Following on from the NTMA’s slidefest from a few days ago, here’s an interesting set of presentations that have just been released (apparently without a press release explaining who they were originally presented to but I think you can guess). There are presentations on Mortgage Arrears, SME Lending, Deleveraging, Funding, and a Banking Report Card. Enjoy.
The government has announced lending plans to SMEs from Bank of Ireland and AIB. It has also released the quarterly report of its Credit Reviewer, John Trethowen. Mr. Trethowen has concluded that he has “found no evidence of bank lending policies which constrained the supply of credit to viable businesses in either of the banks.” If this is correct, then the two banks have formulated plans to deal with a problem that apparently does not exist.
In judging these plans, it would be nice if we were provided with information that distinguished stocks and flows. Of the two plans, AIB’s strikes me as slightly more useful in stating that it has “total lending of over €13bn to SMEs at year-end 2009”. This puts the commitment to €3 billion per year in 2010 and 2011 in “new or additional credit” in some context. One would like to believe that this is a commitment to have total SME lending from the bank at €16 billion by the end of the year but I’m guessing this doesn’t have to be the case: Expiry of old loan agreements could, for all we know, match the €3 billion in new and additional credit.
What would be really useful here would be comprehensive statistics on SME lending in Ireland. It is my understanding the Central Bank are preparing to publish such statistics. Hopefully, these will be more useful in assessing the situation than the assurances of the banks or, with respect, Mr. Trethowen.
The latest Mazers report on lending to SMEs is here.
As usual, Mazars report a very high acceptance rate for credit applications — 87.7% in 2009:Q4. Mazars acknowledge that these figures are skewed to the high side because “limitations exist within bank applications support systems”. In other words, if you call into the local bank branch, have a word with the manager and he tells you there’s no chance of a loan, so you don’t bother filling out the paper work, then this doesn’t count as a loan application that’s been turned down. Somewhat surprisingly, Mazars reckon that “an approval rate of 84% is more representative.”
This still seems to me to be far too high. Mazars own evidence on credit quality provides plenty of evidence for why banks are likely to be extremely cautions in handing out credit in the current environment, regardless of any issues to do with undercapitalisation.
Only 65% of SME loans were fully performing in 2009:Q4. 22% are on “Watchlist” because they are behind 30 to 90 days and 13% are “Impaired” because they are more than 90 days behind. By contrast in 2008:Q2, 85% of loans were performing, 14% were on Watchlist and 1% were Impaired.
These figures show that lending to SMEs is currently a very risky business. Indeed, the fact that 15% of loans were behind on repayments back in 2008:Q2 when the economy was performing much better shows that this class of lending is always somewhat risky.
Personally, I find it hard to believe that the major banks are not currently restricting credit as part of a strategy to get risk-weighted assets down and thus minimise the amount of new capital required to achieve the capital ratio targets set down by the Central Bank. However, in reality, it is very difficult to distinguish between this mechanism and the normal banking approach to screening credit risks during a severe recession.
The fact that this screening often takes the form of turning down loans rather than simply raising the cost of credit has been well understood for a long time and was best explained in this classic paper by Stiglitz and Weiss.