Ireland Financial News – Mortgages & Banking

The Central Bank has published its plans for sweeping reforms of regulation of financial institutions.

The ‘Banking Supervision: Our New Approach’ report outlines how the Central Bank will introduce a more ‘intrusive’ approach to overseeing institutions, as well as introducing credit limits for consumers.

Read the Central Bank’s report

The report says that while banks may not be popular after the actions over the last decade, when they borrowed imprudently and lent recklessly, they remain essential to the functioning of the economy.

The Central Bank says its new ‘intrusive’ model of supervision means that it will have regular, detailed contact with banks, including attendance at board meetings and key risk management committees.

During the second half of the year, the Central Bank will also commission reviews of governance and risk management arrangements at the major retail banks.

These will look at such issues as the skill and experience of bank board members and the range of measures banks have taken to address weaknesses in practices and processes, which were exposed during the recent banking crisis.

Today’s report says that the Central Bank is reforming its approach to supervision of Ireland’s banks, mortgage credit standards and funding risks.

Banks have been asked to provide data on new mortgage and sales targets, arrears levels for the past year, mortgage drawdowns and risks to future lending.

The report says that when the Central Bank identifies risks in an institution, it will now insist on action to mitigate that risk.

Where banks can not, or do not, take appropriation action, the Central Bank warns that it will use its supervisory powers to force a solution.

The banks will also be expected to broaden their lending capabilities and the Central Bank says there is an ‘economic imperative’ to lend to growth businesses and sectors.

Introduction of Credit Register

The Central Bank also wants to see the introduction of a Credit Register, which it says is a key resource for any banking system and operates in most other European countries.

The register would be able to check a bank’s exposure to loans, as well as multiple borrowings by a consumer.

It says it ‘could be made responsible for making the connections which would act as a check on the credit institution’s compliance with large exposures limits and reporting’.

The register would be an important tool for both regulatory authorities and the banking industry and would also bring major benefits to consumers, the Central Bank says.

It would also allow for greater competition both from existing banks in Ireland and new entrants to the market.

The Central Bank says that legislation may be required to provide a suitable framework and data protection issues would need to be fully addressed.

On corporate governance, today’s report says that the Central Bank will introduce, under its statutory powers, standards designed to strengthen the Irish regulatory regime.

Among other requirements, the new rules will impose a minimum number of directors, a review of board membership every three years and a clear separation of the role of chief executive and chairman.

Examination of pay levels

The bank will also examine pay levels for executives in the country’s financial institutions.

The report states that, in the past, resources for supervision were far below what was required.

To this end, the Central Bank is to recruit 150 extra staff this year, bringing overall staff there to 1,300.

It also plans to increase regulatory staff by as much as another 200 over the next two years.

It wants to have a minimum of ten supervisory staff per firm for major banks and building societies and improve specialist expertise by recruiting staff with director business/banking experience.

A compulsory training programme for all new and many existing Central Bank staff will also be held.

The Central Bank is also to set up a risk experts panel, who will prepare reports on key risks as they evolve and provide advice on proposed rules and regulation.

The report says that lending by commercial banks in Ireland needs to return to sound fundamentals and lending standards or what it calls a traditional form of banking.

It said that as lending to property developers at the height of the Celtic Tiger grew, banks increasingly focused on complex deals, profit sharing and personal guarantees to justify lending decisions.

‘Credit institutions must return to more prudent lending standards, in an economy that will not be driven by property,’ today’s report states.

It says that credit granting will be based on sound and well-defined criteria, while banks have to ensure that valuations are prudent and up-to-date.

Business leaders have called on the Central Bank to investigate claims that banks are illegally asking for family homes to be put up as collateral for loans.

ISME – the organisation representing small and medium enterprises – has carried out a survey which it says indicates that banks are continuing to refuse lending to a majority of business applicants.

ISME says that Government calls for an increase in lending by banks to business have fallen on deaf ears, and that a lack of credit has created critical conditions for many business owners who are now, the survey says, desperate.

The organisation claims that banks are putting the future of thousands of small and medium businesses and their employees at risk, and wants to see bank staff being re-educated about business lending practices.

ISME says that of the over 800 business surveyed, the majority revealed that they were refused bank credit in the past three months. A similar figure was recorded for the first three months of this year.

A quarter of respondents said that the possibility of putting a family home up as collateral was raised. One in eight said their bank requested that such collateral be provided.

ISME warns of what it calls ‘a sinister return by some banks to outlawed actions’ and says that tough action is needed to counteract what it calls a ‘two fingered’ policy response by bankers.

IBF questions ISME figures

The Irish Banking Federation has said it seriously questions the representativeness and accuracy of the ISME research.

