Draghi says Irish banking ‘quasi-monopoly’ keeping rates high

ECB president sees Oireachtas committee appearance as ‘conversation to mend a relationship that has been fraught’

Mario Draghi: “I am conscious that I am speaking in a country that went through a severe crisis.” Photograph: Reuters

Mario Draghi: “I am conscious that I am speaking in a country that went through a severe crisis.” Photograph: Reuters

 

Mortgage rates are in higher in Ireland than other European Union countries because of a “quasi-monopoly” among Irish banks and too many problem loans, European Central Bank president Mario Draghi has said.

“If the Government can take action to reduce the degree [of] the presence of a monopoly, that would be welcome,” Mr Draghi told the Oireachtas Finance Committee.

The large number of troubled loans on the books of the Irish banks contribute to higher borrowing rates, said the Italian banker, the first sitting head of the ECB to appear before an Oireachtas committee.

AIB and Bank of Ireland now control about 60 per cent of Ireland’s mortgage market, following the exit of overseas lenders such as Bank of Scotland and Dankse Bank and the liquidation of Irish Nationwide Building Society.

However, the average Irish standard variable mortgage rate available to homebuyers stands at 3.15 per cent in August, compared to 1.77 per cent across the wider euro area, according to Central Bank figures.

The ECB president said there were two groups of borrowers that fall behind in loan repayments: “strategic” defaulters who refuse to pay and those who genuinely cannot do so.

‘Social problem’

The latter category was a “social problem” where borrowers should be supported by fiscal and social measures, rather than left to weigh on the financial system, he said, without elaborating.

Meanwhile, Mr Draghi said Ireland’s recovery from the financial crisis had been impressive, though he highlighted that levels of private debt and loan arrears remain high.

“I am conscious that I am speaking in a country that went through a severe crisis,” Mr Draghi said. “The Irish people made tremendous efforts, for which I have great respect. And these efforts are now paying off.”

Mr Draghi said that with Brexit negotiations ongoing and less than five months to go before the UK left the EU, it was “essential to prepare for all outcomes, including a no-deal scenario”.

Effects

“While the direct trade effects of a hard Brexit would be limited for the euro area as a whole, Ireland is more exposed due to its very close trade relations with the United Kingdom,” he said.

The Italian native, whose eight-year term is due to conclude next November, said the Republic can help protect itself from the economy overheating again, or from the fallout from Brexit, by rebuilding “fiscal buffers”.

When asked about the Government’s plans to establish a so-called rainy day fund, with €3 billion set aside by 2021, Mr Draghi said: “If it falls into the category for building fiscal buffers for situations where things are not going to be as good as they are today, that is a wise thing to do.”

Unprecedented funding

Responding to comments from Sinn Féin’s finance spokesman, Pearse Doherty TD, that the ECB played a “very negative” role by refusing to allow Ireland to impose losses on bank bondholders during the crisis, Mr Draghi said the Frankfurt-based institution provided unprecedented funding to Irish banks. That peaked at €136 billion in late 2010.

He said, however, that he saw his appearance before the committee as a “conversation to mend a relationship that has been fraught”.