central bank Archives - Pat Carroll PCCO - Chartered Accountants & Tax Advisors

Central Bank seeks assurance on Covid-19 insurance claims

The Central Bank is to write to the insurance industry setting out how it expects insurance firms to handle the settlement of claims arising from the Covid-19 pandemic.

The regulator says firms must ensure that all claims are appropriately assessed and where there is insurance cover in place, that claims are accepted and paid.

The Central Bank’s intervention follows complaints from some business owners impacted by the coronavirus crisis that some insurers are refusing to pay out on policies that include business interruption cover.

Peter Boland, director of the Alliance for Insurance Reform, said that it had been inundated with calls from small businesses that have had to close, thought they were covered by their business interruption insurance and are now being told by their insurer that they are not.

He has written to the Minister for Finance, Central Bank and Financial Services and Pensions Ombudsman seeking an intervention.

In a statement, the Central Bank said it continues to engage proactively with insurers on contingency and claims related issues arising from the impact of Covid-19 on consumers, households and businesses.

It also said it expects insurance firms will continue to protect customers and comply with all regulatory requirements in light of the significant economic disruption. 

Firms must ensure, it said, that all claims are appropriately assessed and where there is insurance cover in place that claims are accepted and paid. 

Sources said the bank will tell the industry in the coming days that it expects insurers to offer a claims settlement process which is fair, takes account of all relevant factors and represents the best estimate of a customer’s reasonable entitlement under a policy.

It is understood the bank’s view is policies should be clear about what is covered and what it not.

The bank is also understood to be engaging at a European level on the matter.

Earlier this week the Department of Finance said that in relation to business interruption insurance, whether a business can make a claim in relation to loss of earnings because of closure due to Covid-19 will depend on the specifics of their policy.  

However, the Minister, as a general rule, believes that insurers should not attempt to reject claims on the basis of interpreting policies to their own advantage, it said. 
Mr Donohoe believes that where businesses have had to close on the basis of advice or a direction to close by the Government, and their insurance policy covers such a scenario, that insurers should engage with those businesses honestly, fairly and professionally to honour those elements of the policies covered, the department said.

It also said that where a policy states that a claim can be made when a business has closed as a result of a Government direction, because of a general notifiable infectious disease, the Minister believes that Government advice to close a business amounts to the same thing.  

“He believes that insurers should not try to distinguish between these situations, where there is a general infectious disease provision in a policy, in order to avoid payment of claims,” a spokesman said.

“In this regard, he believes the Government’s direction to childcare providers and its advice to pubs and clubs to close is sufficient for those businesses to be able to make a claim on their insurance where the appropriate business interruption cover is in place.”

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Central Bank announces consumer and investor protection priorities for 2020

The Central Bank has said that the protection of borrowers in mortgage arrears will continue to be a key priority for it during 2020.

Derville Rowland, Director General, Financial Conduct at the Central Bank, said the bank will closely monitor the treatment of borrowers in arrears and take follow-up supervisory actions as required. 

“As part of our supervisory work, we will continue to require all loan owners to put in place long-term sustainable arrangements where possible for their borrowers,” she added.

Ms Rowland made her comments as she outlined the Central Bank’s priorities for the regulation of financial conduct in Ireland during the year. 

These priorities include strengthening consumer protection, a comprehensive review of the Consumer Protection Code and enhanced anti-money laundering measures.

Noting the lack of a consumer-focused culture within the financial services sector, Ms Rowland said it will not come as a surprise to hear that the Central Bank will continue to hold boards and leaders to account for embedding effective behaviour and cultures.

She also said the Central Bank is examining the issue of price differentiation in the motor and home insurance market to understand the extent and prevalence of the practice, how insurers are using it and whether it gives rise to unfair treatment of consumers.  

The Central Bank intends to publish an interim report on its findings at the end of the year.

“At the Central Bank of Ireland we are consistently evolving and enhancing our toolkit. Some of our priority issues will have more immediate benefits, while others will bear fruit over the longer term,” Ms Rowland said.

“I hope – indeed expect – that the 2020s will be the decade when all firms and boards put conduct, culture and customers firmly at the top of the corporate agenda,” she added.

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No change to Central Bank’s mortgage lending rules

The Central Bank has decided not to make any changes to mortgage lending rules here that limit how much people can borrow from banks in order to fund house purchases. 

