THE COUNTRY’S two biggest banks, Bank of Ireland and Allied Irish Banks (AIB), passed an EU-wide stress test to assess the eurozone’s ability to withstand a double-dip recession and a sovereign debt shock.
However, just seven of the 91 European banks tested failed the financial health check with a total capital shortfall of just €3.5 billion, sparking fears that the much-anticipated test was far too soft.
Banking analysts had expected between five and 10 banks to fail and estimated the capital shortfall could be up to €90 billion. No large banks failed, as expected.
The EU authorities insisted that the tests took account of “plausible but extreme” scenarios.
Bank of Ireland was found to have an excess of €933 million above the capital level set as the test’s pass mark, while AIB passed with a buffer of €352 million.
The results show neither bank requires further capital beyond the levels demanded by the Financial Regulator following its more rigorous tests earlier this year.
The test took account of the €2.9 billion already raised by Bank of Ireland and assumed that AIB will raise the regulator’s €7.4 billion capital target either from private investors or the Government.
Minister for Finance Brian Lenihan said that AIB planned to raise capital through the sale of new shares which would be “underwritten by the State or international investment banks” after the bank had sold overseas businesses.
The tests, which followed weeks of haggling among EU finance ministers over their scope, were aimed at bolstering confidence in the sector by removing unfounded suspicion from healthy banks.
Among the banks to fail was state-owned German lender Hypo Real Estate, whose Dublin bank Depfa ran out of cash last year, leading to Hypo’s nationalisation.
Five of Spain's smaller regional banks, known as cajas, failed along with Greece's Atebank. Of surprise to some analysts was the reported resilience of German state-owned regional lenders, or landesbanken.
But even as the European authorities said the results pointed to a strong banking sector, they warned that many of the banks still relied on government support. The review found 38 of the 91 banks rely on continued government support of €170 billion.
While the exposure to European sovereign debt was scrutinised, the tests did not assume a possibility that an EU country would not be able to pay its debts. Considering a default by a country would have been “self-contradictory”, said European Central Bank vice-president Vitar Constancio, rejecting charges the credibility of the test had been damaged.
The EU test ranked Ireland third riskiest behind Greece and Portugal – and ahead of Spain and the UK – under sovereign debt losses in a worse-case scenario. The Committee of European Banking Supervisors, which oversaw the exercise, tested for a sovereign debt crisis involving a write-off of 12.8 per cent on Irish State debt – but not a full default – behind Greece with 23.1 per cent and Portugal with 14 per cent.
A “tier one” capital-to-loans ratio – a measure of a bank’s ability to absorb possible losses – of 6 per cent was set as the pass mark. Bank of Ireland passed with 7.1 per cent, while AIB came in at 6.5 per cent. But both banks fell below the aggregate level of 9.2 per cent across the 91 European banks.
Both Bank of Ireland and AIB climbed slightly in trading on the New York Stock Exchange after the test results were disclosed following the closure of EU markets.
The test included the Irish regulator’s estimated losses on property loans moving to the National Asset Management Agency (Nama) as well as development loans below €5 million remaining with the two financial institutions.
