IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

Principal risks and uncertainties continuedIrish Bank Resolution Corporation LimitedAnnual Report & Accounts 2011to (i) the rationalisation and, where appropriate, closure of theBank’s UK offices and its branches in Dusseldorf, Vienna andJersey, (ii) the disposal of the Bank’s Wealth Managementbusiness and (iii) the Bank’s acquisition of/merger with INBS.The Bank was also required to prepare, in conjunction withINBS and the NTMA, a high level restructuring and work-outsteps plan, based on the Restructuring Plan (the ‘High LevelSteps Plan’) and, subject to the approval of the NTMA,implement that High Level Steps Plan, subject to any variationsdirected by the EC. The Bank is proceeding to implement theHigh Level Steps Plan, following approval by the NTMA on20 June 2011.The Restructuring Plan, which was approved by the EC on29 June 2011, provides for the amalgamation of the Bank withINBS and sets out in detail how the loan books of thecombined entity will be resolved over a period of up to tenyears. To ensure that the assets are managed in a wayconsistent with the resolution of the combined entity, certaincommitments are now binding upon the Bank, including acommitment that it cannot enter into new activities. AMonitoring Trustee was approved by the EC on 8 December2011 to report on a quarterly basis for a period of three yearson the Group’s adherence to these Restructuring Plancommitments.The Bank has prepared an operating plan which is intended toform the basis for the implementation of the RestructuringPlan and the High Level Steps Plan. The operating plan focuseson accelerated deleveraging of the Bank, and includes theaccelerated disposal of its US loan portfolio and the disposal orwind-down of its Wealth Management division in accordancewith the Restructuring Plan, the Direction Order, the MinisterialRequirements and the High Level Steps Plan. The initiatives aresubject to operational challenges and market dependencies inrespect of timing and optimal pricing, which will increase theexecution risk of the operating plan.Note 57, Events after the reporting period, confirms that on30 January 2012 the Bank announced that the Board hadapproved a strategy and direction put forward by managementto wind down its Wealth Management business in an orderlyfashion. This process is currently underway and may include aco-sourcing arrangement. Any final agreement reachedbetween the parties will have operational risks associated withthe process.Ratings downgrades – Bank and SovereignDuring 2011, the Bank’s long-term Standard & Poor’s (‘S&P’)counterparty credit rating was downgraded by three notchesto CCC and remains below investment grade. Similar actionwas taken by Moody’s during the period (rating cut from Ba3to Caa2) and by Fitch (rating cut from BBB- to BB-). In takingthese rating actions, credit rating agencies cited concernsabout the Irish Government’s publically indicated preference toimpose losses on the Group's senior unsecured andunguaranteed debt holders.Eurozone riskDuring 2011, the economic, monetary and political uncertaintyin a number of eurozone members increased. The cost andavailability of funding available to European banks, includingthe Group, may be affected by any further escalation of thesovereign crisis, and could also materially adversely affect theGroup’s financial condition and results of operations due tothe impact on economic conditions in the eurozone and theEuropean Union in general.Liquidity and funding riskLiquidity and funding risk is the risk that the Group does nothave sufficient financial resources available at all times to meetits contractual and contingent cash flow obligations or canonly secure these resources at excessive cost. This risk isinherent in all banking operations and can be affected by arange of institution-specific and market-wide events. TheGroup’s liquidity may be adversely affected by a number offactors, including significant unforeseen changes in interestrates, ratings downgrades, higher than anticipated losses onloans and disruptions in the financial markets generally.In response to major market instability and illiquidity,governments and central banks around the world haveintervened in order to inject liquidity and capital into financialmarkets and, in some cases, to prevent the failure ofsystemically important financial institutions. These variousinitiatives to stabilise financial markets are subject torevocation or change, which could have an adverse effect onthe availability of funding to the Group.In common with many other banks, the Group’s access totraditional sources of liquidity remains constrained. The Bankhas experienced greater reliance on Government and monetaryauthority support mechanisms due to the AIB Transfer Orderand the maturity of debt securities. The Bank’s continuedreliance on support from central banks includes access tospecial funding facilities, a key factor in ensuring successfulimplementation of the operating plan as well as adapting topotential regulatory developments. The funding support fromcentral banks and monetary authorities amounted to €42.2bnat 31 December 2011, representing 87% of total funding, andincluded €40.1bn borrowed under special liquidity facilities.This support increased from December 2010 (70% of totalfunding) following the transfer of certain Irish and UK depositsand NAMA bonds to AIB and AIB UK under the AIB TransferOrder.Should monetary authorities materially change their eligibilitycriteria or limit the Bank’s access to such special fundingfacilities without providing an alternative funding source, thiswould adversely affect the Group’s financial condition andprospects. Additionally, credit rating downgrades may impacton the eligibility of assets currently pledged as collateral forcentral bank open market sale and repurchase agreements.Also during the period the Irish Sovereign’s senior debtsuffered further credit rating downgrades. S&P lowered theirrating from A to BBB+, Moody’s adjusted their rating fromBaa1 to Ba1, and Fitch reduced their rating from BBB+ (Stable)to BBB+ (Negative).19