The IBF says the only authoritative, independent study commissioned by the Government was that undertaken by Mazars, which shows principally that eight out of ten credit applications are approved and that one-third of existing SME loans are on the watch list (ie they are impaired), which is the factor essentially accounting for strains on credit supply to the SME sector.

The Credit Review Office was set up by Government as an ongoing appeals process for business credit applications that have been rejected.

The first set of figures are due to be published by that office later this week and the IBF believes that these figures will simply not reflect the sort of misrepresented trend in the ISME survey.

One of the biggest mortgage lenders in Ireland has said the number of people who are in arrears for more than three months has continued to rise since the start of the year.

Irish Life & Permanent, which is loss-making, said there were signs the number of people starting to get into difficulties with their mortgage repayments was levelling off.

However people already in difficulty with their mortgages are getting into deeper water.

Around 4% of Permanent TSB’s mortgage book is in arrears.

It said salary cuts and joblessness is causing damage in the pensions’ market with premiums into corporate pension schemes down by almost one third.

Irish Life & Permanent is holding its annual general meeting later this morning.

Shareholders will hear updates on the company’s plans to shed its loss-making Permanent TSB brand, which is now damaging the wider group.

The Bank of Ireland and the EBS have announced they are to increase their standard variable rates for mortgage holders.

Bank of Ireland said it is raising its standard variable rate by 0.5%. The rate change is effective from 16 April.

Existing Bank of Ireland mortgage holders on standard variable rates will see repayments increase by between about €80 and €90 a month on a €300,000 mortgage.

Bank of Ireland said that while the increase is ‘regrettable’, it had no choice but to make the move.

The bank said that the cost of funding mortgages has become increasingly costly, as it is paying more to customers for deposits than it is receiving for mortgages. ‘As a result of this, our current mortgage pricing is unsustainable’, it stated.

AIB raised its variable mortgage interest rate by half a percentage point last month, following a similar move by Permanent TSB in February.

Announcing pre-tax losses of €1.8bn for the nine months to the end of last December, Bank of Ireland indicated last week that it planned to increase mortgage rates in the near future.

The move follows the transfer of the bank’s initial tranche of commercial property loans to the National Asset Management Agency, and comes a day after the European Central Bank announced it was keeping euro zone interest rates unchanged at 1%.

ICS Building Society, which is owned by Bank of Ireland, also announced interest rate increases across their variable rate mortgages. The changes are also effective from 16 April.

Meanwhile, the EBS has said that it will increase its standard variable rate by 0.6% from 1 May.

The building society said the current rate was no longer sustainable and that the increase would help meet the cost of funds from retail, corporate and wholesale markets.

The Chief Executive of the Consumers’ Association of Ireland has said that Bank of Ireland’s decision ‘beggars belief’.

Dermot Jewell said consumers would find the bank’s announcement ‘upsetting and sickening’ because of the role taxpayers had played in bailing out the banks.

Mr Jewell has predicted that the economy will suffer if the banks continued to raise their rates.

AIB has increased its estimate of how much it will have to set aside to cope with bad loans this year to €4.3bn.In a trading update issued to the Irish Stock Exchange, the bank blamed the worsening economic conditions in Ireland for the bigger charge.

It also said mortgage arrears in Ireland were climbing and stood at 2% of total mortgage loans at the end of March, compared with 1.5% at the end of December.

However, AIB said that when the bad debt charges were excluded its trading profits so far this year were ahead of the same period last year.

The Church of Ireland Primate has criticised some bank directors and executives for indulging in unnecessarily high risk strategies in the current economic crisis and said they should consider their positions.Archbishop Alan Harper told church members there was an urgent need for a completely new ethic in international banking, based on a powerful regulatory system.

Church of Ireland finances were being discussed by members gathered in Armagh for the General Synod.

But it was the fallout from the global economic crisis that the Primate of All-Ireland turned his attention to.

Referring to the role played by bank directors and executives, Archbishop Alan Harper said it was not acceptable that high-risk strategies should be allowed to threaten the deposits of customers and the investments of shareholders.

He said those in charge of financial institutions who were responsible for the economic crisis should consider their positions.

He also called for a new ethic internationally to replace the flawed economic ethics of the past.

There was a lively debate on education issues on both sides of the border.

Synod members expressed their anger about the implications for the financing of Protestant secondary schools in the Republic in areas such as Cork arising from changes introduced in the October budget.

The Synod concludes tomorrow, the first time it has been held over a weekend.

Former Anglo Irish Bank chairman Seán FitzPatrick was given tens of millions worth of sterling and dollar loans, it has emerged.

Irish Nationwide gave tens of millions worth of sterling and dollar loans to Mr FitzPatrick as part of his loan transfers between the two institutions to conceal up to €122 million in borrowings from Anglo Irish.

The Irish Times reports that Irish Nationwide provided Mr FitzPatrick with loans of $56 million and £14 million on 26 September, 2007.

