Cantillon: Don’t expect banks to change soon

Minister for Finance Michael Noonan was quick to declare victory after his meeting with bank chief executives this week. You can debate how much of what will happen was inevitable and how much will result from political pressure, but some improvement for customers does appear to be in the offing.

Some of the banks are set to announce cuts in their standard variable rates (SVRs) while others will open up and advertise fixing rate options for those on variable rates.

The hope is that most will be able to benefit from rates of under 4 per cent. Decent fixed rate offers are already available from some banks for those on lower loan-to-value ratios – seen as less risky customers. It remains to be seen how widely these will be made available to all SVR borrowers.

The Central Bank research on the issue, which formed the basis for the talks between Noonan and the bankers, confirmed that SVR rates here are high, and that even new borrowers are paying significantly above the EU average – 4.26 per cent here, when restructured mortgages are excluded from the “new loan” data, versus just over 2.5 per cent on average across Europe.

In the banks’ defence, the report points out that when you count in the rate charged on tracker loans, the average rate here on all mortgage borrowings is roughly in line with Europe.

This legacy tracker issue is one of the three reasons identified by the Central Bank for high SVRs here. The second is the lack of competition in the market – a factor that may gradually right itself over time. The final one is credit risk here and the length of time it takes a bank to get hold of the security on a loan gone wrong – a house in the case of the mortgage.

This is where the Government’s mortgage arrears strategy crashes with its desire to get SVRs down . Put bluntly, slowing repossessions down helps to keep mortgage rates up.

Mr Noonan will hope that some competition between lenders and a bit of threat will lead to most SVR customers having a somewhat better deal. But the three factors identified by the Central Bank as keeping rates high will remain for quite some time.

Progress here will be slow and gradual.