Patrick Honohan: Recapitalisation of failed banks - some lessons from
the Irish experience
Address by Mr Patrick Honohan, Governor of the Central Bank of Ireland, at the 44th Annual
Money, Macro and Finance Conference, Trinity College, Dublin, 7 September 2012.
* * *
When and how to recapitalise
Several countries have faced difficult bank recapitalisation challenges during the crisis.
Textbook advice has not always proved easy to implement. That advice has been to
recognise losses early and ensure prompt recapitalisation, ideally from the market. Where a
bank has lost all of its capital it needs to be resolved, with shareholders losing their
investment and debt-holders (apart from insured depositors) also assuming losses as
necessary following the normal priority of claims. Where uncertainty continues to prevail, for
example in a systemic crisis, over-capitalisation of banks which have lost the confidence of
the market should be arranged.
In practice, loss recognition in the 2007-12 crisis has been slow, partly reflecting the
complexity of some of the banking relationships (as in structured finance products in the US
and large global banks 2007-8), but also the exceptionally severe depth of the recession
which has made it exceedingly difficult to narrow the uncertainty of the estimated range of
potential loan losses. Furthermore the systemic nature of the crisis and the fact that it has
occurred in countries whose banking systems are large in relation to the economy's fiscal
capacity has entangled the financial stress of the banks and that of the sovereign, not least
because of the reluctance of public authorities in most advanced economies in these years to
see sizable losses imposed on bank creditors - only Iceland has imposed any losses on
senior bank creditors (of sizable banks) since September 2008.1
Decisions on recapitalisation are needed along three main axes.
(a) Transparency: should the basis of capital adequacy calculations be disclosed and
crystallised promptly and extensively to the market or is there a case for delay and
opacity?
(b) Depth: should the recapitalisation be over-sized, or "just enough" to meet regulatory
minima?
(c) Socialisation: should burden-sharing with the private sector go beyond shareholders
to cover subordinated and even senior creditors, or should there be extensive
socialisation of the banking losses?
In this scheme, the bulk of the professional literature would favour transparency and depth,
but not socialisation.
Ironically, whereas a tough approach to requiring high capital is normally seen as protective
for the taxpayer and contrary to the interests of the bank shareholders, the scale of public
capital injections in this crisis has tended to turn public opinion against high capital. These
needed injections would have been lower had there been less socialisation of losses -
though it does seem that final losses in some countries will be less than was feared at the
outset.
Not all practitioners would agree with the textbook view on the answer to the questions.
Furthermore, operational and practical difficulties can hamper policy implementation. Indeed,
many of the recapitalisation measures adopted around the World since September 2008
have not seemed consistent with these textbook principles.
The Irish case, involving proportionately the largest fiscal costs of recapitalisation incurred
anywhere in the current crisis, provides some important practical lessons.
Bank recapitalisation and the Irish public finances
Although the Irish Government's decision, in the turbulent days of September 2008, to
legislate for a blanket guarantee of the liabilities of the main Irish retail banks, was taken on
the basis of advice that the banks faced liquidity and not solvency difficulties, it soon became
generally accepted that bank capital should be boosted. The demonstration effect of action
by British and US authorities will have been influential in this regard, but there was also the
continued steady fall in property prices, the deepening recession, and a growing realisation
that the banks' exposure to property developer and residential mortgage lending in particular
had created a large and hard-to-quantify risk of loan-losses.
In December 2008, the Government announced its intention to inject capital into the three
largest banks. Thus began a series of estimates and announcements over the following
years as the Irish authorities ramped up efforts to refine estimates of future losses and the
resulting capital requirements and eventually to balance the need to ensure adequate
capitalisation against a background of increasingly stressed public finances and a lack of
investor interest in the Irish banks.
Although the range of uncertainty in bank loan-loss estimates is expected to be rather
narrow, reflecting adequate risk-control measures, systematic loan underwriting errors of
Irish banks over a number of years into a massively over-heated property market opened-up
an extraordinarily wide range of uncertainty. The slowness of bank management to face up
to the scale of losses, the inadequacy of management information and the inherent
uncertainties - not yet fully resolved - about the ability of debtors to service loans where
collateral values fell well below loan amounts (negative equity) complicated the challenge of
getting reliable estimates. At best a range of estimates under progressively more extreme but
plausible scenarios could be aimed for.
