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According to a recent transparency exercise carried out by the European Banking Authority (EBA) - the EU’s banking regulator - Bank of Ireland and AIB Bank performed favourably when compared with other European lenders, with regard to capital ratios.
This report provides detailed information in a comparable and accessible format for 120 banks across 25 EEA/EU countries.
Strong core equity tier one (CETI) capital ratios from a bank are a vital sign to ensure the safety of customers' and farmers' savings in times of crisis or downturns in the economy.
These ratios indicate that the bank is strong enough to repay all customers' deposits.
Strong banking IT security ensures internal safeguards are in place to allow continuity of banking service in the community, and there is no risk that the banks’ IT systems can be hacked.
AIB Bank reported a ratio of core equity tier one (CETI) capital to risk weighted assets (a measure of high-quality capital that can be called upon in the event of a crisis) of 19.3% in June 2021, up 31 basis points since year end December 2020.
Bank of Ireland’s CETI ratio was just under 15.3%, up 37 basis points since the end of December last year.
Ulster Bank’s capital ratios have fallen slightly since December 2020, although is still high at 25.6%.
Testing scenarios
The testing scenarios factor in economic shocks, around a fall in gross domestic product (GPD), rising unemployment and falling property prices until the end of 2023.
Irish banks have record low impairment costs this year, due to accounting for most of their losses in 2020, according to the EBA report.
The Irish banks rank third-lowest in the 25-country bank sample, after Iceland and Slovenia.
Stress tests, now held every two years in the EU, were introduced annually in the aftermath of the global financial crisis over a decade ago, which forced tax payers to bail out undercapitalised banks.
Stress tests this summer showed that AIB Bank and Bank of Ireland would see significant drain on their capital buffers if the country suffered another economic shock, but would still meet EU regulatory requirements. British lenders are no longer included in the stress tests, since the UK decision to leave the EU last December.
Inflation
The EBA report also said inflation is a concern, especially if it translates into a rise in European Central Bank (ECB) rates while the economy slows down due to the new COVID-19 wave.
IT and cyber security incidents
The report stated IT and cyber security incidents have risen substantially across all banks.
It stated banks need to prioritise IT security, including all third-party service providers, not least since cybercriminals are increasingly turning their focus to supply chains.
The EBA instructed that all banks should ensure that effective IT security arrangements are in place at their third party service providers.
Bank of Ireland fined by CBI
Last week, Bank of Ireland was fined €24.5m by the Central Bank of Ireland (CBI) for failing for more than 10 years (from 2008 to 2019) to have an adequate system in place to ensure continuity of service to customers in the event of a serious IT disruption.
The CBI was asked by the ECB to investigate the matter in August 2018. This was almost a year after Bank of Ireland’s own internal report identified a number of risk management and internal control failings with regard to its IT service continuity.
This fine is the second-highest ever levied by the CBI. Ulster Bank earlier this year was fined €38m for its role in the industry-wide tracker mortgage scandal. Both AIB Bank and Bank of Ireland are still awaiting the CBI’s judgement on the level of fines for their part in the tracker mortgage scandal.
Having a robust information technology system is vital to the retail banking service in Ireland and the fine shows how serious the CBI considers IT systems and services in Irish banks.
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