Risk Weights on Irish Mortgages

Risk weighted assets for Irish residential mortgage lending are high in a European context. In this note, we explore the main contributors to these higher mortgage risk weights. One key driver is the underlying credit quality of the stock of outstanding mortgages. Mortgage default rates are higher in Ireland than many other European countries and this is true both historically and over recent years. The majority of recent defaults stem from pre-global financial crisis originated loans, highlighting the central role of these loans issued under weaker lending standards in pushing up risk weights. A second key driver of higher mortgage risk weights relates to higher modelled loss-givendefault. Irish loss rates on mortgage defaults that occurred in the financial crisis years (2009-2013) are more severe than that observed in most other EU countries. This is predominately due to the longer time to resolve defaulted loans in Ireland, associated with a particularly severe crisis. Moving forward, as banks originate new loans, with lower probability of default, these will replace crisis period loans and will place downward pressure on mortgage risk weights. Regulatory reforms such as the introduction of the ‘output floor’ under Basel III will narrow the gap between overall Irish risk weights and those in other countries. Nevertheless, the risk weight applicable to Irish mortgages will likely remain at the higher end of EU comparisons over the medium term.