Financial Stability Note: A vulnerability analysis of Irish SME credit exposures

• Loan-level data from AIB, Bank of Ireland and Ulster Bank show a general improvement in SME loan portfolios.
• The research shows 7.3 per cent of SME loan balances have high vulnerability scores.
• High vulnerability scores indicate higher likelihood of difficulty making repayments in a downturn.

A Financial Stability Note by Niall McGeever presents the results of a vulnerability analysis of the SME loan portfolios of three Irish banks. The author calculates a vulnerability score for each performing Irish SME exposure by linking borrower characteristics and macroeconomic conditions to historical default outcomes. A higher vulnerability score corresponds to a higher likelihood of encountering repayment difficulty in the event of an economic downturn.

The main findings of the Note are:

• There is evidence of a general improvement in the condition of the aggregate SME loan portfolio. Summary indicators, such as the median vulnerability score, are improving.
• A subset of borrowers – accounting for 7.3 per cent of performing balances – continue to have high vulnerability scores. While these borrowers are performing and current in their payments, the research indicates they are more likely to encounter repayment difficulty in the event of a general economic downturn.
• Accommodation & Food and Wholesale & Retail borrowers account for a large share of high vulnerability balances. High vulnerability borrowers are observed in all regions.

Library of Financial Stability Notes.