Banking News

The ESRI’s Quarterly Economic Commentary projects domestic demand to increase by just 2.2% in 2023, a significant reduction on 2022 growth. The Institute expects cost of living pressures to remain elevated in 2023 with headline inflation remaining above 7% for the full year. In 2023, the unemployment rate is still set to continue to fall to a near historical low of 4.3 per cent.

The UK economy is experiencing a rather mild but drawn-out recession with GDP growth expected to fall by 1.3% in 2023, KPMG’s latest Global Economic Outlook has found. Inflation is set to fall from a peak of over 11% in October, to under 4% by the end of 2023 and reach its 2% target by mid-2024. A weaker pound and the rising energy costs have resulted in reduced consumer spending power. This poses a great challenge to businesses as they are adapting to the changing habits of consumers.

According to the ECB Economic Bulletin, economic growth in the euro area slowed to 0.3% in the third quarter of 2022. High inflation and tighter financing conditions are dampening spending and production by reducing real household incomes and pushing up costs for firms. Weaker growth and soaring inflation have deteriorated the outlook for Europe. On the flip side, employment increased by 0.3% in the third quarter, and unemployment hit a new historical low of 6.5% in October.

Soaring energy prices, resulting in steep inflation, are expected to sink growth. The OECD Economic Outlook, forecasts that world growth will decline to 2.2% in 2023 and bounce back to a relatively modest 2.7% in 2024. Asia will be the main engine of growth in 2023 and 2024, with the IMF now forecasting Chinese growth of 4.4% in 2023, whereas Europe, North America and South America will see very low growth. Higher inflation and lower growth are the hefty price that the global economy is paying for Russia’s war against Ukraine. Central banks around the world are increasing interest rates to curb inflation - a strategy that is starting to pay off. The financial sector appears to have weathered these recent shocks relatively well as banks continue to work down their non-performing loans. However, the OECD notes that the sector is set to face some structural problems.

Central Bank identifies calculation errors in Deposit Guarantee Scheme contributions: The Central Bank has apologised to dozens of member institutions participating in the Deposit Guarantee Scheme after it identified errors in its calculations of institutions’ contributions. The errors resulted in undercharging and overcharging, mainly of credit unions, totalling c.€253,000 over a two-year period (2019-2021). Once the assessment is completed in February 2023 the Central Bank will identify next steps to regularise the position of the affected institutions.

Targeted communications with mortgage borrowers can help to improve uptake of refinancing opportunities: Adjusting notifications to mortgage holders to include clearer information on refinancing opportunities led to a significant increase in refinancing activity. The findings from the recent Central Bank research demonstrate the value of leveraging behavioural insights to inform policy design and to address issues in financial product markets. The Central Bank will incorporate the findings of this research into its review of the Consumer Protection Code.

ESB set to raise rates by 50 basis points: The ECB is set to raise interest rates by 50 basis points in both February and March and will continue to do so in the months after, governing council member Klaas Knot said in an interview in mid-January. Knot said that it was “too early to tell” if the ECB could slow down the pace of rate hikes by the summer.

In 2015, the Central Bank of Ireland (“CBI”) introduced mortgage measures with the objective of strengthening the resilience of borrowers, lenders, and the economy overall. These mortgage measures use Loan-to-Value (“LTV”) and Loan-to-Income (“LTI”) limits to place an outer boundary on the size of borrowers’ mortgage debt used to purchase residential properties providing services that meet their unique needs.

Following the CBI’s annual review of the Mortgage Measure Framework in 2022, the CBI is retaining its dual instrument approach using both LTV and LTI limits. The LTI will remain as the income-based limit due to its clarity and comprehensive nature. The LTV will remain as the collateral-based limit. The LTI limit will continue to set a limit on the amount of money consumers can borrow relative to their gross income and the LTV limit will continue to set a minimum deposit amount needed by borrowers to complete the purchase of a residential property.

First-Time Buyers (“FTBs”) can expect change, as the LTI limit is increasing from 3.5 times to 4 times annual gross income. The LTV limit will remain at 90%. The scope of the definition for FTBs is also being enhanced, allowing FTBs who are obtaining an equity release / top-up on their home to avail of the FTB limits, provided the property remains their primary residence. Borrowers facing a change in circumstances (e.g., divorce or personal insolvency) will also be considered FTBs when taking out a new mortgage where they no longer have an interest in the previous property.  

Other outcomes of the review include the LTV limit for Second and Subsequent Buyers (“SSB”) is increasing from 80% to 90%, whilst the LTI remains unchanged at 3.5 times gross income. Furthermore, no changes were made to the mortgage measures for Buy to Let (“BLT”) borrowers where a 70% LTV limit will continue to apply. Lastly, following the change in the FTB LTI limit and SSB LTV limit, the proportion of lending above the revised LTI and LTV limits will now apply at the level of the borrower type rather than the individual limit. In this regard, 15% of FTB lending, 15% of SSB lending and 10% of BTL lending can take place above the revised LTI and LTV limits for each borrower type.

These changes to mortgage measures announced by the CBI should theoretically increase the opportunity base for lenders. However, the current macro-economic climate coupled with the short lead in time before these changes take effect will pose challenges. This creates an additional layer of potential complexity for lenders in reviewing and revising their own mortgage lending practices. 

The review recommends lenders consider a range of different approaches to manage and cope with the latest CBI amendments to mortgage measures. Some recommendations include potential changes to business strategy, assessing integration implications for any recent residential mortgage portfolio acquisitions, downstream implications for end-to-end credit journey transformation and maintaining lenders’ own lending standards despite the revised measures.