AIB posts big improvement in stress tests of EU's banks

AIB and Bank of Ireland both showed large improvements in their anticipated ability to withstand financial shocks, according to the latest “stress tests” from European regulators.

With Brexit looming, British banks emerged as surprise losers, along with Italian financial institutions.

AIB saw its Common Equity Tier 1 capital, which measures a bank’s capital against its assets and is a sign of its ability to withstand severe shocks, rise to 11.83pc, placing it in the top half of 48 banks tested for their resilience to an extreme economic shock.

That’s a large improvement from 2016 tests when the bank ranked second to last.

Bank of Ireland fared worse than its Irish peer, with a ratio under a shock scenario of 8.93pc, and was in the bottom third of the table, although it too showed an improvement on its ratio of 6.1pc in the previous tests and placed better than British banks Barclays and Lloyds. The stress tests by the European Banking Authority cover 48 of Europe’s biggest banks and have been billed as the toughest ever.

Permanent TSB is seen as the most vulnerable of the Irish-owned banks to a crash, but is too small to be included in the current tests. The aim of the process is to ensure that banks have enough capital to withstand shocks and to ensure that taxpayers won’t end up footing the bill to rescue them if there was another recession.

There is no “pass” or “fail” with tests modelling a so-called baseline scenario in which the economy grows steadily for the next three years, then one in which there is a sharp hit to growth – in Ireland’s case amounting to an 11pc shortfall from main forecasts.

The “worst case” scenario also sees house prices here falling by a cumulative 5.1pc. It is under this scenario that the loan portfolios of AIB and Bank of Ireland would be hit hard.

While no level has been set in this assessment, the 2014 ratio of 5.5pc is viewed as the unofficial hurdle ratio.

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