Tuesday 12 December 2017

Ireland presses ahead with new stress test of banks amid gloom

Mortgages, consumer loans and commercial property among categories being scrutinised

Emmet Oliver

The Central Bank is pressing ahead with a fresh stress test of Ireland's banks amid rising concern over the health of the entire European financial sector.

Next week is the deadline for applicants chasing the stress-test contract, with the contracts expected to be awarded in early November. A fresh assessment of mortgage losses is among the components of the test.

While Ireland has convinced the international investment community its banks are now adequately capitalised, the IMF/EU insists upon annual stress tests, assessing the current position of individual loan books.

Similar to the 2011 stress tests, the exercise will concentrate on forecasting future loan losses and deleveraging plans by the banks.

The Central Bank will set up a panel, known as a framework, and, from this, work will be given to different firms on the stress test.

Four separate 'lots' of work will be commissioned, with the main emphasis being on loan losses.

Experts hired will assess the credit quality of a bank's loan book and estimate the annual losses over an agreed time horizon.

Loan books

Mortgages, consumer loans, commercial property and SME lending are among the categories being scrutinised.

The review of loan books will include specific examinations of loan files and also a manual review of loan documents.

In relation to deleveraging, the Central Bank is hoping to get advice on how the banks can be returned to private ownership. Alternatives to the heavy ECB funding the Irish banks use will also be sought. Assets will not only be sold, but also potentially securitised into packages of loans.

The Central Bank is also looking at improving the maturities of the loans Irish banks take from lenders. Any consultants hired will also assist with negotiations with the IMF/EU/ECB, who have a key input into how the Irish banking system is managed.

The move to a second stress test comes as European officials look set to speed up plans to recapitalise 16 banks that came close to failing last summer.

European officials said 16 banks regarded to be close to the capital threshold would now have to seek new funds immediately.

Reports last night suggested second-tier banks would be mostly affected, with the so-called "national champion" banks immune from the need for fresh capital.

Despite market rumours, French banks are not believed to be among the 16 lenders in need of urgent capital.

Irish Independent

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