its members in the changed market circumstances. INBS was seeking to generate sufficient liquidity through the reduction of the loan book. In a normal environment many of INBS's loans would typically be refinanced by other institutions - frequently HBOS or Anglo - within a period of circa 30 months. Because of the liquidity crisis and the problems that that has caused for banks and the property market, most institutions will not refinance the loans of another institution and consequently the redemption rate is much slower. As a result, assuming current market conditions prevail the do nothing option will inevitably result in the collapse of INBS. Continuous downgrades from the rating agencies will reduce the availability of retail deposits, the capital markets have been closed to INBS since the advent of the credit crunch, and for the reasons described above the redemption rate on the loan book is much slower than previously. A collapse of I'NBS would have implications for the circa 180,000 depositors and result in a distressed sale of the loan books. Given the high level of property related lending in all financial institutions this could have serious consequences as valuations in all institutions might then have to be set to reflect distressed levels. The rating agencies in particular are likely to use any benchmarks set in their appraisals. In the absence of action there will be severe outflows of capital from Ireland. INBS has circa EUR2.3 billion of overseas deposits which will leave Ireland, the debt securities in issue of EUR5.9 billion are sourced overseas and many of the Irish depositors withdrawing money are putting it with Northern Rock as it is deemed to be the UK Government. While it is evident to everyone that there is a serious financial problem in Ireland emanating from the impact of the credit camch on the economy and the dependence of the economy at all levels on property - inaction leading to collapse will be seen as a lack of leadership and confirm the international perception that Ireland does not know how to deal with its problems. P a g e 1 of 6 2. Ensure an O r d e r l y Run-ofT of INBS As previously mentioned, prior to the current issues INBS was seeking to undertake an orderly run-off so as to realise maximum value for its members in the changed market circumstances. The focus was on repayments, with lending confined to pre-existing commitments and to existing borrowers when funding was required to bring projects to a certain stage. As of August 3 l sl there was a net reduction in the loan book of circa EUR600 million. In the absence of support, in the current market conditions, it is unlikely that INBS will have sufficient funding to get the time to have an orderly run-off. The immediate issue of INBS could be avoided in a number ofways:a) Provision of liquidity on a covert basis b) Provision of liquidity on an overt basis c) Nationalisation d) Amalgamation with another institution e) Guarantee Deposits Any solution which does not provide confidence to the depositors will ultimately cost more in cash terms as the State will have to replace the deposits or other funds which leave due to that lack of confidence. (a) Covert Funding. If covert funding was provided to INBS to meet its liquidity needs, INBS could survive and continue an orderly run-off. The timing required to do this will depend very much on when the lending markets in the UK return to normality and whether they remain frozen in relation to property. Covert funding will not protect INBS from further downgrades. Downgrades are likely due to the uncertainty in relation to INBS's ability to meet repayments on its Debt securities. The rating agencies will not take cognisance a funding source which is unexplained and uncertain. Ongoing downgrades are likely to result in a continuous outflow of deposits - with the overseas deposits likely to go very quickly. There is also a need to consider what public announcements would be required due to Listing requirements depending on the funding being required. Utilising covert funding is likely to require much more money from the State than would be required if public confidence was restored. (b) Overt Funding Overt funding with the appropriate supporting statement is beneficial to both INBS and the market. As is evident from the UK, overt funding with the wrong message can amplify difficulties. Page 2 of 6 Overt funding which is focussed on a single institution will inevitably raise questions on other institutions. At its simplest if one knows one institution is safe but one is uncertain about the others then inevitably one will put one's money with the safe institution. (c) Nationalisation At first glance this looks like the easy way to deal with the current issues. This, however, ignores the fact that the problems are market wide and will inevitably bring into focus whether other institutions may be nationalised. The threat of nationalisation of institutions is effectively a threat to wipe out the equity in those institutions. In such a position no rational investor is going to provide equity or near equity to an institution which might be nationalised. Nationalising a single institution, in the absence of guaranteeing the deposits with the others will inevitably exacerbate the problems with the others. (d) Amalgamation with another institution The issues associated with this are discussed later as Option 4, in the context mainly of Anglo Irish Bank. (e) Guarantee Deposits The easiest way to facilitate an orderly run-off of INBS is for the State to publicly give comfort that no depositor or equivalent is at risk. Advantages: This is the least disruptive option from a national perspective. It gives a clear signal from the State that it is not prepared to countenance failure and that no creditor of an Irish financial institution is at risk. Risks: Any ambiguity in the statement of comfort could precipitate problems. Wider Implications: With the State giving public comfort on the security of funds with INBS (as the smallest institution) this will inevitably imply that the State will provide similar comfort to larger institutions. Most analysts already assume this is the case for the two main institutions. However confining the Guarantee to INBS may leave Anglo with a problem as its Irish depositor base is much smaller. The admission that INBS requires such support will raise issues in relation to other institutions. However, these same issues are brought even more into focus if a collapse occurred. (Note: In the absence of the comfort being absolutely public this solution would not work as the rating agencies would continue the downgrades. This would result in continuous outflows increasing the magnitude of the funding problem. Goldmans have advised that in the Bradford and Bingley situation that the rating agencies would not take account of implied support.) P a g e 3 of 6 3. Break-up of INBS A break-up of INBS would probably involve an attempt to: a) sell the deposit book, the branch system and the 180,000 customers. b) sell the mortgage book c) sell the developer book in one or two components - potentially separating the UK and Irish elements. In effect there is no difference, other than timing, between Option 3 (Break up of INBS) and Option 2 (providing sufficient support to enable an orderly run-off). Following Option 3 on an accelerated basis results in greater value destruction and almost certaintly causes wider market problems. While in theory this is an option the implementation might prove difficult as it would not necessarily be possible to do it on an overnight basis. In the current market circumstances the sale o f the developer loan book is likely to be at a substantial discount as the only likely buyers are private equity funds looking to buy from forced sellers. Such a forced sale valuation would provide a very negative cross read to other Irish banks with property exposures. The only way to avoid a heavily discounted sale of the loan books would be for the State to underwrite the losses or for the State to take over the book at face value and to pay another institution to manage the book on its behalf. It normal market circumstances the sale of the deposit book would be likely to generate a substantial premium, however given the current period where the retail market has become much more rate sensitive the premium is probably substantially reduced. Depending on the buyer the customers and branch system may be of value. Clearly they would have no value to the main banks who already have a full branch system and probably the same customer base. Page 4 of 6 4. Merge INBS into another Institution The only institution which has indicated a willingness to consider a solution is Anglo. Advantages: 1. Anglo is best positioned to manage the developer loan book. It will have many customers in common. It understands the relevant markets in great detail and it has the experience of working with people in more challenging times. 2. Relative to a straight runoff where customers have no need for long term loyalty the management of the book by someone with overlapping clients is likely to generate a better result. Against this must be balanced the inherent conflict of interest if the deal structure results in the same person managing two overlapping loan books - one where you have all of the downside and the other where you have none. 3. A solution focussed on Anglo avoids further concentration in the banking market. Anglo would get an initial customer group of circa 180,000 and a branch network of 50 outlets. There would be no branch closures as a result. Solution: Any solution must be one that can be executed very quickly. INBS, Anglo have indicated that they would require a) b) c) In any takeover of To be seen as the State's preferred solution provider. Given the initial meetings between the FSR and AIB/BOI there is clearly a risk to this. Anglo must be seen to be insulated from any downside that may exist in the developer book. Anglo would have to be protected against any severe outflow of funds following an acquisition. Proposal Outline Anglo 1. Anglo takes full control of the business with a view to: (a) managing out lending assets to maximise value. (b) effect synergies where possible. The acquisition to be effected through a bankruptcy remote SPV, which will not be consolidated with Anglo for capital purposes. Government underwrites the SPV as to any: (a) deficit in net assets. (b) funding and liquidity support provided with funding secured on SPV asset. Consideration to be in shares and on a basis to be agreed, but largely based on realised net assets. 