competition and the banking boom – Terms and conditions apply

One of the by now accepted memes of the irish boom and bust is that left to their own devices the banks (well, AIB and BOI anyhow) would have toddled along as the staid institutions we all knew and loved, but that the dastardly forces of competition (with the finger pointing usually to either Anglo or to “foreigners“) made them engage in a race to the bottom of the standards market.

Every quarter Irish and indeed eurozone banks complete a survey on credit conditions. For whatever reason this (to me anyhow) fascinating survey doesnt get near enough attention when its released. The Central Bank do publish some commentary on it: see here for the page where it now lives, here for a description of the survey, and here for an analysis (as of 2007) and discussion. In essence the survey asks the chief lending officers to respond on the reasons behind the tightening or loosening of credit over the previous quarter. Some ad-hoc questions are also added but for the most part the questions are fixed across the eurozone. 5 banks (as of the april 2011 survey) are surveyed in Ireland. Although these are not named one can surmise that they would include AIB, Bank of Ireland, ILP and Anglo.

What do we see from the survey? I concentrate on the following questions :

Over the past three months, how have the following factors affected your bank’s credit standards as applied to the approval of loans or credit lines to enterprises (as described in question 1).

A) Price

* Your bank’s margin on average loans (wider margin = tightened, narrower margin = eased)

* Your bank’s margin on riskier loans

B) Other conditions and terms

* Non-interest rate charges

* Size of the loan or credit line

* Collateral requirements

* Loan covenants

* Maturity



Over the past three months, how have the following factors affected your bank’s credit standards as applied to the approval of loans or credit lines to enterprises (as described in question 1)

A) Cost of funds and balance sheet constraints

* Costs related to your bank’s capital position (1)

* Your bank’s ability to access market financing (e.g. money or bond market financing, incl. true- sale securitisation (2))

* Your bank’s liquidity position

B) Pressure from competition

* Competition from other banks

* Competition from non-banks

* Competition from market financing

C) Perception of risk

Expectations regarding general economic activity *Industry or firm-specific outlook

* Risk on the collateral demanded


Analogous questions, on the terms and conditions applied by the bank and on the credit standards applied are posed for loans for house purchase. Questions are ranked 1-5 where 3 is unchanged, 1 is tightened significantly and 5 loosened.

So what do we find?

First, lets look at the terms and conditions for house purchases

and for commercial (not just commercial property) loans

As we might expect on most issues, over the last couple of years, the terms and conditions that the banks were imposing on themselves or on customers, were acting to tighten lending standards. However, while some were acting to loosen standards in the 2003-07 period these were not massively so. Albeit self reported, there is no smoking gun on for example slacker LTV ratios or longer mortgages.

If we look at the factors acting to tighten or loosen credit standards, first for residential mortgages

and then on commercial (again not just commercial property) lending

we also see some myths debunked (or at least, they would be if we took the reports at face value). There is no significant evidence from these survey data that banks loosened credit standards consequent to competition. Mind you, the question is whether or not the data are accurate… While all survey data which ask qualitative information are only as good as the respondent is accurate, we have to take them as such absent any other information. Either the banks were engaged in the lending habits they were engaged in for reasons other than competition, or the respondents over the years honestly did not see the competitive issue as a major force.