Ireland’s banking system remains in a fragile state and is vulnerable to further shocks, according to the Central Bank.

The wide-ranging analysis is contained in its second Macro-Financial Review, a report designed to assess the financial strengths and weakness of all sectors in the economy, along with the risks to which each is subject.

The report contains new figures on mortgages arrears of those who have bought property for investment purposes.

As of the middle of 2012, the holders of €9.3 billion worth of buy-to-let mortgages were in arrears of more than 90 days, according to the bank’s provisional estimates. This amounts to 29 per cent of the total buy-to-let loan book of the banking sector. The mortgage arrears rate among owner-occupiers is half that of buy-to-let mortgage holders.

Since its last review “the environment faced by households has not changed significantly, but remains challenging”, the review states. This is having a knock-on effect on the banks.

“Credit institution losses could conceivably rise in the short-term following the implementation of the new personal insolvency legislation.”

Persistently high levels of impaired loans, loss-making tracker mortgages, the high cost to the banks of fees paid to the Government for liabilities guarantees and intense competition for deposits are some of the factors that are hindering the sector’s return to profit. according to the report.

The review suggests that to accelerate the return to profitability the banks should cut their pay bills. “Employee expenses remain the largest element of the banks’ non-interest expenses, and banks will need to reduce this commensurate with the contraction in lending volumes and income.”