Minister to tell Dáil of response to regulator's position on interest rates

THE GOVERNMENT will give its first formal response in the Dáil today to a letter from Financial Regulator Matthew Elderfield saying he does not want new powers that would effectively force banks to pass on ECB interest rate reductions to customers.

Minister for Finance Michael Noonan began to consider the letter from Mr Elderfield only last night. His spokesman said it was because of a Cabinet meeting on public sector reform that lasted seven hours yesterday.

Mr Noonan will set out the Government’s formal response in the Dáil this afternoon during priority questions on finance, where he and the Government are expected to be severely criticised by the Opposition.

Yesterday Jonathan McMahon, assistant director general for financial institutions at the Central Bank, said regulation of interest rates charged by lenders “would not be a good policy outcome”. “We can think of lots of very good reasons why regulation of interest rates would not be a good policy outcome,” Mr McMahon said yesterday. “Much better could be done through the process of supervisory interventions.”

He was speaking on the margins of a conference on ethics and compliance in the management of financial services firms hosted by the Association of Compliance Officers in Ireland yesterday.

The three main banks operating in the State – Bank of Ireland, AIB and Ulster Bank – rebuffed the Government’s request to pass on the 0.25 per cent ECB rate cut during what was described as a “tense” and “frosty” meeting last week with Taoiseach Enda Kenny, Tánaiste Eamon Gilmore, Mr Noonan and Minister for Public Expenditure Brendan Howlin.

AIB, which is 99 per cent owned by the State, subsequently cut rates.

Mr Kenny made personal contact with Mr Elderfield later that evening and asked him to report back to the Government if he needed additional powers. Mr Elderfield, whose functions and role are independent of government, wrote back saying his office was not “seeking the power to exercise closer regulatory control over retail interest rates at this time”.

Fianna Fail’s spokesman on finance Michael McGrath said the Government should have acted much more swiftly and authoritatively on this matter.

“Fianna Fáil has legislation prepared that would essentially ensure that cuts in ECB interest rates were passed on. What should happen now is that the Minister for Finance should meet the Finanacial Regulator as a matter of urgency to allow for an exchange of views.

“There is an urgency about this now . . . there will be two further ECB rate cuts which will result in further distress for those in arrears if it is not addressed, he said.

Sinn Féin finance spokesman Pearse Doherty contended that the Government had to act immediately to introduce legislation to ensure that banks passed on interest rate reductions to customers.

“If Matthew Elderfield decides he does not want to pass on the powers, that does not mean Enda Kenny can forget those 100,000 people in mortgage distress.”

Mr McMahon said Ireland’s four main domestic lenders will post “materially higher” average loan loss provisions this year as they are forced to take a more conservative and consistent approach to impairments.

While it is “too early to say yet” how individual banks will fare from the exercise, the overall provisioning level will be higher, Mr McMahon said.

He said the exercise relates to the four lenders subjected to stress tests in March, including Allied Irish Banks, Bank of Ireland, Irish Life Permanent and EBS, which subsequently merged with AIB in July.

Separately, Kevin Knightly, chief executive of Rabobank Ireland, told the conference its ACCBank unit is “heavily loss- making”.

Rabobank Ireland “continues to be profitable,” he said in a speech in Dublin, adding the lender is “trying to tackle” losses at ACC. – Additional reporting: Bloomberg