D-day as banks to finally learn their fate

WHEN the banking crisis erupted in September 2008 experts stressed the importance of coming to terms with the crisis as quickly as possible.

Professor Ray Kinsella of the Smurfit Business School in UCD said it was imperative that we got to grips with the crisis without delay. Countries that adopted that kind of approach did better than those that let the uncertainty drag on.

Two-and-a-half years down the line we have been kept waiting until today for a final assessment of the capital requirements of the banks here and the consequences of that have been enormous.

The ambition of this latest round of stress testing is to ensure that the banks know what they have to raise in fresh capital and that more critically the European Central Bank and the international money markets know that we have drawn a line in the sand in terms of determining the fate of the Irish banking sector.

European Central Bank Executive board member Lorenzo Bini Smaghi said the ECB expects Ireland to stand ready with a “backstop facility” for its banks.

“We expect the government to stand ready with a backstop facility to reassure markets and creditors that the banks are viable,” he said in Moscow yesterday, according to Bloomberg.

Peter Brown, managing director of the Irish Institute of Financial Trading, said the latest round of stress testing should, after 30 months of waiting, finally decide how much funding the banks need.

To date the state has invested €46.3bn in the banks, some of which are in the process of being wound down. Both Anglo Irish and Irish Nationwide had to be taken over by the state and will cease to exist in any meaningful way.

AIB is now over 92% in state hands and it looks as if by 4.30pm today Irish Life & Permanent and Bank of Ireland will also be owned by the taxpayer. It’s an extraordinary turn of events that the six Irish banks are either bankrupt or about to become state owned.

The very rigorous stress testing being put in place is to ensure the banks that remain are adequately capitalised. Unless that line is drawn in the sand today as a result of these new stress tests the Irish banks and the economy could be undermined for decades.

Mr Brown said the upshot of the new analysis will be to highlight the fact that the burden is too much for us to handle without serious concessions and support form the EU and the ECB.

Europe will have to give us far greater assistance to sort out both the banking crisis and the national debt imposed on us due to the collapse of the banks and by the disastrous bank guarantee in September 2008.

He warned that getting the capital issue sorted is just one part of the jigsaw.

It is still far from clear that today’s stress testing exercise and the nationalisation of the entire Irish banking sector will be sufficient to allow us to go back into the money markets next year to raise money independently.

Some analysts fear unless serious concessions are made on the €85bn EU/IMF bailout that the economy and banks will continue to struggle long into the future.