Four banks could lose €9.5bn on home loans
Issued : 1 April 2011
Irish Examiner
YESTERDAY'S stress tests found that in a worst case scenario the country's four banks could lose almost €9.5 billion on residential mortgages and €37.7bn in total over the next three years.
The Central Bank concluded the banks will require a further injection of €24bn to shore up their capital bases and help them cope with such losses.
That will bring the total amount invested in the banks to €70bn.
Under the tough tests agreed by the bank with leading international financial experts BlackRock Securities, AIB will require €13.3bn, Bank of Ireland €5.2bn, EBS €1.5bn and Irish Life & Permanent will need an additional €4bn in funding.
The Central Bank also set targets for how much the banks must reduce in size.
That will require a measured sell-off of overseas assets and the run-down of other assets still on the books of the banks that are seen as surplus to requirements at this stage.
The increased burden imposed on the four banks by the new stress-testing process will effectively mean all of the banks involved will be "majority owned by the state," governor of the Central Bank Patrick Honohan said last night.
The governor said the current exercise has been done on an "exceptionally intensive and elaborate basis, and is designed to respond to market scepticism about the banks".
That scepticism about the banks mean they have to hold more capital "than would otherwise be needed in order to convince international lenders of their solidity under all circumstances."
He confirmed also that the move to form two major banks, under the umbrella of AIB and Bank of Ireland, announced last night to the Dáil by Finance Minister Michael Noonan, had been the recommended course of action to the Government by the central bank.
Under the very stringent analysis it emerged the four banks would need €18.7bn in new capital to meet the new Central Bank targets, plus an additional €5.3bn to give the banks an added "layer of resilience" in case of possible further losses after 2013.
Governor Honohan stressed that, while the bank welcomed the severe measures deployed by BlackRock to reassure the markets, he did not expect the level of losses pencilled in to be anything near as bad as has been assumed under the process.
Brian O'Mahony
Q&A
Q. What happens to EBS customers?
A. It is business as normal, with the merger of EBS with AIB having no impact on customers.
All branches will remain open and all deposits remain fully guaranteed.
Q. What will the combined EBS and AIB look like?
A. While AIB has been told by the Central Bank to raise a further €13.3 billion in new capital, the Government insists the combined unit will be "a stronger and more domestically focused institution".
"During the transition, customers continue to do business with either bank and over time the fuller services of AIB become available to the customers of the EBS, but all retain the protection of the state guarantee for their deposits."
Q. What happens to borrowers and depositors with Irish Life and Permanent?
A. While IL&P needs to find €4bn to meet its regulatory capital requirements that will be achieved by the selling off of assets which should not affect ordinary bank customers. The department said they should continue to carry out their business "in the normal way". Again, all branches remain open and Permanent TSB customers are assured by the Government that their deposits remain fully guaranteed.
Q. What if I am a customer of IL&P's life insurance subsidiary Irish Life Assurance?
A. Irish Life and Permanent is to sell off its life insurance subsidiary Irish Life Assurance as part of its requirement to raise the €4bn.
However, for those who have a policy with Irish Life Assurance, the Government stressed it was "in full compliance with all solvency requirements" and was "a well capitalised insurance company".
Q. What happens if I have shares in IL&P?
A. If the institution does not meet its revised capital requirements by getting rid of its non-core assets, the state will have to step in and provide capital through equity. That will mean the state could potentially end up with a majority stake in IL&P. "While shareholders' ownership of, and rights over, the existing ordinary shares would be unaffected by this move, their shareholding will be diluted as a result," the Government said.
"Shareholders should get independent financial advice in relation to this matter."
Q. What if I am a customer or shareholder with Bank of Ireland?
A. While BoI needs to raise €5.2bn in capital it is to be allowed to continue to operate as a stand-alone institution. In that regard customers should continue banking as normal. The bank will be given the opportunity to raise the money through private sources but if it is not successful the state will provide the capital.
Q. What about the staff in all these financial institutions?
A. There is no doubt that thousands of jobs are on the line across the financial sector. The Government says there will be a reduction in employment numbers as non-core businesses are sold or wound down. The only guarantee it can give is that those affected will be treated "fairly" and will be entitled to "fair" redundancy practices.
Finance union the IBOA says it is seeking an urgent meeting with Michael Noonan, to discuss the implications of the restructuring. Larry Broderick, IBOA general secretary, said that while they accept some redundancies may be inevitable, bank employees should be considered as absolutely vital to the solution -- rather than as part of the problem.
"IBOA believes that redundancies should be the last resort rather than the first item on the agenda," he said. "If redundancies are deemed to be necessary following full consultation with staff and their professional representatives, they should be implemented on a voluntary basis and with due consideration for the implications for the remaining staff and for customer service.
Stephen Rogers
