Central Bank warns of fragile banking system

Uncertainties remain about whether banks are sufficiently provisioned to cope with the outstanding stock of distressed loans, the Central Bank said today.

The macro-financial environment remains challenging “amid some tentative signs of economic recovery”, the bank said in its latest Macro-Financial Review.

It said the overall value of impaired loans continues to rise, albeit at a declining rate, and that the level of distress among small and medium-sized enterprises is particularly acute.

While there have been some positive developments in terms of the banking sector’s return to profitability, the overall profile remains fragile and vulnerable to swings in market sentiment.

The review said the bank is anxious to see greater resolution of mortgage arrears situations and SMEs with distressed loans. In relation to mortgages, it said, it is “vital that potential modifications are affordable in both the short and the long term and that the changes provide sufficient clarity on what happens to the collateral at maturity.”

The review focuses on downside risks but “better-than-expected outcomes” are also possible, according to a note in the report.