Macro-Financial Review - Central Bank of Ireland

Transcription

2013: II
Macro-Financial Review
2
Central Bank of Ireland | Macro-Financial Review | 2013:II
MACRO-FINANCIAL REVIEW
Notes
1.
Unless otherwise stated, this document refers to data available on 28 November, 2013.
2.
Unless otherwise stated, the aggregate banking data refer to all credit institutions operating in the Republic of
Ireland.
3.

Domestic banks refer to Allied Irish Banks plc (including EBS), Bank of Ireland and Permanent TSB. The term
domestic banks, unless stated otherwise, excludes the Irish Bank Resolution Corporation (IBRC) which is in
Special Liquidation since 7 February, 2013.

Covered banks refer to those banks covered by the Eligible Liabilities Guarantee Scheme.

Foreign-owned resident banks are foreign banking groups that have a presence (either bank or branch) in the
Republic of Ireland.
Country abbreviations follow ISO standards with the exception of the United Kingdom, which is referred to as ‘UK’. In
addition, the following symbols are used:
e
estimate
H
half-year
f
forecast
rhs
right-hand side
Q
quarter
lhs
left-hand side
Enquiries relating to this document should be addressed to:
Financial Stability Division, Central Bank of Ireland, PO Box 11517, North Wall Quay, Spencer Dock, Dublin 1.
Email: [email protected]
ii
Preface
iv
1
OVERVIEW
1
2
MACROECONOMIC ENVIRONMENT
3
2.1
Macroeconomic overview
3
2.2
Non-financial corporations
5
Box 1 Supervisory review of SME distressed credit operations
8
Household sector
9
2.3
Box 2 Recent developments in mortgage arrears
12
Box 3 Interest only mortgages in Ireland – stylised facts
13
Box 4 Residential property price expectations survey
14
Sovereign debt
15
Box 5 Exit strategy for the Eligible Liabilities Guarantee Scheme
17
3
FINANCIAL SYSTEM
18
3.1
Financial system overview
18
3.2
Banking sector
20
Box 6 Mortgage arrears framework
28
Box 7 New capital rules for EU financial institutions
29
3.3
Insurance sector
30
3.4
Money market funds, investment funds and financial vehicle
corporations
33
2.4
iii
Preface
The Macro-Financial Review offers an overview of the current state of the macro-financial environment in Ireland. Its aims
are twofold: (i) to help the public, financial-market participants and international and national authorities better evaluate
financial risks; and (ii) to promote informed dialogue on the financial system’s strengths and weaknesses and efforts to
strengthen its resilience.
The Review assembles some of the material kept under surveillance by the Financial Stability Committee of the Central
Bank of Ireland. The Review focuses on downside risks but better-than-expected outcomes are also possible. It
evaluates developments since the previous Review, published in May 2013.
iv
1. Overview
Chart A1: Sources of real GDP growth
Overview
per cent
15
per cent
15
As Ireland exits the official assistance programme, the macro-
10
10
financial environment remains challenging amid some tentative
5
5
signs of economic recovery.
0
0
Gross domestic product (GDP) growth is projected to grow
-5
-5
marginally in 2013 and to increase to about 2 per cent in 2014,
-10
-10
as a pick-up in domestic demand begins to complement
-15
-15
96
98
00
02
04
06
08
10
12
Personal consumption
Capital formation
Net exports
continued export growth (Chart A1). Although its high level
remains a concern, there has been a decline in the
14f
Government expenditure
1
unemployment rate of late. Recent data indicate sustained
employment growth (Chart A2) and higher labour force
GDP growth rate (rhs)
Source: Central Statistics Office (CSO) and Central Bank of Ireland.
Notes: Government expenditure and personal consumption relate to
purchases of goods and services. 2013 and 2014 are forecasts from the
Central Bank’s Quarterly Bulletin 4 2013.
Chart A2: Employment and domestic demand
growth
per cent
15
participation, developments which suggest some momentum to
economic activity. Further fiscal tightening and high levels of
private sector debt, however, can be expected to weigh on
domestic demand by constraining consumption and investment
per cent
15
activities. Highly-indebted households remain vulnerable to a
rise in interest rates or a fall in disposable income.
10
10
5
5
0
0
-5
-5
programme. Lower than expected growth rates, however, could
-10
-10
endanger
Irish sovereign bond yields are well below their peak levels and
spreads over core euro area Member States remain lower than
at any time since mid-2011 (Chart A3). Projected fiscal deficits
remain in line with the targets in the official assistance
-15
-15
96
98
00
02
04
06
Employment
08
10
12
14
Domestic demand
attainment
of
medium-term
fiscal
targets.
Furthermore, a re-assessment of sovereign risk by financial
markets could undermine investor confidence and impact on
long-term debt sustainability.
Source: CSO and Central Bank of Ireland.
Notes: Series are year-on-year percentage changes. 2013 to 2014 are
forecasts from the Bank’s Quarterly Bulletin 4 2013.
Chart A3: Sovereign bond yields for selected euro
area countries, 10-year maturity
per cent
the
per cent
10
10
8
8
6
6
4
4
2
2
0
0
Property prices have shown some improvement with year-onyear national house prices increasing in June 2013 for the first
time since January 2008. October data show a year-on-year rise
of 6.1 per cent. The upturn, however, has largely been confined
to the Dublin area, where supply shortages have become
evident. The pace of decline in commercial property prices has
eased further. There has also been a substantial increase in the
volume of commercial property investment transactions.
The overall value of impaired loans continues to rise, albeit at a
declining rate (Chart A4). This impacts the real economy and
also the financial system, through a reduction in asset values on
banks’ balance sheets and, thus, affects banks’ willingness to
lend to the private sector. The level of distress among small and
Germany
France
Spain
Italy
Ireland
medium enterprise (SME) borrowers is particularly acute. This
endangers not only the profitability of the banking sector, but
Source. Bloomberg.
Notes: Chart shows yields on sovereign bonds, ten-year maturity. For
Ireland, a generic eight-year maturity bond yield is used until 14 March.
also has far-reaching consequences for the viability of
1
Ireland’s European Union-International Monetary Fund (EU-IMF) Programme was agreed at the end of 2010. It involved targets and conditions agreed with the external partners in the
areas of fiscal consolidation, financial sector and structural reforms and included a joint financing package of €85 billion. It covers the period 2010-2013.
1
Chart A4: Domestic banks’ impaired loans,
provisions for impaired loans and coverage ratio
corporates and the employment they generate.
€ billions
60
Credit risk is, therefore, a key concern for the domestic banking
per cent
60
sector. While the coverage ratio, which shows the value of
50
50
provisions for impaired loans relative to the value of impaired
40
40
loans, increased in the third quarter of 2013, uncertainties
30
30
20
20
viability of the banking sector depends on its ability to return to
10
10
profitability.
remain about whether banks are sufficiently provisioned to cope
with the outstanding stock of distressed loans. The long-term
0
0
10Q4 11
Q2
Q3
Q4 12 Q2 Q3 Q4 13 Q2
Impaired loans (lhs)
Provisions for impaired loans (lhs)
Cover ratio (rhs)
Q3
Source: Central Bank of Ireland.
Notes:
Data are consolidated. The coverage ratio is calculated by
dividing the value of provisions for impaired loans by the value of
impaired loans. Impaired loans are defined in accordance with the EU’s
Capital Requirements Directive, and refer to loans which are impaired as
defined under International Financial Reporting Standards (IFRS)
accounting regulation (IAS 39) and/or classified as greater than 90 days
in arrears.
There
have
been
some
positive
funding
developments such as a reduction in official sector liquidity
support, strongly supported recent debt issuance, and declines
in deposit rates, but the overall profile remains fragile and
vulnerable to swings in market sentiment.
Responding to the mortgage arrears resolution process initiated
by the Central Bank in November 2011 (including the
quantitative targets set in March 2013), banks have begun to
step up their interaction with borrowers so that sustainable
solutions can be proposed. It is vital that potential modifications
are affordable in both the short and the long term and that the
changes provide sufficient clarity on what happens to the
collateral at maturity. In addition, restructuring targets have been
set to encourage banks to move distressed SME borrowers from
short-term forbearance to longer-term solutions.
The Central Bank, assisted by third party experts, has conducted
a Balance Sheet Assessment (BSA) of the credit institutions that
are subject to the Prudential Capital Assessment Review. The
requirement to complete the assessment was agreed with the
Troika as part of the programme of financial sector reform. The
BSA, together with new stress tests by the ECB in coordination
with the European Banking Authority next year, form part of the
comprehensive assessment of euro area banks in advance of
the establishment of the Single Supervisory Mechanism (SSM)
in 2014.
)
2
2. Macroeconomic environment
2.1 Macroeconomic overview
Despite a weak first quarter, GDP is projected to increase marginally in 2013 and by about 2 per cent in 2014
as a pickup in domestic demand begins to complement continued export growth. The economic outlook,
nevertheless, remains uncertain and dependent on external demand. The pace and effectiveness of loan
arrears resolution and the related ability of the banking system to support the recovery may impact domestic
demand and the capacity of the Irish economy to benefit from any improvement in the external environment.
Chart 1: Sources of real GDP growth
External environment
per cent
15
per cent
15
Weak export performance, particularly in the pharmaceutical
10
10
sector in the first quarter of the year, was the main reason for
5
5
GDP contracting on a year-to-year basis in the first half of 2013.
0
0
Despite the impact of patent expiry in the pharmaceutical sector,
-5
-5
-10
-10
a rebound in the second half of 2013 is expected and real GDP
is forecast to grow by 0.5 per cent this year, rising to 2 per cent
-15
-15
96
98
00
02
04
06
08
10
12
14f
Government expenditure
Personal consumption
Capital formation
Net exports
2
in 2014 (Chart 1). Given its sensitivity to external demand,
domestic
economic
performance
remains
dependent
on
developments in Ireland’s main trading partners. The outlook for
the euro area and the UK is better than in the last Review, with
GDP growth rate (rhs)
an associated improvement in Irish exports (Chart 2). Recent
Notes: Government expenditure and personal consumption relate to
purchases of goods and services. 2013 and 2014 are forecasts from the
Bank’s Quarterly Bulletin 4 2013.
months have seen concerns about the US debt ceiling and the
impact on financial markets of potential tapering of the Federal
Reserve
asset
purchase
programme
(see
Section
3.1),
illustrating their ability to create a volatile macro-financial
environment. The euro area sovereign debt crisis has eased but
Chart 2: Change of 2013 GDP growth forecasts
per cent
0.6
per cent
0.6
0.4
0.4
0.2
0.2
0.0
0
high debt ratios in some Member States remain a particular
concern (see Section 2.4).
The pick-up in external demand through 2013 is also driving the
overall improvement in sentiment, reflected by surveys of both
-0.2
-0.2
-0.4
-0.4
the services and manufacturing industries (Chart 3). Exchange
-0.6
-0.6
-0.8
-0.8
rate developments so far in 2013 have been unfavourable to
-1.0
-1
Ireland’s competitiveness, as the euro has generally appreciated
-1.2
-1.2
against the US dollar and sterling (Chart 3). The overall
-1.4
-1.4
-1.6
-1.6
US
Euro area
UK
Ireland
IE-exports
WEO Jan Update/QB1 '13
WEO April/QB2 '13
WEO July Update/QB3 '13
WEO Oct/QB4 '13
Source: IMF and Central Bank of Ireland.
Notes: Change in forecast GDP and Irish export growth from previous
forecast. QB refers to the Central Bank’s Quarterly Bulletin.
domestic labour market, however, shows a high level of spare
capacity and this should contribute to subdued labour cost
growth in general.
Domestic environment
Both consumption and investment are expected to increase in
2014 (Chart 1). The further fiscal adjustment required to reduce
the government deficit will continue to weigh on domestic
2
See Central Bank of Ireland Quarterly Bulletin 4, 2013 for forecast details.
3
demand in the medium term. High, albeit decreasing, levels of
Chart 3: Competitiveness and PMI indicators
index, 2010 = 100
PMI, 50 = no change
private debt have also constrained consumption and investment
140
60
130
55
120
50
110
45
direct effect on consumption. However, the greater certainty
100
40
provided by seeing solutions worked out may have a beneficial
90
35
effect on confidence.
30
Investment activity is expected to improve into 2014. Its collapse
activity.
Initiatives to provide sustainable solutions to households in
80
02
03
04
05 06 07 08 09 10 11 12 13Oct
Real effective exchange rate (lhs)
Nominal effective exchange rate (lhs)
Ireland PMI (rhs)
EA PMI (rhs)
mortgage arrears (see Section 3.2) may not have a significant
since 2007 has been among the worst in the euro area (Chart 4).
Investment averaged approximately 20 per cent of GDP since
1970, but accounted for just under 11 per cent of GDP in 2012.
Source: Central Bank of Ireland and Markit.
Notes: A rise in the effective exchange rates implies a deterioration in
competitiveness while a fall represents an improvement. For the
Purchasing Managers’ Index (PMI), a value above 50 implies an
improvement in sentiment while below 50 implies a deterioration. EA
refers to the euro area.
At this stage of the cycle, a recovery in both building and
construction
expenditure
and
machinery
and
equipment
investment is expected. A potential constraint would be a lack of
bank finance, particularly for otherwise viable businesses that
have an overhang of property-related debt (see Section 2.2).
Chart 4: Change in investment and GDP 2007 Q4 –
2013 Q2
per cent
basis to 13 per cent in 2013 Q3. The labour force grew for the
0
Germany
Austria
Investment
-10
Finland
-20
EA
first time since 2008 Q3 in the six months to end-2013 Q3.
France
Forecasts for employment growth are 1.1 and 1.2 per cent in
Belgium
2013 and 2014, respectively, which support a projected increase
Italy
-30
Portugal
-40
in domestic demand of 0.4 per cent in 2014 (Chart 5). The
related, albeit small, rise in nominal disposable income which is
Spain
-50
expected over the period will help ease the high household debt
-60
to disposable income ratio.
Ireland
Greece
-70
-30
-20
-10
GDP
0
10
Source: Eurostat.
Notes: Investment refers to gross fixed capital formation. Both series are
in real terms. EA refer to the euro area.
Chart 5: Employment and domestic demand
growth
per cent
15
per cent
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
98
00
02
Employment
04
06
08
10
12
14
Domestic demand
Notes: Series are year-on-year percentage changes. 2013 to 2014 are
forecasts from the Bank’s Quarterly Bulletin 4 2013.
4
concern, recent developments have been broadly positive. The
unemployment rate fell by 2 percentage points on an annual
10
96
Although the high level of unemployment continues to be of
2.2 Non-financial corporations
The main challenges facing non-financial corporations (NFCs) continue to be weak domestic demand,
uncertainty over the external outlook and difficulties accessing credit, in particular for small- and medium-sized
enterprises (SMEs) reliant on bank lending. Aggregate NFC debt remains high but indebtedness relative to
overall balance sheet size is decreasing.
Chart 6: Irish exports
Demand
per cent of GDP
120
per cent of GDP
120
100
100
80
80
60
60
40
40
20
20
0
0
The NFC sector continues to be adversely affected by weak
domestic demand. The performance of the domestic economy is
particularly relevant for non-exporting firms, which account for
over 80 per cent of employment and around two-thirds of
3
economic activity. This group is also largely dependent on Irish
banks for credit.
