IRISH INDEPENDENT : “Stress tests clear AIB and BoI but European market doubts remain”
Currencies Direct July 23rd 2010 - 2 minute read
European banking stress tests.
This is expected to be confirmed by the Committee of
European Bank Supervisors (CEBS) today when it publishes results for the 91
But market sources last night expressed fears that the
results may do little to restore investor confidence in banking , even in the
institutions that passed.
CEBS has been testing the banks’ resilience to a fall in the
value of sovereign bonds and various economic shocks, but the exact parameters
of the tests have not yet been made public.
“What people will be looking at is whether the
scenarios they’ve been testing against are realistic,” said Sebastian Orsi
stock-broking firm Merrion.
“From what’s been leaked, not all of the assumptions
would seem to be.”
Mr Orsi pointed to CEBS treatment of sovereign debt as an
illustration of the robustness of the stress tests. “The suggestions are
that there could be a haircut of 17 or 18pc on Greek debt,” he said,
adding, “a more realistic range based on historic restructurings would be
40 to 50pc”.
If the tests were judged as being “too soft” and
lacking transparency, impact on the market could “be negative”, he
Mark O’Sullivan, director of dealing at London-based foreign
exchange firm Currencies Direct, also warned that if the tests were too weak
they would “lose their credibility” but if they were too harsh this
could “spook the market, making a fragile situation even worse”.
“Whatever the outcome, it seems highly unlikely they
will solve the confidence problem that still plagues the European banking
sector,” he stressed.
Other sources, however, pointed out that the eurozone was
heading into recovery mode, with the euro rallying 8pc since its four-year low
last month and Greece, Spain and Portugal selling €50bn worth of
debt in the last two months.
“The market seems to be much more convinced following
the bailout that the euro zone is working and the peripheral countries will be
able to finance their debt,” said Christoph Kind, head of asset allocation
When the tests began, several brokerages reported that AIB
and Bank of Ireland were at risk of failing, but informed sources yesterday
confirmed they were set to pass.
Both banks have been quietly confident of the outcome since
the Financial Regulator had already carried out extensive testing on their
They are understood to have been informally told they had
passed the EU tests, as has the Financial Regulator.
Bank of Ireland’s pass was secured by last month’s €2.9bn
fundraiser, which gave it enough capital to satisfy Europe‘s
AIB’s pass is understood to hinge on the bank improving its
capital position by €7.4bn by the end of the year. This will be achieved by
selling off non-core assets and a fund-raising spree.
While neither bank is expected to get a major boost from
passing the tests, sources said the implications of a failure would have been
(Additional reporting Bloomberg)
– Laura Noonan