Cliff Taylor: No easy wins for the Government in battle with the banks

Like a parent trying to insist some older offspring behave themselves before they finally move out of home, the Government is trying to control the behaviour of the banks, while at the same time promising to get them off the State books as soon as possible. Trouble is it will take a good while to get them to pack up and move on completely, and in the meantime they aren’t doing what they are told.

Helped by the public mood which holds that the banks are showing little gratitude for being bailed out, the Government has no problem in painting them as unreasonable. The banks are fingered for exercising their veto to turn down personal insolvency arrangements, for being too quick to take court action in cases of arrears and for profiteering from high standard variable mortgage rates.

There is some validity in these claims, but we need a reality check, too. No banking system can deliver a perfect blend of rock-bottom mortgage borrowing rates and zero home repossessions, not least our battered banks, which are still recovering from the crisis. Ministers know this, even if they might not say it, and so the mortgage arrears package was set up to go so far, but not to undermine the fundamental system of secured mortgage lending. Because if banks can’t take your home as security, then they will charge you a lot more for your loan.

In fighting on a couple of fronts against the banks, the Government needs to be careful how it sets up the battleground. On mortgage arrears, the political goalposts are, at least, moveable, though this is a problem the Government can never be seen to “solve”. But on mortgage interest rates it risks a defeat if the banks won’t move – which is why in next week’s meetings with bank chiefs, Minister Michael Noonan will give a “move or else” messageto the bankers.

The mortgage arrears package announced this week was designed to make the insolvency process more accessible and efficient, and also to encourage banks and borrowers to do deals more readily outside this process. This will help some dealing with debt, but won’t change the fundamental maths for many who can’t afford their mortgage. It will be presented as putting manners on the banks, though the banks won’t be too concerned about the veto move, which will only be relevant in a limited number of the cases.

Banks have been too slow to deal with arrears – largely in collusion with the authorities in the period up to mid-2013. Now progress is finally being made and the banks are acting, even if this creates its own problems for the Government.

Damage limitation

Politically, this is a case of damage limitation, as the Government can’t end repossession actions altogether. The State can’t pay people’s mortgages on an ongoing basis. And it can’t abandon the whole system of secured lending, as doing that would push up the cost to everyone of getting a mortgage. And this brings us to the other battlefront.

While there are 30,000-plus in long-term arrears, there are 300,000 or so on standard variable mortgages. This is an even trickier political problem both because of the numbers involved and because the Government will now be seen to either “win” or “lose”, depending on whether the banks agree to cut rates, or not. Ministers have framed this as a move by Government to get the banks to act and unless the banks move, they will be seen to have lost.

This is a messy one for Minister for Finance Michael Noonan and his colleagues. The Central Bank does not want powers to control interest rates. In its report to the Department of Finance, it is believed to say that the average profits being made on lending are not excessive. But this average counts in tracker mortgage, which are yielding very low returns to banks.

The Central Bank’s own figures show that standard variable mortgage rates here are high relative to the rest of Europe. The report makes the point that, in a properly competitive market, this Irish mortgage rate premium would be eroded by competition. Unfortunately, as banks across Europe retrench behind national borders, there is no sign of a new entrant to shake up the market here.

Intriguingly, the report also says that it might be wise for banks to reduce their standard variable rates, to head off a likely response from the political system.

But what might that response be ? No doubt Noonan will not be backward in going forward when he meets the bank chiefs. So far State-owned AIB has cut standard variable rates , but the other banks say they won’t move .

The political hectoring won’t bother them too much. What might is increased competition among existing lenders for switcher business – there are some signs of this for those on low loan-to-value ratios – or the threat of any real action from Government. Noonan will have to persuade them that this threat is real.

Bank levy

Would the Government increase the bank levy? Or would it push the Central Bank to introduce some cap on rates? I suspect Ministers will try to up the pressure first, in the hope that some movement comes. The tough talking from Ministers suggests they believe some of the banks, at least, will move, though by how much is another question. And the flipside is likely to be lower rates for depositors.

A properly competitive banking market is the real fix for this, but we are a long way from that yet. I would bet that standard variable mortgage rates might fall in the months ahead, but not massively. They will remain stuck stubbornly above the level elsewhere in Europe. The best result the Government might get out of this battle with the banks is a draw.