2. 3. 4. Page 5 of 6 Risks: Merging INBS into any bank will be publicly seen as a bailout. Clearly this will bring focus onto the Irish market and the share price of the entity INBS is merged into is likely to fall. This can only be counteracted by very significant support for the entity into which INBS is merged. The State needs to be very careful not to compound its risks. Anglo is already seen to be a property focussed bank and in the absence of very clear support this solution would not work. While INBS's loan book is less than 10% of the level of those in AIB/BOI, Anglo's is over 50%. In effect the State will have to guarantee Anglo at the same time - it may not be sufficient to guarantee the liquidity and assets of the SPV. The other major institutions may be strongly opposed to such a "sweetheart deal" for one of its competitors. The State will be seen to be taking on a much bigger and more complicated problem than was necessary. Conclusion: There is a real danger that the market will not accept this as a solution unless there is an unequivocal statement from the State that it will provide whatever support is necessary to Anglo. The international market may react with cynicism and put the focus on the loan books of the two major institutions. The September 10th JP Morgan report on the Irish Banks noted that "75% of accumulated lending since 1999 has been collateralized with property assets and 50% of lending originated in the last 3 years". P a g e 6 of 6 Options: INBS, EBS, and ILP brought together State guarantee on INBS book + Liquidity Support Anglo Liquidity Support Boland AIB as now INBS INBS taken by broken up Anglo EBS, ILP State and INBS guarantee retail go on INBS together book, +o INBS commercial Liquidity Support property nationalised for whole Financing required for ILP Liquidity INBS Support commercial Anglo Liquidity Support Bol and AIB as now Bol, EBS and AIB as now INBS taken by EBS State guarantee on INBS book, + Liquidity Support for whole Anglo Liquidity Support ILP Liquidity Support Bol, EBS and AIB as now No mergers, nationalisations or takeovers INBS Liquidity support Anglo Liquidity Support ILP Liquidity Support Bol, EBS and AIB as now Badbank approach Combined Asset Swap and Badbank approach INBS Assets put aside, INBS Swap Liquidity Support if IrGovtbonds for INBS needed assets at book value, but Anglo Assets put require INBS to swap out aside, Liquidity assets that do Support if not perform but with a needed maximum pace for ILP doing so. Liquidity Support Anglo Bol, EBS Same as for INBS and AIB as now ILP Liquidity Support Bol, EBS and AIB as now Other possibilities: AIB and Bank could be brought together EBS in appropriate combination with others could seek external taker ILP could seek external taker PWC reported on the Anglo loan book - 13 billion land/development under way of which 700m unzoned; 4.5 billion zoned no planning: over 3 billion zoned with planning; balance incomplete development Of the other 55 bn there was a broad mix of income generating assets. It would be difficult for them to convert their loans to useful collateral, with the exception of an amount of around 2.2bn. There was a discussion of various forms of state interventions. The FR (Pat Neary) said that there is no evidence to suggest Anglo is insolvent on a going concern basis - it is simply unable to continue on the current basis from a liquidity point of view. He felt INBS was in a similar situation. D Doyle noted that Government would need a good idea of the potential loss exposures within Anglo and INBS o on some assumptions INBS could be 2bn after capital and Anglo could be 8/4. Various intervention possibilities were discussed: 'Ordinary' liquidity support, SLS-type scheme, guarantees, nationalisation, bad bank approach. A subsequent meeting took place to present conclusions and possible approaches. Attendance: Baldock & Prasath, Merrill Lynch Pat Neary, Jim Farrell FR Governor, Tony Grimes CB Dan O'Connor PWC Eugene McCague Arthur Cox Attorney General Taoiseach SG to the Government Minister for Finance, D Doyle, K Cardiff Department of Finance CEO NTMA J Corrigan NTMA Basil Geoghegan (for a short part) The issue and options outlined at the previous meeting were presented by KC who underlined the urgency of the situation. It was agreed that work would continue on the intervention possibilities outlined, and on preparing the relevant legislation. Meeting of 26 September 2008 Merrill Lynch presented a number of options - see document of 26 September 2008 Attendance: ML X3 = Prasath, Baldock, Andreas Orcelli Bob O'Hara Con Horan K Cardiff D Doyle Minister ML points o Worst credit crisis ever (R) Need break a bad cycle o French Government has indicated it will guarantee deposits (R) However, number of situations where blanket guarantee may not add up having regard to numbers (R) Liquidity is moving very very quickly (R) Ireland is not an isolated case - other Governments also seeking MI- advice, for example (R) Management teams tend to try to play out to the end, because Government intervention tends to change the team, the advisers etc - their incentive therefore is to be over optimistic (R) But it can create difficulties to go in without being asked in. Presented a central scenario as follows (a) (b) provide liquidity on 'penal' terms - must not be easy money intervention Difficulties - scale of intervention required. Dangers with blanket guarantee - credibility and prolonging of weak institutions Question of who should be protected in interventions - at least depositors in serious debt possibly dated subordinate debt. Big question is how to navigate between intervening early to protect deposits and minimise costs and giving time to markets and management to realise there is a problem and adjust to that reality (can happen in days). But corporate deposits can exit very quickly in the meantime. On a blanket guarantee for all banks - ML felt could be a mistake and hit national rating and allow poorer banks to continue. Liquidation - ML said this was the worst thing that could be done - accelerating trouble for all other institutions. More generally, institutions should be encouraged to sell assets and get equity. Next week is likely to be a very bad one in markets: Fortis, B&B, Dexia all having difficulties - EU will have to look at some more generalised action. Minister asked that the options be articulated clearly over weekend so as to be ready to present to Government. The Minister left and there was a discussion on allocation of work. To recommence at NTMA Sunday morning. PeetMn 2 / 92 0 11:04 .0.1 (1) rsn o2 60 / 0 8 a Draft Preliminary Analysis Presentation to National Treasury Management Agency 26 September, 2008 Merrill Lynch Global Markets & Investment Banking Group e: Presenlfllion2 26/09/2C08 11:04:0-1 (2) )raft Preliminary Analysis Strategic Options Observations si ai Merrill Lynch has been engaged with the NMRA and the Department of Finance for 48 hours Analysis is based on the information from and conversations with: o a a is a PwC regarding Anglo Goldman Sachs regarding Irish Nationwide Limited verbal information from the Ministry of Finance and IFSRA We have not spoken to the management at any of the Irish Banks Scope has been evolving a Initially focused on Anglo and INBS, but now encompasses ILP, EBS and the effects on Bol and AIB given recent developments B a Must calibrate long-term impact on Ireland as a financial centre and implications for sovereign rating Every action should be assessed with respect to impact on share prices of AIB / Bol a Note rating agencies's concern that declining share price represents lack of confidence in the bank as a counterparty which can contribute to a downgrade Impact on ability to raise capital H Need to consider deposit guarantee in any event F The following considerations are therefore preliminary and subject to further consideration J 1 P r o s e n l , n i o n 2 2 6 / 0 9 / 2 0 0 8 n : 0 4 : 0 4 (3) Draft Preliminary Analysis Strategic Options G u a r a n t e e for 6 Primary R e g u l a t e d S e c u r e d Lending S c h e m e I ELA Converts non ECB-eligible collateral into liquidity Deals with immediate liquidity problem / buys time Leaves Irish Nationwide / Anglo Irish temporarily a s going concerns Benefits the whole financial system "Positive" for Ireland Inc. from outsiders' point of viewQ Q Good Bank, Bad Bank Deals with the most problematic a s s e t s causing headline risk Will help restore confidence and help banks carry on business Promotes orderly unwind / minimises a s s e t deflation E U Protective C u s t o d y of ANG IINWE 0 Deals decisively with the most problematic institutions Demonstrates Implicit commitment to Irish banks as a whole Interim step before formal guarantee if needed Protects senior / subordinated creditors Deposit guarantee will stem outflows and may result in inflows Does not deal with problem that monoline / lowly rated business are unlikely to work Irish Government could / will likely end up funding the entire Anglo Irish / Irish Nationwide balance s h e e t s (EUR84bn EUR120bn?). Even with zero u s a g e by other Irish banks No critical m a s s remaining at Irish Nationwide / Anglo Irish Most complex option for Government - will require more time H Capital / liquidity hits (EUR80bn++) 0 E a Government ends up funding combined balance sheet Irish lax payer exposed beyond shareholders' equity Potential negative impact on share price of Bank of Ireland I Allied Irish Banks / ILP Will market find it credible given scale (EUR500bn--)'> Can Ireland afford it? Ratings impact? Will it p a s s the test with other EU countries given broader implications? How long will it last? B Q a M 13 Significant read a c r o s s lo other banks Mark a s s e t s down at other banks '.o liquidation levels Capital and liquidity impact Investor perception of Ireland Inc. and financial stability more generally Perception that authorities nol in control of developments Commercial vs. penal rate funding Over-collateralisation possible Should it be available to all Irish banks? Can be structured lo place government capital injection ahead of existing Equity If this is Ihe chosen path, most likely to be a second s t a g e solution Will require guarantee for senior / subordinated debt holders Irish Nationwide / Anglo Irish to be taken into state control Will require guarantee for senior / subordinated debt holders Put business into run-off Irish Nationwide I Anglo Irish to be taken into state control All cards played immediately Equity market perception? n H o o Irish B a n k s Best / most decisive / most impactful from market perspective Deposit guarantee will stem outflows and may result In inflows Protects senior and subordinated creditors Liquidation - o - o .