James Reilly (Dublin North, Fine Gael)
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Question 178: To ask the Minister for Finance further to Parliamentary Question No. 119 of 11 May 2010, when the Central Bank undertook its final stress test on the financial system prior to the recession; the amount that the price of houses would have to fall in order for the financial system to be at risk according to the stress test; and if he will make a statement on the matter. [20148/10]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am informed by the Central Bank and Financial Services Authority of Ireland (CBFSAI) that the stress-testing exercise relevant to the Deputy's question was carried out by the CBFSAI on Irish credit institutions in 2006. The findings were reported by the CBFSAI in its Financial Stability Report published on 6 November 2006. The results of this exercise were reported in a signed article in the Financial Stability Report.

The stress-testing exercise examined how Irish banks would perform as a result of simultaneous shifts in a number of economic variables. It was assumed that under the adverse scenario that house price inflation would be -13.0 per cent and -8.7 per cent in 2006 and 2007 respectively before growing by 1.1 per cent in 2008. The decline in house prices coupled with the other economic variables produced the broad findings by the banks involved that they could weather the hypothetical scenarios. In the section of the stress test examining the impact of a fall in prices in isolation the analysis found that a 25 per cent fall in house prices coupled with a 10 per cent default rate appeared to yield manageable losses in terms of banks reserves (i.e., the sum of provisions, profits and capital).

The results of the exercise drew attention to the risks faced by the Irish banking system from an assumed decline in house prices but supported the CBFSAI's central expectation at that time, as reported in the Financial Stability Report, that the current shock-absorption capacity of the banking system left it well placed to withstand pressures from possible adverse economic and sectoral developments, although vulnerabilities and risks to the economic outlook posed continuing difficulties for the banking system.