The EBA Stress Tests: What’s the News Value?

The Irish banks, AIB and Bank of Ireland, show up poorly on the stress test of 51 European banks (33 in the Eurozone) released Friday night. The methodology is explained on the EBA website. Briefly, there has not been a review of each bank by a team of EBA inspectors as is implied by some of the media coverage – RTE’s bulletin referred to an ‘examination’. It is a mechanical exercise based on the ‘static’ 2015 balance sheet, as published, with no adjustment for the plausibility of provisions but also with no credit for retained earnings post 2015. The ‘stress’ is essentially a GDP downturn from 2016 through 2018 resulting in a depletion of capital adequacy as against the end-2015 balance sheet number.

The scale of the depletion reflects the extent of the assumed downturn. The essential reason for the sharper loss of capital adequacy for the Irish banks is that the downturn assumed for Ireland is greater. Against a baseline, the cumulative adverse GDP shock for the main Eurozone countries included is as follows:

Belgium -7.6
Germany -6.6
Ireland -10.4
Spain -6.7
France -5.6
Italy -5.9
Lux -8.2
Neth -8.4
Austria -7.6
Finland -8.3

The adverse shock assumed for Ireland is the largest and 3.2% above the average for the others shown. There are some other factors but the EBA release makes it clear that these numbers are the main driver of the projected capital depletion. The basis for the large Irish shock is a calibration against the experience over 2008 to 2011 when the downturn in Ireland was more severe than elsewhere.

The EBA may have sacrificed plausibility to uniformity of treatment – the exercise is in any event an input into a further phase called SREP, the supervisory review and evaluation process, rather than a definitive assessment of bank capital adequacy. The Irish banks, and numerous others, may of course need to generate or raise more capital but the relative worsening in their position flows from the assumptions employed and not from any ‘news’ uncovered by the EBA sleuths.

That 26% growth rate: two weeks on

The recent publication by the CSO of the 2015 National Income and Expenditure Accounts generated a lot of reaction.  There is no doubt that a 26.3 per cent real GDP growth is bizarre but it was not farcical, false or based on fairy tales.

Many commentators went out of their way to highlight that the figures did not characterise what was happening “on the ground” in the Irish economy.  But this seems like a bit of a strawman.  Instead of being told what the figures were we were been scolded over what they weren’t.  No one said the economy was growing at 26 per cent.  Arguments against using GDP in an Irish context have made for the past quarter of a century.  Even as recently as March, when the first growth estimates for 2015 were provided, there were plenty of people who pointed that the underlying growth rate of the economy was probably around half of the 7.8 per cent growth rate in real GDP shown at that time.

But a 26.3 per cent real GDP growth rate is very very unusual.  And one that deserves understanding rather than dismissal.  However, the discussion of the figures has generated more heat than light.  At the briefing it seems three items were identified as having oversized effects on the national accounts’ aggregates. These were:

  • aircraft leasing
  • inversions and corporate restructurings, and
  • asset transfers to Ireland

New Release: The Central Bank Quarterly Bulletin 2016

The central bank have just released their 2016 quarterly bulletin. Box A on Page 11 discusses the farce of the 26.5 per cent growth.

Quote:

“These developments reflect the statistical ‘on-shoring’ of economic activity associated with a level shift in the size of the Irish capital stock arising from corporate restructuring and balancing sheet reclassification in the multinational sector and also growth in aircraft leasing activity”.

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Irish Water’s 2015 Annual Report

Is out. Gavin Sheridan has an initial analysis here. Unsurprisingly, here’s what has happened to payments.

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