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Irish banks need another 24 billion euros, central bank says

01 April 2011 08:56 (UTC +04:00)

Baku - APA-Economics. The Central Bank of Ireland says that its big four banks need to raise another 24 billion euros in capital to shore up that countryâ€™s banking system, Investment Executive reported.

The bank released a report Thursday which aims to spell out how the Irish banking system can get into a position where it can fund itself and generate capital without undue further reliance on the Irish or European public sectors.

The projected capital requirements are derived from: an independent loan loss assessment exercise performed by BlackRock Solutions; a stress test of the banksâ€™ capital under a given scenario; and a review establishing funding targets for banks along with a plan to reduce leverage.

The loan loss exercise measures the nominal losses banks might experience under the base and adverse scenarios, over both a three-year and a loan-lifetime horizon, stretching out to 2040. The stress test is a top-down exercise which requires banks to model the impact of certain assumptions on their balance sheets and profit and loss accounts. The review to establish funding requirements is also a top-down exercise and requires banks to meet a range of target funding ratios, and aims to shrink the balance sheets of the banks by requiring them to sell assets between 2011 and the end of 2013.

The banks will be required to deleverage to reduce the Irish banking system to a manageable size and stabilize its funding base. Currently they face an unsustainable funding position, and when lendersâ€™ confidence in the system faltered, banks faced a liquidity shortage, precipitating the Irish banking crisis.

The report says that banks will implement deleveraging plans agreed with the central bank in order to transition to smaller balance sheets and a more stable funding base. They will do this through the separation of assets into core and non-core divisions, and the gradual run-off of their non-core assets.

â€œThere is no requirement on the state or the banks to aggressively achieve deleveraging to the point of creating fire-sale situations, as this would result in a significant unnecessary transfer of value to third parties, funded via state capital injections,â€ it says. Additionally, the deleveraging of the banking system will give rise to losses which will create a need for further capital.

Overall, the planned capital raise would put the banks above a minimum capital target of 10.5% core Tier 1 in the base scenario, and 6% core Tier 1 in a stressed scenario, plus an additional protective buffer. The affected banks are Allied Irish Banks, Bank of Ireland, EBS Building Society, and Irish Life & Permanent.