Monday 22 January 2018

Stress tests, deja vu and where we go from here


Q: What are stress tests?

A: Stress tests are supposed to uncover how much extra capital banks will require for a given level of loan losses. The higher the level of loan losses, the more capital that will be necessary.

Q: Haven't we been here before?

A: Last July, a stress test of 91 eurozone banks gave Allied Irish Banks and Bank of Ireland a clean bill of health. But in November, just four months later, massive withdrawals from the banks forced the last Government to accept an EU/IMF bailout.

Q: Why should it be any different this time?

A: After last July's embarrassment, the European Banking Authority, which took over the supervision of the eurozone banking system at the beginning of the year, has to get it right this time. With investors losing faith in the banks of all the peripheral eurozone countries, and not just those of Ireland, it is vital the latest stress tests give an accurate picture.

Q: What are the stress tests likely to tell us about Irish banks?

A: They are likely to confirm fears their mortgage loan books are in a desperate state. A combination of a 50pc fall in property values, a 10th of all mortgages being either in arrears or restructured and more than €50bn of loss-making tracker mortgages means Irish-owned banks are going to have to write off tens of billions of their €100bn Irish mortgage book.

Q: What does this mean for taxpayers?

A: The last Government left the decision on whether to inject a further €10bn into the banks -- which was one of the conditions of the bailout agreement -- to its successor. But it is already clear that €10bn won't be enough to plug the fresh holes in the balance sheets.

Most observers now reckon that not alone will the agreed €10bn have to be pumped in, so will the €25bn set aside as a contingency fund in November. If we can't persuade Europe to shoulder some of the bank losses, a €35bn-plus capital injection into the banks would increase the size of the official national debt by over a third.

Q: What will the stress tests do for the Government's hopes of cutting the bailout interest rate?

A: While the interest rate of more than 5.8pc is punitive, it was never the primary issue. The real problem has always been the huge losses of the banks and the inability of the taxpayer to bear the full burden.

Q: What will the stress tests mean for banks and their customers?

A: The publication of the results is almost certain to result in both Bank of Ireland and Permanent TSB following AIB, EBS, Anglo and the Irish Nationwide into majority state ownership. This is likely to be followed by a sweeping consolidation of the Irish banking system.

With Anglo and Nationwide already in the process of being closed, EBS, Permanent TSB and the good bits of AIB will probably be sold off to foreign buyers -- with only Bank of Ireland remaining under domestic control.

While this is likely to lead to more expensive banking all round, it should at least mean depositors have the peace of mind in knowing their money is with larger, safer institutions.

Irish Independent

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