The Central Bank has said mortgages issued before the financial crisis have accounted for 85 per cent of defaults in recent times, underlining how credit standards have improved under home loan rules in recent years.
The comments came as the regulator announced a review of its macroprudential framework for bank capital, at a time when Irish banks continue to have to hold twice as much expensive capital reserves against an average mortgage compared with European peers.
The high level of capital Irish banks must hold against mortgages is a major contributor to borrowers in the State having to pay higher interest rates than many European peers. The average interest rate on new Irish mortgage agreements stood at 2.69 per cent in December, compared with the euro zone average of 1.29 per cent, according to the latest Central Bank figures.
The higher risk weights attached to Irish mortgages reflect a number of factors, the regulator said.
These include the experience of the financial crisis where there was a spike in arrears; the length of time it takes Irish lenders to sort out problem loans, including through repossession; and the international accounting model for the effects of downturns, where the Republic’s loan loss experience during the financial crisis counts against banks.
“Understanding the drivers of risk weights is an important element of the Central Bank’s broader work on the evolution of the macroprudential capital framework. Over the past decade, taking on board lessons from the financial crisis, there have been widespread reforms to the overall bank capital framework, including the introduction of an extensive macroprudential toolkit around bank capital,” the Central Bank said.
Loan performance
A report published by the Central Bank on Tuesday said Irish loans have been performing better since 2015, when the regulator imposed mortgage lending restrictions, leading to improving data feeding into risk-weight calculations.
“The fact that Irish banks lending has improved over time – due in part of the introduction of the Central Bank mortgage measures, and economic conditions in recent years – will, all things being equal, contribute to a gradual lowering of [risk weighted assets], though this will take time,” it said.
“Nevertheless, given factors such as the performance of the pre-crisis loans that are still on Irish banks’ loan books or the longer workout periods for resolving distressed debt in Ireland, the risk weight applicable to Irish mortgages will likely remain at the higher end of EU comparisons over the forthcoming years.”
Davy analyst Diarmaid Sheridan noted that the Central Bank’s view on mortgage risk weightings “will form part of their overall review of the bank capital of which very little is known at this point”.
