Brian Hayes MEP today (Thursday) said that Irish banks have made extraordinary strides in reducing their Non-performing loan (NPL) ratios. In figures published by the European Banking Authority this week, it has been revealed that Irish banks have reduced their NPL exposures by over €12 billion in one year.
“Extraordinary progress has been made by Irish banks in getting non-performing loans off their books. Over a one-year period, Ireland’s NPL ratio has been reduced from 11.8% in June 2017 to 7% in June 2018. Over that same period, the total value of Irish NPLs has gone from €26.1 billion to €14 billion.
“The impact of such reductions cannot be underestimated. The strength and stability of our banking system is contingent on clean balance sheets for the banks. We all know the systemic importance of the banking system following the catastrophe that followed the Lehman Brothers collapse. We must ensure that the same mistakes that led to the Irish banking crisis are never repeated.
“There is still scope for further NPL reductions but we are within touching of reaching a key goal. The stated EU objective is to ensure that all countries have NPL levels below 5%. I believe that we can reach this target by early 2019. But it is not just the banks that are responsible for getting there. The government and the central Bank of Ireland have a role to play by ensuring that conditions remain favourable for banks to dispose of NPLs.
“Another major issue in the near future is that there will be EU wide stress tests in November 2018. These stress tests are an important measure of Irish banks and how they serve the population. Equally, the stress tests can be seen by international investors as a measure of the Irish economy.
“The stress tests should also give us an indication of how ‘Brexit-ready’ Irish banks are. While they do not explicitly take into account Brexit factors, they will assess how Irish banks can cope with a drop in EU GDP of up to 8.3%. This will be a de facto test for Irish banks of how they can cope with a no-deal Brexit scenario, which is still a distinct possibility.”
“The exercise will involve 48 EU banks, which hold 70% of all EU bank assets. Two Irish banks will be assessed – Bank of Ireland and AIB.
“Despite the recent momentum on NPL reductions, huge threats still loom for Ireland’s financial system. Given Brexit and international threats to the Irish economy, especially to the Irish property market, as cited by the Central Bank recently, the pillar banks could be caught in the worst of both worlds. That is, if there is a failure to fully resolve the historic NPL issue from the financial crisis and if banks must deal with new losses on their balance sheets due to a new downturn. It would be the ultimate double whammy.
“Better that quick progress was made now to reduce the existing stock of NPLs, thus preparing the banks for whatever threats emerge, from trade wars to Brexit to reduced ECB liquidity.
“With more NPL reductions, I also believe we will see standard variable mortgage rates come down and deposit rates go up. Our banking system will be more stable and banks will be better able to lend to small businesses and individuals.”