We may have passed -- but it's too early to celebrate
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IN the same way you wouldn't congratulate a Leaving Cert student for passing a primary school spelling test, those of the champagne-popping disposition would do well to look at the detail of the European stress tests before breaking out the Moet for Ireland's banks.
Yes, our banks passed the test, but so did pretty much every other bank in Europe, bar some basket-case Spanish savings banks, the chronically troubled Hypo and a bank from fiscally challenged Greece.
Or to phrase it another way, if AIB and Bank of Ireland hadn't passed, they'd have been in quite the audacious company.
Another thing worth noting is the reasons the two Irish banks got the nod. Bank of Ireland's pass hinged on its recent €2.9bn fundraising round. AIB's is contingent on the bank improving its solvency position by €7.4bn by the end of the year.
Put simply, if the two banks did the tests last year, they wouldn't have passed.
The only reason they're passing now is because our own financial regulator did an earlier round of stress tests, which mandated the aforementioned capital raisings, and which pushed the Irish banks over the European bar.
That European bar, incidentally, appears to have been set quite a bit lower than the one used by Financial Regulator Matthew Elderfield back in March when he assessed the Irish banks capital needs.
Comparable loan losses were applied, similar economic armegeddons were envisaged, but the European test sets the pass rate lower, demanding only a tier one capital ratio of 6pc against the financial regulator's demands for a variety of targets, including equity ratios and core tier one ratios.
The only potentially harsher part of the European tests was banks' vulnerability to sovereign risk -- an area not probed by Mr Elderfield. But many observers last night felt the sovereign risk boat had nonetheless been missed.
Instead of probing the impact of a sovereign default on banks' books, the Committee for European Banking Supervision modelled only the impact of higher sovereign bond spreads stemming from a fear of default.
The result was that banks took a very limited hit on the masses of sovereign bonds they hold to maturity, with direct haircuts only levied on institutions' trading books of sovereign debt (a tiny book in the case of Irish banks).
Against a barrage of criticism for bottling the sovereign question, European policymakers last night vociferously defended their decision not to model a default, stressing that Europe had taken every step to prevent such an occurrence.
"In fairness, I don't think they were ever going to pick a sovereign and say they could default," said one Dublin analyst, adding that the sovereign haircuts levied on the trading books were more robust than many had expected.
Defenders of the test also pointed out that the remarkably high pass-rate had to be viewed in the context of the €170bn in state support that had already been given to 30 of the tested banks.
Others, however, remained unconvinced. "I see nothing stressful about this test," Stephen Pope, chief global equity strategist at Cantor, said. "It's like sending the banks away for a weekend of R&R."
Irish Independent
