Banks cannot challenge results

The Central Bank has resolved that Ireland’s banks will not be able to challenge the findings this week of crunch stress tests, an exercise which will clear the way for the fifth bank bailout since the 2008 guarantee.

The participating institutions – Bank of Ireland, Allied Irish Banks, Irish Life Permanent and the Educational Building Society – will not be able to seek any lower loan loss estimates in the tests or revised capital requirements.

The tests are expected to show a further capital hole at the lenders of between €18 billion and €23 billion. This could push State injections into the banks from €46 billion to between €64 billion and €69 billion.

There has been speculation for weeks that the tests would show a need for more than the €35 billion in the EU-IMF package. But as preparations intensify to publish the test results on Thursday afternoon, the European Commission indicated there was enough money for new capital injections in the €35 million.

“We have no reason to believe that the financial assistance programme would not be sufficient,” said the spokesman for economics commissioner Olli Rehn.

After flaws in the last Irish stress test were blamed for undermining confidence in a wider test of European banks, the Central Bank has been seeking to protect the independence and integrity of the process.

The exercise is under close scrutiny in Brussels and Frankfurt, particularly in light of Government claims it could present an “unsustainable” debt burden to the State.

In anticipation of the test results, the ECB is preparing a “medium-term liquidity facility”, tailor-made for the Irish banks, to replace an existing scheme under which the banks receive some €60 billion in short-term liquidity funding.

The estimate of potential losses on the banks’ loan books by consultants BlackRock under different scenarios are said to be particularly severe.

Although the banks can query the assessment of potential losses by pointing out any inaccuracies in the original loan information, the Central Bank is keen to protect the rigour of the tests and the independent verification of the results.

This reflects pressure to ensure the exercise is stringent enough to allay concern about the state of the banks in the international markets.

Some €10 billion from the EU-IMF plan was set aside for a capital injection last month but that was postponed by then minister for finance Brian Lenihan. The additional €8 billion to €13 billion will be made to protect against potential further losses.

Any requirement on Bank of Ireland to raise more than the €1.5 billion due last month would raise the strong likelihood of the bank falling into majority Government control, effectively nationalising a fifth institution. However, the institution may still have a slim chance of avoiding that by raising cash privately.

The amount the Government will have to pump in will depend on whether losses are imposed on bondholders and whether losses are incurred selling excess loans to reduce the size of the banks.

BlackRock, the world’s largest asset manager, examined potential losses on the full life of the loans, which runs in some cases to 25 years. However, the Central Bank’s capital stress test covers the three-year period to the end of 2013.

A key challenge for the Central Bank will be to show the immediate capital requirements fall short of BlackRock’s estimated loan losses, as it believes the banks will be able to make profits over that time to cover bad loans on their own.

“There is no banking system in the world capitalised for a 25-year stress test,” said one well-placed source.

The tests will focus in particular on residential and buy-to-let mortgages on properties acquired at the peak of the boom. A liquidity stress test, running in tandem with the capital test, will show how much assets each bank must offload so they can fund themselves with deposits rather than having to borrow.