Dublin: Stress Tests Show That Banks Need €24bn Of Further Capital: UPDATED

31 Mar

FILE - This is a Thursday, Nov. 4 2010 file photo  of a Bank of Ireland building in Dublin, Ireland. Bank of Ireland shares fell 7 percent Wednesday M

 AP – FILE – This is a Thursday, Nov. 4 2010 file photo of a Bank of Ireland building in Dublin, Ireland. …

The Central Bank has published crucial stress tests on the Irish banks, which show that €24bn of capital will need to be raised by the banks to help them cope with potential losses.

 Patrick Honohan - Said aim was to create a sustainable Irish banking system
Patrick Honohan – Said aim was to create a sustainable Irish banking system
The Central Bank has published crucial stress tests on the Irish banks, which show that €24bn of capital will need to be raised by the banks to help them cope with potential losses.

The €24bn is comprised of:

– €13.3bn for AIB

– €5.2bn for Bank of Ireland

– €1.5bn for EBS

– €4bn for IL&P

The figures are only appropriate in an ‘adverse and unlikely’ situation, according to Central Bank Governor, Prof Patrick Honohan.

The Central Bank today published the Financial Measures Programme Report, which details the outcome of its review of the capital and funding requirements of the domestic Irish banks.

The Central Bank also set targets for how far the banks must reduce in size, through a combination of run-downs of assets and sales of assets.

Prof Honohan said the aim was to create a sustainable Irish banking system through a combination of recapitalisation, deleveraging and reorganisation.

Prof Honohan said smaller, but sounder, Irish banks should be in a better position to provide loans and other financial services to households and businesses to support the Irish economy.

The stress tests were based on estimates that, in a worst-case scenario, the four banks could lose almost €9.5bn from residential mortgage loans over the next three years.

In total, the assessment found that the banks could face losses of €37.7bn over the next three years under the worst-case, or ‘stressed’ scenario.

The tests found that banks would need €18.7bn in new capital to meet new Central Bank targets, but the bank also added another €5.3bn to bring what it called ‘a layer of resilience’ in case of possible further losses after 2013.

Mr Honohan has said there would be majority state ownership in all banks.

He said that this had proven to be one of the costliest banking crises in history.

Speaking about mortgages, Mr Honohan said he did not predict a lot of home repossessions but said the stress tests were predicting a worst case scenario.

He said he did not predict anything like the number of home repossessions that are predicted and calculated in the stress tests.

He said the Central bank also has a role in consumer protection and would work with the banks to ensure there is better and more considered processes for working out distressed loans or mortgages.

The Financial Regulator, Matthew Elderfield, said banks needed to be up-front with customers; he said people should approach banks and agree a deal if they have loans which are in difficulty.

Noonan announces bank restructuring details

Speaking in the Dáil after the announcement of the tests, Minister for Finance Michael Noonan announced details of the restructuring of the banking sector.

He said there will be two universal, full-service banks and a restructured Irish Life & Permanent.

What he called the ‘first pillar’ bank will be based on Bank of Ireland, with the second one a combination of AIB and the EBS building society.

Mr Noonan said that two new strong universal banks will be created.

He said that 30 September, 2008 will go down as the blackest day in Ireland since the civil war.

He said on that day the decision was made to support and maintain Anglo Irish Bank.

He said the previous Government ducked and dived and procrastinated, that it did not fix the banks and that it paved the road to disaster.


Ireland’s beleaguered banking sector will require a further €24 billion recapitalisation, pushing the total cost of bailing out the banks to €70 billion.

The figure was determined by the Central Bank’s long-awaited stress tests on Bank of Ireland, Allied Irish Banks, Irish Life and Permanent and the EBS.

This will be the fifth attempt to draw a line under the banking crisis, which have so far cost the State €46 billion, and will bring the entire banking sector under Government control.

It also means the State will require substantially more of the €35 billion earmarked for the banks under the EU/IMF bailout deal than previously envisaged.

The recapitalisation will coincide with a major restructuring of the sector, the details of which are being outlined by Minister for Finance Michael Noonan in the Dail.

The stress tests, which gauged the banks’ ability to cope with unanticipated downturns in the economy, indicated AIB will need a further €13.3 billion based on estimated losses.

Bank of Ireland, which is already 36 per cent State-owned, will require a further €5.2 billion while Irish Life and Permanent will need a further €4 billion, bringing both lenders into majority Government ownership for the first time.

EBS will require about €1.5 billion and is now expected to be merged with AIB. Anglo Irish Bank and Irish Nationwide were not tested as they are to be run down over time.

Central Bank governor Patrick Honohan said the intensive nature of the tests were designed to respond to ”market scepticism” about the Irish banks.

He said a pre-requisite for banks to return to normal is that they have capital to meet even the markets “gloomy prognostications”.

“This is what we regard as an adverse and unlikely scenario but we don’t expect it to be this bad,” Prof Honohan said.

Share trading in BoI and AIB was temporarily suspended today, pending the stress test results and any subsequent related announcements by the banks.

The Central Bank sought the suspension “to avoid the possibility of a disorderly market due to the circulation of information or rumours during the day”.

“The upshot of the increased scrutiny, oversight, forecast conservatism and loan-deposit timetable is that the holes to be filled in the Irish banking system will swallow the entire €35 billion,” Brian Devine, chief economist at NCB Stockbrokers said.


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