Sunday 26 January 2020

Central Bank governor's damning letter raises fresh questions over 'help-to-buy'

Central Bank Governor Philip Lane
Central Bank Governor Philip Lane
Richard Curran

Richard Curran

The Government's controversial help-to-buy scheme for first-time buyers took an unusual twist during the week when it emerged that the Central Bank may not have been as informed about it in advance as many would presume.

Central Bank governor Professor Philip Lane read the full details of the scheme in the Budget and identified what he believed was a potential flaw. He pointed it out to the Department of Finance, which then took it on board in the Finance Bill.

From the department's point of view this may show how communication with the Central Bank is working, because they now believe they have a better scheme. On the other hand, after the crisis of the banking collapse we had all presumed there would be a very fulsome and significant level of information exchange and consultation between both bodies on any issue connected with banks, borrowing and housing.

At issue here is the relationship between the Department of Finance and the Central Bank. Is there openness, transparency and communication or can there, at times, be secrecy, tension and even turf wars on key issues?

The relationship between both bodies is not always without tension. As recently as 2015, a senior official in the Department of Finance with responsibility for insurance wrote to the Central Bank deputy governor. He requested a report on the bank's view of the sector following media coverage that imprudent price competition had raised questions about reserve policy and overall competence in the industry.

The Central Bank official wrote back to the head of the Department of Finance saying he was accountable to the Central Bank Commission and to the Oireachtas and not to the Department of Finance.

It was later pointed out that the Department did have the legislative authority to seek the information requested. Tensions between governments and Central Bankers are not unusual. Just last week the head of the Bank of England, Mark Carney, said he wasn't going to have Theresa May tell him how to do his job when it came to setting interest rates.

At home, the potential flashpoints are around banking. The Government didn't like the Central Bank's mortgage cap rules. The Department of Finance asked that they be substantially modified.

The Central Bank has a huge role in the oversight of the banking sector. So too does the Department of Finance. The Central Bank is concerned not so much about house prices, rents or housing supply, but the stability of the financial system. The Department of Finance has to take a keener interest in solving the social problems associated with the housing market.

The Central Bank's mortgage lending rules are aimed at protecting the banks and consumers from a property bubble in which they are both over-exposed.

Strictly speaking, the Central Bank does not have a role in fixing the housing market. If the regulator's mortgage lending rules make it harder for young couples to get a mortgage, but protect the system, the Central Bank isn't worried.

The Department of Finance wants to have policy proposals that fix these other knock-on problems. The strange thing about the help-to-buy scheme is that it provides a solution to a problem that is specifically aimed at working around the Central Bank mortgage rules.

Many people would have expected the Central Bank to be fully consulted on all aspects of it and asked for feedback.

In fact, this was the impression given by the finance minister. Michael Noonan told the Dáil's Budgetary Oversight Committee in September, that "anything we are doing we are doing with the full knowledge of the Central Bank. It knows exactly what I have in mind and it approves of it".

It turns out, as Professor Lane's letter reveals, that the Central Bank was only asked whether the introduction of a tax rebate to top-up a deposit for a house, would qualify as part of the deposit under its rules. It was not consulted on the wider details of the scheme and how it would work. Reading Professor Lane's letter, it is obvious the Minister already knew what the Central Bank would have said. He was going out on a limb with this subsidy and he knew it.

The Department of Finance probably took the view that it consulted with the Central Bank on what it needed to, but not beyond that.

But it raises a question of whether it should have provided more information to the Central Bank simply to hear what its expert view would be.

Its approach is to consult on what it needs to with the Central Bank but not necessarily more where budget policy is concerned. If the Central Bank wants to provide some insight after the policy is published, then, of course, it will be listened to, but it isn't part of the policy formation process on an issue like this.

The whole thing is a grey area. Should it consult with the Central Bank on every fiscal policy? Clearly not. Should it engage with the Central Bank on all policy ideas around housing because of its potential danger to the banking system?

In 2011 the Central Bank and the Department of Finance signed up to a memorandum of understanding (MOU) to delineate their responsibilities in relation to banking and to provide a framework for how much interaction there would be between them.

The MOU describes their respective roles. Among the department's roles is providing advice to the minister in relation to safeguarding the stability of the financial system. Among the Central Bank's responsibilities is "advising the department on policy development for the financial sector".

The help-to-buy scheme did not fit directly into any of the areas on which they have a dual role. In a letter outlining his views on the scheme, Philip Lane did not suggest in any way that he should have been consulted in advance on this issue.

The Department of Finance is technically correct in what it did, but it raises the question of whether it would have been useful to have sought the Central Bank's opinion. After all, the Central Bank was in a position to instantly point to one shortcoming of the scheme.

Running proposals past the Central Bank for its view, undermines the expertise within the Department itself. During the boom, the Department of Finance didn't seem too worried about rising house prices. Neither was the Central Bank, as long as it didn't threaten the stability of the banks.

Now they are both taking a keen interest. However, the Department of Finance is only too aware that it isn't the Central Bank's job to control house prices but only to ensure there isn't too much dangerous borrowing/lending.

Neither is it the Central Bank's job to determine whether state subsidies for house buyers or builders, represent good value for money for the taxpayer.

But it is entitled to have a view and an informed one at that. In his letter to Sinn Fein TD Pearse Doherty, Professor Lane clearly warned that subsidies to housing can just put up house prices with the seller gaining more than the recipients of the subsidy.

Mr Noonan may not have asked for the Central Bank's view on the scheme because he already knew what they would say.

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