Property specialists pose greatest risk among non-bank SME lenders in credit shock – report

Specialist providers of finance to the commercial property sector pose the greatest risk to the Irish economy among non-bank lenders to the small- to medium-sized enterprise (SME) sector in the event of a sharp drop in credit supply, according to a new Central Bank paper.

Some 77 non-bank lenders targeting SMEs in Ireland provided a total of €7.7 billion of loans between 2019 and 2022, according to the report, written by a group of Central Bank economists.

Non-banks became an important source of funding for SMEs after the 2008 financial crash, following the exit of a number of banks from the market and retrenchment by remaining lenders from certain areas, especially property.

However, the report found that while non-bank lenders accounted for 37 per cent of total lending to SMEs in late 2021, this had fallen sharply to 24 per cent by the end of last year, against the backdrop of rising interest rates internationally.

Non-bank lenders are funded by market and international banking sources and often borrow on variable rates, the paper said.

Specialist property lenders accounted for €2.4 billion of non-bank loans to SMEs between 2019 and 2022, second to asset finance providers. However, they are more important from a financial stability perspective, the report said.

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“Any amplification of volatility in Irish real estate through vulnerabilities in non-bank lenders could have implications for Irish financial stability firstly through direct effects on the real economy and secondly, indirectly through potential interconnections with other parts of the financial system,” the report said.

“For example, if a downturn in the real estate market was to be amplified by a reduction in lending from non-banks, this could cause spillovers. Lack of credit could worsen the falling property values affecting collateral for the banking system (through common exposures).”

The original article can be found here

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