BACKGROUND:MINISTER FOR Finance Michael Noonan has reiterated that the banks have enough capital to write off mortgage debt as a result of heavy injections of State capital after the stress tests in March.
Those ests determined that the Irish banks required a further €24 billion in addition to the €46 billion already pumped in – to cover all expected and even some unlikely losses on their loans.
The unlikely losses were considered on the basis that the tests had to reassure highly sceptical financial markets that there were no more black holes in the banks.
To improve the credibility of the tests, the Central Bank asked the world’s largest asset management company, BlackRock, to carry out its independent analysis of the potential losses, particularly on mortgages at the banks.
BlackRock examined the percentage of home loans in arrears and estimated how many would default and what the losses would be if the banks had to sell properties to recoup the loans. It estimated possible losses over the lifetime of the loans, which for mortgages was up to 30 years.
The company expected losses of €9.9 billion on €140 billion of mortgages at AIB, Bank of Ireland, EBS building society and Irish Life and Permanent, including €98 billion in Irish residential mortgages.
In a worst-case scenario, this would rise to €16.9 billion.
In deciding how much the banks needed, the Central Bank took account of 69 per cent of the “lifetime” stress case losses, as those full losses were thought unlikely.
It estimated the banks would lose €5.8 billion on their residential mortgages, rising to €9.5 billion in a stress-case scenario.
The €24 billion bill set for the banks covered potential losses somewhere between these two figures as it included a buffer to cover some of the stress case.
The difficulty for the Central Bank’s tests is that the capital bill was set to cover the banks’ costs of working through problem loans.
It did not take account of any blanket debt forgiveness scheme but only informal scenarios where banks could push out the term of the loans, which did not mean debt being forgiven, just postponed.
The Central Bank is concerned that a formal scheme may increase the number of “won’t pay” borrowers in the hope that they can avail of new benefits for genuine “can’t pay” hardship cases.
The stress tests set a buffer to ensure the banks were well covered to cope with this crisis, but any formal debt relief scheme that has the potential to change borrower behaviour could increase losses not considered in the tests.