“The Irish banking sector remains a source of some concern – with outstanding issues still requiring swift and decisive action. The recently submitted results of the Irish-specific balance sheet exercise indicated that while no capital shortfalls were identified, there is a need for adjustments to provisioning as well as risk-weighted assets – and these issues should be addressed before the ESM’s comprehensive assessment. So it should be clearly stated that the [Central Bank’s assessment] just conducted is not forward-looking in nature and does fall short of a stringent stress test that is ultimately required and will be conducted when the ESM comprehensive assessment takes place.”
Mario Draghi (above), ECB President yesterday
What does any of that mean?
TCD economist Brian Lucey appeared on Morning Ireland on RTE R1 earlier to give his interpretation….
Cathal Mac Coille: “There was some complicated bankers’ speak in there – but at the same time when we hear somebody as important as Mario Draghi saying, ‘swift and decisive action needed’, can we assume two things – he knows something is about to happen and secondly, until that happens, people are going to be worried about our banks?”
Brian Lucey: “Well I think he knows what he thinks should happen and that we should finally after five or six years get on with the residual losses in the banks and face up to the problems – whether that will happen is another matter. It’s interesting that today in the papers, Fitch, the ratings agency, are out re-enforcing this message, saying that there’s problems in the banks now. I think their numbers, which they’re getting from the banks are a little bit, perhaps, optimistic, still – in relation to the amount of money that would be lost from mortgages and it’s about the mortgages and about the ESM loans that Draghi, and presumably every one else is still concerned.”
Mac Coille: “Does this come down to ‘stress tests’ – because we know there’s a big one coming, but there’s one just carried out, in the recent past, by the Central Bank – and the Irish banks came out and said, ‘Central Bank has had a look, stress test already completed, we don’t need any more money for now’.”
Lucey: “My understanding is that those ‘stress tests’, or whatever they were, they were only released last week, were part of what was supposed to be the ‘Pan-European stress tests’. Now in the European context, things have slipped and they had hoped to have had the analysis done in the middle of the year, so that it would help them out in November/December. Now things slipped, for good reason or bad, so the European stress tests’ of all the European banks are going to be done as of the end of December data.
But what Draghi was saying was that we had a look, or rather the Central Bank of Ireland had a look, it’s a Central bank analysis, not an official ECB analysis, even though the Central Bank is part of the Euro system – that it isn’t comprehensive enough because they aren’t taking enough of a look at what could go wrong. If you look at say, the Fiscal Council of the European Commission, part of what they’ll do is that they’ll publish in their analysis, a ‘stress test’ effectively, of sustainable Irish Government debt and they’ll say, ‘Well, you know if you get a 1% decrease above base-line on GDP you’ll get this, if you get a worse outcome it’ll be that” – and they present a range of outcomes, and I think that’s what we need to see from the banks – and that, we didn’t get, say in the last result.
“The result was very interesting – based on the data that they had, they were saying they were okay, but how they said that was very interesting, the Bank of Ireland came out and said, ‘Here’s some figures, here’s some data, a little bit of deterioration, we need to do some stuff, we don’t need to raise any capital right now’. The AIB came out and said, ‘The Central Bank said we were fine.’ The Permanent TSB said very little. Very interestingly, the Central Bank, as of this morning, I couldn’t see on their web-site, they haven’t yet issued a statement on these.
“So, you know as Karl Whelan in UCD described it in Forbes Magazine – in the same week as Forbes Magazine is saying Ireland as the best little country in which to do business – this was a shambles, and it was.”
Mac Coille: “Let’s look in the meantime, bearing in mind there’s the European Summit coming up on Thursday, let’s look at it in the wider context because Mario Draghi also talked about moves toward a European union, a united banking union, which he described yesterday as, ‘very messy’ as they stand. So let’s just look at that in context, and just bear in mind what Michael Martin said in part of that address on television last night, about what we should be looking for, or what he thinks we should expect from Europe in terms of help from banking.”
“Europe should give Ireland the retrospective debt deal that we were promised in June 2012. A further key point is that the European Central Bank should return to Ireland all profits it makes holding Irish bonds. It already does this for one country. The money saved would be almost equal to every cut planned for the Health Service next year.” (Michael Martin)
Mac Coille: “Now that would be very nice to get what Michael Martin is looking for. In terms of the big picture, where do you put, or how can you assess what Draghi was saying about our banks, and what, ‘swift and decisive’ action might mean, in hopefully a positive way?”
Lucey: “Look, I have never thought that we’re going to get the money back. I think that we have been, you know, the Government have been patient doing behind the scenes diplomacy, and I think that’s fine. But I think Draghi is signalling that we’re going to walk out next Thursday with an early Christmas present of 20 or 30 billion euro from anybody – that’s not going to happen. We’re not going to get that money back, not in any meaningful amount.
“As to the ECB giving us profits – I don’t know, I literally don’t know what country that it and I don’t know how much those figures are, but while 5 or 600 million might be nice – again, in the context of the 65 billion, the 62 billion that we’ve spent on the banks, plus the 30 billion or so, in relation to NAMA, 500 million here and there ain’t really gonna make a whole pile of difference.”