IMF backs Central Bank’s mortgage rules

The International Monetary Fund has endorsed the Central Bank’s mortgage rules and applauded its progress in repairing the Irish financial system.

A report assessing the financial system’s stability praised the improvement made by the authorities in strengthening regulation and supervision, but said that the bank should consider using a debt-to-income ratio rather than a loan-to-income ratio.

It said that Ireland’s boom-bust experience demonstrated the need for forward-looking action to head off incipient financial problems and that the bank should maintain its limits on loan-to-value and loan-to-income ratios.

To comply with regulations brought in last year, buyers need to raise deposits of 20 per cent of the value of the property, while first-time buyers must pay 10 per cent for the first €220,000 and 20 per cent on the balance.

Figures released this week show the number of mortgage approvals rising sharply during the summer despite fears that Central Bank rules were stifling new lending. Analysts warn, however, that a lack of building has left more potential buyers chasing fewer homes.

A Banking & Payments Federation Ireland report found that approvals rose by 25.7 per cent year on year for the three months to the end of August and by 4.2 per cent on the April-June period.

Sharon Donnery, the deputy governor of the Central Bank, said the bank would resist attempts to change mortgage rules frequently but that current lending caps could be altered if evidence supported it.

Although the IMF was broadly positive about Ireland’s progress, it said the Central Bank’s high turnover of supervisory staff was a challenge.

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“Turnover has been exacerbated and the risks identified in 2013 have materialised — ie, experienced Central Bank staff is attracted to the benefits of working directly for the European Central Bank and in the private sector as the Irish economy picks up,” it said.

“Continued very high turnover may eventually compromise institutional memory and the depth of practical experience among the staff.”

It also highlighted potential issues in the property and SME sectors. “Residential real estate and commercial real estate prices in Ireland have been rising rapidly in recent years, raising concerns about possible overvaluation and a new build-up of imbalances.”

It found that weaknesses among non-financial corporates had moderated in recent years but risks still existed. “The sector, and especially smaller firms, remains highly vulnerable even to non-extreme shocks, but, all other things being the same, banks’ regulatory capital would still be above the minimum requirement. An adverse shock, which comprises a decline in profitability and an increase in interest rates, is likely to push many firms into a vulnerable state.”

Cyril Roux, the financial regulation deputy governor of the Central Bank, welcomed the feedback. “The report highlights the transformation of the regulatory landscape and supervisory approach that has taken place in recent years,” he said.

“The introduction of new European and local regulations, the increased depth of the supervisory engagement and our focus on systemic and emergent risks across the system enable the Central Bank to deliver effective supervision. These assessments are an important opportunity to have our supervisory practice publicly evaluated against international standards.”

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Meanwhile, Ms Donnery warned that Britain’s vote to leave the EU would have a negative impact on the economy over the short and longer term. She said the impact would ultimately be determined by the trade deal agreed between Britain and the EU.

“The eventual macroeconomic impact for the Irish economy will reflect the extent to which the exit arrangements bring about any change to the free movement of goods, services, capital and labour,” Ms Donnery said.

“Trade, FDI and the labour market are the key channels for the macroeconomic effects of Brexit. Any agreement which keeps the UK access to the single market largely intact would have a more limited impact but the scale of the impact could be much more significant under a more restrictive agreement.”

The Central Bank’s most recently published forecast for the Irish economy has taken into account the potential negative effect from Brexit.

Compared with a no-Brexit baseline, projected GDP growth has been revised down by 0.2 per cent this year and by about a half of 1 per cent for next year.