THE bailed-out banks may need up to €20bn in coming years depending on the economic recovery, the results of looming stress tests and new banking rules.
If the economy improves, unemployment falls and property prices continue to stabilise, then the problems surrounding the banks' €142bn mortgage book become more manageable. The €27bn of loans in arrears of 90 days or more can be worked out. Just.
But the Irish economy is like a little old lady. It'll keel over at the slightest shock. A Western cruise missile strike on Damascus would see oil prices spike. The increased cost of fuel could be enough to cut off a European recovery at the knees. And us a bit higher.
In coming months, regulators will start going into the banks to see how ugly things are in the arrears department. They'll stress-test the loan books and their findings will determine whether the banks need more money to cover bad debts. And, more importantly, how much.
Economist Jim Power is the uber bear in this department. Last May, at the Friends First Quarterly, Power warned that the banks might need as much as €20bn to cover their lending black hole.
Last week, NUIM Professor of Banking Greg Connor suggested that the banks could lose up to €11bn from the €27bn mortgages already in major arrears.
"I've seen estimates that one-third will be lost of the value. And that's what we really don't know. We do not know how many of these or what proportion of value can be saved," he said at the time.
Ratings agencies Fitch and S&P have both said that AIB and Bank of Ireland will need to raise more capital to meet new banking regulations and to absorb the mortgage arrears hit.
"As Irish banks' capital ratios continue to be eroded and a return to profitability only appears feasible in the longer term, the banks may need to raise additional capital before they can contemplate a future independent of state support," Denzil De Bie, a director in Fitch's Financial Institutions Group, said last month.
"We do not expect the Government will be able to quickly exit or reduce its support for its banks – not least because we think the banks need yet more capital. We consequently believe that the very close relationship between the Irish sovereign and its banks will continue for several years," S&P warned earlier this year.
But it's not just the problem with mortgages and other bum loans. Looming European regulations mean that banks will have to hold more capital to satisfy regulatory requirements dreamt up by bureaucrats. This is where the problems really start.
In May, the then Central Bank deputy governor Matthew Elderfield told Germany's Boersen-Zeitung that the banks may need to raise up to €4bn in additional capital in the next six years.
"In the medium term, they will certainly need more capital, simply because of stricter international capital requirements," Elderfield said.
"In the next five to six years, Irish banks may need a further €3bn to €4bn."
In June, Elderfield told the Public Accounts Committee (PAC) that the banks would need about €6bn in fresh capital. This was due to the introduction of Basel III global financial reporting rules that will alter the way financial institutions will account for their capital.
These new banking rules will be phased in over a number of years, so it is unlikely that Richie Boucher or David Duffy will need to raise money in the short term.
Elderfield told the PAC that the new money would most likely come from three sources. It could be raised on the markets, funded through the European Stability Mechanism or, most optimistically, from the banks' own profits. All the banks are forecasting a return to profit next year or the year after. All bets are off if the economy goes brown again.
There's a high-stakes game being played as Taoiseach Enda Kenny tries to lead Ireland out of the bailout programme. Problems with the banks and the potential for further bailouts would spook investors and shatter the fragile confidence surrounding the economic recovery.
Not unexpectedly, Official Ireland is lining up behind the banks. Finance Minister Michael Noonan has consistently dismissed suggestions that the banks will need more money.
"There is no evidence whatsoever that any of the Irish banks will need extra capital next year. They are very well capitalised. I have no evidence [to the contrary] at this point in time either," Noonan said last month.
Last week, the Department of Finance was less emphatic.
"The minister understands the banks are strongly capitalised and they are making good progress in returning to profitability, which is of paramount importance for the economy and the taxpayer as shareholder. Recent H1 results from BOI and AIB were well received by investors and provide evidence of this," reads a statement given to the Sunday Independent.
The State owns 99 per cent of AIB. It has the biggest loan book and thus potentially the biggest problem. If AIB's mortgage book gets really gnarly, its existing cash buffers won't cover the hit. But the bank still insists that it won't need more money.
"We believe, based on everything we have done on a detailed amount of work on our books, that we do not need more capital," AIB chief executive David Duffy told investors last month.
"There is an Asset Quality Review, which will take place in Ireland, later on this year, probably by October. And then there will be a PCAR (Prudential Capital Assessment Review) exercise some time in 2014.
"Our view of that is let's just execute the restructuring, exceed the targets by a distance, and prove on the basis of evidence, rather than models, that we have sufficient capital for dealing with our arrears."
Permanent TSB chief executive Jeremy Masding told the Sunday Independent last weekend that he believed his bank would not need to raise more money when Ireland exits its bailout towards the end of this year. "I think Permanent TSB is well capitalised," said Masding.
Merrion Stockbrokers economist Alan McQuaid said last week: "The key issue is whether the deteriorating picture leads to the banks requiring a further capital injection from the State.
"As things currently stand, banks are probably OK, but if things continue to worsen on the arrears front then the banks could be in trouble."
And the taxpayer, too.