Irish banks expected to pass EU stress test

ONE German, two Portuguese and a number of Spanish banks are expected to fail the EU’s stress test, with Allied Irish Bank being given a conditional pass according to official hints.

The results will be released this evening at 5pm Irish time, as originally planned by the London based Committee of European Banking Supervisors (CEBS), while details of the methodology used will be released earlier in the day.

Bank of Ireland is expected to pass, as it has already raised the €2.9 billion additional capital it was found to require when it was tested by the Irish regulator in March. Allied Irish Bank, found to need €7.4 billion, will be passed on the understanding that it will raise the money by year end.

The Government will underwrite the fundraiser, Finance Department sources have confirmed, and the sale of overseas assets by both banks is going ahead. Restructuring plans for BoI were approved by the European Commission last week; and those for AIB, if not released next week, will be in the autumn.

The Munich-based Hypo Real Estate bank is tipped to fail, having been bailed out by the German government in 2008 and controversially nationalised last year. It is one of the biggest holders of debt from the troubled eurozone countries including Greece, Spain and Portugal.

They plan to spin off much of its balance sheet of about €210 billion of mostly property loans into a bad bank later this year following government approval.

While the major Spanish banks, like Santander, are known to be healthy, the smaller regional cajas are not, holding much of the mortgages for the collapsed housing bubble.

There were suggestions that the results for the 91 banks should be published earlier before European markets closed, giving them a chance to react rather than leaving the field to the US markets.

However, a teleconference between finance officials from the member states, CEBS and the ECB yesterday morning agreed to leave the publication time as agreed but to issue the methodology earlier.

This should clear the air of suspicion that the tests have not been sufficiently tough before European markets close and reassure them that the banking system is strong enough to survive if the economy deteriorated and if those with sovereign debt had to write off some of it.

Banks holding sovereign debt — mostly German and French banks — are understood to have been told to factor in a 20% drop in the value of Greek government bonds, 11% for Portuguese, 8.6% for Irish, 6.7% for Spanish, 4.9% for Italian and 2.3% for German.

However, they only need to factor them in if the bonds are in their short-term trading books rather than being held as long-term investments — something that raised questions about the adequacy of the tests.