There’s a game of chicken taking place between the country’s main banks and credit unions and it has significant implications for borrowers, particularly those in distressed situations.
Fiona Muldoon, the Central Bank's director of credit institutions and insurance supervision, is trying to get the various lenders – banks, credit card groups and credit unions – to agree a framework to deal with the loans of borrowers when they get into distress.
No better woman, you might think. Muldoon has not been behind the door in criticising the banks for failing to face up to their problem loans.
Protocol needed
Agreeing a protocol seems like a sensible thing to do, particularly with the new regime surrounding personal insolvency agreements set to take effect in the second half of this year. Ideally, lenders want to avoid the situation where a flood of customers take the road to bankruptcy.
The full implications of personal insolvency agreements won’t be known until they are up and running but it would seem to make sense to provide a workable solution to distressed borrowers as an alternative, and also to avoid the potential costs involved in this regime.
Some estimates have put the cost of the personal insolvency practitioners at 15 per cent of the restructured debt.
All parties are coy but it’s clear tensions have emerged and there has been some heated debate.The key sticking point is the banks’ security on mortgage assets (traditionally a family home or a buy to let). This is part of their DNA and thus far the banks have not been willing to countenance compromising on this security when dealing with the unsecured lenders.
Even though in thousands of cases enforcing the security would result in crystallising a significant loss on the loan.
Repossessions have been virtually non-existent in Ireland over the past few years, largely because the banks have preferred to kick the can down the road rather than face up to those losses.
Forbearance is the name of the game as they seek to preserve their capital while working towards a return to profitability.
The banks also argue it makes no sense for customers in distress to continue to add to their debts by drawing on funds available from credit unions. This seems logical.
Credit unions aren’t willing to agree a deal unless the banks change their position on the primacy of their mortgage security. Their argument is that there can be no pre-conditions to these negotiations.
The banks have to be willing to bring the mortgage debt into the equation, which means possibly warehousing a portion of a problem loan or writing off some of it as part of an overall solution for a customer in arrears.
Somehow, Muldoon has to find a middle ground. A waterfall effect approach has been taken to the negotiations with the result that broad agreement has been reached for borrowers in distress.
It’s finding an agreed solution to the real basket cases that seems to be the major sticking point.
According to the Central Bank, total unsecured lending in Ireland amounts to about €15 billion. Of this, credit unions account for about €5 billion of the loans and the banks for most of the balance.
These figures exclude lenders not prudentially regulated by the Central Bank, such as credit card provider MBNA.
As unsecured lenders, the credit unions face losing everything if a borrower goes the bankruptcy route, as do the banks.
The credit unions might get something back if a solution can be agreed under personal insolvency agreements but banks have a veto on any deals with borrowers.
The credit unions are saying “we’ll take our chances with personal insolvency agreements” while the banks are saying “we’ll use our veto in them if required”.
The two sides are unwilling to compromise. Of course, borrowers are not represented at these talks and could be the fly in the ointment. A flood of bankruptcy applications later this year would make the outcome of these talks moot.
