Business Irish

Sunday 18 November 2018

Irish banks still need large cash injections from taxpayers, warns Moody’s

According to Moody's, European banks still need to raise money from taxpayers
According to Moody's, European banks still need to raise money from taxpayers

Laura Noonan

BANKS in Ireland and several other European countries need to set aside much more money to cover potentially bad loans, credit ratings agency Moody's warned today.

European banks have already raised hundreds of billions of euro to cover possible losses from loans that soured in property and financial market crises. Much of the funding has come from taxpayers.

"We believe that many banks, in particular in Spain, Italy, Ireland, and the UK, require material amounts of additional provisions to fully clean up their balance sheets," Moody's said in its global banking outlook for 2013.

"Some banks have in recent years delayed full recognition of embedded loan losses, partly by restructuring loans," the report added. "This strategy of buying time (often tolerated by regulators) limits a bank's capacity for new lending and poses risks for creditors of European banks."

Moody's did not say how much extra money banks would need.

Rival agency Fitch also warned today that British banks could be underestimating the riskiness of their property loans and may need more capital to correct this.

Moody's believes 2013 will be a volatile year for Europe's banks, but expects their credit ratings to remain relatively stable after a raft of downgrades in 2012.

The agency's outlook for US banks is negative due to a challenging home market, while its outlooks for Asia/Pacific, Emerging Europe and Latin America are stable.

Fitch's view on British banks' assessment of risk chimes with comments from the Bank of England (BoE) in November.

The BoE said Britain's four biggest banks - HSBC, Barclays, Royal Bank of Scotland and Lloyds - could be over-stating their capital levels by between £5bn and £35bn because of the way they measure risk.

Britain's Financial Services Authority is reviewing how banks weight the riskiness of their loan books and lenders will be told by March if they need to beef up their capital reserves to protect against loans going sour. The results of the review are not expected to be made public.

"We expect that banks will have to set aside more capital and that this requirement will probably be addressed either by way of additional capital buffers or higher risk-weightings for certain classes of loans," Claudia Nelson, senior director of financial institutions at Fitch, said.

"The measures are likely to be introduced gradually."

A Fitch study showed how retail lenders' assessment of their loan books has grown rosier since the financial crisis despite rising unemployment and a poor economic outlook.

From the end of 2007 to the end of June 2012, the banks' risk weighted assets (RWAs) nearly halved to 35pc from 65pc despite their loan books, comprised mainly of mortgages, staying relatively stable.

The lower the RWA weighting, the greater the chance the loan will be repaid and the less capital a bank needs to hold on its books.

A study of banks with a higher exposure to residential mortgages revealed an even sharper fall in their perceived risk, despite a weaker property market, Fitch said.

Nelson declined to say how much more capital banks could need.

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