Exports, largely driven by multi-national corporations (MNCs),
have been the main engine of GDP growth in recent years
(Chart 6). However, patent expiry in the pharmaceutical sector
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Goods exports
and weak external demand caused exports to fall in the first
Services exports
quarter of this year. Uncertainty over the external outlook
Source: CSO.
continues
to
pose
risks
to
NFCs
with
exchange
rate
developments in 2013 illustrating their potential to impact on
competitiveness adversely. The improved outlook for the UK
economy should benefit Irish-owned exporters as it accounts for
4
almost half the exports of Irish-owned firms.
Financing Conditions
Chart 7: New lending by banks to NFCs
per cent of GDP
80
Overall financing conditions for NFCs remain challenging and
per cent
8
are one of the main issues facing the sector. The low value of
70
7
available collateral, such as property, and the high level of
60
6
impaired loans continue to act as constraints on lending (see
50
5
Section 3.2; Box 1 provides details on the Central Bank’s
40
4
supervisory review of distressed credit operations for SMEs).
30
3
New lending by Irish banks to NFCs remains extremely low, and
20
2
volumes of new loans above €1 million have fallen further since
10
1
the last Review (Chart 7). The interest rate on loans up to €1
0
0
million is markedly higher than on larger loans. The former rate
03
04
05
06
07
Loans up to €1 million
Volume (lhs)
Average rate (rhs)
08
09
10
11
12
13
Loans above €1 million
Volume (lhs)
Average rate (rhs)
Notes: This chart depicts lending by credit institutions resident in Ireland
to euro area NFCs. Irish NFCs represent approximately 87 per cent of
the sample, based on December 2008 figures. “Average rate” refers to
average interest rates agreed by borrowers and lenders. The data are
reported on a quarterly frequency to 2013 Q2.
is generally regarded as a proxy of the prevailing lending rate to
SMEs and thus indicates tougher financing conditions for this
group. Recent studies show that credit conditions for SMEs in
Ireland are among the tightest in the euro area, controlling for
borrower characteristics and the macro-economy.
5
However,
survey data from Red C and Mazars suggest that the trend from
6
2012 into 2013 is towards a slight easing of conditions. Some
diversification in SME funding to include internal funding, trade
credit and equity also appears to be underway, but these
3
As measured by the gross value added of Irish-owned enterprises. See Lawless, M., McCann, F. and McIndoe-Calder, T. (2012), ‘SMEs in Ireland: Stylised facts from the real economy
and credit market’. Central Bank of Ireland Quarterly Bulletin, April 2012.
4
O'Brien, D. and Scally, J. (2012). 'Cost Competitiveness and Export Performance of the Irish Economy.' Central Bank of Ireland Quarterly Bulletin, July 2012.
5
Holton, S., Lawless, M. and McCann, F. ‘SME financing conditions in Europe: Credit crunch or fundamentals?’ National Institute Economic review, (225):52-67, (2013).
6
Red C SME Credit Demand Survey, October 2012-March 2013. Prepared for the Department of Finance, May 2013.
5
sources may be more expensive and less developed than bank
Chart 8: NFC debt
per cent
100
per cent
100
80
80
60
60
40
40
20
20
7
financing. In an international context, Ireland is middle-ranking
when considering the range of policies adopted by Organisation
for
Economic
Co-operation
and
Development
(OECD)
governments and central banks to increase credit flows to
SMEs.
8
Credit risk remains high, reflecting the weak economic
environment. The annual rate of company liquidations due to
insolvency remains higher than in previous periods of low
0
growth.
0
02
03
04
05
06
07
08
Debt/Financial Assets
09
10
11
12
13
9
Still, interim data from the Companies Registration
Office on new company registrations suggest, that if the trend in
Debt/Liabilities
the first three quarters of the year is maintained, there will be an
Source: Quarterly Financial Accounts, Central Bank of Ireland.
Notes: In addition to debt, total liabilities for the NFC sector include
shares and other equity, insurance technical reserves and other
accounts payable. Quarterly frequency to 2013 Q2.
increase in the number of new companies registered in 2013,
following a decrease of 4 per cent in 2012.
Indebtedness
Chart 9: NFC debt interest payments
per cent of GDP
6
NFC debt levels remain high but stable, at just over 190 per cent
per cent of GDP
6
of GDP. Ireland has the second-highest debt in the EU after
Luxembourg on this measure. This statistic, however, is affected
5
5
4
4
in both of these Member States. Alternative measures of NFC
3
3
debt relative to balance sheet size are shown in Chart 8. NFC
2
2
1
1
2009 and continued to fall in 2013. Interest costs are higher for
0
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec
02
03
04
05
06
07
08
09
10
11
12
Ireland, gross
Ireland, net
Euro area, gross
Euro area, net
0
NFCs in Ireland compared to other euro-area countries but
by the size of the MNC sector relative to the domestic economy
debt, both as a percentage of financial assets and as a
percentage of liabilities, has been on a downward trend since
remain on a downward trend as a proportion of GDP (Chart 9).
Commercial Property
Source: CSO and Eurostat.
Notes: Gross interest equals interest paid. Net interest equals interest
paid less interest received. In the ESA95 system of national accounts,
interest is measured before the deduction of tax, and excludes the
implicit charge for financial intermediation services included in interest
payments (i.e. Financial Intermediation Services Indirectly Measured).
Quarterly frequency to 2013 Q2.
Domestic banks continue to hold substantial portfolios of
commercial property loans on their balance sheets, many of
which are impaired. This underlines the importance of the sector
from
Chart 10: Commercial property capital value
growth, rental growth and initial yield
year-on-year change, per cent
20
a
financial
stability
perspective.
10
The
impact
of
developments in the commercial property market is also relevant
for NFCs, for which commercial real estate is an important asset
per cent
10
and source of collateral.
10
9
0
8
over 2013 Q3, with annual prices 2.2 per cent lower than a year
-10
7
earlier (Chart 10). In addition, there was a slight rise of 0.3 per
-20
6
cent in capital values between the second and third quarters of
-30
5
-40
4
-50
07Q3
3
The pace of decline in commercial property prices eased further
the year, raising the prospect of stabilisation in the market. The
rate at which commercial rents are falling has also slowed, while
08Q3
09Q3
Capital growth (lhs)
Initial yield (rhs)
10Q3
11Q3
12Q3
13Q3
Rental growth (lhs)
Source: Investment property databank.
Notes: For a definition of initial yield see footnote 11.
7
initial yields remain close to 9 per cent having dipped further in
11
the third quarter.
There has been a noticeable increase in the volume of
commercial property investment transactions in 2013, as the
Lawless, M., McCann, F. and O'Toole, C. (2013), 'The importance of banks in SME financing: Ireland in a European context.' Central Bank of Ireland Economic Letter, Vol. 2013, No. 5.
Holton, S., McCann, F., Prendergast, K. and Purdue, D. (2013), 'Policy measures to improve access to SMEs: a survey.' Central Bank of Ireland Quarterly Bulletin October 2013.
Data from the Department of Jobs, Enterprise and Innovation referring to the sum of creditors’ voluntary liquidations and court liquidations notified to the Companies Registration Office.
10
According to the latest data collected by the Central Bank of Ireland, domestic banks held €37.3 billion worth of commercial real estate assets on their balance sheets at the end of 2013
Q3.
11
The initial yield is calculated as the annualised rents generated by a portfolio, after the deduction of an estimate of annual recurring irrecoverable property outgoings, expressed as a
percentage of the portfolio valuation - European Public Real Estate Association.
8
9
6
Chart 11: Irish commercial property investment
expenditure
€ billions
3.5
pick-up in activity which began in the latter half of 2012
€ billions
3.5
persisted. According to 2013 Q3 data from CBRE, 2013 is
already the busiest year in the Irish commercial property market
in terms of expenditure since 2007 (Chart 11). Furthermore, 57
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
commercial property market at the moment. International
0.0
0.0
investors are competing with Irish funds and domestic private
transactions of at least €1 million in value were completed in the
first three quarters of the year, surpassing the 35 deals done in
06
07
08
Undisclosed
09
10
Overseas
11
12
13 Q3
Domestic
Source: CBRE Research.
Notes: Investment spending relates to individual transactions worth at
least €1 million. Data for 2013 covers the period to the end of Q3.
2012. The office sector has accounted for over 60 per cent of
total commercial property investment since 2011.
12
Diverse sources of demand are a notable feature of the
investors in the market and have been responsible for two-thirds
of the investments, by value, so far this year (Chart 11). This is
in contrast to the situation at the peak of the market in 20062007, when domestic investors dominated activity, supported by
debt finance from Irish financial institutions.
Market momentum has continued into the fourth quarter of 2013
with further new properties and portfolios released for sale. In
addition, the recent Budget decision to retain the Capital Gains
Tax waiver
13
for an extra 12 months has alleviated the necessity
to get deals completed by the end of the year and should ensure
a flow of commercial real estate investment activity into 2014.
14
Notwithstanding the increase in overall transactions, the vast
majority of commercial property investment activity has focused
on prime assets in and around Dublin. The more muted demand
for non-prime assets has resulted in a substantial overhang of
stock in some areas. The activities of the National Asset
Management Agency (NAMA) will also continue to influence the
commercial property market in Ireland, given the institution’s
sizeable portfolio of assets and its potential to increase its sales
activity.
12
See Goodbody Report on the Irish property market, “A detailed analysis of the prospects for Irish property”, September 2013.
This measure, introduced in the 2012 Budget and originally due to expire at the end of 2013, means that residential and comme rcial property bought and held for 7 years, would be
exempt from capital gains tax on gains attributable during this period.
14
See CBRE bi-monthly Irish commercial property report, November 2013.
13
7
Box 1: Supervisory review of SME distressed credit operations
This Box provides some detail on the supervisory review of small and medium size enterprise (SME) distressed credit operations
undertaken by the Central Bank, which commenced in 2012. The review was initiated by the Central Bank following on from the 2011
Financial Measures Programme in order to assess banks’ ability to address early-stage SME arrears effectively, manage existing
arrears, and mitigate future losses.
SMEs are an important source of employment, accounting for over 70 per cent of private sector employment. Additionally, lending to
SMEs represents a substantial proportion (approximately 19 per cent) of the domestic banks’ aggregate loan book. Like other parts of
the Irish economy, the SME sector has faced significant challenges in recent years. This has resulted in the credit quality of
SME/corporate loans deteriorating since the start of the financial crisis. Managing the process of balance sheet repair within individual
institutions is a critical step in restoring a functioning financial system.
The Distressed Credit Operations Review
In early 2012, the Central Bank engaged BlackRock Solutions to undertake an assessment of the distressed credit operations
(DCOR) for SME loans of the two main Irish commercial banks. Three main findings emerged. First, the banks’ operational capacity
to work out debts is new. The review found that the workout units within the banks, which aimed to address the issue of distressed
credit operations, had limited specialist staff. This constrained workout capabilities.
Secondly, the review noted significant differences in banks’ abilities to conduct detailed case reviews. This was mainly driven by
incomplete financial information being available on borrowers and the lack of internal guidelines. Where data were available they
were often not fully utilised, with the level of analysis dependent on the individual case manager. While the banks had formulated
credit related policies to a high level, guidelines for case managers were incomplete and, for some portfolios, entirely lacking.
Thirdly, despite having formulated an adequate range of workout options, the majority of SME loans were subject to rescheduling.
Banks’ plans on debt restructuring were either unrealistic or too recently formulated to assess accurately. In addition, the pace of
work-out action plans was slow, with legal processes taking particularly long to be invoked.
Central Bank’s follow-up actions
In August 2012, the Central Bank wrote to SME lenders active in the Irish market requesting comprehensive strategies for dealing
with SME borrowers in difficulty. In addition, it requested detailed implementation plans illustrating how banks would implement their
strategies over the following months.
The Central Bank specified that the banks’ implementation plans must cover the following critical areas: deployment of strategy;
deployment of loan modification options; borrower engagement; financial analysis and collateral valuations; arrears management
teams; collection and utilisation of data; analytics; and IT systems. Submissions were received in September 2012 and have been
subject to review and challenge on an on-going basis. Key Performance Indicators have been developed to monitor the progress
being made by the covered banks.1 The Central Bank continues its intensive on-site engagement with the SME lenders throughout
2013. This includes SME Operational Effectiveness Reviews which focus on reviewing the banks’ progress vis-à-vis their strategies
and implementation plans. Loan file reviews also form part of the engagement. These are an essential element in supporting the
assessment of risks.
Given the importance of SMEs to job creation and economic growth, the availability of credit to viable enterprises is crucial to
economic recovery. Central Bank research has shown that credit conditions faced by SMEs in Ireland in recent years have been
among the most difficult in the euro area.2,3 Restoring sustainable lending to SMEs, to a level which will support greater economic
activity, will require further work by all parties involved.
________________________
1
2
3
8
Covered banks refer to those institutions covered by the Eligible Liabilities Guarantee Scheme.
Holton, S. and McCann, F. (2012), “Irish SME credit supply and demand: comparisons across surveys and countries”, Central Bank of Ireland, Economic Letter Vol. 2012, No. 8.
Holton, S., Lawless, M. and McCann, F. ‘SME financing conditions in Europe: Credit crunch or fundamentals?’ National Institute Economic review, (225):52-67, (2013).
2.3 Household sector
High levels of mortgage arrears and indebtedness remain key challenges facing the household sector, making
it vulnerable to interest rate rises and decreases in disposable income. The economic environment facing
households is weak as fiscal consolidation, high unemployment and household deleveraging continue to
constrain domestic demand. However, there are some positive signs both in the labour market, where
employment is rising and unemployment is falling, and in the property market, where national residential
property prices returned to year-on year growth during the summer.
Chart 12: Number of mortgage accounts in arrears
as a percentage of outstanding mortgages and
average arrears balance
Mortgage Arrears
per cent
Despite some recent improvement, the scale of mortgage
euros
35
35,000
30
30,000
number and value of mortgage accounts in arrears fell on a
25
25,000
quarterly basis in the third quarter of 2013 as the scale of early
20
20,000
