Have the banks become zombies that are incapable of lending to even viable businesses?The bank regulator Matthew Elderfield demanded that banks meet capital and liquidity standards that are higher than in other countries and at a faster pace. That is a desirable long run goal but in the short term it could stifle lending as banks constrain their business loans both to increase their cash and reduce their ratios of loans to shareholder capital. Hopefully, the regulator will relent on target standards if he sees that business loans are drying up.
An even greater risk to business lending is that banks could be prevented by the government from taking prompt action to repossess houses on mortgage defaults and arrears,now running at 11% of mortgages. If the banks can't sell off those houses,that means they have less money to lend and their potential to lend is further reduced by the writedown of mortgage assets.
Folk memories of heartless 19th century evictions in Famine and post Famine Ireland still have some sway in Irish thinking and the numerically large number of families threatened with eviction are a potent political lobby.
The seemingly reasonable solution talked up by the media is for the banks to give writeoffs on mortgages,reducing them to levels families can afford. The banks could also retain an interest in potential future capital gains above the level of the written down amount in the event of a sale.However,going by US experience most bank restructurings of mortgages in default resulted in repeated defaults in a relatively short time,suggesting that those debtors are hopeless cases.
If the government makes it easy for debtors to declare bankruptcy,a new wave of defaults on mortgages under water (ie house worth less than the mortgage) is likely.