Saturday 10 December 2016

UK lenders played role in Ireland's financial crisis, says bank chief

Emmet Oliver Deputy Business Editor

Published 23/02/2010 | 05:00

Governor of the Central Bank Dr Patrick Honohan at the British-Irish Parliamentary Assembly's 40th Plenary Conference at the Radisson Blu Farnham Estate Hotel in Co Cavan yesterday
Governor of the Central Bank Dr Patrick Honohan at the British-Irish Parliamentary Assembly's 40th Plenary Conference at the Radisson Blu Farnham Estate Hotel in Co Cavan yesterday

A RAPID and "unwise" expansion by UK lenders contributed to Ireland's financial crisis, Central Bank Governor Patrick Honohan said yesterday.

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Professor Honohan said lending by UK banks led Irish consumers into "a sense of false security", mainly because the UK banks lent so many tracker mortgages that borrowers began to think rates never changed.

However, he admitted Ireland's financial crisis was "largely home grown" in origin.

Prof Honohan, speaking to the British-Irish parliamentary assembly in Cavan, commented on the vigorous moves into the Irish market by HBOS, the parent company of Bank of Scotland (Ireland).

He said this bank was especially keen on pricing and initially this had pushed down the margins on mortgages across the market.

Effects

"This bank's actions had the initially favourable effect of reducing lending margins and introducing new products, such as the tracker mortgage, which assured borrowers that interest rate changes on floating rate mortgages would not be arbitrary," said Prof Honohan, a former academic at Trinity College.

He said both foreign-controlled banks and Irish-owned institutions started to build an "extensive reliance" on wholesale funding.

"Indeed, without questioning the largely home-grown nature of the Irish credit bubble, it may well be that the rapid -- and ultimately unwise -- expansion of some of the UK banks both at home and in Ireland may have helped to lull Irish observers into a sense of false security," he said.

While not blaming any institution specifically, Prof Honohan said lending became unsustainable in Ireland.

"New lending features became unsustainable in Ireland once the global financial crisis broke, with the scarcity and increased cost of wholesale funding to many banks undermining the profitability of tracker mortgages," he said.

"Not surprisingly, both of the big British banks that have suffered most in the crisis (HBOS and RBS) have -- like the locally controlled banks -- reported a severe loan-loss experience on the lending of their Irish subsidiaries."

Prof Honohan declined yesterday to discuss the kind of capital levels the Irish banks would need over the next two to three years. Instead he said that future capitalisations would prove adequate.

Dr Honohan also supported the idea of a property tax on homeowners and said it would be a "useful" way to help shore up the public finances. Bankers who committed criminal acts should be jailed and people should be realistic in their expectations that NAMA would free up credit coming from the banks.

Irish Independent

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