Irish banks face less mortgage risk than other EU banks when interest rates rise

Irish banks are the least exposed to borrower risk as interest rates rise.

ata from the rating agency DBRS Morningstar show that falling mortgage debt, rising household wealth and stricter lending regulations have kept mortgage risks lower here than in countries such as Sweden, the Netherlands, Germany, France or Great Britain.

However, the relatively high proportion of borrowers here with short-term fixed-rate mortgages — it’s estimated that about 80 percent of new home loans are initially fixed for one to five years — means those post-rate borrowers “could feel the shock relatively quickly.” rises.

But Diarmaid Sheridan, a research analyst at Davy Stockbrokers, said Irish borrowers will be less shocked than other countries where interest rates have been much lower for years.

“German rates have more than doubled [in the last year]in terms of new mortgage loans so a first time buyer in Germany has a much bigger hurdle to get through to afford that property compared to an Irish where, OK, rates have started to rise but in some cases you still get the same price as 12 months ago.”

The European Central Bank has raised interest rates three times.

The probe comes as EU finance ministers agreed to water down the application of new global capital standards across the bloc, including mortgage books, although MPs have yet to agree.

EU Vice-President and Trade Chief Valdis Dombrovskis said the move was necessary to “avoid a significant increase in capital requirements for EU banks overall”.

The so-called Basel III reforms impose a floor on the cash buffers that banks must hold against certain asset classes, calculated using internal risk assessments.

Irish banks’ risk ratings, particularly in relation to the mortgage book, tend to be rather conservative due to the impact of the 2008 housing crisis.

DBRS research showed that the level of expected mortgage losses modeled by Irish banks was more than 10 times the level predicted by their Swedish peers and eight basis points higher than Spain’s level.

According to the DBRS, countries with low expected losses “have more scope for negative impacts due to modeling errors”.

“Our models are obviously calibrated to what happened in 2008,” said Mr. Sheridan. “Over time, you could see that the amount of capital that banks need to hold could actually decrease.”

Separately, the Bank of Ireland has reached an agreement to sell 1.4 billion euros of non-performing mortgages in two separate transactions.

Distressed asset specialist AB CarVal is buying a portfolio of the bank’s distressed owner-occupier loans with a face value of €800m.

The bank is also removing 600 million euros worth of UK mortgages from its balance sheet via a securitization where market investors assume their performance risk.

The two deals will reduce Bank of Ireland’s non-performing risk ratio to 3.7% from 5.4% while adding a small amount to its Tier 1 capital.

The group is forgoing approximately €30 million in annual revenue from the loan sales, which are expected to close before the end of the year. Irish banks face less mortgage risk than other EU banks when interest rates rise

Fry Electronics Team

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