ECB cheap funding move puts spotlight on costly Irish banks

An ECB move to inject more cheap funds into banks to boost a weakening eurozone economy has put the spotlight on the elevated costs of loans Irish banks charge households and businesses.

ECB head Mario Draghi said the measures that will extend the period that banks throughout the eurozone can avail of cheap funding were needed as evidence mounted that economic growth was slowing in the eurozone.

Citing the slowdown in the world economy and other “internal” pressures, he told reporters in Frankfurt the eurozone was in a period of “continuous weakness” and “pervasive uncertainty” but insisted that it was not heading into recession.

European stock markets fell and the euro slid against the dollar. It traded little changed at 85.74 pence against sterling.

The Iseq index fell 1.7%, as the two main banks tumbled. AIB slid almost 7.5% and Bank of Ireland closed 4.7% lower.

Under the new “lower-for-longer” measures, the period has been extended for eurozone banks to avail of cheap funding from the ECB, although the central bank didn’t extend its so-called quantitative easing programme of bond buying.

Markets had been surveying the weakening eurozone growth figures for months and had already pushed out expectations for the first ECB rate rise to 2021, said Philip O’Sullivan, chief economist at Investec Ireland.

The lower-for-longer interest rate policy will boost Irish households paying down tracker mortgages and put a brake on the funding pressures that were building on banks to push up variable and fixed rates, he said.

However, economist Jim Power said extending the cheap funding will put the spotlight on the reasons that Irish banks often cite for charging SMEs and home loan borrowers the costliest rates in the eurozone.

Mr Power said Irish borrowers were being penalised and the explanations by lenders over their elevated Irish rates lack credibility when Italian borrowers can tap cheaper loans.

Central Bank surveys have repeatedly shown that SMEs and Irish mortgage borrowers pay among the highest rates in the eurozone.

Irish bank chiefs have in recent times again cited their higher costs of funds and the amounts of capital they need to set aside to cover Irish home loans.

Neil McDonnell, head of business group Isme, said it was a matter of “intense frustration” that many eurozone SMEs can tap loans at a fraction of the rates Irish lenders charge Irish SMEs.

At the press conference, Mr Draghi said the ECB had not changed its assessment that risks were tilted to the downside even after tweaking policy. He cited external factors such as protectionism, the still-uncertain nature of Britain’s exit from the EU and vulnerabilities in emerging markets.

“In a dark room you move with tiny steps — you don’t run but you do move,” Mr Draghi said of the bank’s efforts to provide guidance to financial markets in a period of uncertainty.

Today we are not behind the curve — but we weren’t even before

The ECB now sees eurozone growth at barely 1.1% this year, compared with the 1.7% it projected in December.

Its so-called Targeted Long-Term Refinancing Operation is partly aimed at helping banks roll over €720bn in existing TLTROs.

Additional reporting by Reuters

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