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Bank stress tests may not prove robust enough

Further property price falls mean lenders could need extra capital during the year

Despite the €24bn injected last year, mounting mortgage debt means the banks may need even more capital in 2012, an economist warned.

"If we see further worsening trends in mortgage arrears, then the banks will need more capital to get them back up to the levels that were set for them in 2011," Dermot O'Leary of Goodbody Stockbrokers told the Sunday Independent.

"If you look at the recent mortgage arrears trends, they're more in line with the most adverse scenarios set out in last year's bank stress tests. Given the current numbers, the banks are adequately capitalised, but there is a risk. It depends on arrears trends that come out over the next number of months."

On top of the billions already poured into the sector, banking may need more, Mr O'Leary predicted. "I think there's a likelihood of that. We will have further stress tests at the end of the second quarter of this year, in conjunction with the wider European stress tests, which will reveal more."

Adverse findings could mean a need for a further EU bailout. "In relation to the reform and rehabilitation of the banking system as a whole, we will need more help from Europe," Mr O'Leary said.

A further factor in banks requiring more capital is if asset sell-offs disappoint in 2012.

"It's a more crowded market now for selling off bank assets and there are not as many buyers," said Mr O'Leary. "The first asset batch sold last year was better quality. Now there are more and more banks internationally deleveraging and selling off assets."

In March of last year the Government shelled out €30m to stress testing consultants Blackrock (the world's biggest asset manager), Boston Consulting and Barclays Capital to go through the banks with a fine tooth comb. An additional €24bn went into the banks. The Central Bank said at the time that it did not expect the banks to need further capital.

The potential for losses on residential mortgages at the banks was tested. So was the cost of deleveraging their balance sheets through selling off of assets.

Ample provision was supposedly made for both. In theory the banks are over-capitalised well beyond 2012, however, having been stuffed with capital last year under orders from the ECB.

The difficulties in any further bank recapitalisation are heightened by the gloomy European banking landscape.

The new Spanish government announced it was setting aside an extra €50bn in provision against bad property debt in Spanish banks.

Sunday Indo Business