arrears cases moderated further
15
15,000
mortgages (19.9 per cent of total mortgages) remain in arrears
10
10,000
at the end of September 2013, with 72 per cent of these at least
5
5,000
0
0
arrears remains a significant threat to financial stability. The
15
. However, almost 182,000
90 days past due. The average arrears balance among buy-tolet (BTL) borrowers is more than double the principal dwelling
PDH
Between 91 and 180 DPD (lhs)
Average mortgage arrears (rhs)
Source: Central Bank of Ireland
Notes: Chart displays the number of mortgage accounts in arrears as a
percentage of the number of outstanding mortgages in that category.
Also, average arrears balance calculated as the value of the
accumulated arrears balance on those accounts divided by the number
of accounts in arrears. DPD stands for days past due. Data as of the
end of September 2013.
Chart 13: Employment conditions & consumer
sentiment
thousands
16
house (PDH) figure (Chart 12).
BTL
Between 1 and 90 DPD (lhs)
More than 180 DPD (lhs)
index, 2006Q1 = 100
(See Boxes 2 and 3).
Employment conditions are a key driver of mortgage arrears.
17
The labour market has improved with an annual increase in
employment of 58,000 recorded in the year to the end of the
third quarter of 2013 (Chart 13). Although further improvements
in the labour market are anticipated for 2014, a reduction in
unemployment from its current high level may be slow. This
means that any impact of labour market developments on the
level of distressed mortgages is likely to be gradual.
120
120
80
110
The resolution of the mortgage arrears problem is critical for
40
100
households, mortgage lenders and the wider economy. The
0
90
Government and the Central Bank have sought to ensure that
-40
80
-80
70
-120
60
(see Section 3.2 and Box 6). Banks have increased their
-160
50
interaction with struggling borrowers and sustainable solutions
-200
40
now have to be proposed. These arrangements may take a
06
07
08
09
10
11
12
13 Q3
the architecture required to deal with the arrears issue is in place
variety of forms, but it is important that they are affordable for the
Change in the number of people in employment (lhs)
KBC Ireland/ESRI Consumer sentiment index (rhs)
borrower in both the short and the long term and provide
sufficient clarity on what happens to the collateral at maturity.
Source: CSO, KBC Ireland and the ESRI.
Notes: Change in the number of people in employment refers to the
annual change in the number of persons aged 15 and over in
employment. KBC Ireland/ESRI consumer sentiment index data is the 3
month moving average of the monthly data taken at March, June,
September and December during the years shown. Latest data are from
2013 Q3.
18
Households and the real economy
The
economic
environment
facing
households
remains
challenging, despite recent signs of improvement in the housing
15
At the end of September 2013, there were 141,520 PDH and 40,426 BTL mortgages in arrears, with outstanding balances of €25.56 billion and €10.99 billion, respectively. The
equivalent figures at the end of June 2013 were 142,892 PDH and 39,948 BTL cases with outstanding balances of €25.69 billion and €10.94, respectively.
16
According to the end September 2013 data, 21.2 per cent of BTL mortgages were at least 90 days past due compared to 12.9 per cent of PDH borrowers. The average arrears balance is
€32,308 and €15,351 for BTL and PDH borrowers, respectively.
17
See: Lydon, R. and McCarthy, Y. (2011), “What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears”, Central Bank of Ireland, Research Technical Paper, Vol. 2011,
No. 14.
18
According to the March 2013, Mortgage Arrears Resolution Target document, sustainable solutions may come in three forms: (i) the re-establishment of payments on the original term, or
an agreed revised schedule, (ii) the situation where an insolvent borrower opts for a Personal Insolvency Arrangement, and (iii) the surrender or repossession of the property in cases
where an arrangement is inappropriate or could not be agreed.
9
Chart 14: Household debt-to-GDP ratio: European
comparison
per cent
and labour markets. On-going fiscal consolidation, the high level
of unemployment and household deleveraging continue to
per cent
140
140
subdue domestic demand. Negative economic shocks or
120
120
developments that would weaken the growth outlook represent a
100
100
80
80
60
60
40
40
20
20
employment,
0
0
household taxes and charges. Despite emerging signs of
key threat to the household sector. Against that, a sustained
improvement in economic indicators could boost consumer
confidence.
Personal consumer expenditure has declined in recent years,
reflecting lower levels of disposable income due to falling
IT LU AT BE FR DE FI GR UK ES PT IE NL
decreasing
19
earnings
and
an
increase
in
recovery, the weak level of consumer demand in the first quarter
of the year means a fall in consumer expenditure seems likely
Source: Central Bank of Ireland and CSO.
Notes: Data as at 2013 Q2, for selected European countries
for 2013 as a whole. The latest forecasts indicate modest growth
in consumption in 2014, reflecting an improving labour market
and rising consumer sentiment (Chart 13), which should help
reduce the drag on economic activity.
Chart 15: Household debt
220
200
200
180
160
Levels of personal debt continue to decline, which is necessary
Thousands
€ billions
250
per cent of disposable income
240
to repair household balance sheets, but acts as a drag on
consumption and the real economy. Household deleveraging,
however, is likely to persist given the volume of outstanding debt
150
and the weak macroeconomic environment.
100
The Irish household sector remains amongst the most indebted
in Europe, with a debt level of more than 100 per cent of GDP
140
50
120
100
0
03
04
05
06
07
08 09 10 11 12 13 Q2
Debt (rhs)
Debt/Disposable income (lhs)
Source: Central Bank of Ireland and CSO.
Notes: Household debt is defined as total loans of households.
Disposable income is gross disposable income of households including
non-profit institutions serving households.
(Chart 14). The value of household debt has fallen by 16.4 per
cent from its peak of €203.8 billion in the final quarter of 2008 to
€170.3 billion at the end of the second quarter of 2013. A
corresponding decline of 14 per cent in the value of household
disposable income over the same period kept the debt-todisposable income ratio above 200 per cent (Chart 15).
Most highly-indebted households are vulnerable to a rise in
interest rates or a further fall in disposable income. Mortgages
Chart 16: House price growth: National, Dublin &
non-Dublin
account for a significant portion of total household debt. While
insulated, those with standard variable rate loans or fixed rate
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
06
07
National
08
09
10
11
12
National excluding Dublin
13 Oct
the holders of tracker mortgages will remain somewhat
loans approaching renewal could face greater debt service
burdens if there are interest rate rises from banks under
pressure to rebuild margins and profitability (see Section 3.2) or
a general rise in interest rates.
Residential property market
Bank losses on non-performing residential mortgage portfolios
are driven by developments in residential property prices and the
level of mortgage arrears. In addition, house price movements
Dublin
Source: CSO.
Notes: Latest observation is for October 2013.
can influence household expenditure behaviour through wealth
effects.
In June 2013, national residential property prices recorded their
first year-on-year increase (of 1.2 per cent), since January 2008.
19
According to preliminary CSO data from the end of 2013 Q3, average weekly earnings across all sectors fell by 3.4 per cent between 2009 Q3 and 2013 Q3 – for more details see
Earnings and Labour Costs Quarterly. CSO data for the end of 2012, released in June 2013, showed that annual average earnings between 2009 and 2012 were 2.1 per cent lower – for
more details see Earnings and Labour Costs, Annual Data 2012.
10
Chart 17: Housing market activity: transactions
and mortgage drawdowns
thousands
60
House price growth has continued since then, with October data
20
€ billions
12
showing a year-on-year increase of 6.1 per cent.
Nonetheless,
monthly data remain quite volatile and the relatively low level of
mortgage transactions makes the identification of any clear trend
50
10
40
8
30
6
20
4
10
2
month since the start of 2013.
0
declined, with the number of properties for sale reported to be 60
difficult.
Beyond the national figures, there is a growing divergence in
prices and market conditions across the country (Chart 16). The
0
05
06
07
Dublin market has been registering year-on-year growth each
21
Supply in the capital has
22
08
09
10
11
12 13Q3
Value of mortgage drawdowns (rhs)
No. of mortgage drawdowns (lhs)
No. of transactions (lhs)
per cent lower than two years ago.
Outside Dublin, prices continue to fall, albeit at a slower pace
Source: Irish Banking Federation and Property Services Regulatory
Authority.
Notes: Data are presented on a quarterly basis. Property price register
data available from 2010.
than at the beginning of the year with some areas having a
23
substantial oversupply of units.
Prices across the rest of the
country were 0.3 per cent lower at the end of October 2013 than
a year earlier. There are tentative signs of improvement,
Chart 18: House price growth, rent inflation and
house price to rent index
however, with month-on-month prices growing in four of the last
six months.
index, Jan 2005 = 100
40
120
Property transactions in the first nine months of 2013 were up 18
30
100
per cent on the same period last year, though this was from a
80
low base (Chart 17). In contrast, mortgage market activity
60
remains subdued. Despite an increase in 2013 Q3, Irish Banking
20
10
0
40
-10
Federation data show that the number of mortgage drawdowns
in the first three quarters of 2013 was 0.6 per cent lower than the
-20
20
-30
0
97
99
01
03
05
Rent inflation (lhs)
07
09
11
13Oct
House price growth (lhs)
Price-to-rent ratio (rhs)
Source: CSO, Permanent TSB/ESRI and Central Bank of Ireland
calculations.
Notes: Rent inflation and house price growth are shown as year-on-year
changes.
equivalent period in 2012.
24
The total value of loans drawn down
during this period was also lower. The discrepancy between
transaction levels and mortgage drawdowns is explained by the
increasing role of cash purchases in the market.
25
Residential rents have been growing steadily since August 2011.
National figures indicate a rise of 7.6 per cent year-on-year to
October 2013 (Chart 18). Rents in Dublin are increasing at a
greater pace than in other areas, with lack of supply again an
important factor. The fall in house prices over recent years,
alongside rising rents has resulted in a substantial decline in the
price-to-rent ratio.
The findings of a recent Central Bank survey of “property
professionals” show that, compared with a similar survey in
2012, there has been a substantial increase in the percentage of
respondents expecting national house prices to be higher in one
year’s time (see Box 4). Almost a quarter of participants
envisage an increase of between 4.1 and 5 per cent in annual
prices between the end of the 2013 Q3 and the end of 2014 Q3.
20
See CSO Residential Property Price Index: October 2013. As of October 2013, the overall decline in residential property prices from peak was 47 per cent.
The annual growth rate in October 2013 was 15 per cent.
This information is contained in the Lisney Dublin Residential Market Update Q3 2013.
23
See Central Bank Quarterly Bulletin 4, 2013, Page 23, Box B: “The Stock of Vacant Dwellings and Recent House Price Movements”.
24
The number of mortgage drawdowns in the first 9 months of 2012 and 2013 were 9,838 and 9,779 respectively.
25
This feature of the market makes analysis difficult, as the property price index is constructed on the basis of mortgage transactions only, meaning a large segment of the market is not
recorded in the official data.
21
22
11
Box 2: Recent developments in mortgage arrears
This Box presents details of the Central Bank’s mortgage arrears statistics. Data for end-September 2013 show the first quarterly
decline in the outstanding balance on mortgage accounts in arrears for principal dwelling houses (PDH) since the start of the series in
September 2009. The numbers of accounts in arrears also fell in the third quarter. However, the latest data illustrate divergent patterns
between shorter and longer-term arrears cases. While arrears in all categories up to 720 days past due declined, this was largely offset
by a sharp increase in the number of accounts in arrears over 720 days. PDH accounts in arrears over 720 days now account for 22.5
per cent of mortgage accounts in arrears and over 60 per cent of arrears outstanding. While the pace of increase in longer-term arrears
has moderated somewhat, the amounts involved are large and growing and continue to represent a major concern from a financial
stability standpoint (Chart A).
The latest data for buy-to-let (BTL) accounts in arrears mirror some of the developments in PDH accounts. BTL accounts in arrears
over 720 days represented almost 29 per cent of total accounts in arrears at end-September 2013, up from 18 per cent over a twelve
month period. The increase in the number of BTL accounts in arrears in the third quarter of 2013 is also driven by accounts in longerterm arrears of more than 180 days, with the number of early arrears cases declining.
The latest data on restructures of mortgages show the initial impact of the performance targets set by the Central Bank in March 2013
for the resolution of mortgage arrears on a sustainable basis (MART)1 (Chart B). For PDH accounts in arrears, there was a fall of
almost 4,200 in the number of accounts on short-term interest only arrangements, which was offset by a slightly higher increase in
arrears capitalisation and term extensions. However, at end-September, only 26.5 per cent of PDH accounts in arrears were classified
as restructured, of which some 55 per cent were meeting the terms of their arrangement. There was limited restructure activity among
BTL accounts in arrears during the third quarter of 2013. Only 21 per cent of accounts in arrears had been restructured and of those 43
per cent were meeting the terms of the arrangement.
It is too early to capture the full impact of the MART solutions in the data, but initial audit results suggest banks are meeting their
targets in terms of proposing sustainable solutions. However, it is clear that, in terms of restructures, much of the focus to date has
been concentrated on managing ‘pre-arrears’ cases. The major challenge is in addressing longer-term arrears, where progress to date
has been limited.
Chart A: Outstanding balance on PDH accounts in arrears
over 90 days and over 720 days
Chart B: Breakdown of stock of PDH mortgage accounts
in restructure arrangements
€ billions
per cent
per cent
20
per cent
80
20
15
60
10
40
19
1
8
2
3
5
19
20
20
5
0
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Outstanding balance on PDH loan accounts in arrears > 90 days (lhs)
Outstanding balance on PDH loan accounts in arrears >720 days (lhs)
Annual growth in value of PDH loan accounts in arrears >90 days (rhs)
Notes: Data relating to arrears over 720 days are only available from the second
quarter of 2012.
________________________
1
See Central Bank of Ireland (2013) 'Mortgage Arrears Resolution Targets', 13 March.
12
3
0
Interest only (up to one year)
Reduced payment (< interest only)
Payment moratorium
Arrears capitalisation
Split mortgage
Notes: Data as at September 2013.
Interest only (over one year)
Reduced payment (> interest only)
Other
Term extension
Temporary interest-rate reduction
Box 3: Interest only mortgages in Ireland – stylised facts
This Box discusses the Irish interest only (IO) mortgage market. A key priority of the Central Bank is the resolution of Irish mortgage
arrears. IO mortgages accounted for almost 25 per cent of new residential mortgage restructure arrangements during 2013 Q2.1
Understanding the structure and condition of this market is important given the riskiness of these loans in an Irish context. Challenging
