Ireland’s prospects good after bailout exit, Noonan says

Results of Central Bank asset review tests contain ‘no surprises’, Minister claims

Minister for Finance Michael Noonan said today the results of the recently-concluded asset review tests on Irish banks contained "no great surprises" for him.

Both Bank of Ireland and AIB indicated this morning that they were well capitalised. However, in the case of Bank of Ireland, the Central Bank has extrapolated provisions on its Republic of Ireland mortgage book of €360 million above the bank's own estimate.

Speaking before a conference on the future of banking in Europe hosted by the Institute of International and European Affairs in Dublin today, Mr Noonan said: "We always expected that some of the capital buffers that we put in place two years ago would be eaten away. Debt was crystallised and that has happened."

The Minister said the tests were “technical” in nature and it was a matter between Bank of Ireland and the Central Bank to resolve.

In his conference speech, Mr Noonan said Ireland’s prospects are good for when the country exits the IMF-EU bailout on December 15th.

“Trading partner growth has also resumed and, while challenges and risks remain, external prospects are at their most benign for Ireland for a number of years,” Mr Noonan said.

“Recent indicators are showing the continuation of the recovery. Employment grew robustly at over 3 per cent year-on-year in Q3, property prices have begun to grow again and household debt (although high) is on a downward trajectory,” he added.

Mr Noonan said confidence in Irish banks is beginning to return and has helped reduce their reliance on Eurosystem funding, which is now a “fraction of what it was at the beginning of the [TROIKA]programme”.

“This is further evidenced by the successful conclusion of significant funding transactions by both AIB and PTSB in the international debt markets, raising a combined total of €1 billion of long term funding. Both transactions, which were heavily oversubscribed, represent another significant step forward in the rehabilitation of the Irish Banking system,” he added.

He said banking union should benefit SMEs seeking to access funding.

While a core objective of the Banking Union is to break the bank sovereign nexus, there should be knock-on benefits which ought to deliver significant benefits to the real economy.

“The major benefit, as I see it, is that the cost of bank finance to SMEs and households should converge to the euro area average,” he said.

The Minister said small businesses in Ireland should be able to borrow at the same rate as its equivalent in other euro area countries, assuming that they both have the same level of credit risk, as the country risk has been eliminated.

“This is particularly important for a country such as Ireland where our cost of funding has been consistently higher than the core euro area countries over the last number of years. Banking union is an important step in removing this competitive disadvantage and should contribute to strengthening the domestic economy.”

Under banking union, the European Central Bank will directly regulate the biggest institutions in each country from November 2014 with national authorities continuing to oversee other smaller banks.

Mr Noonan said over the next 12 months the ECB will carry out an asset quality review and stress tests for the most significant banks in the euro area. “This is seen as an important exercise by the ECB, as they want basically a ‘clean bill of health’ for the banking sector in advance of them taking control of supervision.”

The Minister said Ireland favours a backstop arrangement to the Single Resolution Fund while its funding levels from banks in member states are built up over a period of years.

“Our concern is that if there is a significant call upon the Fund in its early years this could have financial implications for Member States unless sufficient monies are available in the [RESOLUTION]fund,” he said.

“In our view, the most appropriate means of achieving this objective is to have a credit line available from the ESM [European Stability Mechanism] in such circumstances. Not all member states necessarily agree on the backstop issue and in particular on how it should be funded.

“However in my view, the backstop is necessary to achieve the central objective of the SRM – that is – to break the link between the sovereign and the banking sector.”

Ciarán Hancock

Ciarán Hancock

Ciarán Hancock is Business Editor of The Irish Times