THE RECENT dramatic falls in Irish bank share prices may be "overdone", the governor of the Central Bank, John Hurley, told the Oireachtas Committee on Finance and the Public Service yesterday. Simon Carswellreports.

Mr Hurley said he did not normally comment on share prices, but added: "Maybe the drop in prices has been overdone, but I should not intrude where the markets know better."

The ISEF index of Irish financial stocks has fallen 68 per cent over the past year.

Mr Hurley said the Central Bank had recently carried out a "state-of-the-art macroeconomic stress test" of the banking system.

He said he "didn't have a crystal ball" but the preliminary findings of the test had shown that "Irish financial institutions were weathering a very difficult financial situation well".

He said the stress test assessed how the banks would handle "very serious scenarios" where there was a surge in unemployment, a severe economic downturn, a decline in foreign direct investment and an "even more serious drop in the housing market".

He said stress tests had their limits but it was one of "a number of tools" to assess the strength of Irish banks.

He said more stringent requirements were introduced on the banks in 2006 when there was a resurgence in the property market and lenders were forced to set aside more capital for loans on speculative property development.

He said banks were also forced from 2006 to stress test a borrower's ability to repay a loan to 2.75 per cent over the European Central Bank (ECB) benchmark rate.

Mr Hurley said Irish banks were "certainly" rolling up interest on loans to builders and developers amid the housing slump. He said that banks could afford for asset values to fall on these loans.

"The loan-to-value ratios in relation to commercial property lending are reasonable and give some headroom for values to fall."

There were "very little arrears" on 100 per cent mortgages.

He said the Government's cost-cutting programme should help the economy to rebound.

"If action is taken early, it helps to reduce the duration of the downturn."

Mr Hurley said the ECB had to be serious about curbing record inflation, which would also help shorten the downturn, but said the Frankfurt-based bank was not locked into a series of rate rises.

He warned the Government to adhere to the EU Stability and Growth Pact which limits budget deficit to 3 per cent of GDP.