--3 Does not have an immediate cos! to the Exchequer, but likely to b e longer term implications Option discounted d u e to impact on slate / other financial institutions C J 1 3 Appropriate tenure Shareholder control maintained as well a s m a n a g e m e n t structure ELA or AIB I Bol ECB a c c e s s could also be u s e d PresentaMon2 26/09/2008 4:04 .0.1 (1) G u a r a n t e e for 6 Primary Regulated S e c u r e d L e n d i n g S c h e m o / ELA G o o d Bank, Bad Bank P r o t e c t i v e C u s t o d y of I N W E I A N G Irish B a n k s Liquidation a Relatively straightforward (subject to checking existing powers) B Very difficult to identify and a d d r e s s all legal i s s u e s in immediate timeframe Q 0 Legislation in hand Preferred s h a r e a p p r o a c h could be a c c o m m o d a t e d in timeframe 0 a Legislation in hand Preferred s h a r e a p p r o a c h couid be a c c o m m o d a t e d in timeframe H NTMA to be g r a n t e d relevant p o w e r s in current bill 0 New legislation required H G u a r a n t e e b a s e d on either a a R e s c u e aid rules applicable to the intervention with Anglo / INBS General g u a r a n t e e to banking s y s t e m would be b a s e d on Art 87(3)(b) - serious d i s t u r b a n c e to the e c o n o m y (systemic risk) H Property structured, should no! e n c o u n t e r a s t a t e aid issue (commercial t e r m s a n d a s nonselective a s possible) (a) r e s c u e aid basis, applying for approval for restructuring aid within 6 months; and/or (b) Art 87 (3)(b) to remedy serious disturbance to the e c o n o m y E3 Legislative power to b e drafted Into current bill to provide further g u a r a n t e e s if n e c e s s a r y R Clear s t a t e m e n t by Minister of intent to provide further aid a s n e c e s s a r y should not attract additional state aid problems H Should investigate w h e t h e r on b a s i s of Art 87(3)(b). g u a r a n t e e limited to the 6 b a n k s would b e allowable ra D a n g e r that the Commission would not a c c e p t this basis for the general g u a r a n t e e Presentation^ 26/09/2008 11:04:04 (5) Draft Preliminary Analysis Strategic Options P r o t e c t i v e C u s t o d y of INWE / Secured Lending Scheme Good Bank, Bad Bank ANG G u a r a n t e e for 6 Primary R e g u l a t e d Irish B a n k s Liquidation Restrict collateral to commercial real estate and to primary regulated banks to deter foreign-owned institutions No effect a N/A 19 Other institutions scope for possible complaints but no legal grounds Long-term reputational issues for Ireland No effect Other institutions scope for possible complaints but no legal grounds Long-term reputational issues for Ireland Most contentious a N/A Ei ti No effect u a No effect Immediate liquidity issues need to be addressed Maximum 2 week window, more likely 7 - 9 days No reason to expect significant liquidity improvement in the market TARP issues in US still to work through 30 September quarter end money market redemptions will prevent any meaningful change in market conditions Present,uion2 26/09/20C8 11:(M:> Tier 1 -- Upper Tier 2 -- Lower Tier 2 <<> I n s u r a n c e D a t e d S u b o<>###################################### TL message w/attachments (message) may be privileged, confidential or proprietary, and if you are not an intended recipient, please notify Lhe sender, do not use or share it and delete it. 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S u n d a y 28'" .SeoU-mhi-r Mcmoraii(liim from Merrill Lvncli I) I n t r o d u c t i o n T h e Department of Finance and NTMA have been working with the Financial Regulator and the Central Bank of Ireiand to establish the current liquidity and financial position of the Irish banking sector. They have appointed PwC accountants to investigate the liquidity position and asset quality of the loan books of Irish Nationwide Building Society ("Irish Nationwide"), Anglo Irish Bank ("Anglo") and Irish Life & Permanent. They engaged Merrill Lynch on 24 September to advise on the liquidity and strategic options available to the Government and Arthur Cox to advise on legal aspects. This is the initial report of Merrill Lynch based on information as at 6pm on Sunday 28 : " September. T h e analysis has been undertaken in a short period of time and is based only on information from and conversations with the three institutions. The implications for the broader financial sector have also been considered as well as the impact on Ireland as a financial centre and as a sovereign issuer. T h e markets oil a global basis are witnessing unprecedented levels of volatility. In the past two weeks many major financial institutions have either tiled for bankruptcy (Lehman, Wamu, Roskilde) or have had to be rescued by either the state (Fannie, Freddie, AIG) or acquired by a rival (HBOS, Alliance & Leicester). Libor levels have, in the past week, risen to highs not seen since 1992 with banks choosing to hoard cash or deposit it with central banks. The Bank of England last Thursday was holding ?6bn of bank deposits against a long term average of around ? l b n . Much of the Commercial Paper market (circa 90%) is currently rolling overnight. The Irish financial sector is experiencing extreme difficulties with wholesale market access all but non existent. Even post the quarter end (30 September 2008) we feel this is unlikely to improve in the context of a worsening macro economic environment and a general backdrop of deteriorating asset quality. While Irish banks have not had the same exposure as other banks to structured credit and US mortgage/real estate risks, their loan assets are concentrated in residential and ocommercial property where asset values have been falling and are expected to continue to fall as the international economy contracts. The liquidity issues facing Irish banks are compounded by investor concerns with regard to the high concentration of commercial property risk in their respective asset portfolios. The three institutions where these liquidity issues have been most pronounced have been Irish Nationwide, Anglo Irish Bank and Irish Life & Permanent AIB, Bank of Ireland and EBS, while experiencing reduced access to liquidity continue to have access to wholesale funding (for example with the ECB) and do not have such acute near-term liquidity issues based on the information provided to the Financial Regulator. EBS as a smaller institution is likely to be more vuln<<"-^ble as time goes on. 1 It is important to stress that at present, liquidity concerns aside; ail of the Irish banks are profitable and well capitalised. However, liquidity for some could ran out in days rather than weeks. Anglo Irish has recently approached the Central Bank with a proposal to create a new funding facility that the Central Bank would accept commercial mortgage assets in return for cash. Anglo are rapidly approaching the point where they have exhausted all possible sources of liquidity available via the market or their ECB eligible collateral is close to being fully utilised.. This memo sets out the strategic options available to the Government. There is 110 right or wrong answer and the situation is very fluid with financial institutions experiencing difficulty and being supported by governments on a daily basis. Preserving flexibility is key and the solution may be different for each institution. The important issue is for the Government to preserve the stability of the Irish financial system overall and to safeguard the interests of individual bank customers to avoid widespread panic. That said, there is a limit on the financial resources available to the Government and there may be a need to preserve firepower as events unfold. The implications of each option in terms of whether it constitutes State Aid also needs to be carefully considered. It is clear that certain lowly rated monoline banking models around the world, where there is concentration on a single asset class (such as commercial property) are likely to be unviable as wholesale markets stay closed to them. This has inevitably had an impact on our conclusions and we believe- it is important to act quickly to deal with these institutions to avoid a systemic issue. 