WHEN THE State owns virtually all banks, political pressure on Government to intervene in their day-to-day business operations is easily exerted. Business wants banks to lend more, claiming that credit is too hard to secure. Depositors, faced with falling interest rates, rising inflation and lower real returns on their savings, want higher rates. And mortgage holders in difficulty, some with outstanding loans on residential property that may have halved in value since 2008, want lower rates. The challenge is how to balance these conflicting and competing claims.
Banks must shrink their balance sheets and raise revenue to get back to profitability, allowing the State in due course to sell them back to the private sector at a reasonable price. This necessarily involves increasing the net interest margin on their loans: the difference between the rate at which they borrow and lend to customers. Competition for deposits has kept rates high, depressed margins and made lending unattractive.
Banks have begun now to adopt a more aggressive stance: paying less for deposits and raising interest rates on mortgage loans. For the second time in two months, AIB will shortly raise its standard variable rate (SVR) mortgage. For those with SVR mortgages, interest rates and loan repayments have continued to rise. In contrast, those with tracker loans – which reflect the European Central Bank benchmark rate – have seen their repayments fall steadily. Variable rate loans have carried the burden of adjustment disproportionately.
Fianna Fáil finance spokesman Michael McGrath recently illustrated how large and inequitable that burden has become. The holder of a €200,000 tracker mortgage with 20 years remaining would pay €224 per month less than on an SVR mortgage of the same size and duration: a differential of €53,700 after 20 years. The Coalition, in its programme for government, committed itself to taking a tough line with banks on raising variable mortgage rates – a promise it has yet to keep.
The Central Bank has expressed dissatisfaction with the slowness of the banks in addressing the issue of mortgage arrears and – where necessary – agreeing realistic loan modifications with borrowers in difficulty. At the same time new insolvency legislation, designed to offer some financial relief to distressed borrowers, may not be enacted until early next year. Instead, as Mr McGrath has pointed out, the Government has remained silent as the banks take the easy option of “targeting variable rate customers again and again”.