Minister for Finance Michael Noonan told the governor of the Central Bank of Ireland last month that any public comments on the results of recent European bank stress tests should highlight that the design of the examination was "disproportionately negative" for AIB and Bank of Ireland.
This has emerged from documents released to Sinn Féin's finance spokesman Pearse Doherty under freedom of information legislation.
"This was principally a result of the loss projections being based on models that still bear the impairment experience of our recent economic collapse, notwithstanding the very small probability that such a scenario could happen again in the next three years which was the horizon for the exercise," Mr Noonan told governor Philip Lane in a letter dated August 31st.
This was in response to Mr Lane’s letter to the Minister on August 4th, outlining “some observations” on the macro-financial outlook in advance of October’s budget.
Mr Lane had noted that the results of the European Banking Authority stress tests "confirm that the financial system remains vulnerable in the event of a downturn and/or a deterioration in the international financial environment".
“Given this assessment, it is clear that a prudent fiscal strategy remains essential,” he added.
Poor results
AIB and Bank of Ireland fared among the worst financial institutions in the Europe-wide stress test of their capital strength.
Under adverse scenarios applied by the EBA, AIB would have a fully loaded Common Equity Tier 1 ratio of 4.3 per cent at the end of 2018, below the 5.5 per cent level that markets and regulators would typically expect it to hold. For Bank of Ireland, the equivalent figure would be 6.1 per cent.
Mr Noonan said that if other countries’ banks were stressed with the “same inputs as our banks”, their results would have been “very different”.
“ln addition, you are familiar with the unrealistic assumptions contained in a static balance sheet exercise such as the inclusion of expensive debt instruments, which no longer exist.”
Mr Doherty said it was “worrying” that the Minister for Finance feels the need to let the governor know that he should be “talking up” the banks.
“The governor was only doing his job in noting his concerns,” he said. “The Minister’s response suggests a touchiness on the issue that is hard to separate from his plans to offload the banks in the coming years. Such short-term thinking should not stand in the way of an objective view of the health of our banking sector.”
Mr Noonan also told Mr Lane that he was “conscious” of the substantial increase in corporate tax receipts last year and believed it was “prudent to assume lower rates of increase in the future”.
