A guarantee has been provided for the Off-Balance Sheet (OBS)/ derivative exposures of Anglo Irish Bank. This includes foreign exchange instruments, interest rate instruments and other hedging arrangements. Anglo is the only institution that has availed of such a guarantee. As with all banks, Anglo Irish Bank is exposed to a number of risks and uncertainties in the normal course of its business activities. These risks include market risk (arising from Anglo's exposures to interest rate and currency movements). Derivatives are used by Anglo Irish Bank solely for the management of these risks and are not entered into for any speculative purposes. The bank's balance sheet exposure to these risks taken together with the risk mitigation provided by these derivatives are managed within risk limits which are approved by the bank's board of directors.
Anglo Irish Bank had recently indicated to the authorities that owing to the bank's financial situation and recent ratings actions their derivative counter parties required the provision of such a guarantee for such transactions with the bank. The ELG does not cover such liabilities.
The situation was reviewed by the NTMA who, based on the bank's concerns, recommended to me that the guarantee should be put in place given the financial issues the bank was currently experiencing. The Governor of the Central Bank was also consulted and the Central Bank confirmed it was agreeable to such a guarantee to help manage Anglo's balance sheet risks.
Under the terms of the guarantee package, Anglo management must continue to manage these derivative positions within pre-approved risk limits approved by the bank's board of directors.
It was concluded that it was important to avoid exposure to serious operational risks in the bank which could potentially arise without the continued support of the counter parties.