Following a review, the regulator has concluded that the measures continue to meet their objectives of strengthening bank and borrower resilience.

It also said the measures reduce the likelihood and impact of a credit-house price spiral emerging. 

Without the restrictions, the Central Bank estimates that house prices this year would been 15% to 25% higher than they currently are. 

The measures were introduced in 2015 in order to strengthen the resilience of borrowers and lenders and to reduce the likelihood of an unsustainable credit fuelled housing boom. 

The Central Bank claims the rules are not meant to target house prices. 

The rules include a borrowing limit of three and half times gross income, while borrowers must have a particular level of deposit set aside dependent on whether they are buying a house for the first or second time or as an investment. 

The decision not to change the restrictions is likely to come as a disappointment to some would-be-borrowers who had been hoping for some relaxation in order to enable them to borrow funds they require to make a purchase. 

Some in the banking industry and in politics are also likely to be unhappy.

Earlier this year, AIB chief executive Colin Hunt said the rules should not be set in stone. 

Taoiseach Leo Varadkar also expressed hope that there would be some changes in order to help those renting, while also recognising the independence of the Central Bank. 

In its 2019 review, the Central Bank said the measures have been effective in strengthening borrower and lender resilience and in limiting the potential for an adverse credit-house price spiral to emerge. 

Without them, both house price levels and the proportion of highly indebted mortgage borrowers would likely have been significantly higher this year, it said. 

It added that while the aim of the measures is not to target house prices, analysis suggests that without them, affordability pressures for mortgage borrowers would have been even more acute.

It maintains that supply restrictions, not the lending rules, are what is continuing to fuel House price growth.

In its latest Financial Stability Review, the Central Bank also says that the main risks facing the economy here continue to stem from external developments, such as falling global interest rates and Brexit,.

It also pointed to a gradual domestic build up of cyclical risks in the economy as it comes close to capacity. 

The Central Bank said the banking system is now better able to absorb shocks, but cautioned that further progress is needed in key areas such as non-performing loan reduction. 

The review concludes that the continuing risk of a disorderly Brexit and the macroeconomic shock that could follow would be sizeable, with more severe effects in certain regions and sectors. 

It also identifies the growth in leveraged lending markets internationally, through the growth in the use of instruments such as collateralised loan obligations. 

Changes in the international trading and tax environment could also impact Ireland as a small open economy that is highly integrated into global supply chains, it cautioned. 

The possible re-emergence of sovereign debt concerns in the euro area is also a worry, the bank claims, with sovereign debt levels in some parts of the euro zone remaining high. 

If a disorderly Brexit does not arise, then the prospects for the Irish economy remain favourable, it said, but the economy is also near capacity and credit growth is strengthening.

On sovereign debt, the Central Bank found ratios of debt to the GNI* measurement of the size of the economy have improved in recent years on back of strong growth, but a range of possible shocks have the potential to impact that.

The bank also points to possible risks in the non-bank financial sector.

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Irish mortgage rates still higher than euro zone average

Irish mortgage rates still higher than euro zone average

New figures from the Central Bank show that Irish mortgage holders continue to pay the second highest interest rates in the euro zone.

The average interest rate on all new mortgages issued here in August stood at 2.99%, down two basis points since the beginning of the year but up from 2.98% in July.

This compares to the average rate of 1.48% for the euro area – a new record low. Only Greek mortgage interest rates higher than Irish rates in August.

Price comparison and consumer website bonkers.ie said that first-time buyers here are paying over €173 more on average every month compared to euro zone average.

Daragh Cassidy, from bonkers.ie, said that for all the talk of falling interest rates and a mortgage price war in recent months, the average rate in Ireland is down only two basis points since the beginning of the year.

This compares to a fall of over 30 basis points in the euro zone.

Mr Cassidy said there is still a lack of competition in the Irish mortgage market as it remains heavily concentrated in the hands of a few main banks

“Although competition has improved in recent times, it’s still below where it needs to be and this is leading to higher rates. The issue around home repossessions, and the inability of banks to take back a loan that has gone bad, is also a factor,” he added.

Today’s Central Bank figures also show that the volume of new mortgage agreements came to €753m in August.

This brought new home loan agreements for the first eight months of the year to €5.4 billion, up almost 12% on the same time last year.

