Denis Casey: wholesale funding

The level of lending by Irish banks is among the highest in the industrialised world and significantly higher than at most US banks, new research shows.

Apart from Nordic and Portuguese banks, Irish banks have the highest loan-to-deposit ratios in western markets. Unhealthy levels of loans to deposits are fast becoming a key issue in international banking, with short-sellers besieging the share price of British bank HBOS last week because it had a ratio of 177%.

According to a UBS survey of bank balance sheets, Ireland's average loan-to-deposit ratio has risen to almost similar levels (163.1%), with the country's largest mortgage lender, Irish Life & Permanent (IL&P), recording a ratio of 277.4%, one of the highest of any western financial institution.

Loan-to-deposit ratios measure the value of loans compared to deposits. Banks plug the gap by relying on wholesale funding provided by other banks.

Since last week's events on Wall Street, many analysts believe the wholesale markets have effectively seized up or become prohibitively expensive. This has prompted analysts and short-sellers to focus on banks with a heavy reliance on wholesale funding.

The average ratio of loans to deposits at US regional banks is 113%, with successful banks such as Wells Fargo maintaining a ratio of 118.6%.

Ireland's average rate is just short of the rate at Morgan Stanley, the US investment bank that was struggling to survive as an independent entity late last week.

While Iceland's banks have a huge dependence on wholesale funding, Ireland is rapidly developing a similar problem which could become a serious threat to their future profitability and, based on the example of HBOS, could threaten their survival.

Anglo Irish Bank, a keen taker of deposits, has the lowest loan-to-deposit ratio (124.2%), followed by Allied Irish Banks at 156.7%, according to the UBS research.

The second-highest ratio, behind IL&P, is Bank of Ireland (160.3%).

While the slowdown in lending will help to address the problem slightly, next year's estimates put Ireland at similarly worrying levels.

Last week, UK analysts Exane BNP described any bank with rates of over 177% as having an "unhealthy" profile.