Lending to households falls 4.5%

The latest Central Bank figures show that domestic banks and households continue to deleverage, with mortgage and business lending falling and deposits increasing.

Total lending to households was down 4.5% over May. There was a 2.1% drop in mortgage lending and a 11.5% fall in consumer loans over the same period. Loan repayments exceeded drawdowns by €507m over May, following a net decrease of €631m in April.

“The declining level of lending at a time when there is a strong and growing demand for mortgages is indicative of a seriously malfunctioning banking system,” said Rachel Doyle, chief operations officer at the Professional Insurance Brokers Association (PIBA).

“We would call on the Government to face up to the reality that the dysfunctional state of the Irish banking system is preventing a recovery in the economy. The issue is going to have to be faced at some point. It is far more beneficial to do it now,” she added.

Business lending fell by 5.1% in May, following a 4.8% decrease in April. However, there was an increase in the level of deposits over the same period. Total deposits were up by 7.6% in May.

There was a marginal 0.3% decrease in household deposits, but corporate deposits grew by 5.3% and insurance companies’ deposits surged by 25.1% in May.

Irish banks have been deleveraging since the financial sector collapsed in 2008. During the boom years their loan books grew must faster than their deposit bases.

Over the past few years, credit to the Irish economy has been very constrained, which has weighed on domestic demand.

The next set of bank stress tests are scheduled for March 2014, which means that the banks will be looking to preserve capital over the intervening period.

They also have to work through billions in mortgage arrears over the next few years.

“As we have pointed out on numerous occasions recently, the lack of available credit will severely hamper the overall recovery prospects for the housing market and the Irish economy as a whole, and keep the unemployment rate higher than it would otherwise be,” said Merrion Stockbroker economist, Alan McQuaid.

The latest EU Summit agreed plans for the next stage of banking union, including rules on the resolution of a bank. It involves the ‘bail-in’ of a hierarchy of creditors.

According to Lorcan Roche Kelly, chief European strategist with the hedge fund Trend Macro, this will make banks more risk-averse and affect credit growth.