I thank the Chairman and members of the joint committee for inviting us to discuss the statistics compiled by the Central Bank for personal non-mortgage debt in Ireland. As the Chairman stated, I am accompanied by colleagues from the statistics division: Ms Mary Cussen, a senior economist in our financial accounts unit, and Mr. Martin O'Brien, an economist in the money and banking unit.
I propose to begin by outlining the framework for the compilation of statistics for personal non-mortgage debt by the Central Bank. I will then discuss recent trends in these data which are presented in the charts which have been circulated to members. I will also discuss some forthcoming developments.
Most of the statistics published by the Central Bank derive from statutory obligations to provide data necessary for monetary policy decision-making at the ECB. The data are compiled in accordance with international standards which provide the framework for national accounts and international financial statistics. Understanding the rationale for collecting the data is important in interpreting the information for domestic policy purposes. In this regard, I have outlined a number of factors which we need to consider.
The first factor concerns the institutions which are covered. Money and banking statistics published by the Central Bank are collected from credit institutions, that is, banks, building societies and credit unions, which conduct business in the Republic of Ireland. To be clear, we are talking about lending by resident offices of institutions in the Republic. Lending by affiliates or branches outside the country is not included in our money and banking statistics. The statistics are used to analyse the dynamics in Irish credit and deposit markets and, as I stated, cover only household positions vis-à-vis resident credit institutions. In contrast, quarterly financial accounts, also published by the bank, include the balance sheet and transactions of the household sector in aggregate, not just their liabilities vis-à-vis resident credit institutions. The financial accounts also include debts such as tax liabilities, trade or store credit figures, etc.
The second factor to bear in mind is the definition of household in the national accounts framework. For statistical purposes the household sector covers not only private households but also sole traders and non-profit institutions serving households. Therefore, only some of the data specifically refer to personal debt, or more correctly, credit advanced to private households.
The third point worth bearing in mind concerns the aggregate nature of the data. The statistics published by the Central Bank relate to the entire resident banking system and the entire household sector. In terms of the personal debt dynamics, they say nothing about the distributional aspects of the debt across the population, which is obviously an important aspect when considering policy responses to issues of concern.
I understand the committee has asked me to address the issue of personal non-mortgage debt, but before turning to address it, it is useful to set it in the context of total household debt in recent years. In the years leading up to the financial crisis Irish households' liabilities increased substantially, as Chart 1 outlines. By the fourth quarter of 2006, their average ratio, measured by liabilities as a percentage of disposable income, was over double that of the euro area average. The growth in liabilities was mainly due to increased levels of mortgage debt - this led to mortgage debt comprising over 70% of total household debt by the end of the third quarter of 2011. However, in aggregate, the assets of households increased much more than their liabilities in the pre-crisis period, predominantly owing to valuation increases in housing assets. This led to an increase in households' net worth up to the end of 2006, with a subsequent decline which was driven primarily by negative valuation effects. Chart 2 outlines these data. The reduction in net worth has been accompanied in the past two years by de-leveraging of the household balance sheet, which means that household debt repayments have been outstripping new drawdowns of debt by households. These data are included in Chart 3. It is important to acknowledge these developments to analyse household behaviour and inform policy decision-making.
As outlined, the money and banking data published by the Central Bank for non-mortgage personal debt refer only to personal or household debt vis-á-vis credit institutions. This non-mortgage debt can be split between consumer credit and other forms of credit. Consumer credit which covers standard lending for the consumption of goods or services accounted for approximately 10% of total household debt, or €17.3 billion at the end of 2011, having been close to 12% in the two years leading up to the financial crisis. There was, in most cases, annual double digit growth in consumer credit up to the third quarter of 2008, far outstripping the level of consumer credit growth in the euro area as a whole in the same period. Chart 4 outlines these data. Since late 2008 the level of consumer credit has been contracting, albeit at a slower pace throughout 2011. Most consumer credit is unsecured, with approximately 10% collateralised by real estate - this mainly reflects mortgage equity withdrawals used for consumption purposes rather than for home improvement or investment purposes.
Consumer credit includes the use of credit cards, a product for which we have specific data which are shown in Chart 5. The amount of personal credit card debt outstanding peaked at the end of 2008 at just under €3 billion, or approximately €1,350 for each card in issuance. Repayments have since outstripped new lending and by the end of 2011 credit card debt outstanding had fallen to €2.6 billion. Part of this reflects the exit from the Irish market of some credit card providers, as well as repayment dynamics. Given that there are fewer personal credit cards in circulation, the average debt per card has not fallen significantly and currently stands at approximately €1,330. The information available suggests many new transaction charges on credit cards are being repaid but that there is a portion of historic debt that is not being reduced significantly.
