The Republic’s five retail banks have confirmed they will continue to apply interest to loans subject to payment breaks during the Covid-19 crisis, even as European regulators clarified this week that waiving such charges would not tip borrowers into default.
When banks agreed in March to offer payment holidays on loans, they relied on EU banking rules which stated that non-accrual of interest is a sign a borrower is unlikely to repay a loan – resulting in it being classified as being in default. A loan deemed to be in trouble would hit the borrower’s credit rating and require banks to set aside bad-loan provisions.
Banks concluded that subsequent guidance from the European Banking Authority (EBA) on April 2nd supported their approach. However, Central Bank deputy governor Sharon Donnery said on June 22nd in a letter to Sinn Féin TD Pearse Doherty that both interest accruing and interest not accruing are permissible under the guidelines.
An EBA document on Tuesday in relation to payment breaks across Europe further undermined the banks’ position, essentially confirming that borrowers would not be pushed into default regardless of whether interest did or did not accrue on loans subject to the relief.
Banking & Payments Federation Ireland (BPFI) chief executive Brian Hayes said the EBA clarification represented a "moving target" for banks.
“The payment break is offered on the same conditions as payment breaks in the past, and we believe that it is important that we have fairness of treatment across the board for past, present and future customers wishing to avail of breaks,” Mr Hayes said. “The Irish payment break moratoria including the accrual of interest is, always has been and remains fully in line with EBA guidance.”
Mr Doherty this week accused banks of "wilfully misleading" Ministers after it emerged bankers told the then taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe on May 11th that if interest did not continue to accrue, loans would be considered to be in default.
Mr Hayes said that Mr Doherty’s assertions were “completely unfounded and untrue”, as the April 2nd EBA guidelines seemed pretty clear to banks. The guidelines at the time allowed for payment breaks that “only change the schedule of payments, namely by suspending, postponing or reducing the payments of principal amounts, interest or of full instalments, for a predefined limited period of time”. The EBA added that “no other terms and conditions of the loans, such as the interest rate, should be changed”.
The Taoiseach, Micheál Martin, told the Dáil on Wednesday that the Minister for Finance will not engage with banks in relation to the EBA’s latest clarification.
Mr Hayes said the approach by Irish lenders goes “above and beyond” the offering made in other European countries. According to the EBA, only 10 EU countries offer moratorium to mortgage customers, of which Ireland is one.
Only two of those countries, Belgium and Spain, allow for the non-accrual of interest during Covid-19 payment break periods, but these are only open to “very specific, limited and legally defined” groups of borrowers, according to the BPFI.
A decision not to apply interest for six months to loans parked during the Covid-19 economic lockdown could cost banks up to €150 million, analysts at Goodbody Stockbrokers estimate.
The banks’ current practice of applying interest and adding it to the principal of a loan at the end of the break period would add €4,300 to a €300,000 mortgage with 30 years to go, according to price comparison website Bonkers.ie.
A spokesman for AIB and Bank of Ireland and a spokeswoman for Permanent TSB, Ulster Bank and KBC Bank Ireland confirmed that each of the banks could continue to apply interest to loans subject to payment breaks.
“As the sudden and severe impact of Covid-19 became apparent, we reacted swiftly by implementing a series of measures to support our customers,” said the AIB spokesman, noting that these included close to 50,000 payment breaks for mortgage, personal and business customers.