SENIOR BANKERS challenged the higher loan losses expected by the Central Bank under more pessimistic scenarios for the economy and unemployment in the forthcoming bank stress tests during a series of meetings yesterday.
The Central Bank informed Bank of Ireland chief executive Richie Boucher, AIB executive chairman David Hodgkinson, Irish Life & Permanent chief executive Kevin Murphy and EBS chief executive Fergus Murphy, and other senior bank executives that loan losses would, as expected, be higher under the tests and gave an estimate of the losses for each of the institutions.
However, the Central Bank stopped short of telling the institutions how much more they would need beyond the €10 billion to be injected within the €35 million EU-IMF bank bailout fund. These figures will be published next Thursday afternoon when the test results are announced.
A spokeswoman for the Central Bank said the bankers were told about its expectations for higher loan losses under the various macroeconomic scenarios considered in the tests, including worse than expected economic outlooks and unemployment.
None of the institutions would comment on the meetings or the level of loan losses estimated under the tests.
The Central Bank provided estimated losses for each of their loan portfolios, including residential mortgage and buy-to-let loans, which are receiving a stronger focus due to higher unemployment and austere budget changes.
The bankers will not be told how much in additional capital injections will be required under the capital stress test, the prudential capital assessment review (Pcar), until the results are announced on Thursday.
The higher loan losses will determine how much more capital they will require beyond the €10 billion which is already earmarked for the lenders within the €35 billion EU-IMF bank bailout fund.
One well-placed source estimated that, based on the expected loan losses at one lender, it was likely that the next bailout would fall short of the full €35 billion.
Loan losses at 92 per cent State-owned AIB are expected to be higher again than at the other banks. Bank of Ireland is expected to argue it can still avoid majority Government control and maintain State ownership below 50 per cent, despite higher estimated loan losses. The Government owns 36 per cent of the bank.
The Central Bank confirmed during the meetings that the banks would be expected to meet a loan-to-deposit ratio of 122.5 per cent by the end of 2013 but ruled out firesales of loans and other assets to reach this target as this would incur further losses and higher capital requirements. The Government said this was unaffordable.
This new ratio amounts to €122.5 in loans for every €100 that the lenders have on deposit compared with the current level of loans of about €180 for every €100. The banks must present a plan to “de-leverage”, showing what loan books and assets will be sold over the coming years. The plan is likely to involve higher levels of asset disposals than they had previously estimated.
Analysts estimate the four banks will have to offload between €60 billion and €100 billion in loans and assets to reduce the size of their balance sheets so they can fund themselves again without Government support.
Some of the bankers challenged the Central Bank’s interpretation of how the more pessimistic economic scenarios would result in higher loan losses and capital bills.
The Central Bank spokeswoman said the meetings gave the banks the opportunity to challenge expected loan losses under the economic assumptions of higher unemployment and weaker economic activity.
The Irish banks have received €46 billion from the Government over four previous bailouts since December 2008. Some €30 billion of this has been provided by way of promissory notes (State IOUs) and €16 billion in cash.
Stockbroker Davy estimated earlier this week that the banks would require up to €27.7 billion more from the €35 billion EU-IMF bank bailout fund.
