Banks may need more capital with new 'stress tests'
OUR banks got another €24bn a few months ago in the bailout to end all bailouts -- so why is the issue of bank recapitalisation back on the agenda again today?
As part of an effort to restore confidence in Europe's banks, the European Banking Association (EBA) is expected to launch fresh 'stress tests' that will demand banks hold €9 of the purest kind of capital, dubbed 'core tier one', for every €100 of their loans.
The EBA standard is 9pc core tier one capital in banking lingo. Our banks were capitalised to the tune of 10.5pc core tier one ratio this summer. That doesn't mean we're in the clear though, as the EBA could take a different view on a number of things including:
The next EBA tests are expected to force banks to mark down their holdings of sovereign bonds, so every €100 of government bonds bought can no longer be valued at €100.
Irish debt is typically trading at about 80pc of its issue value, so if banks were forced to mark their Irish debt to market, they'd take a hit of about 20pc.
At the end of June, the three quoted banks had about €12bn of Irish government debt between them, since then they've bought about €3bn or so. If they were forced to take a 20pc hit on that, that's €3bn. Some fear the hit could go beyond the current market prices, since sovereign bond prices may fall after Greece's debt deal is announced today.
Many fear that sovereign haircuts could spill over to the €24bn of NAMA bonds held by AIB -- €19.5bn -- and Bank of Ireland (BoI) -- €5bn.
The NAMA bonds are secured on the assets that the banks originally transferred to the agency, so in that sense they are seen as less risky than traditional sovereign bonds. That said, NAMA bonds are still ultimately guaranteed by the State, and so they could face markdowns in the latest EBA tests.
The banks' new capital demands will also be influenced by their level of expected profits over the coming years. The Irish stress tests assumed operating profits of about €1.4bn at BoI over 2011/2012, operating profits of €240m at Irish Life & Permanent (IL&P) and operating losses of €463m at AIB. But since then the economy has gotten worse.
Core Tier One
There's been some discussion that the EBA might disallow "deferred tax assets" from the core tier one figure, since they won't be allowed under the Basel III bank capital rules.
This would probably hit the Irish banks collectively by less than a billion.
There's also been some confusion about whether BoI's €1.8bn of preference shares will be included as core tier one, and whether the €3bn of 'contingent convertible' capital put into the banks by the Government would count.
One view is that the so-called 'cocos' would have to be converted into equity in order to be counted, something that would dilute down existing shareholders.
The good news, though, is that most analysts don't think our banks are going to need material extra capital as a result of the next EBA review. AIB and IL&P got some of the best results in the EBA review in July, and have plenty of headroom.
BoI was closer to the pass mark, but recent analysis from Goldman Sachs suggested the bank should clear the latest hurdle without having to find more cash.