IPM Irish Life&P.Gp

 

TIDMALBK TIDMBKIR TIDMIPM 
 
RNS Number : 4555J 
Irish Financial Servs Reg Auth 
30 March 2010 
 
                      PRUDENTIAL CAPITAL ASSESSMENT REVIEW 
The Central Bank and Financial Regulator has carried out an exercise to 
determine the forward-looking prudential capital requirements of certain of  the 
Irish credit institutions  covered by the government guarantee. The Prudential 
Capital Assessment Review (PCAR) process for Allied Irish Bank, Bank of Ireland 
and EBS has been concluded and the results are set out below, together with the 
status of Anglo Irish Bank, Irish Nationwide Building Society and Irish Life and 
Permanent. 
The Prudential Capital Assessment Review (PCAR) assesses the capital 
requirements arising for expected base and potential stressed loan losses, and 
other financial developments, over a 3 year (2010-2012) time horizon.  It 
involves the Central Bank and Financial Regulator making an assessment of the 
recapitalization requirements of the credit institutions in order to satisfy 
both a base case and stressed target capital requirement. 
The PCAR has been undertaken to determine the recapitalisation requirements of 
the credit institutions with reference to both: 
·    A target level of 8% core tier 1 capital should be attained after taking 
account of the realisation of future expected losses and other financial 
developments under a base case scenario.  This test is designed to ensure the 
credit institutions are capitalised to a level which reflects prudential 
requirements and current market expectations, after taking account of forecast 
loan losses through to 2012.  As a further prudent requirement, the capital used 
to meet the base case target must be principally in the form of equity, the 
highest quality form of capital, with 7% equity as the target level. In 
calculating the requirements, individually specified amounts have been added to 
the institutions' estimates of expected losses to take account of the 
uncertainty of  loss forecasts for particular portfolios. 
·    A target level of 4% core tier 1 capital that should be maintained to meet 
a stress scenario or a portfolio level sensitivity analysis.  This capital test, 
which is similar to that employed by US and UK supervisory authorities, is 
designed to ensure the credit institutions have a sufficient capital buffer to 
withstand losses under an adverse scenario significantly worse than currently 
anticipated. 
The Financial Regulator has required the credit institutions that have completed 
the exercise to prepare recapitalisation plans to comply with the additional 
capital specified by the PCAR.  The level of additional capital required for 
each institution under the PCAR analysis is set out below. This amount of 
capital set by the PCAR process must be in place by the end of 2010. 
Recapitalisation to the target requirements specified in the PCAR will provide 
market participants with the confidence that the institutions have a strong 
capital base after realising forecasted expected losses and that a prudent 
capital buffer is in place to withstand additional losses in adverse stress 
conditions. 
PCAR Methodology 
The PCAR has involved the Central Bank and Financial Regulator making an 
assessment of the recapitalisation requirements of the credit institutions 
involved in the exercise in order to satisfy both a base case and stressed 
target capital requirement. 
A team of prudential supervisors, credit specialists and treasury specialists in 
the Financial Regulator, supported by Central Bank economists and financial 
stability specialists, conducted the PCAR by: 
·    Assessing the provisioning estimates of  each credit institution, their 
Basel capital model outputs,  expected loss forecasts, funding costs and 
projected operating income; 
·    Reviewing independent third party estimates of provisions and expected 
losses conducted on specific credit institutions' portfolios; 
·    Reviewing likely and stressed scenario loan loss projections for portfolio 
categories by credit rating agencies and other sources including regulatory 
agencies; 
·    Reviewing the outcome of modelled base and stress macro-economic scenarios 
that we  specified and mandated the credit institutions to calculate; 
·    Using information received from NAMA in respect of  the first tranche  of 
"haircuts" as the basis for estimating the NAMA loan losses; 
·    Applying prudent buffers to estimates of expected loan losses; 
·    Applying prudent adjustments to base case and stress scenario funding costs 
and treasury asset losses; 
·    Applying knowledge of the quality of loan portfolios gained through our 
more intensive supervisory interaction with the banks, including observation of 
Credit Committee deliberations; and 
·    Benchmarking our analysis to the approaches taken by other leading 
international financial supervisors. 
 
 
 
The PCAR methodology assessed the capital requirements arising for expected base 
and potential stressed losses, and other financial developments, over a 3 year 
(2010-2012) time horizon. 
The PCAR required the assessment to take account of changes to EU prudential 
banking capital requirements that have been formally adopted, even if they have 
yet to be implemented. This does not include the "Basel II plus" changes that 
are still at consultation stage, although the potential changes were noted as 
part of our overall assessment of target capital levels. 
 
Stress Test 
In this test the capital requirement of 4% core tier 1 capital is designed to 
ensure that banks will be adequately capitalised even after experiencing a 
hypothetical adverse macroeconomic scenario or unexpected severe losses on 
particular loan portfolios.  This capital level is equivalent to that 
established by the UK Financial Services Authority and similar to that 
established by the US Federal Reserve, Federal Deposit Insurance Corporation and 
Office of the Comptroller of the Currency. 
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. 
 
 
 
 
 
 
The Central Bank and Financial Regulator required firms to stress test their 
portfolios to the higher of: 
·    The firms estimated loan losses in a stress scenario based on a delayed 
macroeconomic recovery scenario prescribed by the Central Bank and Financial 
regulator and, 
·    Application of severe sensitivity shocks to the loan book at a portfolio 
specific level. This included loan loss rates of 5%  for mortgages in Ireland 
and non-NAMA developments property loan losses of  60%  in Ireland and 35% in 
the UK.  We emphasise that these are not forecast or expected loss levels, and 
are disclosed to show the extent of the stress that  has been applied in the 
test. These loss rates are not based on any macroeconomic scenario and therefore 
should not be interpreted in that manner. 
It is the losses established under the portfolio level sensitivity approach that 
have provided the binding stress case capital requirements, rather than the 
macroeconomic scenario. 
The use of stress testing to benchmark prudential capital requirements will 
become a part of the regulatory framework operated by the Central Bank and 
Financial Regulator. 
 
