AIB, BoI face tougher stress tests

IRELAND’S two largest banks will undergo tough stress tests over the next few months, raising questions about their future viability.

AIB and Bank of Ireland both passed tests last year but within months had a capital shortfall that eventually led to the Government being forced to take a bailout from the EU-IMF.

This helped undermine the credibility of the stress tests carrIed out on 91 banks last July and has led to calls for much more stringent and comprehensive testing.

EU finance ministers, meeting in Brussels yesterday, agreed to go ahead with the new round of tests on the same banks and include issues as housing market, banking books, trading books and core tier 1 capital. They will also include liquidity tests, which were excluded last time, though there was some debate on whether the results of this could be made public.

The mortgage arrears situation in Ireland will come under the spotlight, which according to banking expert Kevin Newman could raise major problems for the Irish banks despite the move to raise their capital to 12%.

“There are an estimated 40,000 mortgage holders in serious arrears. If they were to include the possibility of an interest rate increase later this year and the effects of the Government’s austerity measures and consequences for employment — the results could be disastrous,” said Mr Newman. He believes part of the reason AIB and Bank of Ireland passed the tests last year was that the tests did not factor in homeowners, personal credit and that of small businesses. He believes that, depending on the parameters of the tests, the results could show that many banks, especially in Portugal, Spain and Germany are in severe difficulties. “They risk opening a Pandora’s Box — you could have another banking crisis in the EU,” he said.

Banks that have been over-dependent in the past and continue to depend on liquidity from the ECB should be considered to be non-viable, needing to be restructured or shut down, he said.

The issue of how to recapitalise banks that are found to be under-capitalised by the tests also needed to be resolved, he said.

“Where will countries like Portugal or Spain, that are already heavily indebted and struggling, find the money needed to help their banks?”, he asked.

EU Internal Market Commissioner Michel Barnier questioned whether the sovereign debt that banks are holding on their longer-term books should be included in the test.

The parameters of the tests should be agreed next month and the tests themselves finished by May and published in June. They will be carried out by the new London-based European Banking Authority, which takes over from the CEBS working with national regulators.