The presentation is different from the previous one. When I finish, I might formally introduce the four other representatives and ask them to speak briefly about their institutions.
We are pleased to accept the invitation of the committee. The Irish Banking Federation is the trade representative body for international and domestic banks in Ireland. We have a clear purpose, which is to foster an innovative, stable and dynamic banking system which contributes not just to the economic life of the country but also its social well-being. We take this seriously and it is subscribed to by all our members.
It is important to make a number of key points about the banking system. It is a key driver of economic development and growth. It does not just operate within the economy in its own right but oils the wheels of business and life generally. In addition, it is not said sufficiently often that the sector has a very strong service export performance. International financial services now represent about one third of our internationally traded services. Thus, it is a key component of growth in this country. To a large degree, it has taken up the slack in the shift from manufacturing to services. It is also a major employer. Banking and financial services employ more than 100,000 people, making them one of the largest private sector employers, representing more than one in 50 people employed in the economy. The sector is a significant contributor to wealth generation by virtue of the activities in which banks are engaged. It is also important to state it is very competitive. There are a large number of players in the market and the sector is well capitalised and profitable and has strong shock absorption capacity. It has negligible exposure to the subprime market, of which much has been said and written, and has consistently received a clean bill of health from respected agencies both locally and internationally. We have recently had reviews by the International Monetary Fund, the Central Bank and Financial Services Authority which conducts stability reviews on which it has a mandate to report to this forum and others, and the OECD which also carried out a report on Ireland recently.
The economy is advanced and as such, needs a well developed, internationally active banking system. The sector has delivered this very strongly in the last couple of decades and it has kept pace with the level of economic growth. While we have been challenged in other aspects of our infrastructure, the banking system has delivered. We also contribute about €2 billion in taxes and spend another €6 billion on purchasing goods and services in the economy.
In the last ten years there has been a significant number of new entrants into the market. We now have ten providers of business banking services, as opposed to four or five at the start of the decade, and 20-plus banks and building societies offering personal banking services such as current accounts, mortgages and so on. That number, again, has almost doubled over the same period. In recent weeks an established UK provider has announced its entry into the Irish savings market. The entry of new providers is continuous. In the international sector, a few months ago we saw Goldman Sachs, a global investment bank, establish a presence in the IFSC. Thus, there continues to be new entrants at both international and domestic level. Ownership is highly diversified, as our banks are owned by both local and foreign players.
There is a changed reality in the economy, both globally and locally. It is important to dwell on this for a minute or two because it sets the context for discussion. There has been continued turmoil in the global financial markets for almost a year now. We have had adverse changes in exchange rates with our major trading partners which have been well chronicled. We have also seen sharp rises in commodity and food prices. There have been changes at regulatory level, principally with regard to the introduction of the capital requirements directive. Locally, there has been an economic slowdown, as well as uncertainty. We are going through a housing market correction and, generally, consumer sentiment is more negative. Any one of these factors would have a negative impact but together they pose a considerable challenge. They all have consequences and a range of stakeholders — consumers, the Government, business and banks — must adjust to these new realities.
These adjustments are not confined to Ireland. They are having an impact globally, principally in Europe and the USA. This has resulted in changes in the funding landscape. Financial institutions must have access to funding in order to lend to the productive sectors of the economy and personal customers. The way in which financial institutions in the economy and many advanced economies access funding has changed in recent years. Under the old model — at a time when economic growth was at a much lower level than today — it was possible to fund most of the lending from traditional retail deposits which included both business and customer deposits, mainly from Irish customers. However, the world in which we live today is different, not just in Ireland but in all advanced economies. Some 40% of lending to Irish customers is now funded from international and wholesale sources. This is important because such sources have become more restricted in some cases. There has been a freeing up of funds in recent times but, generally, access to funds is less available than in the past and also much more costly.
Since the international turmoil began, access to funding has become much more expensive, not just for Irish banks but for the whole banking system. Before the events in the autumn of 2007 with which we are all familiar, there was relative stability in bank funding costs, but since that time there has been major and continued volatility in international markets which has significantly increased the cost of funds for the banking system. The market in securitisation, also a source of funding for Irish banks, has been largely inactive since the commencement of the turmoil in international markets. Interbank lending has also dried up and funds are generally harder to access and much more expensive.
