Department urges EU regulators to ease bad loan classification

ECB’s view of non-performing loans queried in bid to exclude restructured mortgages

Department of Finance officials have challenged the European banking watchdog's classification of restructured home loans to borrowers who are meeting new repayment terms as non-performing.

Irish officials lobbied the European Central Bank’s supervisory arm at the highest level, querying the regulator’s logic of classifying some restructured mortgages as non-performing beyond their standard probationary period.

They made the case in a bid to ease the pressure the ECB is applying on European Union banks to offload large portfolios of financial crisis-era non-performing loans.

In Ireland’s case, these include mortgages split by the banks and part-frozen to keep borrowers in their homes and ensure they are repaying some of the loan.


To meet ECB demands, Permanent TSB, which is 75 per cent-owned by the State, has put €3.7 billion in loans up for sale in an attempt to reduce the 28 per cent of non-performing loans sitting on its books. The Frankfurt-based regulator wants the Irish non-performing levels down to the EU average of 5 per cent.

The sale has generated a political storm as the Irish banks have begun offloading large tranches of home loans to repair their balance sheets.

Permanent TSB’s portfolio includes loans on 14,000 principal dwelling homes and €700 million of loans to home owners who are meeting restructured loan terms.

Attempts are being made to block the sale as the likely buyer of the “Project Glas” portfolio will be a so-called vulture fund, which is not obliged to honour these restructured deals.

Split mortgages

At the crux of the contacts between Irish officials and the regulator – the Single Supervisory Mechanism (SSM) – is the issue of split mortgages where a bank warehouses part of the loan to be dealt with at some future date because the borrower cannot repay that portion of the mortgage.

Irish banks argue that the borrower’s ability to repay the active part of the restructured mortgage means the loan is performing, while the regulator views the mortgage as a whole and therefore non-performing.

“While the department has been informed that the SSM is looking into the regulatory treatment of split mortgages across a number of European member states, it has no evidence at this point that this categorisation is going to change,” said a spokesman for the department.

The ECB said that it was carrying out a legal and technical review on “the appropriate use of non-performing mortgages splitting.” A spokesman referred to a letter sent in November by the chairman of the ECB’s banking supervision board Daniele Nouy to an Irish MEP saying that several banks in EU countries had asked the regulator for “supervisory guidance” on the issue.

Not all Irish banks treat split/warehoused mortgages the same. Some restructure the split mortgage as two separate loans, permitting the bank to categorise at least the active part of the mortgage as performing.

Permanent TSB’s decision to include €700 million of so-called “treated” loans essentially acknowledges that Irish banks have lost the debate over restructured loan classification with the ECB’s regulator.

One mortgage lender, KBC Bank Ireland, has said the banks should be cut some slack by regulators as much of the mortgage debt categorised as non-performing is generating cash after years of restructuring.

Ulster Bank said on Friday it was looking to sell on as many as 7,000 non-performing mortgages in 2018.

Simon Carswell

Simon Carswell

Simon Carswell is News Editor of The Irish Times