Central Bank of Ireland investigation into ‘unfounded’ European Bank Authority stress test claims

THE Central Bank has received allegations from one of its own officials that Irish bank stress test data it processed was ‘doctored’ before being passed on to Europe.

The official claims the Central Bank did this to ensure Irish banks passed European Banking Authority stress tests in July.

The allegation, which the Central Bank has dismissed as unfounded, has been the subject of a secret internal investigation.

The investigation was launched about two months ago after the claim was made by the official, who had worked on stress test data prior to it being sent to the EBA.

The official claimed to have worked on data that was then deliberately ‘dressed-up’ to ensure AIB, Bank of Ireland and Irish Life & Permanent passed.

The whistleblower has also claimed to have repeatedly flagged problems with the data that was submitted to the EBA – which has yet to receive details of the Central Bank’s internal investigation.

A Central Bank spokesman said last night: ‘In response to an employee’s complaint expressing a concern over the way in which the EBA stress testing procedure was applied in Ireland, Central Bank management commissioned an investigation.

‘This investigation was conducted by the Bank’s Internal Audit Department under the Bank’s “Speak-Up” policy.

‘Based on the report of this investigation, which has been accepted by the employee, Central Bank management is satisfied that, while the complaint was made in good faith, there is no reason for concern with the figures provided to the EBA.’

Oireachtas Finance Committee member Stephen Donnelly said last night: ‘I would like the Finance Minister to come back into the Dail with sufficient information about these allegations so Dail members can see whether further information is warranted.

‘Then perhaps the Financial Committee could look into these allegations on behalf of the Dail.

‘In particular, it could see whether or not inappropriate pressure was applied and to see what impact this might have had on the final EBA stress test results.’

The Wicklow Independent TD added: ‘It is not appropriate for the Central Bank to be the only body investigating serious allegations against it by one of its own employees and especially on such a serious issue as the bank stress tests.’

A spokesman for the European Banking Authority said last night: ‘We are not aware of this at the moment.

‘We have not been informed by the Central Bank.

‘If the Central Bank of Ireland has information like this, we are waiting for them to inform us.

Economist Constantin Gurdgiev last night called for an independent investigation into the allegations.

‘The fact that allegations of this nature have been made is a very serious and worrying development,’ he said.

‘With all due respect to the Central Bank, they should not be the only organisation investigating these allegations.

‘It is fair enough for them to deal with them internally as a matter of course, but there needs to be an independent examination of the allegations.

‘If anybody at the Central Bank had any kind of pressure put on them to deliver a certain set of results then that puts the entire banking process into question.’

Of the 91 banks assessed, the EBA awarded stress test pass marks to all but eight of Europe’s major lenders.

Those who passed were deemed capable of sustaining theoretical drops in stocks, bonds and property prices during a two-year recession.

As far as Irish banks were concerned, AIB, Bank of Ireland and Irish Life & Permanent all passed.

Had any one of them failed, they would have had just two months to come up with a plan to deal with their short-comings.

They could have also ended up having to return cap-in-hand to the government for more bail-out money.

News that there has even been an investigation – not to mention allegations – related to Central Bank stress-testing data comes at a worrying time for banking across Europe.

Just last month, analysts at US firm Goldman Sachs warned that more than half of Europe’s biggest lenders are likely to fail the EU banking watchdog’s latest health checks.

The Wall Street giant has warned that the region’s weak banks could be facing a shortfall of as much as £260bn if the EBA forces lenders to raise their capital buffers to 9pc of their total loan book.

Under pressure from critics, the EBA is re-working its widely derided examination of the EU’s banking system that was conducted in July.

But so far, at least one of the European banks that passed –  Dexia – has run into trouble.

It had to be rescued a few months later by the German and French governments.

Indeed, the whole issue of stress-testing has already been undermined in Ireland because AIB ended up needing a bail out despite passing stress-testing in 2010.

Despite the EPA’s decision to publish 3,000 points of data about each bank in its last round of stress tests, there has been a feeling that there was little real clarity about dangerous banking exposures that may still be lurking in the system.

In Ireland’s case, this could well relate to bad residential mortgage debt.

As the Irish Daily Mail revealed last year, AIB staff – according to a staff whistleblower – alone account for around €3billion of the bank’s debts.

That figure emerged before AIB announced its intention to shed more than 2,000 staff.

There has also been criticism that the July 2011 stress tests did not take into account the chances of a Eurozone company collapsing and defaulting on its debt.

With Greek teetering on the brink of financial oblivion and Italy now becoming more of an issue, these scenarios look ever more plausible.

At the time, ratings agency Standard & Poor’s had suggested the tests could have been much more severe.

And Francis Fitzherbert-Brockholes, a banking and capital markets partner at law firm White and Case, added: ‘Although the tests are apparently more robust now, they still do not assume a sovereign debt default, only a sovereign debt downgrade.’

Have you got a whistle to blow about Irish banking? Call 087 919 9113 or email contact @ irishwhistleblower.com.