The feedback loop: Ireland’s retail banks, regulation & real economy supply and demand

1. The feedback loop: Ireland’s retail banks, regulation & real economy supply and demand Fiona Muldoon Director, Credit Institutions & Insurance Supervision 11 April 2013

2. Key Industry Metrics As at 31 Dec 2012 Data does not include branches Safeguarding Stability, Protecting Consumers

3. TO BE UPDATED FOR 31 DECMBER DATA in EARLY APRIL Safeguarding Stability, Protecting Consumers

4. Key Industry Metrics: Balance Sheet Safeguarding Stability, Protecting Consumers

5. Key Industry Metrics: Profitability Safeguarding Stability, Protecting Consumers

6. The challenges facing the retail banking industry are acute and can be divided into two broad areas • Work-out of distressed credit portfolios • Implementing resolution focused Mortgage products and offerings with properly trained staff and efficient processes and systems • Developing longer term and incentivised debt restructuring options for viable SME businesses • Future viability • Restoring interest margin; paying less for deposits, re-pricing existing loan books and increase new lending at rates that restore profits • Reduce cost base and develop less costly distribution channels and mechanisms • Designing a business model for the new ‘business as usual’ including increased capital requirements (Basel III) Safeguarding Stability, Protecting Consumers

7. The challenges faced by the domestic banks matter in a real way to ‘ordinary’ SME borrowers and to consumers Safeguarding Stability, Protecting Consumers

8. SME’s are critical to the Irish economy and to Irish recovery • SME make-up >99% of businesses in Ireland¹ • SME account for 70% of people employed in the private sector ² • 64% of private sector workers are employed by indigenous non-exporting firms, with 56% working for indigenous, non-exporting SMEs¹ • SME Gross Value Add is 47% (€84bn)² • SME Turnover is 51% of Turnover (€314bn)² • Core SME is dominated by 4 sectors (76% of lending) Hotels & restaurants/ Wholesale & Retail/ Agri / Manufacturing Source:¹ DoF Budget 2013 Assistance for SME Sector Presentation ² CSO: Business in Ireland Report (published Nov12)

9. SME Arrears: Complex issues and a high level of inter-connectedness Safeguarding Stability, Protecting Consumers

10. SME Arrears: Central bank areas of regulatory focus for 2013 • Governance & Execution framework of SME Support Unit organisation • Quality of Implementation plan and progress made • Restructuring – assessing and distinguishing viable and non-viable borrowers • Re-underwriting – disentangling viable debt from unsustainable property-related debt • Credit Assessment Tools & Policies (Debt/ Financial/ Collateral) • MI/ KPIs/ key milestones and timelines • Operational plans/Skills/ Resources and Training/Execution ability • Level of external assistance / sectoral/ restructuring expertise Safeguarding Stability, Protecting Consumers

11. SME health and stability links directly to Mortgage arrears issues • Employment in SMEs = repayment capacity for employee mortgages • Many distressed SME borrowers also hold a number of BTL exposures • Banks consider distressed SME borrowers at a total borrower exposure level (excluding PDH) • Public targets & audits of result • Multi-indebted mortgage borrowers require resolution too Safeguarding Stability, Protecting Consumers

12. SME Gross New Lending constant since 2010 Safeguarding Stability, Protecting Consumers

13. Direction of SME new lending is realigning away from Property(4 quarter moving average to Q3 2012) Safeguarding Stability, Protecting Consumers

14. The sectors seeing reduction also have high levels of default: Causality? Micro SME book, June 2012. Total Balance €~5bn Safeguarding Stability, Protecting Consumers

15. Is demand for credit weak in Ireland? ECB survey: Asks firms for Net % increase in financing needs in previous 6 months Safeguarding Stability, Protecting Consumers

16. Economic growth is linked to supply and demand for credit. Health of Banking sector is linked to wider ‘real economy’ & vice versa • Banks: Capital & Provisioning helps but leaves non-performing asset on banks’ books • Banks: Work out and restructuring is necessary • Regulator: Audit & oversight work taking place. Monitoring, measuring & consequence. • SME’s: Increase in receiverships, liquidations necessary and inevitable to allow leanest and fittest to emerge and compete • Europe: Banking union and European Stability Fund offer opportunity to break damaging link between Sovereign & Banking Sector • Ireland: Better oversight, better regulation, safer banks prevent recurrence of past mistakes What can be done to change the cycle? Safeguarding Stability, Protecting Consumers