Report notes capital concerns for banks

Irish banking stocks came under pressure in Dublin trading this afternoon on concerns about new capital requirements in a report from a US stock broker and investment bank.

In a research note to investors, Keefe, Bruyette & Woods Ltd (KBW) said Bank of Ireland and Anglo Irish Bank have lower Tier 1 capital, a measure of financial strength, than most European banks.

It said Ireland was among the countries that would need to raise the most new capital under Basel II, which aims to modernise capital rules to make bank lending and their balance sheets more sensitive to risk.

KBW said that when geographic and macro risks to rating downgrades and lower collateral prices are assessed alongside low core tier 1 ratios Bank of Ireland appears as one of the banks most at risk from rating downgrades and lower collateral prices.

At 3.20pm Bank of Ireland shares were down over 5 per cent at €6.63, valuing the company at €6.7 billion.

The report says Anglo Irish Bank faces similar macro economic risks to Bank of Ireland, but has a slightly higher core tier 1 ratio. Anglo Irish Bank shares were trading down just under 3 per cent at €6.96 this afternoon.

The note regards "Spain, Ireland, Denmark and the US as the countries most at risk due to GDP forecasts being cut, unemployment rising considerably and houses prices that are either high or have already started to fall."

It notes that Basel II will exaggerate the normal affects of an economic downturn, when banks have less capital for lending, defaults write-offs rise hitting bank equity.

“Basel II exaggerates the effect by factoring in rating downgrades/upgrades”, the note said.