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Friday 15 December 2017

Time for banks to cut purse strings and start lending

With the two main Irish banks passing the ECB stress tests they must now open their purses. If the recent economic recovery is to continue, then AIB and Bank of Ireland must start lending again.

After all the waiting, the results of the ECB stress tests of the major European banks, including the major Irish banks, came as something of an anti-climax.

As expected, both AIB and Bank of Ireland passed the stress tests while the smaller Permanent TSB failed.

The major foreign-owned banks operating in Ireland, including Ulster Bank, also passed the stress tests.

So far so good. However, the ECB found that if things went completely pear-shaped the Permo could require up to €854m of extra capital.

Does this mean that the unfortunate Irish taxpayer, who has already had to pump €64bn into the banks, will be stung once again?

In theory it is certainly possible that taxpayers could find themselves being forced to crack open their piggy banks once again to bail out one of the banks.

Thankfully this is unlikely to happen in practice.

The conditions under which the Permo would require an €845m capital injection are so extreme, a 3.5pc drop in property prices and a 1.3pc contraction in the value of our economic output this year - most analysts are predicting 2014 GDP growth of 5pc and Dublin property prices jumped 25pc over the past year - that they are very unlikely to come to pass.

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Far more likely is that the Permo, two-thirds of whose mortgage book is tied up in loss-making trackers, will somehow muddle through.

PTSB has already sold two mortgage books to investors and is gradually reducing the size of its loan book, which stood at €29bn at the end of June.

Bailing out the Permo has cost the taxpayer a net €2.7bn when the €1.3bn received from the sale of Irish Life is deducted. Part of this €2.7bn consisted of €400m in contingency capital (COCO) notes.

If the Government converted the COCOs into ordinary Permanent TSB shares this would knock €400m off the amount of capital which it would have raise.

The downside for the taxpayer is that the COCOs have been paying the exchequer a 10pc coupon or interest rate of €40m a year.

This income would disappear if they were converted into ordinary shares. Most analysts reckon that when the conversion of the COCOs and the sale of further loan books is factored in, Permanent TSB will have to raise somewhere between €125m and €200m of additional capital.

With the Irish economy growing once again and the property market showing clear signs of recovery, the Permo should be able to raise this money from private investors rather than having to tap the taxpayer once again.

Unfortunately, just because the two larger Irish-owned lenders passed the stress tests and the Permo should be able to raise the capital it requires from private investors, doesn't mean that the Irish banking system has recovered from the post-2007 bust. Far from it.

The reality is that, despite the stress test results, the Irish banking system is still broken with total bank lending down by a further 15pc over the past year, according to the latest Central Bank figures.

And it isn't just the Permo cutting back on its lending.

AIB and Bank of Ireland are also still reducing the size of their loan books. This amounts to sacrificing the economy in order to save the banking system.

Until the banks start lending again, any economic recovery will be patchy and short-lived at best.

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