Regular stress tests will be feature for Irish under banking union

Irish banks will have to undergo regular stress tests as part of the new European Banking Union, one of the region’s top regulators told a conference in Dublin.

Regular stress tests will be feature for Irish under banking union

Daniele Nouy, chair of the supervisory board at the ECB, said, “stress tests are another tool in the tool box. They will go on for some time.”

However, these stress tests will not be on the same scale as the tests scheduled for later this year as part of the Comprehensive Assessment of the banking system, she added.

Speaking at the Irish Banking Federation’s Banking Union Conference, Ms Nouy said the Irish banks are moving in the right direction, although sorting out the mortgage arrears problem remained the biggest challenge.

She said that markets are well disposed to banks looking to raise capital. “The markets are in a reasonably benign situation and there is liquidity ready to be invested in banks, in equity or funding, if the markets are convinced by the transparency exercise that we are undertaking.”

Overall, Ms Nouy said the ECB’s Single Supervisory Mechanism (SSM) remains on track to take over the direct supervision of 130 of the region’s largest financial institutions by the end of this year.

The three domestic Irish banks — Bank of Ireland, AIB, Permanent TSB — are all coming under the direct supervision of the ECB as well as Ulster Bank and Bank of America Merrill Lynch.

Prior to the launch of the SSM, the banks have to undergo an asset quality review and stress tests. If any of the banks fail these tests they will have to raise capital to plug any shortfall.

Speaking at the same conference, deputy governor of the Irish Central Bank, Cyril Roux, said that the asset quality review exercise for the Irish banks are well advanced.

“Why not publish the results now, or afford you a sneak preview? Because the first sets of preliminary results may well turn out to require a lot of validation, consistency checking, supervisory dialogue, integration and rework before we can all stand behind them.

“The next four months will see a period of challenge, quality assurance, integration of the asset quality review results and finalisation. The results will then be published by the EBA for all banks in their sample. For those banks that are also part of the SSM, it is expected that results of the Comprehensive Assessment will be published thereafter — recognising the unique integration of asset quality review results into the forward-looking stress test capital requirements,” said Mr Roux.

Even though Irish banks will be directly supervised from Frankfurt, this will be done in conjunction with staff at the Central Bank.

Mr Roux said the main changes under the new regime is that “the supervisory manual is more prescriptive than our current processes and it provides greater linkage between individual risks and a quantitative outcome.”

Moreover, the level of supervision will be much more intrusive with a much greater focus on on-site inspections, said Mr Roux. “The on-site inspections will be more prominent and more formalised with different aspects of the engagement led by different functional experts and possibly led by heads of mission from a different national supervisory authority.”

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