Monday 25 September 2017

ESRI questions Noonan move to force banks into variable rate cut

ESRI economist Kieran McQuinn. Photo: Gareth Chaney Collins
ESRI economist Kieran McQuinn. Photo: Gareth Chaney Collins

Charlie Weston and Colm Kelpie

Moves by Finance Minister Michael Noonan to push banks to cut their variable rates have been questioned by the country's leading thinktank.

Kieran McQuinn, the Economic and Social Research Institute (ESRI) research professor, said fostering competition would be a better way to get banks to drop sky-high variable rates.

Prof McQuinn appeared to back the stance of Central Bank governor Patrick Honohan.

Mr Honohan said he did not want the power to force banks to lower variable rates, and said competition was the best cure for higher rates.

About 300,000 mortgage holders pay among the highest variable rates in the eurozone.

The high cost works out at around €300 a month more than the costs for a similar-sized mortgage in the rest of the European Central Bank area.

Mr Noonan has given the banks until July to start lowering their variable mortgage interest rates, or offer lower fixed rates. He called senior executives from the banks into his office recently, demanding they reduce rates.

He told them he has the option of hiking the levy on lenders if they failed to reduce rates and said the Government could also enact legislation to give the Central Bank powers to regulate high variable rates.

But Prof McQuinn said the Government's involvement in the banking sector might put off some foreign banks from entering the Irish market.

"If you want greater competition in the domestic banking sector, if you want possibly new entrants coming into the market, you have to think that they're not going to be encouraged by that kind of intervention in the market," he said.

"In the short run, you may get the banks to bring down their SVRs (standard variable rates) and that's very welcome for mortgage holders, but in the longer course of action, does it act as a deterrent for potential new entrants?"

Variable rates were close to, and moved in line with, the official ECB rate until 2009, according to an academic paper by Prof McQuinn and Dr Ciara Morley for the ESRI.

The paper explains that what it calls a "tight oligopoly" stops lenders passing on cuts to the ECB rate to those on variables.

An oligopoly is a market structure in which a few firms dominate. AIB and Bank of Ireland dominate in this market.

The most effective way to ensure there are lower rates is to improve banking competition.

"The lower the level of competition in the market, the higher the mortgage interest rate," the paper found. High levels of arrears and larger numbers of trackers also restrict banks from lowering variable rates, the ESRI paper says.

Irish Independent

Also in Business