Irish banks' foreign deposits fall by €91bn

FOREIGN DEPOSITS with Irish banks declined by 40 per cent during 2010, while the flow of credit to businesses and households continued to dry up in December, new figures from the Central Bank show.

Non-Irish euro zone residents withdrew 39 per cent, or € 10 billion, of their deposits from domestic banks (including Irish and foreign-owned retail banks) over 2010, according to the Central Bank. Meanwhile, deposits from the rest of the world fell 40 per cent, or €81 billion, to €121 billion.

Irish residents reduced the level of money on deposit with domestic institutions by almost 6 per cent last year. Deposits from businesses fell by 16.1 per cent, while those from households declined by 4.7 per cent.

Irish lenders became increasingly dependent on European Central Bank (ECB) funding last year as a result of this outflow of deposits, and volatility in wholesale funding markets. However, in December banks reduced their reliance on ECB funding by €2.7 billion to €94.5 billion, the Central Bank’s statistics show.

The figures also indicate consumers have become increasingly reluctant to lock away money for fixed periods. During December, overnight deposits from households rose by €1 billion. The Central Bank says this suggests a significant proportion of fixed-term deposits that matured in November may have been moved into demand and current accounts.

The statistics also confirm a shortening in the terms of credit provided to businesses, with firms becoming increasingly reliant on overdraft facilities. The overall level of credit extended to businesses fell 1.2 per cent last year.

However within this, business loans with a term of more than five years contracted by 7.8 per cent year on year, whereas loans maturing within one year, which would include overdrafts, were 11.5 per cent higher in December on an annual basis.

Households also borrowed less in 2010. Loans for house purchases declined almost 2 per cent year on year, but lending for consumption and other purposes was harder hit, slumping 16.6 per cent.

Alan McQuaid, chief economist at Bloxham Stockbrokers, said the banking figures contained “little to cheer about”. He noted the annual rates of decrease for the main loans to the household sector continued to rise in December, and said there is no sign this trend will change any time soon.

“Getting the banks back to some sort of ‘normal’ lending practices should be the key objective of a new government,” he advised.

“Until the banking sector crisis is fully resolved and things improve on the labour market front, the supply/demand for credit will remain subdued in our view, severely hampering the recovery prospects for the economy as a whole in the process,” he added.