economic circumstances mean that some borrowers with mortgages where the interest only term is coming to an end may experience
difficulty meeting the higher “principal and interest” repayment schedule leading to an increase in mortgage arrears. Furthermore in the
UK, where over 40 per cent of outstanding loans are IO, rating agency Moody’s estimates that these mortgages are one and a half
times more likely to fall into arrears than standard mortgages.2
Using end-2011 data for the domestic banks on 630,000 individual mortgages with an outstanding balance of €89.7 billion3, it is
possible to carry out a more detailed analysis on the characteristics of the Irish IO mortgage market. These include its size, the buyer
types involved, the breakdown of mortgages originated on IO terms and those who switched to IO subsequently, the geographic
location of these loans and their repayment performance.
IO loans account for €14.8 billion or 16 per cent of total mortgages. Chart A shows this is split into roughly one-third PDH and twothirds BTL. By value, this represents 7 per cent of PDH mortgages and almost one-half of BTL mortgages.4 For PDH mortgages, the
bulk (64 per cent) converted to IO during the life of the loan, indicating the repayment difficulties facing many borrowers. For BTL loans,
however, 76 per cent were sold as IO, with the peak issuance years being 2006 and 2007. A significant proportion (42 per cent) of IO
loans are to borrowers in Dublin, representing one-fifth of the Dublin total outstanding balance by value, reflecting a high level of BTL
properties.
Chart A: Interest only mortgages by buyer type and status
Chart B: Interest only end dates by buyer type
number
€billions
10
30,000
25,000
20,000
15,000
€billions
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
Billions
35,000
12
Billions
40,000
€billions
8
6
4
10,000
5,000
0
PDH mortgage
Value of subsequent IO mortgages (rhs)
Number of original IO mortgages (lhs)
2
0
BTL mortgage
Value of original IO mortgages (rhs)
Number of subsequent IO mortgages (lhs)
0.0
0.0
2012
13
14
15
PDH
Notes: Original IO mortgages are those initially sold as IO. Subsequent IO mortgages
initially involved principal-and-interest payments but converted to IO during the life of
the loan.
16
17
BTL
Notes: Y axis represents the outstanding value of IO loans where the IO term
matures by year. For example, the IO term expires for circa €1.1 billion of BTL IO
loans in 2013.
The concern from a financial stability perspective is that when the loans revert to higher principal-and-interest repayments, some may
re-enter arrears or fall into arrears in the case of those originally sold as IO. Indeed the data show that at end-2011 the over 90 days
past due arrears rates were greater in the IO sample than the overall market, at 20 per cent versus 12 per cent for PDHs and 18 per
cent versus 15 per cent for BTLs. In addition, 39 per cent of the BTL loans originally sold as IO were due to convert between 2012 and
the first half of 2013 (Chart B), leaving the holders exposed to higher repayments.5
________________________
1
See Goggin, J. (2013), “Mortgage Arrears in Ireland; Introducing the Enhanced Quarterly Statistics”, Central Bank of Ireland Quarterly Bulletin 4.
Interest only mortgages are classed as “high risk” by regulators in the UK, who have tightened the criteria on which they may be offered from 2014. For example, all lenders will be
required to determine how borrowers seeking new interest-only mortgages will repay their debts. For more details see the Mortgage Market Review available on the Financial
Conduct Authority website and a Financial Times report from November 2012 “Many mortgages still interest only”.
3
There were €143.2 billion Irish residential mortgages outstanding at June 2012.
4
In a recent study of the UK market, one-third of PDH mortgages were IO. The BTL sector was not covered in the UK report. See FCA commissioned Experian report “Residential
Interest Only Mortgages”. Irish IO loans were often IO for a period of 5 years, whereas in the UK many loans are IO for the full life of the mortgage with the borrower expected to
repay a lump sum at the end.
5
The end dates for the IO period are only available for 46 per cent of the sample.
2
13
Box 4: Residential property price expectations survey
The results of property price surveys are a timely means of monitoring key developments in the housing market. This Box presents
findings concerning house price expectations contained in the Central Bank/Society of Chartered Surveyors Ireland (SCSI) Quarterly
Property Survey.1 The survey probes market participants’ views on national and regional house price developments over a number of
different time intervals. Recent surveys show a noticeable increase in the percentage of individuals anticipating an increase in national
residential house prices over the subsequent 12 months, as well as an even more positive outlook for prices in the Dublin market.
The corresponding response in the initial survey, (2012 Q3), was that national residential property prices would be lower in a year’s
time. Almost 60 per cent of respondents believed prices would fall, as a consequence of factors such as the limited availability of
mortgage credit, concerns surrounding the weak economic outlook, the lack of job security and falling disposable incomes (Chart A). A
further 24 per cent were of the opinion that prices would remain constant over the same period. In contrast, responses to the 2013 Q3
survey provide a more optimistic outlook, with four out of five participants expecting higher prices by 2014 Q3. There has also been a
noticeable movement, in terms of the expected extent of the annual house price change, whereby those anticipating price increases in
the 2013 Q3 survey, were, on average, predicting them to be larger than those who took part in the 2012 Q3 survey. Reasons
underlying the expectations of survey participants include tentative signs of a pick-up in prices and activity levels, tight supply in some
areas and a sense that the bottom of the market had been reached.
A comparison of respondents’ expectations at 2013 Q3, for national and Dublin property prices, in the 12 months ahead is presented in
Chart B. House price growth in the capital is expected to outperform the overall market. Almost all participants expect higher prices in
the Dublin area for the year ahead. A shortage of certain types of accommodation in parts of Dublin, such as family units, was widely
cited as a factor which would cause increased prices. In general, the price increase in Dublin is also expected to be greater than that
observed nationally. This can be seen due to the greater prominence of the Dublin (light blue) bars amongst the higher positive values.
Chart A: Expectations of changes in residential property
prices over the coming 12 months: (2012 Q3 vs. 2013 Q3)
per cent of observations
Chart B: Expectations of change in residential property
prices over the coming 12 months: (2013 Q3 National vs.
Dublin)
0
10
20
30
40
50
60
70
80
90
0
100
10
20
30
40
50
60
70
80
90
100
40
35
2012 Q3
National
35
30
Dublin
2013 Q3
30
25
25
20
20
15
15
10
10
5
5
0
>10
10
9
8
7
6
5
4
3
2
1
NC
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
< -10
anticipated annual percentage change
Extent of change (2012Q3 survey)
Price decrease
Price Increase
Extent of change (2013Q3 survey)
No change
Source: Central Bank of Ireland and SCSI data.
Notes: Chart is based on 42 responses to the Q3 2012 survey and 52 responses to
the Q3 2013 survey.
>20
20
18
16
14
12
10
9
8
7
6
5
4
3
2
1
NC
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
-12
-14
-16
-18
-20
<-20
0
anticipated annual percentage change
Extent of change (National)
Price decrease
Price Increase
Extent of change (Dublin)
No change
Source: Central Bank of Ireland and SCSI data.
Notes: Chart is based on 52 responses to the question on national house price
expectations and 44 responses to the question on Dublin house price expectations
in the Q3 2013 survey (1 respondent who indicated their expectation that Dublin
prices would increase, failed to quantify by how much).
________________________
1
The Central Bank/SCSI Quarterly Property Survey began in 2012. Its respondents include estate agents, auctioneers and surveyors, as well as those with a more indirect
involvement in the industry such as economists, market analysts and academics. While the main focus of the survey is on market participants’ price expectations; questions are also
included on activity levels and other market issues. The survey is a snapshot of respondents’ expectations at a particular point in time and so can provide only limited informati on
about possible future property price developments. It also provides a measure of uncertainty regarding those expectations, which is a useful complement to the available
information on the domestic property market. The most recent survey focussed on 2013 Q3 and was carried out in late September/early October 2013.
14
2.4 Sovereign debt
Lower bond yields, a lengthening of the maturity profile of government debt and the withdrawal of the Eligible
Liabilities Guarantee have benefitted the Irish sovereign position. On the domestic front, sovereign
performance remains vulnerable to low output growth and to any potential recapitalisation of the banking
sector. It is also susceptible to a general rise in interest rates and the possibility of adverse fiscal developments
in other Member States.
Chart 19: Sovereign bond yields for selected euro
area Member States, 10-year maturity
External and domestic environment
per cent
The improvement in the euro area sovereign bond market noted
per cent
10
10
8
8
6
6
4
4
2
2
0
0
in the previous Review has been maintained in recent months.
While there has been a moderate rise in euro area bond yields
since May, yields in Ireland and other Member States remain
markedly below their values in mid-2012 and earlier (Chart 19).
The recent reductions in official interest rates by the ECB and its
policy of forward guidance are likely to be supportive of
sovereign bond markets.
Adherence to the programme of fiscal consolidation is likely to
Germany
France
Spain
Italy
Ireland
have supported the market for Irish sovereign bonds. Ratings
agency Standard & Poor’s revised its outlook on Ireland to
Source: Bloomberg.
Notes: Chart shows yields on sovereign bonds, ten-year maturity. For
Ireland, a generic eight-year maturity bond yield is used until 14 March
2013. Last observation is 25 November.
positive in July. Moody’s changed its outlook on Ireland’s
sovereign rating from negative to stable in September, while still
maintaining a Ba1 sub-investment grade rating. The projected
General Government debt ratio for end-year, however, remains
high, at 124 per cent of GDP, and the budget deficit, while
meeting programme targets, is among the highest in the euro
area. While the debt ratio is projected to start declining slowly
from next year, lower-than-expected economic growth would
endanger the attainment of medium-term fiscal targets, including
Chart 20: Government debt ratios in selected
Member States
per cent of GDP
achieving the 3 per cent deficit target for 2015. Such a
per cent of GDP
development could undermine investor confidence in the Irish
sovereign, have a negative impact on bond yields and threaten
200
200
160
160
120
120
80
80
40
40
surrounding the US Federal Reserve adjusting its programme of
0
quantitative easing. While the Federal Reserve announced in
fiscal sustainability.
External developments could also impact the Irish sovereign
bond market. The moderate generalised rise in bond yields in
0
06
07
Ireland
08
09
Portugal
10
Italy
11
12
Greece
13
recent months reflected, at least in part, market concerns
September that it would keep its monthly asset purchases
Spain
unchanged, bond markets can be expected to remain sensitive
to changes in monetary policy. If the market takes the view that
Source: European Commission AMECO database.
a tightening of US monetary policy is required or likely in the
near term, it could make the cost of funding for sovereign bonds
more expensive.
The sustainability of the US sovereign position is a concern
given that the recent deal to address the debt ceiling only funds
the government in the short term. The inability of the US political
system to provide a longer-term agreement creates uncertainty
15
Chart 21: Difference in maturity profile of
Government debt as at December 2011 and
October 2013
€ billions
units
around the US sovereign bond market and could prove
damaging to other sovereign markets. The market for Irish
€ billions
sovereign bonds is also likely to remain sensitive to economic
and political developments in other Member States (Chart 20).
The maturity profile of Irish debt has been extended (Chart 21)
5
10
as a result of the liquidation of Irish Bank Resolution Corporation
0
0
(IBRC) in February 2013, the replacement of government-issued
Dec-11
2046-2053
20
2036-2045
10
2026-2035
withstand financial disruptions that may arise in the short term.
2020
30
2021-2025
15
2019
40
2018
20
2017
50
2016
25
2015
60
2014
30
Ireland’s substantial cash balances provide it with a buffer to
Promissory
Notes
with
a
portfolio
of
longer-term
Irish
government bonds, and amendments to European Financial
Stability Facility (EFSF) and European Financial Stabilisation
Oct-13
Mechanism (EFSM) loan repayments provided under the EUSource: National Treasury Management Agency and Central Bank of
Ireland calculations.
IMF programme of financial support. As long as a sub-
Chart 22: Guaranteed liabilities
however, institutional investors may be prevented from investing
€ billions
€ billions
investment grade rating on Irish debt is maintained by Moody’s,
in Irish bonds.
400
400
350
350
300
300
250
250
200
200
(ELG) for all new liabilities from participating credit institutions in
150
150
March has reduced the contingent liabilities of the State (Chart
100
100
22). (See Box 5 for a summary of the ELG exit strategy). As in
50
50
0
0
2008Q4
2009Q4
2010Q4
CIFS
2011Q4
2012Q4
2013
September
ELG
Notes: CIFS: Credit Institutions (Financial Support) Scheme; ELG:
Eligible Liabilities Guarantee Scheme.
16
Banking issues
The withdrawal of the Eligible Liabilities Guarantee Scheme
other Member States, however, the sovereign position could be
adversely
affected
by
losses
that
necessitate
recapitalisation of the domestic banking sector.
further
Box 5: Exit strategy for the Eligible Liabilities Guarantee Scheme
This Box outlines some of the work undertaken by the Central Bank in the lead up to the exit from the Eligible Liabilities Guarantee
(ELG) Scheme which was announced by the Minister of Finance on February 26 2013.1 While the ELG Scheme formed an important
part of the crisis response, exiting it was a necessary step in restoring a fully functioning banking system in Ireland. The ending of the
ELG Scheme for new liabilities is a step towards the normalisation of banking activity. It also has the broader benefit of leading to the
gradual removal of the contingent liability on the State associated with the guarantee.
As a measure which qualified as State Aid under EU competition rules, the ELG Scheme was subject to regular review. While both the
introduction and removal of the ELG Scheme was a decision for the Government, subject to EU approval, the Central Bank played an
active role throughout in monitoring and assessing the need for and scope of such a guarantee.
Extensive work was carried out by the Central Bank in preparing for a possible exit from the Scheme. An initial assessment was
conducted in early 2012.2 Following this, a more in-depth analysis was carried out and shared with the Department of Finance and the
National Treasury Management Agency.
In June 2012, the Central Bank issued a letter of instruction to the covered banks (those banks covered by the Eligible Liabilities
Guarantee Scheme) requesting an assessment of the impact of the removal of the ELG Scheme and exit strategies taking into account
both the risk of outflows and operational constraints. This was followed up by weekly contact with the banks in order to assess
progress and discuss findings.
In light of the analysis, research and international comparisons carried out, the following potential ELG exit options were identified:

