A NEW Central Bank survey shows that Irish banks continued to tighten their lending standards in the opening months of the year, even as AIB and Bank of Ireland made public commitments to increase lending when the Government agreed to recapitalise them to the tune of €7 billion.
The responses of five Irish banks to a euro-zone survey of 112 banks suggest there was a decline in loan demand from households and businesses in the first quarter as the pattern of tighter standards continued.
The Central Bank, which said the decline in loan demand was due to a reduction in the financing needs of companies and households, declined yesterday to disclose the identity of the Irish institutions that took part in the survey.
The results are in line with private reports from high-level business sources who routinely cite a marked decline in unsecured commercial lending and significant upward pressure on the price of loans in cases where companies need to change their facilities.
The restoration of bank lending was a prime concern of the Government when it agreed to recapitalise the two main banks, a deal in which they made commitments to increase lending capacity to small and medium-sized enterprises (SMEs) and to first-time home buyers. The same concern was crucial to the Government plan to establish the National Asset Management Agency to take investment property and development loans from banks’ balance sheets.
In a commentary, the Central Bank said recapitalisation and guarantee initiatives improved access to wholesale funding markets but access remains challenging and was expected to remain broadly unchanged during the second quarter of the year.
“Credit standards on loans to enterprises tightened during the first quarter of 2009, the eighth successive tightening. An increase in banks’ cost of funds and balance sheet constraints coupled with greater risk perception explain most of the reported tightening in credit standards,” it said.
The tightening of credit standards was independent of loan duration, but was stronger on loans to large firms compared with loans to SMEs. “Banks’ ability to access market financing along with industry or firm-specific outlook made the strongest contribution to the tightening of credit standards on loans to enterprises.”
For households, credit standards for house purchase and consumer credit and other lending tightened. On the lessening of loan demand from banks, the Central Bank cited the use of “alternative” finance: “The tightening of credit standards on loans to households for house purchase was reflected in higher loan margins and more restrictive loan-to-value ratios. The tightening of credit standards on loans for consumer credit and other lending was entirely attributed to increased risk perception.”
Fine Gael deputy leader Richard Bruton said anecdotal evidence suggests banks have dramatically increased interest margins, increased the security they demand and are imposing arrangement fees and other charges: “All of these measures are making it more difficult for businesses and families to cater for their credit needs.”
