Written answers

Tuesday, 21 September 2021

Photo of Richard BrutonRichard Bruton (Dublin Bay North, Fine Gael)
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51. To ask the Minister for Finance the latest assessment of the financial robustness of the Irish banking sector in a European context; if Ireland can expect lower risk loadings on interest rates to follow; and if he will make a statement on the matter. [44806/21]

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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In answer to the first part of the Deputy’s question, the European Banking Authority (EBA), conducts a European wide stress test on supervised banks () at least once every two years. Similarly the European Central Bank (ECB) conduct an annual stress test, the results of which provide important input to other reviews such as the Supervisory Review and Evaluation (SREP) process.

On 30 July 2021, The EBA published the outcome for banks that participated in the 2021 EBA EU-wide stress test. Further, and for the first time, the ECB has also published high-level information on the outcome of the parallel Single Supervisory Mechanism (SSM) stress test of banks directly supervised by the ECB but which were not included in EBA EU wide stress test. The results for the Irish banks included in these assessments are available on the Central Bank's website.

The stress test is not a pass or fail exercise and no threshold is set to define the failure or success of banks for the purpose of the exercise. Instead, the findings of the stress test will inform the 2021 SREP for banks.

The EBA stress tests uses theoretical adverse economic scenarios to test the resilience of banks. Overall, the impact of the stress test is more severe than the results from the 2018 exercise, reflecting a more severe scenario used by the EBA. This severe scenario modelled the effect of a severe shock on these banks, to take into account the impact of the pandemic. Nevertheless, even though uncertainties currently remain high, the benefits of resilience built up in the Irish banking sector in recent years is evident, with banks having sufficient capital to absorb the impact of the severe scenario.

Interest rates on new lending (mortgages, non-financial corporations and consumer) in Ireland are higher than in most other EU countries.

However, the trends show that interest rates in Ireland have been falling in recent years, providing benefit to consumers. Interest rates on new mortgages (excluding renegotiations) have fallen from 4.05% in December 2014 to 2.73% in July 2021. The weighted average interest rate on new fixed rate mortgage agreements stood at 2.62 per cent in July, down from a series high of 4.11 per cent in December 2014.

We have also seen reductions in interest rates on loans to SMEs from 5.19% to 3.89% over the period Quarter 1 2015 to Quarter 1 2021, as well as reductions in interest rates on consumer loans (for example, from 8.3% to 6.7% on Annual Percentage Rate (APRC) consumer loans from January 2015 to July 2021).

There are a number of explanations that likely explain the higher level of interest rates in Ireland relative to other countries. In particular Irish retail banks’ mortgage modelled Risk Weighted Assets are higher than the EU average. This results primarily from the relatively high historic credit risk experience in Ireland, the longer workout process on defaulted loans and uncertainty in relation to collateral realisation and the relatively elevated levels of Non-Performing Loans and restructured loans in Irish banks. These higher capital requirements increase the cost of lending for banks, but now leave them in a more resilient position, reducing the risk of systemic stress events. The experience of the COVID-19 pandemic has highlighted the importance of a resilient banking sector that can withstand adverse shocks.

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