A full and immediate withdrawal of the ELG was the simplest option from a customer and operational perspective,
although placing a larger portion of an institution’s customer deposits at risk of outflow.

A phased withdrawal by maturity, simultaneously for all of the covered banks, provided a compromise between the potential
for an outflow of funds and operational constraints.

An exit whereby banks could offer guaranteed and unguaranteed customer offerings was seen as operationally difficult to
execute and risked creating confusion in the market place.

A withdrawal by customer type strategy posed challenges with regard to the definition of the various customer types and
the resulting uncertainty from a consumer protection perspective.

Similarly, a withdrawal by entity was seen as risking confusion among depositors as well as creating the potential for
sending a negative signal about any entities remaining guaranteed.
An additional consideration was the cost of the guarantee to the banks. In 2012, for example, the cost of the ELG Scheme to the
domestic banks amounted to approximately €1.2 billion. The reduction in fees and expenses associated with the withdrawal of the ELG
Scheme would be of benefit to those institutions covered by it.
A stabilisation in deposit flows and a marked improvement in market sentiment towards Ireland were key factors in considering the
timing for exit.3 Adoption of a phased withdrawal to the scheme was advised because the analysis conducted by the Central Bank
suggested that some deposits may be at risk from a full and immediate removal of the ELG scheme. This approach was prefaced by
sufficient communication with markets, institutions and depositors.
The withdrawal of the ELG scheme has not had a significant effect on deposits in the Irish banking sector. It represents a step towards
the normalisation of the banking sector. However, challenges still remain in further reducing the sector’s dependence on Central Bank
funding and in restructuring bank balance sheets. Further steps will be needed to facilitate a return to a position where the sector has
access to market funding at a sustainable cost.
________________________
1
The ELG Scheme came into effect in December 2009 at a time of, and in response to, significant financial stress in the Irish banking system. It provided a (temporary) State
guarantee for certain eligible liabilities of up to five years in maturity incurred by participating institutions. The guarantee sought to provide participating institutions with access to
medium-term funding, lengthening the maturity profile of their liabilities and thereby help maintain financial stability. As announced by the Minister of Finance on 26 February last,
the ELG Scheme closed to all new liabilities from midnight on 28 March 2013.
2
Following this, a working group was established within the Central Bank. This group was tasked with conducting a comprehensive assessment of the consequences of exit from
the ELG Scheme and proposing an exit strategy. The Department of Finance had also established a cross institutional working group on which the National Treasury Management
Agency and the Central Bank were represented.
3
As evidenced by the partial return to the primary market and the compression in sovereign bond yields.
17
3. Financial system
3.1 Financial system overview
Developments in international financial markets since May have been dominated by speculation surrounding
tapering of the Federal Reserve’s asset purchases, concerns over the US debt ceiling, and accommodative
monetary policy with both the European Central Bank (ECB) and Bank of England (BOE) announcing forward
guidance. Domestically, sovereign debt issuance, mortgage arrears and the Asset Quality Review will remain
in focus in the coming months, with Ireland due to exit its EU/IMF programme of external financial assistance
at the end of the year.
Chart 23: Equity market movements
Global equity markets have experienced increased volatility
index, Jan 2013 = 100
160
May: Bernanke
150
comments
since May as the prospect of a reduction in the Federal
index, Jan 2013 = 100
160
Sept: FOMC
150
meeting
Reserve’s asset purchases weighed on risk sentiment over the
summer. Vulnerabilities of emerging markets, in particular
140
140
130
130
120
120
110
110
100
100
which improved market sentiment. These developments indicate
90
90
that while central bank actions have supported financial markets
80
Jan-13
Mar-13
May-13
Jul-13
Nikkei
MSCI EM
Sep-13
80
Nov-13
Eurostoxx
S&P 500
related to countries with large current account deficits, also
came into focus with equity prices declining (Chart 23). Expected
Federal Reserve tapering in September did not materialise,
in recent years, their gradual withdrawal, when they occur, may
increase volatility and uncertainty. The ECB and BOE introduced
forward guidance policies during the summer, with the ECB
Source: Bloomberg.
Notes: Last Observation is 26 November 2013. The first black line
corresponds to the 22 May comments by Federal Reserve Chairman
Ben Bernanke, indicating that tapering could take place in 2013. The
second black line corresponds to the FOMC meeting on 17-18
September 2013, at which the Federal Reserve had been expected to
announce tapering of its asset purchases but left policy unchanged.
announcing that it would maintain key interest rates at or below
their current level for an extended period. The ECB cut its main
refinancing rate by 25 basis points to 0.25 per cent in November,
with the money market curve flattening somewhat due to the
deposit facility rate remaining at 0 per cent and the extension of
Chart 24: Sovereign 10-year bond spreads versus
Germany
per cent
per cent
4.5
4.5
May: Bernanke
Comments
4.0
Sept : FOMC
Meeting
4.0
Fixed Rate Full Allotment
26
until July 2015, which has put some
downward pressure on longer-term money market rates. Euro
money market rates remain relatively low despite the reduction
in excess liquidity from a high of €812 billion in March 2012 to
circa €170 billion in November 2013.
3.5
3.5
3.0
3.0
Peripheral sovereign bond spreads have tightened since June
2.5
2.5
(Chart 24) and the improvement in sentiment towards the
2.0
2.0
periphery is also evident in recent bond issuance by financial
1.5
1.5
institutions, including both secured and unsecured debt issuance
1.0
1.0
0.5
0.5
0.0
Jan 13
0.0
Mar 13
May 13
Irish Spread
Jul 13
Sep 13
Nov 13
Spanish Spread
Italian Spread
Source: Bloomberg.
Notes: Last Observation is 26 November 2013. For Ireland the 8-year
bond is used up to 14 March 2013. The first black line corresponds to
the 22 May comments by Bernanke, indicating that tapering could take
place in 2013. The second black line corresponds to the FOMC meeting
on 17-18 September 2013, at which the Federal Reserve had been
expected to announce tapering of its asset purchases.
26
by domestic Irish banks. In July, rating agency Standard &
Poor’s upgraded its outlook on Ireland’s credit rating to positive
from stable and reaffirmed its BBB+ rating, while in September
Moody’s revised Ireland’s outlook from negative to stable but
kept the rating at Ba1, below investment grade.
Ireland
still
faces
considerable
challenges
with
high
unemployment, further fiscal consolidation and tight credit
conditions, particularly for SMEs, weighing on economic growth.
With effect from 15 October 2008, the ECB introduced the fixed-rate full allotment policy in all ECB refinancing operations, replacing the variable rate tender format for a specified period
of time. Under fixed rate full allotment, eligible counterparties have their bids fully satisfied in the operation, provided they have adequate collateral to post.
18
Sovereign debt issuance, mortgage arrears and the ECB’s Asset
27
Quality Review
of banks will remain in focus in the coming
months.
27
In collaboration with competent national authorities, the ECB is to conduct a comprehensive assessment of systemically important euro area banks. This exercise has begun and is
expected to take twelve months to complete. It is a necessary step in the preparation for assuming full responsibility for supervision as part of the Single Supervisory Mechanism in 2014.
There will be three elements to the assessment: a supervisory assessment of key risks, an asset quality review and a stress test in coordination with the European Banking Authority. The
stress-testing methodology has yet to be announced. The Irish banks included on the ECB’s preliminary list of 124 banks are Bank of Ireland, Allied Irish Bank plc, Ulster Bank Ireland,
Permanent TSB and Merrill Lynch International Bank.
19
3.2 Banking sector
In line with more positive sentiment towards the sovereign, there has been some further term debt issuance by
the domestic banks. Their reliance on Eurosystem borrowings has also declined. Outflows in customer
deposits, however, highlight funding fragility. Interim results for 2013 indicate some increases in net interest
margins although earnings capacity is still weak. The key challenge for banks remains the efficient
management and resolution of distressed mortgage and small and medium enterprises (SME) debt, while
supplying sufficient credit to the real economy. Asset quality weakened further in recent quarters as evident in
the continued growth in the value of non-performing loans (NPLs). The outcome of the Asset Quality Review
and forthcoming European stress tests will be crucial in determining the adequacy of capital buffers in the
major banks and their resilience to future shocks.
Chart 25: Average interest rates on customer
loans and funding costs
per cent
Profit and Loss
per cent
Domestic banks have started to rebuild margins and net interest
8
8
7
7
6
6
5
5
and government guarantee fees are falling, benefiting pre-
4
4
provision profits. Impairment charges have declined from recent
3
3
peaks but are still the single biggest determinant of losses (Chart
2
2
26).
1
1
0
income. The banks have made some progress on re-pricing
deposits and certain loan portfolios (Chart 25). Operating costs
Earnings capacity remains constrained by the high share of
0
impaired loans and tracker mortgages in domestic banks’ loan
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
spread
interest bearing liabilities
loans to customers
books. The authorities continue to explore options to lower the
Source: Domestic banks’ annual reports.
Notes: Average rates are weighted using interest earning assets.
Permanent TSB is included from 2002. 2013 data are annualised.
funding cost of tracker mortgage portfolios. The balance sheet
contraction under the Financial Measures Programme (FMP)
28
and increased reliance on the domestic market means future
growth prospects for domestic banks will remain tied to a
recovery in the real economy. While some banks outside Ireland
are increasingly relying on trading and fee income, non-interest
Chart 26: Domestic banks' profitability
€ billions
20
€ billions
20
15
15
10
10
5
5
income is quite low for domestic banks (Chart 27).
The banks project further reductions in funding costs and
provisioning. However, the cost of future debt issuance is
0
0
dependent upon positive investor sentiment and an improvement
-5
-5
in domestic banks’ credit rating, notwithstanding recent lower-
-10
-10
-15
-15
-20
-20
average of their higher-rated European peers on market debt
-25
-25
and deposits and this may remain the case for some time as
08
09
Net interest income
Dividend income
Impairments
Other
10
11
12
13Q2
Fees & commissions
Other income
Admin costs
Pre-tax profits
Notes: Data collected in accordance with European Banking Authority’s
(EBA) FINREP reporting requirements. Impairments include provisions.
2013 data are annualised.
cost issuances. Domestic banks continue to pay above the
bondholders demand additional interest to lend to riskier banks
(Chart 28). Uncertainty also persists about the incremental effect
on provisions from the ECB’s comprehensive assessment of
banks prior to the establishment of the Single Supervisory
Mechanism, which is expected to take effect in late-2014.
The low interest rate environment is still depressing returns on
28
The Financial Measures Programme (FMP) outlines the package of banking-sector measures Ireland adopted as part of the 2010 agreement with the EU, ECB and IMF, aimed at putting
the finances of the domestic banks on a more secure basis. For more details see Central Bank of Ireland (2011) Financial Measures Programme Report. Dublin.
20
investment portfolios, including National Asset Management
Chart 27: Non-interest income to gross revenue
per cent
60
per cent
60
29
Agency (NAMA) and government bonds.
Recent supervisory
data indicate that cost-to-income ratios have fallen - following a
50
50
40
40
30
30
20
20
substantial rise in 2012 - but further rationalisation is required
given the smaller income base. This may prove difficult not least
due to the debt collection costs and lower revenue associated
with non-performing loans.
The recent Budget imposed an annual levy of €150 million on
banks operating in Ireland, to be paid between 2014 and 2016.
10
10
The proportion levied on each bank will be based on the amount
30
For
profits
is
of deposit interest retention tax (DIRT) paid in 2011.
0
0
AT BE DE ES DK FR GR
IE
IT
PT SE UK
Source: Bankscope.
Notes: Data for sample of European banks from 2012. Light blue line is
average for all banks.
domestic
banks,
the
negative
impact
on
counterbalanced to some extent by the removal of a restriction
on the use of deferred tax assets (DTAs), giving them more
scope to use part of these tax credits before they become
31
ineligible under Basel III (see Section on Solvency).
Chart 28: Customer deposit interest expense
per cent
4.0
per cent
4.0
Credit Risk and Asset Quality
The arrears crisis is weighing heavily on credit quality, with the
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
implementation of sustainable solutions.
1.5
1.5
Domestic banks’ loan books have become smaller and more
1.0
1.0
concentrated in recent years due to the impact of the FMP
0.5
0.5
deleveraging plan, under which banks were instructed to sell off
0.0
“non-core” liquid international assets, such as property portfolios,
trend of rising long-term arrears a particular concern. Processes
to deal with distressed borrowers should now be in place and the
0.0
AT BE DE ES DK FR GR
IE
IT
PT SE UK
onus is on the lending institutions to push forward with the
consumer loans and foreign operations. The transfers of
Source:Bankscope.
Notes: Per cent of average customer deposits for sample of European
banks as at 2012. Light blue line is the average for all banks.
commercial real estate (CRE) assets to NAMA and the low
levels of new lending have also contributed to this development.
Outstanding lending fell by €11.8 billion to €212 billion in the first
three quarters of 2013 as the trend of slow asset wind-down
Chart 29: Domestic banks’ credit exposures
€ billions
300
per cent
70
through amortisation continues (Chart 29). Irish loans now
account for more than two-thirds of the value of all loans of
domestic banks. Meanwhile, in terms of sector, residential
250
65
200
60
150
55
100
50
significant borrower distress in the household and NFC sectors
50
45
(see Sections 2.2 and 2.3). The stock of impaired loans
40
by €1.5 billion since the end of 2012, to reach €57 billion at the
mortgage lending makes up over 58 per cent of total loans.
Asset quality has weakened further in recent quarters. The value
of non-performing loans (NPLs) continues to grow, as a result of
0
10Q4 11
Q2 Q3 Q4
12
Q2 Q3 Q4
13
Q2 Q3
Outstanding lending (lhs)
Mortgage loans as a % of lending (rhs)
RoI loans as a % of lending (rhs)
Notes: Data are consolidated. Total lending equals drawn-down
exposures. Data for 2010 Q4 are not broken down by geography. RoI
refers to the Republic of Ireland.
32
rose
end of 2013 Q3 (Chart 30), equivalent to 27 per cent of the value
of outstanding loans. Nevertheless, the pace of deterioration
continues to slow. The annual growth rate of impaired loans was
8 per cent in 2013 Q3, down from 10 per cent in 2013 Q2 and 26
29
See page 18 of Macro Financial Review 2013:1 for more details.
DIRT is deducted at source by deposit takers (e.g. banks, building societies, Credit Unions, etc.) from interest paid or credited on deposits of Irish residents. For details see Revenue.ie.
Deferred tax assets are effectively a tax credit against future income and for domestic banks arise largely due to losses carried forward assuming future profitability. These will be
