Tuesday 23 January 2018

Stress tests to factor in house-price fall of 60pc

Laura Noonan

A 60pc fall in house prices and rates of unemployment as high as 15.8pc will be used to assess the financial strength of Irish banks in the Central Bank stress tests.

The unprecedented level of detail on the scenarios the banks are being measured against comes a fortnight before the publication of the test results.

These will show how much cash Ireland's banks will need to survive an even deeper crash than is forecast.

Finance Minister Michael Noonan this week suggested the banks might need more than the €10bn capital injection pencilled in by the bailout, triggering a raft of speculation about the tests' methods and outcomes.

The Central Bank stressed the scenarios, which also include the lower European Commission forecasts on economic growth, were "hypothetical" and "not an economic forecast".

Economists described the scenarios modelled as "broadly credible" for the purposes of the tests, though some said the 'adverse' case of a 70pc peak-to-trough fall in commercial property prices might not be pessimistic enough. Sources say this has already been reached.


Banking analysts said there wasn't enough detail to assess the likely capital demands for different financial institutions, but investors still rushed to sell shares with Irish Life & Permanent falling 10pc and Bank of Ireland closing down 3.6pc.

The disclosures show the Central Bank is modelling a 'baseline' scenario case of house prices dipping by 55pc from the peak to the bottom of the market, and an 'adverse' scenario of a boom-to-bust fall of 60pc.

"House prices have already experienced falls of that magnitude -- residential properties changing hands have experienced value declines of more than 55pc," CBRE chief economist Marie Hunt said last night.

The Central Bank declined to say what level of mortgage losses was being assumed in the tests, but confirmed the data would be disclosed with the results on March 31.

The costs around possible interest rate rises was not disclosed, but it is understood that some level of interest rate stress is being applied.

Sources also suggested that the treatment of sovereign bonds held by Irish banks will become clearer tomorrow, when the European Banking Authority publishes the framework for its upcoming stress tests.

The disclosures show the Irish tests' 'base' scenario includes an unemployment rate of 13.4pc this year, improving to a rate of 11.5pc by 2013; while the 'adverse' scenario has 14.9pc for 2011, a peak of 15.8pc in 2012 and 15.6pc in 2013.

Growth levels assumed in the 'baseline' scenario include gross domestic product rising by 0.9pc this year, by 1.9pc in 2012 and by 2.5pc in 2013; while the 'adverse' case has GDP falling by 1.6pc this year, rising by 0.3pc in 2012 and 1.4pc in 2013.

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