Banks may need €18bn of contingency fund

NEARLY €18 billion of the €25bn contingency fund for the banks — which formed part of last year’s EU/IMF bail-out deal — might be needed in order to recapitalise the Irish banks further in the aftermath of next week’s capital and liquidity stress tests.

The Central Bank is due to publish results from its latest PCAR and PLAR (Prudential Capital/Liquidity Assessment Reviews) stress tests on the Irish banks at the end of next week.

In a detailed report into the banks, and their potential capital needs, Davy Stockbrokers yesterday forecast that anything between €12.9bn and €17.7bn of the contingency fund will be needed for the banks after the completion of the stress tests.

Davy analyst Emer Lang suggested that loan losses for the four PCAR-related banks (AIB, Bank of Ireland, Irish Life & Permanent and the EBS Building Society) may not prove as high as speculated upon and the overall capital requirement may be relatively contained; but added that “the spectre of further unquantifiable potential losses has undermined efforts to restore confidence in the Irish banks.”

“Central Bank Governor, Patrick Honohan has summed up Ireland’s two main problems as too much debt — public and private — and a market perception of significant tail risk to the debt, not least the part that relates to the banks.

“These related problems have led to the market’s reluctance to provide continuing funding at a reasonable price,” Ms Lang said.

She added: “Our analysis is limited by the lack of disclosure in PCAR 1 [from last year] but suggests that incremental loan-related losses may come in below €10bn for the four PCAR 2 candidates. Add to this, a provision for possible non-loan loss-related stress and the wind-down banks [Anglo and Irish Nationwide, which aren’t included in this round of stress tests] and we get a range of €12.9bn-€17.7bn within the contingency fund for the banks. It assumes that a bank funding solution can be delivered without a significant capital cost.”

The €25bn contingency bank fund made up the second largest element of the €85bn EU/IMF agreement, with another €50bn covering the country’s budgetary financing needs and €10bn being committed to the immediate recapitalisation of the banks.

Further afield, a study by credit ratings agency Standard & Poor’s has suggested that European banks, as a whole, could be forced to raise up to €250bn if another “severe economic downturn” were to occur inside the next four years.

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