That, in turn, has had an impact on mortgage rates. I have read some commentary about the linkage between the ECB rate and the charges banks pass on to their customers. The reality, as all commentators acknowledge, is that while there was little variation between the benchmarking of the mortgage rate against the ECB rate before August 2007, there has been a sharp and sustained spike in the interbank rates since. That benchmark is the one against which banks must price their funds in terms of lending to borrowers. The cost of funds for banks is at least 5%, and upwards. The Euribor three-monthly interbank rate, namely, the gross cost of funds to lenders, has increased significantly and has stayed well above the ECB rate.
There have also been changes on the regulatory front. The Irish regime for capital requirements is stricter under the Basel II accord. This is not specific to Ireland but has happened across the EU with the result that banks have to set aside more capital to lend higher loan-to-value ratios. That has had an impact and in one particular area, lending on land bank developments, the weighting on those is now 150%. This is unique to Ireland. The regulator's consumer protection code imposes additional requirements on banks when assessing customers and potential customers for loans.
Last and by no means least, due to regulatory changes which had their origins in the EU in the first instance, the liquidity risk management framework is recognised as a tough one. That was put in place some time ago and banks are now more regularly reporting their requirements. That predates the market turmoil.
The full impact of Basel II took effect on 1 January 2008 and affects countries across Europe. They have had the same issues in having to adjust policies in consequence.
There have also been changes in the housing market and an overhang of supply remains to be cleared, as is well recognised. There has been a change in buyer sentiment and house values continue to fall from historic highs. This is important because it has implications for the loan-to-value ratios at which banks lend. It is prudent for banks to take such factors into account when they lend in order to avoid negative equity situations.
There has been a corresponding effect on the borrowing capacity of customers because, ultimately, their ability to borrow is based on their capacity to repay. If we remind ourselves of the impact of this on changing economic circumstances and look at the increased cost of commodities in utilities and foodstuffs, people have less disposable income. Therefore their capacity to borrow is reduced. There is also greater caution among borrowers reflected in the fact that consumer sentiment is generally weaker. Against this backdrop lenders must continue to take a prudent and responsible approach.
On the business banking side there is and has been strong lending support to the private sector. This is across all sectors and covers various types of finance. As we speak, almost €155 billion is outstanding to business in different types of finance, both short and long-term. In the area of agriculture, forestry and fisheries, for example, €5.6 billion is outstanding.
In the accompanying slide material members will notice how the banking system, from 2004 to the last quarter for which we have details, is providing finance to all those sectors with which they will be familiar.
There is a current myth that banks are not open for business. They are very much so. The graph depicting standard overdraft loans for both under and over €1 million reveals that a degree of leaning has returned. For the period April to April, the latest figures from the Central Bank show that there is a consistently strong level of lending to business. That is indisputable and is verified by the Central Bank. However, there has been an impact on business. The cost of funds to the sector is higher, just as it is to personal customers. Credit has tightened somewhat but it is important to know that the most pressing concern for SMEs is not access to finance or the cost of it. The greatest concern is about costs associated with staffing and energy which also impact on personal customers. When one looks at interest rates and access to finance, for example, these factors rank much lower than many other factors.
The accompanying material includes an up-to-date survey undertaken by the Small Firms Association. Top of the list is economic uncertainty, followed by managing costs, recruiting and retaining staff and so on. Access to finance and its cost rank much lower on the list of concerns for business than might be assumed from some of the current commentary.
In the mortgage market there is very strong lending support to housebuyers. The value of the mortgage book is seen in loans that total €145 billion, loans that have enabled Ireland to have one of the highest owner-occupier levels in the EU, a very desirable social objective. In the period since 2005, about 110,000 first-time buyers have been provided with mortgages. This is a constituency on which we will all, rightly, focus. The graph available shows that from the first quarter of 2005 to the one just past, the figure has been steadily building to a point where there is €145 billion outstanding.
