THE markets will be "highly sceptical" if the latest round of stress tests claims to pinpoint the maximum cost of Ireland's banking collapse, National Irish Bank-owner Danske has warned.
The comments in a Danske research note come a week before European bank supervisors are due to announce the methodology for the next round of tests.
These are designed to predict future losses and assess whether the banks have enough capital to sustain such future hits.
Irish banks came through a previous round of European stress tests with flying colours last summer and also passed the Irish regulator's stress tests last March.
They will be put through another round of stress tests by authorities in Europe and Dublin at the end of March.
"The market will be highly sceptical," said Danske in its research note, "after previous estimates of the cost to the State of bailing out Ireland's banks were ratcheted up with depressing regularity.
"Markets will want to see a series of largely unchanged loan-loss projections before they begin to believe that there is no further liability from the banking sector coming down the line."
Authorities here are hoping that the results of the forthcoming stress tests, coupled with a programme of downsizing, will finally restore market confidence in Irish banks and therefore enable them to borrow money on the wholesale markets again.
However, Danske's analysts point to the "dilemma" created by the downsizing process, as banks face the prospect of suffering losses in a fire sale so that they can be rehabilitated.
"The losses would have to be made good by the Irish taxpayer, who would at least get the benefit of a rapid resolution of the banks' liquidity problems," Danske says, pointing to Irish banks' €140bn dependence on liquidity from central banks.
Its analysts also address the thorny issue of forcing losses on banks' senior unguaranteed bondholders and say it is "very unlikely" that the new Government will take that step.