Bank shares plunge amid stress test details

The value of bank shares plunged across the eurozone as details of the ECB stress tests, which will be carried out over the next 12 months, were unveiled.

There is still no political agreement on key parts of EU banking union, including how banks will be recapitalised in the event that the stress tests expose capital shortfalls.

However, analysts say the Irish pillar banks are unlikely to need capital following the stress tests.

Investec chief economist, Philip O’Sullivan, says the plans unveiled so far have failed to live up to the pledge made at the Jun 29, 2011, EU summit by EU leaders to break the “deadly embrace” between highly indebted governments and the banking system.

Berlin is adamant that if a bank needs to be recapitalised, then it would first have to tap private investors, including bail-ins of shareholders and junior debt holders before public funds can then be accessed.

ECB president Mario Draghi has warned that if bailing-in junior bondholders is made a pre-condition for using public funds to recapitalise banks, then it will destabilise the entire system and lead to further fragmentation across the region.

Moreover, even though the EU Commission wanted the ESM to be used to recapitalise banks, the German government wants each country to take responsibility for recapitalising its own banks.

But if the responsibility for recapitalising banks falls on already overstretched sovereigns, then it could lead to another flare-up of the debt crisis.

The ECB will take over responsibility for supervising the banking system, including direct supervision of Bank of Ireland and AIB at the end of 2014.

Five Irish banks will be covered by the stress tests in 2014, including Bank of Ireland, AIB, Permanent TSB, Ulster Bank and Merrill Lynch International.

The Irish banks are currently undergoing a balance sheet assessment, which will be less rigorous than the stress tests scheduled for next year.

Mr O’Sullivan believes that the Irish banks are sufficiently capitalised to come through the stress tests on the basis that the last set of stress tests carried out in Mar 2011 were done according to adverse scenarios. Economic growth, unemployment and the mortgage arrears level have all performed better than these adverse scenarios.

According to the ECB, the stress tests have three goals: “transparency — to enhance the quality of information available on the condition of banks; repair — to identify and implement necessary corrective actions, if and where needed; and confidence building — to assure all stakeholders that banks are fundamentally sound and trustworthy.”