Irish borrowers face higher costs under ECB bad debts plan

Irish borrowers face tougher access to credit and higher interest rates as a result of European Central Bank plans to force banks across the euro zone to set aside more provisions to cover bad loans in future.

The ECB plans to give euro zone lenders two years to set aside enough money to cover 100 per cent of their non-performing unsecured loans and seven years to cover all their secured debt, irrespective of the value of the underlying assets, Reuters reported on Tuesday, referring to a draft document of ECB guidelines which are scheduled to be released this week.

However, sources have told The Irish Times that the plan, which is going out to consultation, will apply only to newly classified non-performing loans (NPLs) from January of next year.

“The concern will be that it makes loans more difficult to access and/or more expensive to borrow in the first place, and that banks will be more aggressive in the event of arrears occurring,” said Owen Callan, an analyst with Investec in Dublin.

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“Given the problems we know exist in Ireland around dealing with arrears – legally, politically, socially – it will probably put the onus on the Irish banks to tighten initial lending standards rather than a more aggressive post-arrears approach.”

The average rate on new Irish variable mortgages stood at 3.38 per cent in July, compared to 1.84 per cent across the broader euro zone, according to Central Bank data published last month.

While Ireland's banks have cut their NPLs from an average of 27 per cent of their loan books in 2013 to 14.2 per cent at the end of last year, they remained well above the 5.4 per cent EU average, leaving the Republic among banking systems most exposed to the ECB's drive to draw a line under the issue. Greece, Italy and Cyprus also have elevated NPL levels.

At the end of June, Bank of Ireland had set aside provisions equivalent to 40 per cent of its €8.07 billion NPLs though it taken a charge against 96 per cent of its €98 million of soured consumer loans, reflecting the fact that this portfolio is not secured against assets. AIB’s provisions stood at 44 per cent of its €7.8 billion of impaired loans, a narrower definition than NPLs, while Permanent TSB’s coverage ration against its €5.78 billion of NPLs was 43 per cent.

A tightening of credit standards would make it even more difficult for Ireland’s lenders to rebuild their loan books following almost a decade of contraction, impacting their ability to grow their earnings.

The draft ECB document will be put out to consultation and it is possible that it could be watered down before it takes effect. The ECB declined to comment on the draft, as did a spokesman for the Central Bank of Ireland.

Central Bank deputy governor Sharon Donnery chairs the ECB working group in charge of tackling NPLs across the euro zone.