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    Central Bank of Ireland Updates Discuss Issues Related to Lending

    May 26, 2022

    The Central Bank of Ireland has published a financial stability note on credit conditions for small and medium enterprises (SMEs) and on non-bank mortgage lending in Ireland. The Central Bank also announced an extension to the existing regulatory regimes following the commencement of the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022.

    Below are the key highlights of the recent updates:

    • The note on credit conditions for SMEs examines credit conditions for SMEs in the context of the recovery from the COVID-19 pandemic and the extraordinary policy measures put in place during the crisis. Government policy supports have been large and composed mainly of grants. These supports have provided extensive liquidity support to firms and mitigated debt overhang risks, while also likely weighing on demand in the formal credit market. The note highlights that new bank lending to SMEs has fallen moderately, mainly driven by decline in lending to pandemic-affected sectors, while SME demand for credit remains low. The note indicates that the main reason Irish SMEs do not apply for credit is because they have sufficient internal funds. In terms of credit supply, rejection rates on SME loan applications remain stable. The tapering of government supports to businesses may result in a rise in credit demand over the coming months.
    • The note on non-bank mortgage lending in Ireland examines the growing role of non-bank financial intermediaries (NBFIs) in the Irish mortgage market since 2018. The Central Bank has heightened its focus on the evolution and risk profile of NBFI lending in recent years. The note highlights that market share of new lending has increased from 3% in 2018 to 13% in 2021. Non-bank lending is currently concentrated in the buy-to-let and refinance segments of the market, when compared to lending by retail banks. The note further highlights that NBFI lending may differ from bank lending in ways that benefit the real economy. However, there are some potential risks from a financial stability perspective. The note points out that NBFI participation across a range of lending markets can mitigate the risk of a single, systemic event undermining financial stability—as occurred during the Global Financial Crisis. NBFIs are likely to increase cyclical pressures during times of economic expansion, but may exacerbate declines in credit supply during downturns.
    • The new rules on consumer protection allow the Central Bank to close a consumer protection gap so that consumers who enter into hire purchase, consumer hire, and indirect credit (for example buy now pay later) agreements can be protected by the Central Bank’s consumer protection framework, including key provisions of the Consumer Protection Code 2012, the Minimum Competency Code 2017, and the Minimum Competency Regulations 2017. Firms providing these services will be required to seek authorization as a retail credit firm or as a credit servicing firm as appropriate. The Consumer Protection Act also introduces an interest rate cap of 23% annual percentage rate on all credit agreements provided to consumers (other than money lending agreements which have a separate regulatory framework). The Act ensures that all retail credit firms must comply with Section 149 of the Consumer Credit Act 1995 and notify the Central Bank if they wish to introduce any new charges or increase any charge that has been previously notified to the Central Bank.

     

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    Keywords: Europe, Ireland, Banking, Securities, SME, Lending, Credit Risk, Mortgage Lending, NBFI, Financial Stability, Consumer Lending, Central Bank of Ireland

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