Low Irish deposit rates ‘subsidising’ mortgage holders, Makhlouf says

Central Bank governor Gabriel Makhouf said the low rates Irish banks are paying customers for deposits are “subsidising” mortgage holders, at a time when lenders are making an annualised €1.8 billion of interest on excess cash placed with the regulator.

Speaking to the Dáil Committee of Public Accounts on Thursday, Mr Makhlouf also said that the rates banks offer for deposits and charge for loans are “commercial decisions”, when asked if Central Bank should intervene on the ultra-low rates savers are receiving.

“That’s a commercial decision that they’re making,” the governor said, confirming that the Central Bank does not want the authority to intervene in the rates lenders pay or charge.

“One of the implications of the judgments [banks are making] is that lower rates that they are paying for deposits are subsidising the lower rates that they’re charging for mortgages.”

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[ Savings: If you have cash on deposit you’re losing money. Not just a bit, but a lot ]

Irish banks, because they have higher deposit levels relative to loans than European peers, have been among the laggards across the Continent in raising deposit rates since the ECB abandoned its negative rates strategy last July.

They currently have about €60 billion of surplus money stored with the Central Bank, earning the current 3 per cent ECB deposits rate, equating to an annualised amount of €1.8 billion.

Most household deposits in the banks are in current accounts, earning nothing. Figures published by the Central Bank last week show the average rate on household overnight deposits, meanwhile, was just 0.03 per cent in February.

While the average rate for households putting money into Irish term deposit products has risen from almost zero last June to 1.02 per cent as of February, it remains 0.9 of a point below the euro-zone average.

On the other hand, the average rate on new Irish mortgages agreed in February was 2.92 per cent, below the euro-area figure of 3.33 per cent, the data showed.

Separately, the committee heard that professional services group PwC paid €54 million last year to settle a €900 million legal claim for negligent auditing over the collapse of Quinn Insurance.

The figure was provided by Department of Finance secretary general John Hogan. It is in line with an amount of €53 million reported by The Irish Times on Wednesday, and ultimately went to the State’s Insurance Compensation Fund (ICF).

[ Interest rates are rising so why am I not earning more on my savings? ]

Between 2011 and 2015, the exchequer advanced €1 billion of loans to the ICF to meet Quinn Insurance liabilities. The gradual repayment of this is being financed by a 2 per cent surcharge on all home and motor insurance policies in the State.

The settlement of the PwC litigation also saw €29 million of security of PwC legal costs being returned to the ICF. Department of Finance officials were unable to say how much of the €54 million settlement covered legal costs incurred in the case against PwC, which was taken by the administrators of Quinn Insurance a decade ago.

It is estimated that when PwC’s own legal fees of some €25 million were paid, the cost to the firm was €78 million. That sum is considered virtually certain to have been covered by PwC’s professional indemnity insurers.