Lenders pass on increased costs

Irish lenders have passed on the increased cost of buying money in the international markets to borrowers following the recent collapse in the US subprime mortgage market, new figures show.

The Central Bank yesterday released updated monthly statistics for August showing that banks charged higher interest rates for new business in August, while lending volumes fell.

The consumer loan rate rose by 30 basis points from 6.55 per cent to 6.85 per cent during the month, while the yearly rate jumped by 51 basis points from 8.39 per cent in July to 8.9 per cent in August.

For companies, one-year loans on amounts of up to €1 million increased by 26 basis points from 6.24 per cent to 6.5 per cent in August, while the rate for companies borrowing one-year loans of more than €1 million increased by 37 basis points from 5.94 per cent to 6.31 per cent.

In terms of lending volumes, borrowing on floating rate consumer loans fell from €663 million in July to €568 million in August, while the amount of one-year consumer loans dropped from €253 million in July to €178 million in August.

For corporate loans under €1 million, borrowing volumes at the floating rate fell from €1.5 billion in July to €1.4 billion in August. For loans over €1 million, volumes fell from €7.2 billion in July to €6.2 billion.

Central Bank governor John Hurley said that the figures showed "a net tightening of lending standards which is greatest with respect to loans to enterprises, particularly for the financing of mergers and acquisitions and corporate restructuring. Such a tightening at this point is not surprising."

Sebastian Orsi, banking analyst with Merrion Capital, said: "While some interbank borrowing rates are settling down again, I would expect rate increases to continue to be passed on to borrowers."

The large number of homeowners defaulting on payments in the US subprime mortgage market has driven up the cost of interbank borrowing. High-risk US subprime mortgages were packaged with lower-risk asset-backed securities and sold on to institutions and investors in the securitisation market.

The meltdown in the US subprime market led to the collapse of the securitisation market last month, creating a crisis in the liquidity markets and forcing up the cost of wholesale (interbank) borrowing.