Finance Minister Michael Noonan said yesterday that following a round of meetings this week with bank chiefs, he has secured their agreement to lower their standard variable mortgage rates.
The Government would consider “a penal banking levy” or provide new powers to the Central Bank if the Department of Finance was not happy with the lenders’ actions in the coming months, the minister said.
But US investors in particular are said to be very concerned about what they perceive as political interference in the banking market which has come only weeks after the government sold a 25% stake in Permanent TSB to stock market investors, and at a time when the Government eyes a sale of parts of its huge investment in AIB, probably next year.
Including a €1.6bn contingent convertible debt note, Government-owned AIB is currently valued at €13.3bn.
“Investors have been very surprised how much the Government has been trying to get involved in the banks’ lending practices because of the sale of AIB. It is fair to say that investors do not like Government interference in any industry, and the banking industry is no different to that. It does complicate the sale issue,” an industry source said.
Moody’s Investors Service told the Irish Examiner yesterday that it was closely following the controversy on standard variable rates in Ireland.
However, the rating agency would wait to see what actions the banks would take before it could measure the impact, if any, on their profitability.
It had previously said that Irish banks’ profitability had so far been supported by the write-backs of provisions following the rebound in residential and commercial property prices here.
Michael Dowling, a leading mortgage expert, said that investors looking at investing in Irish banks would be concerned that Government is strongly influencing the banks’ powers to set interest rates.
“PTSB has just raised over €500m on back of a document which indicated what its margins were on lending. And we are suggesting that before the ink is dry on that document, that margin levels are going to have to be cut.
“It does not send out the right signals. It could potentially delay the timetable for the sale [of AIB] and I do not see a new competitor coming in, especially when you see talk of penal banking levies,” he said.
Goodbody chief economist Dermot O’Leary said the Government will be mindful of its need to tread carefully in the coming months.
“I believe that the Government would want to be careful of some of the unintended consequences of the pressure they have put on the banks. It may act as a disincentive for further entrants into the Irish market, thus weakening one of the factors that would bring interest rates down,” he said.
A spokesman for the Department of Finance said the Government did not believe that investor confidence had been undermined.
The minister had taken “a firm line” because there was general consensus that standard variable rates were too high, the spokesman said.