CENTRAL BANK:THE STRESS tests were designed to provide confidence to the markets and, along with the Government's plan for the banks, did not envisage any losses being suffered by senior bondholders, the governor of the Central Bank, Prof Patrick Honohan, said yesterday.
He said he had always maintained that the Government should not act on senior bank debt without a “green light” from our European partners.
Asked about medium-term European Central Bank funding for the Irish banks, he said: “I don’t see any particular prospect of anything imminent on the cards.” Irish banks currently have funding of more than €140 billion from the European and Irish central banks.
The banks require a further €24 billion in capital to restore market confidence in them, he said.
The figures for extra capital for the four institutions are: Bank of Ireland (€5.2 billion); AIB (€13.3 billion); EBS (€1.5 billion); and ILP (€4 billion). Prof Honohan said the proportionately differing outcomes had to do with the structure of the banks’ loan portfolios and their effectiveness at retrieving loans.
Prof Honohan added it was “only realistic” in the circumstances to expect them all to come under majority State ownership.
Asked when the markets might regain confidence in the Irish banks, he said the markets recognised that the health of the banks and the public services were interlinked. “Fixing the public finances is also a huge prerequisite.”
Prof Honohan described the Irish banking collapse as one of the costliest banking crises in history. The approach being taken was aimed at getting the best net benefit for the Irish people.
“We constantly review if we are going in the right direction. There are no good ways forward, but this is the best way. It doesn’t score very highly on fairness but any other way forward might score a few more apparent fairness points, but it would be a question of biting off your nose to spite your face.”
He said the scenarios contained in the report on mortgage debt and repossessions were not what the Central Bank was expecting.
The figure emerged after the bank engaged BlackRock Solutions to conduct a comprehensive three-month review of the banks’ loan portfolios. The exercise involved an emphasis on “determining the potential scale of loan losses in an adverse and unlikely macroeconomic scenario”.
The severe stress test led to loss provisions of €27.7 billion over a period of three years, €5.5 billion more than the banks’ own assessments. The Central Bank has also estimated the banks would lose a further €13.2 billion when selling non-core loans at a loss.
This would eat up the banks’ capital and other available funds, and meant the banks would require €24 billion to bring them back to the capital requirement the Central Bank has set for them.
The losses involved in the exercise are not likely to transpire in reality, the governor pointed out.