Central Bank backs ‘legitimate and necessary’ sale of bad loans

Central Bank deputy governor Ed Sibley has said it is a "legitimate and necessary approach" for banks to sell off bad loans to boost their financial standing, as he warned that the Irish economy is particularly exposed as "we are closer to the next downturn than we are to the start of the last one".

Addressing a Trinity College Dublin event on Wednesday evening marking the 10th anniversary of Irish banking crisis, Mr Sibley said while the financial system is sounder than a decade ago, "there are clouds on the horizon" as Irish household and public borrowings remain elevated against the backdrop of record global debt.

“There is a strong argument that Ireland, as a small and open economy, was and is more susceptible to the economic cycle and is likely to experience more froth in the good times and is at greater risk of severe downturns than larger, less open economies,” the deputy governor said.

“Building resilience now, for individuals, governments and banks will serve us well for future downturns, whatever the cause may be.”

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A decade this month since the Republic issued a snap guarantee of its banking system that precipitated €64 billion of taxpayer aid and an international bailout of the State, Mr Sibley said that lenders’ increasing reliance on non-performing loan (NPLs) sales to improve their balance sheets is a “legitimate and necessary approach”, even though it has proven controversial.

Mr Sibley reiterated a point he made at a press briefing in May that there was no real evidence that overseas buyers of Irish NPL portfolios have issued more legal proceedings against borrowers in arrears than banks.

Not engaging

The deputy governor noted that 44 per cent of owner-occupier loans more than two years in arrears are more than five years past due, while 40 per cent those more than two years behind in repayments are not engaging with their lenders.

“Recognising the individual distress these numbers represent, I would again urge anyone in arrears to engage with their lenders” or avail of other supports to help distressed borrowers, said Mr Sibley.

However, he warned that in order for banks to be able to offer lower rates for mortgages – which are backed by collateral – than for unsecured loans, “then that security must mean something, and banks, from both a commercial stability perspective, must have a way of dealing with NPLs.”

While regulators internationally have introduced a veritable “alphabet soup” of regulations bearing a host of acronyms in the decade following the collapse of Wall Street investment bank Lehman Brothers, there is more to be done “to remove implicit taxpayer support for the larger banks”, according to Mr Sibley.

In addition, Irish banks still have work to do to improve their cultures and levels of diversity at senior levels in order to restore trust in the system, he said. A report published by the Central Bank in July on banking culture in the wake of the tracker-mortgage scandal found that top banking executives retained too much of a crisis-era “firefighting” mindset to place customers at the heart of all decisions.

Meanwhile, Mr Sibley said the housing market remained “dysfunctional” as housing supply continued to fall well short of demand after the “emergency brake” was applied to construction in 2008.