Quarter of Irish bank lending is to UK borrowers, raising fears of Brexit shock
More than a quarter of lending by the main Irish banks is to borrowers in the UK, leaving the financial system here hugely exposed to a Brexit downturn, the Central Bank has warned.
UK-based borrowers account for 26pc of lending by retail banks here, according to the Central Bank of Ireland’s latest Macro-Financial Review.
That’s understood to mostly be made up of UK borrowers against UK assets, including homes, rather than cross-border investors.
It means there’s a danger economic shocks in Britain from the UK crashing out of the European Union could hit the profitability of banks here and have a material impact on their ability to be repaid.
Central Bank deputy governor Ed Sibley said AIB and Bank of Ireland are the two lenders most exposed.
Both have significant lending activities in the UK, including in Northern Ireland, that could be directly affected by Brexit.
However, he was “reasonably confident” in the banks’ ability to cope with a Brexit crisis.
Both AIB and Bank of Ireland have UK subsidiaries structured with their own capital, separate to the Irish parent banks, he noted.
Regulators have not sought specific remedies to better equip banks to deal with a Brexit crisis, Central Bank deputy governor Sharon Donnery said.
However, she said regulators here and in the UK had lifted banks’ requirement to hold capital – essentially a buffer against future losses – over the summer.
Brexit is a “key risk” for Irish economy generally, the report said, creating a wide range of potentially negative effects.
“Whatever form it takes, Brexit will be negative for Ireland. Even in the event of a deal, much uncertainty still surrounds the post-transition environment and this could continue to put pressure on investment that is vital for jobs and economic growth,” said Ms Donnery.
That includes the knock-on impact of a decline in sterling, including on small and medium enterprises (SME) that rely on exports to Britain.
The economy here has continued to grow strongly in the two-and-a-half years since the Brexit vote.
This has happened despite sharp falls in sterling.
Ms Donnery said she did not believe business here had become complacent in relation to the issue, although growth had masked some of the effects.
“There’s certainly no complacency, from what we hear there’s concern and frustration,” she said.
Further weakening of sterling would make Irish exports to the UK more expensive, and in a hard Brexit that could be compounded by tariffs.
In relation to the domestic economy, house prices are “close to or above what would be consistent with broader economic developments”, the Central Bank said.
In essence it means the bank thinks prices are justified – but based on the current lack of supply, which could change.