Sunday 25 February 2018

Ireland's biggest banks 'among most vulnerable in Europe' to financial shock

AIB Photo: Steve Humphreys
AIB Photo: Steve Humphreys

Ireland's biggest banks remain among the most vulnerable in Europe to a financial shock, according to the results of European Banking Authority stress tests.

The tests measured lenders' ability to weather a severe recession over three years.

The probe conducted earlier this year didn't include a pass/fail mark.

But AlB was the second-poorest performer in the so called adverse scenario, after Italy's Banca Monte dei Paschi di Siena.

Bank of Ireland, the only other Irish bank tested, fared better but was the fourth weakest out of 51 banks tested. Both lenders would see significant capital eroded in the event of a severe downturn.

The tests looked at the capital banks would be left with after a crash using a standard measure called core equity tier 1 (CET1) Under a severe scenario AIB would be left with CET1 of 4.1, below the 5.5 level analysts see as adequate. Bank of Ireland's CTE1 in a stress scenario of 6.1 is also well below the average.

More than three-quarters of the 51 lenders looked at maintained a CET1 ratio of more than 8pc in the tests.

However, banks in Portugal and Greece weren't included, and might well have brought down the average.

The two Irish banks both published positive financial results this week, showing significant profits. But the test results will come as a blow, almost nine years after the start of the financial crisis.

The stress test is intended to give supervisors across the European Union a common basis for measuring and bolstering lenders’ financial resilience.

The legal minimum for all banks is a CET1 ratio of 4.5pc.

There is no question of the Irish banks not currently having solid capital capable of coping with potential losses. But the results looking at potential scenarios are a stark remainder that the banking sector here remains highly vulnerable.

If anything the tests may under estimate the worst case scenario. Analysts have already questioned the reliability of the exam because the scenario doesn’t include the fall out from the UK decision to leave the EU.

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