Peripheral Banks To Feel Ireland Stress Test Pain

The publication of new stress tests for Ireland’s banks Thursday will once again throw the troubled country into the spotlight, but the results could cause unrest in Europe’s southern periphery as well, as investors fret over which banks there will need additional capital.


“People will look back at the Irish case and see the continued underestimations of capital and think: this is quite possible for Spain," Claire Kane, European banking analyst at MF Global told CNBC.

"There are quite a few differences I would say,” she cautioned however.

“The Irish banking system’s significance to the Irish economy was much more than Spain’s, 2.5 times as big,” Kane said, adding Spain’s banks are far less exposed to construction real estate than those in Ireland were.

The Irish banking sector was brought to its knees following the crash of the housing market. The banks’ huge exposure to real estate eventually led to their collapse and the subsequent European Union/International Monetary Fund bailout for Ireland.

She also pointed out that Ireland’s banking system was far more concentrated.

“The five largest banks had by far the majority of the system, and Spain has had a problem with overcapacity, so the problem is much more spread out there,” she said.

Investors have nevertheless been spooked by developments in Portugal, Spain and Italy in recent days, which left them wondering whether the southern peripheral banks will once again need more capital.

Difficult Environment

Spain’s third-largest savings bank, Banco Base, requested 2.8 billion euros in state aid earlier this week, twice what the Spanish government thought it would request.

Meanwhile Portugal’s five largest banks were downgraded by rating agency S&P which said it saw an increasingly difficult economic, financial and operating environment in Portugal.

Making matters worse, the health of Italy’s banking sector also came into question earlier this week when UBI Banca announced a surprise 1 billion euro capital increase.

Ricardo Salgado, CEO of Banco Espirito Santo tried to calm investors, saying banks in Portugal would not suffer the same fate as those in Ireland.

House prices in Portugal had been fairly stable over the past four to five years, he said.

“The bubble did not exist in Portugal,” Salgado said. Although Portuguese banks had suffered from the downgrade of Portugal’s sovereign debt, they had not been locked out of credit markets, he said.

But a plan to be presented to shareholders in Portugal's largest listed bank Millennium bcp on April 18, proposing a capital hike of 1 billion euros, has once more added to concerns over the peripheral banks’ capital requirements.

It seems that until the European Banking Authority carries out tough and credible EU-wide stress tests on lenders, fears over parallels between southern Europe’s banks and those in Ireland will continue to unsettle investors.