The other category - other household credit - which effectively covers lending for non-housing and non-consumption related activity also grew substantially during the years to the end of 2007, as highlighted in Chart 6. This category of lending which includes items such as education loans or loans for non-property investment purposes was the first to react to the wider financial crisis but accounted for the smallest share of household debt. In looking at this category it is important to recognise, as I mentioned, the definition of the household sector in financial statistics. As I stated, the household sector includes, for instance, lending to sole traders, partnerships and other non-incorporated enterprises. This needs to be distinguished from credit advanced to private households.
Apart from the volume of personal debt, it is also worth examining, where possible, the cost of servicing the debt. Interest rates on lending to households for non-mortgage related credit purposes are typically higher than mortgage interest rates, as they are mostly unsecured and have shorter terms to maturity. The link between policy rates, such as the ECB main refinancing rate, and interest rates on non-mortgage related household lending is also less defined than that of mortgage rates, as shown in chart 7. Interest rates charged on short-term non-mortgage household loans with a maturity of up to one year, including amounts drawn down on credit cards and overdraft facilities, as well as other short-term loans, have typically been in high single digits and above comparable rates for the euro area as a whole. This has been particularly true since 2010, when rates on this type of lending in Ireland increased more sharply than for the euro area and reached approximately 9.3% by the end of 2011. It must be noted, however, that interest rates on this type of lending remain close to pre-crisis levels, despite the recent increases. Meanwhile, interest rates on longer-term non-mortgage lending in Ireland have remained relatively stable in recent years and were around 5.5% at the end of 2011.
I will move on to the quarterly financial accounts, QFA, data, which include all Irish household debt, including debt not held with Irish credit institutions, and these data are shown in chart 8. They reveal that at the end of Q3 2011, Irish households had €27 billion of liabilities not held with Irish credit institutions or in the form of securitised mortgages. The largest component of this €27 billion is held with non-residents. However, it should be noted that household debt held with non-residents increased substantially in Q4 2010, when Bank of Scotland (Ireland) exited the Irish market. At the time Bank of Scotland (Ireland) left the Irish market, Irish households had approximately €10 billion in debt with that institution, primarily in the form of household mortgages. The QFA data also include mortgages with some sub-prime lenders and debt held with general government, largely reflecting taxes payable and affordable housing loans. The QFA data also include other smaller elements, such as accrued interest on borrowings from non-financial corporations, which are not part of the money and banking data but which are quite small in volume.
I will turn to the new work that is taking place in the Central Bank. It is developing new data sources for analysing issues relevant to personal debt dynamics. These data sources stem from the requirements to conduct stress testing of the Irish-owned banks under the financial measures programme, FMP. This exercise involved the collection of detailed loan-by-loan information for the banks covered in the FMP report published at end of March 2011. Members will recall the presentation given to the joint committee on 26 October last on work related to mortgage lending using these data. To date, this loan-by-loan analysis has focused on mortgage lending and SME lending, as non-mortgage lending to households has not been analysed in depth as yet. A new data collection exercise is under way for the forthcoming 2012 stress testing exercise, when analysis undertaken in 2011 will be built upon and expanded.
Alongside this data collection from the participating banks, the Central Bank will conduct a household income survey in the coming months. This survey will aim to collect more accurate detail on the income and financial position of a representative sample of households. These survey data will complement the kind of analysis done on the aggregate household position and the loan-by-loan data discussed previously, by allowing more direct matching of issues like employment status with individual household's financing conditions, thus enabling the tailoring of policy recommendations in areas of concern. It is envisaged that data collection will be undertaken around April 2012, with first results and analysis of the data later in the year. Separately, a detailed survey on household income and wealth is being considered for 2013 as part of a euro area-wide initiative. This is designed to provide comprehensive information on household income, consumption and wealth.
Finally, in the medium term a more significant project is the establishment of a centralised credit register, CCR, which would see the kind of micro-level data collected from the Irish-owned banks for the stress testing exercises being expanded across all credit providers in the State. The main purpose of the CCR is to ensure that consumers, credit institutions and the Central Bank have sufficient information to ensure that risks are appropriately managed. Members can appreciate the significant amount of work that is involved in such a project, ranging from establishing a data protection and legislative framework through to the conceptual issues around database definitions and design, as well as installing supporting information technology, IT, infrastructure in all the relevant institutions. It is envisaged the CCR will become operational in late 2013.
I thank members for their attention and we are now happy to respond to any questions from the members.