The Central Bank noted that fixed rate mortgages continued to increase in popularity and accounted for 76% of new mortgage agreements.

The increase brings Ireland closer to the euro area preference for fixed rate mortgages, the Central Bank said.

Meanwhile, the bank also said that interest rates on new household term deposits remained close to zero in August, coming in at just 0.05%, as ECB rates remain at record lows.

The equivalent euro area rate stood at 0.33%.

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Disorderly Brexit biggest risk to financial stability – Central Bank

Disorderly Brexit biggest risk to financial stability – Central Bank

A new review from the Central Bank shows that the main risk to the country’s financial stability and the wider economy is a larger than expected macroeconomic shock in a case of a disorderly Brexit.

As well as Brexit, the other risks to the financial sector are related to external developments and include a sudden tightening in global financial conditions and a re-emergence of sovereign debt sustainability concerns in the euro zone.

Domestic risks facing the financial sector include an abrupt fall in Irish property prices and banks’ profitability as well as the possibility of elevated risk-taking behaviour in the banking sector.

The Central Bank’s first Financial Stability Review outlines key risks facing the financial system and assesses the resilience of the economy and financial system to adverse shocks.

It is not aimed at providing an economic forecast, but instead focuses on the potential for negative outcomes to materialise.

The Central Bank cautioned today that the risks to the country’s financial stability have increased slightly over the last six months and some of the possible triggers have now become more imminent.

It noted that global growth prospects have been downgraded and the trade row between the US and China has created increased uncertainty about global trade deals.

A key lesson from the last crisis is that different risks can crystallise at the same time, challenging financial stability, and the Central Bank said it is key to recognise that the risks could interact.

“For example, a disorderly Brexit would act as a trigger for an abrupt tightening in global financial conditions and lead to a macroeconomic disruption in Ireland, both of which would have adverse implications for domestic property prices,” it cautioned.

However, the Central Bank also said that the banking system here has strengthened considerably in recent years – despite vulnerabilities remaining.

It noted that domestic lending is now funded mainly through retail deposits, rather than less stable sources of short-term, wholesale financing.

Non-performing loans on the banks’ balance sheets have fallen by 79% since 2014, however they still remain higher than international standards, it also noted.

“Overall the banking system is now better able to absorb shocks, rather than amplify them,” the Central Bank wrote in today’s review.

But it added that further progress is needed to strengthen resilience and maintain sustainable profitability in a changing operating environment.

It also warned that while domestic households and companies have also become more resilient, a significant number of consumers with restructured mortgages could be especially vulnerable to economic stress.

The share of mortgage holders in negative equity has fallen from 40% in 2012 to 5% last year, but the Central Bank said the level of average household debt to income – which stands at 123% – is also high compared to international standards.

Last November, the Central Bank concluded its most recent review of the mortgage measures and decided to make no changes to its loan-to-value or loan-to-income limits or exemptions.

The bank said the measures were meeting their objectives in guarding against an excessive loosening of underwriting standards, strengthening both borrower and lender resilience, and minimising the potential for a credit-house price spiral emerging.

But it said that after consultation with the Minister for Finance, the Central Bank in June decided to exempt “lifetime mortgages” from the loan to income limit.

Lifetime mortgages are equity-release home loans to elderly people whose debts are later repaid from their estates after they die.

“These products do not have a contractual regular repayment of capital and interest, so the affordability of regular repayments, which is a primary concern of the LTI limit, is not applicable in these cases,” the Central Bank explained.

Meanwhile, the level of debt owed by SMEs to Irish banks has fallen by more than a third over the last five years and SMEs are increasingly using retained earnings to fund spending and investment rather than borrowing.

“As a small and highly globalised economy, with a particular reliance on activity from foreign multinational companies, Ireland is both more sensitive to developments in the global cycle and more prone to structural macroeconomic shocks,” commented acting Central Bank Governor Sharon Donnery.

Ms Donnery said it is critical that the Central Bank continues to identify, plan and prepare to mitigate the impact of those shocks, should they materialise.

“Building a resilient system is central to this. Resilience is not something that can be built after an event, but is something that should be in place well before any issues arise,” she added.

The Central Bank also said today that it has kept its Countercyclical Capital Buffer (CCyB) rate at 1%. The CCyB aims to strengthen the resilience of the banking sector to a future downturn.

