Good news could be in store for European banks as chatter says the ECB is considering just a 6% capital requirement in its stress tests as opposed to the 8% previously promised. A small number of countries aren't even satisfied with 6% and reportedly may press for a lower number.
Previous European bank stress tests are known mostly for giving passing grades to lenders who just a short while later required government bailouts.
Tails in the air today include: Santander (SAN +1.6%), Deutsche Bank (DB +2%), ING (ING +0.9%), BBVA (BBVA +3.4%), Bank of Ireland (IRE -0.6%), and Allied Irish Banks (AIBYY +6.3%).
Irish banks' borrowings from the ECB totaled just €138B at January's end, off from December's €151B, and the lowest level in nearly 18 months. Analysts believe the decline is due to the lower needs of Dublin-based foreign banks, rather than any improvement in the position of the country's domestic lenders.
Irish banks swapped billions in government debt due in 2014 to paper maturing in 2015 earlier this month, according to Davy. The move will relieve funding pressure for the government when its aid package runs out next year. The government has a sizable (if not near complete) ownership of the major Irish banks, so the whole exercise is a circular one.
Seeing that the EFSF may be expanded to help recap French banks, Ireland looks to get some candy as well. The government is seeking to have the EFSF take over its stakes in AIB and Irish Life & Permanent, reducing the nation's debt load by more than €20B. EU sources react coolly, saying Ireland has been "dealt with."
Let Ireland default too, argues David McWilliams, who points out markets have had a massive rally on the idea Greece will be allowed a "ring-fenced" default. Every $700M bond payment to AIB bondholders is $700M not going into the future of Ireland. "If (finmin) Noonan walked away from paying the next tranche ... the market in Ireland would rally."
The Irish National Pension Fund Reserve says it liquidated €10B so far in 2011 in order to contribute to the EU/IMF bailout of the banking system. The total fund size now stands at €20.8B, with 1/2 of that in shares of Bank of Ireland (IRE) and AIB. The fund's value has fallen 25% YTD due to those bank investments.
AIB may use its taxpayer funded bailout to bailout taxpayers stuck in underwater mortgages. Saying such a solution needs to be "industry-wide," the lender is in talks with the central bank over the plan. "I'd prefer to call it debt restructuring. Forgiveness implies a degree of moral hazard," says AIB's chairman.
Allied Irish Bank (AIB +22%) and Bank of Ireland (IRE +38%) are soaring in the wake of the European stress tests. The report confirms the banks exceed their capital ratio thresholds, showing a significant capital surplus for each in both the base and stress scenarios.
More from Europe's banking stress tests: Aside from eight that flunked, another 16 (seven more in Spain) "narrowly" passed (5-6% capital ratio). The tests were almost preordained for a "strict" reputation - but if the big three Irish banks (which scrambled for capital after last year's passing grades) made the grade "comfortably," just how tough were these exams? Euro now +0.09% against dollar; AIB +6.1%; IRE +17.2%.
Sources tell the Independent.ie that the Irish banks - including Bank of Ireland (IRE) and Allied Irish (AIB) - have passed the latest round of stress tests "comfortably." Last year about this time, the Irish banks passed the 1st stress test, only to need billions in capital within weeks in order to stave off collapse.