The European Central Bank (ECB) has warned that regulating overseas buyers of soured Irish loans may ultimately limit banks' ability to lend and potentially lead to higher costs for borrowers.
Responding to a request from Taoiseach Leo Varadkar and chairman of the Oireachtas finance committee John McGuinness for an opinion on the Fianna Fáil Bill paving the way for such regulation, ECB president Mario Draghi also said the draft law would give the Central Bank powers over so-called vulture funds that it does not even have over mainstream lenders.
Concerns over the attitude of buyers of Irish loan portfolios prompted Fianna Fáil to introduce its Bill to the Dáil in February, even though the Central Bank has argued that mortgage holders enjoy the same protections whether they are indebted to banks or funds. Laws enacted in 2015 in Ireland stipulated that firms managing loans on a day-to-day basis, even on an outsourced contract, must be regulated in Ireland and adhere to the regulator’s code of conduct on mortgage arrears and consumer protection code.
The State’s banks have ramped up portfolio sales in recent times as they come under mounting pressure from regulatory authorities to lower their non-performing loan (NPL) ratios to the European average of about 5 per cent.
Permanent TSB, which has a 26 per cent NPL ratio, currently has €2.2 billion of problem owner-occupier and buy-to-let loans on the market, while Ulster Bank is seeking to lower its 17 per cent ratio through the sale of €1.6 billion of NPLs.
AIB agreed in May to sell €1.1 billion of bad loans at a discounted rate to a consortium led by US distressed-debt firm Cerberus.
‘Unintended side effects’
The ECB cautioned in its opinion that the draft laws may have “unintended side effects”. The Frankfurt-based institution stressed that it was a “strong proponent” for the development of a market the sale and purchase of NPLs.
“In the context of the large stocks of NPLs that remain on the balance sheet of some European credit institutions, and as part of a comprehensive solution to NPL resolution, the development of secondary markets may contribute to reducing NPLs,” the letter said.
The ECB said the draft laws could put off potential buyers of Irish loans and make it more difficult for banks to diversify their funding.
“This could in turn increase pressure on Irish credit institutions to adjust their own strategy or managing and administrating existing credit agreements and determining interest rates, which may not ultimately benefit borrowers,” it said.
“In addition, it could detrimentally affect Irish credit institutions’ ability to engage in new lending and the terms on which they could provide new credit, also to the potential detriment of borrowers,” it added.
The ECB said provisions in the Bill would give the Central Bank powers over potential future owners of NPLs that it did not even currently have over mainstream banks. These would impact funds’ ability to determine their strategy and interest rates.
The opinion follows an even more cautious view the ECB gave in late 2016 to a Fianna Fáil Bill that would give the Central Bank powers to limit variable mortgage rates in Ireland. The ECB said at the time that the proposed laws, which have not progressed beyond the early stages of the Oireachtas legislative process, would hit competition in the market and might force banks to push up the cost of other types of loans.
