Business Irish

Sunday 17 December 2017

Fresh bid to ease rules and get our bailed-out banks lending again

Laura Noonan

Laura Noonan

THE Government has mounted a fresh attempt to get bailed-out banks to start lending again.

It is trying to convince the EC/IMF that regulatory demands on the banks should be eased to encourage greater lending.

But the Government's efforts aren't all good news for consumers, since they are also trying to eliminate "excessive competition" for deposits -- which may put an end to the high interest rates that competition gives savers.

Details of the Government's plans emerged in the latest 'Memorandum of Understanding' agreed with the European authorities and IMF after the January review of Ireland's bailout programme.

A key target of the landmark 2011 bank 'stress tests' mandated that all banks have no more than €122 on loan for every €100 out deposit, as part of an effort to get them to shrink their over-stretched businesses down to a more manageable size.

Yesterday's document shows that the Government is now preparing proposals to move away from that 'loan to deposit ratio' approach in favour of a more flexible yardstick.

A spokesman for the Department of Finance last night said that adopting the new measure would "discourage excessive competition for deposits and minimise risks to lending to the economy".

The old 'loan to deposit' target incentivises banks to pursue an absolute target of reducing their loans and increasing deposits. The new 'net funding stable ratio' would also incorporate banks' other funding sources into the mix.

Banking sources stressed that it was "impossible" to say what the net impact would be until a firm proposal was put forward showing what level the new ratio would be set at. But they said it was "in theory, positive" since the banks would have the flexibility to increase their lending or stop chasing expensive deposits if they were able to secure medium term funding.


Firm proposals are expected to be put before the European authorities and the IMF in April when officials return to Dublin for their next review mission.

The Department of Finance spokesman said arguments for moving away from the loan to deposit approach included the fact that the old system "may encourage banks to over-compete for deposits, thereby increasing their cost of funding and potentially delaying a return to sustainable profitability".

The original method also fails to "recognise banks' recent efforts to mobilise market funding" and "does not provide a separate" way to assess banks' continuing operations separately to their 'non core' units that are being sold or wound down.

Sources stressed that the alternative proposals were at an "early stage".

A spokesman for the Department of Finance also insisted that an easing of the loan-to-deposit targets would not change the banks' requirement to slim down their balance sheets by €73bn of assets over a three-year period.

That 'deleveraging' project had been directly tied into the loan-to-deposit targets, since every contraction in the banks' loan book or sale of assets made the ratio healthier.

Irish Independent

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