It said it stands ready to adjust the rate in either direction “as the risk environment evolves in a manner consistent with the objective of mitigating procyclicality and supporting a sustainable supply of credit to the economy”.

The Central Bank said its macroprudential policies, which currently include its mortgage measures, the CCYB and capital buffers for systemically-important institutions contribute to safeguarding financial stability here.

The Minister for Finance today has confirmed that the power to set a Systemic Risk Buffer is to be granted to the Central Bank, which will complete the macroprudential framework for bank capital, it said.

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Irish banks have higher concentration of property loans than European peers – Central Bank

Irish banks have higher concentration of property loans than European peers – Central Bank

Central Bank shows that Irish banks have a higher concentration of property lending than their European peers – with the concentration mainly in residential property.

But in a Financial Stability Note, the Central Bank said the banking system here has increased its capacity to absorb shocks – including property price falls – since the financial crisis.

It said that more stable funding sources, higher capital and liquidity ratios, more intensive supervision and the introduction of macroprudential rules all contributed to this increased resilience.

The Central Bank also said that since the financial crisis, the overall level of concentration of the Irish banking system to property lending has remained relatively stable at around 70% of total balances.

It noted that the share of residential mortgages is increasing and the share of commercial real estate decreasing.

The Financial Stability Note said that property exposures have been central to many financial crises, including Ireland’s own financial crisis from 2008 to 2013.

Commercial and residential property prices declined by 67% and 51% respectively between December 2007 and September 2013.

It said that while prices have since recovered – in line with the improved economy – the level of concentration of the Irish banking system in property 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 Central Bank said the research concludes that the high degree of exposure to property 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,” the Central Bank added.

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Govt wants Central Bank in financial sector forum

Govt wants Central Bank in financial sector forum

New structures to encourage the development of international financial services will include bringing the Central Bank into a new stakeholder engagement group with industry and see overall responsibility for promoting the sector shifting to the Department of Finance.

A new strategy for the sector will be launched today by Michael D’Arcy, Minister of State with special responsibility for Financial Services and Insurance, and Finance Minister Paschal Donohoe.

Ahead of the launch, Mr D’Arcy said growth of the industry had stalled following the financial crisis.

“In the last decade we were just trying to keep the lights on,” he said.

The new strategy will mean a greater budget for the Department of Finance for its enhanced communications and promotions function.

The Central Bank lost that role following the crash.

The IDA does have a remit to bring in foreign direct investment, but has no role in developing indigenous firms.

The new push will set out broad goals, including to encouraging indigenous and foreign firms to expand here, a regional spread and more streamlined interaction with both the sector and with legislation and regulation increasingly coming from European level, he said. But he declined to give a specific target for job creation or overall value targets.

The Minister said complaints that the Central Bank here had failed to encourage banks and insurers leaving the UK as a result of Brexit – in contrast to some European peers – were wrong. “That wasn’t the case. The Central Bank were certainly unwelcoming of companies trying to trade somewhere else but pretend they were here.

“They weren’t having any of that,” he said.

However, the new strategy includes a push for greater engagement by regulators with industry.

“We want to establish a better structure with the Central Bank regulators and industry so we have agreed wording with the Central Bank that we will look at other eurozone countries and replicate what they do,” he said.

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Central Bank seeks extra power to force banks to further increase their capital

Central Bank seeks extra power to force banks to further increase their capital

The Governor of the Central Bank has written to the Minister for Finance asking him to put in place measures that would enable the regulator to force banks to hold more capital if systemic risks increase.

Philip Lane said the extra capital required by the Systemic Risk Buffer (SyRB) would help improve the loss-absorbing capacity of the main lenders here if there was a structural shock to the Irish economy.

However, if given the go-ahead and used, the new power could put further pressure on the interest rates paid by bank customers here, which are among the highest in the euro zone.

The SyRB was put in place when some countries in Europe wanted their banks to have higher capital requirements than those agreed under the 2013 Capital Requirements Directive.

Ireland and Italy were, at the time, the only countries not to transpose the new rules into domestic law.

However, the Central Bank Governor has now written to Paschal Donohoe asking that it be added to the regulatory toolkit here.