The Government went into the crisis with a low level of public debt. But with the emergence
already in 2008 of budgetary overruns, the sharp deterioration in public finances (reflecting
the exceptional degree to which revenue had become dependent on boom-time sources, as
well as the operation of automatic stabilisers into the deep recession), the Government was
poorly placed to absorb the sudden additional burden of filling the growing capital hole in the
banks. Short of defaulting on the formal guarantees it had provided to the depositors and
bondholders, however, the Government had to acknowledge a large additional bank-related
debt. To be sure, the repayments of exiting bondholders and depositors (especially during
early 2009 and late 2010) were financed by central bank liquidity support, but this merely
changed the identity of the banks' creditors. Had market confidence remained, allowing the
Government to borrow at the low interest rates prevailing for highly-rated Sovereigns, the
situation could have been manageable. However, by November 2010 the yield spreads for
Ireland had deteriorated to the point where debt sustainability could no longer be assured
and the Irish Government sought the assistance of the IMF and the new European Financial
Stability Facility. The Programme agreed with these official lenders did not envisage any loss
sharing with senior bank creditors (even those which were no longer
Governmentguaranteed), so the Government had to use a sizable slice of the resources of the
Programme to continue the process of strengthening bank capital. The result was a very
delicate balance established in 2011 between ensuring adequate bank capital and retaining
Government debt sustainability.
Phase 1: the initial capital injection
The initial Government capital injection announced in December 2008 was €2 billion each
into AIB and Bank of Ireland (plus a commitment to underwrite a further €1 billion each in
new equity to be issued), and €1.5 billion into Anglo taking a 75 per cent stake in that
company.
Events overtook this announcement. First, in the face of continuing outflows, Anglo Irish
Bank was nationalised on Friday January 16, 2009 and the capital injection decision
deferred. For AIB and Bank of Ireland, the scale of these initial recapitalisations was
increased before they were actually concluded. Their public offerings were shelved in the
face of the further sharp decline in bank share prices following the nationalisation of Anglo;
instead, with a view to strengthening market perceptions of the capital adequacy of the two
main banks the Government injected €3.5 billion each in cash into AIB and Bank of Ireland in
February 2009 in return for preference shares. Anglo itself received €4 billion in capital in
June 2009 as the scale of prospective loan losses began to become more evident. By
endyear 2009 Anglo was again heading for an undercapitalised situation; this was closed
through a written commitment from the Minister for Finance to fill the gap with an instrument
approved by the Competition Directorate General of the European Commission (DGCOMP).
The instrument duly materialised with the issuance of the first Promissory Note (for
€8.3 billion) at end March 2010.
Phase 2A: PCAR2010 - NAMA first tranche and rest of portfolio for the going concern
banks
Loss rates
The initial focus on prospective losses was on the large loans that had been made to
property developers. The Government's approach to these loans, announced in April 2009
and legislated for in December of that year, was to create an asset management company
NAMA to purchase the large property loans at "long-term economic value", thereby
crystallising prospective losses. The rest of the banks' portfolio was also becoming evidently
stressed, not least the residential mortgages. Sooner or later, these losses would have to be
provided for.
By the autumn of 2009 there was a growing recognition that prospective losses on developer
loans were likely to be very high, and that these losses would crystallise when NAMA
purchases occurred. In order to comply with the specific requirements of DGCOMP, the
NAMA purchases had to be based on detailed valuations and it was decided that they would
therefore necessarily occur in a sequence of tranches, beginning with the largest loans. As
soon as the first tranche was purchased, losses would begin to crystallise and
recapitalisation could not be deferred. But how much additional capital would be required?
An indicative percentage haircut had been mentioned by the Minister for Finance in a
September 2009 statement, but there was no assurance that this would be accurate, and
indeed it proved to be a considerable underestimate of the severity of the shortfall. As it
became clear that, for operational reasons, final NAMA prices would not be available all at
once, the choreography of determining needed capital and requiring capital injections
became problematic.
If, as seemed plausible, the larger property developer exposures, which were to be valued
first, were likely to generate a higher percentage loss than the smaller exposures, the first
NAMA haircuts might not be too optimistic an estimate. Indeed, all of the banks felt this was
going to be the case and they argued against being required to put up sufficient capital to
meet an overall NAMA loss ratio equal to that of the first tranche. In response, the Central
Bank undertook to review the capital requirement on June 30, 2010 and to relax it if
subsequent NAMA tranches proved by then to have lower haircuts. Would that it had been
so!
