The Stress Test Results and the Restructuring of the Irish Financial System
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The Stress Test Results and the Restructuring of the Irish Financial System
Our first step to restore creditability in the Irish Banking System
The 31st of March 2011 is an extremely significant day in Irish History. Not only was it the day of the publication of the stress tests on our financial institutions but it also marks the day that Anglo Irish Bank published a record €17.7 billion loss, the worst set of financial results of any business in Irish Corporate History. Despite this astronomical losses, it is unclear whether additional funding shall be required from the state as Anglo is currently in the process of wind down and have had all their deposits transferred to Allied Irish Bank. In addition Chief Executive Officer Mike Aynsley has stated “the Irish banking system has developed black holes which needed to be funded and that the banks needed adequate supplies of capital as the country requires a healthy system”.
The Central Bank published the findings of the crucial stress tests on the Irish Banks and has stated that € 24 billion is required to be allocated to different financial institutions to assist them in coping with financial losses. The breakdown of the funding allocation will be as follows:
Allied Irish Bank € 13.3 billion
Bank of Ireland € 5.2 billion
EBS € 1.5 billion
Irish Life and Permanent € 4.0 billion
The Central Bank has also set objectives that must be achieved regarding a reduction on the size of the financial institutions through the process of combination of run downs of assets and asset sales. Governor of the Central Bank Professor Patrick Honohan has stated the stress test is an integral part in achieving the objective of creating a sustainable banking system through a combination of recapitalisation, deleveraging and reorganisation. The stress tests were based on estimates that in, a worst case scenario, and the four financial institutions that could lose almost € 9.5 billion from residential mortgage loans in the next three years. In conclusion, the assessment found that the financial institutions could face losses of € 37.7 billion over the next three years under the worst case scenario or stressed scenario. The stress tests where a key part of the EU-IMF bailout programme and the findings have been keenly awaited in Brussels and Frankfurt.
On foot of the above findings it was inevitable that Finance Minster Michael Noonan would announce details of the Governments plan for a radical restructuring of the banking sector. The plan regarding restructuring involves having the following aspects:
Having two universal full service financial institutions knows as “ pillar “ banks consisting of a restructured Bank of Ireland and a second financial institution consisting of an entity created by the amalgamation of AIB and EBS. Irish Life and Permanent will also be restructured with the state having a majority stake and will require to sell off its Irish Life Business.
The restructuring plans for the Irish Bank Sector require approval from the European Commission and Finance Minister Michael Noonan has stated that “for the first time in a long time the Irish Banks are secure and it will provide the foundation for recovery and future prosperity”. The general consensus is that the findings of the above stress tests and the publication of these in conjunction with the restructuring plan for the Irish financial system will provide a degree of closure that has plagued the Irish taxpayer since the financial crises began in September 2008.
John McCarrick
John McCarrick and Associates
11 Dunville Avenue, Rathmines
Dublin 6,Ireland
Telephone:01 4960102
Fax: 01 4973717
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