Wednesday 16 October 2019

Half of banks would not survive a six month crisis, ECB warns

Donal O'Donovan

Donal O'Donovan

Half of the eurozone's biggest banks would go under after six months if money markets swung shut and big depositors pulled their cash, the European Central Bank (ECB) said yesterday.

However, most banks tested would be well able to withstand a shorter liquidity shock, or the initial phase of a longer crisis, long enough to take deeper measures, the results show. Bigger lenders and subsidiaries of foreign institutions would be most vulnerable, according to the latest ECB bank stress test.

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Unlike previous stress tests, the results do not provide a breakdown by bank or country.

However, the 103 lenders subject to the test include Ireland's biggest banks, AIB and Bank of Ireland, and other lenders regarded as systemically important.

The results for the eurozone were described as "broadly positive", finding that most banks would survive a shock lasting 30 days with relatively little stress.

That is as long as current rules require banks to have enough liquid assets to survive. However, the results highlight ongoing weakness in the eurozone's banking system - including the quality and accessibility of data - with evidence that some banks needed extra time to address ECB questions put to them as part of the testing process.

The results indicate that four of the area's biggest banks would not survive six months if they were frozen out of the wholesale funding market, and 52 would go under within six months if financial counterparties and some commercial clients took money out.

"Universal banks and global systemically important banks would generally be affected more severely than others by idiosyncratic liquidity shocks, as they typically rely on less stable funding sources," the ECB said in a press release.

Twenty-six banks would survive longer than six months even under an 'extreme' shock, in which their credit rating is downgraded by three notches and more deposits are pulled out, the test found.

Several banks had to restate their liquidity levels following the ECB's check, again highlighting data quality issues.

The so-called Sensitivity Analysis of Liquidity Risk assessed banks' ability to handle hypothetical liquidity shocks lasting six months.

Detected vulnerabilities requiring a supervisory follow-up relate in particular to foreign currencies, data quality and collateral management, the ECB said.

Meanwhile, Irish and other eurozone banks continue to have access to market funding at historically low costs.

Bank of Ireland yesterday borrowed €300m of relatively risky Tier 2 ranked bonds for 10 years, at an annual interest rate of just 2.375pc.

Strong demand saw the order book more than three times oversubscribed.

That was a big turnaround from the start of September, when the bank temporarily pulled the deal at the last minute, amid muted demand and ongoing gyrations in the market, ahead of a planned ECB interest rate setting meeting.

It is understood investment banks managing the bond deal had secured €340m of orders, more than the bank was seeking, but a relatively low so-called bid-to-cover ratio in a market where bond deals are typically oversubscribed.

The initial low demand increased the risk that the bonds could dip in later trading, leaving bondholders nursing paper losses and possible resentment.

The bank opted to postpone the deal instead, sources said. The revived deal priced yesterday with strong demand.

Irish Independent

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