In a speech delivered in UCD this evening, Mr Lane said the move would ensure that the banking system would be resilient in the event of a structural shock to Irish economy.

“The advantage of the systemic risk buffer is that extra capital would improve loss-absorbing capacity if a systemic risk event occurred,” the soon to be European Central Bank executive board member said.

“Furthermore, credit supply could be further protected by switching off the systemic risk buffer under such circumstances.”

If the minister agrees to the request, legislation will have to be passed by the Oireachtas to give it effect.

Even then, the Central Bank would still have to carry out a full assessment of the financial risk environment before triggering it.

“With any of our policy instruments, the calibration and timing of the systemic risk buffer will be based on a thorough evidence-based assessment of its benefits and costs,” said Mr Lane.

“Furthermore, we adopt a holistic approach to policymaking, taking an integrated view of the interactions across the full set of macroprudential instruments…and the overall capital position of the banking system”.

The Central Bank also has a number of other macroprudential rules at its disposal, including the mortgage lending rules and the Counter-Cyclical Capital Buffer (CCyB).

The CCyB differs from the SyRB in that the former relates to domestic exposures only, while the latter is based on the whole of a bank’s book.

Countries that already have the SyRB in place require their banks to put aside varying levels of capital under it, with some demanding as much as 3%.

The Governor also told the UCD School of Economics that policymakers must look beyond the short-term horizon of the macro-financial cycle and ensure financial and fiscal resilience against tail risks.

He said it was imperative to build the resilience of both the financial system and the public finances against “tail risks” or events unlikely to occur.

Mr Lane also warned that dependence on high-tech multinational companies could amplify an economic shock here if it led to outflows of capital and labour and the loss of the technology embedded in departing firms.

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Central Bank slightly reduces estimates for economic growth this year

Central Bank slightly reduces estimates for economic growth this year

The Central Bank has slightly reduced its estimates for economic growth this year, amidst an ongoing weakening of the international trading and economic environment.

In its latest Quarterly Bulletin, the Central Bank expects GDP growth of 4.2% this year, down 0.2% since its January forecast.

It is all just a little bit weaker than even three months ago.

The forecast for both output and exports is down 0.2%, while consumer spending is forecast at just over 2% this year and next, compared with 3% last year.

It is due to a mixture of a weakening of the international trading and economic environment in which Ireland trades, and softer sentiment in the domestic economy, fueled by concerns over Brexit.

“This is mainly due to heightened uncertainty surrounding the global economy, including the risks in relation to trade disputes, higher protectionism, more stresses in international financial markets and already growth has slowed in the major economies,” said Mark Cassidy, director of economics and statistics at the Central Bank.

“Over recent years unemployment [in Ireland] has been gradually falling… and as the economy gets closer to a position of full capacity then there is diminishing scope for output growth due to less labour supply.”

Mr Cassidy also said some of the softness in the economy at present may be due to companies and individuals holding back on spending, as they wait to see what the outcome of the ongoing Brexit negotiations are.

Still the economy is set for strong growth this year of just over 4%, with unemployment set to average 5.4% for the year, dropping to 5% next year, and wages rising over the two years by 7%.

But that is based on Brexit being an orderly affair, with a deal and two year transition period.

In a disorderly no deal scenario, economic growth would be just 1% this year and next year.

“I would emphasise the inherent uncertainty surrounding any estimates in relation to a no-deal Brexit. It would be an unprecedented event,” Mr Cassidy said. “Our estimates indicate that economic growth could be of the order of 4 percentage points lower in the first year, and a further 2 percentage points lower in the second year.

“That would leave some positive growth, perhaps 1% to 1.5%, over those two years.”

Part of the Central Bank’s no-deal calculations include a significant further depreciation in the value of sterling, which it sees falling by 10% against the euro should Britain leave the European Union without a deal.

That would see one euro buy somewhere in the region of 97p – which represents an extremely unfavourable exchange rate for exporters.

“We think financial markets are currently pricing in a reasonably strong likelihood that a deal on Brexit will be agreed; it would be a shock to financial markets if there was no deal,” Mr Cassidy said. “Tariffs would come into effect also in the event of a no deal, and you would also get other disruptions to trade – difficulties in moving goods into and out of the country.

“All of those on top of each other would underlie the negative consequences for growth and employment across many parts of the economy.”

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