Irish banks undergo EU stress tests today

BANK OF IRELAND (BoI) and Allied Irish Banks (AIB) are poised to pass crucial EU stress tests today as the European authorities…

BANK OF IRELAND (BoI) and Allied Irish Banks (AIB) are poised to pass crucial EU stress tests today as the European authorities try to boost confidence in the markets with health checks on 91 of the region’s leading banks.

Amid lingering doubt as to the scope of the exercise, there were indications late last night that the test methodology would be published this morning in an effort to boost confidence in the initiative.

“I don’t think many banks will fail,” said a source briefed on the process. However, it is widely held that Spanish savings banks and German regional banks will require tens of billions of euro in fresh capital.

Crucial to the success of the initiative is the extent to which holdings of doubtful government debt are disclosed. Officials at finance ministries throughout Europe participated in a telephone conference yesterday to make final preparations for the publication of the results around teatime.

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The net outcome of the process will be published in a joint statement from the Committee of European Banking Supervisors (CEBS), the European Commission and European Central Bank (ECB).

The key question in advance of the tests is whether the detected capital shortfalls in any banks convince the markets that the tests were an adequate assessment of the vulnerability in the system. Bank stocks rose yesterday in a sign that investor anxiety about the tests was easing.

A further consideration for the European authorities is whether the tests force any government into a situation in which they end up leaning on the euro zone rescue net for fresh capital. A source with knowledge of Irish tests indicated yesterday that the current capital-raising plans for BoI and AIB would be upheld in the test process. The two State-backed institutions were stress-tested by the Financial Regulator in Dublin last March, so the examination led by CEBS stands as a key test of the credibility of the new management in the Irish regulator.

The sovereign risk profile in the two banks is perceived to be smaller than some of their European peers.

The extent to which the tests examined any pressure on their holdings of Irish sovereign debt, if at all, was unclear last night.

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.