Ireland’s three main domestic banks will once again have to undergo a series of extensive balance sheet assessments as part of an EU-wide exercise to test their ability to withstand various shocks to their balance sheets.
AIB, Bank of Ireland and Permanent TSB, all underwent balance sheet assessments in the second half of last year as a condition of our exit from the EU-IMF bailout programme.
The tests, based on data for the end of June 2013, were undertaken by the Central Bank of Ireland and found that while none of the banks required extra capital, all of them should take additional provisions for property-related exposures.
Assessments
The Central Bank had hoped that these assessments would suffice for this year's EU-wide exercise, and avoid a duplication of cost.
However, a spokeswoman for the Central Bank told The Irish Times yesterday that another round of assessments – called asset quality reviews by the EU – would now be required.
The assessments are a precursor to the EU-wide stress tests and are expected to begin in the middle of this month.
However, there does appear to be some good news for the Irish banks in relation to the stress tests. The European Banking Authority (EBA) has decided that an 8 per cent Common Equity Tier 1 threshold will be the hurdle set for the baseline scenario and 5.5 per cent CET1 for the adverse scenario.
This is above the respective 10.5 per cent and 6 per cent thresholds the Central Bank has applied to Irish banks and would appear to improve the chances of them coming through the tests without being required to raise more capital.
A lot will depend on the precise criteria for the stress tests that will be used by the EBA and the types of scenarios they apply in assumptions around the likes of property prices, unemployment rates and GDP growth. The methodology is expected to be set out by the EBA in April.
The stress tests are set to begin in May with the results published in October. This is just in advance of the Single Supervisory Mechanism for the euro zone area beginning life on November 4th.
The stress tests will apply to 124 banks in 22 EU member states, including AIB, Bank of Ireland and PTSB here.
Banks will be required to stress a common set of risks, including credit risk, market risk, sovereign risk, securitisation and cost of funding.
Stress
Both trading and banking book assets will be subject to stress, including off-balance sheet exposures. National regulators may include additional risks and country-specific sensitivities beyond this common set but the published results should allow for understanding the impact of the common set of risks in isolation.
The EBA plans to disclose the results of the tests on a bank-by-bank basis. This will include the capital position of banks, risk exposures and sovereign holdings. The “resilience” of the EU banks will be tested for the period 2014 to 2016.
