* Deal paves way for Irish bank tests to be held in late
* Preparatory work has already begun
* New capital holes could hurt investor sentiment towards
By Laura Noonan
DUBLIN, May 3 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
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
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.