Bankers cutting credit is another unintended consequence of stress tests

The Irish Independent carried an article on how an Irish bank is adopting its lending to regulatory stress tests.  It is making smaller loans so it can be assured that the loans will pass the stress tests.

While this might be prudent from the perspective of the individual bank, it works against policymakers efforts to make adequate credit available to support areas of the real economy like real estate.

STATE-owned AIB insisted it is being prudent after it emerged yesterday that it has reduced by around 10pc the amount of money it will lend to first-time buyers for mortgages. 

The bank has changed its lending criteria, which means it will now offer new buyers less than it had been up to now, the Irish Independent has learned. 

The move comes in spite of the State pumping €20bn into the bank to rescue it....

Now the lender has changed its rules and will only approve mortgages for those who can cope with interest rates going as high as 6pc. This "stress test rate" was as low as 5pc earlier this month.

The move has the effect of lowering the amount of money home buyers are now approved for by AIB. 

Broker Karl Deeter, of Irish Mortgage Brokers, said that a couple with two incomes of €35,000 each, taking out a 30-year mortgage, would have been approved for €348,000 under the old rules. 

But the new stress-test rules mean that the couple would now be approved for €36,000 less, or €312,000 in total. 

The same couple would end up with more from other lenders....

A spokeswoman for AIB said the rule change was introduced to ensure all lending by the bank was prudent. 

It was required to stress test borrowers to see if they could cope with lending rates of at least 2pc above current rates, she said.