Non-NAMA loss projections also needed to be made. Here the question was different. At
least NAMA purchases would crystallise the banks' losses; furthermore, NAMA was
mandated to value the loans it purchased on the basis of the market prices for land and
property prevailing when the legislation was being enacted in November 2009. (To be clear,
the loans were not themselves valued at mark-to-market prices, but the property prices input
into the long-term economic value calculations that were made were based on that fixed
date.) Accordingly, future property price and macroeconomic developments would not play a
central role in these valuations. But for the non-NAMA loans, their recoverability would
depend on future economic conditions of firms and households, on the banks' ability to
recover on distressed loans, and not simply on current collateral values.
The banks had made their own unpublished estimates for these, but the Central Bank made
an independent top-down estimate of loan-losses over a three-year horizon for a base and
stress case. These estimates were considerably higher than those of the banks, and the
latter strongly contested them. The estimates drew on the experience of the Central Bank's
in-house credit specialists - many of them hired within the previous year or so. Analysts'
estimates published by rating agency and other sources were factored-in, especially in
relation to the banks' non-Irish exposures. Separate loan-loss ratios were assigned to each
bank for 12 different loan categories.2 The challenge was to choose loss rates, all of which
were sure to lie well beyond all local experience. The projected loss rates that were chosen
varied widely across the different categories (for example the stress-loss rate on Irish
commercial development property non-NAMA for Bank of Ireland was 60%; for Irish retail
mortgages it was 5.6%), and to a lesser extent across the banks. These were all well above
the banks' own published estimates and far in excess of provisions taken.
The limitations of stress-testing as an exercise across the globe are pretty well appreciated.
Both the choice of stress scenarios in terms of macroeconomic and other external factors,
and the mapping from those factors to default probabilities and to loss-given-default are
always subject to uncertainty. Variances are high. This is all the more so when the economy
moves outside of the previously experienced range. Given the steepness of the decline in
economic activity (between the peak quarter in late 2007 and the trough in late 2009, real
GDP fell by 11.5%; GNP by 13.9%) and employment and the steady decline in house prices
both actual and forecast, there was very little in historical experience - either in Ireland or in
other advanced economies with large financial sectors - to guide those attempting to
estimate the range of plausible outcomes for a bank lending portfolio which had clearly been
inadequately underwritten. Loan losses were certain to be beyond almost all previous
experience not just in Ireland, but in advanced economies: just how far beyond was clouded
in uncertainty.3
From loss rates to capital requirements
The Central Bank's March 2010 projection for non-NAMA loss rates, combined with the first
tranche haircut grossed up to apply to all NAMA loans, were employed with projections of
capital and income generation from the rest of the banks' activities over a three-year horizon,
and a small buffer, to arrive at a needed capital amount by end-2012 that would ensure that
the bank would satisfy the Central Bank's chosen core capital adequacy thresholds. These
thresholds were higher than current international standards, reflecting evolving international
discussions. They were set at 8 per cent Core Tier 1 on Basel 2 basis in a base case
scenario, (of which at least 7 per cent to be in the form of common equity); and at 4 per cent
Core Tier 1 in the stress case.
The outcome (known as PCAR2010) of these calculations for three banks BOI, AIB and
EBS, imposing the equivalent of €11 billion of new capital on these banks, was published at
end-March 2010.4 The future of Anglo and INBS as going concerns being in question, no
specific new forward-looking capital requirements (beyond standard Basel 2) were imposed
on them by PCAR2010.
However, the NAMA read-across and preliminary indications for their non-NAMA book were
officially stated to imply further future losses of over €20 billion for those two banks, which
were also immediately capitalised to meet crystallised losses. The PCAR2010 exercise,
implying, as it did, a total of almost €31 billion in additional capital, was the largest capital
deficiency announcement during the period 2008-12.
Too much or too little?
Given the scale of needed recapitalisation and the fact that much of it would have to come
from the State, the decision on precisely how much capital to require as of the first transfer of
developer loans to NAMA presented risks in both directions. Insist on much too much capital
- more than seemed likely to be needed - and the ability of the State to retain access to
market finance could be immediately and unnecessarily be lost; on the other hand, fixing an
amount of required capital that subsequently proved inadequate would have reputational
consequences.
