The policies used by the main banking groups in assessing how much to lend to mortgage borrowers have come under close examination, following criticism by the Minister for the Environment, Mr Dempsey, of changes made by the Bank of Ireland. The Minister's concern is genuine, although targeting Bank of Ireland was a little unfair. As has become clear in recent days, many of the institutions have changed their approach to assessing how much to lend out to borrowers. In doing so they do not operate under any formal rules - or even any written guidelines - set down by the Central Bank. The traditional industry norm - adopted by the banking sector itself - was to lend 2.5 times the salary of the main earner plus one times the salary of the second earner in any family. Over the past couple of years this policy has gradually been eroded. Now most lenders operate a more flexible policy, looking at a range of factors based on the salary of the borrowers and their potential to repay.
Speaking at the publication of the quarterly comment yesterday, senior Central Bank officials indicated that they realised times had changed. They were aware of cases themselves where loans based on very high salary multiples had been granted. Rising employment and higher incomes had changed the picture, the bank's officials conceded. The Central Bank is not clearly stating whether it is content with the changing approach of the commercial banks and the building societies. Yesterday its officials played down the importance of the traditional multiples-of-income approach. However they did say that they would be concerned if the impression was given to the public that loans were now easier to get, or if lenders were loosening their overall credit criteria. It would not yet be appropriate to do so, as the supply of housing had not yet picked up, they pointed out.
The Central Bank has traditionally done a good job in ensuring that overlending does not threaten the solvency of the financial sector. It has been active in recent months in policing the banks and building societies, writing earlier this year to express concern about lending policies and later pressing the lenders to calculate more rigorously what would happen to different borrowers if interest rates rose. It will hope that tightening up in this area will ensure that changing loan criteria do not translate into bad debts in future years. However it would be useful if the Central Bank would indicate more openly what criteria it feels should apply. Granted, no hard and fast rules based on one single criteria may be appropriate, but the bank should be able to set out publicly the general approach which it feels should apply. This would act as a guide not only to the lenders, but also to those taking out loans.
At the moment, it is unclear whether the Central Bank is happy with the recent changes in lending practices, or not. The problem is that if it is not, then its powers are limited to twisting the arms of the banks and building societies; it can only intervene more forcefully if it feels the solvency of an institution is threatened. Active regulation is needed and we can only hope that the Central Bank can keep some control on the banks and building societies as they scramble for market share.