Pearse Doherty (Donegal South West, Sinn Fein)
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Question 105: To ask the Minister for Finance if the proposed recapitalisation of the covered institutions in July will be the last taxpayer funded recapitalisation by him for the covered institutions; and if he will make a statement on the matter. [22287/11]

Michael Noonan (Limerick City, Fine Gael)
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As I have said previously in my Statement on Banking in March, the PCAR bank stress tests carried out by the Central Bank are certainly among the most thorough and demanding such tests ever performed in Ireland and or indeed anywhere. The detailed results methodology and assumptions underlying these stress tests have been published, emphasising Ireland's firm commitment for this critical exercise to be fully open and transparent. In addition to the very conservative economic assumptions built into the capital scenarios the Central Bank has gone further than its international peers in setting its requirements by taking a three year rather than two year outlook and also by requiring capital levels after any stress losses of 6% rather than 5% of Risk Weighted Assets.

The bank stress testing exercise, the results of which were announced by the Central Bank of Ireland on 31 March 2011, included a detailed review of loan files on an appropriate sampling basis. As the Deputy will be aware, the Financial Measures Programme also announced on that date included an independent loan loss assessment exercise performed by BlackRock Solutions ("BlackRock"), the results of which informed the calculation of capital requirements for Allied Irish Banks, Bank of Ireland, EBS and Irish Life and Permanent 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.

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 specific terms I am satisfied on the basis of the results of the PCAR assessment carried out by the Central Bank, which have been endorsed by the external authorities, that the loan loss assumptions made reflects a high degree of conservatism and underpin the robustness and credibility of the exercise overall.

I am strengthened in this view by the results of the European Banking Authority (EBA) stress tests on Allied Irish Banks, Bank of Ireland and Irish Life and Permanent which were published on 15 July. The results of the tests show that the Irish banks meet the stress requirements and do not require additional capital beyond the requirement set in the Financial Measures Programme published in March 2011. The results of the EBA stress tests take account of the recapitalisation measures announced following the Prudential Capital Assessment Review (PCAR), which required the banks to raise an additional €24 billion to in order to achieve a core tier 1 ratio of 6% at the end of 2013 in a stressed scenario.

It should be noted that stress testing is used by banking supervisors to determine whether a bank is adequately capitalised to withstand adverse macro-economic events or unanticipated shocks. Our banks will be well capitalised by international standards following the recapitalisation measures but this position will not then remain frozen in time. Apart from anything else, both the global and domestic economies will continue to evolve and the Central Bank will perform future annual PCAR assessments to ascertain the position of the banks at that point in time. That does not necessarily mean that the banks will require any further capital. However; no eventuality, regardless of how remote, can be ruled out when predicting future events. I would nevertheless reiterate that based on the conservative assessments used in the PCAR/PLAR analysis of potential future scenarios for the banks, and indeed the Irish economy, I am entirely satisfied that the banks are currently well capitalised to serve the needs of the Irish economy following this round of measures.