Mortgages

Irish banks to hold 2½ times as much capital on mortgages as EU peers – The Irish Times


Irish banks, which are charging well above the euro-zone average on standard variable mortgages, face having to hold almost 2½ times as much expensive capital against home loans as their European peers, due to the severity of the domestic financial crisis, according to Davy analysts.

The Davy analysts noted that a transparency exercise published over the weekend by the European Banking Authority showed that Irish banks had to hold 1.9 times as much capital reserves against mortgages as the European Union average as of the first half of 2018.

However, taking the European Central Bank’s ongoing review of the riskiness of banks’ assets into consideration, the analysts estimate that Irish lenders will end up having to hold 2.4 times as much costly capital against mortgages as the EU average.

The estimate comes as Fianna Fáil has in the past week revived its aim of bringing in rules for variable mortgage rates in the State, having agreed to support the minority Government for another year through 2020. The State’s main opposition party brought forward a Bill in 2016 seeking to give the Central Bank powers to cap mortgage rates in the market, though it hasn’t progressed through the Oireachtas.

The Attorney General highlighted to Minister for Finance Paschal Donohoe in 2017 that the proposed Bill had “significant constitutional issues”. European Central Bank president Mario Draghi warned that the measures would further hit competition by discouraging new entrants into the market, and may force banks to put up the costs of other types of loans.

Variable mortgages

The average rate on new standard variable mortgages in Ireland stood at 3.06 per cent in October, compared with a euro-zone average rate of 1.77 per cent, according to the latest figures from the Central Bank.

“Irish politicians are correct to highlight the significant differential in pricing between Irish mortgages and the rest of Europe,” said Davy analysts Stephen Lyons, Diarmaid Sheridan and Jack O’Halloran. “Yet their ire is misdirected – focusing on pricing alone is overly simplistic and an inaccurate portrayal of the Irish market due to disregard for Irish banks’ significantly more elevated capital requirements compared with peers.”

Separately, the Central Bank confirmed on Tuesday that the country’s lenders face having to hold an additional layer of capital, equivalent to 1 per cent of so-called risk-weighted assets related to Irish loans, from next July.

It comes as ratings agency Standard and Poor’s (S&P) Global said its outlook improved on a raft of Irish banks but warned that it wasn’t “overly optimistic” on the future prospects for the country’s banking system as a whole.

S&P raised its “long-term issuer credit ratings” on AIB, KBC Bank Ireland and Permanent TSB, adding that the outlook for each bank was “stable”. The rating assesses the creditworthiness of the various banks. It also reaffirmed its ratings on Bank of Ireland and Ulster Bank, adding that the outlook on both banks remained “positive”.



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