Irish banks: How much capital do banks need? Ireland's central bank is trying to find out by injecting another ¤10 billion into the country's beleaguered lenders. The latest bailout may reassure Ireland's jittery depositors and the European Central Bank. But other European countries will have to take similar steps. The fate of Ireland's banks has become indistinguishable from that of the government. When confidence dried up, the state had no choice but to seek a bailout. Similarly, the success of the rescue rests on whether Ireland's banks can stand on their own feet.
The central bank's solution is to demand more capital. The 12 per cent core Tier 1 ratio it has imposed is half as high again as the 8 percent minimum it set in March. Ireland's four remaining viable lenders will need to find an extra ¤8 billion. Most of this will come from the state.
Allied Irish Banks, which needs an extra 5.3 billion euros, will be nationalised. Bank of Ireland, which must raise ¤2.2 billion, more than its ¤1.4 billion market capitalisation, is also likely to end up with a majority government stake - though it might be able to swap depressed subordinated debt for equity.
If losses turn out to be even worse, Ireland has another ¤25 billion fund in reserve. This should reassure depositors, and ensure support from the ECB. Irish banks may even be able to borrow in the wholesale markets - at least for short periods.
Yet while Ireland’s banks may take some comfort, their European counterparts will not. The bailout has once again exposed the shortcomings of Europe’s July stress tests. Both BoI and AIB comfortably passed the test, which demanded just 6 percent Tier 1 capital in a stressed scenario. Anglo Irish Bank, which has swallowed almost 30 billion euros of state support, was not even included.
