Stress tests raise questions for Irish banking system

An EU-wide stress test suggests that our banks are not in fact on top of their game as they would have us believe.

Despite the strong argument that the results of the recent banking stress on Ireland’s two main banks were not a fair reflection of the banks’ position should we be concerned at those banks effective failure to meet the requisite protection standards?

Are there implications for both investors and depositors?

It has been argued that the stress tests undertaken were in fact a look at what would happened in a set of circumstances somewhat similar to what happened at the start of the financial crisis in in 2007, or worse.

On the basis of the stress test undertaken by the European Banking Authority — the EBA, both Allied Irish Banks and Bank of Ireland were seen to be poorly placed to overcome the fallout, relative to most other European banks in the EBA sample.

The bottom line is that the level of non-performing loans in the Irish banks is still too high in comparison to the vast majority of the other banks reviewed.

It has been further argued, however, that the banks are generating sustainable profits.

The immediate question is how are banks making these profits?

Is charging interest rates for some SME loans up to 4% higher than eurozone competing countries sustainable?

Senior political and financial sources have insisted that these test results will not in any way affect the performance of the banks or the Government’s intention to sell some or all of its shareholdings in 2017.

However, that was knocked somewhat on the head when share prices very quickly reflected investors’ views of the situation.

It is important for the economy that we have a strong banking sector and that the business community and the public at large have confidence in the sector.

However, our experience over the last eight years is that our bankers by and large have held back the full details of their loan books. We will need convincing.

For instance, why is the level of non-performing loans still so high? Is it because the banks genuinely believe that the loans will bear fruit and are recoverable.

Or, is it a case of wishful thinking, or worse still disingenuousness, when, in fact, it is extremely unlikely that the loans will ever recover?

If it is the former, then we would have to question the prudence of such views given that it is now over eight years since the slump started. If it is a fact that many of the loans won’t recover, our banks are not as strong as we think.

It’s impossible for us to forget the events of the 2008 financial crisis.

There is, of course, the recent prison sentences imposed on the three bankers for their part in an attempt to make Anglo Irish Bank’s balance sheet looks considerably better than it really was.

To quote a recent commentary from the Irish Examiner — “the fallout from Anglo did not just cost us our economic sovereignty. It brought enormous hardship and distress to many people; most of them investors with modest means who could ill afford to lose what money they had”.

That is one of the backdrops that most of us have when we look at the banks. The other backdrop is the fact that there is a widespread view that most of the bankers who caused the collapse are once again enjoying large salaries.

The banks are squeezing the rest of us to the pin of our collars with high-interest rates and poor-to-zero returns on our deposits.

Such interest rates might be acceptable, and even then barely so, if the monies generated were solely for the benefit of returning the banks to the necessary financial strength to overcome any financial calamities.

However, when there are questions about the sustainability of the profits, we cannot have strong confidence in the banks.

When there are suggestions that some banks may start charging interest to bank depositors our concerns are greatly increased.

It is a fact that we do need a strong banking sector.

But questions remain about just how healthy the banking system is.


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