Central Bank Publishes Capital Assessment Macro Economic Scenario 

Information Release 16 March

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The Central Bank of Ireland is today publishing the macro economic scenarios for its 2011 Prudential Capital Assessment Review (PCAR). The PCAR is an annual stress test that covers a three year time horizon (2011-2013). The outcome of the 2011 PCAR will be published by the Central Bank on Thursday 31 March and is being applied to Allied Irish Bank (AIB), Bank of Ireland (BOI), the Educational Building Society (EBS), and Irish Life and Permanent (ILP).

Stress testing is used by banking supervisors to determine whether a bank is adequately capitalised to withstand adverse macro-economic events or unanticipated ‘shocks’. It is not an economic forecast: it employs hypothetical scenarios. 

The European Banking Authority (EBA) will announce macro economic scenarios for its 2011 stress testing exercise on Friday 18 March. The EBA stress test covers a two year period (2011-2012) and is a separate exercise to the PCAR. The EBA stress test will apply similar base and adverse macro-economic scenarios for Ireland. The scenarios for Ireland were designed by the Central Bank in conjunction with EBA, ECB and European Commission. 

Key features of the 2011 Central Bank PCAR stress test include:

  • A detailed assessment across a three year period from 2011-2013;
  • A comprehensive, independent loan loss estimation exercise performed by BlackRock Solutions including in depth data validation and asset quality reviews of each loan book;
  • A Prudential Liquidity Assessment Review (PLAR) that incorporates the establishment of liquidity targets for each institution.   

These elements will influence the eventual capital requirements of the participating banks. The methodology will be made public by March 31, 2011. 

Additional Notes

The starting point for both the base and adverse macro economic scenarios for Irish domestic banks reflects the very significant degree of stress which has already materialised in the domestic Irish economic environment. The baseline is based on an EU Commission baseline forecast for Ireland from December 2010 with additional property price assumptions provided by the Central Bank. Against this backdrop, the Central Bank is applying a scenario that both commercial and residential property prices continue to decline in the base and the stress case. These are not forecasts of outcomes but represent two possible paths from a large range of future outcomes regarding property prices. 

Appendix-Ireland - Macroeconomic scenarios The Central Bank has prescribed a common base-line macroeconomic scenario and adverse scenario consistent with those being applied for the 2011 EBA EU-wide stress test. The prescribed macroeconomic and market variables are applied when performing loan loss and funding cost forecasts. The details of the macroeconomic parameters for Irish balances are detailed in the table below. Details of the UK and US Macroeconomic scenarios will be published by the EBA on 18 March.  

IE – Ireland

Baseline

Adverse



2010e

2011f

2012f

2013f

2010e

2011f

2012f

2013f

GDP

-0.2

0.9

1.9

2.5

-0.2

-1.6

0.3

1.4

GNP

-3.0

-1.5

0.8

1.5

-3.0

-2.6

         -0.2   

1.2

Consumption

-1.4

-1.9

-1.0

0.5

-1.4

-3.9

-1.3

0.1

Investment

-21.1

-8.9

1.8

4.3

-21.1

-11.3

-1.7

-0.3

Of which construction

-28.9

-15.6

-1.3

2.0

 

 

 

 

Equipment

-5.2

1.4

5.8

7.1

 

 

 

 

Government Consumption

-2.2

-5.7

-1.8

-2.4

-2.2

-5.5

-4.3

-2.4

Exports

5.7

4.5

4.5

4.6

5.7

2

2.1

2.5

Imports

2.3

0.9

2.7

3.3

2.3

-1.1

0.5

1.7

Balance of Payments (%GDP)

-0.9

1.2

2.2

2.6

-0.9

1.6

3.1

4.3

Employment

-4.0

-0.8

0.5

1.1

-4.0

-2.5

-1.1

0.1

Unemployment Rate

13.6

13.4

12.7

11.5

13.6

14.9

15.8

15.6

Inflation

 

 

 

 

 

 

 

 

HICP

-1.5

0.4

0.6

1.6

-1.5

0.1

0.6

1

CPI

-1.0

0.9

0.8

1.6

-1.0

0.7

0.9

1

House Prices

-15.5

-13.4

-14.4

0.5

-15.5

-17.4

-18.8

0.5

Commercial Property

-13

-2.5

1.5

1.5

-13

-22

1.5

1.5

Personal disposable Income

-3.2

-1.9

-1.3

0.4

-3.2

-3.9

-1.2

0.2