Banks to tighten lending standards because of Covid-19, Makhlouf says

Lenders expect sharp contraction in demand for mortgages

Gabriel Makhlouf: ‘A stable supply of credit is essential to ensure the liquidity demands of viable firms are met.’ Photograph: Nick Bradshaw

Gabriel Makhlouf: ‘A stable supply of credit is essential to ensure the liquidity demands of viable firms are met.’ Photograph: Nick Bradshaw

 

Central Bank governor Gabriel Makhlouf said on Wednesday the Republic’s banks expect to tighten their lending criteria in the second quarter as they become more cautious about borrowers’ ability to make payments.

In a blog posted on the Central Bank’s website, Mr Makhlouf said that a quarterly lending survey to be published on Thursday will show that banks expect companies’ demand for short-term loans to increase while interest in longer-term facilities will decrease as they cope with the Covid-19 crisis.

Banks have reported that demand for mortgages and household credit are expected to “contract sharply,” he said.

“Banks reported a very marginal tightening in credit standards on loans to firms in the first quarter of the year, owing to changes in the economic outlook and borrower creditworthiness,” he said. “And, so far, banks do not report any changes in credit supply coming from changes in their own cost of funds or balance sheet conditions although they expect to tighten their credit standards in the second quarter of the year.”

Surge

The State’s two largest banks, AIB and Bank of Ireland, revealed this week that they had taken €476 million of loan impairment charges between them in the first quarter as they prepare for a surge in bad loans as a result of the economic shock unleashed by the coronavirus pandemic.

While the Government moved on May 2nd to announce plans for a €2 billion credit guarantee scheme to support lending to small- to medium-sized enterprises (SMEs) as well as a €2 billion equity investment plan for medium and large groups, these measures will require the formation of a new government and the passing of necessary legislation. Analysts see these measures as key to providing credit to businesses at a time of uncertainty.

Emergency liquidity

A study published by the Central Bank last month said that SMEs may need up to €5.7 billion in emergency liquidity to help them through the Covid-19 crisis.

“A stable supply of credit is essential to ensure the liquidity demands of viable firms are met,” Mr Makhlouf, noting that the renewal or restructuring of existing overdrafts was the most common bank lending product requested following the last crisis in Ireland.

“Supporting viable businesses through difficult economic times can avoid unnecessary bankruptcies and is a critical function of the banking system.”

Still, he added: “It is in the interest of the whole banking system to maintain the supply while ensuring prudent lending.”