This has been a difficult year for the banking sector, with three US bank collapses and a forced takeover in Switzerland. Indeed, last week’s takeover of First Republic by JP Morgan Chase brought banking back into the headlines in a way most would prefer not to see. Nevertheless, Laura Holtham, partner at law firm Ogier Leman, said that recent events have been driven by important specificities.
In Ireland the banks are in good shape, so the discussion is slightly different. Indeed, Holtham said she was cautiously optimistic about Irish banks, which are subject to much stricter regulation than the US regional banks.
“There was always going to be a test at some point,” she said. “Post the financial crisis, there was a huge amount of regulation put in place – so, while Irish bank share prices did drop following events in the US, they all have good liquidity positions and strong levels of capital. Irish banks are far less risky than they were in 2008.”
Beyond the international banking story, discussion about the role and availability of finance in Ireland has turned to non-bank lenders – often in reference to mortgages, but they are also present in other sectors. Central Bank of Ireland figures indicate that non-bank entities lent Irish SMEs €1.6 billion in 2020.
“When seen in light of the exit of KBC and Ulster Bank, there is perhaps something to be said about the changing face of lending in Ireland,” said Holtham.
Driving the rise of non-bank lenders is a need for finance that often goes beyond what is available from banks.
“I think there are a number of factors. The additional regulation that has been put on traditional banks means they are less able to take risky positions, and that has created a gap for alternative lenders to step in,” she said.
“We’ve seen, particularly over the past year or so, that banks are still willing to lend, but less than in the past or on stricter terms. Alternative lenders and funds are not subject to the same restrictions, so are able to meet the needs of borrowers and tend to make decisions very quickly.”
Borrowers, often in commercial real estate, typically accept higher pricing on the deal as the cost of doing business.
Holtham said that given how alternative lenders meet a growing need, they are likely to become a permanent fixture of the lending landscape. There is always going to be a place for the traditional lenders, she said, but recalibration in the real estate sector with uncertain valuation and increased costs, as well as the macroeconomic picture, has created more space for alternatives.
“We’ve had a really long period of low interest rates and low inflation, followed suddenly by the opposite. That will, hopefully, change but it’s not going to go back to the zero per cent that we saw,” she said.
The kinds of entities now lending in Ireland include private equity and, most recently, investment funds.
“There’s a retreat away from looking to banks for financing in the SME sector along with increased lending from private equity, and now it’s not uncommon for us to work with funds, where we have very good contacts, we’ve got a big global network,” she said.
Holtham added that traditional finance and alternative lending shared core concepts, even if the process of organising lending was different.
“The fundamentals are the same. You have the same provisions in a loan document: interest rate provisions, representations and warranties, you have financial covenants,” she said.
Ogier Leman, which includes among its clients businesses seeking to set up Irish special purpose vehicles, has a bird’s eye view of how businesses are making use of alternative finance to grow. For Holtham, this is indicative of the flexibility the sector brings.
“Ten years ago, we would have only seen large institutions utilising complex structured finance structures, but as time has gone on we are seeing more non-bank lenders exploring these options too,” she said.