The building society also reportedly loaned the then Anglo Irish chairman $26 million on 27 September, 2006 with an undertaking from Anglo Irish that it would repay the loan if Seán FitzPatrick could not.

The report says that these borrowings form only part of Mr FitzPatrick’s loans from Irish Nationwide in 2007, as Anglo Irish Bank said last month that he had repaid €122 million.

Seán FitzPatrick borrowed from Irish Nationwide over eight years, drawing loans before Anglo Irish’s accounting year-end on 30 September, and repaying them within days with fresh loans from Anglo.

By transferring the loans, the Irish Times says, Mr FitzPatrick hid them from the bank’s auditors and shareholders.

The Financial Regulator and the Office of the Director of Corporate Enforcement are investigating Mr FitzPatrick’s loans.

 Bank of Ireland and AIB Group have agreed to delay issuing repossession orders on homes for 12 months as part of the Government recapitalisation plan.

The banks have told Government that delaying repossession proceedings for those in arrears on their mortgages for any longer would be viewed negatively by investors.

The issue of mortgage arrears has become more central in the €7bn recapitalisation talks because of rising unemployment levels.

Negotiations continue today and any final agreement may be extended as part of a new regulatory code covering mortgage arrears for the entire home loan sector.

The fine detail of the plan is now expected after markets close on Wednesday evening or early Thursday.

The Government had wanted delays in repossession proceedings for two years compared to the current six-month rule.

However, banks raise new funds by issuing bonds against using their mortgage books as security. The banks pay interest on those borrowings.

Carrying mortgage arrears for up to 24 months would make the quality of mortgage-backed securities less attractive to international investors.

It now appears banks are offering not to pursue mortgage arrears for six months and have offered not to repossess homes until 12 months has elapsed.

The compromise has regard to the distressed financial situation arising for many losing their jobs.

Other talking points have centred on executive pay.

Future bad debts

Meanwhile, it appears a firm Government guarantee of AIB and Bank of Ireland’s exposure to future bad debts on property development loans is unlikely at this juncture.

The €7bn injection may not be enough to cover future bad debts arising in the property sector, and markets are sensitive to this weakness.

Fine Gael says the Government’s bank recapitalisation plans may leave taxpayers dangerously exposed to massive bad debts.

In a statement, the party’s finance spokesman Richard Bruton said the Government should urgently consider other options, including the creation of ‘good banks’ with clean balance sheets.

Mr Bruton said Fine Gael has huge concerns that the taxpayer is being asked to put money into existing banks without knowing the full extent of the hole in their balance sheet.

He said there was a real risk that the only result will be to allow the banks to nurse along their dodgy property lending while continuing to starve viable businesses of access to the credit
they so badly need.

Fine Gael Leader Enda Kenny has said the pay and actions of top banking executives must be reviewed before the Government’s finalises its €7bn recapitalisation plan for Bank of Ireland and AIB.

Speaking on RTÉ Radio’s Morning, Mr Kenny said taxpayers’ money should be carefully employed

Last night, Minister for Finance Brian Lenihan said there was much tougher talking to be done before the Government signs off on the plan.

He said the Government will call the shots and will have a substantial influence.

Minister Lenihan said the Government has a detailed assessment of the banks’ debts but it would observe due diligence before investing in the banks, as any investor would.

Meanwhile, a group of teachers from all three teaching unions, ASTI, INTO and TUI, are to stage a picket at Anglo Irish bank, on St Stephen’s Green this afternoon.

Teachers United says the protest is to highlight the underfunding of the education system, while the banks are being bailed out.

 The Central Bank says it expects the economy to contract by 4.7% this year, as Ireland continues to be impacted by global recession and falling demand.

In its latest economic forecast, the Central Bank says the contraction will lead to significant job losses with 100,000 fewer people working by the end of the year.

The bank says unpalatable short-term measures are needed if the economy is to stabilise in 2010.

In one of the most negative outlooks published so far, the bank says the contraction in the economy this year will more than cancel out growth the economy enjoyed in the boom year of 2007.

In the housing market, blamed for many of the ills, the Central Bank says completions could fall to as low as 22,000 units this year compared to 52,000 last year, despite their being more affordable.

Last year saw the first drop in employment in many years. The trend is set to accelerate and assuming some emigration, unemployment is likely to average 9.4% of the labour force this year.

However, it believes Ireland has the potential to grow strongly again if productivity can be improved but the potential is not a given and the Central Bank says unpalatable measures are needed.

The bank says the largest item of government expenditure, the public sector pay bill, is ‘beyond the scope of current resources’.

It says the public sector needs to use its purchasing power to drive hard bargains with the services sector.

The central bank suggests reducing tax avoidance schemes and imposing user charges for public services.

It describes Ireland as unusual in not applying an annual residential property tax.