However, if a bank fails the stress tests, it could raise funds from the private markets. If this is not possible, the capital shortfall should be plugged using the ESM, said the IMF.

“If the supervisory risk element of the assessment identifies other issues, such as profitability or liquidity, staff considers these should be addressed over time in a manner that contains costs while firmly safeguarding financial stability,” it said.

“This is especially important for PTSB, where staff continues to see risks to its return to adequate profitability over a reasonable horizon in its current form, but approval of its European Commission restructuring plan is on hold pending completion of the Assessment.”

IMF Ireland mission head, Craig Beaumont, said the fund did not have a view on whether PTSB should be maintained in order to preserve competition in the Irish market, although there would be significant costs in winding it down. The IMF’s priority is the least fiscal cost to the State while ensuring financial stability, he added.

The IMF recommended further action on the banks’ commercial real estate loans. It noted the recent improved market conditions for the loan portfolios following the disposal of IBRC and Nama assets. “[The IMF] therefore recommends that banking supervision press forward the restructuring of these non-performing loans or their disposal in a manner that achieves sufficient deal flow while avoiding flooding markets. Although one bank is exploring disposal options for its CRE loan portfolio, others prefer loan restructuring to retain potential upside and their customer base.”

Other recommendations included long-term solutions for mortgage arrears by the end of the year; further progress on SME loans; and, accelerated disposals of assets enjoying greater demand, particularly from Nama.