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Irish banks face less mortgage risk than EU peers as rates rise

Falling mortgage debt, rising household wealth and stricter lending rules have kept mortgage risks lower here

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EU vice-president and trade chief Valdis Dombrovskis. Photograph: Yves Herman/Reuters

EU vice-president and trade chief Valdis Dombrovskis. Photograph: Yves Herman/Reuters

EU vice-president and trade chief Valdis Dombrovskis. Photograph: Yves Herman/Reuters

Irish banks are among the least exposed to borrower risk as interest rates rise.

Data from ratings agency DBRS Morningstar shows falling mortgage debt, rising household wealth and stricter lending rules have kept mortgage risks lower here than in countries such as Sweden, the Netherlands, Germany, France or the UK.

However, it said the relatively high share of borrowers here on short-term fixed-rate mortgages – it estimates around 80pc of new home loans are initially fixed for one to five  years – means those borrowers “could feel the shock relatively quickly” after rate rises.

But Diarmaid Sheridan, a research analyst with Davy stockbrokers, said Irish borrowers will feel less of a shock than other countries, where rates have been much lower for years.

“German rates have more than doubled [in the last year], in terms of new mortgage lending, so a first-time buyer in Germany has a much bigger hurdle to hit to be able to afford that property, relative to an Irish one, where, OK, rates have started to go up, but in some instances you can still get the same rate you got this time 12 months ago.”

The European Central Bank has hiked rates three times.

The research comes as EU finance ministers agreed to water down how new global capital standards are applied across the bloc, including to mortgage books, although MEPs have yet to agree.

EU vice-president and trade chief Valdis Dombrovskis said the move was necessary to “avoid a significant overall increase in capital requirements for EU banks”.

The so-called Basel III reforms create a floor on the cash buffers banks must hold against certain asset classes, where those buffers are calculated using internal risk ratings.

Irish banks’ risk ratings, particularly on the mortgage book, have tended to err on the conservative side due to the effects of the 2008 housing crash.

The DBRS research showed the level of expected mortgage loss modelled within Irish banks was more than 10 times the level predicted by their Swedish counterparts, and eight basis points ahead of Spain.

DBRS said countries with low expected losses have “more room for a negative impact due to modelling error”.

“Our models are obviously calibrated to what happened in 2008,” Mr Sheridan said. “In time, you might see that, actually, the amount of capital that banks have to hold might come down.”

Separately, Bank of Ireland has reached agreement to dispose of €1.4bn of non-performing mortgages in two separate deals.

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Distressed asset specialist AB CarVal is buying a portfolio of the bank’s defaulting owner-occupier loans with a face value of €800m.

The bank is also moving €600m worth of UK mortgages off its balance sheet via a securitisation that will see market investors take on their performance risk.

The two deals will cut Bank of Ireland’s non-performing exposure ratio from 5.4pc to 3.7pc while adding a small amount to its core capital.

The group is giving up about €30m in annual income from the loan disposals, which are expected to close before the end of the year.


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