Quarterly Bulletin Q3 2013

38
Financing Developments
Quarterly Bulletin 03 / July 13
in the Irish Economy
Box 1: The Changing Composition of the Irish Banking System 2003-2012
By Sarah Frost
The main asset class driving the expansion from 2003 to 2008 for the domestic market credit
institutions was credit advanced to the Irish-resident non-financial private sector (households and
non-financial corporations). Among the Irish-owned retail banks, credit advanced to the Irishresident
non-financial private sector increased by 128 per cent over the period and accounted
for the largest share (36 per cent) of total credit for these banks at end-2008. Similarly, for the
non-Irish owned retail banks, credit advanced to the Irish-resident non-financial private sector
increased by 226 per cent to account for a 52 per cent share of total credit advanced in 2008.
Meanwhile the increase in the IFSC banking sector from 2003 to 2008 was mainly driven by
increases in credit advanced to the non-resident, non-bank private sector.
The three categories of banks in Ireland responded in different ways from 2008, when the
property market began to falter, the domestic economy began to contract and the wider
international economy stagnated. A feature of the years following 2008 has been retrenchment
by banks to home markets, and this is evident in the data for the Irish resident banking system.
Over the 2008-2012 period, credit advanced to the Irish-resident non-financial private sector
decreased by 8 per cent and 14 per cent for the Irish-owned and non-Irish owned retail banking
groups, respectively. Meanwhile, credit advanced to the non-resident non-bank private sector
(households, non-financial corporations, other financial institutions and insurance corporations
and pension funds) declined by 61 per cent for the Irish-owned retail banks and increased
by 63 per cent for the non-Irish owned retail banks. Among the Irish-owned retail banks, the
proportion of total credit advanced to non-residents contracted by 15 percentage points over
the 2008-2012 period, reflecting drops in credit to non-affiliated entities (both bank and nonbank).
Meanwhile, among the non-Irish owned retail banks, credit advanced to non-residents
increased by one percentage point over the same time period, reflecting increases in credit to
the non-bank private sector.
By 2012, following the developments in the key asset categories discussed above, the size
of the resident banking system had fallen to €859 billion (525 per cent of GDP), with IFSC
banks reporting the sharpest decline. At end-2012, similar to 2008, the largest share of the
Irish banking system’s total assets was held by Irish-owned retail banks (51 per cent), while
IFSC banks and non-Irish owned retail banks held 38 per cent and 11 per cent, respectively.
The differing responses of the three categories of banks to the domestic and international
financial crises of recent years can be seen to have implications for the analysis of credit to Irish
households and NFCs. Correctly identifying the size and behaviour of the domestically-relevant
banking system is an important first step in outlining any difficulties in credit provision and
targeting of policy measures to address these where necessary.
Money Market Funds
The year-on-year change in the net asset value
(NAV) of money market funds (MMFs) resident
in Ireland which was positive at end-2012, had
turned negative by April 2013 (Chart 4). This
was due to a continued sell-off of holdings of
MMF shares between November and February,
although some inflows were recorded in March
and April. The NAV of an MMF is also influenced
by price and exchange-rate valuation changes
in the assets that they hold. Over the twelve
months to April 2013, positive revaluations were
recorded in only four months, reflecting the
difficult environment that MMFs are currently
operating in. Euro area resident MMFs, in
aggregate, also recorded sizeable declines
in their NAVs over the year to March 2013.
MMFs have been operating in an environment
of low interest rates which has made it more
difficult to generate positive returns, and have
not benefited from inflows that were previously
seen during periods following the onset of the
financial crisis.