Irish banks ‘returning to risky business’

Irish banks used league tables to encourage staff to increase potentially risky lending within the last year, according to the Central Bank.

Philip Lane, the Central Bank governor, said that banks have been using the tables to drive lending volume “without consideration” for the quality of the loans being issued. The league tables ranked employees in terms of volumes of lending that had been underwritten.

Mr Lane said the practice was one of a number of weaknesses uncovered as part of its supervision of the country’s lending institutions.

It is believed that the use of league tables came to light within the past year but that they are no longer being used by banks.

The Central Bank also found that boards were failing to adequately supervise banks’ risk appetites while strategies focused on delivering additional lending were also being used without consideration for the level of long-term risk involved.

Mr Lane said a number of risks relating to banks’ lending practices have been uncovered but that overall the level and quality of supervision across the sector has improved since the 2008 financial crash.

“We are starting to see some signs of increased competition and a strong desire from the banks to start to grow their loan books once more, both in Ireland and in the UK. This is welcome, provided lending is prudent, and provides evidence of the continuing return towards normalisation of the domestic banking sector.

“While these weaknesses are concerns, they have been identified and banks are required to implement remediation measures. I would note that banks are more resilient and the supervisory regime much more robust compared with the pre-2008 period. Nonetheless, the Central Bank needs to maintain its vigilance,” Mr Lane said.

Mr Lane said that while Irish banks have recovered significantly in the aftermath of the crisis, “significant risks remain on the horizon” which leave them vulnerable to economic shocks.

The long-term sustainability of banks’ business models depends on their ability to generate sufficient net income, he said.

He added that Irish banks have a “mixed performance” in that regard.

The Central Bank governor said that while the level of non-performing loans on banks’ balance sheets remains high, Irish lenders are “somewhat ahead of European banks” in resolving bad debts.

He added that some of the 56,350 mortgage loans currently in long-term arrears would inevitably be resolved through repossession.

Appearing before the Oireachtas finance committee, Mr Lane also reiterated his opposition to proposed legislation that would give the Central Bank power to cap mortgage rates.

Mr Lane said that his concerns were twofold in that he believed capping interest rates would damage a properly functioning mortgage market while giving the Central Bank responsibilities over competition would also be inappropriate.

The bill proposed by Michael McGrath, the Fianna Fail finance spokesman, requires the Central Bank to assess whether banks are charging appropriate interest rates on mortgage products.

The Central Bank previously had powers to evaluate market failure but the Honohan report on the Irish banking crisis, published by Patrick Honohan, the former governor of the Central Bank, found that this responsibility caused a conflict of interest with the bank’s other responsibilities.

“Our view is that this approach has many downsides to it so we would be of the view — and I think the ECB opinion too is relevant — that there’s many problems with this approach to intervening in the mortgage market and in general caps on interest rates have a lot of problems.

“But there’s an extra layer of problems asking the Central Bank to take on the role of assessing the level of competition in the mortgage market. That is a role typically played by competition authorities, not Central Banks,” Mr Lane said.