UPDATE 1-Ireland to test banks ahead of EU-wide exercise-sources

Fri May 3, 2013 9:09am EDT

Related Topics

* Deal paves way for Irish bank tests to be held in late 2013

* Preparatory work has already begun

* New capital holes could hurt investor sentiment towards Ireland

By Laura Noonan

DUBLIN, May 3 (Reuters) - Ireland has resolved a standoff with international lenders over the timing of so-called "stress tests" of its bailed-out banks that threatened to cloud its exit from an EU-IMF rescue deal at the end of the year, four sources close to the matter said.

The government has agreed the tests - aimed at gauging banks' resilience to economic shocks - could take place ahead of a Europe-wide exercise, in line with the European Union and International Monetary Fund's desire for the banks to be checked before the end of Ireland's sovereign bailout deal in December.

Dublin had wanted the tests carried out in conjunction with a European-wide exercise, expected in early 2014.

"The situation has been defused," one of the sources told Reuters.

Ireland's banks have not been stress-tested since 2011 when consultants Blackrock identified a 24 billion euros ($31 billion) capital hole.

Poor results from a new set of tests could result in the government having to funnel more capital into state-backed lenders, on top of 64 billion euros already poured in, potentially complicating Ireland's ability to fund itself from international bond markets.

The deal paves the way for Ireland to run its tests in late 2013, though the exact timing is unclear since it depends on the date of the European exercise, which has not yet been set.

Finance Minister Michael Noonan hinted at the compromise speaking to Reuters in Switzerland on Thursday, where he said the Irish tests would be "in close proximity to" the European ones, a softening of his previous stance.

WORK HAS STARTED

At a review of the Irish bailout this week, Irish officials told representatives from the European Commission, the European Central Bank and the IMF that they had already begun preparatory work with the banks and Blackrock, and were ready to hold stress tests by the end of the year.

Two sources said Ireland's central bank will rely more on its internal models to assess banks' mortgages and small business loan portfolios, using BlackRock to verify the results rather than carry out the entire review, as they did in 2011.

BlackRock will carry out a root-and-branch review of the banks' commercial real estate loan books again this year, one of the sources said, since predicting repayments on those loans is more complex.

The Irish tests will use the same macroeconomic assumptions that are employed in the European tests, so that there is consistency between the two.

The European Commission declined to comment, as did the ECB, the Irish department of finance and the central bank. The IMF could not be reached for comment.

Irish central bank governor Patrick Honohan said this week the country's banks would need more capital before 2019, when tougher international rules on the sort of capital banks can use come into effect. He did not quantify the amount of capital that would be required.

Honohan also said that no decision had been made on the timing of stress tests but he expected to oversee them in the latter part of this year.

The head of state-controlled Allied Irish Banks, one of three domestically-owned lenders left following the near-collapse of the sector, argued the case for 2014 stress tests earlier this week, saying the bank would have a clearer picture on problem mortgages next year.

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