Sunday 23 October 2016

Simplistic demands for banks to slash their rates are just early election stunts

Published 09/04/2015 | 02:30

Teacher's cartoon
Teacher's cartoon

The Wetherspoon's Principle has leapfrogged from the pub industry to the banking sector, and is currently being applied to Irish banks in State hands.

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Here's how the principle works. If a market proves lucrative, outside competition will arrive to share in those profits, which is good for consumers because prices fall, while less good for indigenous companies whose margins shrink. But cheaper alcohol is the result - or in the case of the banking sector, cheaper loans.

Which brings me to the vexed question of standard variable mortgages set at an uncompetitive and unfair mark-up, as practised by Permanent TSB, among other providers. Applying the Wetherspoon's Principle, Central Bank Governor Patrick Honohan seems disinclined to intervene.

The British brewery entered the Irish market with a value proposition that offered a cut-price core product - alcohol - plus meal deals. Initially, there was weeping and wailing and gnashing of teeth; it came mostly from publicans, with back-up from a Greek chorus promoting the cultural purity of the Irish pub. However, the market decided. The formula is proving successful for the brewery and popular with consumers fleeced by publicans for too long. It's not for everyone, but choice brackets have widened.

I don't know if Mr Honohan has been tempted into either of the company's two south Dublin pubs. But I can see he's familiar with the strategy. Clearly, he is hopeful that foreign banking equivalents of Wetherspoon's will be tempted to dip toes into Ireland's mortgage market, forcing a reduction in standard variable rates. They stand at almost 2pc higher than the eurozone average, and have not fallen in line with ECB wholesale rates.

But the Wetherspoon's Principle is no quick fix - it's a long-term game plan. Competition, although welcome, won't arrive overnight. Meanwhile, standard variable customers are being squeezed by a banking profit drive, and you'd want a heart of stone not to feel for them.

PTSB chairman Alan Cook was heckled by shareholders at yesterday's AGM in Dublin, and questioned about its 4.5pc variable rate. He said the bank couldn't afford a cut because it is not yet making money. Last year's pre-tax loss was €48m, down from €668m in 2013. It is expected to be profitable in 2015. There, and at AIB, Bank of Ireland and other banks, standard variable borrowers are paying extra to subsidise sweet deals for those on trackers and people unable to meet their mortgage repayments. These 300,000 sacrificial goats on standard variable arrangements are paying somewhere between 4pc and 4.5pc interest rates, compared with just over 1pc for those on a tracker loan. That's a whole lot of bank fattening.

However, it's not as simple as villainous banks versus hapless homeowners, as Fianna Fáil is eager to suggest in early electioneering rhetoric. And is it really appropriate for the Government to wade in, even though it owns PTSB, AIB and 14pc of Bank of Ireland? Intervention would be popular, but not necessarily right.

Certainly, those 300,000 mortgage holders paying over the odds are in an unenviable position. But what's in their best interests is diametrically opposed to the best interests of citizens as a whole. It will benefit the Irish people if every Irish bank became profitable again - that represents our best chance of payback on the bailout. In addition, profitable banks are better insulated against another downturn.

The Government is hoping to sell off AIB and PTSB, probably in stages - and the plumper they are, the higher the selling price. AIB made €1.1bn last year, its first profitable year since the crash. Those high-priced standard variable mortgages are among the profit drivers. Cut them, and profits will tumble. So, the few are being sacrificed for the many. Although 300,000 is not an insignificant number.

But there is a further element to bear in mind. Standard variable borrowers are more likely to have bought post-peak: it was no longer possible to get a tracker mortgage after early 2009. Which means they paid post-boom property prices. By comparison, tracker-holders probably bought during the runaway years. Which means they paid more and may now be in negative equity. Perhaps that relatively affordable tracker loan is all that enables the borrower to meet repayments. Another consideration is the law of unintended consequences arising from politicians interfering in the banking sector.

When companies scan a new territory with a view to market entry, they consider something called the PESTLE test: the political, economic, socio-cultural, technological, legal and environmental factors which might either benefit or impede investment.

A glaring deterrent to investment arises in the case of a country whose finance minister is also the majority shareholder in two of the banks, and pressurises them into accepting lower profits. If foreign banks sniff out government obstruction on the rates at which they can offer products for sale, they will not enter that market. Too risky. Too unstable.

I wouldn't hold my breath for any cuts soon. Not with Mr Honohan reluctant to see mortgage rates tampered with because of those new entrants he is looking towards. Fianna Fáil TDs are presenting themselves as people's champions here, but the situation is being oversimplified. If the party was in power, I doubt if there would be any moves to legislate for lower interest rates.

Meanwhile, it appears that 300,000 borrowers are being given false hope.

Irish Independent

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