Credibility of bank stress tests questioned

THE European Commission is being asked to explain why Allied Irish Bank received a clean bill of health in its stress test when it later needed an extra €3 billion from the Irish taxpayer.

Labour MEP Alan Kelly is calling into question the credibility of the stress tests to which 91 banks throughout the EU were subject in July. AIB was one of those that just scraped through, while Bank of Ireland fared somewhat better.

Mr Kelly said the test assumed the bank would raise €7.4 billion it needed in capital by the end of the year. However, the Government was forced to step in with a capital injection when it became obvious that AIB would not be able to raise the money.

He said: “Was the bank giving a truly accurate assessment of its projected losses? What kind of tests were applied to AIB’s loan books?

“For example, did they factor into this any projected National Asset Management Agency discounts to the AIB loan book, which should have been known?”

Banks reported on their own figures and the Committee of European Banking Supervisors cross checked and peer reviewed the data.

The tests were designed to restore confidence in Europe’s banking sector, which unlike that of the US, had not been subjected to such examination. They were aimed at determining how the banks would survive difficult economic circumstances.

Both AIB and Bank of Ireland had also passed what were said by the Department of Finance to be even more difficult circumstances set by the Financial Regulator in March.

They found that both banks had above the 6% Tier 1 capital ratio required, which begs the question of how it was that AIB just a few months later needed a government bailout.

Mr Kelly asked if the stress test was real a examination or just designed to inject some positive sentiment into the European markets.

He has written to Competition Commissioner Joaquin Almunia asking: “With the Irish taxpayer already being bled dry by the banks, can the Commission be certain that no further capital will be required? Will it publish detailed assessments of how they came to their conclusions?”

Economist Nicolas Veron said the tests failed to trigger the necessary restructuring and recapitalisation of Europe’s still fragile banking sector.

He believes further work is needed to put the financial system back on a sound track.