Annual Report & Accounts 2009 - Anglo Irish Bank

Principal risks and uncertainties continued
Restructuring
Financial support provided by the Government to the Group is
subject to review by the European Commission (‘EC’) under EU
state aid rules. The Group has submitted a restructuring plan
to the EC and the review of that plan by the EC is ongoing.
The EC will consider whether the plan demonstrates the
Group’s long-term viability, that the Group (and its capital
holders) make an appropriate contribution to the restructuring
costs from their own resources and that measures are taken
to limit distortions to competition arising from the financial
support provided by the Government to the Group.
No decision in relation to the form of the restructuring has
been announced by the EC. The EC may require the Group to
limit its operations or restrict its commercial activities in such a
way that could have a material adverse effect on the results of
its operations, financial condition and future prospects.
Liquidity risk
Liquidity risk is the risk that the Group does not have
sufficient funds available at all times to meet its contractual
and contingent cash flow obligations. This risk is inherent
in all banking operations and can be affected by a range
of institution-specific and market-wide events. The Group’s
liquidity may be adversely affected by a number of factors,
including significant unforeseen changes in interest rates,
ratings downgrades, higher than anticipated losses on loans
and disruptions in the financial markets generally.
The crisis in the global financial system has resulted in a period
of significant turbulence and uncertainty, with unprecedented
levels of illiquidity, resulting in considerable problems at many
financial institutions. The terms on which funding is available
have also become more onerous and expensive.
While liquidity in wholesale markets improved in the second
half of the year, the perception of counterparty and country
risk has remained high. This negative perception has led to
reductions in, and increased costs of, wholesale funding.
Accordingly, in common with many other banks, the Group’s
access to traditional sources of liquidity has been constrained.
In addition, negative sentiment towards the Irish market has
created additional funding challenges for Irish institutions. This
has resulted in an overall reduction in liquidity and the Group
has increased its recourse to liquidity schemes provided by
central banks as a result.
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In response to major market instability and illiquidity,
governments and central banks around the world have
intervened in order to inject liquidity and capital into
financial markets, and, in some cases, to prevent the failure
of systemically important financial institutions. These
various initiatives to stabilise financial markets are subject
to revocation or change, which could have an adverse
effect on the availability of funding to the Group. The Bank
is a participating institution in both the guarantee scheme
pursuant to the Credit Institutions (Financial Support) Scheme
2008 and the Credit Institutions (Eligible Liabilities Guarantee)
Scheme 2009. The financial position of the Group could be
impacted by the termination, amendment or cancellation
of these schemes or the removal of the Group from these
schemes, prior to their termination.
Furthermore, the Group relies on customer deposits to meet
a considerable portion of its funding requirements and those
deposits are subject to fluctuation due to certain factors, such
as a loss of confidence, reputational damage or competitive
pressures, which could result in a significant outflow of
deposits within a short period of time. The availability of
commercial deposits is often dependent on credit ratings and
any further downgrade could limit the Group’s liquidity and
therefore increase liquidity risk.
Within the banking industry the default of any institution
could lead to defaults by other institutions. Concerns about, or
a default by, one institution could lead to significant liquidity
problems, losses or defaults by other institutions because
the commercial soundness of many financial institutions may
be closely related as a result of their credit, trading, clearing
or other relationships. This risk is sometimes referred to as
systemic risk and may adversely affect financial intermediaries,
such as clearing agencies, clearing houses, banks, securities
firms and exchanges, with which the Group interacts on a
daily basis, which could have an adverse effect on the Group’s
ability to raise funding and on the Group’s results, financial
condition and prospects.