The Governor of the Central Bank, Patrick Honohan, has told the International Centre for Monetary and Banking Studies that the upcoming stress tests for the banks will be more 'granular, more explicitly transparent, and tougher' than those of 2010.
'This year we are determined to present a stress test that will not only be more convincing to the market, but also be better insulated against surprises by using aggressive stress assumptions and modelling,' he told the Geneva-based group.
Professor Honohan also warned that the stress tests would likely uncover larger losses by Irish banks that currently acknowledged. 'To be sure the somewhat weaker economic growth projections now available would imply some increase in expected losses,' Mr Honohan said.
He said he saw no risk that the European Central Bank would stop providing large volumes of short-term funding to Irish banks.
'The direct lending by the Central Bank of Ireland is of course carried out with the prior knowledge and approval of the ECB: The suggestion sometimes heard, that the ECB might be about to cut off the Irish banks, is very wide of the mark,' he added.
On the banks, Professor Honohan said that the downsizing of financial institutions is already under way. The first - and so far - the largest element of this downsizing was the sale last year of development property-related loans to NAMA. He said the authorities want to avoid fire-sale losses as the country can not afford them.
He said that as soon as assets can be sold outright, instead of being placed in a 'bad bank' then some of the banks' excessive borrowings from the Central Bank can be reduced.
He also said that putting the continuing parts of the banking system on a firm footing can best be done with the involvement of new foreign owners, who can bring capital, risk control and other management skills to the sector.
'Provided they bring credible business plans, I look forward to welcoming new owners of Ireland's downsized and cleaned-up banks,' he stated.
Professor Honohan said that the key risks now facing the Irish economy lie in its financial balance sheet. He said that Ireland has too much debt - both public and private - while there is also a market perception of significant risk to the debt, especially bank-related debt.
Professor Honohan said that it is these two interlinked problems that have led to the market's reluctance to provide continuing funding at reasonable rates of interest.
He also said that when the dust is settled, Ireland is likely to be the country case most studied by future generations of students of the crisis.
