CENTRAL BANK Governor John Hurley has said there is no sign of a "material increase" in loan arrears in Irish banks, whose shares have dropped significantly amid fear of lower profits and higher bad debts in the economic downturn.

Publishing his 2007 annual report yesterday, Mr Hurley said preliminary results from the latest stress tests on the bank sector suggest that its shock absorption capacity remains strong.

Irish banks were not immune to the dislocation in international money markets, but they remained well-capitalised with good asset quality, he said.

"While the share prices of Irish banks have fallen, it is important to point out that the direct and indirect exposure of Irish banks to US subprime mortgages is negligible, and there is no sign of a material increase in loan arrears.

"Accordingly, the banking sector here has not experienced the writedown of assets that has required some of their international peers to raise additional capital, thus Irish banks are well capitalised with good asset quality.

"In line with the results of previous exercises, the preliminary results of our latest macroeconomic stress tests on the banking sector, suggest that the banking sector's shock absorption capacity remains strong. This strength is an essential prerequisite for the more challenging times that have arisen."

Investment bank Merrill Lynch yesterday cut its earnings estimate for next year for AIB by 32 per cent and lowered its forecast for Bank of Ireland by 49 per cent.

Anglo Irish Bank shares closed down 8 per cent at €4.85 last night.

AIB was down 4 per cent at €8.21.

Irish Life Permanent was down 3 per cent at €4.72.

Bank of Ireland rose 2 per cent to €4.94.