‘Stress tests’ show bad loans must be dealt with urgently

Eugene McErlean: Abnormal to have that number of bad loans.

New urgency is needed to review the huge number of impaired loan books after stress tests showed the Irish banks remain among the weakest in Europe, a leading banking expert has said.

The European Banking Authority (EBA) stress tests applied tests to 51 lenders across Europe, including Allied Irish Banks and Bank of Ireland.

AIB fared poorly, with its capital ratio falling as low as 4.3% by the end of 2018 under a future economic shock. With a 6.1% capital ratio, Bank of Ireland performed better but still lagged many European peers.

Expert Eugene McErlean said the EBA’s findings could be positive for small businesses and households here, but only if the lesson from the stress tests is applied. The main reason the Irish banks were at the bottom of the pile was because of the non-performing loans on their books, Mr McErlean said.

“It is abnormal to have this amount of non-performing loans. The rate of decrease is abnormally slow. Other countries which had large amounts of non-performing loans have dealt with it. The issue is recognising the actual value of the loans on the banks and the EBA has called it,” Mr McErlean said.

He said regulators have repeatedly said the banks have enough capital to recognise their losses but no one will know until the banks write down the losses on their books.

In recent months, Mr McErlean has advised the Independent Alliance grouping of TDs on ways to deal with the country’s huge amount of distressed mortgage debt. He has been critical of the slow progress in resolving distressed home loans.

“Once you do write down loans, it increases the banks’ capacity to lend into the real economy,” he said.

Philip O’Sullivan, chief economist at Investec Ireland said the Irish banks were generating sustainable profits.

Writing in the irisheconomy.ie blog, economist Colm McCarthy said “the essential reason” the EBA scored Irish banks relatively poorly was its test applied a sharper economic downturn for Ireland than that applied to other eurozone countries.


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