The most important of the charts shows the Irish Banking Federation's own data which we report into the market on a quarterly basis, and about which I spoke on my last meeting with this committee. Members will see that the volume of lending has gone down in the first quarter of 2008 but I emphasise that less lending takes place during that particular period because of cyclical factors. This is evident in figures for the same quarters of 2006 and 2005. The volume of lending is sustained and across all segments, top-ups, re-mortgages, first-time purchases and all the others. If we look at the figure for the first quarter of 2008, benchmarked against the same for 2005, the same value of mortgage lending was distributed by the banks to would-be house purchasers and borrowers. I would ask what was wrong in 2005. That is a very creditable performance against a backdrop where demand has decreased and house prices are falling.
Regarding mortgage finance generally, the next figures show that the decline in the housing market began in the first quarter of 2006. The chart clearly shows this from a number of indicators such as house registrations and house completions. My point is that the decline in the housing market began much earlier than the present credit crunch and much earlier than banks had reasons to adjust their lending policies. On the other hand, it is important to point out that the private sector and the banks and building societies are the engines for home ownership. The graph shows that while there were a number of other players in the market such as social and rented accommodation, affordable housing, etc., the lion's share of provision of home ownership and the ability to acquire a home comes from the private sector and the banking system, namely, our members, banks, building societies, etc.
We work with borrowers. I take issue with the view that seems to be held by some people, that we are in some way uncaring, or unwilling to work with borrowers who have issues. That is not the case. A regulatory consumer protection code exists which imposes additional requirements and assessment requirements on banks, building societies and borrowers in general. They are required to establish the suitability of the product for the customer and are also required to stress test it at 2.5% above the ECB rate. There is a range of measures. That statutory code follows on a voluntary code to which we still adhere, one we established ourselves concerning mortgage arrears, in which we undertake to alert customers who are in difficulties to contact the lender at the earliest opportunity. We practise this code. Both parties can then work out an arrangement and find terms that can deal with the matter to the satisfaction of everyone. That will always be the first approach of a lender, but it is also important that the borrower approaches the lender.
On repossessions, many figures have been mentioned but in 2007 there were 50 repossessions in total. All of these were voluntary and I understand that in all of these situations family units broke up and there was a voluntary surrender of the property. Figures have been circulated which are higher but in reality that is the number of repossessions for 2007 and for the previous year. The figures we have to date this year suggest there is no appreciable change in that number.
I will talk briefly about savers and investors as I do not wish for them to be left out of the debate. Borrowing is one side of the balance sheet but savings and asset accumulation is the other. Financial institutions have a responsibility to savers and investors and they have many of both. There is a very strong savings culture in this country and it is important people understand and appreciate this when discussing the balance sheet of Ireland Inc. and our individual balance sheets. According to the ESRI the savings rate in Ireland in 2008 is 5.8%. This compares with a savings rate of 1.1% in the UK as measured by the authoritative body there. The Central Bank and the ESRI data show strong growth in financial assets. Banks need to ensure their savings and investment customers' assets are secure. This chart, which has come from an authoritative source — the ESRI — shows the accumulation of wealth in household assets that has taken place in the country from 2001 to date. It is substantial and shows the balance sheet is strong.
In summary, there are global challenges and the international economic environment is challenging. These challenges are by no means unique to Ireland, as we all understand and appreciate. I have many press cuttings from European newspapers all showing the same message, which is that credit conditions are tightening and banks are having to adjust lending policies. The situation is not unique to this country. In recent days I saw a headline in most of the UK media publications stating there was a mortgage market collapse in the UK. This is not unique to this country. The banks operating in this environment cannot be immune to what is happening in the rest of the world, especially in a country with a small, open and exposed economy. We are exposed to what happens in the global international environment more than most because of the open economy. The banks here are well positioned but they must maintain financial strength so that they are best placed to continue serving their customers, not just in the short term but also in the long term. Banks are in the business of building long-term relationships with their customers, including both their borrowing customers and their savings and investment customers.
Banks have obligations to meet for a broad group of stakeholders. These include obligations to customers, employees, the regulatory authorities — it is a very heavily regulated sector — shareholders and investors. They also have obligations to pension funds. There are between 950,000 and 1 million people in this country who depend, notwithstanding current share values, on the performance of shares such as bank shares to provide for their long-term financial future and retirement. Last but not least, one of our stakeholders is Ireland Inc., of which we are very conscious. We have been part of the story of the growth and development of Ireland and this will continue.
