Ireland Financial News – Mortgages & Banking

The Financial Regulator has asked the six Irish banks covered by the State’s guarantee to submit new business plans showing how they plan to reduce their risks.

The regulator has also placed ‘officers’ in each of the banks to scrutinise their future operations.

20 officers have been employed to be placed on-site across the banks.

The moves were agreed as part of the €500bn deposit guarantee introduced by the Government to prop up the Irish banking sector amid the global financial crisis.

Elsewhere, European shares have dived in opening trade this morning, tracking steep falls across Asia on global recession fears.

Dublin’s ISEQ index was down almost 3.5% in the first 10 minutes of trade.

Irish financial stocks were all lower.

London’s FTSE 100 tumbled over 3% in opening trade, while the Frankfurt’s DAX index also fell by 3% in early trades as investors fretted over potentially weak corporate earnings. The Paris CAC plunged fell 4.9%.

Japan’s Nikkei index plunged 9.6% earlier this morning to end at a five-year low.

Meanwhile, a growing list of countries have been affected by the global financial crisis in recent days.

Among those now affected by the credit crunch are: Iceland, Hungary, Pakistan, Ukraine, Serbia and Belarus which are all in discussions with the International Monetary Fund.

Capital has also flowed out of countries such as South Africa, South Korea and Argentina which yesterday announced it was nationalising its pension funds.

 The Minister for Housing has denied that the Government’s new home loan and equity schemes for those trying to get on the property ladder will put the State’s finances at further risk.

Michael Finneran also denied that the measures were being taken to help builders to offload excess stock.

He said they were purely designed to extend credit to first-time buyers unable to secure finance due to the credit crunch.

Under the Home Choice Loan scheme, the Government will lend up to 92% of the value of a home to an individual buying a new house, provided they are a first-time buyer and earn in excess of €40,000 a year.

They must also be in permanent employment for at least two years, and be able to prove that they have been unable to secure a sufficient mortgage from a bank or building society.

The loan will be at the commercial variable lending rate and the risk of each loan will be assessed using the same grounds that banks use.

Mr Finneran said the purpose of the scheme, which will be launched properly in a fortnight, is to extend loans of up to 92% to buyers who at present who are only being offered loans of around 80% by the banks.

The aim of the Government Equity scheme is to streamline the existing affordable housing initiatives into one system.

Instead of selling properties to buyers at a reduced rate, subject to a clawback if they are sold on, the local authorities administering the new scheme will take an equity stake equivalent to the amount that is currently being discounted.

The State’s equity will remain as a set percentage of the market value of the house and will stay in place until fully repaid or bought out.

Both schemes will be financed from the market through the Housing Finance Agency, which borrows from the international markets at Government rates, and will lend on at commercial rates.

Outlining details of the scheme, Mr Finneran said there would be no maximum placed on qualifying earnings for those seeking a Home Choice Loan.

He rejected suggestions that the declining value of houses put the State at risk, saying all normal risk management systems will be put in place. Valuations would be done by the State, he said.

Mr Finneran also said that because we are approaching the bottom of the housing correction, the Government believes there is good value there for first-time buyers, which in time will benefit the Exchequer.

He said both schemes will allow Government to recycle money they earn back from the loans and equity into further affordable housing.

 The Government has finally released details its controversial bank guarantee scheme, more than two weeks after the plan was first announced.

Minister for the Finance Brian Lenihan said the new regulations would take the Government deep into the banking system.

Under the scheme, taxpayers will guarantee all loans and deposits in the country’s banks and building societies.

One of the key provisions contained in the Bill will be measures to prevent abuse of the scheme.

The Government will raise €1bn over two years from the banks covered by the State guarantee. If the guarantee is called upon the banks involved will eventually have to refund the money.

Up to two directors, representing tax payers interests, will be appointed to the board of each bank and building society covered by the scheme.

They will be drawn from a panel approved by the Minister for Finance.

A new committee will oversee bonuses and pay of directors and executives.

Bonuses will be linked to a reduction of risk and long term sustainability of the banks.

