Regulator warns of future debt crisis

FINANCIAL regulator Liam O’Reilly expressed his fear yesterday that the country could be heading for a huge debt repayment crisis.

Mr O’Reilly warned that many individuals may be getting in over their heads and borrowing too much.

“Along with the Central Bank, we are concerned about the rapid rise in the levels of indebtedness in the economy and are well aware that if conditions change adversely, many people could be severely affected“.

Mr O’Reilly said it was critical in this environment that borrowers knew what they were getting into and were able to repay loans.

The difficulty highlighted earlier by the Central Bank is that the level of personal debt in Ireland is increasing at the rate of 24% or 25% per annum.

At that rate Irish consumers are destined to be the second most heavily indebted in Europe after the Netherlands.

Presently the level of debt to net income is at 120%, but that will soon hit the 140% mark, placing us firmly in the top tier or European borrowers, the Central Bank has warned.

Dr Dan McLaughlin, chief economist, Bank of Ireland, says the fuss is over done arguing the amount of debt at roughly €90 billion is only a fraction of net assets held by individuals which are close to €500bn.

However with three institutions now offering 100% mortgages, Mr O’Reilly warned individuals need to be very careful about the debt levels to which they were exposing themselves.

And he stressed also that financial institutions who were lending too aggressively and faced having their capital ratios increased to ensure they have enough in reserve to deal with any bad debt issues that may arise down the line.

“We will raise their capital ratios,” warned Mr O’Reilly, but he refused to comment on whether he has already taken such action in the case of some financial institutions.

“Institutions should only advance loans where they are confident their customers will have the ability to repay. They have a responsibility to inform their customers about the risks they are taking in borrowing large amounts of money and to ensure that they retain some flexibility to cope with changes in their personal circumstances like unemployment and higher interest rates,” he said.

The financial regulator’s first annual report highlighted that financial institutions have paid back €69m to customers as a result of overcharging.

The regulator said 259 instances were identified, the most high profile case being that of AIB and the foreign exchange debacle where it agreed to pay back over €34m to clients.

The report covers the period from 1 May 2003 to the end of 2004.

Chairman Brian Patterson said the structure of financial regulation in Ireland with its “joined up approach” to financial regulation was “unique in international terms.”

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