First phase of stress tests set for later this year

The bank stress tests will be held in two phases with an asset quality review scheduled for later this year followed by stress tests in the first half of next year, the deputy governor of the Central Bank, Matthew Elderfield, said.

There has been confusion about the timing of the stress tests ever since Finance Minister Michael Noonan said they would coincide with EU stress tests which will take place next year. In its last economic review, the troika said it wanted the tests completed before the country exited the bailout programme in November.

Appearing before the Public Accounts Committee (PAC), Mr Elderfield confirmed the tests will be held over two stages. “It is very important the stress tests are aligned with the EBA [European Banking Authority] stress tests and that the same methodology is used.”

The asset quality review will be completed before November.

The banks will need to raise new capital at some stage in order to comply with Basel III banking regulations. However, the outgoing deputy governor refused to be drawn on whether the banks would need to raise more capital following the tests.

At present, AIB, Bank of Ireland, and Permanent TSB are heavily capitalised. Whether they had sufficient capital to withstand future losses depend on the economic recovery and the level of mortgage arrears. But if capital had to be raised then, how it was raised depended on when it was needed and the state of the banks. As it stands there are three potential sources: from the banks through increased profitability; from private investors; or, through the ESM, although political agreement was needed for this last option, he noted.

Mr Elderfield said there would have to be a “significant increase in the level of repossessions” although the current rate here is much lower than in the UK.

Meanwhile, he recommended that either a former judge, or attorney general or even the PAC did a “stocktake into how whitecollar crime was tackled”.

At present investigations are split between the Central Bank, the Office of the Director of Corporate Enforcement and the Garda Fraud Squad. Under the bank’s fitness and probity regime if any former executive of one of the bailed-out banks was looking to become a board member of a financial institution, that would ‘raise a red flag’ and would merit a probe. A total of 94 individuals decided not to take up board positions following contact by the team.

The bank and third-party consultants it employed had failed to detect problems with client funds at Custom House Capital.

Mr Elderfield declined to identify the consultants or if any steps were taken to recover the fees paid to this firm.