Bank plans to raise €200m a year with asset-covered security programme,writes Cliff Taylor

Banks are commonly associated with managing customers' money. But an increasing challenge is to manage their own balance sheets, particularly crucial at a time when competition is squeezing margins on their traditional deposit and lending businesses.

This week Bank of Ireland announced an initiative in this area, planning to raise €200 million a year over the next five years through an asset-covered security programme, a new brand of financial instrument that is a first cousin of mortgage securitisation.

Mick Sweeny, chief executive of Bank of Ireland Global Markets, says the issue is an important step in capital management for the bank, leveraging the expertise of its trading arm. Legislation to allow such issues was introduced a couple of years ago. Depfa, the international bank based in the IFSC, has availed of this legislation, but Bank of Ireland is the first domestic financial institution to take advantage and use a mortgage book as security.

The issue for the bank - in common with other Irish financial institutions - is that slow-growing deposits are not providing enough cash to fund the rapid growth in loan demand. This means institutions have had to resort to expensive money-market fund-raising.

The asset-covered issue will, says Mr Sweeney, offer an attractive rate of five to 10 basis points (0.05 to 0.10 of a percentage point) over LIBOR - the benchmark London money market rate. Technically, he explains, the scheme works by moving a tranche of mortgages into a separate deposit credit institution, which remains as part of Bank of Ireland. This institution then issues a bond, offering investors a fixed interest rate return.

While similar to securitisation, it is structured differently, with the assets remaining on the bank's balance sheet. The aim is to acquire an AAA credit rating for the issues. This - and the "jumbo" size of the issue, which ensures liquidity for investors - should then ensure that the bond will be attractive to a wide range of institutional investors.

The potential to get a wide spread of investors from different parts of the world and different types of institutions is a key advantage, explains Mr Sweeney. "We can play with the big guys," he explains, with long-term advantages in terms of securing funding, global linkages and awareness of the bank's stock from potential equity investors.

The planned issues - which will commence later this year subject to regulatory approval - "show the intent of being first to market" in developing new instruments, according to Mr Sweeney.

The global markets division headed by Mr Sweeney was recently "rebranded" from the former Bank of Ireland Treasury and International, and trades actively on the company's own book, with a young, casually-dressed team taking positions in every imaginable market from new headquarters in Dublin's Talbot Street. Its activities have contributed significantly to group profits, chipping in some €30 million in the past two full financial years and €15 million in the first half of the current financial year, which ends on March 31st.

Mr Sweeney, a native of Cork, previously headed the bank's treasury operations in London, was head of trading in global markets before being promoted to his current job a little over a year ago. A keen marathon runner - he will run in London next month - he heads a division with 600 people, which manages gross balance sheet assets of some €70 billion.

Apart from being "banker to the bank", Global Markets also serves a large customer base of 13,000 retail, corporate and institutional clients. Mr Sweeney's goal is to bring the same creativity and "global reach" to bear for these clients in what is a highly competitive market. Here a key initiative is the introduction of a US dollar liquidity fund, currently managing some €500 million, mainly on behalf of multinational clients. The fund - named as the leading one of its kind by iMOneyNet, the market analyst - was a conscious decision by the bank to take an aggressive approach to moving into a new area, he says.

By offering a home for excess customer funds it carries an opportunity cost for the bank, as otherwise the money could be held on its own balance sheet. However, as international banks start to market such vehicles, the choice was to wait for others to target existing clients, or develop new products itself, Mr Sweeney says. The approach is to offer corporate clients an active "partnership" approach to managing their funds.

Sterling and euro funds are planned to follow and he believes that all three could attract assets of up to €1 billion. Here the competition is more global than local. With a tap on a computer key, Irish-based firms can as easily deal with a bank in London or New York as the local banker, a key challenge facing the Irish financial institutions in the years ahead.