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Northern Ireland's banks pass stress test

Northern Ireland's main banks have passed new European stress tests.

Bank of Ireland, Ulster Bank's parent company RBS, First Trust parent AIB and Northern Bank's Danish parent Danske Bank managed to meet the European Banking Authority's (EBA) criteria which tests the health of each lender.

Irish Life and Permanent also passed the EBA's scrutiny.

The stress test is designed to find any weak spots in the banks' balance sheets in the event of a another damaging economic shock occurring.

The banks with local interests were among 90 throughout Europe which came under the EBA's spotlight, accounting for 65% of the EU banking sector.

Eight banks failed the test, including five in Spain, two in Greece and one in Austria, while a further 16 banks only narrowly passed.

The stress tests are not a new phenomenon, having been carried out in the US in 2009 and in Europe in 2010.

The latter European round of tests were widely criticised after a number of Irish banks, including AIB, were passed as healthy only a few months before having to go cap in hand to the EU and International Monetary Fund for more bailout funding.

This year's tests were much more stringent and should have picked up on any early signs of distress in the banks' balance sheets which may have slipped through the net in the last survey. They tested how the banks would handle a scenario involving a contraction in the EU economy of 0.5% and a fall in EU stock markets of 15%.

Some of the other facts the banks have been forced to reveal would, in the past, be highly confidential.

They include profitability estimates for 2011 and 2012, details about sovereign debt holdings and, most importantly, capital holdings.

All this gives a good insight into the banks' solvency, but the main test is Tier 1 capital which is considered the core measure of a bank's financial strength.

However, a number of the banks which passed may have relatively healthy capital balance but that is because they have been bailed out by the IMF and EU and doesn't account for what would happen if Greece or another struggling economy defaulted on its loans. Twenty of the banks in the test would have failed had they not secured IMF funding.

The EBA also revealed the 90 banks in its survey have exposure of €200m (£175m) to the governments of the three countries, including Ireland, worst hit by the debt crisis.

Belfast Telegraph