The great Irish deleveraging

This is like the Great Irish Bake-off but all about delevaging, Central Bank economists Reamonn Lydon and Tara McIndoe-Calder put together an excellent paper (05/RT/2017)on the topic, the full technical paper is here.

Our condensed and plain English version is below:

ABSTRACT The authors drew on the 2013 household Finance and Consumption Survey (HFCS) to stimulate household balance sheets form 2005 to 2014 for the purposes of investigating household leveraging and deleveraging during this period. The paper shows that deleveraging has proceeded significantly faster with older households as opposed to younger ones. With younger borrowers, tracker mortgages have eased the debt repayment burden in the presence of large income shocks. All in all, income shocks are the main factor contributing to mortgage repayment problems.

INTRODUCTION From the early 2000s through to the peak of the property boom in 2007, rapid increases in leverage ratios and repayment burdens far outstripped growth in disposable income, leaving households exceptionally vulnerable to the economic shock of 2008. One result of the crisis was the large increase in non-preforming mortgage loans. …

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Banks acting like teenagers?

I smiled when I heard that Central Bank director Fiona Muldoon had described dealing with the banks as ‘like dealing with troublesome teenagers‘. This was referring to their resistance to resolving their loan book issues for the last five years.

The thing that wasn’t mentioned was ‘why’, and as always, it’s the ‘why’ that plagues many of us the most. The ‘delay and pray’ response is a standard tactic deployed by lenders when they have a crisis, this has occurred in Japan in the past, is currently an issue in Vietnam and also in the USA. Banking is one of the industries where honesty is not the point, survival is. At any time a bank could unwind if everybody made their claims against them and the same broadly holds true for dealing with bad debts.

If a bank started to deal with one bad debt (at a time when there is a pent up mass of them in the …

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