deducted in full under Basel III capital requirements.
32
Impaired loans are defined in accordance with the EU’s (Capital Requirements Directive), and refer to loans which are impaired as defined under IFRS accounting regulations (IAS 39)
and/or classified as greater than 90 days in arrears.
30
31
21
Chart 30: Domestic banks’ impaired loans,
provisions for impaired loans and coverage ratio
per cent a year earlier.
€ billions
While the aggregate coverage ratio
per cent
60
60
33
increased marginally in the
third quarter of 2013, to just over 50 per cent, concerns remain
50
50
40
40
cope with the outstanding stock of distressed loans. In response,
30
30
an Asset Quality Review (AQR) under the Balance Sheet
20
20
10
10
about whether domestic banks are sufficiently provisioned to
Assessment (BSA) has been completed in the fourth quarter of
2013 (see Section on Solvency).
0
0
10Q4 11
Q2
Q3
Q4 12 Q2 Q3 Q4 13 Q2
Impaired loans (lhs)
Provisions for impaired loans (lhs)
Cover ratio (rhs)
Q3
34
At present, provisioning levels
across the domestic institutions are diverse, reflecting varying
sectoral and geographic exposures as well as the performance
of these portfolios (Chart 31). While the problem of mortgage
arrears is the subject of much attention, the rate of distress in
Notes: Data are consolidated. The coverage ratio is calculated by
dividing the value of provisions for impaired loans by the value of
impaired loans. Impaired loans are defined in accordance with the EU’s
Capital Requirements Directive, and refer to loans which are impaired as
defined under IFRS accounting regulation (IAS 39) and/or classified as
greater than 90 days in arrears.
the SME and CRE sectors is significantly higher.
The scale of residential mortgage arrears and the drift into longterm arrears is a particular cause of concern. At the end of
September 2013, the value of principal dwelling house (PDH)
Chart 31: Domestic banks’ asset quality by sector
and geography (2013 Q3)
and buy-to-let (BTL) mortgages greater than 90 days past due,
coverage ratio (per cent)
90
coverage ratio (per cent)
90
of each category’s outstanding balance. Despite a fall of 10.3
80
80
per cent since September 2012, the outstanding stock of all
70
70
mortgages in early arrears stood at €8.8 billion in September
60
2013 (Chart 32).
50
arrears cases ensures that the transition into longer-term arrears
IE
60
€23.2bn
€10.4bn
UK
50
40
IE
30
€22.5bn
UK
IE
€89.5bn
40
€15.6bn
30
UK
20
10
10
0
0
10
35
The current low cure rate
36
of mortgage
continues to grow. The value of PDH mortgages in arrears for
over two years increased by 60 per cent since the third quarter
20
€34.3bn
0
reached €18.9 billion and €8.9 billion, or 17.4 and 29.3 per cent
20
30
40
50
60
impairments (per cent)
Mortgage
SME/Corporate
70
80
90
while almost 12 per cent of the value of BTL mortgages is also in
arrears for at least two years.
CRE
37
A recovery of the domestic banks relies on a resolution of the
Notes: Data are consolidated. Impaired loans are expressed as a
percentage of lending to that particular sector. Size of circle represents
the share of overall lending to that particular sector.
mortgage arrears issue in particular. The efforts of lenders to
address the problem have proven largely inadequate to date.
Banks have tended to favour short-term forbearance measures,
Chart 32: Value of mortgage accounts in arrears
by number of days past due (2012 Q3-2013 Q3)
€ billions
12
of 2012 and now accounts for 6 per cent of all PDH mortgages
particularly interest only arrangements. However, the share of
€billions
12
restructures accounted for by interest only or reduced payment
arrangements (interest plus some capital) made up 45 per cent
10
10
8
8
6
6
of the restructures granted to PDH and BTL borrowers according
to September 2013 data. This was down from 52 per cent at the
end of June 2013, indicating a move away from short-term
38
arrangements.
4
4
2
2
0
<90 days
0
As a consequence of the lack of progress on mortgage arrears,
90><180 days
BTL 12Q3
180><360
days
PDH 12Q3
360><720
days
BTL 13Q3
>720 days
a
target-based
framework,
Resolution Targets
39
known
as
Mortgage
Arrears
(MART) was unveiled by the Central Bank
in March 2013 (see Box 6). Under the MART, banks are subject
PDH 13Q3
Notes: PDH refers to primary dwelling house; BTL refers to buy-to-let.
33
to public targets and must propose sustainable solutions for 50
per cent of mortgage debtors in more than 90 day arrears by the
The coverage ratio is calculated by dividing the value of provisions for impaired loans by the value of impaired loans.
As part of this exercise a detailed inspection of provisioning procedures and policies has taken place, involving loan file sampling and review, collateral value assessment, inspection of
loan workout units and validation of loan loss forecasting models. The AQR ensures that provisions are consistent with the Central Bank’s updated “Impairment Provisioning and Disclosure
Guidelines”.
35
Early arrears are defined here as mortgages in arrears of less than 90 days.
36
The cure rate is the rate at which defaulted accounts return to performing status.
37
For more information, see Goggin, J. (2013), “Mortgage Arrears in Ireland; Introducing the Enhanced Quarterly Statistics”, Central Bank of Ireland Quarterly Bulletin 4.
38
Switching a distressed borrower to an interest only (IO) repayment structure has been a common form of forbearance offered by lending institutions in recent years. For more see Box 3.
39
For more details see Central of Ireland (2013) ‘New Mortgage Arrears Targets and Consultation on Review of the CCMA’. Central Bank of Ireland Press Release, 13 March.
34
22
Chart 33: Aggregate proposed sustainable
mortgage solutions as reported (2013 Q2)
no. of accounts
end of 2013.
no. of accounts
While it is still too soon to assess the impact of the MART, and
27,000
27,000
24,000
24,000
21,000
21,000
Q2 and Q3, it is clear that there is progress and a more
18,000
18,000
concerted effort on behalf of banks to engage with distressed
15,000
15,000
borrowers to find durable solutions (Chart 33). However, the
12,000
12,000
data also point to a greater emphasis on the initiation of legal
9,000
9,000
proceedings so far, indicating repossession, rather than more
6,000
6,000
innovative alternatives, as a preliminary proposal.
3,000
3,000
0
PDH
Target
Actual (surrender/legal)
while the banks have all reported compliance with the targets for
40,41
The exposure of the domestic banks to SME/corporate and CRE
0
BTL
Actual (restructures)
portfolios is also substantial, representing 19 per cent and 18 per
cent of the domestic banks’ aggregate loan book, respectively.
Notes: Data are based on unaudited and unchallenged figures provided
by the main mortgage lenders in accordance with their June 2013 MART
requirements.
Impairment rates are noticeably higher than residential mortgage
portfolios. The latest data indicate that impaired SME/corporate
loans have risen from 24 per cent in 2012 Q2 to 27 per cent in
Chart 34: Domestic banks’ rate of SME/corporate
& CRE impaired loans (2013 Q3)
2013 Q3 while CRE NPLs went from 51 per cent to 61 per cent
42
over the same period (Chart 34). As with residential mortgage
per cent
per cent
70
70
arrears, action needs to be taken to repair banks’ balance
60
60
sheets and ensure their future viability, as well as protecting
50
50
employment in the SME/corporate sector. The Central Bank has
40
40
insisted that arrears management strategies are improved and
30
30
restructuring targets have been set to encourage banks to move
20
20
10
10
0
0
11
Q2
Q3
Q4
12
Q2
Q3
Q4
13
Q2
distressed SME borrowers from short-term forbearance to
longer-term resolutions (See Box 1).
The extent of the arrears problem in both the SME and mortgage
Q3
sector means it will take a considerable time to resolve and the
% Impaired CRE loans
% Impaired SME/corporate loans
prospect of a successful outcome is also likely to hinge on the
nature of developments in the wider economy and property
Notes: Data are consolidated.
markets (see Sections 2.1, 2.2 and 2.3).
Funding
Since March 2013, there has been progress in reducing official-
Chart 35: Funding profile of domestic banks
€ billions
€ billions
400
400
300
300
200
200
100
100
sector funding support aided by balance sheet deleveraging,
which has decreased the funding needs of domestic banks by
approximately €12 billion (Chart 35). Although short-term funding
(i.e., less than one month) has declined marginally since the last
Review, it still accounts for 47 per cent of funding and
refinancing risk, therefore, remains elevated (Chart 36).
0
0
Dec 10
Dec 11
Sep 12
Dec 12
Mar 13
Oct 13
Customer deposits
ECB/CB borrowing
Debt capital markets
Interbank deposits & repo
Eurosystem borrowing accounts for 38 per cent of the longerterm funding; hence, domestic banks face the dual challenge of
both reducing central-bank funding while at the same time
lengthening the maturity of market funding.
The phasing out of the Eligible Liabilities Guarantee (ELG)
Notes: Data are consolidated. CB refers to the Central Bank of Ireland.
Last observation 31 October 2013.
Scheme since March 2013 has seen a reduction in covered
liabilities. By September, just over 9 per cent of domestic banks’
liabilities were covered by the ELG compared with approximately
40
The banks argue that many of these cases involve un-co-operative borrowers who have not engaged in the resolution for a protracted period and who have amassed a substantial
arrears balance. However, it is important to note that these figures have not yet been subject to independent verification.
41
A total of 209 PDH properties were repossessed by lenders in the third quarter of 2013, of which 76 were on foot of a court order. Examples of alternative solutions include term
extensions or split mortgages. However, it is important that whatever action is taken is appropriately designed. Furthermore, while account may be taken of future improvements in the
borrower’s circumstances, any solution must also provide the borrower sufficient assurance of affordability at the time of initiation and in the future.
42
If loans, classified as “watch upper” and “watch lower” by domestic banks are included with impaired loans, the percentage of “vulnerable” SME/Corporate loans in 2013 Q3 rises to 45
per cent while the equivalent figure for CRE is 78 per cent.
23
Chart 36: Maturity profile of domestic banks
28 per cent in March. At the same time there has been no
€ billions
€ billions
significant change in the composition of funding.
60
60
50
50
40
40
30
30
liabilities decreased. The reduction in retail and corporate
20
20
deposits of €4.3 billion and €1.1 billion respectively have been
10
10
partially offset by an increase in deposits by non-bank financial
0
0
< 1 month
<6months
August 11
Despite a €3 billion outflow of customer deposits over the past
seven months to October, this category’s share of total funding
increased to 64 per cent in October 2013 as overall funding
institutions (NBFI) of €2.4 billion. The decline in retail deposits
6-12 months
>12 months
was primarily driven by a reduction in UK deposits which, in part,
March 13
October 13
can be explained by greater price sensitivity in the UK market to
January 12
a reduction in deposit rates. While the rise in NBFI deposits is
positive, the increasing reliance on this type of deposit raises the
Notes: Data are consolidated. Last observation: 31 October 2013.
sensitivity of banks’ funding to individual counterparties.
Market sentiment towards domestic banks had shown signs of
improvement at the time of the last Review. This general trend
has continued since then, although bond yields rose during the
Chart 37:Domestic banks’ covered bond yields
per cent
4.0
summer months before declining thereafter (Chart 37). The
per cent
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
tentative return to market funding that began late last year has
continued into 2013. In terms of domestic banks, both Allied Irish
Banks plc (AIB) and Bank of Ireland (BOI) continued to issue
new debt with the latest placements occurring in November.
Although the vast majority of activity has been secured, there
has also been unsecured issuance during the year. Despite this,
the share of wholesale funding as a percentage of institutions’
overall funding has not increased between late-March and endOctober.
Nov
12
Jan Feb Mar May Jun
13
13
13
13
13
BOI 3.125% Nov 2015
Jul
13
Sep Oct Nov
13
13
13
AIB 3.125% Dec 2015
A comparison of recent issuances reveals domestic banks, on
average, pay a premium over European counterparties reflecting
their perceived riskiness (Chart 38). Vulnerabilities in domestic
Source: Bloomberg.
Notes: Last observation is 28 November 2013.
banks’ asset books continue to weigh on their credit ratings.
The longer-term trend of declining deposit rates has continued
(Chart 39). While there have been some marginal increases in
Chart 38: Asset swap spread of EU bank covered
bonds by maturity
asset swap spread (bps)
asset swap spread (bps)
300
300
250
250
200
200
150
150
100
100
50
50
0
0
interest rates on maturities greater than one year, Irish banks
have seen the overall cost of new deposit funding decline by 34
basis points since the end of March. The interest rate on the
stock of existing deposits has declined by 36 basis points.
-50
2012
2014
2017
2020
2023
2025
2028
-50
2031
Maturity date
domestic banks
EU sample
trend line
However, as noted previously, domestic banks are still incurring
higher interest expenses on deposits than their international
counterparts (Chart 28). This reflects the higher risk premia
associated with domestic banks.
A further risk that has emerged during the crisis is the increased
encumbrance of domestic banks’ assets due to a higher reliance
on collateralised borrowing from the Eurosystem. Therefore
banks have a smaller pool of assets for secured market funding.
This development highlights
Source: Bloomberg and Central Bank of Ireland.
Notes: Sample of 22 European banks that issued covered bonds from
parents located in Denmark, Finland, France, Guernsey, Germany Italy,
Norway Spain, Sweden, Switzerland and UK. Data as at 28 November
2013.
the importance of reducing
dependence on Eurosystem borrowing and increasing the
diversity of stable funding sources (i.e., both secured and
unsecured) once market conditions normalise.
The changing regulatory environment and the introduction of
24
Chart 39: New and existing deposit rates
liquidity requirements will present challenges for the domestic
per cent
5
per cent
5
4
4
3
3
2
2
1
1
banks in the medium term. As EU banks move to implement the
requirements
under
the
Capital
Requirements
Directive
IV/Capital Requirements Regulation (CRD IV/CRR), market
pressure is likely to lead to early adoption and disclosure of the
requirements. While domestic banks continue to report progress
towards regulatory targets under the Advanced Monitoring
43
Framework , current funding conditions imply that domestic
banks may continue to lag other EU banks in the near term.
Solvency
0
Sep 03
Sep 05
Sep 07
Sep 09
Sep 11
Existing business
0
Sep 13
New business
The solvency ratios of the domestic banks have stabilised
following recent declines. Capital levels, however, are vulnerable
Notes: Data relate to new and existing business rates offered to
households and NFC’s conducted through resident offices of banks
operating within the State. Last observation: September 2013.
to adverse macroeconomic shocks. The outcome of the Balance
Sheet Assessment (BSA) and the 2014 stress-testing exercises
may imply that solvency ratios will be revised down.
Chart 40: Solvency ratios, domestic banks
The domestic banks are currently capitalised in excess of the
per cent of RWA
units
25
per cent of RWA
25
minimum of a 10.5 per cent Core Tier 1 ratio, as stipulated under
the
FMP
(Chart
40).
Operating
losses,
deleveraging,
20
20
15
15
10
10
Central Bank led to a rise in impairments for some banks.
5
5
The Central Bank has undertaken a balance sheet assessment
0
Mar 08
0
amortisation and higher provisions have, however, contributed to
recent declines in Tier 1 capital and risk-weighted assets (Chart
41). New provisioning standards introduced in May 2013 by the
of the domestic banks as part of the Financial Measures
Mar 09
Mar 10
Mar 11
Total solvency
Mar 12
Mar 13
Tier 1
Programme. The BSA includes a review of provisioning
