The IMF has released its latest post-program monitoring report for Ireland. What is notable in the report is how it highlights the still very-high-risk profile of the Irish banking sector, and the policy quandary regarding encouraging housing construction without endangering another Irish banking sector crash over the medium term. Despite a strong, three-year-long domestic economic expansion, Irish mortgage loans remain an unusually risky asset class.
Due to demographic pressures, Ireland needs a sharp increase in housing construction, but the very-high-risk nature of Irish mortgage loan assets pushes against any such increase. This is a quandary for the banking sector, the construction sector, and especially for the Irish Central Bank, attempting to calibrate its macroprudential regulation of the mortgage lending market.
Irish mortgage loans have very limited, almost negligible, realizable collateral value. That is a big risk factor for the banking sector and the domestic economy, although obviously in the midst of an economic boom it is not a short-term problem. At the same time, there is a demographic bulge of young Irish adults needing more and better housing.
Some selected quotes from the report (see the link for the full report):
“Staff cautioned that, as banks may resort to more risky assets to improve returns, supervisors must ensure that banks’ business models appropriately balance profit seeking and risk management, and that loan pricing adequately reflects credit risk and barriers to collateral realization. “
“In the mortgage segment, NPL [non performing loan] resolution is complicated by weak cooperation between borrowers and lenders, lengthy legal proceedings, and limited (but increasing) utilization of personal insolvency arrangements. As a result, the stock of mortgage accounts in deep arrears (over 720 days) continues to increase, reaching 55 percent of past-due loans (over 90 days) in mid-2015 from 49 percent at end-2014. About half of the CRE [Commercial Real Estate] loans are still nonperforming, despite promising trends in restructurings and write downs. “
“Provision coverage declined slightly as collateral values rose, although these values often remain untested by foreclosures and sales. Nonetheless, loan books continue to contract, profitability remains low and partly driven by provision write backs, and nonperforming loans (NPLs) are still high at about one-fifth of gross loans.”
“With banks continuing to release provisions as property market conditions improve, staff cautioned that write backs should be based on conservative assumptions and collateral reappraisals. “