Dan O'Brien: 'Banks' profits are a result of customers being fleeced'
Our banks charge individuals and businesses some of the highest interest rates in the euro area. That's why they're so profitable, writes Dan O'Brien
The word 'scandal' is overused. It is, however, entirely appropriate in the case of banks breaching their contractual obligations to customers by moving tens of thousands of people off tracker mortgages. This resulted in those affected handing over money to the banks that they should never have had to hand over. In around 100 cases, it resulted in people losing their homes.
The behaviour of the banks in relation to breaching the terms of so many tracker mortgages had many of the characteristics of financial fraud. When managers in companies breach the terms of contracts signed with customers and cause those same customers considerable financial loss, the same sort of penalties which apply to an individual defrauding another individual should apply.
This scandal and the absence of sanction for the individuals who perpetrated it has deservedly got a lot of attention. A banking issue that is not quite scandalous, but that does not get the attention it deserves, is the relationship between Irish banks' strong profits and the rates of interest they are charging customer for loans, which are among the highest in the euro area.
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By way of preface, this column does not jump on bandwagons, and is neither anti-business nor anti-profit. On the contrary. Successful businesses are the basis of everyone's prosperity. Profits are good. They are reinvested in businesses to generate more jobs and prosperity; they are distributed to the shareholders who are rewarded for the risks they take with their money; and they go into the State's coffers in the form of corporation tax (the €10bn businesses paid over in tax on their profits last year covered the cost of educating every child and student in the country).
But when a business makes profits in an uncompetitive market, consumers are usually paying the price. That is what has been happening in the Irish retail banking market for half a decade, as banks charge borrowers - both individuals and businesses - some of the highest interest rates in the eurozone.
No less a figure than the head of the European Central Bank has highlighted this. On a visit to Ireland last November, Mario Draghi described the Irish banking market as a "quasi monopoly". His comments were followed by the usual flurry of excuses and obfuscation from banks and vested interests. The hard facts show that Draghi was right.
Nine days ago, the Irish Central Bank published its monthly report on retail lending. That report has been publishing figures on variable mortgages rates across the euro area since May of last year, a month after this column urged it do so in order to highlight how badly Irish customers are doing compared to others across Europe who use the same currency (hats off to the institution for being open to such suggestions).
The latest figures show that the average rate of interest in Ireland on new mortgages was just over 3pc, not far off double the rate across the euro area as a whole. Only in Greece were new home borrowers paying more, and that is because almost half of outstanding loans in that crisis-racked country are duds. In Ireland, the banks have got their share of loans that are not performing down to 5pc.
It is important to stress that it has not always been the case that Ireland has been one of the most expensive places to borrow for a home. Mortgage rates were in line with the norm across the rest of the single currency zone for most of the two decades the ECB has been setting interests for the entire bloc. But as banks in most other countries started passing on to customers the lower costs of raising money for themselves over half a decade ago, Irish banks did so to a much more limited extent.
That opened up a gap between Ireland and most other euro countries. As we shall see later, the opening of this gap coincides with Irish banks' profits rates starting to outperform the average for all eurozone banks.
Those who justify what the banks charge often claim that it is because home repossessions are much more costly in Ireland than elsewhere. There is truth in this. Cases continue to be reported of people living in million-euro homes for years without paying a bean on their mortgage. If lenders have to pay staff costs and huge legal fees to sort out long-term, non-performing loans such as these, then compliant mortgage-payers will pick up the tab. That is as sure as night follows day.
But the high cost of enforcing contracts in Ireland only partially explains why mortgage rates in Ireland are far above the euro zone average. That is illustrated by the fact that business borrowers, who do not have the sort of protection from the banks that home borrowers enjoy, also pay interest rates above the euro average.
In May the cost of new borrowing for companies was among the highest in the 19-country euro bloc. The ECB's composite rate on all forms of business lending in Ireland was over 2.5pc. The average for the single currency zone was 1.6pc.
Some kinds of business lending are a lot costlier and the gap with the rest of euro area bigger. As of last May, interest rates charged on overdrafts and revolving loans for businesses - a vital source of funding for many companies - were the third highest in the single currency area at 4.3pc. That was well over double the eurozone average of 2.1pc.
While expensive mortgages are bad because people have less money to spend on other things, expensive borrowing for businesses means that the underlying source of wealth creation is weakened. Companies need bank borrowings to invest and grow. That is particularly the case for smaller companies and start-ups which do not have profits to plough back into their businesses.
The high interest rates charged by banks have been showing up in fat profits for more than half a decade. As far back as 2014, the domestic Irish banks' collective profits relative to their assets (mostly loans to households and businesses) were four times greater than the average for all eurozone banks. The gap persists, even if it has narrowed. Last year Irish banks' return on their assets was twice as high as the average for banks across the single currency bloc.
The second standard comparative measure of profitability is to compare cash profits with the equity invested in an institution. By this measure, the Irish banks have also made more than the eurozone average over the past half decade, even if the difference is smaller than the profits relative to assets. That gap persists, too.
The notion that Irish banks have to charge customers high interest rates because they are damaged in some way may have led to greater public acceptance of what has been going on.
But what happened during the crash is mostly in the distant past and banks long ago returned to profitability.
The reason customers are paying over the odds to borrow is because there is insufficient competition in the market and banks can get away with charging high rates. Greater public awareness of this state of affairs could lead customers to more actively seek better deals from the banks. In the absence of new entrants to the market, which is unlikely in an era when European banks are retrenching rather than expanding, that may be the best hope for consumers.
Let me again call on the Central Bank of Ireland to do more to highlight these issues. The ECB figures on business rates and profitability are not easy to access even for nerdy types who follow such things. Including them in regular reports would increase awareness.
In the absence of new entrants to the market, public debate on the matter might be the only way to intensify competition to the benefit of consumers.