Thursday 8 December 2016

Unprofitable trackers hide full extent of bank losses

The banks are far more bust than you think, as many of their loans are not worth full value, says Colm McCarthy

Published 24/05/2015 | 02:30

MORTGAGES: The Central Bank has prepared a valuable report on the complex issues involved in relation to the mortgage interest rate question
MORTGAGES: The Central Bank has prepared a valuable report on the complex issues involved in relation to the mortgage interest rate question

It remains to be seen what will be the outcome of Friday's news, from the Government, that holders of variable-rate mortgages will see reductions in their monthly repayments. The Central Bank has prepared a valuable report on the complex issues involved, which was released to coincide with the Government's declaration of victory. This is a wearingly familiar pattern: the report on which any kind of coherent public debate might be based is withheld, apparently to suit the Government's convenience.

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The Central Bank, as we are entitled to expect, has produced a solid report, available on their website only since Friday. The coincident timing of the report's release and the Government announcement that variable-rate mortgage holders are about to see cuts in their monthly bills is another example of doing policy backwards. The value of any report on a difficult policy issue is to inform the public debate, not to validate news releases from the Government press office. I imagine that there is some unhappiness in the Central Bank at this, sadly familiar, cart-before-the-horse procedure. Senator Feargal Quinn, Fianna Fail's Michael McGrath and Sinn Fein's Pearse Doherty have all initiated bills designed to address the issue, all three blindfolded through the delay in releasing the Central Bank's study, apparently at the behest of Government spinpersons. All three should object to being treated like this.

A functioning banking system will charge mortgage and other borrowers a sufficient margin to cover three items - operating costs; the cost of borrowing the necessary funds; and a further margin to cover the reality that there will be some defaults: some customers will not repay their loans. During the bubble, the Irish banks charged too little - they extended too much credit, but they also charged too little. It was inevitable that the margin of lending rates over the cost of funds would rise as the banking system returned to normality. Unfortunately this has happened in a highly dysfunctional manner.

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