FRANKFURT (MNI) – European Central Bank Governing Council member
Patrick Honohan on Tuesday called the suggestion that the ECB would soon
cut off liquidity support for Irish banks “very wide of the mark,” and
he underlined that the upcoming bank stress tests would be tougher and
more transparent.

In the text of a speech given at the International Centre for
Monetary and Banking Studies in Geneva, the Irish central bank head
criticized the bank stress tests carried out last July, arguing that
they had failed to properly assess both Irish banks’ current and future
losses.

“Usually the validity of stress tests is revealed only over a
period of time, but in our case, within months of publication, one of
the underlying assumptions of the 2010 stress tests was unluckily
undermined,” the central banker said.

“We had to go public on them part-way through the big programme of
loan purchases by the State property company NAMA,” Honohan continued.
“These loan purchases crystallized those embedded bank losses
immediately, but the prices at which the purchases would be made were
calculated in a very elaborate and time-consuming way mandated by
competition law.”

The upcoming stress tests, however, will be different, Honohan
said.

“This year, we are determined to present a stress test that will
not only be more convincing to the market, by providing much more
granular detail, but also be better insulated against surprises by using
aggressive stress assumptions and modelling,” he said.

Commenting on the markets, Honohan said that “normality has
returned” to many key segments. “Indeed, some observers are fretting
about the growing risk appetite that begins to be evidenced by some
securities market prices in recent months.”

“But for other asset classes, normalisation has not occurred; risk
premia have not narrowed,” Honohan continued, citing rising yields on
Eurozone peripheral debt, including Ireland’s, as one example.

Honohan also argued that the EU-IMF financial support package for
Ireland was not a bailout.

“Furthermore, the financing provided is not structured to itself
reduce the tail risks – that would have been beyond the current scope of
the funds from which the financial support has been sourced,” Honohan
said.

“If I am right in saying that the markets’ reluctance to finance
Ireland is down to the exposure to tail risks that they fear, then
restoring Ireland’s access to market funding needs to address those
risks,” he said.

— Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com —

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