Permanent TSB may have to raise more money to meet ECB rules – but it shouldn’t have to come from the taxpayer
By David Murphy, Business Editor
Many would have imagined that by the end of 2014 the difficulties of Irish banks would, after six tortuous years, have concluded.
However the strong possibility that one Irish bank may need further money illustrates that the effects of Ireland’s financial collapse is lingering.
Next Sunday, October 26th, the European Central Bank will release details of its stress test of banks across the euro zone.
Finance Minister Michael Noonan said that the two big banks, AIB and Bank of Ireland, were “very secure in capital terms”. In other words they should pass the stress test.
However, he said if Permanent TSB requires extra capital, it is “strong enough to get the small amounts of capital they require in the markets, so we don’t see any risk to taxpayers.”
It was official acknowledgement that the bank could fail the test. Arrears on home loans and an expensive portfolio of tracker mortgages have diminished Permanent TSB’s cushion to absorb bad loans.
The good news, however, is that this time the stock market could provide the necessary funds instead of ordinary citizens.
Of course, that means the State’s 99.2% shareholding in the bank would be diluted; but the taxpayer would be likely to remain a majority owner of the company.
The ECB’s stress tests are based on a snapshot of bank’s financial position at the end of last year.
Since then the economy picked up, property prices rose and mortgage arrears improved; but those factors won’t be included in the ECB’s calculations.
In addition, the ECB will not count €400m of the €4bn given to the bank by the taxpayer when it was rescued from collapse, nor will it count recent sales of assets or improvements in its costs.
However, the Permanent TSB will be able to use some of those positive elements to offset the amount it may have to raise from private investors.
If it comes to this, there is the danger that State could sell a significant stake in what could become a valuable bank for a relatively low price. But it is much better than the alternative of hitting the taxpayer once again.
Increased private ownership may also suit Permanent TSB’s boss Jeremy Masding as it would serve as an acknowledgement that bank has regained the trust of the markets.
As a result, the bank may still try to raise money through a share sale even if it passes the stress tests.
Either way, though, the authorities and the public will be hopeful the stress test will mark the final chapter in Ireland’s banking collapse.
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