BANK OF IRELAND and Allied Irish Banks (AIB) are among a group of 91 banks facing Europe-wide stress tests to assess potential losses on sovereign debt and greater economic strain, the EU banking regulator has confirmed.
The Committee of European Banking Supervisors (CEBS) has said the tests will cover 65 per cent of the EU banking system.
Bank of Ireland and AIB have already been subjected to much tougher tests by the Financial Regulator. The tests determined that Bank of Ireland required €2.66 billion to cover rising losses, while AIB needed a further €7.4 billion.
Bank of Ireland boosted its reserves by almost €3 billion following a capital-raising programme. AIB is selling its Polish, US and UK businesses to help raise some of the required capital.
The regulator has said both AIB and Bank of Ireland have been stress-tested ahead of the Government’s recapitalisation last March and that up-to-date data on their balance sheets has “already been subjected to rigorous analysis”.
The regulator has said that its so-called prudential capital assessment review (PCAR) for the banks “involved intense scrutiny and challenge of their balance sheets”.
It is understood that the Financial Regulator and the Department of Finance are not concerned about EU tests, but fear two different sets of stress tests results may create market confusion about the financial health and capital strength of the two big banks.
The regulator demanded a 4 per cent minimum core tier one ratio – a closely-watched gauge of a bank’s ability to withstand financial strain – after worst-case scenario losses under its stress test.
The CEBS has raised the minimum tier one threshold from 4 per cent to 6 per cent under its worst-case scenario assessment.
The two largest Irish banks are being included in the EU-wide stress tests as the European regulator’s sample is extended to cover a more comprehensive set of banks.
The EU is trying to restore confidence to the region’s embattled banking sector by reassuring markets that major EU banks can cope with greater financial strains.
At least 50 per cent of each State’s banking system is being tested. EU leaders have pledged to disclose the results of the tests.
The CEBS has said its “adverse scenario” covered a three percentage-point fall in growth from the EUs forecast for the next two years, which is effectively a less severe double-dip recession.
The tests will examine a jump in interest rates linked to a “deterioration in the EU government bond markets” but does not detail the “haircuts” used for the risk of debt restructuring in Greece, Portugal, Ireland or Spain.
“The sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010,” said the committee.