standards, classifications of non-performing loans and the
Core Tier 1
calculation of risk-weighted assets. This process determined the
Notes: Data are consolidated and exclude IBRC. Last observation:
September 2013.
adequacy of current provisions based on a point-in-time
analysis. It is intended that the BSA will form part of a broader
assessment by the ECB at European level which also includes
an overall risk assessment and a stress-testing exercise in
Chart 41: Change in level of Tier 1 capital and risk
weighted assets, domestic banks
coordination with the European Banking Authority in 2014.
€billions
The domestic banks must direct their capital strategy towards
€billions
350
35
300
30
(see Box 7). Although these will be introduced on a phased
250
25
basis, banks will be required to disclose pro-forma ratios and
200
20
there may be market pressure to raise capital buffers in advance
150
15
100
10
would have a negative impact on domestic banks’ capital ratios.
50
5
Recent budgetary announcements, however, on the removal of
0
the 50 per cent restriction on the use of DTAs related to NAMA
0
Mar 08
Mar 09
Mar 10
RWA (lhs)
Mar 11
Mar 12
Mar 13
Tier 1 capital (rhs)
Notes: Data are consolidated and exclude IBRC. Last observation:
September 2013. Light blue line refers to July 2011 Government capital
injection.
meeting forthcoming capital requirements under CRD IV/CRR
of the deadlines. Future regulatory changes on the eligibility of
DTAs, pension deficits and the Government’s preference shares
will have a positive capital effect and help to offset these
deductions in part.
In the longer term, normalisation of the capital structure of
domestic banks with a reduction in state ownership is an
43
The August 2012 Memorandum of Understanding, under Ireland’s EU-IMF Programme of Financial Support, introduced an advanced monitoring framework for banks’ funding and
liquidity, which substituted the Loan to Deposit Ratio targets with nominal deleveraging requirements and a Net Stable Funding Ratio benchmark as outlined in CRD IV.
25
Chart 42: Foreign-owned banks’ profitability
€ billions
5
important target to ensure viability.
per cent
0.0
0
-5
-10
08
09
10
Dividend income
11
-0.1
Foreign-owned resident banks are an important element of the
-0.2
Irish banking system, both as providers of credit and as a source
-0.3
of employment. The group of banks considered here includes
-0.4
large International Financial Services Centre (IFSC) banks such
-0.5
as Citibank Europe plc, Merrill Lynch International Bank, Depfa
-0.6
Bank plc, UniCredit Bank Ireland plc, and retail banks such as
12
Jun 13
Net interest income
Fees & commissions
Trading income
Other income
Admin costs
Impairments
Pre-tax profits
44
Foreign-owned resident banks
Ulster Bank Ireland Limited and KBC Bank Ireland, amongst
others and employed over 11,000 people as at December 2012.
The sector has been undergoing a period of consolidation and
Return on assets (rhs)
deleveraging since the financial crisis and this has continued in
Notes: Data are collected in accordance with EBA’s FINREP reporting
requirements. Impairments include provisions. Data as at June 2013.
2013. The international regulatory environment has led banks to
review their organisational structures resulting in reduced
international operations and rationalisation of legal entities.
Chart 43: Foreign-owned banks’ impairment rates
Total assets of foreign-owned resident banks in Ireland declined
per cent of total exposures
by 13 per cent in the first nine months of the year, driven by a 14
per cent of impaired exposures
40
35
60
per cent fall in loans and receivables. Total assets of these
50
banks have fallen by 18 per cent since September 2012 and by
30
40
25
20
15
30
Overall profitability for the sector improved in the first half of
20
2013 and half-year pre-tax profitability was positive for the first
10
10
5
47 per cent since December 2008.
time since 2009 (Chart 42). Profitability of these banks falls into
two categories. Banks with a significant retail presence in the
0
0
Sep 10
Sep 11
Sep 12
Irish market continued to make losses due to high impairments,
Sep-13
with an impairment rate of 33.4 per cent at the end of September
Total foreign-owned banks
Foreign-owned banks with Irish retail exposure
(Chart 43). However, impairments in the first half of 2013 were a
Total coverage ratio (rhs)
quarter lower than that of 2012. Banks which can be loosely
Notes: Data are consolidated. Data as at September 2013.
characterised as having an international focus continued to
make profits in 2013, boosted by trading income (Chart 42).
The funding patterns of foreign-owned banks remained broadly
Chart 44: Foreign-owned banks’ solvency
stable with little change in the maturity distribution of funding
per cent of risk-weighted assets
sources to September 2013.
per cent of risk-weighted assets
45
Total funding requirements fell by
10 per cent in the year to September 2013 in line with the
30
30
25
25
20
20
total funding has fallen from 46 per cent to 38 per cent in the
15
15
same period. This has been replaced by deposits (mainly in
10
10
those banks with Irish retail exposure) and longer-term market
5
5
decline in assets. Intergroup funding remains the most important
source of funding for these banks, although its contribution to
funding. The reliance of these banks on support from their
0
Sep-08
Sep-09
Sep-10
Core tier 1 ratio
Sep-11
Sep-12
Solvency ratio
0
Sep-13
Tier 1 ratio
Notes: Data are consolidated. Data as at June 2013.
parent bank declined in the last year, but remains a potential
channel for contagion.
Capital ratios for the sector continued their upward trend and
Core Tier 1 capital for the sector reached 20 per cent in
September 2013 (Chart 44).
While provisions taken through the income statement may have
started to fall, the low interest rate environment and the
44
45
The term foreign-owned resident banks refers here to a selection of the larger banks whose ultimate parent is located outside the State.
Analysis of funding focuses on a smaller subset of the main foreign-owned banks.
26
Chart 45: Credit unions, share of Irish deposits,
loans and assets
per cent
80
increasing cost of compliance and regulation could continue to
per cent
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
Irish private sector
deposits
Domestic banks
loans to Irish
residents
Share of total Irish
credit institution
assets
Other institutions
area sovereign debt crisis or tax arrangements could affect
decisions made by foreign parents regarding Irish subsidiaries.
Credit unions
The 393 credit unions currently operating in Ireland remain a
relatively small part of the domestic banking sector in terms of
assets and members’ savings (Chart 45). Credit unions continue
to face significant challenges to their business model. Declines
in lending are putting pressure on what are already weak loan to
asset ratios. The level of loan arrears remains high, while the
Credit unions
introduction of new debt settlement arrangements and the
Notes: Data are resident statistics for all credit institutions in Ireland.
Data as at 30 September 2013.
personal insolvency regime are likely to lead to a further
deterioration in asset quality (Chart 46). Maturing legacy books
are reducing interest income and investment yields are on a
Chart 46: Credit union arrears
€ billions
7
weigh on the profitability of this sector. Uncertainty over the euro
per cent
21
downward path at a time when the investment portfolio
continues to grow. All of this is occurring while embedded costs
6
18
continue to rise. These factors are reflected in the average
5
15
dividend paid for 2012 which was below 1 per cent.
4
12
3
9
2
6
Union’s balance sheet to Permanent TSB. In January 2012, the
1
3
Central Bank identified that the credit union’s regulatory reserves
0
0
had fallen below the required level and there were concerns
2009
2010
2011
2012
Gross loans outstanding (lhs)
Gross loans in arrears (lhs)
Average arrears rate (rhs)
Source: Central Bank of Ireland
Notes: Arrears are defined as nine weeks past due.
Sep 13
Following an application by the Central Bank in November 2013,
the High Court approved the transfer of Newbridge Credit
about its financial position. A special manager was appointed at
that time to run the day-to-day activities of the credit union.
However, following a thorough assessment, it was determined
that the only viable resolution of the financial difficulties was a
transfer to another entity.
A significant number of new legislative requirements for credit
unions recently commenced under sections of the Credit Union
and Co-operation with Overseas Regulators Act 2012 arising
from recommendations contained within the Report of the
Commission on Credit Unions. The new legislation is designed
to support the development of a strengthened regulatory
46
framework.
A core recommendation of the Commission was that the credit
union sector should be restructured on a voluntary, incentivised
and time-bound basis. Restructuring may come about because
of identified weaknesses in a particular credit union or a
proactive strategic decision by a credit union or group of credit
unions to undertake a re-organisation. Credit unions that
experience a fall in their capital levels below the minimum
regulatory capital requirement of 10 per cent will be required to
either recapitalise or seek a restructuring solution under the
Credit Union Restructuring Board (REBO).
47
The winding up of
insolvent credit unions, where necessary, is also provided for in
legislation.
46
The legislation provides for the development of a regulatory framework that incorporates prudential and governance requirements, addresses gaps in the existing regulatory framework
and sets out clearly the requirements for credit unions, their boards and management.
47
REBO has been set up on a statutory basis under the Credit Union and Co-operation with Overseas Regulators Act 2012.
27
Box 6: Mortgage arrears framework
The issue of mortgage arrears is a key challenge for Ireland resulting from the financial crisis. Mortgage arrears have reached
unprecedented levels with the number of accounts in arrears more than doubling over a three-year period. The level of mortgage
arrears raises consumer protection and prudential banking issues. Individual circumstances vary greatly, and resolution requires a
broad range of actions. Increased arrears affect bank capital and the ability of the banks to lend effectively. Designing policy
parameters for banks’ mortgage modification schemes is important to the process of recognising losses and working out bad debts to
repair the Irish banking sector. This Box presents an overview of the principal actions taken by the Central Bank in order to deal with
the mortgage arrears crisis.
Mortgage Arrears Resolution Strategies
In 2011, the Central Bank intensified its engagement with lenders in relation to their Mortgage Arrears Resolution Strategies (MARS).
During 2012, the Central Bank commenced a programme of rolling reviews with the main lenders. It also maintains intensive on-site
reviews of banks’ mortgage arrears operational capabilities.
Another component of the strategic approach taken by the Central Bank was the once-off income survey of mortgage holders initiated
in 2012. This was designed to capture detailed information on affordability factors. In addition, a regular survey of property
professionals was put in place. It gauges industry views in respect of property prices and illustrates national and regional market
dynamics.
Enhanced Mortgage Arrears Framework
In March, the Central Bank introduced an enhanced mortgage arrears framework. This included the publication of quantitative
performance targets for the main mortgage banks in terms of offering sustainable long-term solutions for mortgage arrears customers,
referred to as Mortgage Arrears Resolution Targets (MART), and a revised Code of Conduct on Mortgage Arrears (CCMA). Further
targets were set in September in relation to proposed solutions offered and also in terms of concluded arrangements.
The enhanced framework applies to: ACC Bank; Allied Irish Banks plc; Bank of Ireland; KBC Bank Ireland; Permanent TSB; and Ulster
Bank in relation to both principal dwelling house (PDH) and buy-to-let (BTL) mortgages. Banks must meet the specific targets set by
the Central Bank. The targets include proposing and concluding sustainable solutions for borrowers in arrears of over 90 days on their
mortgages. The targets will become progressively more demanding. By end 2014, it is planned that the vast majority of borrowers in
distress will have been proposed a sustainable offer. There will be public disclosure of the performance of lenders against the targets.
A sustainable solution must, inter alia, provide the borrower with clarity on how much of their income is expected to be used for debt
service over the full term of the (modified) loan, and how any shortfall will be treated at the end of the term.
By the end of June 2013, approximately 25,400 proposals to PDH borrowers and 9,500 proposals to BTL borrowers, representing 27
per cent of all borrowers in more than 90 day arrears, were made. Further targets, requiring mortgage lenders to reach sustainable
conclusions with at least 15 per cent of borrowers more than 90 days in arrears before the end of the year and 25 per cent by March
2014, were announced in September 2013.1 Other initiatives, such as the enactment of the personal insolvency legislation, the
establishment of the Insolvency Service of Ireland and the removal of previous legal obstacles to the instigation of repossession
proceedings, should encourage lenders and borrowers to step up their efforts to find workable solutions.
In addition, a review of the CCMA has been completed and a revised Code was published on 27 June, effective from 1 July 2013. 2 The
revised Code provides an integrated and cohesive package of consumer protection measures to facilitate the appropriate resolution of
each borrower’s arrears situation. It also seeks to ensure that borrowers are treated in a fair and transparent manner by their lender.
The focus of the Central Bank in 2013 continues to be driven by prudential and consumer protection objectives. The mortgage arrears
situation is one of the most serious social and economic issues currently facing Ireland. It necessitates engagement of institutions
which are both within and outside the remit of the Central Bank. Although the banks have begun to step up their interaction with
borrowers the mortgage arrears issue is far from resolved at this stage and intensification of efforts by all parties involved is paramount
for a successful resolution.
________________________
1
2
For more information see “Central Bank Statement on Mortgage Arrears Resolution Targets: “Concluded” Arrangements”.
For more information see Central Bank of Ireland, Code of Conduct on Mortgage Arrears.
28
Box 7: New capital rules for EU financial institutions
This Box presents an overview of the main regulatory capital rules applicable to Irish institutions from 1 January 2014 under the new
Capital Requirements Directive (CRD IV) and Capital Requirements Regulation (CRR). The CRD IV/CRR package incorporates the
new Basel Committee on Banking Supervision (BCBS) standards generally known as Basel III. 1 These standards were issued as a
response to the banking crisis and are designed to support financial stability and to increase the financial sector’s resilience to shocks.
CRD IV/CRR will harmonise prudential rules across the EU, creating a single rule book, and will amend and replace the existing CRD.
The Regulation will become directly applicable in all Member States from 1 January 2014. The Directive will be transposed into national
legislation during the second half of 2013 and will be applicable from 1 January 2014.
The rate at which institutions are expected to make the transition to the new capital requirements is at the discretion of the Central
Bank subject to them being fully-implemented by the specified dates in CRD IV/CRR.2 Grandfathering provisions for capital instruments
that no longer meet the new eligibility requirements are also provided for. 3
CRD IV/CRR, the main features of which are outlined below, aim to enhance the quantity and quality of institutions’ regulatory capital
and to give regulators a broader range of tools to combat emerging cyclical and macro-prudential risks.
CRR Capital Requirements

