Draghi’s warning

Comments by European Central Bank president, Mario Draghi, have dampened some of the understandable enthusiasm that has surrounded Ireland's exit from the EU/IMF bailout programme. Mr Draghi has expressed concern about the health of Irish banks. This follows recent analysis by the Central Bank of the adequacy of the balance sheets of the domestic banks. And the ECB president has called for "decisive" action to address the financial weaknesses that the Central Bank has identified. The IMF, in its statement to mark Ireland's completion of the programme, has reflected a similar concern. It too has highlighted the need for banks to deal with the problems of mounting mortgage debt. Almost one fifth of all mortgage loans are in arrears on their repayments.

The Central Bank, in its unpublished report assessing bank balance sheets, found that while the three domestic banks do not now require extra capital, they do need to make some extra provision for potentially bad loans. Bank of Ireland, which is again back in profit, has disputed the Central Bank's finding that it needed to make €1.3 billion in extra provisioning. Fitch, a credit rating agency, has also said the banks will need to increase their level of impairment charges next year. And Mr Draghi has strongly suggested the banks should do so before the ECB begins a rigorous series of stress tests for all euro zone banks later in 2014. The outcome of those tests will determine whether or not the banks do need further capital.

Ireland’s economic recovery is predicated on a healthy banking system, one in which the banks overcome their debt management problems and are, once again, able to provide the economy with the credit that it needs to expand. The risks to the banking sector cannot be minimised. The Central Bank’s balance sheet assessment is a measure of their state of readiness for next year’s tougher set of stress tests by the ECB. Clearly, the domestic banks have some ground to make up, and not that much time to do it.