Put another way, the market clearly desires certainty and was not going to welcome repeated
revisions in projected loan losses. But the only way of ensuring a one-bite capital increase in
the face of gradually emerging information would have been to overcapitalise the banks by
an amount sufficient to cover any potential eventuality.5 Given the degree of uncertainty that
then existed - albeit some of which would crystallise quite soon, as successive tranches of
NAMA valuations were determined - that would have required a much larger capital injection
than was decided upon in March 2010. To insist on overcapitalising to that extent would have
pushed all of the banks into majority State ownership even if there was no need or clear
justification for this. Above all, a sufficient overcapitalisation to cover any eventuality (or even
to meet the much higher ratio subsequently adopted as a standard in 2011) would have
undermined the State's already precarious finances and tipped it into an immediate need for
a programme of assistance from the IMF and EU partners.
Accordingly, having been assured by NAMA that there was no basis for assuming that the
first NAMA tranche was unrepresentative of haircuts that would come in subsequent
tranches, the Central Bank decided to apply this first-tranche haircut across the board to the
whole portfolio of developer loans. There was no realistic alternative, despite the risk of a
confidence-reducing sequence of upward revisions in required capital.
In the event, that is what actually happened: as became clear in August, the later NAMA
haircuts would be uniformly higher than those of the first tranche that had been announced in
March 2010. It remains somewhat puzzling why the later tranches should have been
systematically worse than the first lot. After all, these were generally smaller exposures and
- all other things being equal - that alone would, if anything, tend to predict lower loss
rates).6
Phase 2B: adjustment for full NAMA sample and for Anglo wind-down
By end-August 2010, then, higher than anticipated losses on later NAMA tranches began to
eat into the buffers that had been provided for in March. In early September, the latest NAMA
tranche information, together with indicative but reasonably firm estimates for the remaining
NAMA tranches, made it unavoidable that additional capital of about €3 billion would be
needed for AIB.7 The buffer for Bank of Ireland was, however, sufficient.
The increasing haircuts for the NAMA loans being transferred by Anglo8 and INBS were even
larger. Accordingly, the Government decided to abandon the plan to build a new business
bank out of Anglo and to proceed to a dismantling of that bank.9 Following this
announcement, Anglo management were asked to provide a firm assessment of their
prospective losses under the new structure. This estimate implied higher non-NAMA losses
than had been envisaged under the previous plan. Together with the higher NAMA haircuts,
this gave rise to the announcement that Anglo's future losses over its remaining life-time in
wind-down mode could imply a need for capital over €12 billion higher than had previously
been pencilled in.10 The figure for INBS was almost €3 billion higher than at March 2010.
These figures were all announced11 on September 30, 2010, just after the expiry of the 2008
guarantee, an event which had been preceded by substantial maturities of bank paper and
non-renewal of deposits, giving rise to a surge in the need for ELA funding from the Central
Bank of Ireland.
Three factors have been mentioned as contributing to the surge in the spread of Irish
Government bonds in October and November of 2010 leading to Ireland's application for
financial support from the EU and IMF.
First: the market's revised perception of the scale of banking losses following the
announcement of September 30, 2010.
6
For one thing, smaller loan projects should be easier for the lender to value. Also, positive lender valuation
errors will tend to increase approved loan size, while negative errors will reduce size.
7
The announcement of an additional capital need for AIB was highly significant in a European context also, as
this was a bank which had been subjected to the CEBS stress test in July 2010. In fact, AIB and Bank of
Ireland had been subjected to a more aggressive stress than the minimum set by CEBS in that the first
tranche NAMA loss rates were applied to the full developer portfolio in place of the lower minimum loss rates
specified in the CEBS rules. Thus, even though it resulted simply from the time-consuming nature of the
NAMA valuation procedures (mandated by the European Commission DGCOM), the need to revise the CEBS
result so soon was seen as a negative reputation event both for the Irish and European authorities.
8
As Anglo's losses crystallised, the amount of the Promissory Note provided by the Minister for Finance to
meet Basel 2 regulatory capital requirements increased: by €2.0 billion on 28 May, €8.6 billion on 23 August
and €6.4 billion on 31 December 2010 giving a total of €25.3 billion. INBS likewise received a promissory note
whose value had increased to €5.3 billion at end-2010. Anglo and INBS were merged in July 2011 to form
IBRC.
9
It was decided that Anglo would be split into a Funding Bank (containing the deposits and central bank
funding, with eligible and Government-guaranteed assets) and a Recovery Bank (containing the rest).
