Irish Banks: The Dead Cat Doesn’t Always Bounce1 April, 2011, 13:24. Posted by BM
Tags: Financials, Ireland
"Even a dead cat will bounce if it falls from a great height"
Well, apparently not, at least not for the Irish banks. The Central Bank of Ireland published its stress test result for the four major Irish banks, which basically focused on three areas:
1. Estimated loan losses in 2011-13
Blackrock was chosen as an independent advisor to assess the loan loss situation between 2010-13E. They come to the conclusion of EUR20bn of losses in the base case and EUR28bn in the stressed case. The aggregate loan book of the four Irish banks amount to EUR256bn. In the base case, a 54% peak to trough fall in house prices was assumed, while this was 59% under the stressed case.
2. Capital assessment
The four banks currently have EUR13.3bn CT1 capital while the estimated additional capital required amounted to almost double (EUR24.0bn). The additional capital required was set such that banks would be able to meet the new on-going target of 10.5% CT1 in the base and 6% CT1 in the stressed scenario (EUR18.7bn). On top of that, to be prudent the Central Bank of Ireland imposed additional capital requirements of EUR5.3bn.
3. Liquidity / LDR
The loans/deposits of the four banks came to an unsustainable 180% while the target level for 2013 is 122.5%, which would imply a 28% reduction in loan balances. The key idea here is to reduce the reliance on wholesale funding, such that there would be a lower refinancing risk for the banks.
It is clear that the situation is dire. Broadly speaking you had banks running on high leverage pre-crisis which suffered from a collapse in the housing markets and asset values. These banks then found it difficult to refinance their wholesale funding, and the ever-widening sovereign spread of Ireland obviously didn’t help. The risk to these banks is therefore a liquidity shock. If a Sept/Oct 2008 scenario was to be repeated again, today, it is unclear whether these banks can rollover their funding.
With the current assessment outlining how much capital the banks need to raise , and also reducing the funding/refinancing risk down to a reasonable level by 2013, this would hopefully provide some confidence to the market. Some of these banks may be close to being nationalised given the massive government capital injection which will take place. Equity holders will pretty much be dead, but for debt holders senior enough they probably will still live.
This is just another example that shares can indeed go to zero. The dead cat doesn’t always bounce.