1. The feedback loop: Ireland’s retail banks, regulation & real economy supply and demand Fiona Muldoon Director, Credit Institutions & Insurance Supervision 11 April 2013

2. 2 Key Industry Metrics Number of Firms Regulated in Ireland2012¹ Irish Licensed Banks32 Designated Credit Institutions (ACS issuers)5 Building Societies1 Branches35 Total73 Solvency (as at Dec. 2012) €mDomestic Market 2 Others 2 Total Assets€429 bn€570 bn Total Own Funds€36 bn€31 bn Total Capital Requirements (Pillar 1)€18 bn€9.5bn Overall Sector Solvency15.6%26.4% 1.As at 31 Dec 2012 2.Data does not include branches Safeguarding Stability, Protecting Consumers Domestic Market16 International57

3. 3 Safeguarding Stability, Protecting Consumers TO BE UPDATED FOR 31 DECMBER DATA in EARLY APRIL Snapshot of Irish Banking as of 31 December 2012 Domestic Market Credit Retail Institutions Total Assets: €429b Business Lines 1. Retail Deposits and Loans 2. Corporate Deposits and Loans 3. Commercial Lending 4. Mortgage Lending 5. SME Lending 6. Credit Cards Other Credit Institutions Total Assets: €570b Business Lines 1. Corporate Loans 2. Structured Products/Lending 3. Corporate Trust Services 4. Custody Services 5. Wealth Management 6. Debt Securities

4. 4 Key Industry Metrics: Balance Sheet Key Balance Sheet Statistics as at 31 December 2012 Retail Institutions Others Total Assets€429b€570b Of which Loans and Advances€299b€122b Debt Securities€93b€84b Derivatives€11b€353b Asset Quality Non-performing Assets €98b€0.8b Impairment Provisions €52b€0.9b Coverage (Provs/Non-Perf) 52%108% Safeguarding Stability, Protecting Consumers

5. 5 Key Industry Metrics: Profitability Profitability (as at 31 December 2012)Retail institutions Others Operating Income€3.5b€1.9b Fees and Commission Income€0.9b€1.0b Total Income€4.4b€3.0b Operating Expenses-€4.7b-€1.9b Operating Profit-€0.3b€1.0b Impairment Charges-€9.8b-€0.2b Profit Before Tax-€10.1b€0.9b Safeguarding Stability, Protecting Consumers

6. The challenges facing the retail banking industry are acute and can be divided into two broad areas 1.Work-out of distressed credit portfolios Implementing resolution focused Mortgage products and offerings with properly trained staff and efficient processes and systems Developing longer term and incentivised debt restructuring options for viable SME businesses 2.Future viability Restoring interest margin; paying less for deposits, re-pricing existing loan books and increase new lending at rates that restore profits Reduce cost base and develop less costly distribution channels and mechanisms Designing a business model for the new ‘business as usual’ including increased capital requirements (Basel III) 6 Safeguarding Stability, Protecting Consumers

7. 7 Economic contraction Domestic demand SME capacity to pay Distressed Loans Bank profitability Bank capacity to lend Consumer & SME confidence The challenges faced by the domestic banks matter in a real way to ‘ordinary’ SME borrowers and to consumers Safeguarding Stability, Protecting Consumers

8. 8 SME’s are critical to the Irish economy and to Irish recovery SMEs in Ireland 99.8% of enterprises 47% money 70% of workforce SME make-up >99% of businesses in Ireland¹ SME account for 70% of people employed in the private sector ² 64% of private sector workers are employed by indigenous non-exporting firms, with 56% working for indigenous, non-exporting SMEs¹ SME Gross Value Add is 47% (€84bn)² SME Turnover is 51% of Turnover (€314bn)² Core SME is dominated by 4 sectors (76% of lending) Hotels & restaurants/ Wholesale & Retail/ Agri / Manufacturing Source:¹ DoF Budget 2013 Assistance for SME Sector Presentation ² CSO: Business in Ireland Report (published Nov12)

9. SME Personal guarantees 70% employer : repayment capacity for mortgages Cross guarantees on collateral No single definition of SME Cashflow supports direct trading & “indirect” debt Business property is part of a larger premises PDH debt serviced through drawings Multi-banking 9 SME Arrears: Complex issues and a high level of inter-connectedness Safeguarding Stability, Protecting Consumers

10. 1.Governance & Execution framework of SME Support Unit organisation 2.Quality of Implementation plan and progress made 3.Restructuring – assessing and distinguishing viable and non-viable borrowers 4.Re-underwriting – disentangling viable debt from unsustainable property- related debt 5.Credit Assessment Tools & Policies (Debt/ Financial/ Collateral) 6.MI/ KPIs/ key milestones and timelines 7.Operational plans/Skills/ Resources and Training/Execution ability 8.Level of external assistance / sectoral/ restructuring expertise 10 SME Arrears: Central bank areas of regulatory focus for 2013 Safeguarding Stability, Protecting Consumers

11. SME health and stability links directly to Mortgage arrears issues Employment in SMEs = repayment capacity for employee mortgages Many distressed SME borrowers also hold a number of BTL exposures Banks consider distressed SME borrowers at a total borrower exposure level (excluding PDH) Public targets & audits of result Multi-indebted mortgage borrowers require resolution too 11 Safeguarding Stability, Protecting Consumers

12. SME Gross New Lending constant since 2010 12 Safeguarding Stability, Protecting Consumers

13. Direction of SME new lending is realigning away from Property (4 quarter moving average to Q3 2012) 13 Safeguarding Stability, Protecting Consumers

14. The sectors seeing reduction also have high levels of default: Causality? Micro SME book, June 2012. Total Balance €~5bn 14 Safeguarding Stability, Protecting Consumers

15. Is demand for credit weak in Ireland? ECB survey: Asks firms for Net % increase in financing needs in previous 6 months 15 Safeguarding Stability, Protecting Consumers

16. 16 Economic growth Domestic demand SME profits = capacity to service Performin g Loans Bank profitability Bank capacity to lend Consumer & SME confidence Economic growth is linked to supply and demand for credit. Health of Banking sector is linked to wider ‘real economy’ & vice versa Banks: Capital & Provisioning helps but leaves non-performing asset on banks’ books Banks: Work out and restructuring is necessary Regulator: Audit & oversight work taking place. Monitoring, measuring & consequence. SME’s: Increase in receiverships, liquidations necessary and inevitable to allow leanest and fittest to emerge and compete Europe: Banking union and European Stability Fund offer opportunity to break damaging link between Sovereign & Banking Sector Ireland: Better oversight, better regulation, safer banks prevent recurrence of past mistakes What can be done to change the cycle? Safeguarding Stability, Protecting Consumers