Irish banks face the uncomfortable task of “telling the neighbours who donated blood to them that they need to charge them more as customers,” according to the Financial Regulator.
Speaking at an event in UCC, Matthew Elderfield said the banks were out of the “critical ward following radical surgery and an extensive transfusion of blood from the Irish taxpayer”.
But, he said, they were still not contributing properly to society as they should and remained weak.
Mr Elderfield said returning to profitability was one of the key challenges the banks faced. He said at present the net interest margins banks are earning – essentially the difference between what it costs them to raise funds from deposits and other sources and what they earn in interest payments on lending – are too low.
“Progress on profitability will only be possible in the interim due to gradual re-pricing of assets to reflect the cost of funds,” he said. That implies further interest rate hikes which bring lending rates more in line with what banks are having to pay to raise funds.
The regulator acknowledged that the prospect of banks “earning ever-increasing profits from their activities is understandably met with dismay by those hard pressed consumers that are being charged more”.
“But it is surely preferable that the banking system is able to operate based on the commercial arrangements it has with its customers rather than continuing to have dependence on government and taxpayer assistance,” he said.
The speech echoed comments made by Central Bank director Fiona Muldoon during the week when she was scathing in her criticism of the lack of progress the banks have made in resolving problems faced by heavily indebted customers who are behind on mortgage repayments.
Mr Elderfield said banks had relied too heavily on measures which were merely delaying default by customers on their debts particularly those who were in arrears on buy-to-let or investment properties.
Those measures include allowing customers to pay interest only on mortgages or adding unpaid interest to the overall debt to reduce month-to-month repayment costs.
“These techniques were clearly unsuitable for a sizeable group of customers with unsustainable mortgages as a result of a severe reduction in income,” he said.
Ultimately the banks will be required to deal with arrears problems on a case-by-case basis, he said, and will have to come up with more creative solutions to indebtedness. He cited the example of the “split mortgage” as a case in point – where a borrower continues to repay what they can on part of the debt with the remaining amount set aside or “warehoused”.
This approach too has problems, however, said Mr Elderfield. “For example is there shared risk between the bank and the customer regarding this element? And is it realistic that full interest accrues on this warehoused element?”.
The regulator noted that the problems of arrears for mortgage customers were being replicated for debts owed by small and medium enterprises.
He said to date banks had focussed on rescheduling payments and forbearing from taking action to recover debts rather than making a “determined effort to restructure loans and deploy a wide range of workout options”.
The Central Bank will conduct an independent assessment of the banks’ loan losses and the levels of capital they have on hand to absorb them, similar to last year’s stress tests, in the course of next year.
Mr Elderfield said that while the capital position remains strong at this point there was too much uncertainty to predict whether or not banks would still have enough capital in the medium term.
Summing up the challenges facing the Irish banking sector he said “they need to demonstrate dedication in getting fully fit, they need to face up to their remaining ailments – by recognising losses – and continue to slim down both their balance sheets and their costs”.