Tuesday 23 January 2018

'Housing is a very emotive issue, but we have to think in the long term'

Central Bank Deputy Governor Sharon Donnery told Group Business Editor Dearbhail McDonald that mortgage caps are here to stay

Sharon Donnery by Jon Berkeley
Sharon Donnery by Jon Berkeley
Dearbhail McDonald

Dearbhail McDonald

It's not quite up there with the shooting of JFK or the death of Princess Diana.

But many Irish people remember where they were on November 18, 2010 when former Central Bank Governor Patrick Honohan revealed on RTE's Morning Ireland that Ireland was in talks with the EU and IMF about a bailout.

The Financial Times had just led with an article stating that Ireland should prepare for a bank run.

Honohan, who had not forewarned then Taoiseach Brian Cowen or the late finance minister Brian Lenihan that he was going to contact RTE from Frankfurt (where Honohan was attending an ECB governing council meeting), rang Morning Ireland in a bid to subdue public alarm.

But the de facto announcement of the bailout caused a political uproar at a time when the Government was out in force denying to a fearful public any bailout talks were taking place.

"Rarely has a Finance Minister been so deftly sliced off at the ankles by his central bank governor," UCD economics professor Morgan Kelly would later say of Honohan's sublime intervention.

Sharon Donnery, the economist who may yet enter the history books as the first female Central Bank Governor, will never forget the now infamous call.

The 43-year-old, then acting as Head of Consumer Protection at the Central Bank was strolling into work, listening to the radio.

It was, recalls Donnery, who was appointed Deputy Governor (Central Banking) at the Central Bank last January, a "key moment" in the financial crisis.

Donnery's verbal restraint is typical of what you might expect from a risk-averse central banker.

But she has been at the heart of the centrifuge of efforts to resolve the banking crisis.

Having held a series of mostly consumer roles during her 20-year tenure at the Central Bank, Donnery - who from 2013 to 2014 was the Registrar of Credit Unions - now occupies a key role in Europe as Governor Philip Lane's alternate on the governing council of the ECB.

She was previously the alternate member of the Supervisory Board and also chairs that body's high level taskforce on non-performing loans (NPLs).

Though her brief has a broad European and macro-financial dimension, Donnery acknowledges, from her seventh floor office at the bank's Dame Street HQ, that it is deeply personal issues such as mortgages, private debt and the transfer of people's loans to so-called 'vulture funds' that are vexing the public most.

For more than a year, the Central Bank has been on the receiving end of intense consumer and political pressure over its decision to impose caps on mortgage lending.

The caps are prohibitive.

For non-first-time buyers, a limit of 80pc loan to value (LTV) ratio applies on new mortgage lending.

First-time buyers, who have to fork out an eye-watering €51,000 deposit to buy a home in the capital (an average €38,000 outside of Dublin), a limit of 90pc LTV applies on the first €220,000 of the value of a residential property.

A limit of 80pc LTV applies on any value of the property thereafter.

The caps aren't the primary cause of the current housing crisis, driven in the main by a chronic lack of supply, but that hasn't stopped the finger of blame being pointed squarely at the Central Bank.

Is the accusation fair or right?

Donnery is sympathetic to the plight of those desperately trying to secure a home, but insists the caps are necessary to prevent the "vicious" house price credit cycle that fuelled the property bubble and bust.

"On a personal level, all of us know people who are impacted by the caps," says Donnery, who says the bust would not have been as extensive as it was had similar caps been in place 15 or 20 years ago.

"Bank staff are impacted by the caps, friends, relatives are impacted... we know [at the Central Bank] individuals are definitely being impacted."

The mortgage caps are now under review by the Central Bank which has put the issue out to public consultation.

But the caps, it seems, are here to stay.

"I think the view that we are taking is that really these [caps] have to become structural, permanent and we are looking at the moment from a medium- to long-term perspective as opposed to a very short-term one," says Donnery, who adds that housing is "a very emotive issue, a very personal thing".

This first-time buyer throws a glance of despair when Donnery observes that there are circumstances in which the mortgage caps could yet increase.

"I think there are circumstances that you could imagine where the measures would at some point be tightened if we felt that the data was showing that there was overheating in the market or any sign of an unsustainable level of house price increases," she says.

Which isn't good news, particularly for younger borrowers and those on standard variable rate (SVR) mortgages whose future vulnerabilities - including a high risk of default in the event of interest rate and income shocks - were recently highlighted in the Central Bank's latest macro-financial review (MFR). We move from one emotional cohort to another.

These are the 300,000 borrowers with SVRs whose plight led to the introduction of legislation the Central Bank doesn't want.

