Further signs Irish banking system is stabilising

There are further signs the Irish banking system is stabilising with deposit volumes unchanged in June compared with the previous month at €152.03bn, according to the Department of Finance.

Drawings from the ECB by Permanent TSB, AIB and Bank of Ireland continued to fall in June to stand at €34.76bn at the end of the month.

Banks operating in Ireland — both the covered and non-covered banks — continue to reduce their borrowing from the ECB.

“During June total utilisation of ECB facilities by banks in Ireland declined by €0.8bn (c -2%) to €46.1bn — it’s lowest level since September 2008,” said the department.

The figures reflect the ongoing deleveraging by the Irish banking system. During the massive credit expansion leading up to the financial crash, Irish banks became exposed to the wholesale money markets in an effort to ramp up their mostly property- related lending activities.

But when the sub-prime crisis erupted, the wholesale money markets seized up and funding for the Irish banks dried up.

When the Government was forced to accept and EU/IMF bailout in 2010, deleveraging targets for the banks was part of the overall programme.

However, in an effort to shrink their balance sheets, the domestic banks have had to scale back their lending which has had a huge impact on the flow of credit to the SME and corporate sectors.

The banks face stress tests as part of an EU-wide review next March.

But the Central Bank governor, Patrick Honohan, has said the banks will have to raise further capital over the medium term to meet Basel III regulatory requirements, which are being phased in between now and 2019.

This will put huge pressure on the banking system across the eurozone. The Financial Times’ reported yesterday that Deutsche Bank plans to shrink its balance sheet by one-fifth in order to meet the new capital requirements.

Analysts have raised concerns that if banks throughout the region are all required to raise their capital levels over the next few years, then its will constrain business lending and hamper recovery.

Pressure is growing on the ECB to develop non-bank funding channels, such as a securitisation market for SMEs, although, ECB president Mario Draghi has dampened expectations that a big bazooka will be unveiled over the short to medium term.


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