Bank lending standards have declined severely since 2003, according to the Central Bank. It says that the number of borrowers at risk from higher interest rates is growing, writes Marc Coleman, Economics Editor.
The bank has welcomed what it says are tentative signs of a slowdown in the housing market, with Central Bank governor John Hurley saying that the worst appears to be over in terms of recently strong house price inflation.
At the publication of the bank's annual Financial Stability Review yesterday, he added that any resumption in house price growth would be serious. According to the report, problems identified by the Central Bank last year have intensified during 2006, including excessive credit growth and an overconcentration on loan books of property-related lending.
Frank Browne, head of the bank's monetary policy and financial stability unit, said mortgage lending standards had declined severely since 2003, resulting in strong growth in property-based lending.
While not universally negative, Mr Browne said banks needed to ensure their ability to protect themselves in the event of a property market slowdown.
"If the volume of lending growth slows down, we have to ask to where do banks turn . . . It's important that banks are healthy. If they're not healthy, the implications for the real economy are quite severe," he said.
Interest rate cuts would be of limited assistance to the economy in the event of a banking crisis as banks would then be unwilling to lend, he added.
"If the tentative information we're seeing - that there is a slowing - is confirmed into next year it would be a very welcome development. If that didn't happen, there would be grounds for serious concern," Mr Hurley said, adding that a soft landing in the property market would be easier to achieve while the economy was still growing and the banking sector still strong.
The report notes that "60 per cent of [ bank] debt is property-related. According to survey evidence cited in the report, 71 per cent of bank respondents now regard a "rapid and abrupt house price change" as a "major risk" to the economy. Fifty per cent see "domestic credit risk" as a major threat while a "commercial property price bubble" is seen as the third highest risk factor, with 43 per cent of respondents describing this risk as "major".