Wednesday 18 October 2017

ECB stress test gives banks rate rise comfort

ECB president Mario Draghi
ECB president Mario Draghi

Gretchen Friemann

The European Central Bank's latest stress test results show banks with a large portion of variable rate loans will fare better when interest rates rise - appearing to cast Irish banking in a favourable light.

While AIB and Bank of Ireland last year emerged as some of the worst performers from the ECB stress tests, the conclusion from this latest investigation appears to favour domestic banks.

Davy analyst Emer Lang, stressed the Irish banks possess comparatively high volumes of variable rate loans given the number of tracker and standard variable rate mortgages, which she described as "positive" in light of the latest ECB assessment. She pointed out that AIB has previously disclosed a interest rise of 100 basis points would be worth an additional €110m in income.

The central bank yesterday revealed the results of a test examining how prepared the region's banks are to a sudden rise in interest rates.

After subjecting the lenders to an array of hypothetical shocks, ranging from a sudden monetary tightening to the kind of lending freeze that followed Lehman Brothers' collapse, the ECB concluded most of the 111 eurozone banks it tested are well prepared for an unexpected jump in rates.

But it warned 51 banks may need to set aside more capital and said it will embark on "intensive discussions" with these institutions. It is not clear if any Irish banks are included in this category. The ECB said these banks may be may be making themselves vulnerable to an interest rate shock due to large bets on derivative instruments and overly aggressive models for calculating risk.

Ms Lang stressed the capital buffers of Irish banks remain well above regulatory requirements.

However, these requirements are expected to tighten further next year extending the lending curbs on the banks.

On aggregate, the ECB found that an increase of 200 basis points in interest rates would lead to a rise in net interest income of 4.1pc in 2017 and of 10.5pc by 2019 for the banks tested.

But when rates move, the net value of assets and liabilities of a bank also change. (Additional reporting Reuters)

Irish Independent

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