It was great to see Jon Ihle, one of Ireland’s best financial journalists, writing in the Sunday Business Post yesterday. Missing Jon’s weekly insights was one reason to mourn the Tribune’s demise.
Jon has an informative piece on the coming bank stress tests: see here.
We are clearly being prepared for some additional bad news on the bank losses, and maybe for once we will be surprised on the downside. In interpreting the additional capital needs, however, it will be important to distinguish between estimates of additional losses and the new capital required to meet higher capital ratio targets.
The EU/IMF terms require A baseline capital level of 12 per cent for all banks – far above the normal 8 per cent regulatory level at which Anglo and INBS are being allowed to operate.
But if the stress level is as high as 10.5 per cent – meaning capital could not fall below that point even under dire conditions – bankers expect the baseline level could go as high as 16 per cent, imposing huge recapitalisation costs.
28 replies on “Jon Ihle on the Stress Tests”
Meanwhile, in combustive Rome.
There is a VERY SHORT window of opportunity to make the case for the un-fixing of the EZ bank stress tests. This would be of significant advantage to Ireland in its “negotiations”. Who is visibly stirring this up. Who is taking the initiative?
http://ftalphaville.ft.com/blog/2011/03/14/513306/how-stress-tests-make-europes-bank-funding-worse/
Also Isda has accepted a request to decide whether the sov cds have been triggered on Irish bonds by the acceptance by the state of IMF loans. In any case, it appears ESM will trigger a default event for these contracts – unless Irl is back in the markets by then.
Isn’t it Jon Ihle?
Thanks Seafoid. Now fixed. I apparently have paid more attention to his articles than his name.
On the level of likely bank losses-
‘‘If I took Jesus Christ off the cross and asked him to run an Irish bank, he couldn’t tell you,” said the bank chief executive.
I wonder if Blackrock have any Messiahs on board.
Why are we still flailing about in confusion about this? The state of the Irish banks cannot be news at this point. It’s approaching 3 years of constant crisis, which is no way to live. Anglo has already had a few stress tests in the real world. It failed. The bank collapsed. So why are we still wittering on about the banks’ inability to survive a stress test when the banks are dead? Is there any provision or plan or hope that maybe some time in the future we can stop talking about how much more money our dead, bankrupt, failed banking corpses “need” and give them a burial at a suitable crossroads?
It looks like the saintly FG-Lab government are up to their old political trick of pretending that things are much worse on taking office than they actually are, so that they can then claim credit for the failure of their own doom predictions to materialise. They perfected this technique in the 1970s and 1980s. According to the Irish Times:
http://www.irishtimes.com/newspaper/breaking/2011/0314/breaking17.html
“Speaking ahead of the meetings, Mr Noonan that Irish banks will need more than the €10 billion initially earmarked to recapitalise them. However, Mr Ollie Rehn said that he disagreed with the Irish Government’s assessment that more than €10 billion may be needed to bolster the banks. ‘I don’t share’ that view, Mr Rehn told journalists in Brussels.
There were a whole series of leaks over the weekend claiming that 35 billion would be needed. I’ll be very surprised if it turns out that they didn’t come from saintly FG-Lab ministers, aided and abetted by their supporters in the media, and primarily intended to smear their evil predecessors. The strategy will be to excuse their breaking of election promises by claiming that there was an additional big black hole that they were unaware of because evil FF kept it secret from them. Alas, EU Commissioner, Ollie Rehn, comes along and says that he disagrees – in short, that its a load of cobblers. So, either saintly FG-Lab Ministers are playing politics and damaging the national interest in the process or the EU Commissioner doesn’t know what he’s talking about.
Well, anyone who’s still making excuses Fianna Fail at this stage has opted out of any reasonable discussion about anything.
@ben
If you did that, what would happen to the pension, bonus and general contractural liabilities of the banks? What would the “social partners” think about union members being invited to apply for jobs at new banks – on different contracts, with competition in the form of applications from……..foreigners?
@JtO
So Mickeen Martin renewed your retainer then (-;
The opening few paragraphs suggest that some of the surviving four are likely to end up in being wound down. Now which of them could that be?
