Fine Gael TD Peter Matthews estimates there is up to €30bn in losses still lurking in the balance sheets of the Irish banks.
And, he argues, with losses coming in well above what was forecast in the last round of Central Bank stress tests, Irish banks will require a further recapitalisation in the future.
So far the Government has pumped €64bn into bailing out the banks. Roughly €34bn of this amount is in the form of promissory notes relating to Irish Bank Resolution Corporation (IBRC), which is responsible for running down the operations of Anglo Irish Bank and Irish Nationwide.
The Central Bank commissioned the international consultancy firm Blackrock to conduct the stress tests of Bank of Ireland, AIB and Permanent TSB in March 2011. The tests used extreme scenarios for losses that could materialise across the banking sector. A further €30bn was pumped into the three banks following these stress tests.
The Government has argued that the Irish pillar banks are sufficiently well capitalised to absorb future losses. But Mr Matthews says that this position underestimates the extent of mortgage related losses the banks are facing.
“Bank of Ireland has a gross loan book of €105bn, but it only has loss provisions of €7bn. I would estimate that eventual losses will reach 15% of the loan book, which means that Bank of Ireland needs another roughly €10bn in capital.”
Mr Matthews argues that is a 15% loss rate is applied to the other banks, then a total of €30bn in fresh capital will be needed.
The next set of stress tests will be conducted in July as part of EU-wide stress tests overseen by the European Banking Authority (EBA).
Mr Matthews claims that the banks will attempt to hoard capital ahead of these stress tests. Consequently, the banks will not engage sufficiently with the proposed personal insolvency legislation and will refuse to write down the appropriate level of debt needed to solve the mortgage arrears crisis.
The latest Central Bank figures show that there are 86,146 residential mortgages with a value of €16.8bn in arrears of 90 days or more. Moreover, there are 26,770 buy-to-let mortgages with a value of €7.9bn in arrears of 90 days or more.
The three pillar banks also have sizeable loss-making tracker mortgage books. The Government is in negotiations with the European Commission about hiving off these books into an EU funded special purpose vehicle. But if the tracker mortgages are transferred at current market value rather than book value, then that will lead to capital hits for the banks.
If Irish banks need to be recapitalised in the future, then the money will have to come from the European Stability Mechanism (ESM), says Mr Matthews. However, uncertainty over the size of the banking losses and the failure of the banks to recognise these losses will weigh on Ireland’s attempts to regain full market access, adds the Fine Gael TD.
But a banking consultant with knowledge of the stress tests — who didn’t want to be named — disputes Mr Matthews assertions. The banking consultant argued that the last round of stress tests took a very bearish assessment of potential bank losses.
“I don’t think losses will exceed what was set out in the last set of stress tests unless the economy falls off the side of a cliff and I don’t see that happening at the moment. The fact that investors are willing to buy Irish debt at reasonable rates would suggest that they do not see this either,” he said.
The source added that the current EU banking union proposals are aimed at breaking the link between sovereign debt and bank losses. Consequently, even if the losses in the Irish banking system exceed the upper limits of the March 2011 stress tests and require a future recapitalisation, then they would be taken over by the ESM. In this event the Irish Government would not be called on to make further capital injections.
If the banks know that future recapitalisation will be done through the ESM, then it will remove the incentive to hoard capital and not recognise losses. “In the past there was an incentive not to recognise losses because there was uncertainty over who would cover these losses and the alternative was insolvency. But that uncertainty is no longer there,” says the banking source.
Taoiseach Enda Kenny was in Germany yesterday pleading Ireland’s case for bank debt restructuring.
The Government is in two separate strands of negotiations over the €64bn bank debt. The Department of Finance has been in talks with the ECB over wrapping up the promissory notes into a 30-to-40 year bond. The other set of negotiations are focused on the €30bn of legacy debt belonging to the pillar banks. The Government wants the ESM to take over its stakes in these banks.
The success of these twin track negotiations will have a significant bearing on whether the country can successfully emerge from the EU/IMF bailout programme at the end of this year.
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