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Stress test scenario of 50,000 repossessions "very aggressive"

The economist’s view: Ronan Lyons says the aim of the game is to convince the markets that Irish banks are still open.

Image: Chris Radburn/PA Wire

THE ULTIMATE GOAL of this afternoon’s stress tests has been to underline to the world’s markets that Ireland’s banking system remains open for business, and is sufficiently resourced to survive into the future, according to economist Ronan Lyons.

Speaking to TheJournal.ie this evening after the results of the latest stress tests were revealed – which showed that four of the six banks covered under the government guarantee need another €24bn in capital – Lyons said the stress tests had been based on a “very aggressive” worst-case scenario that was very unlikely ever to be realised.

“They totted up the numbers and came to €19 billion or so, and even still they said, ‘It’s not enough, let’s put in an extra buffer of €5 billion’,” Lyons said.

“By being so pessimistic, they’ve gone past what will happen… we’ve put in such an insurance policy.

They’re being so pessimistic and therefore costing the taxpayer extra money now, by putting in €24 billion instead of €10bn or €12bn, to try and convince the markets that the finance system is ready to start again.

The tests had been particularly “prudential” in the scenario it envisaged regarding the potential collapse of the residential mortgage market, Lyons elaborated.

The tests had “suggested a capacity there for a lot of repossessions – much more than people think will actually happen. They’ve put aside six to nine billion for losses to banks from the mortgage market,” Lyons suggested.

The level of mortgage losses envisaged in the worst case scenario suggested that the banks would now be equipped to handle between 40,000 and 50,000 domestic home repossessions – a figure “inching towards 10 per cent” of the total number of domestic mortgages in the country.

That would be simply huge in terms of the overall market, and in terms of global history… [but that is] much more than people think actually will happen.

Ronan Lyons will be discussing the results of the stress tests on Sky News after 7pm.

About the author:

Gavan Reilly

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