Higher regulatory capital requirements; minimum common equity Tier 1 capital (CET1) ratio increases from 2 per cent to 4.5
per cent of risk-weighted assets, Tier 1 from 4 per cent to 6 per cent and total capital ratio remains at 8 per cent.

The quality of regulatory capital is set to improve through stricter eligibility criteria for capital instruments; the standard form of
capital will be common shares.

Regulatory adjustments to be made to CET1, e.g., mandatory deductions of certain balance sheet items whose realisable
value may be uncertain in times of stress.

More detailed public disclosures of regulatory capital.
CRD IV Capital Buffers – to be introduced as additional capital requirements

Conservation Buffer of 2.5 per cent comprising CET1; capital buffers which can be drawn down if losses are incurred without
automatically breaching basic capital requirements.

Countercyclical Capital Buffer of between 0 per cent and 2.5 per cent comprising CET1- dependent on the economic cycle.

Global Systemically Important Institution Buffer (G-SII) of between 1 per cent and 3.5 per cent comprising CET1 - mandatory
buffer.

Other Systemically Important Institution Buffer (O-SII) of up to 2 per cent comprising CET1 - optional buffer.

Systemic Risk Buffer – no limit but certain procedures must be followed depending on the buffer level required.

If the combined buffer requirement (conservation buffer plus other applicable buffers) is breached, distributions (e.g.,
dividend and bonus payments) are restricted.
With the exception of the Conservation Buffer, exercise of the other capital buffers is at the discretion of an authority designated to
exercise each function or the competent authority, as determined by the Member State. The applicable authority (or authorities) has yet
to be confirmed by the Department of Finance. Under the CRD IV provisions, each of the buffers, with the exception of the G-SII and
O-SII Buffers, may be introduced from 1 January 2014.
CRR Article 458 permits designated authorities to apply higher capital ratios, among other measures, for domestically authorised
institutions where the buffers referred to above are deemed inadequate to deal with the systemic or macro-prudential risks posed.
These measures aim to improve the banking sector’s loss-absorbing capacity. By reducing the probability of default, the intention is to
improve the chances that depositors and debt holders are repaid without resort to taxpayers’ funds. While the transition to full
implementation may present challenges, this is expected to support financial stability in the longer term and means that Irish institutions
should be better equipped to withstand unexpected losses without withdrawing credit to the economy.
________________________
1
Basel III: A global regulatory framework for more resilient banks and banking systems (Original version: Dec 2010, Revised version: June 2011) and Basel III: International
framework for liquidity risk management, standards and monitoring (Original version: Dec 2010, Revised version: Jan 2013).
2
Higher ratios are to be phased in by 1 January 2015; State aid, deductions and prudential filters are generally to be phased out/in by end-2017; and non-compliant non-state aid
instruments are to be phased out by end-2021.
3
Further information may be found in the Public Consultation Paper on Competent Authority Discretions and Options in CRD IV and CRR.
29
3.3 Insurance sector
The weak macroeconomic climate and sustained low interest rates remain the key concerns for the domestic
and international insurance sectors. Profitability is constrained by weak premium growth, in the non-life sector
in particular, and difficulties in generating adequate investment income.
The Irish insurance sector is diverse in nature. There is a
Chart 47: Solvency position of life insurers
per cent
per cent
domestic life and non-life market and a substantial international
1100
1100
1000
1000
900
900
800
800
700
700
600
600
The performance of the life insurance sector is showing tentative
500
500
signs of improvement since the last Review although challenges
400
400
300
300
200
200
solvency positions continue to exceed the regulatory minimum
100
100
Sept 13
with the majority of insurers strengthening their solvency ratios in
Dec 09
Dec 10
Dec 11
Dec 12
sector. The latter covers a range of product types, with particular
concentrations in reinsurance and variable annuity services.
Life sector
presented by the macro-financial environment persist. Insurers’
Median solvency
the third quarter of 2013 after some declines in the first quarter
Minimum solvency requirement
(Chart 47). The improvement in solvency ratios is largely a result
Notes: Time varying sample of life insurers. The box at each point
shows the interquartile range of solvency positions for a sample of the
largest life insurers by gross written premium. Data are quarterly.
of increased values, as yields have fallen, of fixed income
securities, which represents the main asset class across the
sector.
New business premium income for Irish risk business increased
by 7 per cent in the first half of 2013 compared to the same
period in 2012, suggesting that the domestic life market is
Chart 48: Claims analysis of life insurers
€ billions
€ billions
stabilising. However, it is unclear at this stage whether this
18
18
represents a change in consumer sentiment or is the result of
16
16
some bulk annuity
14
14
schemes as they continue de-risking and transfer some
12
12
exposure to the life insurance sector.
10
10
8
8
Elevated lapse
6
6
current lapses well above the long-term assumptions (Chart 48).
4
4
Firms recoup the set-up costs of a life assurance policy over the
2
2
life of the policy. The early surrender of policies, therefore,
0
0
02
03
04 05
Death
06 07
Maturity
08 09 10 11 12e 13e
Surrenders/Lapse
49
48
purchases by defined benefit pension
rates remain a feature of the market with
impacts negatively on profitability. There are tentative signs that
lapse rates are declining with a slow trend away from the levels
of 2011 and 2012 but this remains a significant challenge for
Notes: Types of life insurance claims are as a percentage of life
insurance funds. A surrender/lapse is when a policy is relinquished for
some cash value. A maturity is when the policy commences paying out
an endowment. Death benefit is the payment made when the
policyholder dies. The peak in surrenders in 2006-2007 is due to the
withdrawal of funds from Government Special Savings Incentive
Accounts (SSIAs).
firms.
The low interest rate environment is considered to be a
significant risk to the insurance sector internationally. However,
the domestic life sector is largely insulated from this risk as the
majority of life business written in Ireland is unit-linked in nature.
This means investment risk is borne by the policyholder rather
48
49
Bulk annuity describes a contract between a pension scheme and an insurance company whereby the insurance company insures some or all of the liabilities of the pension scheme.
A policy lapse is the voluntary discontinuance or surrender of a policy before the expected maturity.
30
50
than the insurer.
Chart 49: Combined ratio of non-life insurers
per cent
per cent
120
120
100
100
cost of providing the investment guarantee in their products and
80
80
represents a challenge to their business models. To understand
60
60
40
40
completed in the first quarter of 2014.
20
20
The low interest rate environment could also encourage firms to
0
alter their strategic asset allocations and their associated risk
Firms offering variable annuities
51
are particularly exposed to the
persistent low interest rate environment as this increases the
better the resilience of the sector to this scenario, the Central
0
04
05
06
07
08
09
10
11
12
13
Bank has launched a stress testing exercise which is due to be
profile in a “search for yield”. Implications of shifts in asset
allocation need to be carefully evaluated by companies from a
Notes: Data for 2013 are based on end-September 2013 figures. A
combined ratio below 100 per cent indicates that a company is making
underwriting profit while a ratio above 100 per cent means that it is
paying out more money in claims that it is receiving from premiums.
credit quality perspective to ensure a proper balance between
risk and return.
Non-life sector
Non-life insurers are also contending with testing economic
conditions in Ireland and Europe. The solvency position of a
number of non-life insurers weakened slightly during the first half
of 2013 although solvency levels remain in excess of the
regulatory minimum. Premium income growth in the Irish risk
business was stagnant in the first half of 2013 despite the
Chart 50: Gross return on investments for non-life
insurers
per cent
per cent
mandatory nature of some classes of non-life insurance. Privatesector spending capacity remains constrained by reduced
disposable
income
and
profitability.
Competitive
market
9.0
9.0
8.0
8.0
7.0
7.0
premia and underwriting profitability. Combined ratios (i.e.,
6.0
6.0
incurred losses and expenses as a proportion of premiums
5.0
5.0
earned) are just above 100 per cent and thus insurers are
4.0
4.0
paying out more in claims than they have received in premiums
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
Dec 11
Dec 12
Mar 13
Jun 13
Sep 13
Median
conditions are also resulting in continued downward pressure on
in
2013
(Chart
49).
Accordingly,
firms
must
advance
underwriting discipline in the current competitive environment.
The last Review noted that the Central Bank had increased its
supervision of non-life reserving and pricing. The Central Bank
carried out an onsite review of claims cases in RSA Insurance
Ireland in August 2013 where it identified an issue with regard to
Notes: Gross return includes investment income and profit on sale of
investments including any unrealised gains or losses on investments
expressed as a percentage of opening investments. The box at each
point shows the interquartile range of investment returns for a sample of
the largest non-life insurers by gross written premium. Data for March,
June and September are year-to-date figures annualised.
delays in increasing case reserves on large claims in a timely
manner. The RSA Group is engaging with the Central Bank on
an on-going basis as it works to resolve these matters.
Pressures in underwriting profitability increases non-life insurers’
reliance on investment income to maintain overall profitability.
However, the low yield environment presents difficulties for
insurers in this regard. Investment returns were positive for most
Irish non-life companies during the course of 2013, but lower
than in 2012 when investment portfolios benefited from falling
sovereign yields. The latter increased valuations and generated
unrealised gains (Chart 50). However, the compression of
income returns may tempt insurers to seek out higher revenues
from riskier assets. Over the past two years, Irish non-life
50
51
See EIOPA (2013) Risk Dashboard, June 2013 and EIOPA (2013), Financial Stability Report, June 2013.
Variable annuities are life-insurance products with investment guarantees.
31
Chart 51: Returns on catastrophe bonds and other
asset classes
index
240
index
240
insurers have substituted part of their sovereign bond holdings
with corporate bonds which offer higher returns. This strategy is
not without risk as the continued weakness in economic activity
poses increased credit risk in the corporate sector. Irish insurers’
190
190
140
140
90
90
40
40
conservative investment approach, however, has meant that
they are not substituting into other assets, such as equities and
structured credit, or engaging in non-core activities, such as
property and infrastructure lending.
While sustained low interest rates hamper insurers’ profitability
Jan
04
Jan
06
Jan
08
Jan
10
Jan
12
Nov
13
US corporate bond high yield return
Swiss Re Catastrophe Total Return
S&P 500
Source: Bloomberg.
in the long run, a sharp increase in interest rates could also pose
short term difficulties for the sector as it could result in realised
or unrealised investment losses. This underlines the importance
of maintaining strong underwriting results and asset quality to
ensure long-term resilience to the operating environment.
Reinsurance sector
The Irish reinsurance sector comprises subsidiaries of large
global reinsurance groups and the sector as a whole engages in
a diverse range of reinsurance activities, making direct
comparisons across firms difficult. Irish reinsurers’ global market
share increased from 3.1 per cent in 2011 to 4.5 per cent in
52
2012, with equal proportions of life and non-life business.
The global reinsurance sector, similar to the non-life sector, also
contends with the challenges low interest rates pose for
investment income and, therefore, profitability. However, a
secondary effect has been the influx of capital into the sector.
Low interest rates have prompted institutional investors, such as
pension funds, hedge funds and life insurers, to invest in
alternative asset classes, as offered by the reinsurance sector,
in a search for yield.
The property-catastrophe reinsurance sector offers higher
returns that are uncorrelated with other financial assets given the
nature of the underlying risk (Chart 51). These investment
vehicles take the form of ‘sidecars’
53
and insurance linked
securities (ILS) which invest in catastrophe bonds, for example.
New capital issuances in 2013 are expected to be of a similar
level to the record highs of 2007, adding to the oversupply of
reinsurance capacity. This is putting considerable downward
pressure on prices and profitability. The stability of this source of
capital has yet to be tested. An outflow of this capital source for
insurers could be precipitated by a return to higher interest rates
or a large catastrophe event. The downward pressures on
underwriting profitability may also prompt firms to move into
other lines of business where they have less expertise and into
less well-modelled areas of catastrophe risk.
52
Estimate of Irish reinsurers’ market share is based on reinsurance listings in Standard & Poor's (2013) 'Global Reinsurance Highlights 2013'.
A reinsurance sidecar is a financial structure that allows investors to take on the risk and return of a book of insurance policies written by an insurer or reinsurer. The (re)insurer pays the
premiums to the entity if the investors place sufficient funds in the entity to meet claims if they arise.
53
32
3.4 Money market funds, investment funds and financial vehicle corporations
Irish-resident money market funds, investment funds and financial vehicle corporations collectively manage
assets amounting to almost €2 trillion. However, domestic financial stability risks emanating from these sectors
are low. Investors in money market and investment funds are predominantly non-resident and assets under
management are mostly located abroad. Similarly, for financial vehicle corporations, the securitised loans are
generally sourced from foreign banks and the securitised debt securities sold to non-residents. Nevertheless,
these entities can provide some indications of global financial risks.
Chart 52: MMF total assets and components
€ billions
Money Market Funds
€ billions
400
400
Money market funds (MMFs) are an important source of funding
350
350
for the international financial system. Irish resident MMFs have,
300
300
in common with international experience, been subject to
250
250
significant structural pressures in recent years. First, there were
200
200
substantial investor outflows from some MMFs in 2008 Q3, as
150
150
100
100
50
50
0
11Q2 Q3
Q4 12Q1 Q2
Q3
Q4 13Q1 Q2
Q3
the financial crisis developed. Secondly, yields in the highestrated money market instruments declined over the past couple
of years, in part, due to quantitative easing by central banks.
0
The performance of Irish MMFs was quite resilient up to 2012
Total assets
Debt securities
Loans
Q3 but has deteriorated since due to the low interest rate
Notes: The movement from 2011Q3 to 2011 Q4 includes €114 billion of
money market funds that were reclassified as investment funds.
environment. In many cases, average fund yields declined to
close to zero, when expenses were deducted. The value of
shares/units in MMFs declined by €13 billion, to €284 billion, in
the year to 2013 Q3 (Chart 52). MMFs, in turn, reduced both
holdings of debt securities and the volume of loans to other
entities. Rising global bond yields since late May appear to have
had only a limited impact on investor inflows in 2013 Q3. MMFs
Chart 53: Value of investment funds shares/units
remain a key source of funding for banks and leveraged
€ billions
investment activity in Europe and the US. However, there is
55
50
45
40
35
30
25
20
15
10
5
0
-5
€ billions
1,100
1,000
900
800
700
600
500
400
300
200
100
0
11Q2 Q3
Q4 12Q1 Q2 Q3 Q4 13Q1 Q2
Transaction Net Inflows (lhs)
Value of Investment Funds (rhs)
Q3
Notes: The movement from 2011 Q3 to 2011 Q4 includes €114 billion of
money market funds that were reclassified as investment funds.
some uncertainty over the impact of rising bond yields on MMFs.
Investment Funds
Investment funds cover a broad range of the investor risk
spectrum. Many bond and equity funds track various indices in a
passive manner while hedge and mixed funds have, in general,
relatively unconstrained investment strategies and tend to make
more use of leverage to finance asset purchases. Some
exchange traded funds (ETFs) are also highly leveraged.
Irish resident investment funds continued to expand strongly
over the past year. The value of shares/units increased by €109
billion, or 12 per cent, to €1,041 billion in the year to 2013 Q3
(Chart 53). Net inflows from investors are the main driving factor,
amounting to €106 billion. These inflows were relatively strong
for both hedge and mixed funds, which are generally seen as
attracting a higher risk appetite. The volume of loans taken out
by investment funds (which includes cash received under
repurchase agreements) is an indicator of leverage. It increased
significantly over the year to 2013 Q3, by €13 billion to €31
33
Chart 54: Total assets and number of reporting
Irish resident FVCs
€ billions
billion.
units
Both hedge funds and leveraged ETFs are an important part of
800
800
the global investment fund industry. Leveraged investment funds
700
700
often
600
600
instruments that can be particularly vulnerable at times of market
500
500
stress.
400
400
300
300
200
200
100
100
0
0
Q4 11 Q2 Q3 Q4 12 Q2 Q3 Q4 13 Q2 Q3
Total assets (lhs)
Number of reporting Irish resident FVCs (rhs)
employ
short-term
securities
lending
or
derivative
Financial Vehicle Corporations
Financial vehicle corporations (FVCs) are special purpose
vehicles that carry out securitisation transactions, the majority of
which involve converting securitised loans from banks into assetbacked debt securities. The global appetite among investors for
buying these asset-backed debt securities has been tempered
by the financial crisis, particularly with the freezing of
securitisation markets in 2007. In addition, it has become more
difficult for loan tranches to attain investment grade status.
Irish resident financial vehicle corporations declined steadily
from total assets of €576 billion in 2010 Q4 to €423 billion by
2013 Q3 (Chart 54) with the number of reporting vehicles
declining from 749 to 708 over the same period. This trend partly
reflects an inability to rollover maturing asset-backed debt
securities. The volume of securitised loans linked to Irish banks
also declined, with volumes decreasing by €3.3 billion to €41
billion in 2013 Q3. Despite these declines in asset values there
have been very tentative signs of stabilisation recently for the
sector as a whole. The number of vehicles, which had been
declining steadily, increased slightly over the last two quarters.
34
35
T +353 1 224 6278
F +353 1 671 6561
www.centralbank.ie
[email protected]
Bosca OP 559, Sráid an Dáma, Baile Átha Cliath 2, Éire
P.O. Box No 559, Dame Street, Dublin 2, Ireland
36

Macro-Financial Review - Central Bank of Ireland

Transcription

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