European Union Rebuffs Irish Pressure to Delay Stress Tests

The European Commission said it’s “essential” Ireland completes its next round of bank stress tests by the end of the year, rebuffing attempts by the bailed-out nation to delay the assessment.

Ireland needs to remove uncertainty around banks’ asset quality and conduct a “rigorous and credible” test before the country exits its rescue program at the year-end, the European Commission said in a staff review of Ireland’s bailout supplied to German lawmakers and obtained by Bloomberg News. Finance Minister Michael Noonan had said in February that he’d prefer the country’s banks to be tested as part of a Europe-wide review which he expects to take place in 2014.

Noonan has argued that holding stress tests alongside the EU review would demonstrate that the country’s banking system is returning to normality after it received 64 billion euros ($82 billion) of taxpayer aid since 2008. Allied Irish Banks Plc Chief Executive Officer David Duffy has said a delay would allow lenders to spend this year focussing on easing the terms of residential mortgages in arrears.

“Banks are moving forward with long-term restructurings of mortgages under the direction of the central bank,” said Stephen Lyons, a credit analyst at Dublin-based Davy. “Rather than test the banks on hypothetical situations, it makes sense to judge the interim success of new restructuring techniques and use this data in the next round of stress-tests.”

Ireland’s central bank, which carried out stress tests in 2010 and 2011, last month set quarterly targets for banks to tackle “unprecedented levels” of mortgage arrears. Lenders have begun writing off irrecoverable home loans and allowing borrowers to suspend repayments on part of their mortgage until their personal circumstances improve.

Almost 12 percent of Irish owner-occupier loans were at least three months in arrears at the end of December, compared with almost 19 percent of buy-to-let mortgages, the central bank said on March 7.