Wednesday, March 23, 2011

Banks are stress tested for 60% fall in house prices - The Irish Times - Thu, Mar 17, 2011

SIMON CARSWELL, Finance Correspondent

THE CENTRAL Bank is stress-testing the Irish banks for a worst case scenario where residential property prices would fall 60 per cent from their peak and commercial property prices by 70 per cent.

This would involve residential prices falling by a further 17.4 per cent this year and 18.8 per cent in 2012 before the market recovers, while commercial property would fall a further 22 per cent this year before rising slightly in 2012.

The Central Bank is using these scenarios (published yesterday) for its stress tests on the banks’ capital – the Prudential Capital Assessment Review – to be announced on March 31st.

A stress test on bank liquidity – the Prudential Liquidity Assessment Review – will determine the value of loans to be sold or run down to reduce the size of the banks, bringing their loans closer in line with their deposits.

AIB, Bank of Ireland, EBS Building Society and Irish Life & Permanent are being stress-tested. Anglo and Irish Nationwide fall outside the tests as they are being closed.

While a worse or “adverse” case scenario will be looked at, the Central Bank expects residential property prices to fall by 55 per cent from their peak in 2007 until 2012 and to recover gradually in 2013.

This would imply declines of 13.4 per cent in 2011 and 14.4 per cent in 2012 after falls of 14.8 per cent in 2008, 18.5 per cent in 2009 and about 15.5 per cent in 2010.

The bank is using the Permanent TSB house price index, which shows prices have fallen 38 per cent from the peak. The index lags current house price falls. House prices have already fallen by 60 per cent since the peak, said Marie Hunt, director of research at estate agents CB Richard Ellis.

Commercial prices are expected to fall by 62 per cent from peak, implying a 2.5 per cent fall in 2011 and a rise of 1.5 per cent in 2012.

Unemployment is expected to peak at 13.4 per cent in 2011 under a “base” case scenario and at 15.8 per cent in 2012 in a worst case.

The rate reached 14.7 per cent in the last quarter of 2010, the Central Statistics Office has said.

The Central Bank can adjust its estimates upwards to account for this, but sources close to the process said the quarterly figure would average lower over a year.

GDP is expected to grow 0.9 per cent in 2011 and 1.9 per cent in 2012 under the base case and to shrink 1.6 per cent in 2011 before rising 0.3 per cent in 2012 under the worst-case scenario.

The Central Bank insisted the stress testing was “not an economic forecast” but that “hypothetical scenarios” were applied. The base case uses European Commission forecasts from December 2010 and the Central Bank’s property price assumptions.

The tests will decide how much of the €25 billion EU-IMF contingency fund will be required by the banks beyond the €10 billion to be pumped into the banks under the first part of the external bailout.

Central Bank governor Patrick Honohan has warned the stress tests would likely uncover larger losses beyond current estimates.

The liquidity test will set targets for each bank on their ratios of loans to deposits. The banks must show how they will offload assets and grow deposits before the end of 2013 and how this process will affect their capital requirements.

The average ratio stands at about 175 per cent (€1.75 on loan for every €1 on deposit).

This may be reduced to an expected average of about 122.5 per cent, but the final figure for each institution will not be known until March 31st.

The pace of the disposal of excess assets and the amount to be disposed will determine how much further capital the banks will need.

The Government is resisting firesales as they would inflict further losses and capital demands on the State.

Posted via email from quirkeproperty's posterous


  1. As an American with a great deal of respect for the Irish, I have been investing in $AIB (Allied Irish Banks) at these prices because I think it will survive this period. I feel this way because of the need to have two major banks in Ireland (!choice of $AIB or $IRE) and because of the resiliency of the Irish people.

    I think it won't become 100% nationalized, and that they are resistant to a complete foreign acquisition. I think the Irish banking system has picked its two winners and now everything will be done to shore them up.

    Any thoughts???

  2. The general view here is that we can only "shore them up" for a limited time.
    Most of the population think we will default, probably only on Bank debt, not Sovereign, although separating the two is complicated!
    Your strategy is not for the faint-hearted!
    I wish you well.