Irish banks are among the least exposed to borrower risk when interest rates rise.
ata from ratings agency DBRS Morningstar shows that falling mortgage debt, rising household wealth and tighter credit rules have kept mortgage risks lower here than in countries like Sweden, the Netherlands, Germany, France or the United Kingdom.
However, he said the relatively high share of borrowers here on short-term fixed-rate mortgages — he estimates around 80% of new home loans are initially fixed for one to five years — means these borrowers” could feel the shock relatively quickly” after rates go up.
But Diarmaid Sheridan, research analyst at Davy Stockbrokers, said Irish borrowers will feel less shock than other countries, where rates have been much lower for years.
“German tariffs have more than doubled [in the last year]in terms of new mortgages, so a first-time buyer in Germany has a much bigger hurdle to jump to be able to afford that property, compared to an Irish one, where, OK, rates have started to go up, but in some case, you can still get the same rate as 12 months ago.
The European Central Bank raised rates three times.
The research comes as EU finance ministers agreed to water down how new global capital standards are applied across the bloc, including to mortgage portfolios, although MPs are not not agree yet.
EU vice-president and trade chief Valdis Dombrovskis said the move was necessary to “avoid a significant overall increase in capital requirements for EU banks“.
The so-called Basel III reforms create a floor on the cash buffers that banks must hold against certain asset classes, where these buffers are calculated using internal risk ratings.
Irish banks’ risk ratings, particularly on the mortgage portfolio, have tended to be conservative due to the effects of the 2008 property crash.
DBRS research showed that the level of expected mortgage loss modeled across Irish banks was more than 10 times higher than expected by their Swedish counterparts and eight basis points ahead of that in Spain.
DBRS said countries with low expected losses have “more room for negative impact due to modeling error.”
“Our models are obviously calibrated to what happened in 2008,” Mr Sheridan said. “Over time, you might see that actually the amount of capital that banks need to hold might go down.”
In addition, Bank of Ireland has reached an agreement to sell €1.4 billion of non-performing mortgages in two separate transactions.
Distressed asset specialist AB CarVal is buying up a portfolio of defaulting homeowner loans from the bank with a face value of €800m.
The bank is also removing €600 million of UK mortgages from its balance sheet via a securitization that will see market investors assume their performance risk.
Both transactions will reduce Bank of Ireland’s non-performing exposure ratio from 5.4% to 3.7% while adding a small amount to its capital base.
The group is giving up around 30 million euros in annual revenue on loan sales, which should be finalized before the end of the year.