The Central Bank has paid almost €1.8 billion to the exchequer, after increasing profits to €2.24 billion last year, according to its annual report, up from €2.14 billion the previous year. The profits related largely to the sale of holdings of special government bonds which the Central Bank took on when the IBRC was liquidated in 2013.
The bank's governor, Philip Lane, has also again underlined that the controversial new mortgage rules are here to stay and will only be adjusted on the basis of strong evidence. The bank will invite the public and other interested parties to submit their views on the rules as part of a review process to get underway in the coming months.
The bank’s annual financial results show that bond sales contributed over €1.1 billion to profits last year, up from €739 million in 2014. The report shows that unrealised gains on these bonds increased to €10.6 billion from €9.44 billion in the previous year’s balance sheet.
This reflects the strong increase in bond prices since the bonds were taken on by the bank, in return for a deal in which the promissory note, obliging the State to pay the bank over €3 billion each year in repayments, was torn up.
Elsewhere, Central Bank earnings were hit by the international environment of low interest rates. Net interest income to the bank fell by €214.6 million to €1.207 billion, mainly due to lower earnings on bank holdings, reflecting generally low international rates.
The Central Bank took on around €25 billion of bonds when IBRC was liquidated. It has sold down the holdings at a higher rate than the minimum agreed with the ECB when the promissory note deal was done.
The ECB wants the bonds sold off as it believes that the arrangement is a type of monetary financing of the government by the central banking system. The report shows that the nominal value of the special bonds held fell to €22.78 billion by the end of last year, with further sales made in the meantime.
Selling the bonds allows the bank to book a profit and return money to the exchequer – and the unrealised gains shows that further profits may be returned in the years ahead, though only if bond prices stay strong.
However the sale also means that, in future, the government must pay interest to international investors who buy bonds issued by the NTMA replacing the IBRC bonds. In contrast, interest on the special bonds is paid by the State to the Central Bank and is thus not a net cost to the State.
Launching the report, Central Bank governor Philip Lane said the outlook was good for the domestic economy. However, he stressed in a statement that discipline in addressing the remaining vulnerabilities was important..
Mr Lane also referred to “tentative signs of recovery in the euro area” supported by ECB policies. He said the measures announced by the ECB in March to increase its buying of government bonds underscores its determination to act in support of its mandate.
The governor also commented on the new mortgage rules introduced in 2015, which oblige homebuyers to have a deposit of 20 per cent in most cases, and introduce restrictions on the size of the mortgage in relation to earnings. The bank has said it would review the rules later this year, but has given no commitment to ease them.
Mr Lane said that the new rules are intended to be a permanent feature and that “ any changes will require a high evidence threshold and that the calibration of these rules can be tightened, loosened or left unchanged” .
He also announced that as part of its review of the mortgage lending rules, the Bank will invite written public submissions that provide evidence-based analyses of the impact of the rules. Details on this process will be provided by the Central Bank in advance of the submission period.
