Banks feel heat as focus on standard variable interest rates intensifies

Permanent TSB’s warning to potential investors that political pressure to cut its mortgage interest rates could impact on its return to profitability is the clearest signal yet of nervousness within the banking sector about how the Government might react to the growing clamour for decisive action on the festering issue of standard variable rates.

“There has been heightened scrutiny in connection with the setting of variable mortgage interest rates in Ireland recently,” PTSB said, setting out the potential risk factors in an information memorandum for a €125 million additional Tier 1 security that forms part of its capital-raising plan.

PTSB said it was “examining” its strategy on interest rates and it was “possible” the standard or managed variable rates “may reduce” in the future. “There is both political and regulatory focus on the pricing of variable rate mortgages with significant pressure both to align new and existing pricing levels and to bring pricing in line with selected European mortgage markets,” the bank told investors.

The anger around the SVRs got a very public airing at the recent Permanent TSB annual general meeting. A number of speakers vented their frustration at having to pay an SVR of 4.5 per cent while new customers could get loans with an SVR of 4.2 per cent.

Sticky wicket

It’s a sticky wicket for PTSB. The bank is still loss-making and has a near-€15 billion tracker book, that at last count was dragging on its bottom line to the tune of €75 million a year.

Hence the 4.5 per cent SVR when the European Central Bank’s main rate is almost zero. The lower SVR for new loans is necessary for PTSB to compete with rivals for business and to persuade investors that it has a viable future as a challenger bank.

This is of little comfort to those paying the higher SVR, who feel they are being charged thousands of euro over the odds to service loans.

It's a similar story at the other banks and the Government is feeling the heat to do something about it, especially as it is a 99 per cent-plus shareholder in both AIB and PTSB and a 14 per cent stakeholder in Bank of Ireland.

The tools at its disposal are limited. The official line is the setting of interest rates is a commercial decision for the banks, and the department tries not to interfere in the day-to-day running of AIB, Bank of Ireland or PTSB.

The Government has asked the Central Bank of Ireland to conduct independent research on the SVR issue. It plans to publish this information in the hope that, by having the figures in black and white, the banks would take appropriate actions, assuming of course the findings indicate gouging.

The Oireachtas finance committee could also haul the banks in to justify their SVRs in a public forum. Its latest round of engagement with the banks begins today, with AIB appearing before the committee, where mortgage arrears, SVRs and some other old reliables will get an airing.

The Government could potentially legislate to control SVRs but this would be a regressive step and wouldn't be favoured by Central Bank governor Patrick Honohan.

The issue of SVRs has become a key policy issue for MEP Brian Hayes, who has undertaken his own unscientific research. Hayes cites recently published Central Bank figures showing the average variable rate in Ireland is 1.79 per cent higher than the euro zone average.

He wonders why Belgian and German consumers get a rate of about 3 per cent for a long-term fixed-mortgage product while Irish consumers have to pay almost 4.5 per cent. The banks argue it is down to their overall cost of funds, which bears no resemblance to the ECB’s key rate.

Hayes was a junior minister at the department of finance until his move to the European Parliament and some might wonder why he wasn’t as vocal in Government.

The MEP took his campaign to the Competition and Consumer Protection Commission, requesting it to undertake an inquiry. The commission declined, saying it would not be the "best use" of its resources.

Isolde Goggin, chair of the commission, told Hayes "more robust competition" was key to ensuring keenly priced financial products are available to consumers while allowing the sector achieve a healthy and profitable state.

Lack of competition

At least half a dozen retail banks have quit the Irish market since the crash in late 2008 and there doesn’t appear to be a queue of new lenders forming outside the Central Bank, in spite of the economic recovery.

This is the rub for the Government. Intervening in the SVRs charged by banks might play well with voters in an election year but it does little to encourage new competitors into the market.

And it would hardly tempt investors to participate in the capital-raising plans of PTSB and AIB, which are key to taxpayers getting back the €23 billion bailout.

Twitter:@CiaranHancock1