Banks need to act on mortgages or State will beat them to it

The Fine Gael-Fianna Fáil deal for Government has received an early test with FF's finance spokesman Michael McGrath following through on a promise to table a Bill that would give the Central Bank certain powers in relation to mortgage interest rates.

It’s a smart move by McGrath, positioning himself as a champion of the 300,000 or so variable rate customers who are paying over the odds for their loans because a bunch of legacy issues are weighing on the profits of the banks.

Meanwhile, Minister for Finance Michael Noonan is left to argue about what he regards as a number of flaws in the Bill. It's not an easy message to sell.

McGrath has been banging the drum on variable mortgage rates here for more than a year now. He introduced an identical Bill in May 2015, but it ran into the sand in the face of opposition from the Fine Gael-Labour Party coalition which enjoyed a comfortable majority in the Dáil at the time.

Good chance

Things are different now, with

Fine Gael

relying on the support of Fianna Fáil to govern, and McGrath standing a good chance of having his Bill enacted as law.

In his statement yesterday the Minister highlighted three potential problems with the Bill.

He said some of the provisions “appear unconstitutional”, which would obviously be a major stumbling block. McGrath argues that this is a red herring with no such concerns raised by the Minister when he introduced the same Bill last year. Noonan has also suggested amendments that could kick it down the road by six months, but McGrath will push today to move it to committee stage.

The Minister also noted that the European Central Bank would need to be consulted before legislation such as this could be enacted. This would be by way of legal opinion and would seem to be a manageable wrinkle.

The third was that the Central Bank governor, Philip Lane, and his predecessor Patrick Honohan had stated that the bank does not want the power to regulate interest rates.

This could prove to be the real fly in the ointment for the legislation. The Oireachtas has the right and power to put this on the statute books but it can’t actually force the Central Bank to exercise the powers.

Such a scenario would test the independence of the regulator, a situation that is not exactly optimal.

In private briefings the Central Bank has warned that there could be a number of unintended consequences from enacting this Bill into law, and has tried to explain the various legacy factors that feed into the pricing of variable rates by the five players left standing in the market.

On the former, it has argued that Fianna Fáil’s Bill could deter new lenders from entering the Irish market rather than encouraging them. Pepper recently launched a home loans offering, while Frank Money is awaiting authorisation from the Central Bank. But neither is taking deposits, and, while their entry is welcome, they will only be niche players.

Then there is Permanent TSB, which is 75 per cent owned by the State. I've written before about how the bank's recovery is the most fragile of the remaining players in this market. Some two-thirds of its mortgage book consists of loss-making trackers and it has struggled for share in what is still a constrained market for lending. Deeper cuts to its variable rates won't improve its long-term viability or attractiveness to outside investors.

Non-performing

The latter includes the drag of loss-making trackers, which account for about 45 per cent of all home loans here. In addition, just under one-fifth of all outstanding borrowings by value are classed as non-performing.

There are quite a number of moving parts to this thorny issue and a fair share of hot air, which is not to say that the status quo should be allowed to continue.

Whatever the merits of McGrath’s Bill or Noonan’s amendments, the reality for lenders is that this issue is not going to go away any time soon. Particularly given the current fragmentation within the Dáil.

McGrath is open to the banks taking matters into their own hands by voluntarily lowering their rates. They might do well to bite this carrot before the politicians fashion a stick to beat them with.

Twitter:@CiaranHancock1