2) S u m m a r y description of the reviewed institutions Further information is contained in Appendix A Irish Nationwide Building Society INBS is primarily a retail deposit funded, commercial property lender with a relatively small residential mortgage book of j u s t over 62 billon. The asset quality of the commercial loan book is regarded as being generally good. However there are concerns over the influence of the Chief Executive. Based on their own management projections, fNBS have liquidity sufficient to meet their needs for around one to two months depending on the level of withdrawals. In the extreme stress case analysis the total writeoffs including loss of interest income would just deplete most of INBS reserves of 61.8 billon. Anglo Irish Bank Anglo is a commercial property lender with loan assets of Eur 72bn. Only 3 % of the loan book is currently regarded as impaired by Anglo management however falling property prices are likely to impact their book particularly where they have lent on speculative development. If one was to apply the INBS stress case scenario the writeoffs would deplete ordinary shareholders and other lower category subordinated debt by EUR7.5 billon. The main issue for Anglo is a pressing need for liquidity as a result o f * sustained outflow of corporate deposits and overnight funding being 2 unavailable to banks of their credit rating. Based on current market conditions, management is projecting a funding deficit of EUR0.1 bn on Tuesday 301'1 September growing to EUR4.9bn by 24 ; " October. On Friday 26 September Anglo have formally requested a short term liquidity advance of EURl.7bn from the Central Bank for the end of the month. Irish Life and P e r m a n e n t IL&P is a baiicassurer with a leading life insurance company and a retail bank focused on providing residential mortgages. The asset quality is good but IL&P rely heavily on wholesale funding and jire approaching the limit of their eligible collateral at the EC 3) Strategic options T h e strategic objective is to address the immediate liquidity issues of the three institutions and allow the situation to unfold Given current instability in financial markets this could happen quite quickly and there could be a need to implement a combination of the options below. All solutions require financial resources from the Government and could add pressure to the sovereign credit rating and the borrowing costs of the Irish Government. Whilst we set out the various strategic options within this memo, we have also fully considered, and ultimately discounted, one additional outcome - allowing an Irish bank to fail and go into liquidation without any government intervention. Whilst this option would initially have no financial impact to the government, the resulting shock to the wider Irish banking system could, in our view, be very damaging. The ensuing Tiresale' of assets could precipitate dramatic asset deflation and hence force other Irish banks to take significant write downs on their own asset portfolios thus depleting their capital positions. The significant volatility in the equity and capital markets that would likely follow would mean access to any form of new capital for Irish banks would be severely restricted for a protracted period. Therefore, in order to minimise the impact of any bank failure on the rest of the broadly sound domestic financial institutions, we strongly advocate a more controlled interventionist approach. (a) I m m e d i a t e Liquidity Provision The short-term liquidity issues for the banks need to be immediately addressed, most notably at Anglo which may have a net deficit as early as Tuesday 30 September. The wholesale markets are closed and the three banks have limited access to the ECB facility as self originated commercial property assets are not accepted as collateral and Irish Life & Permanent is reaching the limit of its available eligible collateral. If the E C B were to change this stance and accept a broader type of collateral then arguably there would be no need for the Central Bank to offer any additional liquidity. If that is not the case, the Central Bank should be prepared to provide auxiliary overnight liquidity facilities at a penal interest rate to the banks that request it. There is then the question of whether this becomes known to the m - ' - e t , We believe it 3 could be sensible to let it be known that the Central Bank has been asked to provide additional liquidity to certain financial institutions so that debt and equity investors do not criticise the Government if/when further State intervention needs to lake place, in particular if equity is acquired in the institutions for zero value. Taking the worst case scenarios of each bank we estimate there could be an immediate funding requirement of EUR5bn. (b) State protective custody The additional liquidity provided would allow Anglo and Irish Nationwide to offset any continuing deposit outflows with liquid assets. However, even if markets stabilise both institutions are likely to find it hard to fund themselves independently and the penal interest rate if they use the Special Liquidity Scheme (outlined below) will deteriorate their earnings. For that reason and to avoid systemic risk, the Government should make preparations for State intervention in cither or both institutions, once it becomes evident to the market that they need to intervene. This could occur over a very short period of time i.e. within days, but at the point at which it occurs it will not be a surprise to debt or equity investors as knowledge of the institution's financial position will be obvious and they should expect such intervention in the absence of a private sector solution. At Anglo the majority of equity and debt investors are Irish, UK and US institutional holders, but there are significant retail interests including a major shareholding by Sean Quinn Irish Nationwide and Anglo either together or separately could be taken into Stale custody using either (i) common equity and/or (ii) a preferred plus warrants investment akin to the one used in the Freddie Mac and r a n n i e Mae situation A State guarantee would be given to all depositors and senior creditors as well as dated subordinated debt holders (given the crossover between these two holders) which would again send a strong implicit message to the investor community that this level of protection would be afforded to all other Irish banks The business would be run off with no new loans extended and it would be logical to use this entity for the base for the "Bad bank" in Option (d) below. Equity holders and undated junior subordinated debt holders would receive nothing providing a capital cushion of EUR1.4 billion in the case of Irish Nationwide and EUR7.5 bn in the case of Anglo. It is important that all other creditors are reimbursed to avoid a contagion effect with the other Irish banks that continue to raise capital in the senior and subordinated debt markets. The investment by State can be in the form of preferred instrument and/or common equity. In either case the Government will own and control the bank and its decision making. The advantage of the preferred investment is thai it establishes a clear priority ranking for the government's investment over shareholders, the existing preferred investors, and undated subordinated debt holders. The preferred effectively leaves the shares outstanding, would still require the government to hold public shareholder meetings as well as file regular statements. This may be considered impractical. If the Government were to take over the equity in its entirety there would be no need to report on an ongoing basis and hold any AGMs 4 A common equity investment effectively either dilutes or completely removes the existing shareholders and places the government's investment pari passu with the existing common shareholders and below any preferred investment; therefore, it provides the potential for any upside at the expense of the existing common holders who cither are heavily diluted or completely removed. This equity investment does riot necessarily need to be the funding instrument. As the common ownership makes the State a direct shareholder (and likely the majority or sole shareholder) in the bank and thus responsible for the corporate governance, it can have the bank issue a subordinated instrument that effectively has clear priority ranking to any existing preferred investors and undated subordinated debt instruments. This will provide the government with downside protection as well as current yield. This form of common equity investment is effectively taking over the company and providing funding in consideration. The Fannie and Freddie investments by the US Government is similar in nature and combined the two instruments (see description in appendix C) with a preferred investment coupled with warrants in order to maximise the benefits of the two instruments. It is likely situation specific in terms of what the appropriate form of the investment should be. The State should have flexibility to pursue either or both. (c) Secured Lending Scheme ( " S L S " ) In conjunction with the State protective custody option, it is also recommended that the Government introduce a secured lending scheme which would accept both commercial property and non ECB eligible tradable securities as collateral to be either exchanged for government bonds or cash. This would be based on the following terms: Available: All Irish Building Societies and Banks listed on the Irish Stock Exchange. Available only once ECB eligible collateral is exhausted by an individual financial institution. Liquidity provided for any term up to 9 months Irish, UK Commercial loans secured with a first legal charge and certain securities tradable on a recognised exchange No more than 60% of outstanding loan balance for commercial loans / no more than 75% of the lesser of last observable trade / currently marked price of the tradable securities EUR20bn Minimum cost will be Euribor 150jbps Tenure: Assets eligible Advance Rale: Size: Cost. Disclosure System announced but no publication of individual usage to market Advantages >> Converts non ECB-eligible collateral into immediate lia , ' r t y 5 a a The existence of a public announcement of an additional liquidity facility benefits whole financial system and is positive for Ireland May assist all private sector banks' liquidity issues. Disadvantages n 0 a Of itself does not deal with longer-term funding issues associated with lowly rated monoline businesses whose model is unlikely to be sustainable long-term Irish Government could end up funding over EURIOObn albeit at a highly attractive rate for an unknown period Money supply from the Irish Central Bank must be co-ordinated with ECB operations for injecting liquidity The SLS scheme is recommended because it would offer immediate liquidity and stabilise the sector. The option to subsequently own or separate assets out of the banks into State ownership or to stronger banks will be preserved, and can be done with full market support. The announcement of the creation of this SLS facility should be made public to the market in order to maximise the impact it could have of promoting confidence that all Irish financial institutions have access to an additional liquidity facility provided by the State for its own institutions. All banks should be encouraged to publicly support the SLS facility as a strong indicator of Slate support for the Irish banking system and no one institution should confirm or deny its use of SLS. Any institution seen or rumoured to be relying on this SLS liquidity facility will likely suffer a dramatic loss of confidence by the wholesale market and result in significant outflows of deposits. There is a risk banks