–Adds More Comments From Irish Central Bank, Honohan, Analyst

DUBLIN (MNI) – Irish banks need to raise E24 billion in fresh
capital, the Central Bank of Ireland said Thursday as it announced the
results of new stress tests performed on four of the country’s major
financial institutions.

The required new capital injections exceed the E18 to E23 billion
analysts had expected but is well within the E35 billion earmarked for
Irish banks under the terms of the EU-IMF bailout agreement in November.

“Collectively, the four banks will be required to raise E24 billion
in capital in order to remain above a minimum capital target of 10.5%
Core Tier 1 in the base scenario and 6% Core Tier 1 in the stress
scenario, plus allowing for an additional protective buffer,” the
central bank said in a statement.

The four banks tested are Allied Irish Bank, Bank of Ireland, Irish
Life & Permanent and EBS.

Each bank must meet a required loan-to-deposit target ratio of
122.5% by 2013, through a combination of run-off and disposals of
non-core assets, the statement said.

Allied Irish Banks require E13.3 billion in new capital; Bank of
Ireland must raise E5.2bln; Irish Life & Permanent E4 billion; and EBS
E1.5 billion.

Filling these holes will be Ireland’s fifth attempt at
recapitalizing banks, and it means that all five of the top banks in
Ireland will be majority-owned by the state, Patrick Honohan, the Irish
central bank governor said.

Total state support to the Irish banking sector has so far amounted
to about E46 billion, and it is the main reason why Ireland’s public
sector deficit swelled to an incredible 32% of GDP last year. With
today’s results, the total of state aid provide to banks will rise
considerably further. The magnitude of the increase depends on how much
of the E24 billion, if any, the banks will be able to raise from private
sources.

Irish Finance Minister Michael Noonan, addressing parliament
moments after the stress test results were unveiled, said that E17.5
billion of the new capital required would come from the government and
the rest from “existing sources,” which he did not name.

Noonan also said the European Central Bank has a “high commitment”
to provide liquidity to Irish banks as they work through their problems.

There have been numerous news reports in recent weeks of a new ECB
facility that would provide longer-term support to the banks while they
restructure and recapitalize. But Honohan said the creation of such a
facility was not “imminent,” according to news wire reports.

The central bank said in a written statement that there would be a
comprehensive new effort to “place the Irish banking system in a
position where it can fund itself and generate capital without undue
reliance on the Irish or European public sectors, through a process of
recapitalisation, deleveraging and reorganisation.”

Honohan said in the same statement that banks would be adequately
capitalized, because the new requirements “provide for future loan
losses over the course of the three years on a scale that is unlikely to
occur, and an additional buffer for subsequent events.”

The worst-case scenario under which banks’ capital levels were
tested included a further fall of 17.4% in residential property prices
from already depressed prices, as well as a 22% plunge in commercial
property prices, this year.

An additional 18.8% drop in housing prices in 2012, in the adverse
scenario, means the banks were tested for a total decline of 60% in
housing prices from the pre-crisis peak of 2007. The 22% plunge in
commercial property prices in 2011 would imply a 70% drop from the peak.

Other “adverse” scenarios envisioned by the central bank included a
GDP decline of 1.6% this year versus a baseline case of +0.9%, followed
by modest growth rates of +0.3% and +1.4% for 2012 and 2013,
respectively. The bank’s baseline growth scenarios for those years were
a far more robust +1.9% and 2.5%.

The base case uses European Commission forecasts from December 2010
and the Central Bank’s property price assumptions.

The Central Bank insisted that stress testing for the adverse
scenario was “not an economic forecast,” though many in Ireland have
complained that some of the adverse scenario data points are not so far
from what is already happening in the real economy.

There is serious concern that Irish property prices could continue
to decline. Ireland already led the world in house price declines last
year, with a 10.8% fall in values, according to new data from
international agents Knight Frank.

The tests are much stricter than those carried out in July 2010 as
part of a European-wide exercise, which failed only 7 out of 91 banks
tested and raised serious concerns about the test’s credibility.

The two Irish banks tested in 2010, Allied Irish Bank and the Bank
of Ireland, both passed the test only to reveal large capital shortfalls
three months later that forced them to request state aid.

Noonan told parliamentarians that Irish banks were embarking on a
“radical” restructuring that would break their independence on public
sector aid. He said the banks needed to be smaller, and focus on their
core operations.

Financial markets reacted with relative calm to the Irish stress
test announcement.

“The perception that Irish banks are undercapitalized was there
before and has been confirmed now,” said Mario Gruppe of Norddeutsche
Landesbank. “But this had been already priced in and was expected, and
it is no real surprise. I don’t think there will be any problems raising
that money.”

A statement from the European Commission, the European Central Bank
and the International Monetary Fund is also widely expected later today.

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