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.

The latest report from the Central Bank says the Irish economy is likely to start growing again in the second half of 2010, but only at a ‘modest’ pace.

Its quarterly bulletin warns, however, that lower incomes and increased unemployment are likely to continue to hold back consumer spending.

It says there are signs that the economy is stabilising, but it warns that it will be 2011 before growth is strong enough to start bringing unemployment down.

It also says the timing and strength of a recovery very much depends on the performance of the worldwide economy, which will influence demand for Irish exports.

The Central Bank praises the Government’s measures taken so far to deal with the public finances, but warns that any ‘slippage’ from these would damage confidence.

It also urges the Government to give greater detail on how it plans to cut the budget deficit over the next few years.

The report refers to concerns about home owners struggling to pay their mortgages, saying any measures to help them should not

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.

All mortgage lenders have been banned from taking legal action against borrowers in arrears for one year after the householders have missed their first home loan repayments.

The lenders were written to by the Financial Regulator today informing them the new measures will come into effect from 17 February this year.

The measures now cover sub prime lenders, which had not been covered by a voluntary code of conduct.

In a statement, the Regulator said ‘the 12 month requirement does not apply where the borrower is deliberately not engaging with the lender.’

It added ‘The Financial Regulator is of the view that lenders should only seek repossession in less than 12 months in very exceptional circumstances and when all reasonable attempts to encourage engagement by the borrower have failed.’

Companies which fail to comply face the threat of fines of up to €5 million.

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.

Minister for Finance Brian Lenihan has said that this afternoon’s Budget will not be easy for anyone, but that it will be fair.Mr Lenihan is to announce the details of the Budget, which is expected to impose extra taxes and spending cuts worth around €3.5bn.

The Cabinet will meet in Government Buildings this morning for a final discussion on the Budget, but at this stage the decisions have already been taken.

After ten sessions, Ministers hope they have a package that can start the recovery of the national finances and will commend itself to the public and the international markets.

Last night, Minister Lenihan said the tax base had declined dramatically and has to be repaired.

He said everyone will make some contribution, though those who have the most will pay the most.

Mr Lenihan is keenly aware that taking too much money out of the economy could create a deflationary spiral, while not taking enough may lead international markets to doubt the Government’s resolve.

The Budget is expected to set out a three- to four-year framework for restoring the public finances.

House prices in the North have dropped by nearly 30% over the last year, according to a new quarterly survey.It confirmed 2008 was the worst year for the housing market since the start of the 1980s.

The figures were contained in the latest University of Ulster Quarterly house price index, produced in partnership with the Bank of Ireland and the Housing Executive.

The survey showed prices had fallen by just over 28% in 2008.

It also confirmed the continuing low volume of house sales, with 704 transactions recorded in October, November and December, a figure just slightly up on the previous quarter’s report of 670.

The authors said the drop was no surprise and argued that it came with the silver lining that homes were becoming more affordable for first-time buyers.

The sharp decline confirms the downward trend of recent years.

But the drop followed a period when Northern Ireland house prices rocketed over a very short period of time.

The survey, billed as the most broadly-based of those undertaken in Northern Ireland, covers approximately 120 estate agents and records all open-market transactions.

It showed the overall average price of a house in the final quarter of 2008 was £168,185 – a drop of 16.6% on the third quarter.

Some property types saw greater falls than others.

The sharpest drop was in detached bungalows, down almost 35%over the year to an average of £218,216.

Terraced or town houses fell by 28% to an average of £134,905.

In Belfast the average price of housing at £178,399 showed a 20.9% annual decline, indicating that it did better than the overall Northern Ireland market.

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.