LONDON (Reuters) - Banks in Europe, keen for any hints about next year's industry health check by European regulators, will find few pointers from Ireland's just-completed review of its three major lenders.
The Irish test results - released by banks on December 2 as a pre-cursor to the country's December 15 exit from its sovereign bailout - could have provided a flavor of the tests the European Central Bank (ECB) is lining up for the euro zone's 128 largest banks over the next year. forerunner
Dublin had hoped its own "balance sheet assessment" of Ireland's main banks would count as part of Europe's banking industry check-up. But the Irish banks are not off the hook as the ECB has said they will be put through their paces in the same way as other banks in 2014.
"The Irish Central Bank's Balance Sheet Assessment was conducted completely independently from the ECB's planned comprehensive assessment," a spokeswoman for the ECB said.
The ECB aims to check if Europe's banks have set aside enough for bad loans. Banks will also be tested to see if they have enough capital to withstand future shocks and prevent a repeat of the bank failures that followed the financial crisis.
After the Central Bank of Ireland's review, the three banks - Bank of Ireland BKIR.I, AIB (ALBK.I) and permanent tsb IPM.I - said they did not have to raise additional capital as a result.
But Bank of Ireland was the only one to publish a detailed statement, a point noted by several London-based analysts and experts. Irish finance minister Michael Noonan said on December 6 AIB and permanent TSB would publish more details shortly.
Bank of Ireland's more detailed statement said the central bank estimated it needed an extra 846 million euros in loan-loss provisions, plus an increase of 547 million euros related to expected loss-changes on defaulted loans. Bank of Ireland disagrees and is in talks with the central bank on the findings.
"I don't think you can get too much read across from one bank," said Richard Barfield, a London-based director at PwC's risk consulting practice.
"It would be better for the European system if there was a coordinated release of information from the comprehensive assessments," a senior Irish banker said of the lessons that could be learned from the handling of the Irish test results.
Alan Bowe, a London-based financial credit analyst at JP Morgan, said a key factor of the European tests would be the harmonization of definitions of non-performing loans (NPLs) and forbearance - when borrowers are given more time to pay. "We don't know the definition of NPL and forbearance they were using here," Bowe said of the Irish tests.
The central bank declined to comment on the definitions used in its review, but has previously published guidelines on NPLs and forbearance that are similar to the European regulator's.
Bank of Ireland did provide some detail on mortgage loan-loss provisions. The central bank estimated the bank needed to set aside an extra 360 million euros for mortgage loan losses. This was because it looked at industry-wide data to see whether the banks' existing provisions were adequate.
Bank of Ireland said it did not believe the industry-wide grid model reflected its risk profile or its likely losses.
Bowe said the European tests would look at bank loans individually instead of the industry-wide grid approach used for the Irish banks. "I don't think it's going to be done with the same broad brush approach, the time for the AQR (asset quality review) is much longer than the Irish regulator had," Bowe said. The ECB has close to a year to complete its review.
The review also said Bank of Ireland's property and commercial loans needed an extra 486 million euros ($666.77 million) of provisions, while the expected loss on defaulted loans was 547 million euros higher than the bank's.
Ciaran Callaghan, credit analyst at Dublin-based Merrion Capital, said he expected a similarly tough treatment of banks in the euro zone tests, as banks were given less discretion over their provisions and their assumptions.
"This enhanced regulatory intrusion is bound to catch some banks out," he said, pointing to the prospect of banks having to raise more capital if their bad loans treatment was overhauled.
Bank of Ireland is still in discussions with the Irish regulator over some of the review's findings. The decision whether to take extra provisions or not rests with the bank.
"I don't think there will be the same give and take (in the EU tests)," Bowe said, adding that the EU tests would be more detailed than the Irish ones. If the ECB decides a bank's provisions are too low, remedial action will be mandatory.
Three sources with direct knowledge of the process said the central bank's guiding force in its review was to stay close to what the ECB would be doing in Frankfurt to avoid duplication.
The ECB was silent on any interaction between Ireland's review and its upcoming tests until December 6, when Noonan's claim that ECB head Mario Draghi had agreed Ireland would not have to do a repeat exercise triggered the ECB statement that Ireland would be treated in the same way as everyone else.
Slovenia's banking stress test results, due on Thursday, offer the next insight into the EU testing process, followed by Greece's stress test results, due by the end of the year.
Both Slovenia and Greece, unlike Ireland, will be testing the ability of their banks to withstand future stresses. The macro-economic scenarios used might give some clues for Europe's banks even if other elements are as opaque as Ireland's.
($1 = 0.7289 euros)
Additional reporting to Padraic Halpin and Carmel Crimmins in Dublin; reporting By Laura Noonan. Editing by Jane Merriman