@John McHale
“We are clearly being prepared for some additional bad news on the bank losses, and maybe for once we will be surprised on the downside. ”
I don’t follow. Are you saying we will see more losses.
The leaking is interesting – and to what purpose?
@ Ceteris
They are those who would suggest that the cross would have its uses after the said Jesus was taken down.
But the man is right. The banker, that is!. And Ireland as a country is in danger of being robbed blind by a set of rules designed to do just that.
1. Nobody, in a any company, bank or otherwise can say with certainty what loans or debts will be paid and what loans won’t be paid.
2. If the sovereign (Ireland) has already made the stupid blunder of agreeing to recapitalise the banks, without setting a limit, then the ECB can simply rip the country off by setting stringent stress tests, thereby crystallising the losses and forcing the sovereign to cough up the capital shortfall. They don’t need to to ask Ireland to have a firesale. An over stringent stress test does the work for them. Same result.
3. Therefore using a super capitalization ratio of 16% or 6% above a normal bank does not improve the loan collection ratio one iota. It merely forces the dumb shareholder, the Irish sovereign in this case, to lift her skirts a little higher, as she dances jigs for her economic life to the delight of her overlords.
@grumpy Surely one of the things a government might do is address these problems? One might even consider that the job of a Minister for Finance would be to tackle this issue and implement solutions. What I don’t understand is why after all this time we are still in scrambling crisis mode and talking about recapitalization and stress tests instead of dealing with the reality, which is that the banks have failed.
And, of course, here’s a problem created entirely by banks, bondholders, and a government in hock to them and your reaction is to start banging on about the unions. The unions didn’t bankrupt Anglo Irish Bank. Maybe if you thought about the actual problems and what actually needed to be done instead of using everything as an excuse for bringing out your Ayn Rand playbook we’d make more progress, too.
@CP
By downside I meant lower losses not worse news.
@ CP/JtO
it smells like a deliberate leak alright. It also may be in the national interest. Lot easier to whack bondholders if there’s 25-35bn in losses and a 16% capital requirement, no?
@ben
Actually I was thinking mainly about the middle and senior execs, both current and past. The salaries and pensions are a bill the taxpayer is going to have to keep paying and nobody is talking about a haircut, never mind a default.
Opening up to foreign competition would turf out duff decision makers who ended up in positions they were not suitable for because of full employment and promotion from within. Branch staff would not be the “target” but it is reasonable for pay ratres and pension deals to be brought in line with what the country can afford.
Ive googled Ayn Rand. Actually I have in the past got quite a lot of stick for pointing out the dangers and callousness of liassez-faire capitalism – at a time when it was hard to do so and won you no friends.
@John Mc Hale
The dire predictions in the first few paragraphs leads me to believe that Jon Ihle had the ear of someone close to the stress testing and someone in Government. Eoin Bond may be right -whacking the bondholders may be easier if the losses are so much more. With only two weeks to go to the summit and the stress testing results it may be that we are being conditioned for some very unpleasant emergency fiscal actions by Government.
I fail to see the positive situation you seem to expect in light of that article, perhaps I cannot see the woods from the trees.
@ceteris
I think it is tactically bad for other EZ states if Ireland’s stress tests are credible and show up what is planned for other states as unarguably a sham.
This is already the consensus view at the non-dozy end of the market.
Lucinda would be better employed reading up on this stuff and being provocatively rude about what is planned for EU banks. It is an open goal, but you need initiative to actually score.
@grumpy point being that here’s a set of issues: the continuing inaction about dealing with the bank crisis, the ongoing limbo that the entire banking sector is in and the lack of any attempt to deal with it, finalize the amount of money involved, and try to find solutions so we can find a way not to have these bankrupt, failed entities continuing to suck money, time, and energy from the country.
And the response from the cranks here is (a) incoherent maundering about the *incoming* government and (b) blaming the unions.
Great to see Jon Ihle back in the saddle.