could be unable to refinance its short term debt if it is perceived as a substitute or as sign of an inability to obtain longer term funding. It is an interim solution until either the market settles or a suitor in some cases is found to acquire or stablilise the individual institution. In any event the identity of any individual institution using SLS could become known in a small country and the move into Emergency Lending Access (ELA) could happen sooner than expected. The Central Bank of Ireland's Emergency Lending Access already performs the role of providing liquidity of last resort in a way that would become known to the market due to the fortnightly reporting requirement of the Central Bank. In these markets a bank in ELA is vulnerable because the market will no longer provide funding. The SLS would require new legislation which is currently being drafted and should be available before the end of the week. In the meantime the Central Bank is working on auxiliary measures which would allow the primary regulated Irish banks to post security backed by commercial property assets in return for cash or securities at a penal interest rate. This could be announced if needed to stablise concerns about the remaining Irish banks immediate liquidity. (d) Good b a n k s / Bad b a n k s 6 II' the financial situation worsens there is the possibility of allowing other banks to contribute their bad commercial property loans to the State Banks(s) to allow a Statecontrolled orderly unwind of property holdings and limit asset deflation. This would also help restore investor confidence in the now 'cleansed' banks and enable them to continue in business T he structuring of this option would be the most complex and time consuming. Considerations such as third party management required, upside/downside for tax payers, purchase price of the assets and the impact that would have on marks for other bank portfolios would have to be carefully thought through. This system was used in Scandinavia in the early I990's but only as the second phase of the stale rescue of the banks. It is also difficult to predict how long the work out of the assets would take but recent Bank of Ireland published projections show a three to five year period is required to recover 80% - 90% of book value. (c) Consolidation of financial institutions Irish Life &. Permanent has a good business franchise with a leading life insurance company and a residential mortgage book similar to Bank of Ireland and AIB, which is not experiencing significant arrears. It may be that they can come through the crisis unscathed. However if this looks unlikely, at the same time as providing short-term liquidity facilities, the other large banks can be approached to be ready to acquire and integrate the Irish Life & Permanent business in a private sector transaction. Similarly EBS could be easily acquired and absorbed by ar. entity with a larger balance sheet. Depending on the acquirer, the competition issues may need to be addressed by the State as they were on the Lloyds TSB / HBOS transaction in the UK.. (I) G u a r a n t e e for six P r i m a r y Regulated Banks The alternative to a SLS facility is to offer a complete State guarantee to all depositors and senior creditors of the six primary regulated financial institutions. This should stem outflows and encourage inflows of deposits. However, the scale of such a guarantee could be over 6500bn. This would almost certainly negatively impact the State's sovereign credit rating and raise issues as to its credibility. The wider market will be aware that Ireland could not afford to cover the full amount if required. It might also be poorly perceived by other European states if they come under pressure to do the same as liquidity flows migrate. A coordinated response across Europe could make this option more viable. Comments in such regard have already been made by the several European governments. 4. Conclusion The extension of a discreet liquidity advance is important to stabilise Anglo (and possibly IKBSj and avoid immediate contagion risk. The market environment is highly uncertain with international developments adding to the pressure on Irish financial institutions Even if the situation stabilises, the immediate outlook for monoline, single asset class, lenders is increasingly uncertain. In this context, it is important for the Government to be prepared to act quickly and decisively as required to step in and prevent a systemic problem 7 Appendix A 1) S u m m a r y of capital, liquidity and asset position Irish Nationwide Building Socictv Description: Mortgage provider: 80% commercial, 20% residential Overview of L o a n b o o k : Total size: EUR11.8bn a European CRE: >> UK CRE: n Irish CRE: b Irish residential: EURl.lbn(9%) EUR5.3bn (45%) V LTV 77% EUR2.9bn(2S%)J EUR2.4bn ( 2 1 % ) } - LTV 51% Land Bank exposure, few large loans (>6100m), loans to deposits ratio as at August 2008 of 187%, average maturity of loans is 2 years Irish residential: n No significant deterioration of book o 40% of loans with LTV >75% a UK and EU CRE: d 47% development, 13% construction, 4 0 % asset enhancement o 2005-2007 account for 84% of loans PwC and Merrill Lynch had a review with Irish Nationwide's C E O and CFO on the loan book. A sample of the top 60 C R E loans ( - 4 6 % of total) was reviesved. The explanations from management regarding the Company addressed LTV of these loans as well as the quality of counterparty do not seem unreasonable The short-dated nature of the loans as well as relying on the value uplift in the underlying property could pose risks if the real estate market continues to slide a Capital Position: Tier 1 Capital: Which includes: Undated junior Subordinated Tier 2 Capital: Which includes: Dated subordinated 61,365m EUR0m EUR476m ?3 Mm Anglo Irish Bank Description. Monoline lender, commercial property assets Overview of Losmbook: k Totai size e72bn (as of August 2008) a Ireland: EUR43.2bn (60%) >> UK: EUR l 7 . 9 b n (25%) a North America: EUR9.!bn(13%) s Wealth Management: ?2.7bn (4%) n Other ?0.9bn (intercompany lending to Wealth Management] a a Total leans neither impaired nor past due: 97.0% Approximately 82% of loan book is CRE, 1% residential and about 17% other corporate loans a Ireland - lop 20 represent 26.5%; - EUR 1 3 b n (30%) related to land and development loans; 2.9% of loans are on watch list a UK - top 20 represent 45.9% m North America - lop 20 represent 32.0% o UK, US and Wealth Management watch list total 2.13% n Anglo has EUR9 4bn of available for sale financial assets. 9 Government securities CDs Bank bonds ABS RMBS COO SIV Cther listed securities FV Mar-08 3.1 0.8 3.6 0.2 1.1 0.5 0.1 1.9 9.4 % 33.0% 8.5% 38.3% 2.1% 11.7% 5.3% 1.1% 20.2% C a p i t a l position Tier 1 Capital: Which includes: Preference shares Undated junior Subordinated-: Tier 2 Capital: Which includes: Undated subordinated Dated subordinated 67,113m EUR3 70m EUR2.151 m 62,642m EUR424 EUR2,136m 10 I r i s h Lil'e & Permanent Description: banc assurance - residential mortgage provider mainly on IL&P has not been properly reconciled aI this slate with Note that the information IL&P manaeemenl O v e r v i e w of L o a n b o o k : Loans and Receivables Residenlial M o r t a g e loans Commercial Mortgage Loans Finance Leases MwvMartotoJs Loans ana receivables :o JV 39,120 I lo Customers h Residential mortgage loans m a d e up circa 89% of gross loans and receivables to customers n o > Primarily made of first charge residential mortgages 2 0 % are UK loans mostly properties on average in the BTL market which are secured on 3 C a p i t a l position Tier I Capitai tgross): Winch includes: Undated junior subordinated EUR 4 , 7 9 8 m (EUR2,096, net c f d e d u c t i o n s ) EUR0m EUR 1,487m EUR455in EUR1.144m Tier 2 Capital: Which includes: Undated subordinated Dated subordinated L4IiA p p e n d i xCExamplesofRecentAssistancetotheFinancialsector 2) Hank of England Special Liquidity Scheme ( " S L S " Overview) On 2 l s : April 2008, the Bank of England (the "Bank") announced the SLS to enable banks and building societies to swap temporarily assets that are currently illiquid in exchange for UK Treasury bills. Maturity: The bills lent under the SLS are for an original maturity of 9 months and will have been created within the month preceding the drawdown. Bills must be delivered back 10 the Bank 10 days prior to their maturity and will be exchanged for a further 9inonll) Bill. Banks can renew, at the discretion of the Bank, these transactions for a total ot"up to 3 years. The SLS was originally open for a period of 6 months (until October 2008) and was recently extended to January 2009. Eligible Banks: All of the banks and building societies that are eligible to sign up for the standing deposit and lending facilities within the Bank's Sterling Monetary Framework. Eligible Securities: o UK and EEA Covered bonds rated AAA. The underlying assets must be either residential mortgages (Buy-to-let loans to private residential landlords are eligible) or public sector debt o AAA-rated tranches of UK and EEA Residential Mortgage-backed Securities (RMBS) backed by UK and EEA mortgages (the underlying asset must not be synthetic) AAA-rated tranches of UK, 'JS and EEA Asset-backed Securities backed by credit cards (not synthetic) Debt issued by G I 0 sovereigns rated Aa3 or higher, excluding securities eligible in the Bank's normal Open Market Operations, subject to any settlement constraints Debt issued by G I 0 government agencies guaranteed by national governments, rated AAA Conventional debt by the US government Sponsored Enterprises (Freddie Mac, Fannie Mae and Federal Home Loans), rated AAA o o o o Participating institutions may deliver securities held, or formed from assets held on the balance sheet of the participating entity Subsidiaries' assets are also eligible provided that the subsidiary is owned bv the participating leaal entity (ownership is defined as holding of a majority of the voting rights is the st ^ary) 13 Securities, including covered bonds, formed in whole or in part from underlying commercial loans are not accepted by the Bank Commercial loans include loans to SMEs, including those secured on land or commercial property. Participants may deliver as collateral only eligible securities held on balance sheet as at 31 December 2007 