Europe is trying to emerge from an extraordinary economic downturn and restoring faith in the Continent’s banks is a key step in doing this. Previous stress tests of the euro zone banks singularly failed to do this. Now we must hope that tests overseen by the European Central Bank -- which will take over regulation of the major euro zone banks next month -- will draw some kind of line in the sand
Of the 130 banks subjected to the test, 25 failed and were seen to need additional capital of €25 billion. While the details of the tests were complex, the results mean regulators believe these banks do not have enough resources on their balance sheet to cope if another economic downturn hits. Most will hope to raise the cash from the financial markets, though benign economic conditions in Europe will be needed for this to happen -- and that cannot be guaranteed.
In Ireland, the two main banks ,AIB and Bank of Ireland , passed the test. It is another milestone in the return of these banks to some kind of normality, but there is still a distance to travel, particularly for AIB.
Permanent TSB failed the most rigorous part of the test, which modelled what would happen in a significant economic downturn. The tests said it needed to raise more than €850 million in new capital. Like many other banks , PTSB has done what it can to raise capital in recent months and now says the net amount it needs to raise is around €125 million.
The most obvious way for the bank to raise more capital is for the state to sell down some of its shareholding. Naturally, the government and the bank were putting their best foot forward in the immediate aftermath of the tests, suggesting that private investors will be found to buy some state shares. This may be the case, but we will have to wait and see whether a deal can be done - and on what terms. PTSB’s fortunes have improved over the past year and its management team deserves credit. However it remains loss-making, with an overhang of tracker mortgages and without an approved restructuring plan from the EU Commission.
Against this backdrop, the government will have to decide, when it sees what offers are on the table, how best to proceed. Another option would be to invest cash from state funds. PTSB is an important part of the banking system and a valuable source of competition, but there is still work to be done if its long-term future is to be secured.
The state must also prepare to start selling down its stake in AIB, while the Central Bank still has a significant regulatory job in overseeing the banks dealing with bad debts built up during the bust -- and making sure new problems do not emerge. The stress tests are an important marker, but the long job of creating a properly functioning banking market here still has a way to run.
