Monday 19 February 2018

New capital review likely to increase banks' losses

Dublin 'has not yet convinced markets', but Honohan aims to soothe their concerns

Patrick Honohan, governor of the Central Bank, listens during an interview with Reuters in his office in Dame Street, Dublin,
Patrick Honohan, governor of the Central Bank, listens during an interview with Reuters in his office in Dame Street, Dublin, yesterday

Carmel Crimmins and Marc Jones

Ireland's banks will likely face higher prospective loan losses following the completion of a new capital review agreed under an €85bn EU/IMF bailout programme, the central bank governor said in an interview with 'Reuters' yesterday.

The central bank will complete its second capital review of the banks and a review of their liquidity requirements by the end of the first quarter.

"The prospective loan losses will probably be a little larger," governor Patrick Honohan said.

"We had a base case and a stress case in our March 2010 estimates and if I were a betting man, I would say it would be moving up from the base case.

"That would not be surprising given the somewhat more disappointing economic statistics since then."

Prof Honohan said Dublin had not yet convinced markets that it had got to the bottom of the banks' losses, but providing clear information about their portfolios should help soothe concerns.

"What we are trying to do is to get precision. It's much more important to get precision than to land on a particular number. If we achieve that we will go a long way toward getting to the situation where the banks and the government can return to the market."

To ensure Irish banks are bullet-proofed against further shocks, Prof Honohan has insisted that banks "overcapitalise" beyond a new core Tier 1 capital ratio of 12pc and some €10bn of the EU/IMF package will be used to achieve that.

The EU/IMF plan is also designed to wean Irish banks off their dependence on ECB funding and exceptional loans from the central bank in Dublin, which together amounted to €183bn at the end of the year.

Prof Honohan said the central bank would set out a timeframe for reducing the banks' reliance on such funding.

"Timeframes are going to be defined. They haven't been defined yet," he said. "We are relying very much on external advisors who are closer to securitisation markets."


Commenting on the current political turmoil, Prof Honohan said he didn't expect a change of administration to affect Ireland's commitment to its targets.

"The main opposition parties, from everything they have said, are fully committed to the scale of fiscal adjustment," he said.

"They might want to change A, B, or C by replacing A, B or C with D, E or F, but they completely bought into the concept that any changes have to be neutral in fiscal terms."

"I think that the months ahead will see a consolidation of a stable political situation. That's going to be a good basis for completing the programme that we are embarked on."

Both Fine Gael and Labour would like some senior bondholders in Irish banks to share some of the losses, but Prof Honohan said such a proposal was unlikely to become policy.

"I don't see any traction around that idea, taking everything into account, including the fact that European partners make it quite clear that this is a very unattractive proposal."

Whoever forms the next government will face a very weak Irish economy particularly as Ireland tackles one of the worst budget deficits in Europe. "We are projecting, I would say quite a weak 2011," said Prof Honohan.

"The recovery is very gradual." (Reuters)

Irish Independent

Promoted Links

Business Newsletter

Read the leading stories from the world of Business.

Promoted Links

Also in Business