and eligible securities formed from underlying loans, including sellers' claims on Master Trusts, held on balance sheet at that date. For RMBS issued via a Master Trust where the pool of assets includes mortgages originated after 31 December 2007, 100% of the level of such securities or underlying loans outstanding on balance sheet as at 31 December 2007 will be eligible in the first year of the SLS. In year 2 two-thirds of those securities will be eligible. In year 3, one-third of those securities will be eligible. Securities, including covered bonds, formed in whole or in part from residential mortgages secured on properties not located in the UK or other EEA countries are not accepted by the Bank. ^ Securities may be denominated in Sterling, EUR, USD, AUD, CAD, SEK, C H F and JPY (for Japanese government bonds only). Ail eligible securities must be rated by two or more of Fitch, M o o d y ' s and S & P Eligible securities will be valued by the Bank using observed market prices thai are independent and routinely publicly available Collateral substitutions are permitted throughout the life of the schemes Pricing and haircut The fee payable on borrowings of Bills is the spread (to be re-fixed every 3 months) between 3m Libor and 3m General Collateral gilt repo, as observed by the Bank, subject to a floor of 20bps. The fee may vary a: the Bank's discretion. Government USGSEs 1 O M O eligible and | GIO i GIO Sovereign i guaranteed ! agencies paper I AAA j AAA ' Credit rating ( M o o d y ' s ( Aa3 or higher 1 scale) 1 1 Al! floating rate ! 1^ ' 3 1 Fixed rate, under 3 years ! 3 | o f maturity 1 4 4 | Fixed ra'.e, 3-5 years to 15 maturity 1 ! S [ Fixed rated, 5-10 years to 3 1 8 i 1 maturity 1 ! Haircut (%) | RMBS, covered . bonds and Crec:: 1 I Cards A B S ( AAA 1 o 12 1 I | M< 1 I 17 1 1 ! 1 1 Fixed rale, 10- 30 years 1 to inaurity S.S | i 1 14 ! 1 1 22 3% will be added to haircuts to allow for currency risk when securities are nonSterling An additional 5% will be applied to own-name eligible covered bond, RMBS and credit --'d ABS 14 Appendix C E x a m p l e s of R e c e n t A s s i s t a n c e t o t h e F i n a n c i a l s e c t o r Fannie Mae and Freddie Mac On September 7, 2008, Treasury announced that it had placed Fannie Mac and Freddie Mac in "conservatorship" resulting in significant implications across the companies' capital structures. Treasury's stated goals in appointing the Federal Housing Finance Agency (FHFA) as Conservator: "...to preserve and conserve the Company's assets and property and to put the Company in a sound and solvent condition. The goals of the conservatorship are to help restore confidence in the Company, enhance its capacity to fulfil its mission, and mitigate the systemic risk that has contributed directly to the instability in the current markets ". The assistance package consisted in: X 1. Capital injection: Treasury entered into a Senior Preferred Slock Purchase Agreement with each OSE receiving up to $100 billion and indefinite in duration. In exchange for entering into these agreements, Treasury receives: o SI billion of senior preferred slock in each GSE. The senior preferred stocks shall accrue a dividend of 10% per year, increasing to 12% if, in any quarter, the dividends are not paid in cash, until all accrued dividends have been paid in cash o Warrants representing 79.9% ownership in each GSE if exercised (at a nominal price). o Exercise price of one-thousandth of a U.S. cent ($ 0.00001) per share, and with a warrant duration of twenty years 2. C r e d i t Facility: Treasury has agreed to create a back-stop short-term secured lending facility for each GSE available generally at LIBOR +50 bps o The facility will offer liquidity ifr.eeded until December 31, 2009 o Loans expected to be less than I month but no shorter than I week "All loans will be collateralized and collateral is limited to mortgage-backed securities issued by Fannie Mae and Freddie Mac and advances made by the Federal Home Loan Banks." 3. S u p p o r t of the Agency MBS M a r k e t Treasury will set up an investment fund to purchase GSE mortgage-backed securities (MBS) in the open market. This move should assuage investor concerns about the functioning of the market, improve liquidity, and lower borrowing costs. The investment fund's goals; "By purchasing these guaranteed securities. Treasury seeks to broaden access lo mortgage funding for current and prospective homeowners as well as to promote market stability. Treasury is committed to investing in Agency MBS with the size and timing subject to the discretion of the Treasury Secretary. The scale of the program will be based on developments in the capital markets and housing markets". 16 Implications by category- of investors Debt / M B S B B e n h a n c e d abi'ity of the G S E s lo meet their obhgat.ons Additional security and clarity to 3 S E debt holders - senio' ar.d subordinated o Ability lo purchase G S E M B S .n i h e cper. market should improve market borrowing provid r.g o Covenants ; Preferred Equity P'eferred trade No voting rights Preferred dividends are susper.dec stock will continue to C o m m o n Equity o B a 0 C o m m c r . slock wi'.t continue to trade No voting rights No common aivioends to exisl : ng shareholders Existing c o m m o n slock shareholders will cear any tosses ahead of Ihe government a r c preferred shareholders h o Dilution due to issue of warrarts Negative common preferred capita' h n Covenants prevent purchase of redemption of capita) stock Covenants p'event new capita, issues impact due lo on EPS available on to div.dends senior Ex.st'.ng preferred shareholders wil! bear any 'osses ar.d prevent prevent aneac not o' the goverpmer! Covenants Covenants issues aireaoy or liqu.dily costs aad :.cr.ai prevent and ower thereby aasorbed by c o m m c n snareho'de's purchase new redemp'.lcr cf capital stock ccnlidence cebt from than t o investors : n G S E M B S be-ng increased to more 2008 1 *C% cf lis aeht as of June 30. die Or. September 23 ,d , 2008, AIG announced that it had signed a definitive agreement with ihe Federal Reserve Bank of New York aimed at addressing the liquidity needs of AIG. AIG Chairman and CEO Edward Liddy said." AIG made an exhaustive effort to address its liquidity needs through private sector financing, but was unable to do so in the current environment. This facility was the company's best alternative". The agreement consisted in: 1. 2 year, S8Sbn revolving credit facility provided by the Federal Reserve Bank of New York to provide a o Interest to accrue on 3m libor + 8.50%, initial commitment fee of 2% (payable at closing) and a commitment fee of 8.50% per annum on any undrawn amount o AIG is required to repay the facility from, among other things, the proceeds of certain asset sales and issuances of debt or equity securities. These mandatory repayments permanently reduce the amount available to be borrowed under the facility 2. Convertible Participating Serial P r e f e r r e d Stock to be issued by AIG to a trust that will hold the Preferred Stock for the benefit ofTreasury o The Preferred Stock will be entitled to participate in any dividend paid on the common stock, with the payments attributable to the Preferred Stock being approximately, but not in excess of 79.9% of the aggregate dividend paid o The Preferred Stock will vote with the common stock on all matters and will hold approximately, but not in excess of 79.9% of the aggregate voting power 17 o The Preferred Stock will be convertible into common stock following a special shareholders meeting to amend A l G ' s restated certificate of incorporation. Implications by category of investors Debt / M B S Enhanced eb'Jity of AIG to meet on-going obligations Additional security and clarity lo AIG debt holders - senior and subordinated Incentive to reduce balance sheet through asset disposal Preferred Equity I Hybrid Capital The fale cf hybrid capital holders remains indicate coupon securities uncertain. thai AIG will on Current suspend tnese secondary trading levels seem to payments C o m m o n Equity Common stcck will continue Ic trace CiiJted voting rights AIG suspended dividends c.n Common Stock on 23"' September Existing common slock, shareholders will bear any losses ahead ol the government ar.d preferrec shareholders Negative ccmmor. preferred impact due lo on EPS availac> o o o o Debt I M B S 0 0 Enhances ability ot the Bank to meet on-going obligations Additional security and clarity to the Bank's deol holders - senior, subordinated, Undated subordinated (UT2) and non voting undated junior subordinated {hybrid Tier I) are ail protected Common equily is diljlea 20 I IRE: Hypo Real Estate, the Dax-lisied company, is one of Europe's biggest finar.cers of commercial property but is thought to have faced refinancing problems within Depfa, the public sector lender that it bought in 2006 o Hypo Real Estate Holding AO, together with its subsidiaries DEPFA Bank Pic, Hypo Real Estate Bank AG, Hypo Real Estate Bank International AG and DEPFA Deutsche Pfandbriefbank AG has secured a 635bn Euro short-term and mid-term credit facility to cover the Group's funding needs well into the future HRE is understood to have secured credit line in the form of bank loans and credit guarantees from a consortium of listed and public-sector banks in Germany as well as the Government o The guarantees are designed to encourage banks to start lending money to Hypo Real Estate, which reiies on unsecured money market debt to finance a significant proportion of its funding needs, at a time when the money markets have ground to a halt o Hypo Real Estate's public finance operation, which is conducted through its Depfa Bank subsidiary and comprises just over half the entire company's activities, raised 22% of its financing needs, or EUR54 billion, in the unsecured money market at the end of June c The company's real estate division, which lends to commercial property projects, raised 4% of its financing this way, or ?4.3 billion o The risk coverage is understood to be divided in two tranches - a first loss tranche of ?14bn and a second loss tranche of EUR21bn Private banks wili cover for 60% of the first tranche, while the government will cover for 40% of the first ar.d the entire second tranche. The German government has received no equity stake and does not plan any