Bank of Ireland purchases insurance to ease capital pressure on risky mortgages

Bank of Ireland has opened a new front to ease the burden of expensive capital tied up on its mortgage portfolio, effectively purchasing insurance against € 1.4 billion in high-risk homeowner and rental loans.

The bank said a group of anonymous investors assumed the credit risk for 265 million euros of potential losses on the portfolio at an initial cost of 12 million euros per year, decreasing over the lifetime of the transaction. The so-called credit risk transfer agreement has a lifespan of up to 15 years, but can be canceled after 9.5 years, according to a spokesperson, declining to name the investors.


The deal has the effect of reducing the average risk weight of its Irish mortgages to 22% of all mortgages, down from 26% at the end of June. The risk weight of a loan portfolio is a key determinant of the amount of expensive and rainy capital that a bank must hold against loans, in the event of an increase in defaults.

Irish banks are required to hold much higher capital levels against mortgages than the average European lender, a legacy of losses lenders suffered as a result of the property crash. This is part of the reason why the new average mortgage rates in Ireland, at 2.74% in August, according to the Central Bank, are more than double the European average.

“There is no customer impact of the transaction. No assets will be derecognized from the group’s balance sheet and the benchmark portfolio of credit assets and associated customer relationships will continue to be managed by the group, ”the bank said of the credit risk transfer agreement.


Loans from the portfolio were included because they attract higher risk weights as the majority of the portfolio has either been restructured previously, after experiencing difficulties, or rental mortgage products, according to the spokesperson.

The bank has completed three credit risk transfer transactions since 2016, covering Irish business loans, project finance loans and UK business acquisition finance and leverage exposures. However, this is the first time that it has carried out such a transaction involving real estate loans.

The bank said the latest deal would increase its Common Equity Tier 1 (CET1) ratio by 0.3 percentage points. The bank had a CET1 ratio of 14.1% at the end of June, well ahead of regulatory requirements.

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