Liz McManus (Wicklow, Labour)
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Question 50: To ask the Minister for Finance if he will estimate losses over a three year horizon by the guaranteed credit institutions on that portion of their loan books not destined for the National Asset Management Agency; and if he will make a statement on the matter. [17204/10]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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It is a matter for the Board of each and Management of each institution to assess and make public as appropriate forecasts for future losses. As Minister, I don't make such forecasts but I do expect the Financial Regulator will make its own assessment of capital needs of banks, having regard to both expected and potential losses and appropriate capital levels.

New capital levels have recently been set by the Financial Regulator to ensure that the banks can maintain appropriate capital levels and withstand future losses, even under very stressed conditions. These are contained in the Prudential Capital Assessment Review published recently. As Minister, I have already indicated the steps that the Government is taking to ensure that the banks can meet their capital requirements. We have already started to put these measures into affect, in relation to Bank of Ireland. The House will agree with me that the fact that this bank can raise significant private capital is a real sign of stabilisation and recovery in the sector. There is much further work to be done to build on this significant step.

The Regulator requirement is that a level of 8 per cent of core tier 1 capital is to be attained by the end of the year. This level of capital must be met after taking account of future losses, from both NAMA and non-NAMA portfolios. This capital will be principally in the form of equity – a 7 per cent equity requirement. Equity is the highest quality form of capital, and the emerging international standard. In addition, further amounts, specific to each institution, are to be added on in the calculation of future loan losses. The new requirements also mean that banks cannot go below a level of 4% core tier 1 capital in a severely stressed scenario.

The Governor of the Central Bank, Patrick Honohan considers that the actions and announcements at the end of last month create a secure platform on which confidence in the banking sector will be built. The Financial Regulator has accepted that it is important that our banks move to a strong capital position as soon as possible and that we draw a line under the Irish banking crisis. Sufficient capital is an essential ingredient to ensure that banks can withstand future losses. He has applied a robust, realistic and prudent capital standard informed by his own detailed analysis and by emerging best practice internationally.

The stress test requirement is based on a severe scenario of hypothetical adverse macroeconomic conditions and therefore involves an element of judgment. The stress test inputs do not represent a forecast of likely economic developments by the Central Bank and Financial Regulator, instead they are much more adverse than what is considered likely.