Mr. Andy Harkness:

In response to the financial crisis in 2008, the State undertook a succession of interrelated measures to stabilise the banking system. The economic impacts of the measures are both complex and long term. Chapter 3 was compiled to provide an estimate, as at end-2016, of the net financial cost of the measures. The chapter updates a previous report which gave the position as at the end of 2014.

The sums involved in recapitalising banks, including covering their losses, are relatively straightforward to identify. Income accruing from the investments, and capital repayments or disposals of investments, are also generally clear. Less easy to identify are the costs incurred by the State in funding the investments, which are substantial. Estimation procedures are required to identify those funding costs, and in arriving at a valuation of the State's residual interest in banking assets.

The results of the examination analysis are summarised in figure 3.1 in the chapter. The overall investment in the banks, including the value of shares accepted in lieu of dividends, totalled €66.8 billion. That resulted in additional State borrowing and the utilisation of State investment funds, at an estimated cost of €14.8 billion up to the end of 2016. Against that were receipts totalling just over €25 billion from disposals of shares, income from the investments, fees for bank liability guarantees and related Central Bank surpluses.

By the end of 2016, the estimated net cost to the State of measures taken to stabilise the banking system was €56.5 billion. When the estimated value at that date of the State’s remaining shareholdings in the banks and NAMA’s projected surplus are taken into account, the estimated net outturn is a cost of around €39.9 billion.

After taking account of the estimated residual value of the State’s holdings in the financial institutions, the estimated net outturn, as at 31 December 2016, for each institution is as shown in figure 1.

We estimated that, up to 31 December 2016, support for the IBRC had cost the State a net €35.8 billion, support for AIB had cost a net €7.9 billion, support for Permanent TSB cost a net €1 billion, and there was a net surplus of €1.8 billion in respect of the State’s support for Bank of Ireland.

The projected €3 billion in receipts arising from the winding up of NAMA offsets a part of those net losses but cannot be attributed across the rescued institutions. I emphasise that all those estimates are at a point in time, and that the final cost of the measures will not be identifiable for some time to come. In particular, the cost of servicing residual banking-related State debt will be an ongoing economic cost. It is estimated that this cost will be around €1.7 billion for 2017. In the longer term, this cost is estimated at between €1 billion and €1.4 billion annually, if the State’s average cost of borrowing is in the range 2.5% to 3.5% a year. To put that in context, the NTMA’s average cost of borrowing was around 3% at end June 2017.

Of course, other factors will also be at play in determining the final overall cost of the stabilisation measures. These will include the amount the State ultimately realises from the disposal of its remaining bank investments, and the period for which the Central Bank continues to hold Government bonds related to redemption of the IBRC promissory notes.