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Irish Loan Losses May Rise on Insolvency Laws, Central Bank Says

Irish banks’ loan losses may increase “in the short term” following the implementation of planned personal insolvency laws, which will pave the way for write-offs of some home loans, the central bank said.

Still, the legislation “is an important part of the solution for managing private-sector indebtedness and promoting long-term growth,” the Dublin-based central bank said in a report today. The laws may also aid the recovery of household finances if implemented effectively, it said.

Irish household debt stands at more than 200 percent of disposable income, twice the euro-area average, according to the Irish central bank. Under the planned laws going through parliament next month and scheduled to be enacted by year-end, troubled borrowers will be able to seek writedowns of as much as 3 million euros ($3.9 million) on secured debt, including home loans, in out-of-court settlements.

Almost 15 percent of Irish banks’ owner-occupier loan books and 29 percent of their buy-to-let portfolios were more than three months in arrears at the end of June, according to the Irish central bank. The European Central Bank said on Sept. 14 that the move could “significantly increase default rates” and impact lenders’ capital and liquidity positions.

Bank Risks

Irish taxpayers have committed 64 billion euros to shore up the nation’s banks against soaring bad loan losses, following the implosion of a domestic real-estate bubble in 2008.

“Loan impairments, low interest margins and lack of access to longer-term market funding continue to pose risks for Irish banks,” the central bank said in today’s report.

On Nov. 13, Bank of Ireland Plc became the first domestic bank to issue a public bond in two years, selling 1 billion euros of residential mortgage-covered bonds.

Still, Irish lenders “have not yet returned to senior unsecured or short-term securities issuance, with their current credit ratings at or below investment grade,” the central bank said.

Having sustained a 61 percent slump in operating income since 2008, the nation’s banks remain under pressure from low growth, high funding costs and the fact that they can’t independently raise rates on more than half their home loans, which are linked to the ECB’s benchmark rate, it said. They’re also facing “significant costs” upgrading computer systems to meet regulatory requirements, according to the report.

The central bank highlighted the “recent operational failure” in an overseas-owned bank in pressing the need for information-technology improvements in some banks. Royal Bank of Scotland Group Plc’s Ulster Bank unit set aside 82 million pounds ($131 million) to compensate customers hit by a computer failure, the Edinburgh-based lender said on Nov. 2.

The failure left some of Ulster Bank’s 1.9 million customers without access to their accounts for more than three weeks in June and July.

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