Oireachtas Joint and Select Committees
Thursday, 28 May 2015
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Overview of the Banking Sector: Central Bank of Ireland
2:00 pm
Professor Patrick Honohan:
Given the actual loan losses, the prospective loan losses and the perceived difficulty in recovering loans in Ireland, we will see spreads to cover higher loan risks in Ireland for a good while to come. That is the reality. It will be one of the long-lasting legacies. Anybody coming into the Irish market will be making that choice by comparison with going into the Netherlands or somewhere where it is easier and quicker to recover on a loan if it is not performing so that loan losses will be small. In going into Ireland, they will need to make a larger allowance for future loan losses. That is one element.
I will mention another element. When we make cross-country comparisons, as we have done in our paper, they are never perfect. In some countries in Europe most loans have a compulsory insurance element at a cost of perhaps 1 percentage point on top of the interest rate. We do not see this in the chart. Therefore, the comparisons are a little misleading. However, when one sees the movement that has happened recently, one sees that it is not sustainable. It will not last and the banks will-----
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