Financial Stability Note: Real-estate concentration in the Irish banking system

• Since the financial crisis, the overall level of concentration of the Irish banking system to real-estate lending has remained relatively stable at around 70 per cent of total balances.
• Irish banks are more concentrated in real-estate lending than their European peers. This concentration is primarily to residential real estate.
• The Irish banking system has increased its capacity to absorb shocks since the Global Financial Crisis.

The Central Bank of Ireland has published a financial stability note which examines real-estate exposures of the Irish banking system in a historic and European context. A review of the international evidence on the risks associated with real-estate lending is also provided.

Real-estate exposures have been central to many financial crises, including Ireland’s own financial crisis experience (2008-2013). In Ireland’s case, commercial and residential real-estate prices declined by 67 and 51 per cent respectively between December 2007 and September 2013. While prices have since recovered, in line with the improved Irish economy, the level of concentration of the Irish banking system in real-estate lending means that it remains vulnerable to potential price corrections. This is despite the banking system having increased its ability to absorb such shocks.

The key findings of the Financial Stability Note are:

• Despite a substantial reduction in overall lending balances since the Irish financial crisis, the overall level of concentration of the Irish banking system in real estate lending has remained relatively stable at around 70 per cent of total balances.
• Irish banks are more concentrated in real-estate lending than their European peers. This concentration is primarily to residential real estate.
• The composition of banks’ lending has changed, with the share of residential mortgages increasing and the share of commercial real estate decreasing.
• The Irish banking system has increased its capacity to absorb shocks since the Global Financial Crisis. More stable funding sources, higher capital and liquidity ratios, more intensive supervision and the introduction of macroprudential rules all contribute to this increased resilience.

The Financial Stability Note concludes that the high degree of exposure to real estate in the Irish banking system underlines the importance of prudent underwriting by the banking system. It also concludes that the Central Bank’s mortgage market measures help in this regard, by protecting banks and borrowers against a marked loosening of such underwriting. In doing this, the measures serve to strengthen the resilience of a concentrated system.

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