Cost of servicing bad loans still ‘too high’ according to Central Bank governor Patrick Honohan

Irish banks have made progress, but the costs of servicing their high-level of non-performing loans will likely not fall as quickly as they hope, despite the strong recovery, outgoing Central Bank governor Patrick Honohan said yesterday.

Cost of servicing bad loans still ‘too high’ according to Central Bank governor Patrick Honohan

In a wide-ranging speech to the London School of Economics on Ireland’s banking and property bust and the lessons learned from the bailout and recovery, Mr Honohan said that the country may have escaped “the error” of pressing for too many home repossessions that could possibly have made matters worse.

The speech is likely to be one of his last as he prepares to step down from the top job after steering the Central Bank through the crisis years.

Mr Honohan will be succeeded by Philip Lane who, like Mr Honohan, is an economics professor at TCD.

Mr Honohan bluntly said that the Central Bank had pressed on the lenders a range of policies to reduce arrears, which have to date fallen short.

He told the LSE audience that compared with the UK and US, the number of repossessions in Ireland “is very small” and that “Ireland has escaped the error of levels of repossession that are so high as to be economically inefficient.”

But lenders have been slow to adopt solutions to impaired home loans, such as split mortgages, which “would result in debt sustainability and better loan-loss performance over time”.

“Progress has been made, but still the level of unresolved non-performing loans remains too high,” he said.

“As the economy recovers, so too will the debt servicing on some of these loans, but probably not as many as the banks hope.

"All available policy tools to improve the situation have been energetically deployed, but on the whole have proved somewhat lacking.”

The outgoing governor said the size of the credit bubble made the Irish bust remarkable.

However, supporting austerity and bailout programmes the authorities struck with the troika, Mr Honohan said: “The adjustment path was close to the best available to Ireland.”

He reiterated the Irish authorities were “leaned upon” in 2010 and 2011 not to burn bond-holders of unguaranteed senior bank debt in defunct lenders Anglo Irish and Irish Nationwide.

However, he said, Europe may have learned from this mistake and agreed to refinance the Irish promissory note in February 2013.

“I think it’s fair to say that European decision makers subsequently had misgivings about having blocked this bail-in,” he said.

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