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Friday 2 November 2018 Irish banks face ‘toughest ever’ European stress tests

Regulators’ ‘worst case’ scenario by factors in house prices here falling by 5.1pc
HIGH stocks of bad loans and a relatively pessimistic ECB view of Irish growth prospects will weigh on AIB and Bank of Ireland in the EU’s latest bank stress test results today.

However, both banks go into the current process in better shape than in 2016 when they were ranked second and fourth weakest in Europe by regulators.

The stress tests by the European Banking Authority cover 48 of Europe’s biggest banks and have been billed as the toughest ever.

Permanent TSB is seen as the most vulnerable of the Irish-owned banks to a crash, but is too small to be included in the current tests.

The aim of the process is to ensure that banks have enough capital to withstand shocks and to ensure that taxpayers won’t end up footing the bill to rescue them if there was another recession.

There is no “pass” or “fail” in the tests which model a so-called baseline scenario in which the economy grows steadily for the next three years, then one in which there is a sharp hit to growth – in Ireland’s case amounting to an 11pc shortfall from main forecasts. The “worst case” scenario also sees house prices here falling by a cumulative 5.1pc.

It is under this scenario that the loan portfolios of AIB and Bank of Ireland would be hit hard.

A base level for the measuring risk is the ratio of Common Equity Tier 1 capital, which measures a bank’s capital against its assets.
While no level has been set in this assessment, the 2014 ratio of 5.5pc is viewed as the unofficial hurdle ratio.

Bank of Ireland’s most recent ratio was 15.1, based on its third-quarter earnings, while AIB’s stood at 17.9.

In 2016, AIB had a CET1 ratio of 4.3 based on the adverse scenario, while Bank of Ireland was at 6.1. “The stress test results might lead banks to issue more capital,” rating agency DBRS said in a preview of the results.

The 2014 tests were criticised for putting Irish banks in a worse starting position than their peers as the rules penalise countries that have experienced a banking crisis and gave little or no credit for their success in reducing non-performing loans. The current worst outcome economic scenario puts Ireland in with seven Eastern European countries as well as Luxembourg, Cyprus and Malta in applying heftier economic and financial shocks so that the 2020 growth outcome is negative, as part of the test methodology.

The downside applied to Ireland’s growth prospects would see the economy 0.2pc smaller by 2020 in the worst outlook and that is a full 11 percentage points smaller than under the baseline scenario, a figure that is larger than the EU average of 7.8pc and the eurozone’s 8.3pc. In addition, a property crash is modelled into the extreme scenario, under which house prices fall by a cumulative 5.1pc by 2020, a level that is 19.8pc below the base assumptions.

Ireland’s financial sector as a whole is far less fragile than it was in the run-up to the financial crisis.

Data released this week showed that far from a borrowing binge, consumers here were squirrelling away money and that deposits at banks hit an all-time high of $103bn.

Mortgage and other consumer lending remains low, raising concerns among economists that the pace of economic expansion here could slow.

Among foreign banks, German giant Deutsche is will be watched closely after it posted three years of losses while Italy’s banks are expected to be in the firing line and an adverse performance in the tests could fuel more anxiety over their resilience and over Italy’s ability to withstand a shock in its confrontation with the European Union over the country’s budget.

Italian banks have large holdings of the country’s debt which has come under pressure since a eurosceptic coalition took power earlier this year.

The latest economic growth data showed the country was flat-lining.

Weak growth will feed into concerns over Italy’s ability to service its debts, although any action by the European Commission is not expected until next year.

Article Source: http://tinyurl.com/kbwqb42


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