AIB and BoI 'vulnerable to a downturn' - Central Bank
Bank of Ireland and AIB remain "adequately capitalised" but are vulnerable to a downturn, Central Bank Governor Philip Lane has said.
It was a view shared by global ratings agency Standard & Poor's (S&P), which claimed the State's two main banks had made substantial progress in dealing with bad loans, but were susceptible to another financial shock.
It comes after Europe-wide stress tests concluded that AIB and Bank of Ireland were among the most exposed to another global recession.
Prof Lane told the Institute of International and European Affairs (IIEA) that, compared to other EU member states, the Irish banking system had experienced higher loan loss rates since 2008.
"The primary message from the exercise is that the Irish banks included in the [test] sample are adequately capitalised but remain vulnerable to a downturn, especially in relation to the continued workout of problem loans and the sustainability, under stress, of current profitability levels," Prof Lane said.
Europe-wide stress tests, released on Friday, gauged how banks would survive a recession - and revealed that both AIB and Bank of Ireland fared poorly. The tests measured lenders' ability to weather a severe recession over three years, and AIB was the second-worst performer in the so-called adverse scenario.
Bank of Ireland, the only other Irish bank tested, fared better, but was the fourth-weakest out of 51 banks tested.
Analysts were more upbeat on the health of the banks, saying the tests were harsh on Ireland and skewed against our banks. They also pointed out it was a 'point-in-time' exercise from the end of last year and did not take account of improvements in banks' balance sheets since then.
S&P said the main reason for the poor performance was weak asset quality of the banks, and losses on bad loans.
"While Irish banks have made substantial progress in reducing the stock of NPLs [non-performing loans] and strengthening their credit fundamentals, they remain vulnerable to a sharp downturn," the S&P note to investors said.
Prof Lane also said that because of the economic links between Ireland and the UK, and Ireland's high level of debt, the country is "especially vulnerable" to the negative effects of Brexit.
"In view of its tight economic and financial linkages to the UK and its high levels of private and public sector debt, Ireland is especially vulnerable to any Brexit-related reversal in international financial sentiment," he said.