Central Bank reassuring on market turmoil

Central Bank governor John Hurley has said the risks to financial stability have increased in the past year but the Irish banks are "well-placed" to withstand them in the short to medium term.

Mr Hurley told the Joint Oireachtas Finance and Public Service Committee that Irish banks had "no significant direct exposures" to US subprime mortgages and "only negligible exposures" through investments and links with other financial companies affected by the market turmoil.

He said stress-testing of the financial system had shown that "Irish banks are solidly profitable and well-capitalised and with no major exposures". The "evolution and duration" of the current global crisis is "still uncertain" and "it is difficult to draw firm conclusions at this early stage".

Mr Hurley added that falling house prices, which were down 6 per cent year-on-year in November, were "necessary" following many years of high house-price inflation. He said property had become more affordable due to lower house prices, changes to stamp duty and mortgage interest relief. Rents had risen by 11 per cent, which showed there was still a strong demand for housing.

He said the economy would grow by 3 per cent this year, while unemployment would rise slightly.

Pat Neary, chief executive of the Financial Regulator, told the committee turbulence in the financial markets would "persist for the foreseeable future" and the regulator was in touch with the banks on an almost daily basis, monitoring the availability and cost of funding in the money markets.

Mr Neary said there had been no signs of a "significant increase in loan defaults". He said that while house prices had fallen, homeowners could still afford to pay their monthly mortgage bills.

The regulator would start to monitor Irish subprime lenders from tomorrow, he said, adding that there was about €1.5 billion in subprime loans in the Republic, representing about 1.2 per cent of all home loans.

Responding to a question about rising home repossessions, Mr Neary said he hoped lenders would try to meet struggling borrowers to help them manage their repayments and would only turn to the courts as a "last resort".

Con Horan, prudential director of the regulator, said it had contacted Irish financial institutions following the rogue trading scandal at Société Générale to see if they had any exposure and "to ensure no similar issues emerge here".

He said the regulator needed to "fully understand the circumstances" behind the trading at SocGen before "drilling deeper" to ensure they do not arise within Irish financial institutions.