Banks are facing a second wave of arrears, defaults and bad debts over the next two years as the deterioration in the economy puts pressure on all aspects of their loans books, according to EBS chief executive Fergus Murphy.

Speaking to the Sunday Tribune in the week EBS announced an €8.8m loss for the first half of the year, Murphy said that although the avalanche of land and development loan losses had largely been recognised and were being transferred to Nama, there would be a "natural" progression of credit problems to mortgages and loans to businesses in the medium term.

"These second-round effects of the malaise in the economy – falling GDP, high unemployment – will result in a drip of arrears, defaults and bad debts, even after the recession is technically over," he said.

Murphy said banks may not see losses right away, but they "expect a tail", especially in retail lending. He said there would be a continued requirement for provisions over at least the next two years as EBS went through a slow work-out of "many small loans to many people".

EBS has recognised impairments of just 0.3% of its mortgage book, but 2.14% in its non-Nama commercial investment portfolio. Recently, Irish Life & Permanent, Ireland's largest mortgage provider, said it expected mortgage impairments to reach 1.8% through the cycle, while Bank of Ireland last week issued an unspecific warning about downside risk to asset quality across its loan book.

Meanwhile, the Irish Brokers Association (IBA) attacked Murphy for warning that mortgage interest rates would have to go higher in the new year to compensate for poor profit margins and the cost the banks will have to pay for Nama.

In a statement, the IBA accused EBS of forcing customers to "pay for the mistakes of management" and of "looking to rebuild their empires and ensure [their] comfortable survival". The IBA also said the withdrawal of some foreign lenders from the mortgage market was giving domestic banks the opportunity to push up prices without fear of competition.

Murphy said the comments were "unfair" and failed to take account of the fact that Irish banks have some of the lowest net interest margins in Europe – half of the average and higher only than Finland.

"Irish banks will need similar margins to their peers in other countries to compete credibly for funding," he said.