Bank of Ireland and AIB pass European stress tests

Fri, Jul 23, 2010, 01:00

Bank of Ireland and Allied Irish Banks have passed crucial EU stress tests, European authorities confirmed today.

The Central Bank said the tests confirmed the current capital-raising plans for both banks were sufficient at this stage.

The net outcome of the process to asses the health of the region’s leading banks was published in a joint statement from the Committee of European Banking Supervisors (CEBS), the European Commission and European Central Bank (ECB).

The tests required banks to meet a 6 per cent Tier 1 target capital ratio. Additional stress parameters to both banking and trading books consistent with “sustained sovereign stress” were also applied.

Seven of 91 European banks failed the stress tests and showed an overall capital shortfall of €3.5 billion, the organisers of the tests said.

Both Irish banks, which between them control nearly 53 per cent of domestic retail banking sector assets, were also subject to further tests by the Irish financial authorities, in the form of higher loan loss rates for both the Nama loans and the non-Nama investment and development property loans.

“This resulted in a more demanding stress test than was prescribed by original process due to the specific loss rates applied to these exposures,” the Central Bank said.

Financial regulator Matthew Elderfield said the test were set at “a severe stress level” and it is therefore consistent with our earlier exercise that the Irish banks have achieved the target level of capital in the EU process.

Commenting on the European-wide results, the CEBS said that arising from the adverse scenario after a sovereign shock, seven banks would see their Tier 1 capital ratios fall below 6 per cent. About 10 banks had been expected to fail.

The euro remained lower versus the dollar as regulators began releasing results of stress tests emerged.

"This strikes me as too lenient, everybody's getting A's," said Win Thin, a senior currency strategist at Brown Brothers Harriman and Co in New York. "It's too easy. No surprises and no high-profile failures."

CEBS, which is based in London, asked banks to provide all holdings of government bonds in their trading and bank books but the left the question of publication up to banks and supervisors. Whereas disclosure might end uncertainty about the banks’ exposure to sovereign paper issued by weak euro countries such as Greece, it could fuel demands for additional capital.

Minister for Finance Brian Lenihan welcomed the outcome of the test saying the two mains banks passed because of “decisive and prompt action taken earlier this year”.

He said: “Today’s results vindicate the capital levels set by the Financial Regulator and the Central Bank following its prudential capital assessment review last March.

“This demanding capital assessment took account not only of the impact of transfers to the National Asset Management Agency but also of the potential losses on other parts of the banks’ loan book.”

“The actions the Government has taken have ensured that the Irish banks are in a position to withstand a variety of adverse shocks,” he added.

Fine Gael’s Michael Noonan, while also welcoming the result, said it had only been achieved at “enormous risk to taxpayers”.

He said: “Banks can never be allowed to forget that they only reached this stage because taxpayers have put their collective necks on the line.

“We have seen variable mortgage rates creeping up over the last few months, even though the European Central Bank has kept its own rate untouched.

“The least that taxpayers should now expect is for Bank of Ireland and AIB to set an example by cancelling planned increases in variable mortgage rates. It’s the least that taxpayers deserve.”

Additional reporting: Bloomberg/Reuters