Regulator pushing for 7pc capital ratio across all the banks
Elderfield's plans leading to 'healthy tension' with Finance
The country's new financial watchdog is pushing banks to reach harsher-than-expected capital levels this year -- putting them under pressure to raise more equity than the analysts have pencilled in.
Matthew Elderfield is understood to be looking for the banks to build their balance sheets up to where their equity capital ratios will stand at 7pc at the bottom of the economic cycle. Equity ratios are a keenly monitored gauge of lender's ability to withstand a shock loss.
But his determination to catapult Irish banks into the league of the best capitalised in Europe is believed to be encountering resistance from top officials in the Department of Finance.
The more onerous the targets, the more banks will have to rely on state capital. The fear is that self-help measures by the banks -- through the likes of asset sales and rights issues -- would not generate as much as hoped, if they were seen as distressed sellers in the market.
One well-placed source spoke last night of a "healthy tension" existing between the watchdog and the department on the crucial issue.
The regulator declined to comment, other than to say: "We continue to engage with credit institutions on their capital positions and requirements, with a view to making a public statement within weeks."
The department refused to comment.
The general consensus among local analysts is that that banks will need to hit an equity ratio of 6pc this year, before rising -- through retained earnings -- to 8pc by 2012.
Analysts at Goodbody Stockbrokers estimate Allied Irish Banks would need to raise €4bn to reach 6pc, and that Bank of Ireland would require €2.8bn of fresh capital.
This is based on the broker's view of NAMA discounts as well as underlying profit and bad loan loss scenarios for the loan books that banks will be left with in future.
"Every 1pc increase in required capital ratio levels adds €900m to €1bn to AIB's requirement and €800m to €900m to BoI," they said in a note issued to clients yesterday.
Mr Elderfield is also overseeing a large-scale 'stress test' of the domestic banks' and building societies' non-NAMA loans, factoring in much higher unemployment and poorer economic and property price figures than expected by most financial commentators. Sources also suggested he is on a clear agenda to have the banks weaned off all government guarantees as quickly as possible.
The original guarantee plan is due to expire at the end of September, with a new scheme allowing investors to issue state-covered bonds of up to five years, coming up for review with the European Commission in June.
However, some observers believe Irish banks will continue to find it difficult to fund themselves in the wholesale markets without some sort of guarantee, for as long as there is uncertainty about the economic outlook.
"That would continue to be the case, even if they were recapitalised in the morning to the extent that they were left with an 8pc equity ratio in the morning," said one debt market source.