Banks need to set interest rates, says lobby group

THE HEAD of the Irish Banking Federation, the lobby group for the banks, said lenders need to retain control of their ability to set interest rates in order to make a return on capital and to attract investors.

Pat Farrell, chief executive of the IBF, was responding to comments by the head of financial regulation Matthew Elderfield last week that the banks would face legislative restrictions on their ability to raise variable mortgage rates if their actions were seen to exacerbate arrears.

Mr Farrell, who made the comments to RTÉ following the publication of a Trinity College report on overindebtedness in Ireland, told The Irish Timesthat he agreed with the Central Bank's strong focus on customers.

“On the issue of mortgage rates we are very conscious of the need to strike a balance between the cost of funds and not exacerbating the issue of mortgage arrears,” he said.

Irish mortgage rates compared competitively with banks in Europe, he said.

Mr Elderfield said last week that he was “breathing down the necks” of the banks on their handling of mortgage arrears and that if they persisted in raising standard variable interest rates, they risked a cap on rates being introduced.

The banks have raised variable rates on their loss-making mortgage books, in some cases outside of any moves by the European Central Bank on its rates, to account for the higher cost of raising deposits and market funding.

The number of Irish residential mortgages that are in arrears or have been restructured increased to 12 per cent in the three months to the end of June, according to the Central Bank.

Yesterday’s report by Trinity College’s policy institute said that the financial crisis offered an opportunity to rebuild the banks to make them more inclusive of all sectors of Irish society, including those experiencing poverty and social exclusion.

Funded by the Department of Social Protection, the report – Understanding and Combating Financial Exclusion and Overindebtedness in Ireland: A European Perspective – said Ireland has the lowest level of access to current accounts in western Europe and some people relied solely on moneylenders to access credit.

Speaking in the Dáil last night, opening a debate on the Keane report on mortgage indebtedness, Minister for Finance Michael Noonan said “there is no one magic bullet or solution to address the problem of mortgage difficulty”.

He said that while the Central Bank estimated it would cost about €14 billion to clear the negative equity on Irish mortgages, this “would not address the key difficulty of making the mortgage payments affordable”.

The issue of mortgage arrears would need to be addressed on a case by case basis, said Mr Noonan. Possible solutions include trade down mortgages, which allow the borrower to move to a cheaper home, split mortgages, where the full mortgage is repaid at a later data, sale by agreement between the lender and borrower, and a mortgage to rent scheme.

“There is an onus on the banks to recognise the economic fact that bankruptcy settlement will often not be in the interest of any of the parties and that alternative solutions such as those advocated in the report and others need to be developed,” said Mr Noonan.