25th Feb 2021

€24bn needed to regain confidence in Irish banks

  • AIB is to be merged into a new entity (Photo: Matt Buck)

Fresh stress tests conducted on Irish banks have revealed a €24 billion capital shortfall, with Dublin rapidly announcing a restructuring plan that will likely see the country's entire banking sector brought under government control.

Announcing the results of the tests on Thursday, Irish central bank chief Patrick Honohan said: "This proves to have been one of the costliest banking crises in history."

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The stress tests gauged the ability of Irish banks to withstand further losses in a deteriorating economic environment, concentrating primarily on mortgage losses.

They found that Allied Irish Banks, once Ireland's leading lender, needs €13.3 billion in additional capital. Bank of Ireland will require a further €5.2 billion, Irish Life and Permanent €4 billion and the EBS building society €1.5 billion.

The injections will be the fifth bail-out for Ireland's banks since crisis struck in September 2008 following the fall of Lehman Brothers in the US, bringing the total state support of the debt-ridden firms to roughly €70 billion.

The figure equates to more than €15,000 for each of Ireland's 4.5 million residents, with taxpayers set to shoulder the vast majority of the burden after the government announced no writedowns for bondholders as part of its latest restructuring plan.

In a joint statement on Thursday evening, the European Commission, ECB and IMF welcomed the Irish tests as "rigorous".

Speaking in the Irish parliament after the results were announced, Irish finance minister Michael Noonan said the government would restructure the sector around "two new strong universal pillar banks", centred around a much-reduced Bank of Ireland and a new entity comprising AIB and EBS.

"This radical restructuring of the banking system is designed to put the banking system on a firm footing for the future and break the bonds with our toxic banking past," he said.

The overhaul will see the banks gradually sell off assets over time, but the size of the newly-revealed hole means Dublin will require more than the €10 billion originally envisaged of the €35bn earmarked for banks under Ireland's international loan.

The former Fianna-Fail-led administration was forced to turn to the EU and IMF last November for €85bn bail-out.

Ireland's recently elected Prime Minister Enda Kenny, head of the centre-right Fine Gael party, told parliamentarians it would not be "reasonable or logical" to go after bondholders in "live banks" which depended on the markets for funding.

Finance minister Noonan said the concept of 'burden sharing' was unpopular with the ECB and a majority of EU member states, although he maintained his desire to see bondholders in Anglo Irish Bank and Irish Nationwide see a reduction in their investments.

Anglo, a commercial property lender that has so far received €29.3 billion in government funds and is set to be wound down, was not part of the stress tests. On Thursday it announced 2010 losses of €17.7 billion, on top of the €12.7 billion it lost in 2009.

Ireland's banks have been relying on ECB short-term loans since being hit by the global credit squeeze in 2008. The Frankfurt based institution had been rumoured this week to announce a new facility which would convert these into medium-term loans, but now appears to have stalled.

The central bank did indicate however that it would suspend ratings requirements for Irish government debt, meaning Dublin's bonds will be accepted as collateral for ECB loans even if they fall below investment-grade status.

The ECB made a similar concession for Greece last year.

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