Michael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context

Question 87: To ask the Minister for Finance if the recent bank stress tests involved an examination, on a sample basis, of the actual documentation underpinning individual commercial loans. [8375/11]

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context

The bank stress testing exercise, the results of which were announced by the Central Bank of Ireland on 31 March last, did include a detailed review of loan files on an appropriate sampling basis. As the Deputy will be aware, the Financial Measures Programme ("FMP") announced on 31 March 2011 included an independent loan loss assessment exercise performed by BlackRock Solutions ("BlackRock"), the results of which have informed the calculation of capital requirements for AIB, Bank of Ireland, EBS and ILP under the PCAR.

BlackRock performed a comprehensive review of the loan portfolios of the PCAR banks, with the assistance of a number of accountancy firms, legal firms, and credit experts. The Central Bank also appointed The Boston Consulting Group, an international consultancy firm, to provide oversight and challenge to BlackRock's work and to ensure consistency across institutions and portfolios. To perform the loan loss assessment, loss models were custom-built for the banks' portfolios as of 31 December 2010. A data integrity and verification exercise was performed to ensure robust outputs from the loan loss assessment models. The accountancy firms, hired by BlackRock, carried out four specific activities including a loan file sampling and testing.

A detailed and comprehensive review of asset quality was carried out as part of the PCAR exercise.

BlackRock and its subcontractors conducted in-depth assessments of loan portfolios by reviewing loan files and, in some cases, work-out capacity. By examining and reviewing loan files, a more accurate assessment of the value of the underlying collateral was possible, enabling a refinement of loan loss assessment assumptions. The loan file reviews focused on large loans and impaired assets. The number of files sampled varied across portfolios and banks but was sufficiently large to allow BlackRock to elicit qualitative and quantitative findings that were subsequently incorporated into their loan loss assessments.

In relation to corporate lending BlackRock loan loss assessments were based on a combination of manual loan file reviews and a more statistical probability of default/loss given default approach. These detailed manual file reviews covered 75% (by value) of loans of over €50 million and involved a full, fundamental reassessment of the loan. The results of the review informed forecasting assumptions for the remaining portfolio.

BlackRock also performed a bottom-up analysis on the larger facility exposures (˜20% of the portfolio) with a view to achieving maximum risk-based coverage. The rest of the portfolio was modelled where data permitted. As with corporate loans, BlackRock performed detailed manual file reviews for 75% by value of Commercial Real Estate loans over €50 million. An additional 200 individual CRE loans were also reviewed.