Business Irish

Sunday 21 January 2018

It looks like a win for our banks – for now

RELIEF is likely to have been the initial reaction at the banks and the Department of Finance to the European Banking Authority's (EBA) publication of the terms of this year's stress tests.

The doomsday scenario outlined by the EBA looks relatively mild compared with the crisis that has rocked the country for six years.

For example, it wants banks here to be able to withstand a notional downturn involving a further 21.5pc drop in house prices, a 16.4pc drop in commercial property prices and unemployment of 14pc.

Shares in BoI were up yesterday; an early sign investors don't foresee big problems for the bank.

With hundreds of data points to work through it will take longer for analysts to fully flesh out the implications. Still, on first blush, the worst case scenario as set out by the EBA – the only one anybody really cares about – looks very manageable for Irish banks.

Since the crash those banks have been forced to shore up their capital – the amount of accessible cash available – to cope with losses. So AIB's common equity tier 1 (CET1) capital (a standard measure of bank capital) is 15pc, Bank of Ireland's is above 12.3pc and Permanent TSB's is 13.4pc.

To "pass" the stress tests they need to show that after losses suffered in the EBA's "adverse scenario" they would still have 5.5pc capital.

But as one analyst put it, trying to apply the logic of stress test scenarios to a bank is more of an art than a science. Even when the methodology is known there are questions of interpretation and application that can never really be second guessed. But for now, it looks like a win for the banks.

Irish Independent

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