Banks’ approach to Covid-related financial stress feels naggingly familiar

At what point do "warning signs" become the thing you look back on after everything has gone wrong? This question might well be high in the top minds of the Central Bank these days, as it surveys a loans market that must be starting to resemble a pockmarked battle site. On Friday, Central Bank deputy governor Ed Sibley and and director general of financial conduct Derville Rowland wrote to the chief executives of lenders here to share their thoughts on how borrowers in Covid-related financial distress were being handled.

In particular, they highlighted a “high reliance on temporary and very short-term forbearance”, identifying “early indications that some lenders are overly relying on short-term arrangements”, including those where mortgage borrowers do not repay any capital on their loans.

It sounds a little familiar to anybody who remembers the financial crisis, which must surely include most borrowers in the Irish market today. Asking bankers to address “warning signs” and avoid “elements of past mistakes” takes on a particular resonance in this context.

The Central Bank’s intervention at this stage of a particularly unpredictable downturn is to be welcomed, if only as a “we are watching you” signal to lenders seeking to deal with a degree of problematic debt, particularly among smaller companies, that they could not have imagined at the start of this very long year.

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Research conducted by the Department of Finance has found, for example, that more SMEs say they have been loss-making than profitable since Covid-19 hit, with turnover across all sectors "significantly lower". It is clearly not an encouraging direction of travel, and it doubtless informs this step from the regulator, particularly as the impact of the current lockdown has yet to filter through.

A key section of the letter to bank bosses mentions “a lack of innovation” in the types of forbearance options available to distressed borrowers, adding that “no single measure” will work for all problematic loans. In other words, banks need to take a good deal of time to sit down with their borrowers and establish a holistic picture of their finances and then show the Central Bank that they have done this. Bank bosses must respond to the letter before Christmas, with their replies confirming that required measures have been taken. Hopefully, their innovation skills will be well on display.