THE BANKS may require up to €27.7 billion of the €35 billion set aside within the bailout fund agreed with the European Union and International Monetary Fund following the March 31st stress tests, stockbroker Davy has said.
A report by the firm estimates the four banks being stress-tested by the Central Bank this month will require between €19.5 billion and €24.3 billion in capital to meet higher anticipated losses.
On top of this, Davy believes that Anglo Irish Bank, which is not subject to the test, will require a further €3.4 billion, bringing the next bank bailout bill to between €22.9 billion and €27.7 billion.
This would bring the total Government capital committed to Anglo to almost €32.7 billion and State cash injected into the six guaranteed banks to €74 billion.
Some €10 billion of the €35 billion EU-IMF bank fund has been set aside for immediate injection into Allied Irish Banks, Bank of Ireland, Irish Life Permanent and EBS, the banks being tested.
Davy said that between €12.9 billion and €17.7 billion of the remaining €25 billion bank contingency fund will be drawn, leaving the amount drawn short of the full €35 billion EU-IMF bank fund.
“We would be hopeful that it would be in the 20 billions range and that some of the €35 billion will remain undrawn,” said Emer Lang, bank analyst at Davy.
Davy anticipates there will be a limited cost from the Central Bank’s liquidity stress test, the prudential liquidity assessment review, which will determine how much in assets have to be sold to reduce the banks in size.
“It assumes that a bank funding solution can be delivered without a significant capital cost,” it said.
The firm estimates that at the upper range of the capital requirement, mortgage losses will peak at 9.2 per cent of that loan book.
This is significantly higher than the 5 per cent mortgage losses estimated by the Central Bank in the prudential capital assessment review this time last year.
The firm said the estimate on mortgage losses compared with 10.5 per cent in the US stress-test model which takes account of higher levels of subprime loans.
The estimate is based on about 7.5 per cent of owner-occupier residential mortgages and 15 per cent of buy-to-let mortgages.
