Thursday 8 December 2016

Stress tests clear AIB and BoI but European market doubts remain

Published 23/07/2010 | 05:00

Bank of Ireland: understood to have passed stress tests. Photo: Bloomberg News
Bank of Ireland: understood to have passed stress tests. Photo: Bloomberg News

AIB and Bank of Ireland are understood to have passed the European banking stress tests.

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This is expected to be confirmed by the Committee of European Bank Supervisors (CEBS) today when it publishes results for the 91 banks examined.

But market sources last night expressed fears that the results may do little to restore investor confidence in banking , even in the institutions that passed.

CEBS has been testing the banks' resilience to a fall in the value of sovereign bonds and various economic shocks, but the exact parameters of the tests have not yet been made public.

"What people will be looking at is whether the scenarios they've been testing against are realistic," said Sebastian Orsi of Dublin stock-broking firm Merrion.

"From what's been leaked, not all of the assumptions would seem to be."

Mr Orsi pointed to CEBS treatment of sovereign debt as an illustration of the robustness of the stress tests. "The suggestions are that there could be a haircut of 17 or 18pc on Greek debt," he said, adding, "a more realistic range based on historic restructurings would be 40 to 50pc".

Credibility

If the tests were judged as being "too soft" and lacking transparency, impact on the market could "be negative", he warned.

Mark O'Sullivan, director of dealing at London-based foreign exchange firm Currencies Direct, also warned that if the tests were too weak they would "lose their credibility" but if they were too harsh this could "spook the market, making a fragile situation even worse".

"Whatever the outcome, it seems highly unlikely they will solve the confidence problem that still plagues the European banking sector," he stressed.

Other sources, however, pointed out that the eurozone was heading into recovery mode, with the euro rallying 8pc since its four-year low last month and Greece, Spain and Portugal selling €50bn worth of debt in the last two months.

"The market seems to be much more convinced following the bailout that the euro zone is working and the peripheral countries will be able to finance their debt," said Christoph Kind, head of asset allocation at Frankfurt-Trust.

When the tests began, several brokerages reported that AIB and Bank of Ireland were at risk of failing, but informed sources yesterday confirmed they were set to pass.

Both banks have been quietly confident of the outcome since the Financial Regulator had already carried out extensive testing on their books.

They are understood to have been informally told they had passed the EU tests, as has the Financial Regulator.

Capital

Bank of Ireland's pass was secured by last month's €2.9bn fundraiser, which gave it enough capital to satisfy Europe's policy makers.

AIB's pass is understood to hinge on the bank improving its capital position by €7.4bn by the end of the year. This will be achieved by selling off non-core assets and a fund-raising spree.

While neither bank is expected to get a major boost from passing the tests, sources said the implications of a failure would have been grave.

(Additional reporting Bloomberg)

Irish Independent

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