Anglo scandals prompt S&P to downgrade banking system

DAMAGE caused by scandals at Anglo Irish Bank has forced Standard & Poor’s (S&P) to downgrade Ireland’s banking system for the second time in three months.

It said Anglo has “weakened investor confidence” while the reputation of Irish banking with the public and the investor community has suffered in recent months.

The New York-based ratings agency believes the regulator has shown “some reluctance” to intervene, particularly in Anglo’s case.

Ireland’s Banking Industry Country Risk Assessment (BICRA) was downgraded by S&P to group three from group two, having already been downgraded from group one in December.

The scale ranges from group one being the strongest to group 10, the weakest. Banking systems ranking similarly to Ireland in group three include Portugal, Austria and Japan.

S&P said the Government’s plan to create a central banking commission that incorporates the functions of the Central Bank and the Financial Regulator will be a positive development but will likely take time to take effect.

It also believes all Irish banks face major near-term challenges from the economic downturn.

“The adverse economic environment has led to a very weak outlook for asset quality,” analysts said.

S&P said a shift to group three has no direct impact on its ratings on Irish banks while an upward revision to group two is “unlikely in the medium term”.

“If this were to happen, it would likely follow radically improved prospects for the economy and bank earnings, and renewed confidence in the regulatory framework.

“A further downward revision would most likely be driven by significantly weaker long-term prospects for the Irish economy and could pressure our ratings on the individual Irish banks,” analysts said.

S&P expects to see the dominant market positions of AIB and Bank of Ireland to be strengthened.

It believes the government has shown significant support to the domestic banking sector, evidenced by the nationalisation of Anglo, the re-capitalisation of AIB and BOI in February and the intention to extend the bank liability guarantee scheme beyond September 2010.