The four domestic Irish banks subject to the European Central Bank’s new stress tests will have to meet lower capital thresholds than required in previous Irish tests.
This will give them an additional capital buffer against potential losses.
As announced yesterday, the ECB is set to engage in a three-stage assessment of the 128 most significant banks in Europe, which will come under its direct supervision when the Single Supervisory Mechanism (SSM) is established next autumn. Five Irish banks are subject to the ECB's comprehensive assessment: Bank of Ireland, AIB, Ulster Bank Ireland, Permanent TSB and Merrill Lynch International Bank.
Asset size
According to the ECB, the criteria for selecting the banks is as follows:
The three largest banks in the country by assets;
Banks where the asset size is above €30 billion;
Banks whose assets comprise more than 20 per cent of the country's GDP.
Merrill Lynch International Bank (now owned by Bank of America) is the largest bank in Ireland, according to Top1000.ie, with assets of €381 billion, followed by the other four banks on the list.
For Ciaran Callaghan, banking analyst with Merrion Capital, the ECB's announcement is "probably positive", in that the 8 per cent core tier 1 capital threshold required under the exercise is slightly lower than the 10.5 per cent indicated in the Central Bank's PCAR exercise.
This means, says Mr Callaghan, that the Irish banks will have an “additional capital buffer”, which could be used to offset loan losses if needed. Bank of Ireland and AIB currently have capital ratios of 14.2 per cent and 15.1 per cent respectively, although these are not directly comparable with the ECB’s proposed threshold.
It is still uncertain what will happen in the event that a capital hole is found as part of the assessment. “That specific element has a bit more to play-out,” says Mr Callaghan.
The ECB will start collecting data in November, which will involve co-operation between itself and central banks across Europe, and the creation of “mixed teams”, of ECB and central bank staff.
The ECB's stress tests will carry on from the Irish Central Bank's balance sheet assessments, which are currently being undertaken in line . These tests will likely feed into the ECB's exercise. "We won't necessarily reinvent the wheel," says a spokeswoman for the ECB, noting that where data from the Central Bank is available and is not outdated, it will be used.
Capital assessments
Results of the on-going Irish tests are expected to be sent to the troika by the end of this month, and to be published internally next month. Unlike previous capital assessments, the Central Bank assessments will not be published publicly.
"Though the results are not expected to be made public, they will inform banks' year-end financial statements with any corrective actions communicated to the market in time," says Emmet Gaffney, an analyst with Investec.
