LOAN LOSSES at the banks may be “a little larger” than was expected under the new regulator’s first round of stress tests last year, governor of the Central Bank, Patrick Honohan, has said.

The Central Bank will complete the second round of capital stress tests on the banks by the end of March. The liquidity of the banks will also be tested in this round.

“The prospective loan losses will probably be a little larger,” Prof Honohan said in an interview with Reuters.

“We had a base case and a stress case in our March 2010 estimates and if I were a betting man, I would say it would be moving up from the base case.

“That would not be surprising, given the somewhat more disappointing economic statistics since then.”

He did not outline the scale of the expected loan losses in March.

He said the Irish banks had not yet convinced markets they had reached the bottom of the banks’ losses, but providing clear information about their loan books should help ease concerns.

“What we are trying to do is to get precision,” he said.

“It’s much more important to get precision than to land on a particular number.

“If we achieve that, we will go a long way towards getting to the situation where the banks and the Government can return to the market.”

To ensure the banks are fully protected against further shocks, Prof Honohan has insisted they “overcapitalise” above a new core tier one capital ratio of 12 per cent.

The further recapitalisation of the banks is being funded by €10 billion of the €85 billion aid deal agreed with the EU and IMF.

The plan is designed to wean the banks off cheap funding from the European Central Bank and the Central Bank, which had together propped up the Irish banks, including overseas lenders based in Ireland, with discounted funding of €183 billion.

Prof Honohan said the Central Bank would set out a timeframe for reducing the banks’ reliance on such funding.

“Timeframes are going to be defined. They haven’t been defined yet,” he said.

“We are relying very much on external advisers who are closer to securitisation markets.”

He said he did not expect a change of government in the upcoming general election to affect the commitment to targets agreed in the EU-IMF plan.

“The main Opposition parties, from everything they have said, are fully committed to the scale of fiscal adjustment,” he said.

“They might want to change A, B, or C by replacing A, B or C with D, E or F, but they completely bought into the concept that any changes have to be neutral in fiscal terms.”

“I think that the months ahead will see a consolidation of a stable political situation.

“That’s going to be a good basis for completing the programme that we are embarked on.”

Prof Honohan said he didn’t see “any traction” around the idea of sharing bank losses with senior bondholders as Europe had made it clear that this was “a very unattractive proposal”.

Looking forward, he projected a weak economy through 2011.

“The recovery will be very gradual,” he said.