Dáil told tests based on ‘worst case scenario’

THE stress tests for Irish banking were based on a further collapse in property prices of nearly one-third, Michael Noonan warned the Dáil.

The Finance Minister said the predictions had veered heavily towards the worst case scenario in order to restore credibility to the Irish Government’s medium term forecasts after four previous “definitive” totals for the banking crisis proved hopelessly inadequate.

Mr Noonan said two new banking entities would be created to act as “twin pillars” for the Irish financial system and would be built around Bank of Ireland in one structure and AIB/EBS in the other.

Mr Noonan was scornful of the previous government’s decision to guarantee the banks in September 2008, branding it: “the blackest day in the history of the state since the outbreak of the civil war”.

Mr Noonan said “the JCB and the swinging crane” had become the symbols of Irish banking during the bubble boom and the sector now had to cut back to the proper size for an economy as small as the Republic’s.

He accused the Fianna Fáil-Green administration of living in denial and creating an ongoing crisis in which they “paved the road to disaster with good intentions”.

Mr Noonan’s bid to finally draw a line under the banking crisis will see a further €24 billion pumped into the beleaguered institutions — but senior bondholders will not be forced to share the cost, Mr Noonan told the Dáil.

The move will bring the entire banking sector under government control and puts the total bank bailout cost at €70bn.

With the number of domestic banks being cut to just two, opposition parties warned that this would lead to major branch closures and job losses.

Bank of Ireland will be forced to sell off €30bn of assets within two years, while AIB — which receives the lion’s share of the new monies at some €13bn — will merge with EBS to act as a counterweight to BoI.

The Irish Life & Permanent will also be restructured and forced to sell its highly profitable pensions division, Irish Life.

Mr Noonan insisted this restructuring would “break the bonds with our toxic banking past”.

Bank of Ireland, which is already 36% state-owned, will require another €5.2bn, with another €4bn going to Irish Life and Permanent and both institutions falling into majority government hands.

EBS will need €1.5bn and will become part of AIB.

Mr Noonan indicated the extra resources and re-drawing of the sector was needed to make Irish financial policy believable in Europe again and so ensure that bank machines and credit cards in this country continue to function.