Regulator tells banks to act over SME loans

BANKS MUST face up to the issue of restructuring rather than just deferring problem SME loans, the deputy governor of the Central Bank said yesterday.

Matthew Elderfield also warned an audience of compliance officers that the Central Bank will conduct a third series of stress tests on Irish banks over the next year to satisfy itself that they were now sufficiently capitalised for the medium term.

He said that, while banks have begun addressing the issue of restructuring mortgage arrears, an in-depth analysis commissioned by the Central Bank shows that, to date, they have failed to show a similar appetite for facing up to the issue of problem SME arrears.

“It appeared that portfolios were largely subject to rescheduling and extended forbearance rather than a determined effort to restructure loans and deploy a wide range of workout options,” said Mr Elderfield who is head of financial regulation at the Central Bank.

While the Central Bank would not be rolling out the same extensive regulatory framework it has done for mortgages, it would be pressing the banks to decisively tackle the recovery and, as necessary, restructuring problem SME loans, he said.

Mr Elderfield made his comments during an address to a conference organised by the Financial Services Innovation Centre at University College Cork.

Turning to the issue of bank capital, Mr Elderfield said it was too soon to say how much risk there is in the medium term for the capital position of Irish banks.

In this regard, there remains the challenge of breaking the damaging link between the banking system and the government finances, which is essential for the successful completion of the financial programme for Ireland and a speedy recovery of the Irish banking system, he said.

The lesson of the Irish programme so far has been that the Irish banks’ capital position will not be definitively resolved before the impact of the bank debt on Irish government finances has been resolved, he said.

“Huge strides have been been made in tackling the banking system problems through decisive and costly actions but there are limits to the public policy measures that can be taken without European assistance,” he said.

Mr Elderfield said Irish banks had made good progress through the transfer of poorly performing commercial property assets to Nama but the challenge remains to make sure the asset disposal process stays on track.

Mr Elderfield said it was also important banks regain profitability in their core business so they no longer rely on the taxpayer, and bank management should be commended for taking tough decisions about staffing levels and branch closures to cut costs.

However, there remains a need for a change in banking culture and although this has begun, it will take time to complete, he said. The tone must set at the top and new standards of behaviour need to be backed up when hard cases of individual conduct come to a head, he added.