Regulator oversees stress test of lenders' mortgages
Non-NAMA property loans come under the spotlight to assess banks' capital needs
The Financial Regulator is overseeing a massive 'stress test' of banks' mortgage and non-NAMA property loans before they are told later this month how much capital they need to raise.
The announcement by Finance Minister Brian Lenihan is expected within weeks and is certain to contain updated estimates on the discounts lenders face on their NAMA loans.
The new estimates will take into account the haircuts on the first tranche of loans that should have been transferred by then.
The European Commission's verdict on the state-aid restructuring plans of both Allied Irish Banks and Bank of Ireland is also expected to be delivered by the end of March.
In his first public address since taking over as Financial Regulator in January, Matthew Elderfield said Irish banks post-NAMA would be scrutinised under a likely -- or base -- scenario and a stress situation.
Following this, they would be set a "prudent target capital requirement that is informed by emerging best practice internationally", Mr Elderfield told a lunch organised by the Chartered Accountants Leinster Society in Dublin.
It is understood the regulator has set a number of worst-case scenario figures in recent weeks for the 'stress test' which centre on unemployment, economic contraction and property prices. The banks and building societies have been working on these over the past few weeks.
It is believed the Government's own banking adviser, NM Rothschild, and a leading accountancy firm are involved in the huge project.
The news comes as the UK financial regulator told the country's banks this week to test their businesses for two more years of recession and a much sharper decline in the British economy than a previous test last year.
The UK Financial Services Authority has demanded that banks have no less than a 4pc equity tier 1 ratio -- a key gauge of a lender's ability to absorb shock losses -- under the worst-case scenario.
The growing consensus is that banks globally will have to reach an 8pc equity ratio by 2012 -- but some analysts have read recent remarks from Central Bank governor Patrick Honohan as a signal that Irish lenders may have to hit this target sooner than elsewhere.
Mr Honohan is Mr Elderfield's boss under a move by the Government to remerge the regulator with the Central Bank.
The watchdog head said yesterday that legislation to cement this new structure "is expected very shortly".
Goodbody Stockbrokers analyst Eamonn Hughes said that his estimates factored in the banks having to reach an equity ratio of 6pc to 6.5pc by the end of this year.
"To get there, Bank of Ireland would need to raise about €2.5bn and AIB around €4bn," he said.
Mr Honohan said last month that the cost of recapitalising the country's banks would be "manageable" for the Government. Both BoI and AIB are working on plans to raise as much capital privately, before going back to the State, which has already pumped €3.5bn into each by way of preference shares.
In the event that they do not reach their targets, it is likely the Government will start converting its preference stock into ordinary shares.