10
This reflects losses under the management's "stress" case; their base case losses were €5 billion lower. The
non-NAMA losses envisaged in these scenarios were considerably higher than provided as late as August
2010 when Anglo management still envisaged it continuing as a going concern.
11
http://www.centralbank.ie/press-area/press-releases/Pages/STATEMENTONIMPLEMENTATIONOF
PRUDENTIALCAPITALASSESSMENTREVIEWEQUIREMENTSFORIRISHBANKS.aspx;
http://www.centralbank.ie/press-area/press-releases/Pages/StatementonAngloIrishBank
restructuringcapitalcosts.aspx. This included a requirement for ILP, which, as a non-NAMA bank, had not
been included in the March exercise.
Second: growing market awareness of the scale of ELA that had been provided to
the banks, calling into question their future viability.
Third: the Deauville Agreement of October 18, according to which private sector
lenders to Governments seeking financial assistance from the new EFSF facility
would have to experience losses on their holdings. All three factors were no doubt
relevant.
Although the scale of the additional capital requirements announced at end-September was
not in itself sufficient to undermine radically the manageability of the public finances, the
market had not focused on the fact that the end-March 2010 announcement left open the
possibility of downside risk on the later NAMA tranches and did not itself purport to account
for Anglo's prospective non-NAMA losses. As a result, the market was unpleasantly
surprised that a further capital announcement was needed so soon. Still, market spreads
actually declined in the days after the announcement and only started to widen again after
Deauville.
The growing ELA, and overall reliance of the Irish banks on Eurosystem funding was also a
matter of evident concern to the ECB, and this concern clearly communicated itself to the
markets in these weeks.
Inasmuch as the unaided public finances were at the limit of their capacity, making
unavailable the option of over-capitalisation of the banks, a major objective, especially of the
funders, in the EU-IMF Programme of Financial Support was to remove this constraint and
provide sufficient funding to allow whatever capital needs were going to be identified by a
new and more in-depth stress test, lifting capital of the banks to a new threshold (10.5%
riskweighted), and also providing for the additional costs of deleveraging the banks so that their
reliance on central bank funding, especially ELA, would be reduced. The nexus between
Government and banking system was not, however, reduced in that the additional capital
was not injected directly, but added to the Government debt. Furthermore, overall
eurosystem policy dictated that senior bondholders - even those that were no longer
Government-guaranteed - should not be required to share the burden of the losses.
It should not be thought, however, that all of the additional capital mandated by PCAR2010
was obtained from the Government. Instead some was secured through sale of assets at
above book value (which both generated additional book capital and reduced the
riskweighted asset base on which the capital requirements were calculated), and some through
burden-sharing offers to subordinated debt-holders.12 There was also an underwritten rights
issue by Bank of Ireland.
Phase 3: PCAR 2011: higher ratio; deleveraging costs; bottom-up estimates
To meet the Programme requirements, the PCAR2011 exercise13 was prepared on a more
granular basis employing an extensive list of external consultants, among which BlackRock
Solutions were the leading player, steering the loan-loss estimation. A more systematic, and
formal (and very expensive!) approach was adopted. Loan-by-loan information was collected
from each of the banks and a systematic process of data verification provided assurance that
the underlying data being used was sufficiently robust. At the heart of the exercise was a
bottom-up multi-year loan-loss forecasting exercise carried out by BlackRock using Central
Bank base and stress projections about GDP, house prices and other macroeconomic
variables, and applying parameters estimated from emerging patterns of loan delinquency. It
is important to realise that, although arrears were mounting steadily, and the inevitability of
sizable losses in the non-NAMA portfolio was recognised by all, even at this stage banks had
recognised relatively few write-downs.
As already noted, the forecasting exercise was being conducted in circumstances that were
largely out of the range of historical experience: absent that, it is of interest to explain the
assumptions that were made (at the instance of BlackRock) to underpin a data-based loss
projection.
Thus, for residential mortgages, BlackRock - extrapolating from UK experience - assumed
that, in the end, bank forbearance on delinquent loans would not be successful in avoiding
foreclosures, and they modelled negative equity as the major driver of delinquencies. Thus,
in effect, a significant proportion of negative equity loans was assumed to default in each
quarter, and little of the unsecured portion of the loan would be recovered.14
Since the house
price forecasts entailed a large fraction of the mortgage book remaining in negative equity
throughout the horizon of the exercise, this produced a higher estimate of life-time losses
than had been envisaged in the top-down exercise of the previous year.
