Credit supply risks remain as economy reopens

Analysts at the financial regulator say activity has started to recover recently

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Credit supply risks remain as economy reopens www.financialstand.com

Risks remain for credit supply as the economy reopens after the Covid lockdown, according to Central Bank analysts.

In a publication examining the impact of the coronavirus pandemic on households and SMEs, on the Irish credit market, the authors note that the onset of the Covid crisis led to a material contraction in new lending volumes. They say that while activity has started to recover, most notably in the mortgage market, that consumer lending remains subdued and is unlikely to recover immediately.

The analysis written by Jane Kelly, Rory McElligott, Conor Parle, and Martina Sherman, suggests contraction in lending volumes has been driven by a drop in demand due to the decline in economic activity, rather than a tightening in credit conditions.

It notes SMEs’ aversion to taking on credit but says demand may increase quickly as the economy re-opens and fiscal supports are unwound.

While a tightening of credit standards has been reported throughout 2020, this was at a slower rate than during the financial crisis, the authors note.

“At this stage, there is little evidence to suggest that changes in credit supply have had broader macroeconomic implications, (but) there are forward-looking risks to the supply of credit. These include risks stemming from the phasing out of government supports as the economy reopens and the possibility of an unexpected deterioration in credit quality on lender balance sheets,” they say.

“If a reduced risk appetite by lenders were to crystallise, the provision of financing by the banking system may only partially meet demand in some sectors as the economy starts to recover, or collateral and interest rates may otherwise tighten supply conditions in the market.”

The authors say this could be made worse by the withdrawal of lenders from the market and therefore may have implications around the phasing out of Government supports such as guaranteed loans.

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