Regulator's study shows bank margins rising despite lower rates

Banks and building societies have been raising their margins on a wide range of everyday banking products over the past few years, even though interest rates have been falling, a new study from the financial services regulator is expected to show.

The Irish Financial Services Regulatory Authority (IFSRA) study into interest rate "pass through" is close to completion and is expected to be published within the next few weeks.

IFSRA is aiming to show how well Irish banks and building societies pass on cuts in interest rates - or lower funding costs - to their customers.

Preliminary findings, which have been seen by The Irish Times, show that, while the cost to consumers of products such as personal loans and overdrafts has been in decline since the last turning point in interest rates in 2001, this has not coincided with lower margins for banks and building societies.

In fact, the study is expected to conclude that margins have been increasing.

This runs contrary to a public perception that margins have been squeezed as consumers have become more aware of interest rate movements and have come to expect more competitive financial products.

In some cases, such as personal loans, margins are thought to have climbed by about 50 per cent since the start of 1999, when the European Central Bank (ECB) began setting interest rates for the euro zone.

The cost of personal loans for consumers has, according to the preliminary findings, remained more or less steady in the same period, aside from tracking small ECB interest rate changes.

Graphs are expected to show that margins shot up in personal and small business loans and overdrafts at the start of 1999 and have remained steady or risen since then.

The only area of everyday banking where the study is expected to point to sustained lower margins is deposits.

Credit card margins fell between 1999 and 2001 but have since been climbing, the study is likely to show.

Graphs are expected to point to a halving in demand deposit margins since 1998, when interest rates, set then by the Central Bank of Ireland, began to fall dramatically.

IFSRA has considered at least seven basic banking products in the pass-through analysis: credit cards, personal loans, personal overdrafts, small-business overdrafts, small-business loans, demand deposits and one-month notice deposits.

The report, which is expected to break out results for each bank or building society, is likely to draw a considered response from the industry representative body, the Irish Bankers' Federation (IBF).

IBF spokesman Mr Felix O'Regan said yesterday that the federation did not yet have a sense of IFSRA's findings.

Mr O'Regan said the IBF had been consulted by the regulator when the initial parameters of the study were being set. "We'd rather not comment on any findings," he said.

The pass-through analysis is the latest in a series of investigations by the Irish Financial Services Regulatory Authority into how banks and building societies charge for financial products.

Over the past few months, the regulator has found, for example, that motor insurance premiums can vary by as much as 500 per cent between providers.

Another investigation concluded that the spread of credit card costs between providers could extend to eight percentage points.

The next product comparison study to be issued by IFSRA will be on the cost of personal loans. Results on this issue are likely to emerge in July.