MercoPress. South Atlantic News Agency

UK banks’ exposure to Irish lenders above £ 139 billion

Bank of England Governor Mervyn King: ‘by no means trivial’

Ireland's banking problems are likely to have a direct effect on the United Kingdom's battered institutions. According to the Bank of International Settlements, UK banks have a total exposure to Irish lenders of 222 billion US dollars (£139bn).

Shares in RBS have been under pressure all week after analysts named it as the UK lender with the biggest exposure to Ireland with about £54bn in loans, a third of which are tied to residential mortgages through its Ulster Bank subsidiary. The rest is related to commercial loans, holdings of Irish government debt and other derivative instruments on the bank's trading book. According to some reports, RBS has already made provision for about 40% of the £9bn in loans to property developers going bad.

The next biggest lender to Ireland is Lloyds Banking Group, largely thanks to its takeover of HBOS, with about £27bn of loans, £11bn of which are related to commercial lending and property. It has set aside £5bn to cover losses in this particular portfolio. Lloyds has already announced its intention to exit its Irish business.

Lenders can take some comfort from the fact that the UK government is ready to extend loans to Ireland, on the basis that these will ultimately turn a profit for the taxpayer. There is considerable incentive to keep Ireland afloat from the UK Treasury's point of view as bilateral trade amounts to around £12bn a year, which makes Ireland the UK's fifth-largest trading partner.

Prime Minister David Cameron has already said that Ireland's economic stability is “in the country's interest”. Depending on which bailout mechanism is used, UK taxpayers could be liable for up to £7bn in loans to the country.

Bank of England Governor Mervyn King said the exposure of Britain’s banking system to Ireland’s economy is “by no means trivial” and growth in the Euro area is “a very important ingredient” to UK economic prospects.

While “the direct holdings of Irish sovereign debt are not especially large,” ownership “of securities issued by Irish banks are bigger and of course there are wider exposures to assets comprising loans to the Irish economy more generally,” King told lawmakers in London. “So I think the overall exposure to the Irish economy is by no means trivial.”

Irish bond yields have soared on concern that the government will need assistance bailing out its banks, marking a new stage in the sovereign debt crisis triggered by Greece in May and threatening to break the euro area apart. King said last week that the biggest risk facing the British economy was from international factors.