nationalisation of Hypo Real Estate o "We are planning no nationalization of Hypo Real Estate," the government said. The bail out package has been backed by German Chancellor Angeia Mcrkel and Finance Minister Peer Steinbrueck. HRE is a one of the largest issuers in the local Pfandbrief market. HRE is about a 20% participant in the EUR900bn Pfandbrief market There are indications that intervention was executed in order to stabilise the Pfandbrief market o As a consequence of the arrangement. Hypo Rea'. Estate Holding AG will have to impair the goodwill of its holding in DEPFA Bank Pic. This impairment will have a significant material effect on the Group's P&L statement A dividend distribution for the financial year 2008 is not expected ir. order to mitigate the capital impact. Equity analysts have voiced concern about current management and have lost all confidence in their abilites Debt/MBS B Enhances ao,;;ty ol the Bar-, to meet ongoing obligations anc funeing Add.lional security and clarity lo the Bank's debt holders - senior subordinated. jndaled subordinated (Opoer T :er 2) ar.d non voting jndaled junior subordinated {hybrid T .er ' ; are a.: protected Preferred Equity I Hybrid Capital H No effect Common Equity a No effect H 21 Glitnlr Bank: o The government of Iceland has announced that it will acquire a 75% stake in Glitnir Bank at the price of 6600m (S859m), through the intermediation of the Central Bank of Iceland which stated that it does not intend to keep its stake for an extended period The new equity will be issued on the 29 September. The capital adequacy ratio will be 14.5 percent after the government's action This action is taken in light of temporary liquidity difficulties laced by Glilnir and because of the unusually difficult situation currently reigning in the global financial market. The government has asked Larus Welding to remain in his role as CEO which he has agreed to Glitnir said that the bank's board voted to accept the proposal at a meeting Monday morning. The bank now plans to call a shareholder meeting to approve ihe deal Preferred Equity I Hybrid Capital B No eftect C o m m o n Equity a No eflecl o o * o Debt / M B S u Enhances ability ot Ihe Bank !o meet cn-going ob'igalions and funding o Addilional security and clarity to ihe Bank's debl holders - semcr, subordinated. undated suborcinaled (Upper Tier 2) ana non voting undated junior subordinated (hybrid Tier 1) are a.? protected Bradford & Bingley: ' o The UK Government announced today that it lakes control of troubled mortgage lender Bradford & Bingley Pic ("B&B") Following recent turbuier.ce in globai financial markets, B&B has found itself under increasing pressure as investors and lenders lost confidence in its ability lo carry or. as an independent institution. The FSA determined on Saturday, September 26, that the firm no longer met its threshold condilions for operating as a deposit taker under the Financial Services and Markets Act 2000 ana FSA rules For savers and borrowers of B&B it will be business as usual. Customers should continue to use their normal branches to access '.heir accounts. Chancellor of the Exchequer has transferred B&B's UK and Isle of Man retail deposit business and branch network to Abbey National Pic, a unit of Spam's Banco Santander S.A. The remainder of B&B's business such as customer loans and treasury assets, including the 41 billion-pound mortgage assets and its wholesale liabilities, will be taken into public ownership The Treasury has put in place a 6 month guarantee to safeguard certain wholesale borrowings, and derivatives transactions of and wholesale deposits with B&B existing as at midnight on 28lh September 2008. The Government intends to seek state aid approval form the EC to extend these guarantee arrangements In the initial period of public ownership the senior management team of B&B will remain in place to manage the transition o o o o o 22 Debt I M B S a The T Preferred Equity / H y b r i d C a p i t a l reasury ensures thai NO guarartee provided. The Government has varied the t e w s of B & 3 ' s subordinated cect ir. order to allow for the wind-down. C o m m o n Equity Bradford & & n g i e / s stock market listing was little cancelled if any sncrtly before markels ray from get Ihe opened Monday. government. Shareholders u n s e c u r e d and senior whoiesa'e deposits arc? borrowings and any accumulated a Daiod tne guarantee 13 T h e securities issued pursuant lo 3 & B ' s securitisaiio.n ar.d covered b o n d programme will not benefit freer the guarantee interest anc on them will be repaid w h e n railing d^e undated Subordinated do not bene':l ' ' o m compensation 23 A) Market Backdrop Market Backdrop For Financial Institutions Severe Stresses In The Financial Markets Remain Amidst Volatility Aggregate Spread Performance By Asset C a s s o l>i<<<< iSe Un Ivw wutki we;>><<.>> (mi j aifinwilK m c t m o f mnjkr: ranitutem. 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W1 I* 1 (K*l S I >>I-40KX }>>< >>o.>>.-<< w a u t a (0*1 SuMxtfVfrt fO:<>I1KKI 22} M ncixot^t it S* t'iStai >>M SC'Ut<<>> rfAAM 300IM JCODIOtM v.* JVf>>>> ir*" o >. . o>><< MOT iii'K Aittt un.cc F(<<4I MuM fcoO jyn.04 M << So ? oO * Oi.K tu> -- 'oov>v< J u 23 M a r k e t B a c k d r o p For F i n a n c i a l I n s t i t u t i o n s Severe Stresses in T h e Financial Markets Remain Amidst Volatility | 10-Y-ear U S T r e a s u r y C D S | VIX V o l a t i l i t y I n d e x | iTRAXX C r o s s - O v e r | List of Key B a n k F a i l u r e s M a r k e t B a c k d r o p For F i n a n c i a l I n s t i t u t i o n s Acceleration of Bank Failures & Impart on Capital Markets Wjthinjio.n MuIujI {ftjS li<>>yvviv<. 26" Scpur.txrf. fcWS) o u V o i.Srr ni exacted iju*>> portfolio o o I .'uvVlljVJOV to I J o Ovfx-i'.l wltMrtwals ,i>J 1!I^trfdny 8jnk of e>>>>i A>>ii C o g KurgOm!r<>f>>i1Uwfv>>|nwnr< Sepututvr TtiilSfi 7>> o Owiriu o s jutprtstf / C S >><< D U !S|uU4lt) ivvmuh1 o iiltsi l^wdlir >>hOftfcll M O U^uircO by UoyUt T5tf vn 16" S.-plw>>ib<< 290*>> BS o C X W r<g Jty M iuj'J.i",.; o lu/idL-ig ,)>>;< rNh.-valcJ > < l2."<> L<>p:v l'. o- IS" Soft re iter Mug) .<< o Cuivemt rv?ji JJ.ig i)v<<>.'v<> o Finnle Mj<< & Fr<> Mj< iFMierii Kcwrvr irUr/v<> Juvj iruclvt:*} . 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Sobjcquemly ^c^iwtd by Bji* A>><>r.i 0 Bank Failures Substantially Impact Credit Markets JijfvdS Jw.08 AjjOS i<>c-U> I I EUR I n t e r b a n k Rales >>I(M> J U K I n t e r b a n k Kates r*Itinx, K.yen lo\s>d 3 V-J ja,V T ^ *c t J>> 1 uC 0 B*>>>>ftal<<- U ypJ Ut>>i - U O'OirijN Ry.t S S -UK Son R < - U 3 libor oo JK OwrtgN R*t* >><< K m - E B 5*i>> R>>;<< - 3 Suitor - E B Own^M R*t>> C m C r<. v>>f Jan- Mnkfi&iisuki jy* H^t&w^p^^b^m*, 25 Government Decision to safeguard the irisli Banking System Speaking points for the Taoiseach, 30 September, 2008 W h a t a r e t h e G u a r a n t e e a r r a n g e m e n t s a n n o u n c e d by the Government? (C) The Statement issued by the Government today states that following the advice of the Central Bank and Financial Regulator, the Government has decided to guarantee the retail, wholesale, dated term debt, secured borrowings and interbank deposits of the six domestic credit institutions (AIB, Rol, Anglo-Irish, Irish Life and Permanent, Irish Nationwide, EBS). (C) In taking this action the Government is acting first and foremost in the interest of the stability of the Irish economy and the long term interest of the taxpayer. o A secure and stable financial sector is essential for the Irish economy and it is in the best interests of the Irish people. (C) Normal practice is that the guarantee would extend to wholly owned subsidiaries within the Irish bank's group, but this is subject to confirmation of status of the relevant entity to the Government by the bank and FR (R) It is important to note that this guarantee is intended to secure the funding of these institutions. Equity investors and those holding junior debt will take first charge on the risk of any losses in these institutions over time under the guarantee provided by the State is not intended to insulate them from the risks that they have taken on. (R) Since the onset of the current period of turmoil in 2007, the Government has stressed its commitment to the stability of the Irish financial system. (C) The Minister has highlighted in recent weeks that money placed with an Irish credit institution would not be placed at risk. 304 (C) The measure is being taken as a response to the severe dislocation in the international credit markets, which has impacted both in the US and the EU. W h a t is t h e e x t e n t of financial e x p o s u r e of t a x p a y e r s ? o It is important to stress that the risk of any potential financial exposure is significantly mitigated by a very substantial buffer made up of the equity and near-equity (high yielding subordinated debt). There is, therefore, a significant buffer before there is any question of credit impairments impacting on the Exchequer on foot of the guarantee. (C) The guarantee provided by the State relates to the liability side of the institutions' balance sheets - some EUR400bn or so in deposits retail, corporate and wholesale - and their senior and dated subordinated debt. These liabilities are supported by EUR500bn in assets. (C) Owing to the importance from the point of view of market sensitivity of putting definitive figures into the public domain, the Minister for Finance has asked the CBFSAI to confirm detailed figures. (C) The asset quality in our financial institutions is good with a strong concentration in residential mortgages with a relatively low loanto-value ratio (LTV) on average. While Ireland along with all developed economies has experienced a sharp decline in its property market there is very significant capacity within the institutions to absorb any losses. W h a t a r e t h e p r o t e c t i o n s p u t in p l a c e to p r o t e c t I r i s h T a x p a y e r s ? (R) Firstly, I would stress that this guarantee was not given lightly. It was informed by the strong advice of the Central Bank and Financial Regulator that on account of unprecedented disruption in ? international financial markets the system-wide State guarantee was required to - ensure that Irish financial institutions has access to the normal liquidity and funding to effectively