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Irish Times

Non-bank property lenders cut small business loans most sharply during market shocks

Specialist property lenders reduce lending to small and medium-sized businesses (SMEs) much more sharply than mainstream banks and general non-bank finance providers during periods of market shock, according to a new Central Bank study. Between 2019 and 2022, specialist property lenders operating in the Irish market reduced lending by 80-90 per cent in comparison to banks when euro-area financial conditions tightened, Central Bank economists Raffaele Giuliana and Paul Reddan said in a research technical paper published on Tuesday. The period covered both the Covid-19 pandemic and a spike in interest rates globally as central banks fought inflation. While the authors found that lending across non-banks contracted by as much as 9.3 per cent during a shock compared to banks, nonbank providers of asset finance and general loans actually increased credit supply compared to the mainstream banks. READ MORE The authors highlight, however, that the downturn in the commercial property market during the period also played a role in the results of the study. Non-bank entities have become an important source part of the global financial system in the wake of the financial crash in 2008, driven as mainstream banks have been subjected to more onerous regulation and capital requirements. [ EU plans sweeping stress test of non-banks Opens in new window ] The total amount of assets of firm involved in nonbank financial intermediation, which also includes insurance corporations, pension funds and special purpose vehicles, more than doubled to $218 trillion (€186 trillion) between the crash and 2022, according to Switzerland-based Financial Stability Board. That equates to almost half of global financial assets. Some 71 non-bank entities operating in the Irish market accounted for almost half of new lending to SMEs in 2021, when global interest rates were at ultra-low levels and the financial markets was awash with cash that had been injected into the system by central banks during the pandemic. How the wealthy are buying up land to avoid inheritance tax Listen | 22:03 Still, the average SME loan extended by the four retail banks between 2019 and 202 – including the now-defunct Ulster Bank – was more than twice the average €58,902 loan granted by non-banks, according to the Central Bank paper. It used data from the Central Credit Registry. The paper noted that specialist property finance providers in the Irish market receive their funding from third parties operating in the European financial sector. 'The effects of the Covid-19 shock, and the associated implications for office spaces, are clearly a factor during our sample, and the commercial real estate market has continued to be a financial stability concern for policymakers throughout the 2021-2022 period of heightened inflation and increasing interest rates,' it said. 'Our data does not allow us to run regressions for a longer time period, but other cycles of tightening financial conditions, which are not specifically so negative for [commercial real estate] outlooks, may result in different outcomes for lenders focused on providing financing to the real estate sector.'