INTERVENTION:REGULATORY AUTHORITIES had an arsenal of instruments at their disposal that could have stopped the property bubble in its tracks, but it was a case of too little too late.
The report compiled by Central Bank governor Patrick Honohan found that more aggressive intervention by the Central Bank and the Financial Regulator could have changed the behaviour of banks. This would have substantially reduced emerging risks to financial stability.
For example, a far greater increase in capital requirements for risky property-related loans, implemented at an earlier stage in the housing boom, would have made “a major difference”, the report says.
Capital surcharge measures relating to high loan-to-value (LTV) mortgages were introduced by the Financial Regulator in May 2006, and an EU directive implemented in 2007 extended this regime to speculative property development loans. However, the residential property market had already peaked by the end of 2006 and in any event, the likely impact of these measures was modest.
“It was too little too late,” the report concludes.
Authorities should have given serious consideration to limiting or banning certain types of loans such as 100 per cent LTV mortgages. Furthermore, a cap on property-related lending could have “curbed the worst of the excess”. The possibility of restraining the growth in credit extended by certain institutions should have been considered. Although a “crude” measure, it would have been very effective in “stopping the property bubble in its tracks”.
Specifically, the rate of growth of Anglo Irish Bank should have acted as a “trigger” for more intense scrutiny of its business than it attracted.
The imposition of a ceiling on banks’ loan-to-deposit ratios could have restrained the property bubble before it got under way. The report acknowledges that such a move would have been “vigorously resisted”, however.
Even after the property downturn began, regulators could have required banks to increase their provisions for impaired loans.
To support all of these actions, the Central Bank & Financial Services Authority of Ireland should have sent out much stronger warnings in its financial stability reports.