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Banks (Finance)

Irish Banks Pass EBA Stress Tests, Ongoing Euro Crisis Looms Large

Strategic Insights

— 2 min read

Ireland's debt-engulfed lenders, including Bank of Ireland, Allied Irish Banks, and Irish Life and Permanent, have passed an adverse scenario stress test set by the European Banking Authority. The results came as the country's bailout lenders, the European Union, International Monetary Fund, and the European Central Bank, oversee the restructuring plans of the lenders. Analysts, however, note that the results may have limited relevance to the Irish banking system, as they were conducted separately from the extensive stress-test regime by the Irish central bank in March.

Key Takeaways:

  • The European Banking Authority (EBA) conducted an adverse scenario stress test on Ireland's three main banks, which included Bank of Ireland, Allied Irish Banks, and Irish Life and Permanent.
  • The test results showed that Bank of Ireland recorded a 7.1% core Tier 1 ratio as of April 30, rising to 8.7% by the end of 2012. Allied Irish Banks posted a 10% capital ratio, rising to 11.7% over the same period, while Irish Life and Permanent recorded a 20.4% capital ratio, easing to 20.0% by the end of next year.
  • Irish Finance Minister Michael Noonan welcomed the EBA disclosure of sovereign debt holdings by banks, which showed that Irish banks held 61% of a total of EUR52.7 billion in exposures to their government.
  • There are significant differences between the EBA and the Irish central bank's tests, including different thresholds and assumptions about bank losses over time.
  • The ongoing euro debt crisis is likely to overshadow the positive aspects of the test results, according to Conor Houlihan, partner at law firm Dillon Eustace.

Statistics:

  • Bank of Ireland: 7.1% core Tier 1 ratio (April 30, 2011), rising to 8.7% (December 2012)
  • Allied Irish Banks: 10% capital ratio (April 30, 2011), rising to 11.7% (December 2012)
  • Irish Life and Permanent: 20.4% capital ratio (April 30, 2011), easing to 20.0% (December 2012)
  • Irish banks held EUR52.7 billion in sovereign debt exposures, with 61% of this total held by Irish banks themselves.
  • The Irish central bank estimated that four banks needed an additional EUR24 billion in capital and buffer reserves over three years.
  • Bank of Ireland needed EUR5.2 billion more in capital and other buffer reserves, including EUR3.7 billion in core Tier 1 capital between 2011 and 2013.
  • Allied Irish Banks needed EUR13.3 billion, including EUR10.5 billion in capital over the same period.
  • Irish Life and Permanent required EUR4 billion, including EUR3.3 billion in core capital.

Sources:

  • Dow Jones Commodities News Select via Comtex, "Finance Minister Noonan Welcomes EBA Results"
  • Dow Jones Newswires, "Irish Banks Pass Stress Tests, Ongoing Euro Crisis Looms Large" by Eamon Quinn, Dow Jones Newswires.

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