Friday 23 March 2018

ECB says proposed law giving the Central Bank power to cap mortgage prices will discourage competition in Irish market

Mario Draghi
Mario Draghi
Donal O'Donovan

Donal O'Donovan

The European Central Bank (ECB) says a proposed law giving the Central Bank power to cap mortgage prices will discourage competition in the Irish market. However it did not rule out policing credit costs.

In a formal opinion published by the ECB, its President Mario Draghi said the Fianna Fail proposal that the Central Bank be given power to cap the interest rate charged by banks on home loans could backfire.

Irish mortgage borrowers pay the highest interest rates in the Euro area. A succession of ECB rate cuts that have brought official interest rates to an all time low but not materially reduced borrowing costs for Irish variable rate mortgage customers.

In his opinion article, Mario Draghi said the imposition of caps on interest rate may encourage risk taking elsewhere in banks’ businesses, limit competition, and discourage foreign lenders from entering market.

In addition, Mr Draghi said there was a potential conflict of interest if the Central Bank is tasked both with patrolling prices and overseeing monetary policy.

“This could, by extension, potentially damage the credibility of the CBI, the ECB and the Eurosystem as a whole,” he said.

The ECB said that “extreme caution” should be exercised when transferring power to take commercial decisions from banks themselves to public authorities.

However, the ECB noted that mortgages rates are capped in some markets, by authorities other than the Central Bank.

“The ECB understands that the laws in a number of Member States have put in place limitations on the maximum interest rates that can be charged by lenders  for consumer loans  including those relating to immovable property . The national legislation in those Member States either:

"(A) Sets out the methodology for determining the relevant reference index or reference interest rate, and the maximum margin above the reference interest rate which the interest rate charged by the lender cannot exceed or (B) determines the maximum interest rate in the law itself or in a decree adopted thereunder,” it said.

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