Friday 9 December 2016

Finance officials 'in the dark' on level of bank loans

Interest roll-ups blamed for distorting figures on how much new credit is flowing into economy

Emmet Oliver Deputy Business Editor

Published 06/12/2010 | 05:00

Finance Minister Brian Lenihan. Photo: Bloomberg News
Finance Minister Brian Lenihan. Photo: Bloomberg News

There are major "difficulties'' with the official figures on how much the banks lend into the economy, senior Department of Finance staff admit in an internal memo.

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The memo, prepared ahead of Finance Minister Brian Lenihan's end of March banking announcement, says officials discovered shortcomings with official statistics on how much the banks lend.

The issue of interest roll-ups, where banks allow borrowers to defer paying interest and instead add it on to the principal, is distorting figures for the amount of credit actually going into the economy, the officials acknowledged.

"Roll ups of interest are shown as an increase in credit even though no new funds are actually advanced,'' a senior official from the banking section writes in a memo dated March 11. The officials noted the Central Bank didn't even publish figures for individual banks and detailed figures from the Financial Regulator didn't give a sectoral breakdown.

In some instances the amount of credit going into the economy was officially reduced, according to the figures, as banks wrote off old debts. But the officials said such events "do not actually have any impact on businesses seeking credit''.

Targets

The "difficulties with figures'' were among the reasons the department did not ask the banks to sign up to lending targets for individual sectors of the economy. It pointed out that UK banks such as RBS and Lloyds have failed to meet such targets and there were question marks over their usefulness.

The memo, sent to Ann Nolan, a senior adviser to Mr Lenihan, also pointed out that the Financial Regulator Matthew Elderfield was strongly opposed to any sectoral targets.

Last week, the head of the IMF's Irish mission, Ajai Chopra, told the Irish Independent he was against any "indiscriminate'' lending targets being imposed on the banks.

Speaking about official lending figures, the department officials in the memo state: "The figures for outstanding credit in these returns currently include the effects of revaluations and do not fully capture the underlying figures."

Asked last week whether there was a danger that interest roll-ups (sometimes known as interest capitalisation) might still be distorting the figures, even at the margins, the Financial Regulator told Irish Independent: "Capitalisation of interest is an increase in lending which is incorporated in the net flows of lending published in the money and banking statistics. The bank lending survey does not cover this. We do not publish separate information on interest roll-up.''

Irish Independent

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