Irish Bank Capital Requirements Skyrocket

The Irish Financial Regulator has announced new capital requirements after its Prudential Capital Assessment Review:

A target level of 8% core tier 1 capital should be attained after taking account of the realisation of future expected losses and other financial developments under a base case scenario. This test is designed to ensure the credit institutions are capitalised to a level which reflects prudential requirements and current market expectations, after taking account of forecast loan losses through to 2012. As a further prudent requirement, the capital used to meet the base case target must be principally in the form of equity, the highest quality form of capital, with 7% equity as the target level. In calculating the requirements, individually specified amounts have been added to the institutions’ estimates of expected losses to take account of the uncertainty of loss forecasts for particular portfolios.

A target level of 4% core tier 1 capital that should be maintained to meet a stress scenario or a portfolio level sensitivity analysis. This capital test, which is similar to that employed by US and UK supervisory authorities, is designed to ensure the credit institutions have a sufficient capital buffer to withstand losses under an adverse scenario significantly worse than currently anticipated.

This, together with worse than expected valuations of their loan books, has resulted in enormous capital requirement numbers:

Ireland’s banks may need at least 31.8 billion euros ($42.7 billion) in new capital after a real- estate slump left them crippled by mounting bad loans.

The fund-raising requirement was announced after the National Asset Management Agency, the country’s so-called bad bank, said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders, and the financial regulator set new capital targets. The discount compares with the government’s initial 30 percent estimate.

Irish banks were last discussed on PrefBlog in the post Why weren’t Irish Banks Resilient?

One Response to “Irish Bank Capital Requirements Skyrocket”

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