For commercial property loans, the ability of the debtor to secure rental renewals was
assumed to be low, so that for this segment too BlackRock's lifetime loan-loss assumptions
were heavily driven by loan-to-value ratios.
In choosing parameters, BlackRock also made subjective judgments about the banks'
operational ability to make effective loan recovery.
Mapping the BlackRock loan losses into capital requirements for PCAR2011 entailed some
judgment as to how much of future prospective losses to provide for in the banks' capital
right away. Here there was some tension between accounting and economic approaches. It
was deemed, from the accounting point of view, unnecessary to insist that the banks hold
sufficient capital immediately to meet all of the lifetime projected loan losses. On the other
hand, holding enough to meet projected three year losses (and still end after 3 years with
10.5% Core Tier 1 capital in the base case and 6% in the stress case) was deemed
insufficient from the perspective of the underlying economics of the situation.15 A sizable
buffer over three year losses was therefore included in the required capital announced in
March 2011. In addition, some of the banks' non-core assets were slated for deleveraging:
projected realisations for these entailed further losses which could have been avoided if
funding had been available to hold these to maturity.
The combination of the four factors: (i) higher percentage capital ratios; (ii) higher projected
3-year loan losses per BlackRock methodology; (iii) buffer for post-three years loan-losses;
and (iv) deleveraging costs, combined with projections for the evolution of net income and
risk-weighted assets, gave the March 2011 required capital figures. A breakdown is shown in
14
In essence, BlackRock's methodology began by estimating the influence of each loan's LTV and seasoning
(and the borrower's interest-to-initial-income ratio) and macroeconomic variables on the probability of that loan
being in arrears status (defined as nonperforming for at least 90 days). This estimate was based on a
24-month panel (subsample) of individual loans. Then it was assumed that a given fraction of each month's
loans in arrears will default, the fraction being based on UK experience. Finally, arrears percentages were
projected forward for a couple of decades using the estimated and assumed parameters, together with
projected house price and other macroeconomic variables. Central Bank staff shadowed this exercise and
explored alternative assumptions, drawing on estimates of monthly migration of delinquent loans into higher
arrears categories, based on actual Irish experience 2009-10 calculated from the new loan-by-loan data. In
several instances this produced somewhat higher projections of loan cure, but only the BlackRock loan-loss
estimates were used to calculate the new capital requirements.
15
Another complication in assessing needed capital was the extraordinary term and credit risk premia prevailing
in banking and sovereign debt markets during 2010 to 2012. The net present value of a long stream of
payments differed widely depending on which of several market-relevant discount factors were employed.
Figure 1.16 This time an additional €24 billion was being called for, well within the €36 billion
pencilled into the Programme financing envelope by the Troika.
Table 1 shows the requirements bank-by-bank. Figure 2 shows the cumulative additional
capital requirements reached in the crisis. The bank with the largest cumulative amount
(€29.3 billion) is Anglo (and, this bank being in a wind-down mode, that figure does not
include an additional €5 billion of announced potential losses in a stress case). Although
AIB's cumulative requirements are not far behind at €27.2 billion, this does reflect the higher
target capital ratio set for going concern banks in a stress scenario; furthermore, Anglo's
reported pre-crisis total assets stood at €96.7 billion: much lower than the €177.8 billion
reported by AIB. As such, Anglo's overall loss experience was much worse than AIB. The
other large going concern entity Bank of Ireland loss rate had to meet €11.4 billion of
additional capital requirements, which may be compared with its pre-crisis total assets of
€197.4 billion.
Towards PCAR2013
In all banking systems around the world, evolving international standards has tended to
increase required capital levels (especially for core capital - those elements that can absorb
losses while the bank continues to be a going concern). Growth of the business also means
a need for more capital. In normal circumstances, the additional capital can be generated
through retained earnings or by issuing new equity in the market. When conditions return to
normal, this will be the case for Irish banks too. But for the present, their profitability and
access to additional equity has been limited. There is also the question of keeping track of
and responding to any deviations in the actual and prospective loan-loss situation by
comparison with what has been assumed in PCAR 2011.
PCAR2013, employing a further refinement of methodology, embodying recent work on loan
arrears migration and the results of a micro-data survey of indebted households, will allow
capital requirements to be updated on a more secure basis. An emphasis on the
effectiveness of bank loan recovery and the management of mortgage and SME arrears will
also become more central. The more effective the banks are proving to be in m