Central Bank divisions over stress tests

It is believed different views have emerged within the Central Bank about what would happen if an Irish bank needs more capital following the stress tests this year.

It looks as if the stress tests of the Irish banks will be conducted later this year before the country exits the EU/IMF bailout programme in November.

The last round of stress tests carried out in March 2011 found that an extra €24bn in capital was needed for the three pillar banks.

Preliminary planning and discussions have now begun on the next set of stress tests. One view is that the Irish economy needs three functioning banks.

Consequently, if there is a capital shortfall following the stress tests, the next step should be to quantify how much capital is needed and go about raising that amount either from private sources or through an EU fund.

However, the other view is that the Irish banks already have very aggressive provisions in place. Therefore, if more capital is needed then questions should be asked about that bank’s future.

Bank of Ireland is 15% owned by the State and the closest to returning to profitability and making a full return to private ownership. But AIB and Permanent TSB are both 99.8% state-owned. Permanent TSB has submitted a restructuring plan to the European Commission that would see it split into a good bank and bad bank with a separate division for its British business. It faces the biggest challenges among the domestic banks in returning to profitability and carving out a viable future. One of the views being put forward is that, if Permanent TSB needed capital, then it should be turned into a bad bank. Its good assets could be transferred to one of the other banks. It would then be used as a rundown bank for the troubled assets of Bank of Ireland and AIB.

The benefits of this approach is that the capital requirement for a rundown bank is only 4% whereas the minimum core tier one capital for AIB and Bank of Ireland is 12%. Consequently the cost of capital would be much cheaper to manage a much greater amount of assets. Moreover, Bank of Ireland and AIB, free of troubled assets would return to profitability much quicker and would be much more beneficial for the wider economy.

However, there would be huge issues around the transfer of assets and how much PTSB would pay for these assets and whether it was compatible with EU state aid rules. Moreover, it is not certain the Government would want another bad bank following the liquidation of IBRC.

Also, it is thought the European Commission wants PTSB as a third force in Irish banking. According to one source nothing has been decided and the Central Bank has not developed any policy on this issue. The Central Bank declined to comment.