Bank staff incentives to increase lending undervalued ‘quality’

Irish retail banks have been using league tables to incentivise staff in driving new lending without giving proper consideration to quality, the Governor of the Central Bank Philip Lane told the Oireachtas finance committee on Tuesday.

Mr Lane said this emerged in recent inspections by the regulator of the Irish retail banks.

Other weaknesses identified included a need for “better oversight and challenge” from boards in relation to the risk appetites of banks, which are used to govern and quantify lending decisions across sectors and borrower types.

It also included strategies focused on driving increased volumes without sufficient consideration of the risks associated with long-term lending, and the use of the league tables to incentivise staff to push lending volumes without due consideration to quality.

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It is not clear which banks were using the league tables but it is understood that the they were operated informally and their use has stopped after interventions from the Central Bank.

Mr Lane said the culture within Irish banks also needs to change so that they “truly put the customer first”. He called for more oversight by boards of directors and by shareholders.

Separately, Mr Lane said “significant risks” remain on the horizon for the domestic Irish banks, in spite of the measures that have taken place to repair their businesses. “All have relatively concentrated business models, focused primarily on Ireland and to some extent the UK,” he said. “This makes them especially vulnerable to any shocks affecting the Irish economy.”

Mr Lane said that while Irish banks continue to work out their non-performing loans (NPLs), they still “remain high” both in absolute and relative terms. In absolute terms, NPLs have declined by just more than €48.5 billion or 57 percent since their peak in 2013, and now represent 17.3 per cent of all loans.

On the Central Bank’s view of it being given powers to regulate standard variable interest rates, Mr Lane said there were “many downsides” to this but it was ultimately a matter for the Oireachtas to decide.

In the absence of new lenders to the Irish market, Mr Lane encouraged mortgage customers to consider switching their home loan to another lender or transferring to a lower-cost product with their existing bank.

“More can be done to encourage switching,” he said, adding that the incidence of switching here was currently “too low”.

Mr Lane said Brexit presented a “significant challenge” for the domestic banking sector. “Depending on the outcome [of negotiations], the UK’s exit from the EU could have long-term structural consequences for those Irish banks with a significant presence there. This will become clearer during the next two years, as the elements of the EU-UK relationship take shape.”

He said Dublin was “in the mix” with other EU cities in terms of where London-based financial institutions might relocate their activities, adding that the Central Bank had a “neutral” view on this matter and would consider any applications by firms on their merits.