Ireland's banking system remains in a fragile state and is vulnerable to further shocks, according to Central Bank.
The wide-ranging analysis is contained in its second Macro-Financial Review, a report designed to assess the financial strengths and weakness of all sectors in the economy, along with the risks to which each is subject.
"Despite the measures taken to stabilise the banking system under the Financial Measures Programme 2011, the Irish banking sector as a whole remains in a fragile state and its transition to a fully normal mode of functioning is not yet complete," the Central Bank states.
The report contains new figures on mortgages arrears of those who have bought property for investment purposes. As of the middle of 2012, the holders of €9.3 billion worth of buy-to-let mortgages were in arrears of more than 90 days according to the bank's provisional estimates. This amounts to 29 per cent of the total buy-to-let loan book of the banking sector.
The mortgage arrears rate among owner occupiers is half that of buy-to-let mortgage holders.
Since the last such report, "the environment faced by households has not changed significantly, but remains challenging" the review states.
This is having a knock on effect on the banking system "Credit institution losses could conceivably rise in the short term following the implementation of the new personal insolvency legislation. However, this legislation is an important part of the solution for managing private-sector indebtedness and promoting long-term growth".
Persistently high levels of impaired loans, loss making tracker mortgages, the high cost to the banks of fees paid to the Government for liabilities guarantees and intense competition for deposits are some of the factors that are hindering the sector's return to profit according to the report.
In order to accelerate the return to profitability the banks should cut their pay bills, the review suggests. "Employee expenses remain the largest element of the bank's non-interest expenses and banks will need to reduce this commensurate with the contraction in lending volumes and income."
The report welcomes EU-level developments aimed at resolving the euro area crisis since the last review in March. It notes that "the external macroeconomic environment has continued to deteriorate and domestic economic conditions remain challenging".
While these measures have helped the Government in its efforts to access market funding the review notes it goes on to warn of a possible "reassessment of euro area risk by financial markets [WHICH]could result in a rapid reversal of the recent declines in bond yields”. That, in turn, could "could hinder market access and impact debt sustainability in the medium term" the report states.
In assessing the foreign debts of all sectors in the Irish economy, the report notes that the activities of the International Financial Services Sector distort comparisons with peer economies. That said, even when IFSC-related debt is excluded, the report says that economy-wide external debt stood at 309 per cent of gross domestic product in the middle of this year, "higher than the ratios in almost all other European countries".