Recapitalisation Plans 
The Financial Regulator has required the credit institutions to prepare 
recapitalisation plans in light of the PCAR results.  The credit institutions 
are required to set out their plans to ensure that capital is in place by the 
end of 2010 to a level calculated by reference to the base capital target, after 
taking account of projected expected losses, including bank-specific and other 
adjustments.  We will permit credit institutions to take account of projected 
asset disposals, based on valuations confirmed by independent third parties, 
where these are well progressed at year end. 
The credit institutions are also required to set out their plans to ensure that 
capital is in place by the end of 2010 to a level calculated with reference to 
the stress capital target, taking account of stressed losses and other 
adjustments. We are currently assessing various approaches to meeting the stress 
capital target and in principle we will permit credit institutions to take 
account of contingent capital facilities which trigger at a level of 5% core 
tier 1. 
 
                              PCAR Results by Bank 
 
The capital requirements resulting from the PCAR exercise are: 
 
Allied Irish Banks plc ("AIB"): 
(1)  An additional EUR7.396 bn of equity capital to meet the base case target of 
7% equity, before taking account of projected asset disposals, and 
(2)  EUR4.865 bn of Core Tier 1 capital, less any equity generated under paragraph 
1 excluding conversion of preference shares held by the Government, to meet the 
base case target of 8% Core Tier 1.  This additional Core Tier 1 capital will 
also satisfy AIB's stress case target of 4% Core Tier 1. 
 
The Governor & Company of the Bank of Ireland ("BOI"): 
(1)  An additional EUR2.66bn of equity capital to meet the base case target of 7% 
equity, and, 
(2)  In meeting this requirement provided at least EUR0.25 bn of new Core Tier 1 
is raised, then Bank of Ireland also meets (a) the base case target of 8% Core 
Tier 1, and, (b) the stress target of  4% Core Tier 1. 
 
EBS Building Society ("EBS"): 
(1)  An additional EUR875m of Core Tier 1 capital to meet the base case target of 
8% Core Tier 1, and, 
(2)  Contingent capital of EUR120m of Core Tier 1 capital to meet the stress case 
target of 4% Core Tier. 
 
Other Institutions for which the PCAR has not been completed: 
 
Anglo Irish Bank Limited ("Anglo"): 
The PCAR for Anglo has not yet been undertaken because discussions on its 
restructuring plan between the bank, Government and the European Commission are 
still at a formative stage.  If the bank's preferred option - which is to carve 
out a much smaller but viable going concern banking entity with the remainder 
becoming an asset management entity - is approved by the European Commission, 
the PCAR will be applied to the balance sheet of the new banking entity. 
 
As an interim measure, Anglo Irish Bank will require an additional EUR8.3 billion 
of capital to meet current minimum capital requirements, pending conclusion of 
the restructuring discussions and the application of the PCAR. 
 
Irish Nationwide Building Society ("INBS"): 
The Financial Regulator has estimated the capital shortfall to meet current 
minimum capital requirements for INBS at EUR2.6 billion.  In line with all credit 
institutions, INBS must comply with this minimum regulatory capital requirement 
on an ongoing basis. 
 
Irish Life & Permanent plc ("ILP"): 
ILP was not included in the first wave of PCAR as it has not received a 
government capital injection and is not taking part in NAMA. 
 
The PCAR process for ILP will be completed over the coming months as the 
institution's restructuring plan is developed. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Appendix:The PCAR Map 
 
Base Capital Calculation 
 
 
Start with Current Capital of bank and forecast Operating Results 
Deduct impairments on NAMA loans 
Deduct impairments on  non -NAMA loans until 2012 
Make Adjustments on bank specific basis: 
Add/Deduct:  changes to NAMA volumes and % haircut 
Deduct:   regulatory adjustment for loan loss uncertainty 
Deduct:  adjustment for funding cost risk 
   Deduct:  Other amendments to forecast operating results 
  Amend:  Risk Weighted Assets to reflect impact of impairment and other changes 
Determine Capital Shortfall for base case ratios based on adjustments 
Add:  Capital injection by 31 December 2010 
Result:    Target Base Capital of 8% Core Tier 1 of which 7% Equity 
 
 
 
 
 
 
 
 
 
                                                       The PCAR Map 
 
 
Stress Capital Calculation 
Start with Current Capital of bank and forecast Operating Results 
                      Deduct  impairments on NAMA loans 
                Deduct  impairments on non NAMA loans until 2012 
Make Adjustments on bank specific basis: 
Deduct:   changes to NAMA volumes and % haircut 
               Deduct:  hypothetical stress losses through to 2012 derived from 
the higher of: 
(a)  the prescribed macroeconomic scenario 
(b)  the prescribed portfolio level sensitivity loss rates 
Deduct:  regulatory adjustment for funding cost risk under stress scenario 
  Deduct:  Other amendments to forecast operating results (same as base) 
                  Add:  capital injection by 31 December 2010-03-25 or 
Contingent Capital Facility 
Amend:  Risk Weighted Assets to reflect impact of impairment and other changes 
 
Determine Capital Shortfall for base case ratios based on adjustments 
Add:  Capital injection by 31 December 2010 
 
     Result:          Target Stress Capital of 4% Core Tier 1 
 
 
This announcement has been issued through the Companies Announcement Service of 
                            the Irish Stock Exchange. 
 
This information is provided by RNS 
            The company news service from the London Stock Exchange 
   END 
 
 ISELLFSEVVIIVII 
 

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