‘Political pressure’ on banks may damage recovery

Squeezing mortgage interest rates through "political pressure" could undermine the progress made by Ireland towards "healing the domestic financial system", Marco Buti, director-general for economic and financial affairs at the European Commission has told Fine Gael MEP Brian Hayes.

“It should be recalled that the profitability of the domestic banks remains low and still needs to be consolidated over time,” Mr Buti said.

His remarks follow a representation by Mr Hayes on July 10th about Ireland’s standard variable mortgage rates, which the Fine Gael MEP argues are out of kilter with the rest of the euro zone.

Mr Hayes had noted that the SVR for a new mortgage in Ireland cost 4 per cent or more compared with about a figure of 2.1 per cent in Belgium.

He also argued that AIB, Bank of Ireland and Permanent TSB were using their current SVRs to subsidise their pre-boom loss-making tracker mortgages, which are estimated to be valued at a total €50 billion.

“There can be no justification for this discrepancy,” Mr Hayes said in his letter.

In response, Mr Buti said the commission's post-bailout surveillance report noted the recent initiative by Minister for Finance Michael Noonan to "induce" Irish banks to reduce variable rates on existing mortgage loans.

Credit risks

He cited the finding in a report by the Central Bank of Ireland in May on the reasons for the higher SVRs here: elevated credit risks in Ireland due to the still-high levels of nonperforming loans and the lengthy and uncertain process around collateral recovery, a lack of competition due to the higher credit risks and bank profitability being constrained by legacy issues.

“We fully concur with this analysis,” Mr Buti said.

He said that while a reduction of mortgage interest rates would be welcomed by account-holders, the Government’s attempt to reduce rates from the top would not “address the underlying problems”.

“In a functioning market economy, banks must be in a position to set interest rates that cover credit risks,” he said.

“That is a precondition for banks to build capital and to support the economic recovery with new credit.”

Mr Buti said a “durable” reduction in mortgage interest rates “can and will be achieved if efforts to find sustainable solutions for the high share of mortgage arrears are stepped up”.

Different perspective

He said Irish banks were now approaching the issue of higher SVRs from a different perspective, namely by offering lower fixed rates to existing customers.

“To the extent that such an approach effectively reduces the net present value for mortgage-holders, the Government’s concerns in relation to variable rates may be less warranted,” he said.

Mr Hayes said he would "not let the issue rest" and that he would take up the matter with European Central Bank president Mario Draghi when he appears at the parliament's economic affairs committee at the end of September.

Mr Hayes had suggested to Mr Buti that the ECB could use its asset-backed securities programme as a vehicle to take tracker loans from the Irish banks onto its books.