ECB insists on seeing bank stress test results

The Central Bank must submit the preliminary results of its balance sheet assessments of the Irish banks to European authorities by the end of October before any decision on a possible exit mechanism for Ireland can be made.

The results of the test – the first examination of the Irish banks since March 2011 – will be scrutinised by the European Central Bank and European Commission next month as part of negotiations on Ireland's exit from the bailout.

“The question of exit will only be an issue once we have clarity on the results of the ongoing stress tests and balance sheet assessments that are being undertaken for the Irish banking system,” a senior euro zone official said yesterday. However, he stressed that Ireland’s strong funding position meant that a credit line might not be necessary.

“Market conditions are benign, the cash buffers are significant so it’s not as if Ireland is in need of any financing, near term or medium term,” the official said, pointing out that the market view was that Ireland could successfully tap markets across most parts of the yield curve.

Balance sheet assessments of AIB, Bank of Ireland and Permanent TSB have been ongoing since late summer, with Boston Consulting Group contracted by the Central Bank as independent assessors, Ernst and Young examining loans and impairments at AIB and PTSB and KPMG working on Bank of Ireland.

The start of the assessments followed tensions between the Irish government and European authorities over the timing of the tests. While the terms of the IMF-EU bailout required a review of Irish banks before the end of the programme, Dublin protested that Ireland’s tests should be part of the euro-wide stress tests to be undertaken early next year by the European Central Bank as it prepares to take over direct supervision of the euro zone’s biggest banks.

While the balance sheet assessments currently being undertaken will feed into next year’s tests, which will be run by the ECB in conjunction with national supervisory authorities, the preliminary results of the Irish tests must be submitted to EU authorities before the end of the bailout.

Last month, Merrion Stockbrokers said that it did not expect the reviews to expose further capital deficiencies in the banks, pointing out that the State could convert the €2 billion outstanding contingent capital notes in AIB and PTSB to equity if further capital is needed.

While euro zone finance ministers meet in Brussels on Monday, any serious discussion of Ireland’s exit strategy from the bailout is not expected until November.