Recruitment in The Republic of Ireland - History - Bank Solvency

Bank Solvency

The second problem, unacknowledged by management of Irish banks, the financial regulator and the Irish government, is solvency. The question concerning solvency has arisen due to domestic problems in the crashing Irish property market. Irish financial institutions have substantial exposure to property developers in their loan portfolio. These property developers are currently suffering from substantial over-supply of property, much still unsold, while demand has evaporated. The employment growth of the past that attracted many immigrants from Eastern Europe and propped up demand for property has been replaced by rapidly rising unemployment.

Irish property developers speculated billions of Euros in overvalued land parcels such as urban brownfield and greenfield sites. They also speculated in agricultural land which, in 2007, had an average value of €23,600 per acre ($32,000 per acre or €60,000 per hectare) which is several multiples above the value of equivalent land in other European countries. Lending to builders and developers has grown to such an extent that it equals 28% of all bank lending, or "the approximate value of all public deposits with retail banks. Effectively, the Irish banking system has taken all its shareholders' equity, with a substantial chunk of its depositors' cash on top, and handed it over to builders and property speculators.....By comparison, just before the Japanese bubble burst in late 1989, construction and property development had grown to a little over 25 per cent of bank lending."

Irish banks correctly identify a systematic risk of triggering an even more severe financial crisis in Ireland if they were to call in the loans as they fall due. The loans are subject to terms and conditions, referred to as "covenants". These covenants are being waived in fear of provoking the (inevitable) bankruptcy of many property developers and banks are thought to be "lending some developers further cash to pay their interest bills, which means that they are not classified as 'bad debts' by the banks". Furthermore, the banks' "impairment" (bad debt) provisions are still at very low levels. This does not appear to be consistent with the real negative changes taking place in property market fundamentals.

In contrast, on 7 October 2008, Danske Bank wrote off a substantial sum largely due to property-related losses incurred by its Irish subsidiary – National Irish Bank. The 3.18% charge against the loan book of its Irish operations is the first significant write off to take place and is a modest indication of the extent of the more substantial future charges to be incurred by the over-exposed domestic banks. Asset write downs by the domestically-owned Irish banks are only now slowly beginning to take place