Philip Lane: New lenders to lower SME loans in time

New entrants into Irish banking will play a part in driving down the borrowing costs for Irish firms, but it will take time, Central Bank governor Philip Lane has said.

Philip Lane: New lenders to lower SME loans in time

The Central Bank’s own research shows indigenous Irish SMEs pay the highest interest rates to borrow money in the eurozone, and are charged almost double the rates that small firms in Austria are charged by their lenders.

Many analysts say this means Irish firms effectively pay a hidden tax to do business here compared with their counterparts across the single currency area.

Irish SMEs employ tens of thousands of people and their contribution to the economy is not always hailed.

The issue of huge differences in borrowing costs facing firms here come at an interesting time as the ECB has deliberately pushed its interest rates down to rock-bottom levels to quicken a tepid recovery across the zone.

Part of Frankfurt’s armoury involves buying top-rated corporate bonds which has the effect of driving down the borrowing costs of very large corporates.

Mr Lane said the survey evidence confirmed Irish SMEs were paying more for their loans, but a number of factors were likely playing their part.

He told reporters that legacy issues of the financial crash, including fewer banks competing in the market and the high level of debts, had played their part in increasing the risks for banking here.

Over time, however, the arrival of new entrants and the re-assessment of risks facing the economy could bring change to the market, he said.

The ECB’s programme of buying corporate bonds will help smaller firms indirectly as it will reduce large companies’ demand for lending from banks.

There was international evidence that this process frees up lending for other firms, he said. The effects of the financial crisis will nonetheless take time to unwind, Mr Lane said.

The Central Bank did not favour politicians establishing a ceiling on how much banks could charge homeowners for their standard variable rate mortgages because such restrictions could discourage new lenders coming into the Irish market and distort pricing of loans for other customers.

On the Central Bank’s controversial mortgage loan rules, Mr Lane said it was sticking to its schedule to conduct a review later this year.

He reiterated that the review would be based on data and evidence on the possible effects of the rules on the economy and housing market, which “are designed to protect households against over-indebtedness and ensure the stability of the banking system”.

The Central Bank would also seek out a wide range of public submissions on the rules.

Significantly, Mr Lane also pointed to other parts of the bank’s macro-prudential armoury — the so-called counter-cyclical capital buffer on banks — that “can be deployed in the future”.

Mr Lane said the economy has so far grown without building up wage pressures, but there remains a risk as still-high level of unemployment fell further that “leap-frogging” pay demands would emerge in the private and public sectors.

He said it was up to those involved in wage negotiations to assess the risk to the economy.

The Central Bank said it earned a profit of €2.24bn last year, of which €1.79bn was paid to the exchequer.

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