Sunday 25 September 2016

Irish banks to face new European stress tests in February

Sarah Collins

Published 06/11/2015 | 02:30

AIB and Bank of Ireland face European-wide tests again. Photo: Aidan Crawley/Bloomberg
AIB and Bank of Ireland face European-wide tests again. Photo: Aidan Crawley/Bloomberg

Bank of Ireland and Allied Irish Banks are to have their financial health probed next year as part of a fresh round of EU-wide stress tests.

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A group of 53 European banks is being checked to see if their capital reserves are enough to see them through a future crisis.

This is the first Europe-wide probe since 2014, when regulators found that 24 out of 123 banks did not have enough cash to shore themselves up against a hypothetical financial shock.

Permanent TSB was the only Irish-based bank to fail that test out of a total of five that took part. Bank of Ireland, Allied Irish Banks (AIB), Ulster Bank and Merrill Lynch all met the EU requirements.

The probes will begin next February. In July, ratings agency Standard and Poor's raised its credit ratings on both Bank of Ireland and AIB on the back of improving profitability in the two banks.

The next round of tests will cover the three years from end-2015 to end-2018 and will be based on banks' year-end 2015 results.

Each bank was selected because it has at least €30bn in assets. The set of banks from each country covers 70pc of the national banking sector and the group of 53 covers 70pc of the banking sector in the 19-member Eurozone.

The tests work by having banks calculate the impact of certain risks on their balance sheets, first under normal economic conditions and then in the event of a hypothetical financial shock.

Banks will assess credit risks such as a fall in the value of the sovereign debt they hold, market risks such as a buyer or seller defaulting and operational risks within the bank itself.

The banks will have to abide by common standards laid down by the London-based European Banking Authority, which will also check the results before publishing them at the beginning of the third quarter 2016.

The results will show how much high-quality capital - known as Common Equity Tier 1 capital - banks are lacking and would need to raise in the event of a future shock.

The European Central Bank said yesterday that the tests would "help the public and other stakeholders to compare and assess the resilience of the banks, notably their ability to absorb shocks and meet capital requirements under adverse macroeconomic conditions".

Irish Independent

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