Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I will read the note on this issue first. As the committee will be aware, in June the European Council indicated that it was in transition towards the single supervisory mechanism. A balance sheet assessment will be conducted comprising an asset quality review and, subsequently, a stress test. The purpose of this exercise is to ensure banks are appropriately capitalised. This is seen as an important exercise by the ECB, as it wants a clean bill of health for the banking sector in advance of it taking control of supervision in November 2014. The committee will also be aware that a similar exercise is being carried out on domestic banks by the Central Bank as part of our troika commitments. It is expected that this exercise will be finalised by the end of November, but it is not expected that the results will be issued publicly, unless required to be released by banks to comply with market obligations.

As a programme country, it was always part of the programme that, around the time of our exit, we would have asset quality reviews and stress tests. We obtained the agreement of the troika that the asset quality review would take place in the autumn and I believe the phrase used with regard to the stress tests was something like "in close proximity" to the European stress testing but in advance of it. The political and financial risk we identified with this arrangement was that we could get ourselves into a position where we would have to conduct the reviews and tests twice. We had our agreements with the troika, but then during the negotiations on banking union it was agreed that, for prudential reasons, asset quality reviews and stress tests across the European banking system would be required. It would, therefore, be a case of double jeopardy if we had to conduct the reviews and stress tests once for Irish reasons and again for European reasons. As we wanted to avoid this, during my last visit to Frankfurt the banking authorities agreed that they would monitor and become involved in the asset quality review here in an advisory capacity. It was agreed that we would do it once, that we would not have to do it a second time. It was further agreed that the stress tests, rather than being conducted in advance of the European general round of stress testing, would be part of the Europe-wide process. That is the arrangement and we have had no indication that we will require additional capital.

As well as this, while the ECB has issued guidelines on the nature of the stress testing, it has not fully nailed down the absolute conditionality yet. We are not quite sure what the position will be in that regard. The last time we stress-tested, for example, we had to stress-test against a core tier 1 capital requirement of 10.5% and provided funding well in excess of that figure. When Spain and Cyprus stress-tested, they were required to do so at a figure of 9%, but the European rules that have been issued state 8% core tier 1 capital is sufficient. The ECB has not yet defined what financial instruments will constitute core tier 1 capital; therefore, we still do not have the full picture. If the ECB varies what is counted as core tier 1 capital, a figure of 8% might not be an advantage. We are not quite sure about this, but the matter will be clarified as the months go by. The position is that we will stress-test in the same round of stress testing the entire European banking system. We have no evidence from the Irish Central Bank that we will require extra capital, but a lot will depend on the rules for the stress testing and whether they will be more or less rigorous than those already applied to our system.