Bank stress tests - Full extent of problem laid bare

Yesterday’s announcement of the result of the Central Bank’s stress tests into the country’s banks was designed to boost confidence by providing a realistic insight into the extent of the financial problems facing the country.

The tests essentially envisaged bad case scenarios “on a scale that is unlikely to occur,” according to the Central Bank governor Patrick Honohan.

The report indicated that a further €24 billion will have to be pumped into the banks, confirming the growing suspicions that the true financial plight of the banks had been grossly underestimated. The latest move is essentially the fifth round of bank bailouts since October 2008, when then Finance Minister Brian Lenihan announced the process would cost €1bn over 10 years. This was categorised as the cheapest bank bailout in history. The extra €24bn announced yesterday will bring the total cost of bank bailouts to €70bn.

Irish Life & Permanent was the only one of the six Irish banks that were trading at the start of the banking crisis that had up to now avoided state intervention. But it halted trading in its shares earlier this week after rumours of imminent nationalisation led to a record 45% drop in the value of its shares.

Some surprise was expressed yesterday at the extent of its recapitalisation, at €4bn. Should questions be asked about the surge in trading this week?

The first step in tackling any problem is to know the extent of the problem. Hence publication of the stress tests findings should be warmly welcomed, even with the warning that they were based on a pessimistic outlook.

In announcing a “radical restructuring of the banking system” in the Dáil yesterday, Finance Minister Michael Noonan was blisteringly critical of the previous government for lumbering Irish citizens with virtually all banking debts regardless of reckless lending.

He noted that Irish bankers were “as likely to be funding the apartment block in the Black Sea or dabbling in property schemes in Singapore as they were investing in the Irish economy”.

In addition to refinancing the banks, Mr Noonan stressed the need to restructure them. This will involve fewer and smaller banks that will be more domestically focused. He envisages two pillar banks — the Bank of Ireland will be one pillar, while the Educational Building Society will be merged with AIB to form the second pillar.