Central Bank asks lenders to address ‘warning signs’ in treatment of borrowers

Bank flags ‘high reliance’ on short-term forbearance in letter to chief executives

Derville Rowland, the Central Bank’s director general of financial conduct. Photograph: Nick Bradshaw

Derville Rowland, the Central Bank’s director general of financial conduct. Photograph: Nick Bradshaw


The Central Bank has written to the chief executives of lenders in the Irish market asking them to address “warning signs” apparent in their handling of borrowers in financial distress as a result of the Covid-19 pandemic.

The letter, signed by deputy governor of prudential regulation Ed Sibley and director general of financial conduct Derville Rowland, outlines how the Central Bank expects borrowers will be “appropriately protected” through the crisis and lenders will avoid “elements of past mistakes” that could hurt the resilience of the financial system.

Lenders have made “considerable efforts” this year to introduce loan payment breaks and subsequently develop plans for how they will support borrowers after these payment breaks expire, the bank acknowledges.

But information on the supports being provided to borrowers is “in most cases, not sufficiently granular” to allow for effective oversight by the lenders’ boards and executives, its letter warns.

It also identified a “high reliance on temporary and very short-term forbearance” as an area of concern. While this is “understandable” in light of uncertainties about the timing of an economic recovery, there are “early indications that some lenders are overly relying on short-term arrangements”, including those where mortgage borrowers do not repay any capital on their loans.

“These arrangements may not be in the borrowers’ best interest as they increase the overall cost of credit for the borrower and do not address the affordability of their loans over the longer term.”

There is “some anecdotal evidence”, particularly in the case of lending to small and medium-sized enterprises, that borrowers have “concerns regarding the rationale and judgement applied in arriving at credit decisions”, the letter adds.

This includes reported instances where lenders have “inappropriately” justified decisions by citing regulatory requirements.

‘Candid up-front view’

The Central Bank also highlights a “lack of innovation” in the range of loan forbearance options being offered to borrowers.

“Lessons from the past show that excessive use of short-term forbearance and non-recognition of distress allows problems to build up such that it becomes more difficult for appropriate and sustainable solutions to be implemented,” it continues.”

“No single measure will be successful in resolving all distressed debt, and research shows that borrowers and lenders benefit from taking a candid up-front view of borrowers’ repayment capacity, and having a range of solutions appropriate to all circumstances.”

Lenders must “take action now” to prevent a repeat of past mistakes, the bank concludes, with chief executives asked to confirm by December 18th that the necessary steps have been taken.