Central Bank figures let us see which sectors have benefited most from credit in the past year, writes JOHN KELLY

FOLLOWING THE collapse of Lehman Brothers in mid-September 2008, banks experienced serious funding problems as interbank lending dried up.

The pressures were particularly acute in Ireland, given the banks’ dependence on external funding. Government action to support the banking system was necessary and, at the end of September, the guarantee scheme for six Irish credit institutions was introduced.

This was followed in early 2009 by the decision to bring Anglo Irish Bank into full public ownership and by the provision of €3.5 billion each in equity capital to AIB and Bank of Ireland.

One of the main objectives of these moves to support the banks was to ensure credit remained available to the productive sectors of the economy.

So, what has happened to credit since September 2008? The figures released by the Central Bank yesterday allow us to make some assessment of how successful Government support has been, and which sectors of the economy have benefited most.

The data show that, in the year to September 2009, total private sector credit (PSC) contracted by €6.3 billion, or 1.5 per cent. Within this, however, the sectoral breakdown shows a strong rise of over €11 billion, or 15 per cent, in lending to the financial sector.

The main driving factor behind this increase was the purchase of residential-mortgage backed securities by credit institutions. Such securities are included in credit to the financial sector. This involves some double-counting, since the original mortgages are counted in personal credit. Some credit to this sector is not related to domestic activity.

It is more informative, therefore, to construct a measure of credit which relates more closely to real economic activity. This can be done by deducting lending to the financial sector from the total. This measure shows a much more dramatic fall in credit of over €18 billion in the 12 months to September 2009.

The most-affected sectors were construction and real estate, which taken together accounted for €13 billion of the fall. Much of this decline is attributed to writedowns on loans to these sectors and to increased levels of bad-debt provisions, but it would be interesting to know to what extent loans have been repaid.

All of the other business sectors, with the exception of business activities (services such as computing, legal, accounting, consulting and advertising), experienced various declines over the past year. In percentage terms, one of the largest was manufacturing, which contracted by €1.6 billion (almost 18 per cent). Credit to transport fell by over 10 per cent, while a similar percentage decline in lending to wholesale and retail trade translated into a €1.3 billion drop in credit to this sector.

Credit to the personal sector fell by some €3.4 billion, with a €3.8 billion fall in non-mortgage credit being offset by a small rise in residential mortgages.

Some of the fall in personal credit was due to a reclassification of consumer credit loans by a bank, which removed them from both personal and total credit, but, interestingly, consumer credit to households has been falling in other euro-area countries in the past year.

In Ireland, personal credit card debt, part of consumer credit, was virtually unchanged at close to €3 billion since September 2008.

The latest Central Bank data show construction and real estate have borne the brunt of the fall in credit, as might be expected. This, it appears, has mostly occurred through the writing down of loans by banks rather than through repayment of loans by borrowers.

Apart from manufacturing, which saw a significant decline, falls in credit to other sectors were relatively modest. Credit to some service providers increased. Questions remain, however, and further information is required to determine whether the flow of credit to the economy is adequate.

First, the Central Bank data only show net changes in credit to each sector; there is no detail on new credit advanced or the role played by repayments.

Second, responses to the Bank Lending Survey suggest that both reduced demand and tighter credit standards have played a part. But there are no indications of the relative importance of each, and a broader assessment of the demand side is urgently needed.

Finally, large-scale writedowns on loans are a relatively recent development. While most are property-related, it would be interesting to know whether there are other sectors where bad debts are an issue.

John Kelly is a former head of statistics at the Central Bank