Experts prepare for bank stress tests

Personnel from Blackrock International are in the Central Bank preparing the groundwork for the next round of stress tests on Irish banks, which will be held this year, the Irish Examiner has learned.

However, the Department of Finance has said in the latest memorandum of understanding with the troika that it will not publish the results of the stress tests until the European-wide EBA stress tests are unveiled next March.

According to a source, Blackrock International has been meeting with Central Bank staff over the past couple of weeks with the aim of setting out the terms of the stress tests.

It is now expected that the stress tests of the domestic banking sector will be completed in the second half of this year.

The Central Bank declined to comment.

Blackrock International conducted the last round of stress tests in Mar 2011, which found that the Irish banks needed a further €24bn in capital.

AIB received €13.3bn; Bank of Ireland €5.2bn; EBS — which is now part of AIB — €1.5bn; and Irish Life & Permanent €4bn.

The pillar banks — Bank of Ireland, AIB, and Permanent TSB — are now among the best capitalised in OECD countries.

Bank of Ireland’s core tier one equity capital was 14.4% at the end of December, AIB has a core tier one equity capital of 15.1% and PTSB has a core tier one equity capital of 18%.

Blackrock laid out a base case scenario and an adverse scenario in Mar 2011. The banks were capitalised to withstand the losses envisaged in the adverse case scenario.

Losses over the past two years are now approaching the levels outlined in the adverse case scenario.

Whether the banks need more capital after the next round of stress tests depends on losses from the mortgage arrears crisis and whether there is another leg in the economic downturn.

AIB and PTSB are both state-owned. If either bank needs to be recapitalised then it will create potentially destabilising uncertainty. The European Commission and the Eurogroup of finance ministers are rowing back on the idea of using the European Stability Mechanism (ESM) to inject capital into beleaguered banks. That would leave the onus on the Government to stump up the capital shortfall, which would have huge implications for the country’s ability to exit the IMF/EU bailout programme at the end of the year.

Bank of Ireland is 15% state-owned. Michael Noonan, the finance minister, recently said that if Bank of Ireland needed a fresh round of capital then he would expect it to tap private investors.