BANKING CONCERNS:GROWING FEARS about the financial health of insurance giant AIG drove Irish bank shares lower again yesterday as the turmoil in the US banking sector continued to hurt global stock markets.
Bank stocks fell sharply until the early afternoon when they staged a rally. Irish Life Permanent (ILP), the biggest mortgage lender in the country, was the biggest loser again yesterday, closing 8.8 per cent lower at €5.33.
Anglo Irish Bank, which has a heavy exposure to the commercial property sector, dropped more than 13 per cent before closing down 2.1 per cent at €4.55. The bank was the best performer of the Irish financial stocks.
AIB fell 7.4 per cent to €6.95, while Bank of Ireland, which will release a trading statement today, declined 3.3 per cent to €4.62.
The combined market value of the four Irish quoted banks has fallen by €2 billion to €15.6 billion since trading started on Monday.
Britain's largest mortgage lender HBOS, which owns Bank of Scotland (Ireland) and retail bank Halifax, lost more than a fifth of its value.
As the rates at which banks lend to one another spiralled due to rising concerns about the financial sector, the European Central Bank pumped another €70 billion into the money markets to improve liquidity. Other central banks took similar measures. The US Federal Reserve injected another $50 billion into the US banking system.
Inter-bank lending rates for one-week and one-month money reached their highest levels since December. The three-month rate, which sets mortgage costs for banks across Europe, rose towards last month's seven-year high.
The collapse of Lehman Brothers has made investors reluctant to lend to banks because the holders of the US investment bank's senior unsecured bonds, a form of the bank's debt sold to investors, will lose between 20 and 40 per cent of their money due to the Lehman failure.
One senior Irish banker said Lehman's bankruptcy would make it more difficult and more expensive for Irish banks to raise money in the debt markets, and would lead to higher funding costs and make banks reluctant to lend to customers. He said the collapse would "exacerbate the anxiety about risk" and prolong any recovery in the banking sector.
The cost of protecting bank debt surged due to the turmoil.
Spreads on credit default swaps (CDS), financial contracts which protect investors against losses on bank debt, spiked on Monday due to the torrent of bad news from the US and remained largely unchanged yesterday as investors remained nervous of banks.
Davy stockbrokers said the cost of insuring Irish bank debt against default hit new highs on Monday.
CDS spreads on five-year senior debt increased the most at Anglo, rising 86 basis points, or 0.86 of a percentage point, to 4.85 per cent.
Bank of Ireland rose 48 basis points to 3.2 per cent, AIB increased 40 basis points to 2.75 per cent and ILP jumped 36 basis points to 3.06 per cent.
Analysts at Swiss bank UBS warned investors to avoid banks that are "remotely at risk" of having to raise capital or rely on wholesale funding, citing four banks including Anglo Irish Bank and Danske Bank, which owns National Irish Bank, as examples.
This contradicts analysts at Dresdner Kleinwort, who last week said Anglo Irish Bank had an "excess of capital".
Anglo sources 60 per cent of its funding from deposits and has said it will retain €1 billion from profits this year for capital, which protects against unexpected losses.
