Minister for Finance Michael Noonan has said he is “optimistic” about Irish banks’ ability to withstand this years’ European-wide asset quality reviews and stress tests, pointing out that Ireland imposed tougher tests on its banks in previous reviews.
Because of the banking crisis, Ireland had already “done the job” as regards stress-testing and recapitalising banks, he said in Brussels yesterday .
“We’ve been over that ground twice, first with a full stress test, and secondly with an asset quality review, which happened before Christmas. What’s being proposed in the rule book is very similar to what we had in our first stress tests.”
He pointed out that while the ECB tests require a capital ratio of 8 per cent of risk- weighted assets, the Irish stress tests looked at 10 per cent, though he noted that different instruments are regarded as core tier one capital in the new tests.
“Although different instruments are permitted now, so it’s not an exact comparison, it’s definitely no stricter than what we went through already and is somewhat more lenient.”
The European Central Bank yesterday disclosed details of how it will investigate the balance sheets of 128 European banks, as it prepares to assume direct supervisory control of the bloc’s largest banks in November.
Sampling process
Some €3.7 trillion worth of assets, equivalent to 58 per cent of total risk-weighted assets, will be assessed between now and August,, with an average of 1,250 credit files reviewed at each bank.
The process will be based on sampling, whereby between 1 and 20 per cent of the bank’s portfolio is tested and the results extrapolated to the rest of the portfolio.
While the work will be carried out by national central banks and their auditors, the ECB will monitor the process closely.
The results will be released together with the results of stress tests carried out in co- operation with the European Banking Authority in October.
However, any major problem that emerges during the assessment will be highlighted immediately
The review will examine the carrying value of assets in banks’ balance sheets, including issues that affect balance sheet valuations, such as the provisioning approach, treatment of non-performing loans and forbearance.
“A key factor in determining the appropriate carrying amounts is the valuation of collateral or on-balance sheet real estate,” the ECB states in the 285-page manual published yesterday. The value of collateral will be given by a third- party expert if the bank’s estimate is more than a year old, it states.
The ECB has also set out standardised definitions for non-performing loans, including the requirement that any loan overdue by 90 days is categorised as non-performing, even if it is not impaired.
Sovereign exposures
Further details of how sovereign exposures, which are subject to the asset quality reviews and stress tests, will be assessed will be released next month, officials said.
Yesterday, one of Europe’s biggest banks, Italian bank UniCredit posted a record €14 billion loss for last year, as it took huge writedowns ahead of the stress tests. A number of other Italian banks are due to publish results today.
The ECB has warned European leaders a coherent system for dealing with troubled banks must be in place before it takes over supervisory responsibility for the European banking system.
But following two days of talks, European finance ministers again failed to agree on a revised mandate on the single resolution mechanism (SRM), the central resolution authority, and the €55 billion fund to be used to resolve banks.
A further meeting of finance ministers has been scheduled for next week before a meeting of EU leaders on Thursday and Friday, to try and break the deadlock, with discussions due to continue in Brussels today between the Greek presidency and the European Parliament.
Member states and parliament are under pressure to sign off on the SRM before the parliament breaks up for elections in May.