I note that a minimum of 19% capital was mentioned at the Bretton Woods talk linked to by tw featuring Carmen Rainhart.
I think that talk possibly deserves its own post to draw people’s attention to it.
Ben, there is plenty of history on this site which will allow you to form a view as to how much contributors here think non-union causes are to blame vs union causes. I find it hard to believe that an objective reader could really conclude that either unions or the incoming government have been fingered in any significant way for the banking crisis.
Irish unions together with FF have been though, a significant contributing factor to the enormous primary deficit which has left the country with little or no negotiating hand. It is entirely reasonable that this aspect is raised on this site as it it underrepresented in other media. Twisting this, to try to suggest unions are being blamed for the banking mess (David Begg excepted through his CBI role though) is unfair.
#Grumpy
“Lucinda would be better employed reading up on this stuff and being provocatively rude about what is planned for EU banks. It is an open goal, but you need initiative to actually score.”
Agreed. However she could be part of the grand plan by the wily Minister for Finance – better have a junior make the loud noises.
@all
Karl Whelan sells off the banks!
http://www.irishtimes.com/newspaper/opinion/2011/0315/1224292162766.html
@David O’Donnell
Thanks for the heads-up about Karl Whelan’s article in the IT. A very interesting proposal. Presumably KW will start a new thread for comments so he can moderate them. If not, one of the other thread-openers will do so. It is only 6:23 am so I imagine that Karl is only two hours into his work day at this point. Or maybe he works ’till late? I do not know how he does it but I for one cannot keep up his pace.
It seems our own Prof. Whelan has the bones of a solution:
http://www.irishtimes.com/newspaper/opinion/2011/0315/1224292162766.html
I expect we’ll have to gird our loins and move to another thread.
But lo, even as we speak, the cavalry, comprised of some superanuated politicos and some leading lights of the Irish business firmanent, has crested the hill:
http://www.irishtimes.com/newspaper/frontpage/2011/0315/1224292164700.html
I know I have been calling for some strategic thinking, but I would prefer it to emerge from those whom the people have elected. Perhaps, they are so inured to thinking tactically that they are pathologically incapable of thinking strategically. It’s probably just me, but I get uneasy when those who exercised political power and those who continue to exercise some political and economic power – all self-appointed and irrespective of their credentials, combine to seek to shape our future. And I’m even more uneasy when their ‘blueprint’ remains under wraps.
@David O’Donnell
So Mickeen Martin renewed your retainer then (-;
JTO again:
Au contraire. I am merely quoting Ollie Rehn. It is he who is saying that Noonan is talking b*ll*cks. So, it must be him that is receiving the retainer from Michael Martin. And doesn’t he come from Finland, the first two letters of which are ‘Fi’, same as Fianna Fail? What more proof would people on this site need?
@ben
And the response from the cranks here is (a) incoherent maundering about the *incoming* government and (b) blaming the unions.
Welcome to irisheconomy.ie, where cutting government spending will magically fix the international banking system, and even if it does not its only proper penance for our lack of philosophical commitment to the free market.
Once we have made long term unemployment crushingly miserable like the Germans, privatised everything like the Dutch, made teaching a miserable low status career as in the UK we can focus on the real problems, like subsidies for wind power and over regulation of transport and the minimum wage and working time directives and this tiresome obsession with the environment.
Please market – discipline me. No, more efficiently! Harder! There will be have to be sacrifices made, particularly by people with no capital. More pain! Dress like Angela Merkel in bondage gear! Scrooge me!
Make me a good capitalist.
@John the Optimist
I stand corrected. My congratulations on your step-up to punting for The Commission – and I hear that Olli is great crack in his spare time.
Mickeen couldn’t afford Olli – like the country that it governed, FF is broke, if not completely broken …. yet (-;
@Gregory Connor
Glad to see up for the early matins in the Pontifical Environs!
Spose it must be repentance for all those free-mawrket hypotheses delivered during a mis-spent youth and your more recent walk-abouts into the dens of debt maturity. Don’t be too hard on yourself Gregory – like banking system debt, at the end of days, ALL is forgiven (-;