News from RTE >>

 The Financial Regulator has revealed that the six main Irish banks have loans totalling €15bn secured only against property.

Giving evidence to the Joint Oireachtas Committee on Economic Regulatory Affairs, CEO of the Financial Regulator Patrick Neary said that banks will undoubtedly suffer some losses on these property exposures.

He also outlined some measures contained in the Government’s bailout package.

The committee heard that in total, the six Irish banks have speculative lending on construction and property development totalling over €39bn.

Some €24bn of that is secured by additional collateral or sources of cash, leaving €15bn secured solely on property.

Mr Neary said currently the Irish banks are above their regulatory capital requirements, with ratios three points higher than the EU average.

But he said the extent to which the banks’ future profits will able to sustain their capital levels depends on what provisions they have made for their exposure.

Regulator to hire bank supervisors

Revealing details of the Government’s bailout plan, Mr Neary said the Regulator will immediately recruit 20 senior banking supervisory staff who will work in the banks.

He said the scheme will also require detailed business plans and extra reporting from the banks.

Mr Neary said he did not think he should resign and would continue in his job as long as the Regulatory Authority wished him to do so.

He said nobody could have possible forecast the scale of the current global economic meltdown.

News from RTE >>

 The EU Commission has approved the Government’s €400bn guarantee that covers six Irish-owned banks and five foreign-owned financial institutions.

The announcement came as Taoiseach Brian Cowen returned from Paris where EU leaders had agreed on a big funding programme for banks and businesses.

Under the programme governments can use taxpayers’ funds to put new capital into the banks, either by buying bank shares or debt instruments issued by the banks.

It is the biggest move yet by European countries to mount a co-ordinated, system-wide effort to beat the credit crisis and Eurozone countries have agreed that they can do virtually anything to prevent bank failures.

Countries can now invest in bank equity to improve tier one capital rations and can buy up, insure or guarantee debt instruments issued by banks.

Eurozone countries can now take ‘toxic assets’ as collateral for government bonds.

Governments have also encouraged the European Central bank to start lending directly to big businesses through a commercial paper market, hoping that if big businesses get finance they will use it to pay the small businesses that supply them, boosting the flow of cash.

They also want a suspension of the so called mark-to-market accounting rules to try and halt the slide in the value of bank assets.

It will be up to each country individually to decide on which measures, if any, are needed.

Elsewhere, the British government has announced a plan to buy shares in the country’s banks to help shore up their balance sheets.

Under the scheme the government will take a 60% share in the Royal Bank of Scotland, worth £20bn, and around 40% of the combined bank which will be formed by the amalgamation of HBOS and Lloyds TSB.

The amount of money the British government is putting into RBS and HBOS is more than they are currently worth after last week’s losses on the markets.

Barclays said it will not have to turn to the government for emergency recapitalisation and will be raising £6.5bn from investors but will not be paying a final dividend for 2008, saving the group £2bn.

Meanwhile, Royal Bank of Scotland CEO Fred Goodwin has stepped down as RBS looks to recover from the credit crunch

 New research suggests that as many as 170,000 people will fall into negative equity by the end of next year if house prices continue to drop.

The research, by Goodbody Stockbrokers, expects that by the end of 2009 house prices will have fallen 30% from their peak in 2007.

Combined with the fact that one in three homebuyers took out 100% mortgages at the peak of the boom, the research concludes that thousands will fall into negative equity.

Half of those who bought between 2005 and 2007 will be left owing more than their houses are now worth, it says.

People who have jobs and can afford to pay their mortgages will not be in trouble.

But, the research also suggests that unemployment will rise by 2% over the next 18 months, leaving more people without the means to keep up their repayments.

However, evidence has shown that even in severe housing busts, most owners are able to keep up payments on their mortgages.

The Taoiseach will travel to Paris later today for an emergency meeting of leaders from the 15 countries that use the Euro.

The meeting is being held at the request of Spain.

According to French reports, the leaders may be asked to back a plan to invest taxpayers’ money in banks in order to recapitalise them, and guarantee their debts in the interbank money market.

