Monday 26 September 2016

Banks fall silent amid noise and haste of variable mortgage rate row

Published 22/05/2016 | 02:30

KBC’s Wim Verbraeken says that variable pricing can be a complex business. Photo: David Conachy
KBC’s Wim Verbraeken says that variable pricing can be a complex business. Photo: David Conachy

Fans of the great sitcom Yes Minister would have been surprised at developments in the great variable rate saga this week.

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The message of that series was that civil servants never say no to a bit of extra power. But finance minister Michael Noonan has said the mandarins in the Central Bank don't want to be able to cap mortgage rates, thanks very much all the same.

It all makes Fianna Fail's grand design look a bit irrelevant, but nevertheless it has been a successful week for that party, which has reinvented itself as the party that fights the bankers and sticks up for the little guy - not an image it would have had in previous years.

But is there any merit in what the party is actually proposing or is it just populist nonsense?

There's no doubt that people on variables are getting a rough deal. The cost here is about twice the eurozone average, and no-one could quibble with Joe and Jane Bloggs being granted some relief.

The fear is that relief at the diktat of the Central Bank will negatively impact competition and scare off new entrants to the market.

That makes sense at a theoretical level at least. Under the status quo, banks here have started to cut rates, and new entrants like Pepper and Frank Money have been throwing shapes of a kind.

But, so far, it all reeks of tinkering at the margins. In truth, there hasn't been much meaningful benefit for Joe and Jane Bloggs. If there had been, Fianna Fail's proposal wouldn't have got as much traction. What the sector is crying out for is one or two new lenders with serious heft - Santander or banks of that ilk.

Even with the market seemingly ripe for the picking, that hasn't materialised. I spoke to KBC's Irish boss Wim Verbraeken about variables earlier this year, and the Belgian said the reasons behind his bank's pricing were complex.

"Not all banks have the same cost of funds, it depends on the country," he said.

"You have the operating costs, you have the cost of regulation, which has increased let's say by 100pc in the sense that banks such as KBC, but also the incumbent banks - the pillar banks - are now not only regulated by teams here in Ireland but by the ECB in Frankfurt. That has not led to a lower cost of regulation.

"There is a cost of credit. Given the history, it is clear that a mortgage in Ireland, if you would look at any sophisticated model, carries a higher risk than a mortgage in a country that hasn't had a history of boom and bust.

"And then there's the capital that needs to be held against the mortgage. Given the history, we need to hold a lot more capital against our mortgage loans than let's say our peers in other countries, and all of that gets reflected in the rate."

This might explain why proper competition has been slow to emerge. Depending on your view, a mandatory cut might in that scenario be the best way to help people out.

Earlier this week, Davy Stockbrokers circulated a note arguing strongly against the Fianna Fail plan. Davy's analysis was surprisingly robust, in marked contrast to its typical staidness. The note said that "legislating for mortgage caps, if enacted, would be a retrograde step for the banking system, consumers and public finances".

"Capping rates would harm sector profits at a time when sustainable profitability has yet to be achieved," Davy said.

"It would be detrimental to bank valuations and the ability of the State to divest its banking stakes and potentially reduce the national debt."

That's all fair and it's an argument finance minister Michael Noonan has made, too.

But it's not so long ago that Noonan was talking about imposing levies on banks who didn't cut their variables, which would have hit profitability, too.

That may have been a tactic to keep the pressure on banks to make cuts on their own, and Noonan ultimately didn't proceed with those levies, but it suggests a recognition on his part that the Exchequer's bottom line should not always be the sole priority.

I asked AIB, Permanent TSB, Ulster Bank, KBC Bank Ireland and Bank of Ireland for their views on the Fianna Fail plan.

None would comment.

It's probably safe to assume that Verbraeken and the rest of Ireland's banking bosses are not keen on an extra layer of regulation. Nor is Noonan, and nor is Philip Lane.

If you're a hard-pressed mortgage holder hoping for a significant cost-saving, don't hold your breath.

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