Amid opposition from Finance Minister Michael Noonan, Fianna Fail pushed through legislation, which Noonan complained was unconstitutional, to give the Central Bank powers to impose caps on SVRs.

The Central Bank doesn't want to regulate interest rates, even though many of the 300,000 people in Ireland with SVR mortgages are paying rates four times those with trackers are being charged.

Nor does the ECB - which recently gave Fine Gael MEP Brian Hayes short shrift when he and other Irish MEPs asked it to investigate the failure of Irish banks to pass on SVR mortgage holders.

In what looked like a pointed swipe, Daniele Nouy, chair of the Supervisory Board, was quick to point out that Irish banks charge "exceptionally low" interest rates to their tracker mortgage counterparts.

The mortgage war predicted by Morgan Kelly ten days before Honohan's infamous phone call - with trademark prescience, Kelly envisioned a social conflict on the scale of the Land War, one that pits one class of mortgage holders such as SVRs and trackers against each other - hasn't been lost on Donnery.

"That is the challenge," says Donnery, who continually brings you back to the bank's need to protect the system as a whole.

"If the bank is given those powers, it will be really important for us to set out the framework under which we will consider them."

Retrospective regulation, any substantive regulation in fact, of non-bank entities including so called "vulture funds" to whom entire mortgage books have been sold also produces a now hallmark cautious, measured response from Donnery.

It wasn't always this way.

Five years ago, Donnery, in her capacity as head of the Central Bank's Consumer Protection Codes Division, wrote an urgent letter to the Department of Finance expressing concern about the exclusion of vulture funds and other special purpose vehicles (SPVs) from coming under the same constraints as retail credit firms, including compliance with the Code of Conduct on Mortgage Arrears (CCMA).

The letter was sent at a time when Irish banks were considering selling their mortgage books to vulture funds.

It was a time when Donnery feared Irish borrowers could be treated unfairly by hedge funds and private equity firms who bought their loans at a steep discount.

Donnery implored the department to reconsider the exclusions of vulture funds and SPVs. "Careful consideration must be given to the rationale for excluding special purpose vehicles in the first instance and whether these reasons still stand," wrote Donnery - many would argue they do, despite the belated regulation of credit services firms used by the vultures.

As Governor Lane's alternate on the ECB's governing council, Donnery spends a lot of time in Frankfurt.

It's a near exclusively male bastion.

When Donnery attends the council, she is joined by only one female governor (from Cyprus) and the ECB's only female board member, Germany's Sabine Lautenschlager.

Donnery sticks faithfully to the ECB's key messages on Brexit: Irish banks and businesses will have access to euros and sterling in the event of one, she insists. But she refuses to be drawn on what level of provisions, if any, have been set aside to deal with sterling volatility if Britain votes to leave the European Union, other than to say there will be enough liquidity in the event of a big drop.

She also defends the ECB's negative interest rate policy which has angered German borrowers, some of whom have accused the ECB of punishing northern savers and letting southerners of the hook.

The ECB, whose autonomy was sacred when its rates suited Germany, has resisted calls to lavish 'helicopter money' to boost the eurozone's fragile economy.

But last week, German ten-year bund yield's dipped below zero for the first time - reflecting fears about the ECB's ability to reflate the eurozone despite ultra low rates, while at the same time printing money to buy government and corporate bonds.

I ask if she is worried about unintended consequences of a prolonged negative interest environment and if such a policy will hinder the State sale of AIB?

Donnery deftly kicks the question to touch, noting it is a decision for the Government, while adding that the sale would represent "a furthering of our return to normality".

To maintain a sense of normality, Donnery, a keen baker like her mother and grandmother, bakes a mean cheesecake, taking part in charity bake sales at the Central Bank.

She is also a keen photographer and member of the bank's camera club.

You get the sense that Donnery, an economics graduate who once toyed with the idea of academia and law, prefers to stay behind the camera.

But that is something that she may have to embrace more as the Central Bank and Donnery - one of two deputy governors at the bank - faces increased political and other pressures to justify its policies.

"A big part of my role and the role of the Governor is to be accountable," she says.

"It is really important for us that we have the data and the evidence to underlie and support our decisions and we have to accept that our decisions have very real consequences for people."

Sharon Donnery Q&A

What is the best piece of career advice you ever received?

"Find a job you love and do it really well."

Are you a spender or a saver?

"Unsurprisingly — for a central banker — I am quite risk-averse, so I’m a saver."

What is your proudest achievement?

"Being appointed Deputy Governor of the Bank."

When were you most broke and why?

"Like most people, it would have been back when I was at university — or maybe when we bought our first house."

Where was the last good meal you ate?

"Bouchon in Naas."

What are you reading at the moment?

"Brooklyn by Colm Toibin."

Sunday Indo Business

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