Yeah its a common misconception that deposits equal scale and ability to lend - banks in Ireland have excess deposits but dont confuse that with excess and/or abundant shareholder/tangible equity for development lending and dont confuse the low deposit rate your getting on your savings with the profitability or return on equity available lending into the development space.
What limits lending inside of banks is really their tangible or shareholder equity and then the risk weights attached by regulators to the proposed lending to be done which influences the return on equity. The riskier the lending the more capital required. The more capital required the lower the return on equity that can be achieved on the banks equity. Now banks need deposits too to balance their assets and liabilities - ideally this comes from low cost deposits which enhances the return on equity the banks achieves on its own tangible equity (deposit costs being an input to net interest rate margin)...but banks can get deposits from overseas via bond sales etc....deposits are always abundant in some sense, regulatory capital is always scarce.
I can expand further lots of moving parts to this - but two keys issues to reflect on:
(1) I outlined above how producing apartments is currently a non-economically viable activity due to Irish build costs intersecting with the current gross yields demanded by PRS investors (a function of rates but also perceived risk to investor cashflows) the math of which makes building incremental apartment supply a non-starter. Banks do not lend into guaranteed money losing activities so before we even get to whether they have abundant deposits or abundant shareholder equity there needs to be a business case for apartment assets to be constructed such that loans could be even written against them. The business case does not exist for a developer to produce an apartment building and as such no developer would walk into a bank to seek a loan to do so as the upside down math would become apparent in the first 15 minutes - remember above €52m sales price needed to build and where the market will only pay €37m for it.
This is a not a good loan candidate for a bank before we even get to its relative attractiveness to other things a bank could do with its shareholders equity capital.
(2) Lets say the business case existed to construct an apartment complex. OK. The developer can show an end purchaser willing to pay build cost plus 15% developer margin - you're seem to be assuming that because banks have abundant excess deposits they have ample scope to lend?
Two issues....number one banks lending scope is ultimately limited by their tangible equity not deposits and their desire to consume regulatory shareholder capital activity is a function of the profitability of that underlying lending. Development lending is deemed by regulators to be very risky and as such it has very high risk weights which means more and more of the banks scarse shareholder equity gets consumed in making these loans - the shareholder equity capital required to be put aside to write €1 of a development loan is multiples maybe three to four times the level of that required to write a €1 loan to a prime mortgage customer. Yes higher lending rates can be achieved lending to risky developments but that is only half the story - the other half is that this lending consumes regulatory capital, as I said, three to four times that of mortgage lending due to post-GFC regulations....short version lending to developers is not a very good business for the banks....end point concentrated, high risk, and not markedly higher returns relative to other loans you could make due the high consumption of your regulatory capital......regulators to a certain extent put the banks out of the development finance business post-GFC with all the new RWA rules.
What can be done about it.
My prescription to the above problem is simple one......the Irish government could fix this bank development lending viability issue overnight & "mobilize" the excess deposits in Irish savings accounts.....and that would be to engage with the pillar banks and provide SRT's (Synthetic Risk Transfers) for new development lending (apartments/homes)....such SRT's would see the banks take the first, pick a number, 15% tranche of losses on any development lending they might do with the State taking the next 35% of losses with the bank back on the hook for the final 50%.....I'm not sure what the number is....but in doing so you'd restore the attractiveness of development lending such that it might compete with mortgage lending in terms of RoE's.....regulators due to the SRTs would assign lower risk weights to such lending and therefore the scope to lend into the sector would expand (remember its regulatory capital that is truly constrained inside a bank, not deposits). Its a no brainer solution if the exposure was managed appropriately but of course politically it be classed as another bailout of the banks. In reality its the quickest mechanism by which the State's superior cost of capital could be transmitted to the private sector which is best placed to allocate lending appropriately. Under the SRT 'skin in the game' is retained at the bank level but it is required to to make development financing a business that the Irish banks and their shareholders would have any interest in entering again given the current regulatory environment, high risk relative to the low RoE's.
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