Mortgage demand continues to rise as banks tighten rules

THE DEMAND for mortgages increased for the second quarter in a row while credit standards tightened, according to a new survey of banking in the euro area released by the Central Bank.

Improved consumer confidence drove the increase in demand for mortgages, but lower levels of competition, less favourable expectations about economic growth and the prospect of further house price declines led banks to tighten their lending rules for house purchases.

The Professional Insurance Brokers’ Association said that the tightening credit standards on mortgages in the face of increasing demand for the second quarter in a row showed the situation to be “absolutely dysfunctional”.

The association, the largest representative body for mortgage brokers, said the Government and Central Bank had to force a change of direction at the banks that were not lending enough.

The Central Bank reported a decrease in loan demand from businesses, excluding large firms.

An increase in interest rate margins was reported on loans to businesses, while there were perceived to be increased risks in lending to small and medium-sized firms.

A new report by Standard Poor’s has ranked Ireland’s banking system at the same risk level as those of Hungary, Iceland and Portugal.

The “heavily tarnished” reputations of the Irish banks and regulator due to the crisis and the “severe” negative equity in residential mortgages were cited among weaknesses in the Irish system.

The inability of the banks to raise funding in their own name in the foreseeable future, loss-making businesses, and the high rate of bad loans also increased the risks.

Further cost-cutting is required by the banks, while their revenues continued to come under pressure, the agency said. The potential for the banking system to be “simpler, more domestically focused and less competitive” was a strength for the sector, said Standard Poor’s.

The €64 billion in capital injections by the Government into the banks and the improved governance and regulation were also cited as strengths for the banks.

“Most banks will find it difficult to return to profitability before the end of 2013,” the agency added.

Standard Poor’s also ranked the risks in Ireland’s banking sector at the same levels as those of Indonesia and Russia.