Furore over mortgage rates throws light on a still-broken bank system

The row over the legislation on mortgage rates going through the Dáil has highlighted much more than the high costs many thousands of people are paying for their home loans.

Thu, 19 May, 2016 - 01:00

Eamon Quinn

It has exposed the faultlines running through a banking industry, which, eight years after the onset of the huge banking crash, is still far from healthy.

The focus has already widened to fall on the high costs Irish SMEs are paying for their business loans compared with their peers in the eurozone.

Those business loan rates are at elevated levels even when measured against nations which were also devastated by failing banks.

The focus has widened further to mortgage arrears and other soured loans still resting on the books of the bailed out lenders.

The row about mortgage interest rates will help everyone if it shows how the issues of high standard variable mortgages, SME loan rates, and mortgage arrears are intertwined.

The common thread is that Irish banks have still not regained their full health.

It has also starkly raised the issue of the lack of competition in banking.

Asked if it was minded to look at the industry, a spokeswoman last night told the Irish Examiner that the Competition and Consumer Protection Commission “is aware of the continued focus of government and political parties on the banking sector and we are closely monitoring developments”.

The row has opened a divide.

On one side the Fianna Fáil legislation, with the backing of Sinn Féin and other opposition and independent deputies, looks set to secure the support of a majority of the Dáil.

The legislation proposes empowering the Central Bank to intervene in the mortgage market, if it finds the market is not functioning.

On the other side is the regulator and the Department of Finance. The Central Bank has repeatedly said it does not want the powers. Governor Philip Lane has said intervention would likely dissuade new lenders from entering the market.

Finance Minister Michael Noonan appeared to cite research by Investec Ireland when he said the legislation could potentially be unconstitutional.

Philip O’Sullivan, chief economist at Investec Ireland, said there is potential for standard variable rates to fall further.

So far, Irish lenders have benefited from the rescue funds by taxpayers, a rapidly growing economy, and the measures taken by the ECB to help finance eurozone bank lending.

However, the banks here still need to improve their profitability for the Irish banking system to return to health, he said.

Because of the high number of low-yielding tracker mortgages, focusing on standard variable rates is an “incomplete analysis”, said Mr O’Sullivan. He urges the Government to keep out of setting mortgage rates.

However, critics of the high level of mortgage arrears and interest rates say legislating is the way to go because the normal levers of competition just are not working in Ireland.

The Central Bank already regulates large parts of the industry and, despite high margins, there are few signs of major new entrants arriving anytime soon.

Mortgage brokers say that planned new entrant Frank Money may have to rethink its pricing plans, after AIB and KBC cut their mortgage rates last week.

Economists Diarmaid Sheridan and Conall Mac Coille at Davy Stockbrokers said slashing Irish mortgage variable rates to the European average of 2% would not “be sustainable” and “would weigh further on the system returning to sustainability”.

They said cutting mortgage rates “could fuel Ireland’s frothy housing market”.

The row is attracting international attention.

The shares in 75% State-owned Permanent TSB, which has most to lose from any big cuts in standard variable rates, have slid sharply since the Irish Examiner first reported on the plans by Fianna Fáil finance spokesperson Michael McGrath to legislate two weeks ago.

Yesterday, the shares were trading at 190c, down 58% since the start of the year.

Shares in Bank of Ireland — by far the most profitable and least exposed to Irish mortgage lending of the banks — also tread water. Its shares are down over 30% this year.

“In the last week or so, Irish bank shares have been under pressure. It has been messy,” said David Lynch, premium client manager at IG in Dublin.

“Until we get some clarity on the political pressure and mortgage rates the pressure will likely continue.”