This is similar to the plan announced by the British government last week and by US Treasury Secretary Henry Paulson on Friday.

Using taxpayers’ money to buy bank shares, effectively a part nationalisation, would be difficult for the Irish government, which is attempting to plug a €15bn hole in the budget on Tuesday.

It is believed that Ireland would argue for any such scheme to be voluntary.

The Government already provides a guarantee for some bank debts.

Germany’s Finance Minster has said it is time to stop rescuing banks on a case-by-case basis and to move to a comprehensive solution to the credit crunch.

Ten days ago the Dutch proposed a €300bn bank capitalisation fund for all of the EU, but this was rejected by Germany and other states.

The European Central Bank, US Federal Reserve and Bank of England have all cut their key interest rates by half a percentage point.

The ECB interest rate now stands at 3.75%, the Bank of England rate is 4.5% while the US Federal Reserve’s key rate is down to 1.5%

The US Federal reserve said it cut the rate ‘in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.’

In a joint effort to stem losses coming from the financial markets crisis coordinated action has been taken by the world’s central banks.

The Bank of China, the Bank of Japan, the Bank of Canada, the Bank of Sweden and the Swiss National Bank have cut interest rates by 50 basis points or 0.5%.

The Governor of Ireland’s Central Bank, John Hurley, said the move was aimed at addressing the global lack of confidence in financial markets and institutions.

He said that, at a time of weakness in the Irish economy, the move should help to cut business costs and ease the repayment burden on mortgage holders.

He said it would also encourage investment and reduce strains on financial markets.

New figures from property website Daft.ie show that house prices have fallen again.

It says the average price of a house is now €312,500, and that an average fall of 3.8% in house prices was recorded between July and September.

Prices are down by almost 11% compared to the same period last year.

Clare and Cork are the worst affected counties, prices in Clare have fallen by 7.8% and by 7% in Cork.

Prices in Roscommon, Tipperary and Leitrim dropped by more than 6%.

The website says the fall in property prices is closely related to the ongoing financial difficulties in the global economy.

Banks have less money to lend and the downturn is affecting confidence among people thinking of buying a house, it adds.

British banks have complained that the Irish legislation enabling a guarantee for Irish banks’ deposits would distort competition.

The British Bankers’ Association will deliver a letter to the Government later today.

It says the move has put banks in other jurisdictions, especially in Northern Ireland, at a competitive disadvantage.

Meanwhile, it has been reported that Britain’s Chancellor of the Exchequer, Alistair Darling, approached the Minister for Finance, Brian Lenihan, on the legislation.

The Guardian newspaper this morning quotes the British Treasury as saying that in two phone calls the Chancellor told Mr Lenihan ‘in no uncertain terms that the scheme was a problem for the UK’.

The Treasury says Mr Darling was given a sympathetic hearing and was told that Ireland was not seeking to undermine British banks.

Alastair Darling urged Mr Lenihan to open the guarantee scheme to British banks in Ireland and Mr Lenihan indicated that he would consider it.

In the course of last night’s Dáil debate, the Minister told the House that Ulster Bank had made an application to be included in the guarantee scheme, and said the Government would give careful consideration to that application.

British bank HBOS Plc, which is due to be taken over by rival Lloyds TSB Group Plc as part of a UK government-backed bailout, said it would apply to join the scheme.

HBOS has retail and business banking operations in Ireland under the Halifax and Bank of Scotland (Ireland) brands.

Savers in Britain have been moving cash into Irish banks since the Irish guarantee scheme was first announced, as well as into British post office savings accounts which are run by the Bank of Ireland.

The British Bankers Association is writing to the Government to complain about the distortion of competition caused by the guarantee package available to Irish banks.

There is now increasing pressure on Gordon Brown to follow Ireland’s lead and guarantee all British savers’ deposits.

The move would level banking competition but in theory could cost over a trillion pounds sterling.

The prime minister is setting up an emergency cabinet committee to take charge of Britain’s response to the financial crisis.

It is thought it will be on similar lines to the British government’s crisis management committee, known as Cobra.

News from RTE >>