Dáil Éireann Debate, Thursday - 28 February 2019
55. Deputy Michael McGrath asked the Minister for Finance his plans to publish the report on the funding gap in relation to the banking system here; if it states that Irish banks need to double their loan to deposit ratio from 0.8 to 1.6 by 2024 in the event that 50,000 new homes were needed each year; and if he will make a statement on the matter. [10154/19]
Amharc ar fhreagraIn December 2016, the ESRI published ‘Ireland’s Economic Outlook: Prospective and Policy Challenges’. The report included an estimate for the increase in bank credit required to fund the Institute’s estimate for housing supply. The ESRI used COSMO — the structural econometric model of the Irish economy — to generate estimates of both the mortgage credit required to purchase projected housing supply and the construction credit required to build it.
Last year, the Department of Finance undertook to update the work of the ESRI. Given the importance of housing to the macro economy it was deemed appropriate to amend the supply projection to a hypothetical 50,000 units by 2024. The report estimated that if such a level of supply was funded exclusively by the domestic banks, the loan to deposit (LTD) ratio of the aggregate Irish banking system would rise from 70 per cent as of Q4 2017, to 160 per cent in Q4 2024. Of course, housing supply is not funded exclusively by domestic banks and other sources of funding already exist in the Irish market.
Over recent years a number of non-bank entities have emerged to fund residential development. Real Estate Investment Trusts (REITs), pension funds, private equity providers and specialist lenders are now active in the market providing equity and debt to developers. Given the demand/supply imbalance that currently exists, the increase in funders willing to fund construction is most welcome. There are also wider benefits to this process of diversification. As well as being consistent with the EU’s Capital Markets Union agenda, such non-bank investment in the residential sector releases bank capital for alternative forms of lending.
It is important to note that the LTD ratio is also an insufficient metric by which to measure the ability of the Irish banking system to fund their lending activities. It is similarly an insufficient gauge by which to measure banking stability. In fact, under Basel III, LTD ratio requirements were removed and replaced with two quantitative liquidity management regulations — the Net Stable Funding Requirement (NSFR) and Liquidity Coverage Ratio (LCR). The NSFR takes the liquidity value of assets into account, while the LCR aims to ensure credit institutions hold a sufficient reserve of high quality unencumbered liquid assets that can be converted into cash under stressed conditions. Further, banks have many other sources of funding available to support their lending activities. Debt issuance, securitisation and covered bonds are just some examples of options available to the banking system.
Officials from the Department of Finance are currently working on the bank funding paper, which remains in draft form. The Department intends to publish the work in the near future.