operate their day-to-day business - provide confidence to depositors and wholesale lenders that they should continue to transact their business as usual with the institutions concerned. (C) The interests of taxpayers will be very firmly safeguarded from any risk of loss form the very substantial warranty that the State is now providing. (C) Legislation which is to be brought forward to underpin this guarantee will - provide for specific terms and conditions, including fees, in relation to a guarantee provided - provide a very useful mechanism, alongside existing regulatory powers, to ensure that the Irish financial institutions are managed and operated in a manner which it fully consistent with their long-term sustainability (C) The intensified scrutiny and overight of financial institutions which has been put in place since the onset of the current turmoil will be maintained and strengthened further to ensure that high regulatory standards are achieved in Ireland and that the quality of corporate governance in these institutions is a bulwark against any risk of loss for the State. (C) As far as the question of 'moral hazard' is concerned, it will be a priority for the Government to ensure that the highest regulatory standards and standards of corporate governance apply in all of the institutions concerned including in relation to lending practices to safeguard the interests of taxpayers against any risk of financial loss Will t h e r e b e a r e t u r n to T a x p a y e r s f r o m this i n t e r v e n t i o n ? (C) This guarantee will not be a free ride. Legislation which is to be brought forward to underpin this guarantee will provide for specific terms and conditions, including fees, in relation to a guarantee provided (C) In taking this action the Government is acting first and foremost in the interest of the stability of the Irish economy and the long term interest of the taxpayer. (C) A secure and stable financial sector is essential for the Irish economy and it is in the best interests of the Irish people. o The protection of taxpayers' interests is the primary focus of this measure. H a s c o n s i d e r a t i o n b e e n g i v e n to t a k i n g an equity o p t i o n i n b a n k s assisted? (R) This intervention is about enabling Irish banks to meet their liquidity needs in the current very difficult international financial circumstances to allow them to work through these difficulties and realise the value in their loan books. o This guarantee will be paid for and the taxpayer who ultimately underwrites this support will be paid for the support provided. (R) The commercial terms will ensure that the taxpayer gets value for money. (C) We are not subsidising the banks as they are receiving the guarantee on commercial terms. (C) The purpose of this measure is to provide security to all depositors and ensure confidence in the Irish Banking System. This confidence is essential in order that our citizens can access the liquidity that is crucial for the effective operation of our economy W h a t will t h e G o v e r n m e n t get f o r t h e g u a r a n t e e ? (C) The first and most important point to be made is that the measure helps secure the stability of the Irish banking system. As is clear from the impact of the international credit crunch on the Irish economy, the financial system overall plays a central role in the economy and in the day-to-day lives of ordinary people. (R) So the Government's objective for the guarantee is to stabilise the Irish financial system as much as possible against the backdrop of 4 the very uncertain and volatile international environment at present so that individuals and businesses can transact their normal financial business in a normal way. (R) The Government's announcement makes clear that the guarantee will be provided at a charge to the institutions concerned and will be subject to specific terms and conditions so that the taxpayers' interest can be safeguarded. >> The Minister of Finance will be drawing on the advice of the Central Bank and NTMA to put a fee mechanism in place to remunerate the guarantee taking into account such factors as the possibility of increased funding costs for the Exchequer, the economic value for the institutions and need to support the investor confidence in the Irish financial system overall. (R) In current highly abnormal market conditions I don't think it is useful to speculate on what what might be described as commercial rate for the guarantee . It is important to be clear that it is only the State that could provide such a warranty; no market mechanism would of course provide it. (C) The State in its approach to costing the guarantee will wish to take all relevant factors into account including to ensure that in the medium-term the Irish economy supports a strong and viable banking system, the benefit and value it creates for the financial sector and above all else that the Exchequer suffers no financial loss from having provided it. 5 Supplementary Speaking Points A r e Credit Unions covered? Credit Union deposits of up to EUR100,000 are already guaranteed. W h a t a r e the difficulties t h a t h a v e o c c u r r e d ? Global problems in relation to how credit institutions are funded have lead to a lack of liquidity across the global financial environment. (C) Because of the global credit crunch, Irish institutions have had difficulty raising the funds they need to lend to customers. (R) In a normal environment, as its own borrowings on the wholesale money markets (where banks lend to each other) fall due for repayment they would either be continued (rolled over) or new loans taken to replace them. But with the credit crunch new funds are no longer available. ? W h e r e is t h e m o n e y c o m i n g f r o m ? C o m m e r c i a l t e r m s - w h a t is t h e rate? (C) The Exchequer will be remunerated by the financial sector for giving the guarantee to ensure that no financial liability is permanently borne by the taxpayer. o The commercial terms will be market rates. H o w will it be t r a n s a c t e d ? The Central Bank will secure funding/liquidity to those banks that seek it and fulfil the commercial terms required. W h y n o w , w h y not l a s t w e e k o r n e x t w e e k ? (C) The continued uncertainty in the financial markets has come to a head over the weekend as evidenced by difficulties for a number of banks throughout the global economy, including in Germany, Belgium, Holland, the UK and the US. (R) This measure has been heavily influenced by the further uncertainty created by the failure of the US Congress to agree a package. (R) This is a measure which is within our remit. It is important that we do whatever we can to secure our financial interests. 6 W i l l t h i s b e e n o u g h to s e c u r e t h e I r i s h b a n k s ? H o w do y o u k n o w ? (R) This is a pre-emptive measure to secure confidence in the Irish banking system. It will give certainty to customers and the market about the ability of Irish Financial Institutions to honour their financial commitments. W h a t h a p p e n s if t h i s i s n ' t e n o u g h ? (R) The Government, in conjunction with the Central Bank and the Financial Regulator has made this decision as it is viewed as the most appropriate measure at this time. o The Government, in conjunction with the Central Bank and the Financial Regulator, has taken steps to plan for alternative scenarios and will act as necessary to ensure the stability of the Irish financial environment. W i l l t h e y h e l p p e o p l e a n d b u s i n e s s e s to get l o a n s ? (C) Access to liquidity will only improve when the difficulties in the Financial sector are resolved. This decision should remove any uncertainty on the part of counterparties and customers of Irish institutions. (C) Greater confidence in our financial system will increase the liquidity of the Irish financial system, thus improving the prospects for people and businesses in accessing loans. A r e t h e r e a n y c o n s e q u e n c e s f o r t h o s e b a n k s t h a t h a v e given b a d l o a n s ? A r e n ' t you j u s t b a i l i n g o u t b a d b a n k s a n d b a d m a n a g e m e n t ? (C) The difficulties faced by all global financial institutions is related to lack of liquidity throughout the entire global financial markets. (C) tion the Government is acting first and foremost in the interests of the Irish economy and taxpayer. (C) A secure and stable financial sector is essential for the Irish economy and it is in the best interests of the Irish people. 7 Government Decision to Safeguard Irish Banking System The Government has decided to put in place with immediate effect a guarantee arrangement to safeguard all deposits (retail, commercial, institutional and interbank), covered bonds, senior debt and dated subordinated debt (lower tier II), with the following banks: Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society and such specific subsidiaries as may be approved by Government following consultation with the Central Bank and the Financial Regulator. It has done so following advice from the Governor of the Central Bank and the Financial Regulator about the impact of the recent international market turmoil on the Irish Banking system. The guarantee is being /ovided at a charge to the institutions concerned and will be subject to specific terms and conditions so that the taxpayers' interest can be protected. The guarantee will cover all existing aforementioned facilities with these institutions and any new such facilities issued from midnight on 29 September 2008, and will expire at midnight on 28 September 2010. The decision has been taken by Government to remove any uncertainty on the part of counterparties and customers of the six credit institutions. The Government's objective in taking this decisive action is to maintain financial stability for the benefit of depositors and businesses and is in the best interests of the Irish economy. le Financial Regulator has advised that all the financial institutions in Ireland will continue to be subject to nonnal ongoing regulatory requirements. This very important initiative by the Government is designed to safeguard the Irish financial system and to remedy a serious disturbance in the economy caused by the recent turmoil in the international financial markets. Ends