THE CENTRAL Bank will publish a strategy paper next Monday outlining how it plans to force banks to change their business plans to avoid them becoming excessively reliant on property lending and their earnings too concentrated in any one sector of the economy.
The policy paper will draw on the causes of the banking crisis identified in reports by the Central Bank governor Patrick Honohan and international banking experts Klaus Regling and Max Watson which were published last week.
The paper will outline the need to redraw the social contract around banking and to introduce reforms to restore trust and confidence in the system.
The domestic institutions made combined profits of €5.3 billion in 2006 and €5.8 billion in 2007, marking the peak years of the property boom, but posted losses of €3.7 billion in 2008 and €23.8 billion in 2009.
A spokeswoman for the Central Bank said that a key area of its focus over the coming years will be the steps to be taken to rein in excessive lending and to prevent over-concentration of earnings.
The paper, Banking Supervision: Our New Approach, aims to stimulate discussion on plans to impose limits on sectoral loan exposures across the industry.
“This would not be simple but warrants further examination in the case of systemically important lending institutions,” she said.
“Credit institutions must return to more prudent lending standard . . . and have credit policies, approved by their boards, appropriate to the institutions’ risk appetite.”
The paper will set out the Central Bank’s programme of “supervisory themes” to be reported on as they are completed.
One of the authors of the paper, Jonathan McMahon, the assistant director general for financial institutions supervision at the Central Bank, said last month that the regulator would consider whether policy measures such as higher risk weights for certain categories of lending is justified in Ireland.
Specific rules could be considered to curb large exposures and concentration limits, he said.
Mr McMahon said he was concerned that the banks’ business plans, which contain return-on-equity reward forecasts of the high teens and low 20s, could not be realised in the Irish market “without a high degree of risk”.
“It is unclear that the underlying assumptions can withstand scrutiny,” he told the Mazars banking conference in Paris.
