Time running out for Noonan to fix our mortgage rate crisis
Minister must deal with problem that isn't going away
Published 16/05/2015 | 02:30
If a bank wants to add five cents to the cost of processing a cheque, it has to get approval from the Central Bank. But if banks want to hike up interest rates on the mortgages of 300,000 people, to shamelessly boost their profit levels, the Central Bank can do nothing about it.
Banks have been gouging their own customers by charging inordinate interest rates to mortgage holders. Michael Noonan and the Government have only recently taken to beating their chests about how wrong it all is - but they have failed to take a single measure which would change it.
The problem reflects a deep-seated view among the public that the interests of banks are being favoured over the interests of customers who are the same citizens who bailed them out.
This week, we saw a tweaking of the legislation around personal insolvency and mortgage arrears. The Government is going to remove the veto that banks have over insolvency deals. This should never have been there in the first place.
In reality, the new measures will have some limited positive impact but will not be a panacea for those facing repossession. The banks seem to believe that many of those in long-term arrears are strategic defaulters who could pay more. Insolvency practitioners refute this. The response of Government suggests it believes the banks.
The problem of enormous mortgage interest rates affects even more people than those in long-term arrears. These are hard-working families who are struggling to make ends meet.
The situation is very serious for so many people where being on a standard variable rate can cost an average household an extra €6,000 a year in mortgage repayments compared to someone on a tracker mortgage. It can be the difference between paying 1pc on your mortgage or 4.5pc.
This is a potentially explosive issue for the Government at the next election. That explains the change of tone, but not the lack of action.
Last year, Finance Minister Mr Noonan told the Dáil that banks were "independent commercial entities and, as such, it is a commercial decision for each lender to decide what interest rates they charge customers in relation to standard variable mortgages.
"Ultimately, the pricing of financial products, including standard variable mortgage interest rates, is a commercial decision for the management team and board of each lending institution."
Yet a Central Bank report from 2012 concluded that banks were charging higher variable rates to cover their losses on tracker mortgages.
AIB is 99.8pc owned by the State. It has received over €20bn in taxpayer funding which has yet to be paid back. Jeopardising its business and derailing its financial recovery would not make sense for the taxpayer's chances of getting that money back.
However, AIB did cut variable rates by 0.25pc before Christmas. Analysts estimate it cost the bank around €40m. They cut again by 0.25pc on the 1st of May. That is hardly going to break the bank. A similar cut from Bank of Ireland would have cost it just €20m. But none of the other banks followed AIB.
Bank of Ireland, Ulster and Permanent TSB have all said they won't be following suit.
The Government is not powerless in this. Mr Noonan could pass legislation giving the Central Bank powers in relation to interest rates. They wouldn't have to set the rate, which would destroy any semblance of competition, but they could make banks justify, on financial grounds, increases above certain levels. This is precisely what happens in other regulated sectors, such as energy, aviation, etc, where there isn't enough competition.
Mr Noonan could also simply increase the bank levy by an amount greater than the cost of reducing the rates.
In truth, the minister does not want to introduce new legislation that will seriously undermine the value of banks he is trying to sell, namely AIB and Permanent TSB. But this issue has become so serious that one has to question the inaction of Government in protecting citizens over banks that have, let's face it, let everybody down.
The Central Bank is not bothered by this problem. It has two roles. One is protecting the stability of the banking system, the other is protecting customers in relation to financial services.
The old Central Bank was sharply criticised for focusing too much on consumers and not enough on bank stability.
The new Central Bank has tilted the scales in the oppose direction. Excessive variable rates boost bank balance sheets which in turn keep the banking system safer.
The Central Bank's sole contribution to this problem has been to tell the Department of Finance the banks would be better off to cut the rates than face a legislative change. This is, of course, stating the obvious, but it may carry some weight coming from the Central Bank.
Why not take a test case in the courts to assess the legal basis on which rates have been increased? Mortgage contracts allow banks to increase rates in certain reasonable circumstances. Are those reasonable circumstances being met?
Others have been silent on this issue too. Nobody on the board of AIB has come out and said they want this to change.
We have two "public interest" directors on the board of Bank of Ireland, who have not publicly voiced any concerns about this issue. One of them is a former secretary general of the Department of Finance.
In theory, new competitors should come into the Irish market. That is the theory.
Are there a couple waiting in the wings that Michael Noonan knows about and doesn't want to spook with legislative changes?
Mr Noonan might not want to use a legislative sledgehammer to crack a small nut. Possibly, but many people feel they simply can't wait any longer.
The minister is due to meet bank chief executives next week. If he doesn't get a good response, it may be time to get the sledgehammer out.