Thursday 27 October 2016

Banking dogs will finally have to obey the masters

Published 20/05/2015 | 02:30

Patrick Honohan
Patrick Honohan

This could prove to be a fateful week in the financial history of this country.

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It may well go down as the week that Michael Noonan finally brought the badly behaved dogs of banking to heel.

Like poorly trained mutts, the banks have been biting the hand that feeds them for years now.

The banks were rescued by the poor unfortunate taxpayer and the thanks they get is to be snarled at and ignored.

But Mr Noonan and Central Bank Governor Patrick Honohan now seem to have worked out how to tame the beasts of banking.

The two men have laid it on the line for the banks - stop exploiting your customers who have variable rate mortgages, or bring down the might of the State on your heads.

And everyone will lose out if that has to happen. The long-term prospects for the banks will suffer, financial competition will be diminished and the economic recovery will be weakened.

There will be no going back, the report from Prof Honohan states, with specific reference to the boards and management of the banks. This is a nightmare scenario, the Honohan report seems to suggest.

The Honohan report is a strong weapon for Mr Noonan to fire at the bankers in his meetings with them.

Containing much more hard-hitting and bank-unfriendly messages than first thought, the Honohan report leaves the banks with few options now but to start introducing variable rate reductions.

And the lenders will be able to justify this to themselves as their cost of funds have fallen.

European Central Bank interest rates and the cost of funds on wholesale money markets are at all-time lows.

Banks have been steadily cutting deposit rates for months now, and can go on cutting if they feel their profit margins will suffer unduly from reducing variable rates.

Most analysts at stockbrokers that follow the banks here have pencilled in cuts in variable rates, which is a sign that banks have admitted to them that reductions are inevitable.

Many banks are charging variable rates of 4.5pc, at a time when the cost of funds has been falling towards 1pc.

There can be no justification for that sort of customer gouging. The banks have been allowed to call the shots for too long, despite being saved by the taxpayer they seem intent on punishing.

At last the Government and the regulator have barked back at the banking dogs.

Expect them to start obeying orders from their masters soon - it is not before time.

Irish Independent

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